<Page>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
FORM 10-Q
<Table>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</Table>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
<Table>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</Table>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-14680
------------------------
GENZYME CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
MASSACHUSETTS 06-1047163
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS 02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</Table>
(617) 252-7500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The number of shares outstanding of each of the issuer's series of common stock
as of October 31, 2001:
<Table>
Genzyme General Division Common Stock....................... 212,188,951
Genzyme Biosurgery Division Common Stock.................... 39,479,457
Genzyme Molecular Oncology Division Common Stock............ 16,722,572
</Table>
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<Page>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements, including
statements regarding our:
- planned divestiture of the Snowden-Pencer-Registered Trademark- surgical
product lines and the expected timing of the transaction;
- planned completion of our acquisition of certain assets of Pharming N.V.
and the expected timing of the transaction;
- potential additional payments in connection with the acquisition of
Novazyme Pharmaceuticals, Inc.;
- expected future revenues, operations and expenditures;
- product development and commercialization plans and expected timetables;
and
- projected cash needs.
These statements are only expectations of future results. These statements
are subject to risks and uncertainties, and our actual results may differ
significantly from those that are described in this report on Form 10-Q. These
risks and uncertainties include:
- our ability to successfully complete preclinical and clinical development
of our products and services;
- our ability to manufacture sufficient amounts of our products for
development and commercialization activities;
- our ability to obtain and maintain adequate patent and other proprietary
rights protection of our products and services and successfully enforce
our proprietary rights;
- the accuracy of our estimates of the size and characteristics of the
markets to be addressed by our products and services, including growth
projections;
- market acceptance of our products and services;
- the accuracy of our information regarding the products and resources of
our competitors and potential competitors;
- the content and timing of submissions to and decisions made by the Food
and Drug Administration, commonly referred to as the FDA, and other
regulatory agencies;
- the impact of the May 2001 expiration of the orphan drug status of
Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes
on our revenues from these products;
- our ability to satisfy the FDA's request for additional data and
information in connection with our Biologics License Application
submission for Fabrazyme-TM- enzyme;
- our ability to obtain reimbursement for our products and services from
third-party payors, and the extent of such coverage;
- our ability to expand manufacturing capacity for sevelamer hydrochloride
for Renagel-Registered Trademark- capsules and tablets;
- our ability to optimize dosing and improve patient compliance with
Renagel-Registered Trademark- capsules and tablets;
- our ability to establish and maintain strategic license, collaboration and
distribution arrangements;
i
<Page>
- the continued funding of our joint ventures by our partners;
- our ability to successfully increase market penetration for
Synvisc-Registered Trademark- viscosupplementation product as a treatment
for osteoarthritis of the knee and to expand its use in other joints;
- the success of our Fabrazyme-TM- and Thyrogen-Registered Trademark-
product launches in Europe;
- our ability to successfully negotiate purchase and sale agreements for our
Snowden-Pencer-Registered Trademark- surgical product lines;
- the impact of Pharming Group N.V.'s receivership on the realizable value
of amounts due to us arising out of our joint ventures with Pharming and
on our Pompe disease research and development activities;
- our ability to complete our acquisition of certain assets of Pharming N.V.
and to prevail in any appeal related to that acquisition;
- the ability to successfully develop and receive FDA approval for products
for the treatment of lysosomal storage disorders that employ certain of
Novazyme's technologies, and the timing thereof;
- the possible disruption of our operations due to terrorist activities and
armed conflict, including as a result of the disruption of operations of
our subsidiaries and our customers, suppliers, distributors, couriers,
collaborative partners, licensees and clinical trial sites; and
- the operational integration and other risks associated with acquisitions.
For a further description of these risks and other uncertainties, we
encourage you to carefully read Exhibit 99.2, "Factors Affecting Future
Operating Results," to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, as amended (our "2000 Form 10-K").
NOTE REGARDING REFERENCES TO GENZYME DIVISIONS AND SERIES OF STOCK
Throughout this Form 10-Q, the words "we," "us," "our" and "Genzyme" refer
to Genzyme Corporation and all of its operating divisions taken as a whole, and
"our board of directors" refers to the board of directors of Genzyme
Corporation. In addition, we refer to our three operating divisions as follows:
- Genzyme General Division = "Genzyme General;"
- Genzyme Biosurgery Division = "Genzyme Biosurgery;" and
- Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology."
We currently have three designated series of common stock. Each of these
series is intended to reflect the value and track the performance of one of our
divisions. We refer to each series of common stock as follows:
- Genzyme General Division Common Stock = "Genzyme General Stock;"
- Genzyme Biosurgery Division Common Stock = "Biosurgery Stock;" and
- Genzyme Molecular Oncology Division Common Stock = "Molecular Oncology
Stock."
Holders of Genzyme General Stock, Biosurgery Stock and Molecular Oncology
Stock are stockholders of Genzyme Corporation and are subject to all of the
risks and uncertainties of Genzyme Corporation described in Exhibit 99.2 to our
2000 Form 10-K.
ii
<Page>
NOTE REGARDING INCORPORATION BY REFERENCE
The Securities and Exchange Commission, commonly referred to as the SEC,
allows us to disclose important information to you by referring you to other
documents we have filed with the SEC. The information that we refer you to is
"incorporated by reference" into this Form 10-Q. Please read that information.
NOTE REGARDING TRADEMARKS
GENZYME-Registered Trademark-, CEREZYME-Registered Trademark-,
CEREDASE-Registered Trademark-, THYROGEN-Registered Trademark-,
CARTICEL-Registered Trademark-, EPICEL-Registered Trademark- and
SNOWDEN-PENCER-Registered Trademark- are registered trademarks of Genzyme.
SAGE-TM-, SEPRA-TM-, SEPRAFILM-TM-, SEPRAMESH-TM-, SEPRAGEL-TM- and
FABRAZYME-TM- are trademarks of Genzyme. GENZYME-Registered Trademark- is a
registered service mark of Genzyme. RENAGEL-Registered Trademark- is a
registered trademark of GelTex Pharmaceuticals, Inc.
SYNVISC-Registered Trademark-, HYLAFORM-Registered Trademark- and
HYLAGEL-Registered Trademark- are registered trademarks of Genzyme Biosurgery
Corporation. FOCALSEAL-Registered Trademark- is a registered trademark of
Focal, Inc. NEUROCELL-TM- is a trademark of Diacrin/Genzyme LLC. ALDURAZYME-TM-
is a trademark of BioMarin/Genzyme LLC. WELCHOL-TM- is a trademark of Sankyo
Pharma Inc.
iii
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 2001
TABLE OF CONTENTS
<Table>
<Caption>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
GENZYME CORPORATION AND SUBSIDIARIES
Unaudited, Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2001 and
2000.................................................... 1
Consolidated Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000....................... 4
Unaudited, Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000........... 5
Notes to Unaudited, Consolidated Financial Statements..... 6
GENZYME GENERAL
Unaudited, Combined Statements of Operations for the Three
and Nine Months Ended September 30, 2001 and 2000....... 26
Combined Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000....................... 27
Unaudited, Combined Statements of Cash Flows for the Nine
Months Ended September 30, 2001 and 2000................ 28
Notes to Unaudited, Combined Financial Statements......... 29
GENZYME BIOSURGERY
Unaudited, Combined Statements of Operations for the Three
and Nine Months Ended September 30, 2001 and 2000....... 42
Combined Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000....................... 43
Unaudited, Combined Statements of Cash Flows for the Nine
Months Ended September 30, 2001 and 2000................ 44
Notes to Unaudited, Combined Financial Statements......... 45
GENZYME MOLECULAR ONCOLOGY
Unaudited, Combined Statements of Operations for the Three
and Nine Months Ended September 30, 2001 and 2000....... 50
Combined Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000....................... 51
Unaudited, Combined Statements of Cash Flows for the Nine
Months Ended September 30, 2001 and 2000................ 52
Notes to Unaudited, Combined Financial Statements......... 53
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 54
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 105
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds........... 106
ITEM 6. Exhibits and Reports on Form 8-K.................... 106
Signatures.................................................. 107
</Table>
iv
<Page>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
--------- -------- --------- --------
Revenues:
Net product sales......................................... $ 291,959 $206,645 $ 816,262 $592,505
Net service sales......................................... 23,988 19,967 71,983 62,280
Revenues from research and development contracts:
Related parties......................................... 1,043 -- 2,726 --
Other................................................... 2,505 747 7,426 4,617
--------- -------- --------- --------
Total revenues........................................ 319,495 227,359 898,397 659,402
--------- -------- --------- --------
Operating costs and expenses:
Cost of products sold..................................... 75,462 63,729 231,594 165,631
Cost of services sold..................................... 14,041 12,068 40,890 35,886
Selling, general and administrative....................... 122,030 66,379 316,810 195,358
Research and development (including research and
development related to contracts)....................... 69,127 39,678 188,651 123,954
Amortization of intangibles............................... 30,950 3,409 90,115 15,191
Purchase of in-process research and development........... 86,800 -- 95,568 --
--------- -------- --------- --------
Total operating costs and expenses.................... 398,410 185,263 963,628 536,020
--------- -------- --------- --------
Operating income (loss)..................................... (78,915) 42,096 (65,231) 123,382
--------- -------- --------- --------
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... (8,110) (11,420) (28,921) (30,866)
Gain on affiliate sale of stock........................... 212 2,419 212 22,689
Gain (loss) on investments in equity securities........... (24,464) 8,544 (25,996) 22,709
Minority interest in net loss of subsidiary............... 260 977 2,259 3,185
Other..................................................... (1,192) (10) (5,035) 5,185
Investment income......................................... 13,718 12,758 36,359 33,333
Interest expense.......................................... (8,739) (5,010) (30,875) (12,785)
--------- -------- --------- --------
Total other income (expenses)......................... (28,315) 8,258 (51,997) 43,450
--------- -------- --------- --------
Income (loss) before income taxes........................... (107,230) 50,354 (117,228) 166,832
Benefit from (provision for) income taxes................... 4,554 (15,933) 7,288 (51,101)
--------- -------- --------- --------
Net income (loss) before cumulative effect of change in
accounting principle...................................... (102,676) 34,421 (109,940) 115,731
Cumulative effect of change in accounting principle, net of
tax....................................................... -- -- 4,167 --
--------- -------- --------- --------
Net income (loss)........................................... $(102,676) $ 34,421 $(105,773) $115,731
========= ======== ========= ========
Comprehensive income (loss), net of tax:
Net income (loss)......................................... $(102,676) $ 34,421 $(105,773) $115,731
--------- -------- --------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments................ 17,267 (10,273) (577) (20,628)
Unrealized loss on derivatives, net of tax.............. (1,444) -- (1,733) --
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period... (8,675) 44,223 (9,661) 48,597
Reclassification adjustment for (gains) losses
included in net income.............................. 15,535 -- 16,507 (5,501)
--------- -------- --------- --------
Unrealized gains on securities, net................... 6,860 44,223 6,846 43,096
--------- -------- --------- --------
Other comprehensive income................................ 22,683 33,950 4,536 22,468
--------- -------- --------- --------
Comprehensive income (loss)................................. $ (79,993) $ 68,371 $(101,237) $138,199
========= ======== ========= ========
</Table>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
1
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
NET INCOME (LOSS) PER SHARE:
ALLOCATED TO GENZYME GENERAL STOCK:
Net income (loss) before cumulative effect of
change in accounting principle.................. $(81,706) $ 50,973 $(34,843) $160,272
Cumulative effect of change in accounting
principle, net of tax........................... -- -- 4,167 --
-------- -------- -------- --------
Genzyme General net income (loss)................. (81,706) 50,973 (30,676) 160,272
Tax benefit allocated from Genzyme Biosurgery..... 2,918 6,455 20,661 16,291
Tax benefit allocated from Genzyme Molecular
Oncology........................................ 2,687 2,021 9,367 5,558
-------- -------- -------- --------
Net income (loss) allocated to Genzyme General
Stock........................................... $(76,101) $ 59,449 $ (648) $182,121
======== ======== ======== ========
Net income (loss) per share of Genzyme General
Stock:
Basic:
Net income (loss) per share before cumulative
effect of change in accounting principle...... $ (0.37) $ 0.34 $ (0.02) $ 1.07
Per share cumulative effect of change in
accounting principle, net of tax.............. -- -- 0.02 --
-------- -------- -------- --------
Net income (loss) per share allocated to Genzyme
General Stock................................. $ (0.37) $ 0.34 $ 0.00 $ 1.07
======== ======== ======== ========
Diluted:
Net income (loss) per share before cumulative
effect of change in accounting principle...... $ (0.37) $ 0.32 $ (0.02) $ 0.99
Per share cumulative effect of change in
accounting principle, net of tax.............. -- -- 0.02 --
-------- -------- -------- --------
Net income (loss) per share allocated to Genzyme
General Stock................................. $ (0.37) $ 0.32 $ 0.00 $ 0.99
======== ======== ======== ========
Weighted average shares outstanding:
Basic............................................. 208,350 172,759 198,841 170,553
======== ======== ======== ========
Diluted........................................... 208,350 194,148 198,841 191,229
======== ======== ======== ========
ALLOCATED TO BIOSURGERY STOCK:
Net loss.......................................... $(21,525) $(94,460)
Allocated tax benefit............................. 2,444 11,434
-------- --------
Net loss allocated to Biosurgery Stock............ $(19,081) $(83,026)
======== ========
Net loss per share of Biosurgery Stock--basic and
diluted......................................... $ (0.48) $ (2.22)
======== ========
Weighted average shares outstanding............... 39,376 37,479
======== ========
ALLOCATED TO MOLECULAR ONCOLOGY STOCK:
Net loss.......................................... $ (7,494) $ (5,504) $(22,099) $(17,924)
======== ======== ======== ========
Net loss per share of Molecular Oncology
Stock--basic and diluted........................ $ (0.45) $ (0.37) $ (1.36) $ (1.28)
======== ======== ======== ========
Weighted average shares outstanding............... 16,679 14,884 16,225 14,002
======== ======== ======== ========
</Table>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
2
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
NET INCOME (LOSS) PER SHARE (CONTINUED):
ALLOCATED TO SURGICAL PRODUCTS STOCK:
Net loss......................................... $(13,936) $(34,346)
======== ========
Net loss per share of Surgical Products
Stock--basic and diluted....................... $ (0.93) $ (2.30)
======== ========
Weighted average shares outstanding.............. 14,959 14,907
======== ========
ALLOCATED TO TISSUE REPAIR STOCK:
Net loss......................................... $ (5,588) $(14,590)
======== ========
Net loss per share of Tissue Repair Stock--basic
and diluted.................................... $ (0.19) $ (0.51)
======== ========
Weighted average shares outstanding.............. 28,795 28,664
======== ========
</Table>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
3
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 223,420 $ 236,213
Short-term investments.................................... 113,582 104,586
Accounts receivable, net.................................. 239,276 205,094
Inventories............................................... 173,952 170,341
Prepaid expenses and other current assets................. 37,477 37,681
Deferred tax assets--current.............................. 47,074 46,836
---------- ----------
Total current assets.................................... 834,781 800,751
Property, plant and equipment, net.......................... 595,028 504,412
Long-term investments....................................... 746,583 298,841
Notes receivable-related party.............................. -- 10,350
Intangibles, net............................................ 1,561,037 1,539,782
Investments in equity securities............................ 78,279 121,251
Other noncurrent assets..................................... 47,563 42,713
---------- ----------
Total assets............................................ $3,863,271 $3,318,100
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 41,119 $ 26,165
Accrued expenses.......................................... 147,298 139,683
Income taxes payable...................................... 51,502 46,745
Deferred revenue.......................................... 3,667 8,609
Current portion of long-term debt and capital lease
obligations............................................. 8,135 19,897
---------- ----------
Total current liabilities............................... 251,721 241,099
Long-term debt and capital lease obligations................ 244,037 381,560
Convertible notes and debentures............................ 585,000 283,680
Deferred tax liabilities.................................... 168,723 230,384
Other noncurrent liabilities................................ 25,456 6,236
---------- ----------
Total liabilities....................................... 1,274,937 1,142,959
---------- ----------
Stockholders' equity:
Genzyme General Stock, $0.01 par value.................... 2,119 956
Biosurgery Stock, $0.01 par value......................... 395 364
Molecular Oncology Stock, $0.01 par value................. 167 159
Treasury Stock--Genzyme General--at cost.................. (901) (901)
Additional paid-in capital-Genzyme General Stock.......... 1,747,042 1,269,284
Additional paid-in capital-Biosurgery Stock............... 846,368 823,353
Additional paid-in capital-Molecular Oncology Stock....... 116,204 111,484
Deferred compensation..................................... (5,132) (9,943)
Notes receivable from stockholders........................ (11,836) (14,760)
Accumulated deficit....................................... (111,511) (5,738)
Accumulated other comprehensive income.................... 5,419 883
---------- ----------
Total stockholders' equity.............................. 2,588,334 2,175,141
---------- ----------
Total liabilities and stockholders' equity.............. $3,863,271 $3,318,100
========== ==========
</Table>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
4
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(105,773) $ 115,731
Reconciliation of net income (loss) to net cash provided
by operating activities:
Depreciation and amortization........................... 125,203 45,374
Non-cash compensation expense........................... 7,375 --
Provision for bad debts................................. 2,246 5,574
Note received from a collaborator....................... -- (10,175)
Write-off of note received from a collaborator.......... 10,159 --
Charges for in-process research and development......... 95,568 --
Equity in net loss of unconsolidated affiliates......... 28,921 30,866
Gain on affiliate sale of stock......................... (212) (22,689)
(Gain) loss on investments in equity securities......... 25,996 (22,709)
Minority interest in net loss of subsidiary............. (2,259) (3,185)
Deferred income tax expense (benefit)................... (17,165) 4,668
Other................................................... (2,564) 2,224
Increase (decrease) in cash from working capital
changes:
Accounts receivable................................... (36,104) (30,053)
Inventories........................................... 10,551 (15,185)
Prepaid expenses and other current assets............. (1,800) (1,970)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue........................ 30,453 19,109
--------- ---------
Net cash provided by operating activities............. 170,595 117,580
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. (750,075) (498,916)
Sales and maturities of investments....................... 314,233 433,150
Purchases of equity securities............................ (8,318) (5,000)
Proceeds from sale of investments in equity securities.... 36 15,773
Purchases of property, plant and equipment................ (123,229) (52,263)
Acquisitions, net of acquired cash........................ (78,379) (342)
Investments in unconsolidated affiliates.................. (31,298) (19,639)
Other..................................................... 5,679 (1,521)
--------- ---------
Net cash used in investing activities................. (671,351) (128,758)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 74,488 104,122
Payments of notes receivable from stockholders............ 2,896 --
Proceeds from issuance of debt............................ 562,062 --
Payments of debt and capital lease obligations............ (155,128) (5,000)
Bank overdraft............................................ 2,111 --
Other..................................................... 3,237 1,276
--------- ---------
Net cash provided by financing activities............. 489,666 100,398
--------- ---------
Effect of exchange rate changes on cash..................... (1,703) (3,808)
--------- ---------
Increase (decrease) in cash and cash equivalents............ (12,793) 85,412
Cash and cash equivalents at beginning of period............ 236,213 130,156
--------- ---------
Cash and cash equivalents at end of period.................. $ 223,420 $ 215,568
========= =========
</Table>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
5
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Our unaudited, consolidated financial statements for each period include the
balance sheets, statements of operations and cash flows of each of our divisions
and corporate operations taken as a whole. We eliminate all significant
intracompany items and transactions in consolidation. We prepared our unaudited,
consolidated financial statements following the requirements of the SEC for
interim reporting. As permitted under these rules, we condense or omit certain
footnotes and other financial information normally required by generally
accepted accounting principles. We have reclassified certain 2000 data to
conform to our 2001 presentation.
These financial statements include all normal and recurring adjustments that
we consider necessary for the fair presentation of our financial position and
operating results. Since these are interim financial statements, you should also
read the financial statements and notes included in our 2000 Form 10-K.
Revenues, expenses, assets and liabilities can vary from quarter to quarter.
Therefore, the results and trends in these interim financial statements may not
be indicative of results for future periods.
2. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that all
business combinations be accounted for under the purchase method and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS 142 requires that ratable amortization of
goodwill and certain intangible assets be replaced with periodic tests of the
goodwill's impairment and that other intangible assets be amortized over their
useful lives. SFAS 141 is effective for all business combinations initiated
after June 30, 2001 and for all business combinations accounted for by the
purchase method for which the date of acquisition is after June 30, 2001. The
provisions of SFAS 142 will be effective for fiscal years beginning after
December 15, 2001, and will thus be adopted by us in fiscal year 2002. However,
for goodwill and intangible assets acquired after June 30, 2001, certain
provisions of SFAS 142 will be effective from the date of acquisition. For the
nine months ended September 30, 2001, we had approximately $37.6 million of
goodwill amortization, however, the full impact of SFAS 141 and SFAS 142 on our
financial statements has not been determined.
3. ACQUISITIONS AND DISPOSITION
CLASS A AND CLASS B LIMITED PARTNERSHIP INTERESTS OF GENZYME DEVELOPMENT
PARTNERS, L.P.
In January 2001, we purchased all of the outstanding Class A limited
partnership interests of Genzyme Development Partners, L.P., which we refer to
as GDP, for a payment of approximately $25.7 million in cash plus royalties
payable over ten years on sales of certain Sepra-TM- products. In August 2001,
we purchased the two outstanding GDP Class B limited partnership interests for a
payment of $70,000 per Class B limited partnership interest plus $40,000 of
related costs and undertook the obligation to pay additional royalties over ten
years on sales of certain Sepra-TM- products. We allocated the acquired limited
partnership interests of GDP to Genzyme Biosurgery and accounted for the
acquisitions as purchases. Accordingly, we included the results of operations of
GDP in our consolidated financial statements and the combined financial
statements of Genzyme Biosurgery from January 9, 2001.
6
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITION (CONTINUED)
We allocated the purchase prices to the fair value of the intangible assets
acquired as follows (amounts in thousands):
<Table>
<Caption>
CLASS A CLASS B
LIMITED LIMITED
PARTNERSHIP PARTNERSHIP
INTERESTS INTERESTS TOTAL
----------- ----------- --------
Patents (to be amortized over 8 years)........ $ 5,909 $ -- $ 5,909
Trademarks (to be amortized over 10 years).... 2,755 -- 2,755
Technology (to be amortized over 10 years).... 8,827 -- 8,827
Goodwill (to be amortized over 10 years)...... 8,234 180 8,414
------- ---- -------
Total....................................... $25,725 $180 $25,905
======= ==== =======
</Table>
WYNTEK DIAGNOSTICS, INC.
In June 2001, we acquired all of the outstanding capital stock of
privately-held Wyntek Diagnostics, Inc., for $65.0 million in cash. Wyntek is a
provider of high quality point of care rapid diagnostic tests for pregnancy and
infectious diseases. We allocated the acquisition to Genzyme General and
accounted for the acquisition as a purchase. Accordingly, we included the
results of operations of Wyntek in our consolidated financial statements and the
combined financial statements of Genzyme General from June 1, 2001, the date of
acquisition.
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 (amounts in thousands):
<Table>
Cash paid................................................... $ 65,000
Acquisition costs........................................... 234
--------
Total purchase price...................................... $ 65,234
========
Cash and cash equivalents................................... $ 4,974
Other current assets........................................ 4,966
Property, plant and equipment............................... 1,843
Deferred tax assets......................................... 2,312
Intangible assets (to be amortized over 5 to 10 years)...... 39,444
In-process research and development......................... 8,768
Goodwill (to be amortized over 10 years).................... 19,908
Deferred tax liability...................................... (14,197)
Assumed liabilities......................................... (2,784)
--------
Allocated purchase price.................................. $ 65,234
========
</Table>
In connection with the acquisition of Wyntek, we allocated approximately
$8.8 million of the purchase price to in-process research and development or
IPR&D. Our management assumed responsibility for determining the IPR&D valuation
and engaged an independent third-party appraisal company to assist in the
valuation of the intangible assets acquired. We estimated the fair value
assigned to purchased IPR&D by discounting, to present value, the cash flows
expected to result from the project once it has reached technological
feasibility. We applied a discount rate of 25% to estimate
7
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITION (CONTINUED)
the present value of these cash flows, which was consistent with the risks of
the project. In estimating future cash flows, management considered other
tangible and intangible assets required for successful exploitation of the
technology resulting from the purchased IPR&D project and adjusted future cash
flows for a charge reflecting the contribution to value of these assets. The
value assigned to purchased IPR&D was the amount attributable to the efforts of
Wyntek up to the time of acquisition.
In the allocation of purchase price to IPR&D, the concept of alternative
future use was specifically considered for the program under development. The
acquired IPR&D consists of Wyntek's work to complete the program. There are no
alternative uses for the in-process program in the event that the program fails
in clinical trials or is otherwise not feasible. The development effort for the
acquired IPR&D does not possess an alternative future use for us as defined by
generally accepted accounting principles. Consequently, in accordance with
generally accepted accounting principles, the amount allocated to IPR&D was
charged as an expense in our financial statements for the nine months ended
September 30, 2001. We are amortizing the remaining acquired intangible assets
arising from the acquisition on a straight-line basis over their estimated
lives, which range from 5 years to 10 years.
Below is a brief description of the IPR&D program associated with Wyntek's
cardiovascular disease diagnostic product, including an estimation of when
management believes we may realize revenue from the sale of this product.
Wyntek is currently developing a cardiovascular product to rapidly measure
the quantitative levels of cardiac marker proteins. These are the leading
markers for the diagnosis of acute myocardial infarction. The product consists
of a mobile, stand-alone, quantitative diagnostic device and a reaction strip
that detects disease specific marker proteins. The device will be used to read
reaction strips at the patient's bedside or in an emergency room setting. We
expect to complete the regulatory review process and file an application for
marketing approval in early 2002 and begin selling the product during the second
half of 2002. Studies to date have demonstrated the viability of this product
but there can be no assurance that the regulatory authorities will approve this
product.
FOCAL, INC.
In January 2001, Focal, Inc., a public company and developer of synthetic
biopolymers used in surgery, exercised its option to require us to purchase
$5.0 million in Focal common stock at a price of $2.06 per share. After that
purchase we held approximately 22% of the outstanding shares of Focal common
stock and began accounting for our investment under the equity method of
accounting. We allocated this investment to Genzyme Biosurgery. On June 30,
2001, we acquired the remaining 78% of the outstanding shares in an exchange of
shares of Biosurgery Stock for shares of Focal common stock. Focal shareholders
received 0.1545 of a share of Biosurgery Stock for each share of Focal common
stock they held. We issued 2,086,151 shares of Biosurgery Stock as merger
consideration. We also assumed all of the outstanding options to purchase Focal
common stock and exchanged them for options to purchase Biosurgery Stock on an
as-converted basis. We allocated the acquired assets and liabilities to Genzyme
Biosurgery and accounted for the acquisition as a purchase.
8
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITION (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 (amounts in thousands):
<Table>
Issuance of 2,086,151 shares of Biosurgery Stock............ $ 9,450
Issuance of options to purchase 231,566 shares of Biosurgery
Stock..................................................... 351
Acquisition costs........................................... 638
Existing equity investment in Focal......................... 5,488
Cash paid to selling security holder........................ 11
-------
Total purchase price...................................... $15,938
=======
Cash and cash equivalents................................... $ 2,331
Other current assets........................................ 6,003
Property, plant and equipment............................... 1,818
Notes receivable from related party......................... 168
Intangible assets (to be amortized over 3 to 12 years)...... 7,909
Goodwill (to be amortized over 12 years).................... 1,115
Assumed liabilities......................................... (3,773)
Notes receivable from stockholders.......................... 367
-------
Allocated purchase price.................................. $15,938
=======
</Table>
ATIII LLC
In July 2001, we transferred our 50% ownership interest in ATIII LLC, our
joint venture with Genzyme Transgenics Corporation for the development and
commercialization of ATIII, to Genzyme Transgenics. In exchange for our interest
in the joint venture, we will receive a royalty on worldwide net sales
(excluding Asia) of any of Genzyme Transgenics' products based on ATIII
beginning three years after the first commercial sale of each such product up to
a cumulative maximum amount of $30.0 million. Prior to the transfer, we
consolidated the results of ATIII LLC because we had control of ATIII LLC
through our combined, direct and indirect ownership interest in the joint
venture.
NOVAZYME PHARMACEUTICALS, INC.
In September 2001, we acquired all of the outstanding capital stock of
Novazyme Pharmaceuticals, Inc., a privately-held developer of biotherapies for
the treatment of lysosomal storage disorders, or LSDs, for an initial payment of
2,562,182 shares of Genzyme General Stock. Novazyme shareholders received 0.5714
of a share of Genzyme General Stock for each share of Novazyme common stock they
held. We will be obligated to make two additional payments totaling
$87.5 million, payable in shares of Genzyme General Stock, if we receive U.S.
marketing approval for two products for the treatment of LSDs that employ
certain of Novazyme's technologies. In connection with the merger, we also
assumed all of the outstanding options, warrants and rights to purchase Novazyme
common stock and exchanged them for options, warrants and rights to purchase
Genzyme General Stock, on an as-converted basis. We allocated the acquisition to
Genzyme General and accounted for the acquisition as a purchase. Accordingly,
the results of operations of Novazyme are included in our consolidated financial
statements and the combined financial statements of Genzyme General from
September 26, 2001, the date of acquisition.
9
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITION (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 (amounts in thousands):
<Table>
Issuance of 2,562,182 shares of Genzyme General Stock....... $110,584
Issuance of options to purchase 158,840 shares of Genzyme
General Stock............................................. 6,274
Issuance of warrants to purchase 25,338 shares of Genzyme
General Stock............................................. 894
Issuance of rights to purchase 66,846 shares of Genzyme
General Stock............................................. 1,839
Acquisition costs........................................... 951
--------
Total purchase price...................................... $120,542
========
Cash and cash equivalents................................... $ 5,194
Other current assets........................................ 63
Property, plant and equipment............................... 4,475
Goodwill.................................................... 17,336
In-process research and development......................... 86,800
Deferred tax asset.......................................... 8,161
Other assets................................................ 62
Assumed liabilities......................................... (2,795)
Liabilities for exit activities and integration............. (1,740)
Deferred tax liability...................................... (960)
Deferred compensation....................................... 2,630
Notes receivable from stockholders.......................... 1,316
--------
Allocated purchase price.................................. $120,542
========
</Table>
Because our acquisition of Novazyme was completed after June 30, 2001, the
provisions of SFAS 141 and certain provisions of SFAS 142 apply from the date of
acquisition. Accordingly, we will not ratably amortize the goodwill resulting
from the acquisition of Novazyme. Instead we will test the goodwill's impairment
on a periodic basis in accordance with the provisions of SFAS 142.
The 2,562,182 shares of Genzyme General Stock that we issued to Novazyme's
shareholders were valued at $110.6 million using the average trading price of
Genzyme General Stock for the 4 day trading period ending September 26, 2001,
the date of acquisition. Options, warrants and rights to purchase shares of
Genzyme General Stock were valued at $9.0 million using the Black-Scholes model.
In accordance with Financial Accounting Standards Board Interpretation No. 44,
which is referred to as FIN 44, at the acquisition date we allocated the
$2.6 million intrinsic value of the portion of the unvested options related to
the future service period to deferred compensation in stockholders equity. We
are amortizing the unvested portion to operating expense over the remaining
vesting period of approximately 22 months.
In connection with our acquisition of Novazyme, we acquired a technology
platform that we believe can be leveraged in the development of treatments for
various LSDs. As of the acquisition date, the technology platform had not
achieved technological feasibility and would require significant further
development to complete. Accordingly, we have allocated to IPR&D and charged to
expense $86.8 million, representing the portion of the purchase price
attributable to the technology platform.
Our management assumes responsibility for determining the IPR&D valuation
and engaged an independent third-party appraisal company to assist in the
valuation of the intangible assets acquired.
10
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITION (CONTINUED)
The fair value assigned to purchased IPR&D was estimated by discounting, to
present value, the probability-adjusted net cash flows expected to result once
the technology has reached technological feasibility and is utilized in the
treatment of certain LSDs. A discount rate of 16% was applied to estimate the
present value of these cash flows and is consistent with the overall risks of
the platform technology. In estimating future cash flows, management considered
other tangible and intangible assets required for successful exploitation of the
technology and adjusted the future cash flows to reflect the contribution of
value from these assets. In the allocation of purchase price to the IPR&D, the
concept of alternative future use was specifically considered. The platform
technology is specific to LSDs and there is currently no alternative use for the
technology in the event that it fails as a platform for enzyme replacement
therapy for the treatment of LSDs.
UNAUDITED PRO FORMA FINANCIAL SUMMARY
In December 2000, we acquired GelTex Pharmaceuticals, Inc., a public company
engaged in developing therapeutic products based on polymer technology. We
accounted for the acquisition as a purchase and allocated it to Genzyme General.
In December 2000, we also acquired Biomatrix, Inc., a public company engaged in
the development and manufacture of viscoelastic and viscosupplementation
biomaterials for use in orthopaedic and other medical applications. We accounted
for this acquisition as a purchase and allocated it to Genzyme Biosurgery. The
following unaudited pro forma financial summary is presented as if the
acquisitions of GelTex, Biomatrix, Wyntek, Focal and Novazyme were completed as
of January 1, 2001 and 2000. The unaudited pro forma combined results are not
necessarily indicative of the actual results that would have occurred had the
acquisitions been consummated at those dates, or of the future operations of the
combined entities. Material nonrecurring charges related to these acquisitions,
such as the acquired IPR&D charges of $118.0 million resulting from the
acquisition of GelTex, $82.1 million resulting from the acquisition of
11
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITION (CONTINUED)
Biomatrix, $8.8 million resulting from the acquisition of Wyntek and
$86.8 million resulting from the acquisition of Novazyme, are not reflected in
the following pro forma financial summary:
<Table>
<Caption>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------------
2001 2000
---------- ----------
(UNAUDITED, AMOUNTS IN
THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Total revenues.............................................. $906,957 $778,085
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle.................. (39,818) 20,754
Net income (loss)........................................... (35,651) 20,754
Net income allocated to Genzyme General Stock:
Net income allocated to Genzyme General Stock before
cumulative effect of change in accounting principle..... $ 75,861 $121,008
Cumulative effect of change in accounting principle, net
of tax.................................................. 4,167 --
-------- --------
Net income allocated to Genzyme General Stock............. $ 80,028 $121,008
======== ========
Net income per share allocated to Genzyme General Stock:
Basic:
Net income per share before cumulative effect of change
in accounting principle............................... $ 0.38 $ 0.64
Per share cumulative effect of change in accounting
principle, net of tax................................. 0.02 --
-------- --------
Net income per share allocated to Genzyme General
Stock................................................. $ 0.40 $ 0.64
======== ========
Diluted:
Net income per share before cumulative effect of change
in accounting principle............................... $ 0.36 $ 0.60
Per share cumulative effect of change in accounting
principle, net of tax................................. 0.02 --
-------- --------
Net income per share allocated to Genzyme General
Stock................................................. $ 0.38 $ 0.60
======== ========
Net loss allocated to Biosurgery Stock...................... $(93,580) $(82,799)
======== ========
Net loss per share allocated to Biosurgery Stock--basic and
diluted................................................... $ (2.41) $ (2.15)
======== ========
</Table>
4. INVENTORIES (AMOUNTS IN THOUSANDS)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- -------------
(UNAUDITED)
Raw materials....................................... $ 53,102 $ 51,545
Work-in-process..................................... 90,206 73,520
Finished products................................... 30,644 45,276
-------- --------
Total............................................. $173,952 $170,341
======== ========
</Table>
12
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PHARMING GROUP, N.V. RECEIVERSHIP AND OUR ACQUISITION OF CERTAIN ASSETS
On August 10, 2001, Pharming Group, N.V., a public company in the
Netherlands and our partner in two joint ventures for the development of
therapies for Pompe disease, and certain of its subsidiaries filed for
receivership in order to seek protection from creditors. In the quarter ended
September 30, 2001, we recorded pre-tax charges of $23.4 million related to the
Pharming Group receivership, including $10.2 million for the write-off of the
principal and accrued interest due to us under the 7% convertible senior note
issued to us by Pharming Group, $8.5 million for the write-down of our equity
investment in Pharming Group because we consider the decline in value of this
investment to be other than temporary, and $4.7 million for the net amount owed
by Pharming Group to the CHO-cell product joint venture we previously formed
with Pharming Group that we believe is uncollectable.
As a result of Pharming Group's failure to make payments to fund our joint
venture for the development of a CHO-cell product for Pompe disease under a
strategic alliance agreement, we terminated this agreement in August and have
assumed full operational and financial responsibility for the development of the
CHO-cell product. Our joint venture with Pharming Group covering a transgenic
product for Pompe disease remains in place. We do not intend to commercialize
this product, but are obligated to fund its production for the nine patients
participating in a clinical trial extension until those patients can be
transitioned to a CHO-cell product. We expect to complete transition of these
patients to the CHO-cell product by the end of 2003. In September 2001, we
recorded a pre-tax charge of $17.2 million, of which $16.8 million was charged
to selling, general and administrative expenses representing our obligation to
fund the continued production of transgenic human alpha-glucosidase enzyme
through 2003.
On September 18, 2001, we signed a conditional agreement to acquire certain
assets of Pharming N.V., the Belgian subsidiary of Pharming Group N.V.,
including manufacturing facilities in Geel, Belgium. The conditional agreement
is subject to the approval of the Commercial Court in Turnhout, Belgium, the
Province of Antwerp, Belgium, and our board of directors, as well as to the
receipt of a favorable soil attestation for the land. If all of the conditions
are satisfied, we expect to complete the purchase by mid-November.
6. PRIVATE PLACEMENT OF $575.0 MILLION 3% CONVERTIBLE SUBORDINATED DEBENTURES
In May 2001, we completed the private placement of $575.0 million in
principal of 3% convertible subordinated debentures due May 2021. Net proceeds
from the offering were approximately $562.1 million. We have allocated the
principal amount of the debentures and the net proceeds from the offering to
Genzyme General. We will pay interest on these debentures on May 15 and
November 15 each year using cash allocated to Genzyme General. The first
interest payment will be made on November 15, 2001. The debentures are
convertible, upon the satisfaction of certain conditions, into shares of Genzyme
General Stock at an initial conversion price of $70.30 per share. The conversion
price is subject to adjustment. Holders of the debentures may require us to
repurchase all or part of their debentures for cash on May 15, 2006, 2011 or
2016, at a price equal to 100% of the principal amount of the debentures plus
accrued interest through the date prior to the date of repurchase. Additionally,
if certain fundamental changes occur, each holder may require us to repurchase,
for cash, all or a portion of the holder's debentures. On or after May 20, 2004,
we may redeem for cash all or part of the debentures that have not previously
been converted or repurchased. Genzyme General used a portion of these proceeds
to repay the $150.0 million we had drawn under our revolving credit facility in
December 2000 and allocated to Genzyme General to finance a portion of the cash
component of the consideration for the GelTex acquisition. We expect to utilize
the
13
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PRIVATE PLACEMENT OF $575.0 MILLION 3% CONVERTIBLE SUBORDINATED DEBENTURES
(CONTINUED)
remaining proceeds from the sale of the debentures for Genzyme General's working
capital and general corporate purposes.
7. REDEMPTION OF $250.0 MILLION 5 1/4% CONVERTIBLE SUBORDINATED NOTES
In June 2001, we completed the redemption of our $250.0 million in principal
of 5 1/4% convertible subordinated notes due 2005. Prior to the redemption date,
holders of the notes elected to convert substantially all of the principal of
the notes into approximately 12,597,000 shares of Genzyme General Stock,
685,000 shares of Biosurgery Stock and 682,000 shares of Molecular Oncology
Stock. On June 15, 2001, the redemption date, we redeemed the remaining notes
using cash allocated to Genzyme General.
8. REDEMPTION OF $21.2 MILLION 5% CONVERTIBLE SUBORDINATED DEBENTURES
In August 2001, we completed the redemption of our $21.2 million in
principal of 5% convertible subordinated debentures due 2003. Prior to the
redemption date, the holders of the debentures elected to convert all of the
principal of the debentures into approximately 1,305,000 shares of Genzyme
General Stock. We paid approximately $3.2 million in cash for the accrued
interest on the debentures through the date of conversion using cash allocated
to Genzyme General.
9. INTERDIVISIONAL FINANCING ARRANGEMENTS
In July 2001, Genzyme Biosurgery drew down $12.0 million of the
$15.0 million still available to it under the $25.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million
of the proceeds to pay a portion of the amounts it owes to Genzyme General.
Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as
needed each quarter in exchange for Biosurgery designated shares based on the
fair market value (as defined in our charter) of Biosurgery Stock at the time of
the draw. Biosurgery designated shares are shares of Biosurgery Stock that are
not issued and outstanding, but which our board of directors may issue, sell or
distribute without allocating the proceeds to Genzyme Biosurgery. At
September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under
this arrangement.
In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the
$15.0 million still available to it under the $30.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 333,333 Molecular Oncology designated shares. Under the terms of this
arrangement, Genzyme Molecular Oncology may draw down funds as needed each
quarter in exchange for Molecular Oncology designated shares based on the fair
market value (as defined in our charter) of Molecular Oncology Stock at the time
of the draw. Molecular Oncology designated shares are shares of Molecular
Oncology Stock that are not issued and outstanding, but which our board of
directors may issue, sell or distribute without allocating the proceeds to
Genzyme Molecular Oncology. At September 30, 2001, $11.0 million remained
available to Genzyme Molecular Oncology under this arrangement.
10. NEUROCELL-TM- JOINT VENTURE REFUND
Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and
commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not
initiate a Phase 3 clinical trial of
14
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. NEUROCELL-TM- JOINT VENTURE REFUND (CONTINUED)
NeuroCell-TM--PD by June 30, 2001. Because a Phase 3 trial of the product was
not initiated by June 30, 2001, Genzyme General had the right to elect to
receive a refund of $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 plus accrued interest
thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme Biosurgery
received notification from Genzyme General of its election to receive the
refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery
designated shares or both. The refund is due and payable within 90 days after
Genzyme Biosurgery received the notice from Genzyme General.
11. GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES
In the quarter ended September 30, 2001, we recorded charges of
$11.8 million in connection with our investment in the ordinary shares of
Cambridge Antibody Technology Group plc and $4.5 million in connection with our
investment in the common stock of Targeted Genetics Corporation, because we
considered the decline in the value of these investments to be other than
temporary. Given the significance and duration of the declines as of the end of
the quarter, we concluded that it was unclear over what period the recovery of
the stock price for each of these investments would take place and that,
accordingly, any evidence suggesting that the investments would recover to at
least our purchase price was not sufficient to overcome the presumption that the
current market price was the best indicator of the value of each of these
investments.
In August 2001, Pharming Group filed for receivership in order to seek
protection from its creditors. In the quarter ended September 30, 2001, we
recorded a charge of $8.5 million, representing an at cost write-off of our
investment in Pharming common stock.
In April 2001, Antigenics, Inc. announced that it had entered into a
definitive merger agreement with Aronex Pharmaceuticals, Inc. The merger was
completed in July 2001. Under the terms of the merger agreement, we received
0.0594 of a share of Antigenics common stock for each share of Aronex common
stock that we held. As a result of this merger, we recorded a $1.2 million
charge to reflect the fair market value of our investment in Aronex at June 30,
2001.
In the third quarter of 2000, we recorded a realized gain of $10.9 million
upon the sale of a portion of our investment in Genzyme Transgenics common
stock. In the second quarter of 2000, we recorded a realized gain of
$5.5 million upon the sale of a portion of our investment in Genzyme Transgenics
common stock that was offset by the reversal of a $1.9 million valuation
allowance related to previously recognized capital losses. We also recognized a
realized gain of $7.6 million resulting from the acquisition of Celtrix
Pharmaceuticals, Inc. by Insmed Pharmaceuticals, Inc. in which our shares of
Celtrix common stock were exchanged on a one-for-one basis for shares of Insmed
common stock.
12. DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, we adopted Statement of Financial Accounting Standards,
or SFAS, 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that we recognize all
derivative instruments as either assets or liabilities in our consolidated
balance sheet and measure those instruments at fair value. Subsequent changes in
fair value are reflected in current earnings or other comprehensive income,
15
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
depending on whether a derivative instrument is designated as part of a hedge
relationship and, if it is, the type of hedge relationship.
In accordance with the transition provisions of SFAS 133, we recorded a
cumulative-effect adjustment of $4.2 million, net of tax, in our unaudited,
consolidated statement of operations for the nine months ended September 30,
2001 to recognize the fair value of certain common stock warrants held on
January 1, 2001. Transition adjustments pertaining to interest rate swaps
designated as cash-flow hedges and foreign currency forward contracts were not
significant. For the three months ended September 30, 2001, we recorded a
pre-tax charge of $1.2 million in other expense to reflect the change in value
of certain common stock warrants from July 1, 2001 to September 30, 2001. For
the nine months ended September 30, 2001, we recorded a pre-tax charge of
$5.0 million in other expense to reflect the change in value of certain common
stock warrants from January 1, 2001 to September 30, 2001. We also recorded a
charge of $1.7 million in other comprehensive income for the nine months ended
September 30, 2001 to reflect the change in value of our interest rate swap
contract during the period, net of tax.
In the normal course of business, we manage risks associated with foreign
exchange rates, interest rates and equity prices through a variety of
strategies, including the use of hedging transactions, executed in accordance
with our policies. As a matter of policy, we do not use derivative instruments
unless there is an underlying exposure. Any change in the value of our
derivative instruments would be substantially offset by an opposite change in
the value of the underlying hedged items. We do not use derivative instruments
for trading or speculative purposes.
13. TAX BENEFIT (PROVISION)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
---------------------- (DECREASE) ---------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Benefit from (provision for) income
taxes............................. $4,554 $(15,933) (129)% $7,288 $(51,101) (114)%
Effective tax rate.................. 4% 32% 6% 31%
</Table>
Our tax rates for both periods vary from the U.S. statutory tax rate as a
result of our:
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible charges for IPR&D;
- nondeductible amortization of intangibles; and
- use of tax credits.
The decrease in our effective tax rate for both the three and nine months
ended September 30, 2001, as compared to the same periods a year ago, was
primarily attributable to nondeductible charges for IPR&D resulting from our
acquisitions of Wyntek in June 2001 and Novazyme in September 2001 and
nondeductible amortization of intangibles consisting largely of goodwill
resulting from our acquisitions of GelTex and Biomatrix in December 2000. The
tax benefit for the nine months ended September 30, 2001 includes a
$2.2 million benefit resulting from the release of excess tax reserves.
16
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. TAX BENEFIT (PROVISION) (CONTINUED)
We calculate earnings per share for each series of common stock using the
two-class method. To calculate basic earnings per share for each series of
stock, we divide the earnings allocated to each series of stock by the weighted
average number of outstanding shares of that series of stock during the
applicable period. When we calculate diluted earnings per share, we also include
in the denominator all potentially dilutive securities outstanding during the
applicable period. We allocate our earnings to each series of our common stock
based on the earnings attributable to that series of stock. The earnings
attributable to Genzyme General Stock, as defined in our charter, is equal to
the net income or loss of Genzyme General determined in accordance with
generally accepted accounting principles and as adjusted for tax benefits
allocated to or from Genzyme General in accordance with our management and
accounting policies. Earnings attributable to Biosurgery Stock and Molecular
Oncology Stock are defined similarly and, as such, are based on the net income
or loss of the corresponding division as adjusted for the allocation of tax
benefits.
14. NET INCOME (LOSS) PER SHARE
We calculate the income tax provision of each division as if that division
were a separate taxpayer, which includes assessing realizability of deferred tax
assets at the division level. Our management and accounting policies provide
that if, as of the end of any fiscal quarter, a division cannot use any
projected annual tax benefit attributable to it to offset or reduce its current
or deferred income tax expense, we may allocate the tax benefit to other
divisions in proportion to their taxable income without compensating payment or
allocation to the division generating the benefit. The tax benefits allocated to
Genzyme General, which are included in earnings attributable to Genzyme General
Stock, were:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS)
Tax benefits allocated from:
Genzyme Biosurgery.................. $2,918 $6,455 $20,661 $16,291
Genzyme Molecular Oncology.......... 2,687 2,021 9,367 5,558
------ ------ ------- -------
Total............................. $5,605 $8,476 $30,028 $21,849
====== ====== ======= =======
</Table>
In the three and nine months ended September 30, 2001, we allocated
$2.4 million and $11.4 million of tax benefits to Genzyme Biosurgery that
resulted from our acquisition of Biomatrix in December 2000, for which there are
no similar amounts in the same periods of last year.
17
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. NET INCOME (LOSS) PER SHARE (CONTINUED)
In future periods, Genzyme Biosurgery or Genzyme Molecular Oncology may
recognize deferred tax assets in the calculation of their respective tax
provisions determined on a separate division basis in accordance with generally
accepted accounting principles. However, to the extent the benefit of those
deferred tax assets has been previously allocated to Genzyme General in
accordance with the management and accounting policies, the benefit will be
reflected as a reduction of net income to determine net income attributable to
Biosurgery Stock or Molecular Oncology Stock. As of September 30, 2001, the
total tax benefits previously allocated to Genzyme General were (in thousands):
<Table>
Genzyme Biosurgery.......................................... $189,380
Genzyme Molecular Oncology.................................. 33,891
</Table>
GENZYME GENERAL STOCK
TWO-FOR-ONE STOCK SPLIT
At our annual meeting on May 31, 2001, our shareholders approved an
amendment to our charter which increased the total number of authorized shares
of Genzyme common stock from 390,000,000 to 690,000,000 and increased the number
of such shares designated as Genzyme General Stock from 200,000,000 to
500,000,000. On June 1, 2001, we completed a two-for-one split of Genzyme
General Stock by means of a 100% stock dividend paid to holders of Genzyme
General Stock of record on May 24, 2001. We distributed a total of 97,184,967
shares of Genzyme General Stock to holders of Genzyme General Stock in
connection with the stock split. All share and per share amounts for
18
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. NET INCOME (LOSS) PER SHARE (CONTINUED)
Genzyme General Stock have been retroactively revised for all periods presented
to reflect the two-for-one split.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Genzyme General net income (loss) before cumulative
effect of change in accounting principle............... $(81,706) $ 50,973 $(34,843) $160,272
Cumulative effect of change in accounting principle, net
of tax(1).............................................. -- -- 4,167 --
-------- -------- -------- --------
Genzyme General net income (loss)........................ (81,706) 50,973 (30,676) 160,272
Tax benefit allocated from Genzyme Biosurgery............ 2,918 6,455 20,661 16,291
Tax benefit allocated from Genzyme Molecular Oncology.... 2,687 2,021 9,367 5,558
-------- -------- -------- --------
Net income (loss) allocated to Genzyme General
Stock--basic........................................... (76,101) 59,449 (648) 182,121
Effect of dilutive securities, net of tax(2):
5 1/4% convertible subordinated notes:
Interest expense................................... -- 2,285 -- 6,643
Amortization of purchasers' discount and offering
costs(3)......................................... -- 161 -- 472
5% convertible subordinated debentures:
Interest expense................................... -- 181 -- 531
Amortization of debt offering costs(4)............. -- 30 -- 90
-------- -------- -------- --------
Net income (loss) allocated to Genzyme General
Stock--diluted......................................... $(76,101) $ 62,106 $ (648) $189,857
======== ======== ======== ========
Shares used in computing net income (loss) per common
share--basic........................................... 208,350 172,759 198,841 170,553
Effect of dilutive securities(2,6):
Stock options(5)..................................... -- 7,503 -- 6,790
5 1/4% convertible subordinated notes................ -- 12,626 -- 12,626
5% convertible subordinated debentures............... -- 1,260 -- 1,260
-------- -------- -------- --------
Dilutive potential common shares................... -- 21,389 -- 20,676
-------- -------- -------- --------
Shares used in computing net income (loss) per share--
diluted(2,6)........................................... 208,350 194,148 198,841 191,229
======== ======== ======== ========
Net income (loss) per share of Genzyme General Stock:
Basic:
Net income (loss) per share before cumulative effect
of change in accounting principle.................. $ (0.37) $ 0.34 $ (0.02) $ 1.07
Per share cumulative effect of change in accounting
principle, net of tax(1)........................... -- -- 0.02 --
-------- -------- -------- --------
Net income (loss) per share allocated to Genzyme
General Stock...................................... $ (0.37) $ 0.34 $ 0.00 $ 1.07
======== ======== ======== ========
</Table>
19
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. NET INCOME (LOSS) PER SHARE (CONTINUED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Diluted(2):
Net income (loss) per share before cumulative effect
of change in accounting principle.................. $ (0.37) $ 0.32 $ (0.02) $ 0.99
Per share cumulative effect of change in accounting
principle, net of tax(1)........................... -- -- 0.02 --
-------- -------- -------- --------
Net income (loss) per share allocated to Genzyme
General Stock...................................... $ (0.37) $ 0.32 $ 0.00 $ 0.99
======== ======== ======== ========
</Table>
- ------------------------
(1) This represents a cumulative effect adjustment resulting from the
January 1, 2001 required adoption of SFAS 133 to record the fair value of
certain derivative assets held on January 1, 2001.
(2) The net loss per share allocated to Genzyme General Stock on a diluted basis
and weighted average shares-diluted for the three and nine months ended
September 30, 2001 excludes the dilutive effect of shares issuable for
options, warrants and stock purchase rights as the effect in each period
would be anti-dilutive. The shares excluded from the calculation are as
follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2001 2001
------------------ -----------------
(UNAUDITED, AMOUNTS IN THOUSANDS)
Shares of Genzyme General Stock issuable
for options............................. 5,161 3,671
Shares of Genzyme General Stock issuable
for warrants............................ 9 9
Shares of Genzyme General Stock issuable
upon the exercise of stock purchase
rights.................................. 35 35
------ ------
Total................................... 5,205 3,715
====== ======
</Table>
(3) We had been amortizing the debt discount and offering costs of approximately
$7.0 million over the term of the 5 1/4% convertible subordinated notes,
until they were converted or redeemed in the second quarter of 2001.
(4) We had been amortizing the debt offering costs of approximately
$0.9 million over the term of the 5% convertible subordinated debentures,
until they were converted in the third quarter of 2001.
20
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. NET INCOME (LOSS) PER SHARE (CONTINUED)
(5) We did not include the securities described in the following table in the
computation of Genzyme General's diluted earnings per share because these
securities had an exercise price greater than the average market price of
Genzyme General Stock during the following periods:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 2000
------------------ -----------------
(UNAUDITED, AMOUNTS IN THOUSANDS)
Shares of Genzyme General Stock issuable
for options............................. 50 2,210
===== =====
</Table>
(6) We did not include the potentially dilutive effect of the assumed conversion
of the $575.0 million in principal of 3% convertible subordinated debentures
allocated to Genzyme General in the computation of Genzyme General's
dilutive earnings per share for the three and nine months ended
September 30, 2001 because the conditions for conversion had not been met.
The debentures are convertible into shares of Genzyme General Stock at an
initial conversion price of $70.30 per share, which was greater than the
average market price of Genzyme General Stock for the three and nine months
ended September 30, 2001. The following table describes the weighted average
shares that would have been included in the computation of Genzyme General's
diluted earnings per share if the conditions for conversion had been met and
the average market price of Genzyme General Stock during each period was
greater than or equal to $70.30 per share:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2001 2001
------------------ -----------------
(UNAUDITED, AMOUNTS IN THOUSANDS)
Shares of Genzyme General Stock issuable
upon conversion of the 3% convertible
subordinated debentures allocated to
Genzyme General......................... 8,179 4,194
===== =====
</Table>
BIOSURGERY STOCK
We created Biosurgery Stock on December 18, 2000. We created the Genzyme
Biosurgery Division by combining the businesses of our former Genzyme Surgical
Products and Genzyme Tissue Repair divisions as well as the acquired business of
Biomatrix. Accordingly, we amended our charter to create Biosurgery Stock and to
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, and 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.
Prior to December 18, 2000, the net losses of Genzyme Surgical Products and
Genzyme Tissue Repair were allocated to Surgical Products Stock and Tissue
Repair Stock.
For all periods presented, basic and diluted net loss per share of
Biosurgery Stock are the same. We did not include the securities described in
the following table in the computation of Biosurgery
21
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. NET INCOME (LOSS) PER SHARE (CONTINUED)
Stock diluted net loss per share for each period because these securities would
have an anti-dilutive effect due to the net loss allocated to Biosurgery Stock.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2001 2001
------------------ -----------------
(UNAUDITED, AMOUNTS IN THOUSANDS)
Shares of Biosurgery Stock issuable for
options................................................. 4,103 5,130
Warrants to purchase Biosurgery Stock..................... 8 8
Biosurgery designated shares reserved for options......... 95 95
Biosurgery designated shares.............................. 3,104 3,104
Shares issuable upon conversion of 6.9% convertible
subordinated note allocated to Genzyme Biosurgery....... 358 358
----- -----
Total shares excluded from the calculation of diluted net
loss per share of Biosurgery Stock...................... 7,668 8,695
===== =====
</Table>
MOLECULAR ONCOLOGY STOCK
For all periods presented, basic and diluted net loss per share of Molecular
Oncology Stock are the same. We did not include the securities described in the
following table in the computation of Molecular Oncology Stock diluted net loss
per share for each period because these securities would have an anti-dilutive
effect due to the net loss allocated to Molecular Oncology Stock.
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS)
Shares of Molecular Oncology Stock issuable for options..... 1,639 1,083 1,306 783
Warrants to purchase Molecular Oncology Stock............... -- 10 -- 10
Molecular Oncology designated shares issuable upon
conversion of 5 1/4% convertible subordinated notes
allocated to Genzyme General.............................. -- 682 -- 682
Molecular Oncology designated shares........................ 1,651 1,318 1,651 1,318
----- ----- ----- -----
Total shares excluded from the calculation of diluted net
loss per share of Molecular Oncology Stock................ 3,290 3,093 2,957 2,793
===== ===== ===== =====
</Table>
15. SEGMENT REPORTING
We present segment information in a manner consistent with the method we use
to report this information to our management. We have four reportable segments:
- Therapeutics, which as part of Genzyme General develops, manufactures and
sells human therapeutic products with an expanding focus on products that
treat patients suffering from LSDs and other specialty therapeutics. The
business derives substantially all its revenue from sales of
Cerezyme-Registered Trademark- enzyme and Renagel-Registered Trademark-
phosphate binder;
- Diagnostic products, which as part of Genzyme General provides diagnostic
products to niche markets focusing on IN VITRO diagnostics;
22
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT REPORTING (CONTINUED)
- Genzyme Biosurgery, which develops, manufactures and sells instruments,
devices, biomaterials and biotherapeutic products to improve or replace
surgery, with an emphasis on the orthopaedics and cardiothoracic markets;
and
- Genzyme Molecular Oncology, which utilizes its functional genomics and
antigen discovery technology platforms to develop novel cancer products
focused on cancer vaccines and angiogenesis inhibitors and to generate
partnering revenue developing cancer products.
We have provided information concerning the operations in these reportable
segments in the following table:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2001 2000 2001 2000
--------- -------- --------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS)
Revenues:
Genzyme General:
Therapeutics(1,2).............. $ 205,345 $153,840 $ 570,675 $436,220
Diagnostic products(3)......... 20,572 15,824 54,786 46,601
Other.......................... 28,126 22,343 88,590 66,191
Eliminations/Adjustments(4).... 1,009 158 2,692 473
--------- -------- --------- --------
Total Genzyme General........ 255,052 192,165 716,743 549,485
Genzyme Biosurgery(5)............ 63,219 34,607 177,739 105,812
Genzyme Molecular Oncology....... 1,224 635 3,915 4,153
Elimination/Adjustments.......... -- (48) -- (48)
--------- -------- --------- --------
Total........................ $ 319,495 $227,359 $ 898,397 $659,402
========= ======== ========= ========
Net income (loss):
Genzyme General:
Therapeutics(1,2).............. $ (30,537) $ 43,050 $ 41,495 $126,565
Diagnostic products(3)......... 832 865 (3,263) 2,395
Other.......................... 975 (260) 5,847 (1,056)
Eliminations/Adjustments(4).... (52,976) 7,318 (78,922) 32,368
--------- -------- --------- --------
Net income (loss) for Genzyme
General before cumulative
effect of change in accounting
principle...................... (81,706) 50,973 (34,843) 160,272
Cumulative effect of change in
accounting principle, net of
tax(6)......................... -- -- 4,167 --
--------- -------- --------- --------
Net income (loss) for Genzyme
General........................ (81,706) 50,973 (30,676) 160,272
Genzyme Biosurgery(5)............ (21,525) (19,524) (94,460) (48,936)
Genzyme Molecular Oncology....... (7,494) (5,504) (22,099) (17,924)
Eliminations/Adjustments(7)...... 8,049 8,476 41,462 22,319
--------- -------- --------- --------
Total........................ $(102,676) $ 34,421 $(105,773) $115,731
========= ======== ========= ========
</Table>
- ------------------------
(1) In December 2000, we acquired GelTex and allocated the acquisition to
Genzyme General. The operations of GelTex are included in our Therapeutics
segment for the three and nine months ended September 30, 2001.
23
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT REPORTING (CONTINUED)
(2) In September 2001, we acquired Novazyme and allocated the acquisition to
Genzyme General. The results of operations of Novazyme are included in our
Therapeutics segment from September 26, 2001, the date of acquisition.
(3) In June 2001, we acquired Wyntek and allocated the acquisition to Genzyme
General. The results of operations of Wyntek are included in our Diagnostic
products segment from June 1, 2001, the date of acquisition.
(4) Includes primarily amounts related to Genzyme General's research and
development and administrative activities that we do not specifically
allocate to a particular segment of Genzyme General. The amount for the nine
months ended September 30, 2000 also includes a gain of $20.3 million
relating to a public offering of common stock by Genzyme Transgenics, an
unconsolidated affiliate, which we recognized in accordance with our policy
pertaining to affiliate sales of stock.
(5) In December 2000, we acquired Biomatrix and allocated the acquisition to
Genzyme Biosurgery. The operations of Biomatrix are included in our Genzyme
Biosurgery segment for the three and nine months ended September 30, 2001.
On June 30, 2001, we acquired Focal and allocated the acquisition to Genzyme
Biosurgery. The results of operations of Focal are included in the results
of our Genzyme Biosurgery segment from the date of acquisition.
(6) On January 1, 2001, in connection with the adoption of SFAS 133, Genzyme
General recorded a cumulative-effect adjustment of $4.2 million, net of tax,
to recognize the fair value of certain common stock warrants held on
January 1, 2001.
(7) Includes income tax benefits that have not been recognized in the tax
provisions of the divisions.
SEGMENT ASSETS (AMOUNTS IN THOUSANDS):
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- -------------
(UNAUDITED)
Genzyme General(1):
Therapeutics(2)................................... $1,381,118 $1,341,656
Diagnostic products(3)............................ 171,509 89,236
Other............................................. 82,909 77,153
Eliminations/Adjustments(4)....................... 1,496,192 991,008
---------- ----------
Total Genzyme General........................... 3,131,728 2,499,053
Genzyme Biosurgery(5)............................... 775,344 811,600
Genzyme Molecular Oncology.......................... 12,105 30,752
Eliminations/Adjustments(6)......................... (55,906) (23,305)
---------- ----------
Total........................................... $3,863,271 $3,318,100
========== ==========
</Table>
- ------------------------
(1) Segment assets for Genzyme General primarily include accounts receivable,
inventory and certain fixed and intangible assets.
(2) Segment assets for Therapeutics as of September 30, 2001 include
$27.1 million of additional assets resulting from the acquisition of
Novazyme in September 2001, including $17.3 million of goodwill.
(3) Segment assets for Diagnostic products as of September 30, 2001 include
$71.1 million of additional assets resulting from the acquisition of Wyntek
in June 2001, including $19.9 million of goodwill and $39.4 million of other
intangible assets.
24
<Page>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT REPORTING (CONTINUED)
(4) Segment assets for Eliminations/Adjustments for Genzyme General consists of
the difference between the total assets for Genzyme General's segments and
total combined assets for Genzyme General. Eliminations/Adjustments for
September 30, 2001 include the allocation of net proceeds of $562.1 million
from the private placement of $575.0 million in principal of 3% convertible
subordinated debentures which was completed in May 2001. Genzyme General
used a portion of these proceeds to repay the $150.0 million we had drawn
under our revolving credit facility in December 2000 and allocated to
Genzyme General to finance a portion of the cash component of the
consideration for the GelTex merger.
(5) Segment assets for Genzyme Biosurgery at September 30, 2001 include:
- $25.9 million of additional assets resulting from the acquisition of the
Class A and Class B limited partnership interests of GDP, including
$8.4 million of goodwill and $17.5 million of other intangible assets; and
- $19.3 million of additional assets resulting from the acquisition of
Focal, Inc., including $7.9 million of intangible assets.
(6) Represents the elimination of inter-divisional balances.
16. SUBSEQUENT EVENTS
ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V.
We have satisfied all of the conditions to closing on our acquisition of
certain assets of Pharming N.V. that are set forth in the conditional agreement,
including receipt of approvals from the Commercial Court in Turnhout, Belgium,
the Province of Antwerp, Belgium and our board of directors, as well as a
favorable soil attestation for the land. We anticipate completing the
acquisition by mid-November and will allocate the purchase to Genzyme General.
As part of the purchase price for this acquisition, we have agreed to pay
approximately 6.5 million euros to trade creditors of Pharming N.V. We have also
agreed to assume certain liabilities related to governmental grants and the
lease for the land on which the manufacturing facilities in Geel, Belgium sit.
Pharming Group has publicly announced its intention to appeal the decision of
the Commercial Court in Turnhout, Belgium.
NEUROCELL-TM- JOINT VENTURE REFUND
Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme
Biosurgery's deadline to refund $20.0 million to Genzyme General in connection
with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because
a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30,
2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has
agreed to pay the refund and accrued interest in cash.
FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION
On October 22, 2001, we received a complete response letter from the FDA
related to our application to market Fabrazyme-TM- enzyme, an investigational
enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies
additional data and information the FDA requires to complete its review of our
Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for
Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted
for review by the FDA under an accelerated approval mechanism. We received an
initial complete response letter from the FDA in December 2000 and submitted our
response to that letter in April 2001.
25
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Net product sales......................................... $234,875 $176,891 $656,121 $503,700
Net service sales......................................... 17,853 15,115 54,390 45,296
Revenues from research and development contracts:
Related parties......................................... 1,043 -- 2,726 245
Other................................................... 1,281 159 3,506 244
-------- -------- -------- --------
Total revenues........................................ 255,052 192,165 716,743 549,485
-------- -------- -------- --------
Operating costs and expenses:
Cost of products sold..................................... 48,334 45,190 143,697 114,461
Cost of services sold..................................... 10,893 9,165 31,794 26,937
Selling, general and administrative....................... 92,386 41,780 217,475 122,974
Research and development (including research and
development related to contracts)....................... 49,726 25,567 132,317 83,701
Amortization of intangibles............................... 19,221 1,983 55,073 5,962
Purchase of in-process research and development........... 86,800 -- 95,568 --
-------- -------- -------- --------
Total operating costs and expenses.................... 307,360 123,685 675,924 354,035
-------- -------- -------- --------
Operating income (loss)..................................... (52,308) 68,480 40,819 195,450
-------- -------- -------- --------
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... (8,110) (11,420) (27,605) (30,866)
Gain on affiliate sale of stock........................... 212 2,419 212 22,689
Gain (loss) on investments in equity securities........... (24,464) 8,544 (25,996) 22,709
Minority interest in net loss of subsidiary............... 260 977 2,259 3,185
Other..................................................... (1,227) (43) (5,115) 5,110
Investment income......................................... 13,125 11,072 34,136 27,798
Interest expense.......................................... (5,699) (4,647) (19,379) (11,639)
-------- -------- -------- --------
Total other income (expenses)......................... (25,903) 6,902 (41,488) 38,986
-------- -------- -------- --------
Income (loss) before income taxes........................... (78,211) 75,382 (669) 234,436
Provision for income taxes.................................. (3,495) (24,409) (34,174) (74,164)
-------- -------- -------- --------
Division net income (loss) before cumulative effect of
change in accounting principle............................ (81,706) 50,973 (34,843) 160,272
Cumulative effect of change in accounting principle, net of
tax....................................................... -- -- 4,167 --
-------- -------- -------- --------
Division net income (loss).................................. $(81,706) $ 50,973 $(30,676) $160,272
======== ======== ======== ========
Comprehensive income (loss), net of tax:
Division net income (loss)................................ $(81,706) $ 50,973 $(30,676) $160,272
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments................ 18,201 (10,340) 554 (20,737)
Unrealized loss on derivatives, net of tax.............. (1,444) -- (1,733) --
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period... (8,675) 44,394 (9,758) 51,179
Reclassification adjustment for (gains) losses
included in division net income (loss).............. 15,535 -- 16,507 (5,501)
-------- -------- -------- --------
Unrealized gains on securities, net..................... 6,860 44,394 6,749 45,678
-------- -------- -------- --------
Other comprehensive income................................ 23,617 34,054 5,570 24,941
-------- -------- -------- --------
Comprehensive income (loss)................................. $(58,089) $ 85,027 $(25,106) $185,213
======== ======== ======== ========
</Table>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
26
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 170,710 $ 135,841
Short-term investments.................................... 113,582 96,644
Accounts receivable, net.................................. 194,538 165,911
Inventories............................................... 116,712 108,767
Prepaid expenses and other current assets................. 26,954 28,012
Due from Genzyme Biosurgery............................... 50,497 18,645
Due from Genzyme Molecular Oncology....................... 5,409 4,660
Deferred tax assets--current.............................. 47,074 46,836
---------- ----------
Total current assets.................................... 725,476 605,316
Property, plant and equipment, net.......................... 537,702 446,759
Long-term investments....................................... 746,583 298,841
Notes receivable-related party.............................. -- 10,350
Intangibles, net............................................ 998,457 977,147
Investments in equity securities............................ 78,279 119,648
Other noncurrent assets..................................... 45,231 40,992
---------- ----------
Total assets............................................ $3,131,728 $2,499,053
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 29,077 $ 20,091
Accrued expenses.......................................... 112,417 98,201
Income taxes payable...................................... 43,913 40,442
Deferred revenue.......................................... 1,958 6,401
Current portion of long-term debt and capital lease
obligations............................................. 7,171 1,448
---------- ----------
Total current liabilities............................... 194,536 166,583
Long-term debt and capital lease obligations................ 25,110 180,556
Convertible notes and debentures............................ 575,000 273,680
Deferred tax liability...................................... 74,387 124,613
Other noncurrent liabilities................................ 23,827 3,341
---------- ----------
Total liabilities....................................... 892,860 748,773
---------- ----------
Division equity............................................. 2,238,868 1,750,280
---------- ----------
Total liabilities and division equity................... $3,131,728 $2,499,053
========== ==========
</Table>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
27
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net income (loss)................................ $ (30,676) $ 160,272
Reconciliation of division net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 77,828 32,834
Non-cash compensation expense........................... 7,375 --
Provision for bad debts................................. 1,784 5,303
Notes received from a collaborator...................... -- (10,175)
Write-off of notes received from a collaborator......... 10,159 --
Charges for in-process research and development......... 95,568 --
Equity in net loss of unconsolidated affiliates......... 27,605 30,866
Gain on affiliate sale of stock......................... (212) (22,689)
(Gain) loss on investments in equity securities......... 25,996 (22,709)
Minority interest in net loss of subsidiary............. (2,259) (3,185)
Deferred income tax expense (benefit)................... (17,165) 5,882
Other................................................... (3,241) 722
Increase (decrease) in cash from working capital
changes:
Accounts receivable................................... (30,106) (28,776)
Inventories........................................... 1,029 (7,813)
Prepaid expenses and other current assets............. (891) (813)
Due from Genzyme Biosurgery........................... (31,852) (3,544)
Due from Genzyme Molecular Oncology................... (749) (295)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue........................ 76,445 35,600
--------- ---------
Net cash provided by operating activities........... 206,638 171,480
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. (750,075) (389,549)
Sales and maturities of investments....................... 306,441 298,344
Purchases of equity securities............................ (3,318) --
Proceeds from sale of investments in equity securities.... 36 15,773
Purchase of property, plant and equipment................. (113,078) (49,973)
Acquisitions, net of acquired cash........................ (54,832) (342)
Investments in unconsolidated affiliates.................. (31,298) (19,639)
Other..................................................... 5,962 3,161
--------- ---------
Net cash used in investing activities............... (640,162) (142,225)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Genzyme General
Stock................................................... 72,584 80,064
Allocated proceeds from issuance of debt.................. 562,062 --
Payments of debt.......................................... (154,625) --
Net cash allocated to Genzyme Biosurgery.................. (11,993) (9,910)
Net cash allocated to Genzyme Molecular Oncology.......... (4,040) (15,000)
Bank overdraft............................................ 1,434 --
Other..................................................... 3,974 1,276
--------- ---------
Net cash provided by financing activities........... 469,396 56,430
--------- ---------
Effect of exchange rate changes on cash..................... (1,003) (3,892)
--------- ---------
Increase in cash and cash equivalents....................... 34,869 81,793
Cash and cash equivalents at beginning of period............ 135,841 94,523
--------- ---------
Cash and cash equivalents at end of period.................. $ 170,710 $ 176,316
========= =========
</Table>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
28
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited, combined financial statements of Genzyme General for each
period include the balance sheets, statements of operations and cash flows of
the businesses we allocate to Genzyme General. We also allocate a portion of our
corporate operations to Genzyme General using methods described in our
allocation policy included in Exhibit 99.1 to our 2000 Form 10-K. These
unaudited, combined financial statements are prepared using amounts included in
our unaudited, consolidated financial statements included in this Form 10-Q. We
prepared these unaudited, combined financial statements for Genzyme General
following the requirements of the SEC for interim reporting. As permitted under
these rules, we condense or omit certain footnotes and other financial
information that are normally required by generally accepted accounting
principles. We have reclassified certain 2000 data to conform to our 2001
presentation.
These financial statements include all normal and recurring adjustments that
we consider necessary for the fair presentation of Genzyme General's financial
position and operating results. Since these are interim financial statements,
you should also read the financial statements and notes for Genzyme General
included in our 2000 Form 10-K. Revenues, expenses, assets and liabilities can
vary from quarter to quarter. Therefore, the results and trends in these interim
financial statements may not be indicative of the results for future periods.
2. NEW ACCOUNTING PRONOUNCEMENTS
We have included the impact that recently issued accounting standards will
have on our financial statements in Note 2, "New Accounting Pronouncements," to
our unaudited, consolidated financial statements, which we incorporate by
reference into this note.
3. ACQUISITIONS AND DISPOSITION
WYNTEK DIAGNOSTICS, INC.
In June 2001, we acquired all of the outstanding capital stock of
privately-held Wyntek for $65.0 million in cash. Wyntek is a provider of high
quality point of care rapid diagnostic tests for pregnancy and infectious
diseases. We allocated the acquisition to Genzyme General and accounted for the
acquisition as a purchase. Accordingly, we included the results of operations of
Wyntek in our consolidated financial statements and the combined financial
statements of Genzyme General from June 1, 2001, the date of acquisition.
29
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITION (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 (amounts in thousands):
<Table>
Cash paid................................................... $ 65,000
Acquisition costs........................................... 234
--------
Total purchase price...................................... $ 65,234
========
Cash and cash equivalents................................... $ 4,974
Other current assets........................................ 4,966
Property, plant and equipment............................... 1,843
Deferred tax assets......................................... 2,312
Intangible assets (to be amortized over 5 to 10 years)...... 39,444
In-process research and development......................... 8,768
Goodwill (to be amortized over 10 years).................... 19,908
Deferred tax liability...................................... (14,197)
Assumed liabilities......................................... (2,784)
--------
Allocated purchase price.................................. $ 65,234
========
</Table>
In connection with the acquisition of Wyntek we allocated approximately
$8.8 million of the purchase price to IPR&D. Our management assumed
responsibility for determining the IPR&D valuation and engaged an independent
third-party appraisal company to assist in the valuation of the intangible
assets acquired. We estimated the fair value assigned to purchased IPR&D by
discounting, to present value, the cash flows expected to result from the
project once it has reached technological feasibility. We applied a discount
rate of 25% to estimate the present value of these cash flows, which was
consistent with the risks of the project. In estimating future cash flows,
management considered other tangible and intangible assets required for
successful exploitation of the technology resulting from the purchased IPR&D
project and adjusted future cash flows for a charge reflecting the contribution
to value of these assets. The value assigned to purchased IPR&D was the amount
attributable to the efforts of Wyntek up to the time of acquisition.
In the allocation of purchase price to IPR&D, the concept of alternative
future use was specifically considered for the program under development. The
acquired IPR&D consists of Wyntek's work to complete the program. There are no
alternative uses for the in-process program in the event that the program fails
in clinical trials or is otherwise not feasible. The development effort for the
acquired IPR&D does not possess an alternative future use for us as defined by
generally accepted accounting principles. Consequently, in accordance with
generally accepted accounting principles, the amount allocated to IPR&D was
charged as an expense in our financial statements for the nine months ended
September 30, 2001. We are amortizing the remaining acquired intangible assets
arising from the acquisition on a straight-line basis over their estimated
lives, which range from 5 years to 10 years.
Below is a brief description of the IPR&D program associated with Wyntek's
cardiovascular disease diagnostic product, including an estimation of when
management believes we may realize revenues from the sale of this product.
Wyntek is currently developing a cardiovascular product to rapidly measure
the quantitative levels of cardiac marker proteins. These are the leading
markers for the diagnosis of acute myocardial
30
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITION (CONTINUED)
infarction. The product consists of a mobile, stand-alone, quantitative
diagnostic device and a reaction strip that detects disease specific marker
proteins. The device will be used to read reaction strips at the patient's
bedside or in an emergency room setting. We expect to complete the regulatory
review process and file an application for marketing approval in early 2002 and
begin selling the product during the second half of 2002. Studies to date have
demonstrated the viability of this product but there can be no assurance that
the regulatory authorities will approve this product.
ATIII LLC
In July 2001, we transferred our 50% ownership interest in ATIII LLC, our
joint venture with Genzyme Transgenics for the development and commercialization
of ATIII, to Genzyme Transgenics. In exchange for our interest in the joint
venture, we will receive a royalty on worldwide net sales (excluding Asia) of
any of Genzyme Transgenics' products based on ATIII beginning three years after
the first commercial sale of each such product up to a cumulative maximum amount
of $30.0 million. Prior to the transfer, we consolidated the results of ATIII
LLC because we had control of ATIII LLC through our combined, direct and
indirect ownership interest in the joint venture.
NOVAZYME PHARMACEUTICALS, INC.
In September 2001, we acquired all of the outstanding capital stock of
Novazyme, a privately-held developer of biotherapies for the treatment of
lysosomal storage disorders, or LSDs, for an initial payment of
2,562,182 shares of Genzyme General Stock. Novazyme shareholders received 0.5714
of a share of Genzyme General Stock for each share of Novazyme common stock they
held. We will be obligated to make two additional payments totaling
$87.5 million, payable in shares of Genzyme General Stock, if we receive U.S.
marketing approval for two products for the treatment of LSDs that employ
certain of Novazyme's technologies. In connection with the merger, we also
assumed all of the outstanding options, warrants and rights to purchase Novazyme
common stock and exchanged them for options, warrants and rights to purchase
Genzyme General Stock, on an as-converted basis. We allocated the acquisition to
Genzyme General and accounted for the acquisition as a purchase. Accordingly,
the results of operations of Novazyme are included in our consolidated financial
statements and the combined financial statements of Genzyme General from
September 26, 2001, the date of acquisition.
31
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITION (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 (amounts in thousands):
<Table>
Issuance of 2,562,182 shares of Genzyme General Stock....... $110,584
Issuance of options to purchase 158,840 shares of Genzyme
General
Stock..................................................... 6,274
Issuance of warrants to purchase 25,338 shares of Genzyme
General Stock............................................. 894
Issuance of rights to purchase 66,846 shares of Genzyme
General Stock............................................. 1,839
Acquisition costs........................................... 951
--------
Total purchase price...................................... $120,542
========
Cash and cash equivalents................................... $ 5,194
Other current assets........................................ 63
Property, plant and equipment............................... 4,475
Goodwill.................................................... 17,336
In-process research and development......................... 86,800
Deferred tax asset.......................................... 8,161
Other assets................................................ 62
Assumed liabilities......................................... (2,795)
Liabilities for exit activities and integration............. (1,740)
Deferred tax liability...................................... (960)
Deferred compensation....................................... 2,630
Notes receivable from stockholders.......................... 1,316
--------
Allocated purchase price.................................. $120,542
========
</Table>
Because our acquisition of Novazyme was completed after June 30, 2001, the
provisions of SFAS 141 and certain provisions of SFAS 142 apply from the date of
acquisition. Accordingly, we will not ratably amortize the goodwill resulting
from the acquisition of Novazyme. Instead, we will test the goodwill's
impairment on a periodic basis in accordance with the provisions of SFAS 142.
32
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITION (CONTINUED)
The 2,562,182 shares of Genzyme General Stock that we issued to Novazyme's
shareholders were valued at $110.6 million using the average trading price of
Genzyme General Stock for the 4 day trading period ending on September 26, 2001,
the date of acquisition. Options, warrants and rights to purchase shares of
Genzyme General Stock were valued at $9.0 million using the Black-Scholes model.
In accordance with FIN 44, at the date of acquisition we allocated the
$2.6 million intrinsic value of the portion of the unvested options related to
the future service period to deferred compensation in division equity. We are
amortizing the unvested portion to operating expense over the remaining vesting
period of approximately 22 months.
In connection with our acquisition of Novazyme, we acquired a technology
platform that we believe can be leveraged in the development of treatments for
various LSDs. As of the acquisition date, the technology platform had not
achieved technological feasibility and would require significant further
development to complete. Accordingly, we have allocated to IPR&D and charged to
expense $86.8 million, representing the portion of the purchase price
attributable to the technology platform.
Our management assumes responsibility for determining the IPR&D valuation
and 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
probability-adjusted net cash flows expected to result once the technology has
reached technological feasibility and is utilized in the treatment of certain
LSDs. A discount rate of 16% was applied to estimate the present value of these
cash flows and is consistent with the overall risks of the platform technology.
In estimating future cash flows, management considered other tangible and
intangible assets required for successful exploitation of the technology and
adjusted the future cash flows to reflect the contribution of value from these
assets. In the allocation of purchase price to IPR&D, the concept of alternative
future use was specifically considered. The platform technology is specific to
LSDs and there is currently no alternative use for the technology in the event
that it fails as a platform for enzyme replacement therapy for the treatment of
LSDs.
UNAUDITED PRO FORMA FINANCIAL SUMMARY
In December 2000, we acquired GelTex, a public company engaged in developing
therapeutic products based on polymer technology. We accounted for the
acquisition as a purchase and allocated it to Genzyme General. The following
unaudited pro forma financial summary is presented as if the acquisitions of
GelTex, Wyntek and Novazyme were completed as of January 1, 2001 and 2000. The
unaudited pro forma combined results are not necessarily indicative of the
actual results that would have occurred had the acquisitions been consummated on
those dates, or of the future operations of the combined entities. Material
nonrecurring charges related to these acquisitions, such as acquired IPR&D
charges of $118.0 million resulting from the acquisition of GelTex,
$8.8 million resulting from
33
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITION (CONTINUED)
the acquisition of Wyntek and $86.8 million resulting from the acquisition of
Novazyme, are not reflected in the following pro forma financial summary:
<Table>
<Caption>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------
2001 2000
-------- --------
(UNAUDITED, AMOUNTS
IN THOUSANDS)
Total revenues....................................... $725,156 $601,419
Income before extraordinary items and cumulative
effect of change in accounting principle, net of
tax................................................ 41,990 96,975
Division net income.................................. 46,157 96,975
</Table>
4. INVENTORIES (AMOUNTS IN THOUSANDS)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
Raw materials....................................... $ 36,218 $ 30,275
Work-in-process..................................... 59,936 47,880
Finished products................................... 20,558 30,612
-------- --------
Total............................................. $116,712 $108,767
======== ========
</Table>
5. PHARMING GROUP, N.V. RECEIVERSHIP AND OUR ACQUISITION OF CERTAIN ASSETS
On August 10, 2001, Pharming Group, N.V., a public company in the
Netherlands and our partner in two joint ventures for the development of
therapies for Pompe disease, and certain of its subsidiaries filed for
receivership in order to seek protection from creditors. In the quarter ended
September 30, 2001, we recorded pre-tax charges of $23.4 million related to the
Pharming Group receivership, including $10.2 million for the write-off of the
principal and accrued interest due to us under the 7% convertible senior note
issued to us by Pharming Group, $8.5 million for the write-down of our equity
investment in Pharming Group because we consider the decline in value of this
investment to be other than temporary, and $4.7 million for the net amount owed
by Pharming Group to the CHO-cell product joint venture we previously formed
with Pharming Group that we believe is uncollectable.
As a result of Pharming Group's failure to make payments to fund our joint
venture for the development of a CHO-cell product for Pompe disease under a
strategic alliance agreement, we terminated this agreement in August and have
assumed full operational and financial responsibility for the development of the
CHO-cell product. Our joint venture with Pharming Group covering a transgenic
product for Pompe disease remains in place. We do not intend to commercialize
this product, but are obligated to fund its production for the nine patients
participating in a clinical trial extension until those patients can be
transitioned to a CHO-cell product. We expect to complete transition of these
patients to the CHO-cell product by the end of 2003. In September 2001, we
recorded a pre-tax charge of $17.2 million, of which, $16.8 million was charged
to selling, general and administrative expenses representing our obligation to
fund the continued production of transgenic human alpha-glucosidase enzyme
through 2003.
34
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. PHARMING GROUP, N.V. RECEIVERSHIP AND OUR ACQUISITION OF CERTAIN ASSETS
(CONTINUED)
On September 18, 2001, we signed a conditional agreement to acquire certain
assets of Pharming N.V., the Belgian subsidiary of Pharming Group N.V.,
including manufacturing facilities in Geel, Belgium. The conditional agreement
is subject to the approval of the Commercial Court in Turnhout, Belgium, the
Province of Antwerp, Belgium, and our board of directors, as well as to the
receipt of a favorable soil attestation for the land. If all of the conditions
are satisfied, we expect to complete the purchase by mid-November.
6. PRIVATE PLACEMENT OF $575.0 MILLION 3% CONVERTIBLE SUBORDINATED DEBENTURES
In May 2001, we completed the private placement of $575.0 million in
principal of 3% convertible subordinated debentures due May 2021. Net proceeds
from the offering were approximately $562.1 million. We have allocated the
principal balance of the debentures and the net proceeds from the offering to
Genzyme General. We will pay interest on these debentures on May 15 and
November 15 each year using cash allocated to Genzyme General. The first
interest payment will be made on November 15, 2001. The debentures are
convertible, upon the satisfaction of certain conditions, into shares of Genzyme
General Stock at an initial conversion price of $70.30 per share. The conversion
price is subject to adjustment. Holders of the debentures may require us to
repurchase all or part of their debentures for cash on May 15, 2006, 2011 or
2016, at a price equal to 100% of the principal amount of the debentures plus
accrued interest through the date prior to the date of repurchase. Additionally,
if certain fundamental changes occur, each holder may require us to repurchase,
for cash, all or a portion of the holder's debentures. On or after May 20, 2004,
we may redeem for cash all or part of the debentures that have not previously
been converted or repurchased. Genzyme General used a portion of these proceeds
to repay the $150.0 million we had drawn under our revolving credit facility in
December 2000 and allocated to Genzyme General to finance a portion of the cash
component of the consideration for the GelTex acquisition. We expect to utilize
the remaining proceeds from the sale of the debentures for Genzyme General's
working capital and general corporate purposes.
7. REDEMPTION OF $250.0 MILLION 5 1/4% CONVERTIBLE SUBORDINATED NOTES
In June 2001, we completed the redemption of our $250.0 million in principal
of 5 1/4% convertible subordinated notes due 2005. Prior to the redemption date,
holders of the notes elected to convert substantially all of the principal of
the notes into approximately 12,597,000 shares of Genzyme General Stock, 685,000
shares of Biosurgery Stock and 682,000 shares of Molecular Oncology Stock. On
June 15, 2001, the redemption date, we redeemed the remaining notes using cash
allocated to Genzyme General.
8. REDEMPTION OF $21.2 MILLION 5% CONVERTIBLE SUBORDINATED DEBENTURES
In August 2001, we completed the redemption of our $21.2 million in
principal of 5% convertible subordinated debentures due 2003. Prior to the
redemption date, the holders of the debentures elected to convert all of the
principal of the debentures into approximately 1,305,000 shares of Genzyme
General Stock. We paid approximately $3.2 million in cash for the accrued
interest on the debentures through the date of conversion using cash allocated
to Genzyme General.
35
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. INTERDIVISIONAL FINANCING ARRANGEMENT
In July 2001, Genzyme Biosurgery drew down $12.0 million of the
$15.0 million still available to it under the $25.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million
of the proceeds to pay a portion of the amounts it owes to Genzyme General.
Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as
needed each quarter in exchange for Biosurgery designated shares based on the
fair market value (as defined in our charter) of Biosurgery Stock at the time of
the draw. Biosurgery designated shares are shares of Biosurgery Stock that are
not issued and outstanding, but which our board of directors may issue, sell or
distribute without allocating the proceeds to Genzyme Biosurgery. At
September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under
this arrangement.
In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the
$15.0 million still available to it under the $30.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 333,333 Molecular Oncology designated shares. Under the terms of this
arrangement, Genzyme Molecular Oncology may draw down funds as needed each
quarter in exchange for Molecular Oncology designated shares based on the fair
market value (as defined in our charter) of Molecular Oncology Stock at the time
of the draw. Molecular Oncology designated shares are shares of Molecular
Oncology Stock that are not issued and outstanding, but which our board of
directors may issue, sell or distribute without allocating the proceeds to
Genzyme Molecular Oncology. At September 30, 2001, $11.0 million remained
available to Genzyme Molecular Oncology under this arrangement.
10. NEUROCELL-TM- JOINT VENTURE REFUND
Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and
commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not
initiate a Phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because
a Phase 3 trial of the product was not initiated by June 30, 2001, Genzyme
General had the right to elect to receive a refund of $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 plus accrued interest thereon at a rate of 13.5% per annum. On
August 2, 2001, Genzyme Biosurgery received notification from Genzyme General of
its election to receive the refund. Genzyme Biosurgery can pay the refund amount
in cash, Biosurgery designated shares or both. The refund is due and payable
within 90 days after Genzyme Biosurgery received the notice from Genzyme
General.
11. GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES
In the quarter ended September 30, 2001, Genzyme General recorded charges of
$11.8 million in connection with our investment in the ordinary shares of
Cambridge Antibody Technology Group plc and $4.5 million in connection with our
investment in the common stock of Targeted Genetics Corporation, because we
considered the decline in the value of these investments to be other than
temporary. Given the significance and duration of the declines as of the end of
the quarter, we concluded that it was unclear over what period the recovery of
the stock price for each of these investments would take place and that,
accordingly, any evidence suggesting that the investments would recover to at
least our purchase price was not sufficient to overcome the presumption that the
current market price was the best indicator of the value of each of these
investments.
36
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES (CONTINUED)
In August 2001, Pharming Group filed for receivership in order to seek
protection from its creditors. In the quarter ended September 30, 2001, Genzyme
General recorded a charge of $8.5 million, representing an at cost write-off of
our investment in Pharming common stock.
In April 2001, Antigenics, Inc. announced that it had entered into a
definitive merger agreement with Aronex Pharmaceuticals, Inc. The merger was
completed in July 2001. Under the terms of the merger agreement, we received
0.0594 of a share of Antigenics common stock for each share of Aronex common
stock that we held. As a result of this merger, Genzyme General recorded a
$1.2 million charge to reflect the fair market value of our investment in Aronex
at June 30, 2001.
In the third quarter of 2000, Genzyme General recorded a realized gain of
$10.9 million upon the sale of a portion of our investment in Genzyme
Transgenics common stock. In the second quarter of 2000, Genzyme General
recorded a realized gain of $5.5 million upon the sale of a portion of our
investment in Genzyme Transgenics common stock that was offset by the reversal
of a $1.9 million valuation allowance related to previously recognized capital
losses. Genzyme General also recognized a realized gain of $7.6 million
resulting from the acquisition of Celtrix Pharmaceuticals, Inc. by Insmed
Pharmaceuticals, Inc. in which our shares of Celtrix common stock were exchanged
on a one-for-one basis for shares of Insmed common stock.
12. DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that we recognize all derivative instruments as either assets or liabilities in
our combined balance sheet and measure those instruments at fair value.
Subsequent changes in fair value are reflected in current earnings or other
comprehensive income, depending on whether a derivative instrument is designated
as part of a hedge relationship and, if it is, the type of hedge relationship.
In accordance with the transition provisions of SFAS 133, Genzyme General
recorded a cumulative-effect adjustment of $4.2 million, net of tax, in its
unaudited, combined statement of operations for the nine months ended
September 30, 2001 to recognize the fair value of certain common stock warrants
held on January 1, 2001. Transition adjustments pertaining to interest rate
swaps designated as cash-flow hedges and foreign currency forward contracts
allocated to Genzyme General were not significant. For the three months ended
September 30, 2001, Genzyme General recorded a pre-tax charge of $1.2 million in
other expense to reflect the change in value of certain common stock warrants
from July 1, 2001 to September 30, 2001. For the nine months ended
September 30, 2001, Genzyme General recorded a pre-tax charge of $5.0 million in
other expense to reflect the change in value of certain common stock warrants
from January 1, 2001 to September 30, 2001. Genzyme General also recorded a
charge of $1.7 million in division equity for the nine months ended
September 30, 2001, to reflect the change in value of our interest rate swap
contract during the period, net of tax.
In the normal course of business, we manage risks associated with foreign
exchange rates, interest rates and equity prices through a variety of
strategies, including the use of hedging transactions, executed in accordance
with our policies. As a matter of policy, we do not use derivative instruments
unless there is an underlying exposure. Any change in the value of our
derivative instruments would be
37
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
substantially offset by an opposite change in the value of the underlying hedged
items. We do not use derivative instruments for trading or speculative purposes.
13. TAX PROVISION
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Provision for income taxes........... $(3,495) $(24,409) (86)% $(34,174) $(74,164) (54)%
Effective tax rate................... (4)% 32 % (5,108)% 32 %
</Table>
Genzyme General's tax rates for all periods vary from the U.S. statutory tax
rate as a result of its:
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible charges for IPR&D;
- nondeductible amortization of intangibles; and
- use of tax credits.
The decrease in Genzyme General's effective tax rate for both the three and
nine month periods ended September 30, 2001, as compared to the same periods a
year ago, was primarily attributable to nondeductible charges for IPR&D
resulting from our acquisitions of Wyntek in June 2001 and Novazyme in
September 2001 and nondeductible amortization of intangibles consisting largely
of goodwill resulting from our acquisition of GelTex in December 2000. The tax
provision for the nine months ended September 30, 2001 also includes a
$2.2 million benefit resulting from our release of excess tax reserves.
14. SEGMENT REPORTING
We present segment information for Genzyme General in a manner consistent
with the method we use to report this information to our management. Genzyme
General has two reportable segments:
- Therapeutics, which develops, manufactures and sells human therapeutic
products with an expanding focus on products that treat patients suffering
from lysosomal storage disorders and other specialty therapeutics. The
business derives substantially all its revenue from sales of
Cerezyme-Registered Trademark- enzyme and Renagel-Registered Trademark-
phosphate binder; and
- Diagnostic products, which provides diagnostic products to niche markets
focusing on IN VITRO diagnostics.
38
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT REPORTING (CONTINUED)
We have provided information concerning the operations in these reportable
segments in the following table:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS)
Revenues:
Therapeutics(1,2)................................. $205,345 $153,840 $570,675 $436,220
Diagnostic products(3)............................ 20,572 15,824 54,786 46,601
Other............................................. 28,126 22,343 88,590 66,191
Eliminations/Adjustments(4)....................... 1,009 158 2,692 473
-------- -------- -------- --------
Total........................................... $255,052 $192,165 $716,743 $549,485
======== ======== ======== ========
Division net income:
Therapeutics(1,2)................................. $(30,537) $ 43,050 $ 41,495 $126,565
Diagnostic products(3)............................ 832 865 (3,263) 2,395
Other............................................. 975 (260) 5,847 (1,056)
Eliminations/Adjustments(4)....................... (52,976) 7,318 (78,922) 32,368
-------- -------- -------- --------
Division net income (loss) before cumulative
effect of change in accounting principle........ (81,706) 50,973 (34,843) 160,272
Cumulative effect of change in accounting
principle, net of tax (5)....................... -- -- 4,167 --
-------- -------- -------- --------
Division net income (loss)...................... $(81,706) $ 50,973 $(30,676) $160,272
======== ======== ======== ========
</Table>
- ------------------------
(1) In December 2000, we acquired GelTex and allocated the acquisition to
Genzyme General. The operations of GelTex are included in our Therapeutics
segment for the three and nine months ended September 30, 2001.
(2) In September 2001, we acquired Novazyme and allocated the acquisition to
Genzyme General. The results of operations of Novazyme are included in our
Therapeutics segment from September 26, 2001, the date of acquisition.
(3) In June 2001, we acquired Wyntek and allocated the acquisition to Genzyme
General. The results of operations of Wyntek are included in our Diagnostic
products segment from June 1, 2001, the date of acquisition.
(4) Includes primarily amounts related to Genzyme General's research and
development and administrative activities that we do not specifically
allocate to a particular segment of Genzyme General. The amount for the nine
months ended September 30, 2000 also includes a gain of $20.3 million
relating to a public offering of common stock by Genzyme Transgenics, an
unconsolidated affiliate, which we recognized in accordance with our policy
pertaining to affiliate sales of stock.
(5) On January 1, 2001, in connection with the adoption of SFAS 133, Genzyme
General recorded a cumulative-effect adjustment of $4.2 million, net of tax,
to recognize the fair value of certain common stock warrants held on
January 1, 2001.
39
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT REPORTING (CONTINUED)
SEGMENT ASSETS (AMOUNTS IN THOUSANDS)(1):
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
Therapeutics(2)..................................... $1,381,118 $1,341,656
Diagnostic products(3).............................. 171,509 89,236
Other............................................... 82,909 77,153
Eliminations/Adjustments(4)......................... 1,496,192 991,008
---------- ----------
Total........................................... $3,131,728 $2,499,053
========== ==========
</Table>
- ------------------------
(1) Segment assets for Genzyme General primarily include accounts receivable,
inventory and certain fixed and intangible assets.
(2) Segment assets for Therapeutics as of September 30, 2001 include
$27.1 million of additional assets resulting from the acquisition of
Novazyme in September 2001, including $17.3 million of goodwill.
(3) Segment assets for Diagnostic products as of September 30, 2001 include
$71.1 million of additional assets resulting from the acquisition of Wyntek
in June 2001, including $39.4 million of intangible assets and
$19.9 million of goodwill.
(4) Segment assets for Eliminations/Adjustments for Genzyme General consists of
the difference between the total assets for Genzyme General's segments and
total combined assets for Genzyme General. Eliminations/Adjustments for
September 30, 2001 include the allocation of net proceeds of $562.1 million
from the private placement of $575.0 million in principal of 3% convertible
subordinated debentures which was completed in May 2001. Genzyme General
used a portion of these proceeds to repay the $150.0 million we had drawn
under our revolving credit facility and allocated to Genzyme General in
December 2000 to finance a portion of the cash component of the
consideration for the GelTex merger.
15. SUBSEQUENT EVENTS
ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V.
We have satisfied all of the conditions to closing on our acquisition of
certain assets of Pharming N.V. that are set forth in the conditional agreement,
including receipt of approvals from the Commercial Court in Turnhout, Belgium,
the Province of Antwerp, Belgium and our board of directors, as well as a
favorable soil attestation for the land. We anticipate completing the
acquisition by mid-November and will allocate the purchase to Genzyme General.
As part of the purchase price for this acquisition, we have agreed to pay
approximately 6.5 million euros to trade creditors of Pharming N.V. We have also
agreed to assume certain liabilities related to governmental grants and the
lease for the land on which the manufacturing facilities in Geel, Belgium sit.
Pharming Group has publicly announced its intention to appeal the decision of
the Commercial Court in Turnhout, Belgium.
NEUROCELL-TM- JOINT VENTURE REFUND
Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme
Biosurgery's deadline to refund $20.0 million to Genzyme General in connection
with the Diacrin/Genzyme LLC joint
40
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (CONTINUED)
venture. This refund obligation arose because a Phase 3 clinical trial for
NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been
extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund
and accrued interest in cash.
FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION
On October 22, 2001, we received a complete response letter from the FDA
related to our application to market Fabrazyme-TM- enzyme, an investigational
enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies
additional data and information the FDA requires to complete its review of our
Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for
Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted
for review by the FDA under an accelerated approval mechanism. We received an
initial complete response letter from the FDA in December 2000 and submitted our
response to that letter in April 2001.
41
<Page>
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Net product sales.................................. $ 57,084 $ 29,754 $160,141 $ 88,805
Net service sales.................................. 6,135 4,852 17,593 16,984
Revenues from research and development contracts... -- 1 5 23
-------- -------- -------- --------
Total revenues................................... 63,219 34,607 177,739 105,812
-------- -------- -------- --------
Operating costs and expenses:
Cost of products sold.............................. 27,128 18,539 87,897 51,170
Cost of services sold.............................. 3,148 2,903 9,096 8,949
Selling, general and administrative................ 27,827 23,288 93,816 68,095
Research and development........................... 12,352 8,935 35,027 26,230
Amortization of intangibles........................ 11,729 1,426 35,042 4,279
-------- -------- -------- --------
Total operating costs and expenses............... 82,184 55,091 260,878 158,723
-------- -------- -------- --------
Operating loss....................................... (18,965) (20,484) (83,139) (52,911)
-------- -------- -------- --------
Other income (expenses):
Equity in net loss of unconsolidated affiliate..... -- -- (1,316) --
Other.............................................. 35 33 80 75
Investment income.................................. 431 1,274 1,370 4,873
Interest expense................................... (3,026) (347) (11,455) (973)
-------- -------- -------- --------
Total other income (expenses).................... (2,560) 960 (11,321) 3,975
-------- -------- -------- --------
Division net loss.................................... $(21,525) $(19,524) $(94,460) $(48,936)
======== ======== ======== ========
Comprehensive loss, net of tax:
Division net loss.................................. $(21,525) $(19,524) $(94,460) $(48,936)
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments......... (934) 67 (1,131) 109
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the
period......................................... -- (268) 97 (4,050)
-------- -------- -------- --------
Unrealized gains (losses) on securities, net... -- (268) 97 (4,050)
-------- -------- -------- --------
Other comprehensive loss........................... (934) (201) (1,034) (3,941)
-------- -------- -------- --------
Comprehensive loss................................... $(22,459) $(19,725) $(95,494) $(52,877)
======== ======== ======== ========
</Table>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
42
<Page>
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 41,553 $ 78,163
Accounts receivable, net.................................. 44,448 38,952
Inventories............................................... 57,240 61,574
Prepaid expenses and other current assets................. 10,015 9,543
-------- --------
Total current assets.................................... 153,256 188,232
Property, plant and equipment, net.......................... 57,176 57,409
Intangibles, net............................................ 562,580 562,635
Investment in equity securities............................. -- 1,603
Other noncurrent assets..................................... 2,332 1,721
-------- --------
Total assets............................................ $775,344 $811,600
======== ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 12,042 $ 6,074
Accrued expenses.......................................... 41,267 46,245
Due to Genzyme General.................................... 50,497 18,645
Current portion of long-term debt and capital lease
obligations............................................. 964 18,449
-------- --------
Total current liabilities............................... 104,770 89,413
Long-term debt and capital lease obligations................ 218,927 201,004
Convertible notes........................................... 10,000 10,000
Other noncurrent liabilities................................ -- 77
-------- --------
Total liabilities....................................... 333,697 300,494
Division equity............................................. 441,647 511,106
-------- --------
Total liabilities and division equity................... $775,344 $811,600
======== ========
</Table>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
43
<Page>
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss......................................... $(94,460) $(48,936)
Reconciliation of division net loss to net cash used in
operating activities:
Depreciation and amortization........................... 47,281 7,474
Provision for bad debts................................. 462 271
Equity in net loss of unconsolidated affiliate.......... 1,316 --
Other................................................... 524 1,793
Increase (decrease) in cash from working capital
changes:
Accounts receivable................................... (5,939) (1,135)
Inventories........................................... 9,522 (7,372)
Prepaid expenses and other current assets............. (527) (1,104)
Accounts payable, accrued expenses and income taxes
payable............................................. (2,505) 4,234
Due to Genzyme General................................ 31,852 3,544
-------- --------
Net cash used in operating activities............... (12,474) (41,231)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. -- (84,084)
Sales and maturities of investments....................... -- 125,084
Purchase of equity securities............................. (5,000) (5,000)
Purchases of property, plant and equipment................ (10,151) (2,290)
Acquisitions, net of acquired cash........................ (23,547) (4,405)
Other..................................................... (283) (277)
-------- --------
Net cash provided by (used in) investing
activities........................................ (38,981) 29,028
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Biosurgery Stock...... 1,219 1,652
Payments of capital lease obligations..................... (503) --
Payments of notes receivable from stockholders............ 2,896 --
Net cash allocated from Genzyme General................... 11,993 9,910
Bank overdraft............................................ 677 --
Other..................................................... (737) --
-------- --------
Net cash provided by financing activities........... 15,545 11,562
Effect of exchange rate changes on cash..................... (700) 84
-------- --------
Decrease in cash and cash equivalents....................... (36,610) (557)
Cash and cash equivalents at beginning of period............ 78,163 32,046
-------- --------
Cash and cash equivalents at end of period.................. $ 41,553 $ 31,489
======== ========
</Table>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
44
<Page>
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited, combined financial statements of Genzyme Biosurgery for each
period include the balance sheets, statements 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 included in Exhibit 99.1 to our 2000 Form 10-K. These
unaudited, combined financial statements are prepared using amounts included in
our unaudited, consolidated financial statements included in this Form 10-Q. We
prepared these unaudited, combined financial statements for Genzyme Biosurgery
following the requirements of the SEC for interim reporting. As permitted under
those rules, we condense or omit certain footnotes and other financial
information normally required by generally accepted accounting principles. We
have reclassified certain 2000 data to conform to our 2001 presentation.
These financial statements include all normal and recurring adjustments that
we consider necessary for the fair presentation of Genzyme Biosurgery's
financial position and operating results. Since these are interim financial
statements, you should also read the financial statements and notes for Genzyme
Biosurgery included in our 2000 Form 10-K. Revenues, expenses, assets and
liabilities can vary from quarter to quarter. Therefore, the results and trends
in these interim financial statements may not be indicative of the results for
future periods.
In December 2000, we acquired Biomatrix, Inc. and 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.
2. NEW ACCOUNTING PRONOUNCEMENTS
We have included the impact that recently issued accounting standards will
have on our financial statements in Note 2., "New Accounting Pronouncements," to
our unaudited, consolidated financial statements, which we incorporate by
reference into this note.
3. ACQUISITIONS
CLASS A AND CLASS B LIMITED PARTNERSHIP INTERESTS OF GENZYME DEVELOPMENT
PARTNERS, L.P.
In January 2001, we purchased all of the outstanding Class A limited
partnership interests of GDP for a payment of approximately $25.7 million in
cash plus royalties payable over ten years on sales of certain Sepra-TM-
products. In August 2001, we purchased the two outstanding GDP Class B limited
partnership interests for a payment of $70,000 per Class B limited partnership
interest plus $40,000 of related costs and undertook the obligation to pay
additional royalties over ten years on sales of certain Sepra-TM- products. We
allocated the acquired limited partnership interests of GDP to Genzyme
Biosurgery and accounted for the acquisitions as purchases. Accordingly, we
included the results of operations of GDP in our consolidated financial
statements and the combined financial statements of Genzyme Biosurgery from
January 9, 2001.
45
<Page>
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
We allocated the purchase prices to the fair value of the intangible assets
acquired as follows (amounts in thousands):
<Table>
<Caption>
CLASS A CLASS B
LIMITED LIMITED
PARTNERSHIP PARTNERSHIP
INTERESTS INTERESTS TOTAL
----------- ----------- --------
Patents (to be amortized over 8 years)........... $ 5,909 $ -- $ 5,909
Trademarks (to be amortized over 10 years)....... 2,755 -- 2,755
Technology (to be amortized over 10 years)....... 8,827 -- 8,827
Goodwill (to be amortized over 10 years)......... 8,234 180 8,414
------- ---- -------
Total.......................................... $25,725 $180 $25,905
======= ==== =======
</Table>
FOCAL, INC.
In January 2001, Focal, Inc., a public company and developer of synthetic
biopolymers used in surgery, exercised its option to require us to purchase
$5.0 million in Focal common stock at a price of $2.06 per share. After that
purchase we held approximately 22% of the outstanding shares of Focal common
stock and began accounting for our investment under the equity method of
accounting. We allocated this investment to Genzyme Biosurgery. On June 30,
2001, we acquired the remaining 78% of the outstanding shares in an exchange of
shares of Biosurgery Stock for shares of Focal common stock. Focal shareholders
received 0.1545 of a share of Biosurgery Stock for each share of Focal common
stock they held. We issued 2,086,151 shares of Biosurgery Stock as merger
consideration. We also assumed all of the outstanding options to purchase Focal
common stock and exchanged them for options to purchase Biosurgery Stock on an
as-converted basis. We allocated the acquired assets and liabilities to Genzyme
Biosurgery and accounted for the acquisition as a purchase.
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 (amounts in thousands):
<Table>
Issuance of 2,086,151 shares of Biosurgery Stock............ $ 9,450
Issuance of options to purchase 231,566 shares of Biosurgery
Stock..................................................... 351
Acquisition costs........................................... 638
Existing equity investment in Focal......................... 5,488
Cash paid to selling security holder........................ 11
-------
Total purchase price...................................... $15,938
=======
Cash and cash equivalents................................... $ 2,331
Other current assets........................................ 6,003
Property, plant and equipment............................... 1,818
Notes receivable from related party......................... 168
Intangible assets (to be amortized over 3 to 12 years)...... 7,909
Goodwill (to be amortized over 12 years).................... 1,115
Assumed liabilities......................................... (3,773)
Notes receivable from stockholders.......................... 367
-------
Allocated purchase price.................................. $15,938
=======
</Table>
46
<Page>
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
UNAUDITED PRO FORMA FINANCIAL SUMMARY
In December 2000, we acquired Biomatrix, a public company engaged in the
development and manufacture of viscoelastic and viscosupplementation
biomaterials for use in orthopaedic and other medical applications. We accounted
for this acquisition as a purchase and allocated it to Genzyme Biosurgery. The
following unaudited pro forma financial summary is presented as if the
acquisitions of Biomatrix and Focal were completed as of January 1, 2001 and
2000. 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. Material
nonrecurring charges related to these acquisitions, such as the acquired IPR&D
of $82.1 million resulting from the acquisition of Biomatrix, are not reflected
in the following pro forma financial summary:
<Table>
<Caption>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------
2001 2000
--------- ---------
(UNAUDITED, AMOUNTS
IN THOUSANDS)
Total revenues........................................ $ 177,886 $ 172,561
Division net loss..................................... (105,014) (94,233)
</Table>
4. INVENTORIES (AMOUNTS IN THOUSANDS)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- -------------
(UNAUDITED)
Raw materials....................................... $16,884 $21,271
Work-in-process..................................... 30,270 25,640
Finished products................................... 10,086 14,663
------- -------
Total........................................... $57,240 $61,574
======= =======
</Table>
5. INTERDIVISIONAL FINANCING ARRANGEMENT
In July 2001, Genzyme Biosurgery drew down $12.0 million of the
$15.0 million still available to it under the $25.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million
of the proceeds to pay a portion of the amounts it owes to Genzyme General.
Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as
needed each quarter in exchange for Biosurgery designated shares based on the
fair market value (as defined in our charter) of Biosurgery Stock at the time of
the draw. Biosurgery designated shares are shares of Biosurgery Stock that are
not issued and outstanding, but which our board of directors may issue, sell or
distribute without allocating the proceeds to Genzyme Biosurgery. At
September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under
this arrangement.
47
<Page>
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. NEUROCELL-TM- JOINT VENTURE REFUND
Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and
commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not
initiate a Phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because
a Phase 3 trial of the product was not initiated by June 30, 2001, Genzyme
General had the right to elect to receive a refund of $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 plus accrued interest thereon at a rate of 13.5% per annum. On
August 2, 2001, Genzyme Biosurgery received notification from Genzyme General of
its election to receive the refund. Genzyme Biosurgery can pay the refund amount
in cash, Biosurgery designated shares or both. The refund is due and payable
within 90 days after Genzyme Biosurgery received the notice from Genzyme
General.
7. SEGMENT REPORTING
We present segment information in a manner consistent with the method we use
to report this information to our management. Genzyme Biosurgery has three
reportable segments:
- Cardiothoracic, which includes chest drainage systems, lung sealants,
instruments and closures used in coronary artery bypass, valve
replacement, lung surgery and other cardiothoracic surgeries;
- Orthodpaedics, which includes Synvisc-Registered Trademark-
viscosupplementation product and Carticel-Registered Trademark-
chondrocytes; and
- Biosurgical Specialties, which includes the Sepra-TM- products, derived
supplementation 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:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS)
Revenues(1):
Cardiothoracic(2)................... $16,386 $18,804 $ 52,042 $ 58,240
Orthopaedics........................ 29,656 4,021 76,561 13,130
Biosurgical specialties............. 17,177 11,781 49,131 34,419
Other(3)............................ -- 1 5 23
------- ------- -------- --------
Total............................. $63,219 $34,607 $177,739 $105,812
======= ======= ======== ========
Gross Profit(1):
Cardiothoracic(2)................... $ 4,937 $ 6,809 $ 17,392 $ 23,529
Orthopaedics........................ 20,982 3,638 53,928 11,519
Biosurgical specialties............. 7,024 2,717 9,422 10,622
Other(3)............................ -- 1 4 23
------- ------- -------- --------
Total............................. $32,943 $13,165 $ 80,746 $ 45,693
======= ======= ======== ========
</Table>
- ------------------------
(1) In December 2000, we acquired Biomatrix and allocated the acquisition to
Genzyme Biosurgery. The operations of Biomatrix are included in the results
of Genzyme Biosurgery for the three and nine months ended September 30,
2001.
48
<Page>
GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. SEGMENT REPORTING (CONTINUED)
(2) On June 30, 2001, we acquired Focal and allocated the acquisition to Genzyme
Biosurgery's Cardiothoracic segment. The results of operations of Focal are
included in the results of Genzyme Biosurgery from the date of acquisition.
(3) The Other category includes revenue from Genzyme Biosurgery's research and
development contracts which we do not allocate to a particular segment of
Genzyme Biosurgery.
We do not allocate assets within Genzyme Biosurgery for purposes of segment
information. Total assets for Genzyme Biosurgery at September 30, 2001 of
$775.3 million include:
- $25.9 million of additional assets resulting from the acquisition of the
Class A and Class B limited partnership interests of GDP, including
$8.4 million of goodwill and $17.5 million of other intangible assets; and
- $19.3 million of additional assets resulting from the acquisition of
Focal, including $7.9 million of intangible assets.
8. SUBSEQUENT EVENTS
NEUROCELL-TM- JOINT VENTURE REFUND
Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme
Biosurgery's deadline to refund $20.0 million to Genzyme General in connection
with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because
a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30,
2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has
agreed to pay the refund and accrued interest in cash.
49
<Page>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Licensing revenue.................................... $ 484 $ 576 $ 1,696 $ 4,046
Royalty revenue...................................... 36 59 109 107
Research and development revenue..................... 704 -- 2,110 --
------- ------- -------- --------
Total revenues..................................... 1,224 635 3,915 4,153
------- ------- -------- --------
Operating costs and expenses:
Cost of revenues..................................... 668 104 1,697 299
Selling, general and administrative.................. 1,817 1,311 5,519 4,289
Research and development............................. 6,381 5,120 19,610 13,772
Amortization of intangibles.......................... -- -- -- 5,420
------- ------- -------- --------
Total operating costs and expenses................. 8,866 6,535 26,826 23,780
------- ------- -------- --------
Operating loss......................................... (7,642) (5,900) (22,911) (19,627)
------- ------- -------- --------
Other income (expenses):
Interest income...................................... 162 412 853 662
Interest expense..................................... (14) (16) (41) (173)
------- ------- -------- --------
Total other income (expenses)...................... 148 396 812 489
------- ------- -------- --------
Loss before income taxes............................... (7,494) (5,504) (22,099) (19,138)
Tax benefit............................................ -- -- -- 1,214
------- ------- -------- --------
Division net loss...................................... $(7,494) $(5,504) $(22,099) $(17,924)
======= ======= ======== ========
Comprehensive loss, net of tax:
Division net loss.................................... $(7,494) $(5,504) $(22,099) $(17,924)
Other comprehensive loss, net of tax:
Unrealized gains (losses) on securities arising
during the period................................ -- -- -- --
------- ------- -------- --------
Comprehensive loss..................................... $(7,494) $(5,504) $(22,099) $(17,924)
======= ======= ======== ========
</Table>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
50
<Page>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $11,157 $22,209
Short-term investments.................................... -- 7,942
Accounts receivable, net.................................. 290 231
Prepaid expenses and other current assets................. 508 126
------- -------
Total current assets.................................... 11,955 30,508
Equipment, net.............................................. 150 244
------- -------
Total assets............................................ $12,105 $30,752
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses.......................................... $ 1,203 $ 1,540
Due to Genzyme General.................................... 5,409 4,660
Deferred revenue--current portion......................... 1,709 2,208
------- -------
Total current liabilities............................... 8,321 8,408
Deferred revenue--long-term portion......................... 1,629 2,818
------- -------
Total liabilities....................................... 9,950 11,226
Division equity............................................. 2,155 19,526
------- -------
Total liabilities and division equity................... $12,105 $30,752
======= =======
</Table>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
51
<Page>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss......................................... $(22,099) $(17,924)
Reconciliation of division net loss to net cash used in
operating activities:
Depreciation and amortization........................... 94 5,536
Deferred income tax benefit............................. -- (1,214)
Other................................................... 153 (291)
Increase (decrease) in cash from working capital
changes:
Accounts receivable................................... (59) (142)
Prepaid expenses and other current assets............. (382) (53)
Accrued expenses, deferred revenue and other.......... (2,025) 1,124
Due to Genzyme General................................ 749 295
-------- --------
Net cash used in operating activities............... (23,569) (12,669)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................. -- (25,283)
Sales and maturities of investments....................... 7,792 9,722
-------- --------
Net cash provided by (used in) investing
activities........................................ 7,792 (15,561)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Molecular Oncology
Stock................................................... 685 22,406
Repayment of debt......................................... -- (5,000)
Net cash allocated from Genzyme General................... 4,040 15,000
-------- --------
Net cash provided by financing activities........... 4,725 32,406
-------- --------
Increase (decrease) in cash and cash equivalents............ (11,052) 4,176
Cash and cash equivalents at beginning of period............ 22,209 3,587
-------- --------
Cash and cash equivalents at end of period.................. $ 11,157 $ 7,763
======== ========
</Table>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
52
<Page>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited, combined financial statements of Genzyme Molecular Oncology
for each period include the balance sheets, statements of operations and cash
flows of the businesses we allocate to Genzyme Molecular Oncology. We also
allocate a portion of our corporate operations to Genzyme Molecular Oncology
using methods described in our allocation policy included in Exhibit 99.1 to our
2000 Form 10-K. These unaudited, combined financial statements are prepared
using amounts included in our unaudited, consolidated financial statements
included in this Form 10-Q. We prepared these unaudited, combined financial
statements for Genzyme Molecular Oncology following the requirements of the SEC
for interim reporting. As permitted under these rules, we condense or omit
certain footnotes and other financial information that are normally required by
generally accepted accounting principles. We have reclassified certain 2000 data
to conform to our 2001 presentation.
These financial statements include all normal and recurring adjustments that
we consider necessary for the fair presentation of Genzyme Molecular Oncology's
financial position and operating results. Since these are interim financial
statements, you should also read the financial statements and notes for Genzyme
Molecular Oncology included in our 2000 Form 10-K. Revenues, expenses, assets
and liabilities can vary from quarter to quarter. Therefore, the results and
trends in these interim financial statements may not be indicative of the
results for future periods.
2. NEW ACCOUNTING PRONOUNCEMENTS
We have included the impact that recently issued accounting standards will
have on our financial statements in Note 2., "New Accounting Pronouncements," to
our unaudited, consolidated financial statements, which we incorporate by
reference into this note.
3. INTERDIVISIONAL FINANCING ARRANGEMENT
In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the
$15.0 million still available to it under the $30.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 333,333 Molecular Oncology designated shares. Under the terms of this
arrangement, Genzyme Molecular Oncology may draw down funds as needed each
quarter in exchange for Molecular Oncology designated shares based on the fair
market value (as defined in our charter) of Molecular Oncology Stock at the time
of the draw. Molecular Oncology designated shares are shares of Molecular
Oncology Stock that are not issued and outstanding, but which our board of
directors may issue, sell or distribute without allocating the proceeds to
Genzyme Molecular Oncology. At September 30, 2001, $11.0 million remained
available to Genzyme Molecular Oncology under this arrangement.
53
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains forward-looking statements. Actual results could
differ materially from those anticipated by the forward-looking statements due
to the risks and uncertainties described in the section of this report on
Form 10-Q entitled "Note Regarding Forward-Looking Statements" and in
Exhibit 99.2 to our 2000 Form 10-K. You should consider carefully each of these
risks and uncertainties in evaluating our financial condition and results of
operations.
We are a biotechnology company that develops innovative products and
services for significant unmet medical needs. We have three operating divisions:
- Genzyme General, which develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing services and lipid
and peptide products for drug delivery.
- Genzyme Biosurgery, which develops, manufactures and sells instruments,
devices, biomaterials and biotherapeutic products to improve or replace
surgery, with an emphasis on the orthopaedics and cardiothoracic markets;
and
- Genzyme Molecular Oncology, which utilizes its functional genomics and
antigen discovery technology platforms to develop novel cancer products
focused on cancer vaccines and angiogenesis inhibitors and to generate
partnering revenue.
We currently have three designated series of common stock--Genzyme General
Division common stock, which we refer to as "Genzyme General Stock," Genzyme
Biosurgery Division common stock, which we refer to as "Biosurgery Stock" and
Genzyme Molecular Oncology Division common stock, which we refer to as
"Molecular Oncology Stock." We also refer to our series of stock as "tracking
stock." Unlike typical common stock, each of our tracking stocks is designed to
track the financial performance of a specific subset of our business operations
and its allocated assets, rather than the operations and assets of our entire
company. The chief mechanisms intended to cause each tracking stock to "track"
the financial performance of each division are provisions in our charter
governing the dividends and distributions. Under these provisions, our charter:
- factors the assets and liabilities and income or losses attributable to a
division into the determination of the amount available to pay dividends
on the associated tracking stock; and
- requires us to exchange, redeem or distribute a dividend to the holders of
Biosurgery Stock or Molecular Oncology Stock if all or substantially all
of the assets allocated to those corresponding divisions 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 the exchanged 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 each series of stock is defined in our charter as the
net income or loss of the corresponding division determined in accordance with
generally accepted accounting principles and as adjusted for tax benefits
allocated to or from that division 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,
54
<Page>
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. Our board of directors has also adopted accounting policies relating to
the management of our operating divisions. These policies are set forth in
Exhibit 99.1 to our 2000 Form 10-K.
Because the earnings allocated to each series of stock are based on the
income or losses attributable to each corresponding division, we include
financial statements and management's discussion and analysis for the
corporation as well as for each of our divisions to aid investors in evaluating
our performance and the performance of each of our divisions.
While each tracking stock is designed to reflect a division's performance,
it is common stock of Genzyme Corporation and not of a division; each division
is not a company or a legal entity, and therefore does not and cannot issue
stock. Consequently, holders of a series of tracking stock have no specific
rights to assets allocated to the corresponding division. Genzyme Corporation
continues to hold title to all of the assets allocated to each division and is
responsible for all of its liabilities, regardless of what we deem for financial
statement presentation purposes as allocated to any division. Holders of each
tracking 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 each tracking stock would only have the rights of common stock
holders in the combined assets of Genzyme.
As market or competitive conditions warrant, we may create a new series of
tracking stock or change our earnings allocation methodology. At the present
time we have no plans to do so.
We provide separate financial statements for each of our divisions as well
as consolidated statements that include the consolidated results of each of our
divisions and our corporate operations taken as a whole. You should read this
discussion of and analysis of our financial position and results of operations
in conjunction with those unaudited, consolidated financial statements and
related notes, which are included in this report.
In September 2001, we acquired all of the outstanding capital stock of
Novazyme Pharmaceuticals, Inc., a privately-held developer of biotherapies for
the treatment of lysosomal storage disorders, or LSDs, for an initial payment of
2,562,182 shares of Genzyme General Stock. Novazyme shareholders received 0.5714
of a share of Genzyme General Stock for each share of Novazyme common stock they
held. We will be obligated to make two additional payments totaling
$87.5 million, payable in shares of Genzyme General Stock, if we receive U.S.
marketing approval for two products for the treatment of LSDs that employ
certain of Novazyme's technologies. In connection with the merger, we also
assumed all of the outstanding options, warrants and rights to purchase Novazyme
common stock on an as-converted basis. We allocated the acquisition to Genzyme
General and accounted for the acquisition as a purchase. Accordingly, the
results of operations of Novazyme are included in our consolidated financial
statements and the combined financial statements of Genzyme General from
September 26, 2001, the date of acquisition.
In June 2001, we acquired the remaining 78% of Focal, Inc., a public company
and developer of synthetic biopolymers used in surgery, that we did not already
own for a payment of 2,086,151 shares of Biosurgery Stock. We allocated the
acquired assets and liabilities to Genzyme Biosurgery and accounted for the
acquisition as a purchase. Accordingly, the results of operations of Focal are
included in our consolidated financial statements and the combined financial
statements of Genzyme Biosurgery from June 30, 2001, the date of acquisition.
In June 2001, we acquired all of the outstanding capital stock of
privately-held Wyntek Diagnostics, Inc., for $65.0 million in cash. Wyntek is a
provider of high quality point of care rapid diagnostic tests for pregnancy and
infectious diseases. We allocated the acquisition to Genzyme General
55
<Page>
and accounted for the acquisition as a purchase. Accordingly, we include the
results of operations of Wyntek in our consolidated financial statements and the
combined financial statements of Genzyme General from June 1, 2001, the date of
acquisition.
In December 2000, we acquired Biomatrix, Inc., a public company that
develops, manufactures, markets and sells a series of proprietary viscoelastic
and viscosupplementation products based on hyaluronan technology that are used
in therapeutic medical applications and skin care for an aggregate purchase
price of $426.2 million. We accounted for the acquisition as a purchase and
allocated it to Genzyme Biosurgery. Accordingly, the results of operations of
Biomatrix are included in our consolidated financial statements and the combined
financial statements of Genzyme Biosurgery from December 18, 2000, the date of
acquisition.
In December 2000, we acquired GelTex Pharmaceuticals, Inc., a public company
engaged in developing therapeutic products based on polymer technology for an
aggregate purchase price of approximately $1 billion, which we paid primarily in
shares of Genzyme General Stock. We accounted for the acquisition as a purchase
and allocated it to Genzyme General. Accordingly, the results of operations of
GelTex are included in our consolidated financial statements and the combined
financial statements of Genzyme General from December 14, 2001, the date of
acquisition. As part of the acquisition of GelTex, we acquired all of GelTex's
interest in RenaGel LLC, our joint venture with GelTex. Our consolidated
financial statements and the combined financial statements for Genzyme General
reflect the consolidation of RenaGel LLC from the date of acquisition of GelTex.
Prior to the acquisition of GelTex, we accounted for our investment in RenaGel
LLC under the equity method.
A. RESULTS OF OPERATIONS
GENZYME CORPORATION
The components of our consolidated statements of operations are described in
the following table:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
-------------------- (DECREASE) -------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
--------- -------- ---------- --------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues....................... $ 319,495 $227,359 41% $ 898,397 $659,402 36%
--------- -------- --------- --------
Cost of products and services sold... 89,503 75,797 18% 272,484 201,517 35%
Selling, general and
administrative..................... 122,030 66,379 84% 316,810 195,358 62%
Research and development (including
research and development related to
contracts)......................... 69,127 39,678 74% 188,651 123,954 52%
Amortization of intangibles.......... 30,950 3,409 808% 90,115 15,191 493%
Purchase of in-process research and
development........................ 86,800 -- N/A 95,568 -- N/A
--------- -------- --------- --------
Total operating costs and
expenses..................... 398,410 185,263 115% 963,628 536,020 80%
--------- -------- --------- --------
Operating income (loss).............. (78,915) 42,096 (287)% (65,231) 123,382 (153)%
Other income (expenses), net......... (28,315) 8,258 (443)% (51,997) 43,450 (220)%
--------- -------- --------- --------
Income (loss) before income taxes.... (107,230) 50,354 (313)% (117,228) 166,832 (170)%
Benefit from (provision for) income
taxes.............................. 4,554 (15,933) (129)% 7,288 (51,101) (114)%
--------- -------- --------- --------
Net income (loss) before cumulative
effect of change in accounting
principle.......................... (102,676) 34,421 (398)% (109,940) 115,731 (195)%
Cumulative effect of change in
accounting principle, net of tax... -- -- N/A 4,167 -- N/A
--------- -------- --------- --------
Net income (loss).................... $(102,676) $ 34,421 (398)% $(105,773) $115,731 (191)%
========= ======== ========= ========
</Table>
56
<Page>
REVENUES
The components of our revenues are described in the following table:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product revenue.......................... $291,959 $206,645 41% $816,262 $592,505 38%
Service revenue.......................... 23,988 19,967 20% 71,983 62,280 16%
-------- -------- -------- --------
Total product and service revenue...... 315,947 226,612 39% 888,245 654,785 36%
Research and development revenue......... 3,548 747 375% 10,152 4,617 120%
-------- -------- -------- --------
Total revenues..................... $319,495 $227,359 41% $898,397 $659,402 36%
======== ======== ======== ========
</Table>
PRODUCT REVENUE
We derive product revenue from sales by Genzyme General of therapeutic
products, including Cerezyme-Registered Trademark- and
Ceredase-Registered Trademark- enzymes and Renagel-Registered Trademark-
phosphate binder, diagnostic products and other products, and sales by Genzyme
Biosurgery of cardiothoracic products, including
FocalSeal-Registered Trademark--L surgical sealant, orthopaedic products,
including Synvisc-Registered Trademark- viscosupplementation product, and
biosurgical specialties products, including Seprafilm-TM- bioresorbable
membrane.
The following table sets forth our product revenue on a segment basis:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Genzyme General:
Therapeutics:
Cerezyme-Registered Trademark- and
Ceredase-Registered Trademark-
enzymes.......................... $143,048 $136,744 5% $423,991 $400,203 6%
Renagel-Registered Trademark-
phosphate binder................. 52,356 13,814 279% 121,359 24,032 405%
Other therapeutic products......... 6,718 3,282 105% 17,834 12,001 49%
-------- -------- -------- --------
Total Therapeutics............... 202,122 153,840 31% 563,184 436,236 29%
Diagnostic products.................. 20,572 15,824 30% 54,786 46,601 18%
Other................................ 12,181 7,227 69% 38,151 20,863 83%
-------- -------- -------- --------
Total product revenue--
Genzyme General.............. 234,875 176,891 33% 656,121 503,700 30%
-------- -------- -------- --------
Genzyme Biosurgery:
Cardiothoracic....................... 16,386 18,804 (13)% 52,042 58,240 (11)%
Orthopaedics......................... 25,492 -- N/A 63,269 -- N/A
Biosurgical specialties.............. 15,206 10,950 39% 44,830 30,565 47%
-------- -------- -------- --------
Total product revenue--
Genzyme Biosurgery........... 57,084 29,754 92% 160,141 88,805 80%
-------- -------- -------- --------
Total product revenues......... $291,959 $206,645 41% $816,262 $592,505 38%
======== ======== ======== ========
</Table>
57
<Page>
Product revenue continued to increase in both the three and nine month
periods ended September 30, 2001 as compared to the same periods a year ago, due
primarily to increased sales of Renagel-Registered Trademark- phosphate binder,
which is used to reduce serum phosphorus levels in patients with end-stage renal
disease on dialysis, and continued growth in sales of
Cerezyme-Registered Trademark- enzyme for the treatment of Type I Gaucher
disease. We began recording revenues from Renagel-Registered Trademark-
phosphate binder during the second quarter of 2000 under an amended distribution
arrangement with GelTex, which we acquired in December 2000. Prior to this
amendment, revenues from Renagel-Registered Trademark- phosphate binder were
recorded by RenaGel LLC, our joint venture with GelTex, and were $8.0 million
for the three month period ended March 31, 2000.
Sales of Renagel-Registered Trademark- phosphate binder in both the three
and nine months ended September 30, 2001 include sales of capsules and the 800
mg tablet formulation. We launched the tablet formulation in the United States
during the third quarter of 2000. In the first quarter of 2001, the
higher-than-anticipated demand for the 800 mg tablet formulation and certain
production constraints resulted in a temporary shortage of this dosage form of
Renagel-Registered Trademark- phosphate binder. Patients taking the 800 mg
tablets were shifted to an equivalent dose of 400 mg
Renagel-Registered Trademark- tablets or 403 mg Renagel-Registered Trademark-
capsules while we built an inventory of 800 mg tablets to support our re-launch
of this dosage form in June 2001. Despite the temporary shortage of the 800 mg
tablet formulation, sales of Renagel-Registered Trademark- phosphate binder
increased significantly in each of the three and nine months ended
September 30, 2001 in comparison to the same periods of 2000 due to accelerating
adoption of the product by nephrologists, as evidenced by significant increases
in both renewal prescriptions and new prescriptions.
The steady growth in sales of Cerezyme-Registered Trademark- enzyme in the
three and nine months ended September 30, 2001 was attributable to our continued
identification of new Gaucher disease patients worldwide, coupled with
significant investment in our global infrastructure that has continued to
increase international sales of this product. Additionally, we continue to
market Ceredase-Registered Trademark- enzyme for the treatment of Gaucher
disease, although we have successfully converted virtually all Gaucher disease
patients to a treatment regimen using Cerezyme-Registered Trademark- enzyme.
Our results of operations are highly dependent on sales of
Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sales of
this product would adversely affect our results of operations. Revenue from
Cerezyme-Registered Trademark- enzyme would be impacted negatively if
competitors developed alternative treatments for Gaucher disease and the
alternative products gained commercial acceptance. We are aware of companies
that have initiated efforts to develop competitive products, including one
company that recently has applied for marketing approval for its product in the
U.S. Other companies may attempt to develop competitive products in the future.
Although orphan drug status for Cerezyme-Registered Trademark- enzyme, which
provided us with exclusive marketing rights for Cerezyme-Registered Trademark-
enzyme in the United States, expired in May 2001, we continue to have patents
protecting our method of manufacturing Cerezyme-Registered Trademark- enzyme
until 2010 and the composition of Cerezyme-Registered Trademark- enzyme as made
by that process until 2013. The expiration of market exclusivity and orphan drug
status in May 2001 will likely subject Cerezyme-Registered Trademark- enzyme to
increased competition, which may decrease the amount of revenue we receive from
this product or the growth of that revenue.
The following table provides information regarding the change in sales of
our Gaucher disease therapies as a percentage of total product revenue during
the periods presented:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Sales of Cerezyme-Registered Trademark- and
Ceredase-Registered Trademark- enzymes..... $143,048 $136,744 5% $423,991 $400,203 6%
% of total product revenue................... 49% 66% 52% 68%
</Table>
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Although sales of Genzyme General's Gaucher disease therapies continue to
increase, the decline as a percentage of total product revenue is a trend we
expect will continue in the future. We expect that growth in the sales of
Renagel-Registered Trademark- phosphate binder will continue to increase.
Revenue from sales of Renagel-Registered Trademark- phosphate binder represented
approximately 18% of our total product revenue for the three month period ended
September 30, 2001 as compared to 7% for the same period a year ago. For the
nine month period ended September 30, 2001, sales of
Renagel-Registered Trademark- phosphate binder represented approximately 15% of
our total product revenue as compared to 4% for the same period a year ago.
Other therapeutics revenue for each period includes sales of
Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool
for well-differentiated thyroid cancer. Revenue for
Thyrogen-Registered Trademark- hormone increased for the three and nine months
ended September 30, 2001, as compared to the same periods a year ago, due
primarily to increased market penetration. Other therapeutics revenue also
increased due to increased sales of Fabrazyme-TM- enzyme in France under an
Authorisation Temporaire d'utilisation from the French Medicines Agency.
Diagnostic products revenue increased for the three and nine month periods
ended September 30, 2001, as compared to the same periods in 2000, due primarily
to increased sales of infectious disease testing products and HDL and LDL
cholesterol testing products. Also contributing to the increase for both periods
is the addition of sales of point of care rapid diagnostic tests for pregnancy
and infectious diseases that we obtained through our acquisition of Wyntek,
which we acquired in June 2001. Diagnostic products revenue also includes
royalties on product sales by Techne Corporation's biotechnology group.
The increase in other product revenue for the three and nine months ended
September 30, 2001, as compared to the same periods in 2000, was primarily
attributable to increased sales of lipids and peptides for drug delivery.
The decrease in cardiothoracic revenue for the three and nine months ended
September 30, 2001, as compared to the same periods of 2000, was due to
decreased sales of chest drainage systems resulting from competitive pricing
pressures in that market, as well as our withdrawal from certain commodity
suture lines in Europe. The decrease in each period was offset, in part, by the
continued growth in sales of minimally invasive cardiac surgery products and
sales revenue from the FocalSeal-Registered Trademark--L surgical sealant. We
added FocalSeal-Registered Trademark--L surgical sealant to the cardiothoracic
product category in the third quarter of 2000 pursuant to a distribution and
marketing agreement with Focal which, prior to our acquisition of Focal in
June 2001, provided us with exclusive distribution rights for this product in
North America.
The orthopaedics product revenue increased for the three and nine months
ended September 30, 2001 as compared to the same periods of 2000 due primarily
to the sales of Synvisc-Registered Trademark- viscosupplementation product,
which we added to the orthopaedics product category in December 2000 through our
acquisition of Biomatrix.
The increase in biosurgical specialties product revenue in the three and
nine months ended September 30, 2001, as compared to the same periods of 2000,
was due primarily to increases in sales of Seprafilm-TM- bioresorbable membrane
and Sepramesh-TM- biosurgical composite. An increase in sales to original
equipment manufacturers and sales generated from Hylaform-Registered Trademark-
and skin care products, which were added to the biosurgical specialties product
category in December 2000, also contributed to the overall increase in
biosurgical specialties product revenue.
SERVICE REVENUE
We derive service revenues from three principal sources:
- genetic testing services performed by Genzyme General;
- Genzyme Biosurgery's Carticel-Registered Trademark- chondrocytes for the
treatment of cartilage damage; and
- Genzyme Biosurgery's Epicel-Registered Trademark- skin grafts for the
treatment of severe burns.
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<Page>
The following table sets forth our service revenues on a segment basis:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Genzyme General..................... $17,853 $15,115 18% $54,390 $45,296 20%
Genzyme Biosurgery.................. 6,135 4,852 26% 17,593 16,984 4%
------- ------- ------- -------
Total service revenues............ $23,988 $19,967 20% $71,983 $62,280 16%
======= ======= ======= =======
</Table>
The increase in service revenue in each of the three and nine months ended
September 30, 2001 is due to increased sales by Genzyme General of genetic
testing services attributable to expanded presence in the prenatal market and a
broader test menu in oncology, as well as increased sales by Genzyme Biosurgery
of Carticel-Registered Trademark- chondrocytes services and
Epicel-Registered Trademark- skin graft services in each period.
RESEARCH AND DEVELOPMENT REVENUE
The following table sets forth our research and development revenues on a
segment basis:
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Genzyme General................................ $2,324 $159 1,362% $ 6,232 $ 489 1,174%
Genzyme Biosurgery............................. -- 1 (100)% 5 23 (78)%
Genzyme Molecular Oncology..................... 1,224 587 109% 3,915 4,105 (5)%
------ ---- ------- ------
Total research and development revenues........ $3,548 $747 375% $10,152 $4,617 120%
====== ==== ======= ======
</Table>
The increase in research and development revenue in the three months ended
September 30, 2001 is primarily attributable to $1.3 million of revenue
recognized by Genzyme General in connection with our collaboration agreements
for the development of a second-generation lipid-altering product for which
there were no similar amounts in the same period of 2000 and $1.0 million of
additional research and development services performed on behalf of Genzyme
Transgenics. For the nine months ended September 30, 2001 research and
development revenue increased primarily due to $3.5 million of revenue
recognized by Genzyme General in connection with our collaboration agreements
for the development of a second-generation lipid-altering product and
$3.3 million recognized by Genzyme Molecular Oncology under our development
agreement with Purdue Pharma L.P., for which there are no similar amounts in the
same period of 2000. In addition, in the nine months ended September 30, 2001,
we recorded $2.7 million of additional revenue from research and development
services we performed on behalf of Genzyme Transgenics. The increases in
research and development revenue under these contracts for the nine months ended
September 30, 2001 were offset in part by a $2.0 million development milestone
payment received under a license agreement with Schering-Plough Ltd. in the nine
months ended September 30, 2000, for which there is no similar amount in 2001.
INTERNATIONAL PRODUCT AND SERVICE REVENUE
A substantial portion of our revenue was generated outside of the United
States, as described in the following table. Most of these revenues were
attributable to sales of Cerezyme-Registered Trademark- enzyme. International
sales of Cerezyme-Registered Trademark- enzyme increased 9% to $73.8 million in
the three month period ended September 30, 2001 from $67.7 million in the same
period last year. International sales of
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Cerezyme-Registered Trademark- enzyme increased 10% to $223.0 million for the
nine month period ended September 30, 2001 from $203.5 million for the same
period last year. Despite an approximate 1% decline in the average exchange rate
of the euro for the three month period ended September 30, 2001, as compared to
a year ago, and an approximate 5% decline in the average exchange rate of the
euro for the nine month period ended September 30, 2001, as compared to a year
ago, international sales of Cerezyme-Registered Trademark- enzyme increased for
both periods due primarily to the continued identification of new Gaucher
disease patients worldwide, coupled with significant investment in our global
infrastructure. International product and service revenue as a percent of total
product and service revenue decreased in both the three and nine months ended
September 30, 2001 due primarily to increased sales of
Renagel-Registered Trademark- phosphate binder and Synvisc-Registered Trademark-
viscosupplementation product in the United States.
The following table provides information regarding the change in
international product and service sales as a percentage of total product and
service revenue during the periods presented:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
International product and service
revenue............................. $105,638 $89,297 18% $315,417 $264,484 19%
% of total product and service
revenue............................. 33% 39% 36% 40%
</Table>
MARGINS
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product margin:
Genzyme General........................ $186,541 $131,701 42% $512,424 $389,239 32%
% of total product revenue............. 64% 64% 63% 66%
Genzyme Biosurgery..................... 29,956 11,215 167% 72,244 37,635 92%
% of total product revenue............. 10% 5% 9% 6%
Total product margin................... $216,497 $142,916 51% $584,668 $426,874 37%
% of total product revenue............. 74% 69% 72% 72%
Service margin:
Genzyme General........................ $ 6,960 $ 5,950 17% $ 22,596 $ 18,359 23%
% of total service revenue............. 29% 30% 31% 29%
Genzyme Biosurgery..................... 2,987 1,949 53% 8,497 8,035 6%
% of total service revenue............. 12% 10% 12% 13%
Total service margin................... $ 9,947 $ 7,899 26% $ 31,093 $ 26,394 18%
% of total service revenue............. 41% 40% 43% 42%
Total gross margin:
Genzyme General........................ $193,501 $137,651 41% $535,020 $407,598 31%
% of total product and service
revenue.............................. 61% 61% 60% 62%
Genzyme Biosurgery..................... 32,943 13,164 150% 80,741 45,670 77%
% of total product and service
revenue.............................. 10% 6% 9% 7%
Total gross margin..................... $226,444 $150,815 50% $615,761 $453,268 36%
% of total product and service
revenue.............................. 72% 67% 69% 69%
</Table>
We provide a broad range of healthcare products and services. As a result,
our gross margin varies significantly based on the category of product or
service. Sales of therapeutic products, including Cerezyme-Registered Trademark-
enzyme, result in higher margins than sales of surgical or diagnostic products.
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PRODUCT MARGIN
Product margin for products allocated to Genzyme General increased for the
three and nine month periods ended September 30, 2001, as compared to the same
periods a year ago, primarily as a result of increased sales of
Renagel-Registered Trademark- phosphate binder and
Cerezyme-Registered Trademark- enzyme. This increase was partially offset by
charges to cost of products sold of $8.2 million for the nine months ended
September 30, 2001 relating to the increased basis of the inventory obtained in
connection with our acquisition of GelTex in December 2000 and the growth in
sales of Renagel-Registered Trademark- phosphate binder, a lower margin product.
Product margin for products allocated to Genzyme General as a percentage of
total product revenue for the three months ended September 30, 2001 was
consistent with the same period a year ago due primarily to a 41% increase in
our total product revenue which largely offset the 42% increase in Genzyme
General's product margin for the period. Product margin for products allocated
to Genzyme General as a percentage of product revenue for the nine month period
ended September 30, 2001 decreased, as compared to the same periods a year ago
due primarily to a 36% increase in our total product revenue which offset the
32% increase in Genzyme General's product margin for the period. We expect that
in the future margins for products allocated to Genzyme General as a percentage
of total product revenue will trend slightly lower, primarily due to the lower
margins normally attributable to Renagel-Registered Trademark- phosphate binder,
combined with our building of additional manufacturing capacity in both the
United Kingdom and Ireland as we experience a product mix shift as sales of
diagnostic products and services continue to increase.
Product margin for products allocated to Genzyme Biosurgery increased for
the three and nine months ended September 30, 2001 due to increased sales of
higher margin products such as Synvisc-Registered Trademark-
viscosupplementation product and devices for minimally invasive cardiac surgery.
This increase was partially offset by charges to cost of products sold of
$11.3 million for the nine months ended September 30, 2001 relating to the
increased basis of the inventory obtained in connection with our acquisition of
Biomatrix in December 2000.
SERVICE MARGIN
Service margin for services allocated to Genzyme General for the three and
nine months ended September 30, 2001, as compared to the same periods a year
ago, continued to increase primarily as a result of increased sales of our
higher margin DNA and cancer testing services.
Service margin for services allocated to Genzyme Biosurgery increased for
the three months ended September 30, 2001 as compared to the same period a year
ago due primarily to growth in sales of Epicel-Registered Trademark- skin graft
services for the treatment of severe burns. Service margins for services
allocated to Genzyme Biosurgery increased for the nine months ended
September 30, 2001 in comparison to the same period last year due primarily to
increased sales of Epicel-Registered Trademark- skin graft services and a
reduction in manufacturing personnel.
OPERATING EXPENSES
The increase in selling, general and administrative expenses for the three
and nine months ended September 30, 2001, as compared to the same periods a year
ago, is attributable to:
- increased staffing to support the growth in several of Genzyme General's
product lines;
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme, to drive the growth in sales of
Renagel-Registered Trademark- phosphate binder and
Thyrogen-Registered Trademark- hormone, and to prepare for the
commercialization of Fabrazyme-TM- enzyme; and
- the addition of expenses from GelTex, Biomatrix, Wyntek and Focal.
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Selling, general and administrative expenses for the three and nine months
ended September 30, 2001 included $27.0 million of charges resulting from
Pharming Group, N.V.'s decision to file for and operate under a court supervised
receivership. Included was a write-off of the $10.2 million in principal and
accrued interest due to us under the 7% senior convertible note issued to us by
Pharming Group and a charge of $16.8 million representing our obligation to fund
the continued production of transgenic human alpha-glucosidase enzyme through
2003. As a result of Pharming Group's failure to make payments to fund our joint
venture for the development of a CHO-cell product for Pompe disease under a
strategic alliance agreement, we terminated this agreement in August and have
assumed full operational and financial responsibility for the development of the
CHO-cell product. Our joint venture with Pharming Group covering a transgenic
product for Pompe disease remains in place. We do not intend to commercialize
this product, but have committed to fund its production for the nine patients
participating in a clinical trial extension until those patients can be
transitioned to a CHO-cell product.
The increase in research and development expenses for both the three and
nine month periods ended September 30, 2001 as compared to the same period a
year ago is attributable to:
- the cost of post-marketing clinical development efforts for
Renagel-Registered Trademark- phosphate binder, which was included in
equity in net loss of unconsolidated affiliates before we purchased
GelTex;
- the addition of spending on the C. DIFFICILE colitis, DENSPM, iron
chelation, oral mucositis, anti-obesity, and GT102-279 programs as a
result of our acquisition of GelTex;
- increased spending on Genzyme General's program to develop Fabrazyme-TM-
enzyme for the treatment of Fabry disease; and
- increased spending on other internal programs.
Research and development expenses for the three and nine months ended
September 30, 2001, reflects a charge of $4.7 million, representing the net
amount owed by Pharming Group to the CHO-cell product joint venture we
previously formed with Pharming Group that we believe is uncollectable. Research
and development expenses for the nine months ended September 30, 2000 included a
charge of $19.5 million representing initial amounts payable to Synpac (North
Carolina), Inc. under a license granted to us by Synpac to develop and
commercialize a human alpha-glucosidase enzyme replacement therapy for Pompe
disease which was offset in part by a $10.3 million research and development
reimbursement from Pharming Group.
In connection with our acquisition of GelTex on December 14, 2000, we
converted options to purchase shares of GelTex common stock into options to
purchase shares of Genzyme General Stock. In accordance with FIN 44, at the date
of acquisition we allocated the intrinsic value for the unvested portion of
these options of $10.2 million to deferred compensation, a component of
stockholders' equity. We are amortizing this amount to operating expense over
the remaining vesting period of one year from the date of acquisition. We are
allocating the expense to the appropriate expense categories of our statements
of operations based on the functional responsibility of each employee or option
holder. For the three months ended September 30, 2001, we recorded $2.4 million
of compensation expense related to these options, of which $1.9 million was
charged to research and development expense and $0.5 million was charged to
selling, general and administrative expense. For the nine months ended
September 30, 2001, we recorded $7.3 million of compensation expense related to
these options, of which $6.0 million was charged to research and development
expense and $1.3 million was charged to selling, general and administrative
expense. At September 30, 2001, $2.4 million remained in deferred compensation,
all of which we will fully amortize by December 31, 2001.
In connection with our acquisition of Novazyme on September 26, 2001, we
converted options, warrants and rights to purchase shares of Novazyme common
stock into options, warrants and rights to purchase shares of Genzyme General
Stock. In accordance with FIN 44, at the date of acquisition we
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allocated the $2.6 million intrinsic value of the portion of the unvested
options related to the future service period to deferred compensation. We are
amortizing this amount to operating expense over the remaining vesting period of
22 months from the date of acquisition. We are allocating the expense to the
appropriate expense categories of our consolidated statements of operations
based on the functional responsibility of each option holder.
AMORTIZATION OF INTANGIBLES
The increase in amortization of intangibles for both the three and nine
month periods ended September 30, 2001 is primarily attributable to intangible
assets acquired in connection with the acquisitions of GelTex and Biomatrix in
December 2000, the GDP Class A limited partnership interests in January 2001,
Wyntek in June 2001 and the GDP Class B limited partnership interests in
August 2001.
PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT
NOVAZYME
In connection with our acquisition of Novazyme, we acquired a technology
platform that we believe can be leveraged in the development of treatments for
various LSDs. As of the acquisition date, the technology platform had not
achieved technological feasibility and would require significant further
development to complete. Accordingly, we have allocated to IPR&D and charged to
expense $86.8 million, representing the portion of the purchase price
attributable to the technology platform.
Our management assumes responsibility for determining the IPR&D valuation
and 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
probability-adjusted net cash flows expected to result once the technology has
reached technological feasibility and is utilized in the treatment of certain
LSDs. A discount rate of 16% was applied to estimate the present value of these
cash flows and is consistent with the overall risks of the platform technology.
In estimating future cash flows, management considered other tangible and
intangible assets required for successful exploitation of the technology and
adjusted the future cash flows to reflect the contribution of value from these
assets. In the allocation of purchase price to the IPR&D, the concept of
alternative future use was specifically considered. The platform technology is
specific to LSDs and there is currently no alternative use for the technology in
the event that it fails as a platform for enzyme replacement therapy for the
treatment of LSDs. We currently estimate that it will take approximately three
years and an investment of approximately $75 million-$100 million to complete
the development of, obtain approval for and commercialize the first product
based on this technology platform. However, our current estimates of the time
and investment required to develop the technology platform may change depending
on the different applications of the technology we may choose to pursue. We
cannot guarantee that any projects based on these technology platforms will ever
reach feasibility or develop into products that we can profitably market. In
addition, we cannot give you any assurances that we will be able to develop and
commercialize products based on these technology platforms before our
competitors develop and commercialize products for the same indications. If we
do not successfully develop and commercialize products based on these technology
platforms, our results of operations could be materially affected.
WYNTEK
In connection with our acquisition of Wyntek, we allocated approximately
$8.8 million of the purchase price to IPR&D. Our management assumes
responsibility for determining the IPR&D valuation and engaged an independent
third-party appraisal company to assist in the valuation of the intangible
assets acquired. We estimated the fair value assigned to purchased IPR&D by
discounting, to
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present value, the cash flows expected to result from the project once it has
reached technological feasibility. We applied a discount rate of 25% to estimate
the present value of these cash flows, which is consistent with the risks of the
project. In estimating future cash flows, management considered other tangible
and intangible assets required for successful exploitation of the technology
resulting from the purchased IPR&D project and adjusted future cash flows for a
charge reflecting the contribution to value of these assets. The value assigned
to purchased IPR&D was the amount attributable to the efforts of Wyntek up to
the time of acquisition.
In the allocation of purchase price to IPR&D, the concept of alternative
future use was specifically considered for the program under development. The
acquired IPR&D consists of Wyntek's work to complete the program. There are no
alternative uses for the in-process program in the event that the program fails
in clinical trials or is otherwise not feasible. The development effort for the
acquired IPR&D does not possess an alternative future use for us as defined by
generally accepted accounting principles. Consequently, in accordance with
generally accepted accounting principles, the amount allocated to IPR&D was
charged as an expense in our financial statements for the nine months ended
September 30, 2001. We are amortizing the remaining acquired intangible assets
arising from the acquisition on a straight-line basis over their estimated
lives, which range from 5 years to 10 years.
Below is a brief description of the IPR&D program associated with Wyntek's
cardiovascular disease diagnostic product, including an estimation of when
management believes we may realize revenues from the sale of this product.
Wyntek currently is developing a cardiovascular product to rapidly measure
the quantitative levels of cardiac marker proteins. These are the leading
markers for the diagnosis of acute myocardial infarction. The product consists
of a mobile, stand-alone, quantitative diagnostic device and a reaction strip
that detects disease specific marker proteins. The intended use of the device is
to read reaction strips at the patient's bedside or in an emergency room
setting. We expect to complete the regulatory review process and file an
application for marketing approval in early 2002 and begin selling the product
during the second half of 2002. Studies to date have demonstrated the viability
of this product but there can be no assurance that the regulatory authorities
will approve this product.
GELTEX AND BIOMATRIX
In December 2000, we acquired GelTex, a public company engaged in developing
therapeutic products based on polymer technology. We accounted for the
acquisition as a purchase and allocated it to Genzyme General. In connection
with the acquisition of GelTex, we allocated approximately $118.0 million of the
purchase price to IPR&D, which we recorded as a charge to expense in our
consolidated statement of operations for the year ended December 31, 2000. In
December 2000, we also acquired Biomatrix, a public company engaged in the
development and manufacture of viscoelastic and viscosupplementation
biomaterials for use in orthopaedic and other medical applications. We accounted
for this acquisition as a purchase and allocated it to Genzyme Biosurgery. In
connection with the purchase of Biomatrix, we allocated approximately
$82.1 million to IPR&D, which we recorded as a charge to expense in our
consolidated statement of operations for the year ended December 31, 2000.
As of September 30, 2001, the technological feasibility of both the GelTex
and Biomatrix IPR&D 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 any
products reaching technological feasibility. In addition, each product needs to
successfully complete a series of clinical trials and receive FDA or other
regulatory approval prior to commercialization. We cannot guarantee that these
projects will ever reach feasibility or develop into products that can be
marketed profitably, nor can we guarantee that we will be able to develop and
commercialize these products before our competitors develop and commercialize
products for these indications. If these products are not successfully developed
and do not become commercially viable, our results of operations could be
materially affected.
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Below is a brief description of the significant GelTex and Biomatrix IPR&D
projects, including an estimation of when management believes we may realize
revenues from the sales of these products in the respective application:
<Table>
<Caption>
ESTIMATED
COST TO
VALUE AT COMPLETE AT
ACQUISITION SEPTEMBER 30,
PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001
- --------------------- ----------------------------- ----------------------------- ----------- --------------
(IN MILLIONS)
GELTEX:
Renagel-Registered Trademark- Non-absorbed polymer - Clinical studies scheduled $ 19.7 $ 13.2
phosphate binder phosphate binder for the for completion in 2002, 2003
treatment of hyperphospatemia and 2004
C. DIFFICILE colitis Program to develop a toxin- - Phase 2 studies initiated 37.4 31.1
binding polymer for the in 2000
treatment and prevention of - U.S. marketing approval for
antibiotic induced C. this product is expected by
DIFFICILE colitis 2006
Oral Mucositis Focuses on the development of - IND expected to be filed in 17.8 22.3
a topical mouth rinse that the fourth quarter of 2002
combines barrier material and - Product launch expected in
antimicrobial polymers to 2006
create an anti-infective
mechanism against oral
mucositis, a common side
effect of radiation therapy
and chemotherapy
DENSPM Focuses on the development of - Phase 1 safety study and 3.4 28.9
a compound for the treatment dose-ranging studies
of mild to moderate psoriasis scheduled for the fourth
quarter of 2001
- No further development
planned
Iron Chelation Focuses on the prevention and - Expected to file an IND in 15.7 27.8
treatment of transfusional or the fourth quarter of 2001
hereditary iron overload - Product launch expected in
2006
Anti-Obesity Builds on GelTex's expertise - Expected to file an IND in 17.8 35.9
in non-absorbed polymers and late 2002
focuses on the development of - Product launch expected in
a compound that will inhibit 2007
lipase and bind fat
GT102-279 Second generation lipid- - Development on hold 6.2 N/A(1)
lowering compound with
attributes of GelTex's
Welchol-TM- lipid lowering
agent
------ ------
$118.0 $159.2
====== ======
</Table>
- --------------------------
(1) Future development costs will be funded by our collaboration partner.
66
<Page>
<Table>
<Caption>
ESTIMATED
COST TO
VALUE AT COMPLETE AT
ACQUISITION SEPTEMBER 30,
PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001
- --------------------- ----------------------------- ----------------------------- ----------- -------------
(IN MILLIONS)
BIOMATRIX:
Visco-supplement- Use of elastoviscous - European marketing approval $33.8 $ 6.7
ation solutions and viscoelastic for
gels in disease conditions to Synvisc-Registered Trademark-
supplement tissues and body for use in the hip expected
fluids, alleviating pain and by the end of 2001. U.S.
restoring normal function trial scheduled for 2002.
Initiation of a next
generation
Synvisc-Registered Trademark-
program expected in the
fourth quarter of 2001 with
possible U.S. market
approval in the second half
of 2004
Visco-augmentation Use of viscoelastic gels to - U.S. clinical studies of 8.6 6.2
provide scaffolding for Hylaform-Registered Trademark-
tissue regeneration or as an expected to start in the
inert elastic filler for fourth quarter of 2001 with
tissues of the skin and the market launch expected in
subcutaneous and the second half of 2003
intermuscular connective
tissues
- We expect to engage a
development partner for
Hylagel-Registered Trademark-
Uro in 2002
Visco-separation Use of viscoelastic gels and - Clinical studies have been 39.7 6.6
membranes to separate tissues initiated in the U.S.,
and to decrease formation of Germany, France, the United
adhesions and excessive scars Kingdom and Belgium for
after surgery Sepragel-TM- Spine
(formerly
Hylagel-Registered Trademark-
Nuro). Completion of
patient enrollment is
expected by the first
quarter of 2002. Patient
follow up expected to be
completed by the first
quarter of 2003 with U.S.
marketing approval
anticipated in the first
half of 2004. European
marketing approval expected
in the second half of 2003
with submissions for
regulatory approvals in the
U.S., Canada and Europe
thereafter
- Expected product launch in
Europe by the second
quarter of 2002 and in the
U.S. by the fourth quarter
of 2002
----- -----
$82.1 $$19.5
===== =====
</Table>
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<Page>
OTHER INCOME AND EXPENSES
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Equity in net loss of
unconsolidated affiliates...... $ (8,110) $(11,420) (29)% $(28,921) $(30,866) (6)%
Gain on affiliate sale of
stock.......................... 212 2,419 (91)% 212 22,689 (99)%
Gain (loss) on investments in
equity securities.............. (24,464) 8,544 (386)% (25,996) 22,709 (214)%
Minority interest in net loss of
subsidiary..................... 260 977 (73)% 2,259 3,185 (29)%
Other............................ (1,192) (10) 11,820% (5,035) 5,185 (197)%
Investment income................ 13,718 12,758 8% 36,359 33,333 9%
Interest expense................. (8,739) (5,010) 74% (30,875) (12,785) 141%
-------- -------- -------- --------
Total other income (expenses).... $(28,315) $ 8,258 (443)% $(51,997) $ 43,450 (220)%
======== ======== ======== ========
</Table>
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES
We have recorded the results of the following joint ventures in equity in
net loss of unconsolidated affiliates:
<Table>
<Caption>
JOINT VENTURE PARTNER EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
- --------------------- -------------------------- -------------- -------------------------- -------------------
RenaGel LLC GelTex (1) June 1997 Renagel-Registered Trademark- Genzyme General
phosphate binder for the
reduction of serum
phosphorus in patients
with end-stage renal
disease
BioMarin/ Genzyme LLC BioMarin Pharmaceutical September 1998 Aldurazyme-TM- enzyme for Genzyme General
Inc. the treatment of
mucopolysaccharidosis-I
Pharming/ Genzyme LLC Pharming Group, N.V.(2,3) October 1998 Human alpha-glucosidase Genzyme General
for the treatment of Pompe
disease (transgenic
product)
Genzyme/ Pharming Pharming Group, N.V.(2,4) June 2000 Human alpha-glucosidase Genzyme General
Alliance LLC for the treatment of Pompe
disease (produced using
CHO cells)
Diacrin/ Genzyme LLC Diacrin, Inc. October 1996 Products using porcine Genzyme Biosurgery
fetal cells for the (until May 1999);
treatment of Parkinson's Genzyme General
and Huntington's diseases (after May 1999)
</Table>
- --------------------------
(1) We acquired GelTex and the remaining 50% interest in RenaGel LLC in
December 2000. RenaGel LLC was merged into GelTex effective October 1, 2001.
(2) Since August 2001, Pharming Group, N.V. has been operating under court
ordered receivership.
(3) In August 2001, we agreed to fund 100% of the costs to produce transgenic
human alpha-glucosidase enzyme and related clinical trial costs through
2003. We consolidate the results of Pharming/Genzyme LLC effective
August 2001.
(4) In August 2001, we terminated our strategic alliance agreement with Pharming
Group, N.V. and certain of its subsidiaries for the development of a
CHO-cell product for Pompe disease and have assumed full operational and
financial responsibility for the development of the CHO-cell product.
We currently own approximately 26% of the common stock of Genzyme
Transgenics and record our portion of its results in equity in net loss of
unconsolidated affiliates.
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<Page>
We have recorded in equity in net loss of unconsolidated affiliates our
portion of the results of our joint ventures with BioMarin, Pharming Group and
Diacrin. Included in the nine months ended September 30, 2001 are losses from
Focal, which we acquired in June 2001, for which there was no similar amounts in
the same period of 2000. Included in the three and nine month periods ended
September 30, 2000 are losses from RenaGel LLC, in which we and GelTex each
owned a 50% interest. We acquired GelTex, including its 50% interest in RenaGel
LLC, in December 2000. In connection with the merger, we allocated our 50%
interest in RenaGel LLC to GelTex. We have consolidated the results of RenaGel
LLC in our consolidated financial statements from the date of acquisition.
RenaGel LLC was merged into GelTex effective October 1, 2001. Prior to our
acquisition of the remaining 50% interest in RenaGel LLC, we included our
proportionate share of the results of RenaGel LLC in equity in net loss of
unconsolidated affiliates. Our equity in the net losses of RenaGel LLC was
$4.1 million in the three months ended September 30, 2000 and $10.1 million in
the nine months ended September 30, 2000. Excluding these losses, our equity in
net loss of unconsolidated affiliates increased in both the three and nine
months ended September 30, 2001, due primarily to increased losses from our
joint venture with BioMarin, our joint ventures with Pharming, and our equity
position in Genzyme Transgenics, which were offset in part by decreased losses
from our joint venture with Diacrin. Also included in the three and nine month
periods ended September 30, 2001 are losses from Genzyme/Pharming Alliance LLC,
which was the vehicle for our joint venture with Pharming Group for the
development of a CHO-cell derived product for the treatment of Pompe disease. We
terminated our strategic alliance agreement with Pharming covering this joint
venture in August 2001. As a result, we have included 100% of the losses of
Genzyme/Pharming Alliance LLC since August 23, 2001.
GAIN ON AFFILIATE SALE OF STOCK
During the nine months ended September 30, 2000, in accordance with our
policy pertaining to affiliate sales of stock, we recognized gains of
$22.7 million due to the issuance by Genzyme Transgenics, an unconsolidated
affiliate, of additional shares of Genzyme Transgenics common stock.
GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES
In the quarter ended September 30, 2001, we recorded charges of
$11.8 million in connection with our investment in the ordinary shares of
Cambridge Antibody Technology Group plc and $4.5 million in connection with our
investment in the common stock of Targeted Genetics Corporation, because we
considered the decline in the value of these investments to be other than
temporary. Given the significance and duration of the declines as of the end of
the quarter, we concluded that it was unclear over what period the recovery of
the stock price for each of these investments would take place and that,
accordingly, any evidence suggesting that the investments would recover to at
least our purchase price was not sufficient to overcome the presumption that the
current market price was the best indicator of the value of each of these
investments.
In August 2001, Pharming Group filed for receivership in order to seek
protection from its creditors. In the quarter ended September 30, 2001, we
recorded a charge of $8.5 million, representing an at cost write-off of our
investment in Pharming common stock.
In April 2001, Antigenics, Inc. announced that it had entered into a
definitive merger agreement with Aronex Pharmaceuticals, Inc. The merger was
completed in July 2001. Under the terms of the merger agreement, we received
0.0594 of a share of Antigenics common stock for each share of Aronex common
stock that we held. As a result of this merger, we recorded a $1.2 million
charge to reflect the fair market value of our investment in Aronex at June 30,
2001.
In the third quarter of 2000, we recorded a realized gain of $10.9 million
upon the sale of a portion of our investment in Genzyme Transgenics common
stock. In the second quarter of 2000, we
69
<Page>
recorded a realized gain of $5.5 million upon the sale of a portion of our
investment in Genzyme Transgenics common stock that was offset by the reversal
of a $1.9 million valuation allowance related to previously recognized capital
losses. We also recognized a realized gain of $7.6 million resulting from the
acquisition of Celtrix Pharmaceuticals, Inc. by Insmed Pharmaceuticals, Inc. in
which our shares of Celtrix common stock were exchanged on a one-for-one basis
for shares of Insmed common stock.
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY
Due to our combined direct (until July 2001) and indirect interest in ATIII
LLC, our joint venture with Genzyme Transgenics for the development and
commercialization of ATIII, we consolidated the results of ATIII LLC and
recorded Genzyme Transgenics' portion of the losses of that joint venture as
minority interest. Minority interest increased in the three and nine months
ended September 30, 2001 due to a change in the funding agreement for the joint
venture in March 2001, retroactive to January 1, 2001, which increased Genzyme
Transgenics's portion of the losses incurred by ATIII LLC to 50% until
July 2001 and 100% thereafter as compared to 26% for the same periods a year
ago.
In July 2001, we transferred our 50% ownership interest in ATIII LLC to
Genzyme Transgenics. In exchange for our interest in the joint venture, we will
receive a royalty on worldwide net sales (excluding Asia) of products based on
ATIII beginning three years after the first commercial sale of each such product
up to a cumulative maximum amount of $30.0 million.
INVESTMENT INCOME
Our investment income increased for the three and nine months ended
September 30, 2001, as compared to the same periods a year ago, due primarily to
higher average invested cash balances. In May 2001, we completed the private
placement of $575.0 million in principal of 3% convertible subordinated
debentures due 2021. Net proceeds from the offering were approximately
$562.1 million. We allocated the principal balance of the debentures and the net
proceeds from the offering to Genzyme General. A portion of the net proceeds
from the private placement of the debentures was used to repay the
$150.0 million we had drawn under our revolving credit facility in
December 2000 and allocated to Genzyme General.
INTEREST EXPENSE
Our interest expense increased for the three and nine months ended
September 30, 2001, as compared to the same periods a year ago, primarily due to
additional interest expense resulting from the $150.0 million of debt drawn on
our revolving credit facility in December 2000 as part of the financing of the
GelTex acquisition, and the private placement of $575.0 million in principal of
3% convertible debentures issued in May 2001.
TAX PROVISION
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Benefit from (provision for) income
taxes.............................. $4,554 $(15,933) (129)% $7,288 $(51,101) (114)%
Effective tax rate................... 4% 32% 6% 31%
</Table>
70
<Page>
Our tax rates for both periods vary from the U.S. statutory tax rate as a
result of our:
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible charges for IPR&D;
- nondeductible amortization of intangibles; and
- use of tax credits.
The decrease in our effective tax rate for both the three and nine months
ended September 30, 2001, as compared to the same periods a year ago, was
primarily attributable to nondeductible charges for IPR&D resulting from our
acquisitions of Wyntek in June 2001 and Novazyme in September 2001 and
nondeductible amortization of intangibles consisting largely of goodwill
resulting from our acquisitions of GelTex and Biomatrix in December 2000. The
tax benefit for the nine months ended September 30, 2001 includes a
$2.2 million benefit resulting from our release of excess tax reserves.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that we recognize all derivative instruments as either assets or liabilities in
our consolidated balance sheet and measure those instruments at fair value.
Subsequent changes in fair value are reflected in current earnings or other
comprehensive income, depending on whether a derivative instrument is designated
as part of a hedge relationship and, if it is, the type of hedge relationship.
In accordance with the transition provisions of SFAS 133, we recorded a
cumulative-effect adjustment of $4.2 million, net of tax, in our unaudited,
consolidated statements of operations for the nine months ended September 30,
2001 to recognize the fair value of certain common stock warrants held on
January 1, 2001. Transition adjustments pertaining to interest rate swaps
designated as cash-flow hedges and foreign currency forward contracts were not
significant. For the three months ended September 30, 2001, we recorded a
pre-tax charge of $1.2 million in other expense to reflect the change in value
of certain common stock warrants from July 1, 2001 to September 30, 2001. For
the nine months ended September 30, 2001, we recorded a pre-tax charge of
$5.0 million in other expense to reflect the change in value of certain common
stock warrants from January 1, 2001 to September 30, 2001. We also recorded a
charge of $1.7 million in other comprehensive income for the nine months ended
September 30, 2001 to reflect the change in value of our interest rate swap
contract during the period, net of tax.
In the normal course of business, we manage risks associated with foreign
exchange rates, interest rates and equity prices through a variety of
strategies, including the use of hedging transactions, executed in accordance
with our policies. As a matter of policy, we do not use derivative instruments
unless there is an underlying exposure. Any change in the value of our
derivative instruments would be substantially offset by an opposite change in
the value of the underlying hedged items. We do not use derivative instruments
for trading or speculative purposes.
71
<Page>
GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
The following discussion summarizes key factors our management believes
necessary for an understanding of Genzyme General's financial statements.
In September 2001, we acquired all of the outstanding capital stock of
Novazyme, a privately-held developer of biotherapies for the treatment of
lysosomal storage disorders, or LSDs, for an initial payment of 2,562,182 shares
of Genzyme General Stock. Novazyme shareholders received 0.5714 of a share of
Genzyme General Stock for each share of Novazyme common stock they held. We will
be obligated to make two additional payments totaling $87.5 million, payable in
shares of Genzyme General Stock, if we receive U.S. marketing approval for two
products for the treatment of LSDs that employ certain of Novazyme's
technologies. In connection with the merger, we also assumed all of the
outstanding options, warrants and rights to purchase Novazyme common stock on an
as-converted basis. We allocated the acquisition to Genzyme General and
accounted for the acquisition as a purchase. Accordingly, the results of
operations of Novazyme are included in the combined financial statements of
Genzyme General from September 26, 2001, the date of acquisition.
In June 2001, we acquired all of the outstanding capital stock of
privately-held Wyntek for $65.0 million in cash. Wyntek is a provider of high
quality point of care rapid diagnostic tests for pregnancy and infectious
diseases. We allocated the acquisition to Genzyme General and accounted for the
acquisition as a purchase. Accordingly, the results of operations of Wyntek are
included in the combined financial statements of Genzyme General from June 1,
2001, the date of acquisition.
In December 2000, we acquired GelTex, a public company engaged in developing
therapeutic products based on polymer technology, for an aggregate purchase
price of approximately $1 billion, which we paid primarily in shares of Genzyme
General Stock. We accounted for the acquisition as a purchase and allocated it
to Genzyme General. Accordingly, the results of operations of GelTex are
included in the combined financial statements of Genzyme General from
December 14, 2000, the date of acquisition. As part of the acquisition of
GelTex, we acquired GelTex's interest in RenaGel LLC, our joint venture with
GelTex. Our consolidated financial statements and the combined financial
statements of Genzyme General reflect the consolidation of RenaGel LLC from the
date of acquisition of GelTex. Prior to the acquisition of GelTex, we accounted
for our investment in RenaGel LLC under the equity method.
72
<Page>
The components of Genzyme General's combined statements of operations are
described in the following table:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues.................. $255,052 $192,165 33% $716,743 $549,485 30%
-------- -------- -------- --------
Cost of products and services
sold.......................... 59,227 54,355 9% 175,491 141,398 24%
Selling, general and
administrative................ 92,386 41,780 121% 217,475 122,974 77%
Research and development
(including research and
development related to
contracts).................... 49,726 25,567 94% 132,317 83,701 58%
Amortization of intangibles..... 19,221 1,983 869% 55,073 5,962 824%
Purchase of in-process research
and development............... 86,800 -- N/A 95,568 -- N/A
-------- -------- -------- --------
Total operating costs and
expenses.................. 307,360 123,685 149% 675,924 354,035 91%
-------- -------- -------- --------
Operating income (loss)......... (52,308) 68,480 (176)% 40,819 195,450 (79)%
Other income (expenses), net.... (25,903) 6,902 (475)% (41,488) 38,986 (206)%
-------- -------- -------- --------
Income (loss) before income
taxes......................... (78,211) 75,382 (204)% (669) 234,436 (100)%
Provision for income taxes...... (3,495) (24,409) (86)% (34,174) (74,164) (54)%
-------- -------- -------- --------
Division net income (loss)
before cumulative effect of
change in accounting
principle..................... (81,706) 50,973 (260)% (34,843) 160,272 (122)%
Cumulative effect of change in
accounting principle, net of
tax........................... -- -- -- 4,167 -- N/A
-------- -------- -------- --------
Division net income (loss)...... $(81,706) $ 50,973 (260)% $(30,676) $160,272 (119)%
======== ======== ======== ========
</Table>
REVENUES
The components of Genzyme General's total revenues are described in the
following table:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product revenue................. $234,875 $176,891 33% $656,121 $503,700 30%
Service revenue................. 17,853 15,115 18% 54,390 45,296 20%
-------- -------- -------- --------
Total product and service
revenue................... 252,728 192,006 32% 710,511 548,996 29%
Research and development
revenue....................... 2,324 159 1,362% 6,232 489 1,174%
-------- -------- -------- --------
Total revenues.............. $255,052 $192,165 33% $716,743 $549,485 30%
======== ======== ======== ========
</Table>
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<Page>
PRODUCT AND SERVICE REVENUE
The following table sets forth Genzyme General's product and service revenue
on a segment basis:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product revenue:
Therapeutics:
Cerezyme-Registered Trademark-
and
Ceredase-Registered Trademark-
enzymes................... $143,048 $136,744 5% $423,991 $400,203 6%
Renagel-Registered Trademark-
phosphate binder.......... 52,356 13,814 279% 121,359 24,032 405%
Other therapeutic
products.................. 6,718 3,282 105% 17,834 12,001 49%
-------- -------- -------- --------
Total Therapeutics........ 202,122 153,840 31% 563,184 436,236 29%
Diagnostic products........... 20,572 15,824 30% 54,786 46,601 18%
Other......................... 12,181 7,227 69% 38,151 20,863 83%
-------- -------- -------- --------
Total product revenue....... 234,875 176,891 33% 656,121 503,700 30%
Service revenue:
Other......................... 17,853 15,115 18% 54,390 45,296 20%
-------- -------- -------- --------
Total product and service
revenue....................... $252,728 $192,006 32% $710,511 $548,996 29%
======== ======== ======== ========
</Table>
THERAPEUTICS
Genzyme General's continued increase in product revenue for both the three
and nine month periods ended September 30, 2001, as compared to the same periods
a year ago, was primarily due to increased sales of
Renagel-Registered Trademark- phosphate binder, which is used to reduce serum
phosphorus levels in patients with end-stage renal disease on dialysis, and
continued growth in sales of Cerezyme-Registered Trademark- enzyme for the
treatment of Type I Gaucher disease. Genzyme General began recording revenues
from Renagel-Registered Trademark- phosphate binder during the second quarter of
2000 under an amended distribution arrangement with GelTex, which we acquired in
December 2000. Prior to this amendment, revenues from
Renagel-Registered Trademark- phosphate binder were recorded by RenaGel LLC, our
joint venture with GelTex, and were $8.0 million for the three month period
ended March 31, 2000.
Sales of Renagel-Registered Trademark- phosphate binder in both the three
and nine months ended September 30, 2001 include sales of capsules and the 800
mg tablet formulation. Genzyme General launched the tablet formulation in the
United States during the third quarter of 2000. In the first quarter of 2001,
the higher-than-anticipated demand for the 800 mg tablet formulation and certain
production constraints resulted in a temporary shortage of this dosage form of
Renagel-Registered Trademark- phosphate binder. Patients taking the 800 mg
tablets were shifted to an equivalent dose of 400 mg
Renagel-Registered Trademark- tablets or 403 mg Renagel-Registered Trademark-
capsules while Genzyme General built an inventory of 800 mg tablets to support
our re-launch of this dosage form in June 2001. Despite the temporary shortage
of the 800 mg tablet formulation, sales of Renagel-Registered Trademark-
phosphate binder increased significantly in each of the three and nine months
ended September 30, 2001 in comparison to the same periods of 2000 due to
accelerating adoption of the product by nephrologists, as evidenced by
significant increases in both renewal prescriptions and new prescriptions.
The steady growth in sales of Cerezyme-Registered Trademark- enzyme in the
three and nine months ended September 30, 2001 was attributable to Genzyme
General's continued identification of new Gaucher disease patients worldwide,
coupled with significant investment in our global infrastructure that has
continued to increase international sales of this product. Additionally, Genzyme
General continues to
74
<Page>
market Ceredase-Registered Trademark- enzyme for the treatment of Gaucher
disease, although we have successfully converted virtually all Gaucher disease
patients to a treatment regimen using Cerezyme-Registered Trademark- enzyme.
Genzyme General's results of operations are highly dependent on sales of
Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sales of
this product would adversely affect its results of operations. Revenue from
Cerezyme-Registered Trademark- enzyme would be impacted negatively if
competitors developed alternative treatments for Gaucher disease and the
alternative products gained commercial acceptance. Genzyme General is aware of
companies that have initiated efforts to develop competitive products, including
one company that recently has applied for marketing approval for its product in
the U.S. Other companies may attempt to develop competitive products in the
future. Although orphan drug status for Cerezyme-Registered Trademark- enzyme,
which provided us with exclusive marketing rights for
Cerezyme-Registered Trademark- enzyme in the United States, expired in
May 2001, we continue to have patents protecting our method of manufacturing
Cerezyme-Registered Trademark- enzyme until 2010 and the composition of
Cerezyme-Registered Trademark- enzyme as made by that process until 2013. The
expiration of market exclusivity and orphan drug status in May 2001 will likely
subject Cerezyme-Registered Trademark- enzyme to increased competition which may
decrease the amount of revenue we receive from this product or the growth of
that revenue.
The following table provides information regarding the change in sales of
Genzyme General's Gaucher disease therapies as a percentage of total product
revenue during the periods presented:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Sales of
Cerezyme-Registered Trademark-
and
Ceredase-Registered Trademark-
enzymes....................... $143,048 $136,744 5% $423,991 $400,203 6%
% of total product revenue...... 61% 77% 65% 79%
</Table>
Although sales of Genzyme General's Gaucher disease therapies continue to
increase, the decline as a percentage of total product revenue is a trend we
expect will continue in the future. Genzyme General expects that growth in the
sales of Renagel-Registered Trademark- phosphate binder will continue to
increase. Revenue from sales of Renagel-Registered Trademark- phosphate binder
represented approximately 22% of Genzyme General's total product revenue for the
three month period ended September 30, 2001, as compared to 8% for the same
period a year ago. For the nine-month period ended September 30, 2001, sales of
Renagel-Registered Trademark- phosphate binder represented approximately 18% of
Genzyme General's total product revenue as compared to 5% for the same period a
year ago
Other therapeutics revenue for each period includes sales of
Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool
for well-differentiated thyroid cancer. Revenue for
Thyrogen-Registered Trademark- hormone increased for the three months and nine
months ended September 30, 2001, as compared to the same periods a year ago, due
primarily to increased market penetration. Other therapeutics revenue also
increased due to increased sales of Fabrazyme-TM- enzyme in France under an
Authorisation Temporaire d'utilisation from the French Medicines Agency.
DIAGNOSTIC PRODUCTS
Diagnostic products revenues increased for the three and nine-month periods
ended September 30, 2001, as compared to the same periods in 2000, due primarily
to increased sales of infectious disease testing products and HDL and LDL
cholesterol testing products. Also contributing to the increase for both periods
is the addition of sales of point of care rapid diagnostic tests for pregnancy
and infectious diseases that we obtained through our acquisition of Wyntek,
which we acquired in June 2001. Diagnostic product revenue also includes
royalties on product sales by Techne Corporation's biotechnology group.
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<Page>
OTHER PRODUCT AND SERVICE REVENUE
The increase in other product revenue for the three and nine months ended
September 30, 2001, as compared to the same periods in 2000, was primarily
attributable to increased sales of lipids and peptides for drug delivery. The
increase in service revenue in each of the three and nine months ended
September 30, 2001 is due to increased sales of genetic testing services
attributable to expanded presence in the prenatal market and a broader test menu
in oncology.
RESEARCH AND DEVELOPMENT REVENUE
The increase in research and development revenue in the three months ended
September 30, 2001 was primarily attributable to $1.3 million of revenue
recognized by Genzyme General in connection with our collaboration agreements
for the development of a second-generation lipid-altering product, for which
there were no similar amounts in the same period of 2000, and $1.0 million of
additional research and development services Genzyme General performed on behalf
of Genzyme Transgenics. For the nine months ended September 30, 2001, research
and development revenue increased primarily due to $3.5 million of revenue
recognized by Genzyme General in connection with our collaboration agreements
for the development of a second-generation lipid-altering product for which
there were no similar amounts in the same period of 2000 and $2.7 million of
additional revenue from research and development services we performed on behalf
of Genzyme Transgenics.
INTERNATIONAL PRODUCT AND SERVICE REVENUE
A substantial portion of Genzyme General's revenue was generated outside of
the United States. Most of these revenues were attributable to sales of
Cerezyme-Registered Trademark- enzyme. International sales of
Cerezyme-Registered Trademark- enzyme increased 9% to $73.8 million in the three
month period ended September 30, 2001 from $67.7 million in the same period last
year. International sales of Cerezyme-Registered Trademark- enzyme increased 10%
to $223.0 million for the nine month period ended September 30, 2001 from
$203.5 million for the same period last year. Despite an approximate 1% decline
in the average exchange rate of the euro for the three month period ended
September 30, 2001, as compared to a year ago, and an approximate 5% decline in
the average exchange rate of the euro for the nine month period ended
September 30, 2001, as compared to a year ago, international sales of
Cerezyme-Registered Trademark- enzyme increased for both periods due primarily
to the continued identification of new Gaucher disease patients worldwide,
coupled with significant investment in our global infrastructure. International
product and service revenue as a percent of total product and service revenue
decreased in both the three and nine months ended September 30, 2001 due
primarily to increased sales of Renagel-Registered Trademark- phosphate binder
in the United States.
The following table provides information regarding the change in
international product and service sales as a percentage of total product and
service revenue during the periods presented:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
International product and service
revenue......................... $94,555 $80,585 17% $280,022 $237,592 18%
% of total product and service
revenue......................... 37% 42% 39% 43%
</Table>
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MARGINS
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product margin....................... $186,541 $131,701 42% $512,424 $389,239 32%
% of product revenue................. 79% 74% 78% 77%
Service margin....................... 6,960 5,950 17% 22,596 18,359 23%
% of service revenue................. 39% 39% 42% 41%
Total gross margin................... $193,501 $137,651 41% $535,020 $407,598 31%
% of total product and service
revenue............................ 77% 72% 75% 74%
</Table>
Genzyme General provides a broad range of healthcare products and services.
As a result, Genzyme General's gross margin may vary significantly based on the
category of product or service. Sales of therapeutic products, including
Cerezyme-Registered Trademark- enzyme, result in higher margins than diagnostic
products.
PRODUCT MARGIN
Product margin for the three and nine month periods ended September 30,
2001, as compared to the same periods a year ago, increased primarily as a
result of increased sales of Renagel-Registered Trademark- phosphate binder and
Cerezyme-Registered Trademark- enzyme. This increase was partially offset by
charges to cost of products sold of $8.2 million for the nine months ended
September 30, 2001 relating to the increased basis of the inventory obtained in
connection with our acquisition of GelTex in December 2000. Product margin as a
percentage of product revenue increased for the three and nine month periods
ended September 30, 2001, as compared to the same periods a year ago. The
increase for the three months ended September 30, 2001 as compared to the same
period a year ago was primarily attributable to a 33% increase in product
revenue, driven by increased sales of both Cerezyme-Registered Trademark- enzyme
and Renagel-Registered Trademark- phosphate binder, partially offset by a 7%
increase in the cost of products sold for the same period. The increase for the
nine months ended September 30, 2001 as compared to the same period a year ago
was primarily attributable to a 30% increase in product revenue, driven by
increased sales of both Cerezyme-Registered Trademark- enzyme and
Renagel-Registered Trademark- phosphate binder, partially offset by a 26%
increase in the cost of products sold for the same period. We expect that in the
future Genzyme General's product margin as a percentage of product revenue will
trend slightly lower, primarily due to the lower margins normally attributable
to Renagel-Registered Trademark- phosphate binder, combined with our building of
additional manufacturing capacity in both the United Kingdom and Ireland and as
we experience a product mix shift as sales of diagnostics products and services
continue to increase.
SERVICE MARGIN
Service margin for the three and nine month periods ended September 30, 2001
increased, as compared to the same periods a year ago, primarily due to
increased sales of higher margin DNA and cancer testing services. While this
trend continued, service margin as a percentage of service revenue was unchanged
for the three month period ending September 30, 2001, as compared to the same
period a year ago, and increased only slightly for the nine month period ended
September 30, 2001. This was primarily attributable to service revenue
increasing at a rate greater than the rate of increase for cost of services sold
for both periods of 2001. For the three month period ending September 30, 2001,
a service revenue increase of 18% was offset by a 19% increase in the cost of
services sold as compared to the same period a year ago. For the nine month
period ending September 30, 2001, a service revenue increase of 20% was offset
by a 18% increase in the cost of services sold as compared to the same period a
year ago.
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OPERATING EXPENSES
The increase in selling, general and administrative expenses for both the
three and nine month periods ended September 30, 2001, as compared to the same
periods a year ago, is related to:
- increased staffing to support the growth in several of Genzyme General's
product lines;
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme, to drive the growth in sales of
Renagel-Registered Trademark- phosphate binder and
Thyrogen-Registered Trademark- hormone, and to prepare for the
commercialization of Fabrazyme-TM- enzyme; and
- the addition of expenses from GelTex and Wyntek.
Selling, general and administrative expenses for the three and nine months
ended September 30, 2001 included $27.0 million of charges resulting from
Pharming Group, N.V.'s decision to file for and operate under a court supervised
receivership. Included was a write-off of the $10.2 million in principal and
accrued interest due to us under the 7% senior convertible note issued to us by
Pharming Group and a charge of $16.8 million representing our obligation to fund
the continued production of transgenic human alpha-glucosidase enzyme through
2003. As a result of Pharming Group's failure to make payments to fund our joint
venture for the development of a CHO-cell product for Pompe disease under a
strategic alliance agreement, we terminated this agreement in August and have
assumed full operational and financial responsibility for the development of the
CHO-cell product. Our joint venture with Pharming Group covering a transgenic
product for Pompe disease remains in place. We do not intend to commercialize
this product, but have committed to fund its production for the nine patients
participating in a clinical trial extension until those patients can be
transitioned to a CHO-cell product.
The increase in research and development expenses for both the three and
nine month periods ended September 30, 2001, as compared to the same periods a
year ago, is attributable to:
- the cost of post-marketing clinical development efforts for
Renagel-Registered Trademark- phosphate binder, which was included in
equity in net loss of unconsolidated affiliates before we purchased
GelTex;
- the addition of spending on the C. DIFFICILE colitis, DENSPM, iron
chelation, oral mucositis, anti-obesity, and GT102-279 programs as a
result of our acquisition of GelTex;
- increased spending on Genzyme General's program to develop Fabrazyme-TM-
enzyme for the treatment of Fabry disease; and
- increased spending on other internal programs.
Research and development expenses for the three and nine months ended
September 30, 2001, reflects a charge of $4.7 million, representing the net
amount owed by Pharming Group to the CHO-cell product joint venture we
previously formed with Pharming Group that we believe is uncollectable. Research
and development expenses for the nine months ended September 30, 2000 included a
charge of $19.5 million representing initial amounts payable to Synpac (North
Carolina), Inc. under a license granted to us by Synpac to develop and
commercialize a human alpha-glucosidase enzyme replacement therapy for Pompe
disease, which was offset in part by a $10.3 million research and development
reimbursement from Pharming Group.
In connection with our acquisition of GelTex on December 14, 2000, we
converted options to purchase shares of GelTex common stock into options to
purchase shares of Genzyme General Stock. In accordance with FIN 44, at the date
of acquisition we allocated the intrinsic value for the unvested portion of
these options of $10.2 million to deferred compensation, a component of division
equity. We are amortizing this amount to operating expense over the remaining
vesting period of one year from the date of acquisition. We are allocating the
expense to the appropriate expense categories of Genzyme General's statements of
operations based on the functional responsibility of each employee or
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option holder. For the three months ended September 30, 2001, Genzyme General
recorded $2.4 million of compensation expense related to these options, of which
$1.9 million was charged to research and development expense and $0.5 million
was charged to selling, general and administrative expense. For the nine months
ended September 30, 2001, Genzyme General recorded $7.3 million of compensation
expense related to these options, of which $6.0 million was charged to research
and development expense and $1.3 million was charged to selling, general and
administrative expense. At September 30, 2001, $2.4 million remained in deferred
compensation, all of which we will fully amortize by December 31, 2001.
In connection with our acquisition of Novazyme on September 26, 2001, we
converted options, warrants and rights to purchase shares of Novazyme common
stock into options, warrants and rights to purchase shares of Genzyme General
Stock. In accordance with FIN 44, at the date of acquisition we allocated the
$2.6 million intrinsic value of the portion of the unvested options related to
the future service period to deferred compensation. We are amortizing this
amount to operating expense over the remaining vesting period of 22 months from
the date of acquisition. We are allocating the expense to the appropriate
expense categories of Genzyme General's combined statements of operations based
on the functional responsibility of each option holder.
AMORTIZATION OF INTANGIBLES
The increase in amortization of intangibles for both the three and nine
month periods ended September 30, 2001 is primarily attributable to intangible
assets acquired in connection with the acquisition of GelTex in December 2000
and Wyntek in June 2001.
PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT
NOVAZYME
In connection with our acquisition of Novazyme, we acquired a technology
platform that we believe can be leveraged in the development of treatments for
various LSDs. As of the acquisition date, the technology platform had not
achieved technological feasibility and would require significant further
development to complete. Accordingly, we have allocated to IPR&D and charged to
expense $86.8 million, representing the portion of the purchase price
attributable to the technology platform.
Our management assumes responsibility for determining the IPR&D valuation
and 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
probability-adjusted net cash flows expected to result once the technology has
reached technological feasibility and is utilized in the treatment of certain
LSDs. A discount rate of 16% was applied to estimate the present value of these
cash flows and is consistent with the overall risks of the platform technology.
In estimating future cash flows, management considered other tangible and
intangible assets required for successful exploitation of the technology and
adjusted the future cash flows to reflect the contribution of value from these
assets. In the allocation of purchase price to the IPR&D, the concept of
alternative future use was specifically considered. The platform technology is
specific to LSDs and there is currently no alternative use for the technology in
the event that it fails as a platform for enzyme replacement therapy for the
treatment of LSDs. We currently estimate that it will take approximately three
years and an investment of approximately $75 million-$100 million to complete
the development of, obtain approval for and commercialize the first product
based on this technology platform. However, our current estimates of the time
and investment required to develop the technology platform may change depending
on the different applications of the technology we may choose to pursue. We
cannot guarantee that any projects based on these technology platforms will ever
reach feasibility or develop into products that we can profitably market. In
addition, we cannot give you any assurances that we will be able to develop and
commercialize products based on these technology
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platforms before our competitors develop and commercialize products for the same
indications. If we do not successfully develop and commercialize products based
on these technology platforms, our results of operations could be materially
affected.
WYNTEK
In connection with our acquisition of Wyntek, we allocated approximately
$8.8 million of the purchase price to IPR&D. Our management assumes
responsibility for determining the IPR&D valuation and engaged an independent
third-party appraisal company to assist in the valuation of the intangible
assets acquired. We estimated the fair value assigned to purchased IPR&D by
discounting, to present value, the cash flows expected to result from the
project once it has reached technological feasibility. We applied a discount
rate of 25% to estimate the present value of these cash flows, which is
consistent with the risks of the project. In estimating future cash flows,
management considered other tangible and intangible assets required for
successful exploitation of the technology resulting from the purchased IPR&D
project and adjusted future cash flows for a charge reflecting the contribution
to value of these assets. The value assigned to purchased IPR&D was the amount
attributable to the efforts of Wyntek up to the time of acquisition.
In the allocation of purchase price to IPR&D, the concept of alternative
future use was specifically considered for the program under development. The
acquired IPR&D consists of Wyntek's work to complete the program. There are no
alternative uses for the in-process program in the event that the program fails
in clinical trials or is otherwise not feasible. The development effort for the
acquired IPR&D does not possess an alternative future use for us as defined by
generally accepted accounting principles. Consequently, in accordance with
generally accepted accounting principles, the amount allocated to IPR&D was
charged as an expense in our financial statements for the nine months ended
September 30, 2001. We are amortizing the remaining acquired intangible assets
arising from the acquisition on a straight-line basis over their estimated
lives, which range from 5 years to 10 years.
Below is a brief description of the IPR&D program associated with Wyntek's
cardiovascular disease diagnostic product, including an estimation of when
management believes we may realize revenues from the sale of this product.
Wyntek currently is developing a cardiovascular product to rapidly measure
the quantitative levels of cardiac marker proteins. These are the leading
markers for the diagnosis of acute myocardial infarction. The product consists
of a mobile, stand-alone, quantitative diagnostic device and a reaction strip
that detects disease specific marker proteins. The intended use of the device is
to read reaction strips at the patient's bedside or in an emergency room
setting. We expect to complete the regulatory review process and file an
application for marketing approval in early 2002 and begin selling the product
during the second half of 2002. Studies to date have demonstrated the viability
of this product but there can be no assurance that the regulatory authorities
will approve this product.
GELTEX
In December 2000, in connection with the acquisition of GelTex, we allocated
approximately $118.0 million of the purchase price to IPR&D, which Genzyme
General recorded as a charge to expense in its combined statement of operations
for the year ended December 31, 2000. As of September 30, 2001, 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 receive FDA or other
regulatory approval prior to commercialization. We cannot guarantee that these
projects will ever reach feasibility or develop into products that can be
marketed profitably, nor can we guarantee that Genzyme General will be able to
develop and commercialize these products before our competitors
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develop and commercialize products for these indications. If these products are
not successfully developed and do not become commercially viable, our results of
operations could be materially affected.
Below is a brief description of the GelTex IPR&D projects, including an
estimation of when management believes Genzyme General may realize revenues from
the sales of these products in the respective application:
<Table>
<Caption>
ESTIMATED
COST TO
VALUE AT COMPLETE AT
ACQUISITION SEPTEMBER 30,
PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001
- --------------------- ----------------------------- ----------------------------- ----------- -------------
(IN MILLIONS)
Renagel-Registered Trademark- Non-absorbed polymer - Clinical studies scheduled $ 19.7 $ 13.2
phosphate binder phosphate binder for the for completion in 2002, 2003
treatment of hyperphospatemia and 2004
C. DIFFICILE colitis Program to develop a toxin- - Phase 2 studies initiated 37.4 31.1
binding polymer for the in 2000
treatment and prevention of - U.S. marketing approval for
antibiotic induced C. this product is expected by
DIFFICILE colitis 2006
Oral Mucositis Focuses on the development of - IND expected to be filed in 17.8 22.3
a topical mouth rinse that the fourth quarter of 2002
combines barrier material and - Product launch expected in
antimicrobial polymers to 2006
create an anti-infective
mechanism against oral
mucositis, a common side
effect of radiation therapy
and chemotherapy
DENSPM Focuses on the development of - Phase 1 safety study and 3.4 28.9
a compound for the treatment dose-ranging studies
of mild to moderate psoriasis scheduled for the fourth
quarter of 2001
- No further development
planned
Iron Chelation Focuses on the prevention and - Expected to file an IND in 15.7 27.8
treatment of transfusional or the fourth quarter of 2001
hereditary iron overload - Product launch expected in
2006
Anti-Obesity Builds on GelTex's expertise - Expected to file an IND in 17.8 35.9
in non-absorbed polymers and late 2002
focuses on the development of - Product launch expected in
a compound that will inhibit 2007
lipase and bind fat
GT102-279 Second generation lipid- - Development on hold 6.2 N/A(1)
lowering compound with
attributes of GelTex's
WelChol-TM- lipid lowering
agent
------ --------
$118.0 $ 159.2
====== ========
</Table>
- --------------------------
(1) Future development costs will be funded by our collaboration partner.
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OTHER INCOME AND EXPENSES
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Equity in net loss of
unconsolidated affiliates...... $ (8,110) $(11,420) (29)% $(27,605) $(30,866) (11)%
Gain on affiliate sale of
stock.......................... 212 2,419 (91)% 212 22,689 (99)%
Gain (loss) on investments in
equity securities.............. (24,464) 8,544 (386)% (25,996) 22,709 (214)%
Minority interest in net loss of
subsidiary..................... 260 977 (73)% 2,259 3,185 (29)%
Other............................ (1,227) (43) 2,753% (5,115) 5,110 (200)%
Investment income................ 13,125 11,072 19% 34,136 27,798 23%
Interest expense................. (5,699) (4,647) 23% (19,379) (11,639) 67%
-------- -------- -------- --------
Total other income
(expenses)................. $(25,903) $ 6,902 (475)% $(41,488) $ 38,986 (206)%
======== ======== ======== ========
</Table>
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES
Genzyme General recorded in equity in net loss of unconsolidated affiliates
its portion of the results of our joint ventures with BioMarin, Pharming Group
and Diacrin. Included in the three and nine month periods ended September 30,
2000 are losses from RenaGel LLC, in which we and GelTex each owned a 50%
interest. We acquired GelTex, including its 50% interest in RenaGel LLC, in
December 2000. In connection with the merger, we allocated our 50% interest in
RenaGel LLC to GelTex. We have consolidated the results of RenaGel LLC in
Genzyme General's combined financial statements from the date of acquisition.
RenaGel LLC was merged into GelTex effective October 1, 2001. Prior to our
acquisition of the remaining 50% interest in RenaGel LLC, we included our
proportionate share of the results of RenaGel LLC in equity in net loss of
unconsolidated affiliates. Genzyme General's equity in the net losses of RenaGel
LLC was $4.1 million in the three months ended September 30, 2000 and
$10.1 million in the nine months ended September 30, 2000. Excluding these
losses, Genzyme General's equity in net loss of unconsolidated affiliates
increased in both the three and nine months ended September 30, 2001, due
primarily to increased losses from our joint venture with BioMarin, our joint
ventures with Pharming Group (one of which we terminated in August 2001), and
our equity position in Genzyme Transgenics, which were offset in part by
decreased losses from our joint venture with Diacrin. Also included in the three
and nine month periods ended September 30, 2001 are losses from Genzyme/Pharming
Alliance LLC, which was the vehicle for our joint venture with Pharming Group
for the development of a CHO-cell derived product for the treatment of Pompe
disease. We terminated our strategic alliance agreement with Pharming covering
this joint venture in August 2001. As a result, we have included 100% of the
losses of Genzyme/ Pharming Alliance LLC since August 23, 2001.
GAIN ON AFFILIATE SALE OF STOCK
During the nine months ended September 30, 2000, in accordance with our
policy pertaining to affiliate sales of stock, Genzyme General recognized gains
of $22.7 million due to the issuance by Genzyme Transgenics, an unconsolidated
affiliate, of additional shares of Genzyme Transgenics Corporation common stock.
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GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES
In the quarter ended September 30, 2001, Genzyme General recorded charges of
$11.8 million in connection with our investment in the ordinary shares of
Cambridge Antibody Technology Group plc and $4.5 million in connection with our
investment in the common stock of Targeted Genetics, because we considered the
decline in the value of these investments to be other than temporary. Given the
significance and duration of the declines as of the end of the quarter, we
concluded that it was unclear over what period the recovery of the stock price
for each of these investments would take place and that, accordingly, any
evidence suggesting that the investments would recover to at least our purchase
price was not sufficient to overcome the presumption that the current market
price was the best indicator of the value of each of these investments.
In August 2001, Pharming Group announced that it would file for receivership
in order to seek protection from its creditors. In the quarter ended
September 30, 2001, Genzyme General recorded a charge of $8.5 million,
representing an at cost write-off of our investment in Pharming common stock.
In April 2001, Antigenics announced that it had entered into a definitive
merger agreement with Aronex. The merger was completed in July 2001. Under the
terms of the merger agreement, we received 0.0594 of a share of Antigenics
common stock for each share of Aronex common stock that we held. As a result of
this merger, Genzyme General recorded a $1.2 million charge to reflect the fair
market value of our investment in Aronex at June 30, 2001.
In the third quarter of 2000, Genzyme General recorded a realized gain of
$10.9 million upon the sale of a portion of our investment in Genzyme
Transgenics common stock. In the second quarter of 2000, Genzyme General
recorded a realized gain of $5.5 million upon the sale of a portion of our
investment in Genzyme Transgenics common stock that was offset by the reversal
of a $1.9 million valuation allowance related to previously recognized capital
losses. Genzyme General also recognized a realized gain of $7.6 million
resulting from the acquisition of Celtrix Pharmaceuticals, Inc. by Insmed
Pharmaceuticals, Inc. in which our shares of Celtrix common stock were exchanged
on a one-for-one basis for shares of Insmed common stock.
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY
Due to our combined direct (until July 2001) and indirect interest in ATIII
LLC, our joint venture with Genzyme Transgenics for the development and
commercialization of ATIII, Genzyme General consolidated the results of ATIII
LLC and recorded Genzyme Transgenics' portion of the losses of that joint
venture as minority interest. Minority interest increased in the three and nine
months ended September 30, 2001 due to a change in the funding agreement for the
joint venture in March 2001, retroactive to January 1, 2001, which increased
Genzyme Transgenics's portion of the losses incurred by ATIII LLC to 50% until
July 2001 and 100% thereafter as compared to 26% for the same periods a year
ago.
In July 2001, we transferred our 50% ownership interest in ATIII LLC to
Genzyme Transgenics. In exchange for our interest in the joint venture, we will
receive a royalty on worldwide net sales (excluding Asia) of its products based
on ATIII beginning three years after the first commercial sale of each such
product up to a cumulative maximum amount of $30.0 million.
INVESTMENT INCOME
Genzyme General's investment income increased for the three and nine months
ended September 30, 2001 due primarily to higher average cash balances as
compared to the same periods a year ago. In May 2001, we completed the private
placement of $575.0 million in principal of 3% convertible subordinated
debentures due 2021. Net proceeds from the offering were approximately
$562.1 million. We allocated the principal balance of the debentures and the net
proceeds from the offering to Genzyme General. Genzyme General used a portion of
the net proceeds from the private
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placement of the debentures to repay the $150.0 million we had drawn under our
revolving credit facility in December 2000 and allocated to Genzyme General.
INTEREST EXPENSE
Genzyme General's interest expense increased for the three and nine months
ended September 30, 2001, as compared to the same periods a year ago, primarily
due to additional interest expense resulting from the $150.0 million of debt
drawn on our revolving credit facility in December 2000 as part of the financing
of the GelTex acquisition, and the private placement of $575.0 million in
principal of 3% convertible debentures issued in May 2001.
TAX PROVISION
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
-------------------- (DECREASE) ---------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
--------- -------- ---------- ---------- --------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Provision for income
taxes..................... $(3,495) $(24,409) (86)% $(34,174) $(74,164) (54)%
Effective tax rate.......... (4)% 32% (5,108)% 32%
</Table>
Genzyme General's tax rates for all periods vary from the U.S. statutory tax
rate as a result of its:
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible charges for IPR&D;
- nondeductible amortization of intangibles; and
- use of tax credits.
The decrease in Genzyme General's effective tax rate for both the three and
nine month periods ended September 30, 2001, as compared to the same periods a
year ago, was primarily attributable to nondeductible charges for IPR&D
resulting from our acquisitions of Wyntek in June 2001 and Novazyme in
September 2001 and nondeductible amortization of intangibles consisting largely
of goodwill resulting from our acquisition of GelTex in December 2000. The tax
benefit for the nine months ended September 30, 2001 includes a $2.2 million
benefit resulting from our release of excess tax reserves.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that we recognize all derivative instruments as either assets or liabilities in
our combined balance sheet and measure those instruments at fair value.
Subsequent changes in fair value are reflected in current earnings or other
comprehensive income, depending on whether a derivative instrument is designated
as part of a hedge relationship, and, if it is, the type of hedge relationship.
In accordance with the transition provisions of SFAS 133, Genzyme General
recorded a cumulative-effect adjustment of $4.2 million, net of tax, in its
unaudited, combined statements of operations for the nine months ended
September 30, 2001 to recognize the fair value of certain common stock warrants
held on January 1, 2001. Transition adjustments pertaining to interest rate
swaps designated as cash-flow hedges and foreign currency forward contracts
allocated to Genzyme General were not significant. For the three months ended
September 30, 2001, Genzyme General recorded a pre-tax charge of $1.2 million in
other expense to reflect the change in value of certain
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common stock warrants from July 1, 2001 to September 30, 2001. For the nine
months ended September 30, 2001, Genzyme General recorded a pre-tax charge of
$5.0 million in other expense to reflect the change in value of certain common
stock warrants from January 1, 2001 to September 30, 2001. Genzyme General also
recorded a charge of $1.7 million in division equity for the nine months ended
September 30, 2001, to reflect the change in value of our interest rate swap
contract during the period, net of tax.
In the normal course of business, we manage risks associated with foreign
exchange rates, interest rates and equity prices through a variety of
strategies, including the use of hedging transactions, executed in accordance
with our policies. As a matter of policy, we do not use derivative instruments
unless there is an underlying exposure. Any change in the value of our
derivative instruments would be substantially offset by an opposite change in
the value of the underlying hedged items. We do not use derivative instruments
for trading or speculative purposes.
85
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GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
The following discussion summarizes key factors our management believes
necessary for an understanding of Genzyme Biosurgery's financial statements.
In June 2001, we acquired the remaining 78% of Focal, Inc., a public company
and developer of synthetic biopolymers used in surgery, that we did not already
own for a payment of 2,086,151 shares of Biosurgery Stock. We allocated the
acquired assets and liabilities to Genzyme Biosurgery and accounted for the
acquisition as a purchase. Accordingly, the results of operations of Focal are
included in the results of Genzyme Biosurgery from June 30, 2001, the date of
acquisition.
In December 2000, we acquired Biomatrix, Inc., a public company that
develops, manufactures, markets and sells a series of proprietary viscoelastic
and viscosupplementation products based on hyaluronan technology that are used
in therapeutic medical applications and skin care for an aggregate purchase
price of $426.2 million. We accounted for the acquisition as a purchase and
allocated it to Genzyme Biosurgery. 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 December 18, 2000, the date of acquisition.
The components of Genzyme Biosurgery's combined statements of operations are
described in the following table:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
Total revenues....................... $ 63,219 $ 34,607 83% $177,739 $105,812 68%
-------- -------- -------- --------
Cost of products and services sold... 30,276 21,442 41% 96,993 60,119 61%
Selling, general and
administrative..................... 27,827 23,288 19% 93,816 68,095 38%
Research and development............. 12,352 8,935 38% 35,027 26,230 34%
Amortization of intangibles.......... 11,729 1,426 723% 35,042 4,279 719%
-------- -------- -------- --------
Total operating costs and
expenses........................... 82,184 55,091 49% 260,878 158,723 64%
-------- -------- -------- --------
Operating loss....................... (18,965) (20,484) (7)% (83,139) (52,911) 57%
Other income (expenses), net......... (2,560) 960 (367)% (11,321) 3,975 (385)%
-------- -------- -------- --------
Division net loss.................... $(21,525) $(19,524) 10% $(94,460) $(48,936) 93%
======== ======== ======== ========
</Table>
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REVENUES
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
---------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product revenue:
Cardiothoracic..................... $16,386 $18,804 (13)% $ 52,042 $ 58,240 (11)%
Orthopaedics....................... 25,492 -- N/A 63,269 -- N/A
Biosurgical specialties............ 15,206 10,950 39% 44,830 30,565 47%
------- ------- -------- --------
Total product revenue............ 57,084 29,754 92% 160,141 88,805 80%
------- ------- -------- --------
Service revenue:
Orthopaedics....................... 4,164 4,021 4% 13,292 13,130 1%
Biosurgical specialties............ 1,971 831 137% 4,301 3,854 12%
------- ------- -------- --------
Total service revenue............ 6,135 4,852 26% 17,593 16,984 4%
------- ------- -------- --------
Research and development revenue:
Biosurgical specialties............ -- 1 (100)% 5 23 (78)%
------- ------- -------- --------
Total research and development
revenue........................ -- 1 (100)% 5 23 (78)%
------- ------- -------- --------
Total revenues................... $63,219 $34,607 83% $177,739 $105,812 68%
======= ======= ======== ========
</Table>
The decrease in cardiothoracic revenue for the three and nine months ended
September 30, 2001 as compared to the same periods of 2000, was due to decreased
sales of chest drainage systems resulting from competitive pricing pressures in
that market, as well as our withdrawal from certain commodity suture lines in
Europe. The decrease in each period was offset, in part, by the continued growth
in sales of minimally invasive cardiac surgery products and the sales revenue
from the FocalSeal-Registered Trademark--L surgical sealant. We added
FocalSeal-Registered Trademark--L surgical sealant to the cardiothoracic product
category in the third quarter of 2000 pursuant to a distribution and marketing
agreement with Focal which, prior to our acquisition of Focal in June 2001,
provided us with exclusive distribution rights for this product in North
America.
The orthopaedics product revenue increased for the three and nine months
ended September 30, 2001, as compared to the same periods of 2000, due primarily
to sales of Synvisc-Registered Trademark- viscosupplementation product, which we
added to the orthopaedics product category in December 2000 through our
acquisition of Biomatrix.
The increase in biosurgical specialties product revenue in the three and
nine months ended September 30, 2001, as compared to the same periods of 2000,
was due primarily to increases in sales of Seprafilm-TM- bioresorbable membrane
and Sepramesh-TM- biosurgical composite. An increase in sales to original
equipment manufacturers and sales generated from Hylaform-Registered Trademark-
and skin care products, which were added to the biosurgical specialties product
category in December 2000, also contributed to the overall increase in
biosurgical specialties product revenue.
International revenue as a percentage of total revenue for the three months
ended September 30, 2001 was 18%, as compared to 25% in the same period of 2000.
International revenue as a percentage of total revenue for the nine months ended
September 30, 2001 was 20%, as compared to 25% in the same period of 2000.
International product and service revenue as a percent of total product and
service revenue decreased in both the three and nine months ended September 30,
2001 due primarily to the addition of sales of Synvisc-Registered Trademark-
viscosupplementation product, which is sold predominantly in the United States.
In addition, the average exchange rate for the euro declined 1% for the three
months ended September 30, 2001 and 5% for the nine months ended September 30,
2001, as compared to the same periods a year ago.
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<Page>
MARGINS
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product margin...................... $29,956 $11,215 167% $72,244 $37,635 92%
% of product revenue.............. 52% 38% 45% 42%
Service margin...................... $ 2,987 $ 1,949 53% $ 8,497 $ 8,035 6%
% of service revenue.............. 49% 40% 48% 47%
Total gross margin.................. $32,943 $13,164 150% $80,741 $45,670 77%
% of total product and service
revenue......................... 52% 38% 45% 43%
</Table>
Genzyme Biosurgery provides a broad range of healthcare products and
services. As a result, Genzyme Biosurgery's gross margins vary significantly
depending on the category of product or service.
Genzyme Biosurgery recorded a charge to cost of products sold of
$11.3 million for the nine months ended September 30, 2001 relating to the
increased basis of the inventory obtained in connection with our acquisition of
Biomatrix in December 2000. Additionally, Genzyme Biosurgery included a
$1.0 million charge related to the underfunding of an acquired retirement plan
in cost of products sold. Excluding the adjustments described above, product
margins increased in the three and nine months ended September 30, 2001, as
compared to the same periods in 2000, as a result of an increase in sales of
higher margin products such as Synvisc-Registered Trademark-
viscosupplementation product and devices for minimally invasive cardiac surgery
in each period of 2001.
Service margins for services allocated to Genzyme Biosurgery increased for
the three months ended September 30, 2001, as compared to the same period a year
ago, due primarily to growth in sales of Epicel-Registered Trademark- skin graft
services for the treatment of severe burns. Service margins for services
allocated to Genzyme Biosurgery increased for the nine months ended
September 30, 2001, in comparison to the same period last year, due primarily to
sales of Epicel-Registered Trademark- skin graft services and a reduction in
manufacturing personnel.
OPERATING EXPENSES
The increase in selling, general and administrative expenses for the three
and nine months ended September 30, 2001, as compared to the same period in
2000, was due to the additional selling, general and administrative expenses
related to the Biomatrix business, which we purchased in December 2000 and an
increase in patent litigation costs which were $1.0 million for the three months
ended September 30, 2001 and $2.2 million for the nine months ended
September 30, 2001. In addition, for the nine months ended September 30, 2001,
Genzyme Biosurgery recorded $5.5 million in costs associated with the
consolidation of European operations.
Genzyme Biosurgery's research and development expenses increased during the
three and nine months ended September 30, 2001 as compared to the same period in
2000 due to an increase in spending for orthopaedics development programs. This
increase in spending was primarily a result of the addition of the
Synvisc-Registered Trademark- viscosupplementation product to the orthopaedics
line in December 2000 through our acquisition of Biomatrix.
AMORTIZATION OF INTANGIBLES
The increase in amortization of intangibles for the three and nine months
ended September 30, 2001 was primarily attributable to intangible assets
acquired since year end in connection with our acquisitions of Biomatrix in
December 2000, the GDP Class A limited partnership interests in January 2001,
and Class B limited partnership interests in August 2001.
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<Page>
PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT
In December 2000, we acquired Biomatrix, a public company engaged in the
development and manufacture of viscoelastic and viscosupplementation
biomaterials for use in orthopaedic and other medical applications. We accounted
for this acquisition as a purchase and allocated it to Genzyme Biosurgery. In
connection with the acquisition of Biomatrix, we allocated approximately
$82.1 million to IPR&D, which Genzyme Biosurgery recorded as a charge to expense
in its combined statement of operations for the year ended December 31, 2000.
As of September 30, 2001, the technological feasibility of the Biomatrix
IPR&D 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 the projects
reaching technological feasibility. In addition, each product needs to
successfully complete a series of clinical trials and receive FDA or other
regulatory approval prior to commercialization. We cannot guarantee that these
projects will ever reach feasibility or develop into products that can be
marketed profitably, nor can we guarantee that we will be able to develop and
commercialize these products before our competitors develop and commercialize
products for these indications. If these products are not successfully developed
and do not become commercially viable, our results of operations could be
materially affected.
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<Page>
Below is a brief description of the Biomatrix IPR&D projects, including an
estimation of when management believes we may realize revenues from the sales of
these products in the respective application:
<Table>
<Caption>
ESTIMATED
COST TO
VALUE AT COMPLETE AT
ACQUISITION SEPTEMBER 30,
PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001
- --------------------- ----------------------------- ----------------------------- ----------- -------------
(IN MILLIONS)
Visco- Use of elastoviscous - European marketing approval $33.8 $ 6.7
supplementation solutions and viscoelastic for
gels in disease conditions to Synvisc-Registered Trademark-
supplement tissues and body for use in the hip expected
fluids, alleviating pain and by the end of 2001. U.S.
restoring normal function trial scheduled for 2002.
Initiation of a next
generation
Synvisc-Registered Trademark-
program expected in fourth
quarter of 2001 with
possible U.S. market
approval in the second half
of 2004.
Visco-augmentation Use of viscoelastic gels to - U.S. clinical studies of 8.6 6.2
provide scaffolding for Hylaform-Registered Trademark-
tissue regeneration or as an expected to start in the
inert elastic filler for fourth quarter of 2001 with
tissues of the skin and the market launch expected in
subcutaneous and the second half of 2003
intermuscular connective
tissues
- We expect to engage a
development partner for
Hylagel-Registered Trademark-
Uro in 2002
Visco-separation Use of viscoelastic gels and - Clinical studies have been 39.7 6.6
membranes to separate tissues initiated in the U.S.,
and to decrease formation of Germany, France, the United
adhesions and excessive scars Kingdom and Belgium for
after surgery. Sepragel-TM- Spine
(formerly
Hylagel-Registered Trademark-
Nuro). Completion of
patient enrollment is
expected by the first
quarter of 2002. Patient
follow-up expected to be
completed by the first
quarter of 2003 with U.S.
marketing approval
anticipated in first half
of 2004. European marketing
approval expected in the
second half of 2003, with
submissions for regulatory
approvals in the U.S.,
Canada and Europe
thereafter
- Expected product launch in
Europe by the second
quarter of 2002 and in the
U.S. by the fourth quarter
of 2002.
----- -----
$82.1 $19.5
===== =====
</Table>
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<Page>
OTHER INCOME AND EXPENSES
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
---------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Equity in net loss of unconsolidated
affiliate.......................... $ -- $ -- N/A $ (1,316) $ -- N/A
Other................................ 35 33 6% 80 75 7%
Investment income.................... 431 1,274 (66)% 1,370 4,873 (72)%
Interest expense..................... (3,026) (347) 772% (11,455) (973) 1,077%
------- ------ -------- ------
Total other income (expenses)...... $(2,560) $ 960 (367)% $(11,321) $3,975 (385)%
======= ====== ======== ======
</Table>
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATE
In January 2001, Focal completed the exercise of its option to require us to
purchase $5.0 million in Focal common stock at a price of $2.06 per share. After
that purchase we held approximately 22% of the outstanding shares of Focal
common stock and began accounting for our investment under the equity method of
accounting. We allocated our investment in Focal to Genzyme Biosurgery. Genzyme
Biosurgery recorded in equity in net loss of unconsolidated affiliate its
portion of the results of Focal. Genzyme Biosurgery's equity in net loss of
unconsolidated affiliate increased for the nine months ended September 30, 2001
when compared to the same period in 2000 because Genzyme Biosurgery did not own
an equity interest in Focal in 2000. On June 30, 2001, we acquired the remaining
78% of the outstanding shares in an exchange of shares of Biosurgery Stock for
shares of Focal common stock.
INVESTMENT INCOME
Investment income decreased in the three and nine months ended
September 30, 2001 when compared to the same periods of 2000 as a result of
lower average cash balances.
INTEREST EXPENSE
Interest expense increased primarily as a result of the $218.0 million of
indebtedness outstanding as of September 30, 2001, under the portion of our
revolving credit facility that we allocated to Genzyme Biosurgery. In December,
2000, we drew $200.0 million under this facility and allocated the proceeds to
Genzyme Biosurgery to finance a portion of the cash component of the Biomatrix
merger consideration.
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GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
The following discussion summarizes key factors our management believes
necessary for an understanding of Genzyme Molecular Oncology's financial
statements.
The components of Genzyme Molecular Oncology's combined statements of
operations are described in the following table:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
---------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues..................... $ 1,224 $ 635 93% $ 3,915 $ 4,153 (6)%
------- ------- -------- --------
Cost of revenues................... 668 104 542% 1,697 299 468%
Selling, general and
administrative................... 1,817 1,311 39% 5,519 4,289 29%
Research and development........... 6,381 5,120 25% 19,610 13,772 42%
Amortization of intangibles........ -- -- N/A -- 5,420 (100)%
------- ------- -------- --------
Total operating costs and
expenses..................... 8,866 6,535 36% 26,826 23,780 13%
------- ------- -------- --------
Operating loss..................... (7,642) (5,900) 30% (22,911) (19,627) 17%
Other income (expenses), net....... 148 396 (63)% 812 489 66%
------- ------- -------- --------
Loss before taxes.................. (7,494) (5,504) 36% (22,099) (19,138) 15%
Tax benefit........................ -- -- N/A -- 1,214 (100)%
------- ------- -------- --------
Division net loss.................. $(7,494) $(5,504) 36% $(22,099) $(17,924) 23%
======= ======= ======== ========
</Table>
REVENUES
The components of Genzyme Molecular Oncology's revenues are described in the
following table:
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/
------------------- (DECREASE) ------------------- (DECREASE)
2001 2000 % CHANGE 2001 2000 % CHANGE
-------- -------- ---------- -------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Licensing revenue......................... $ 484 $576 (16)% $1,696 $4,046 (58)%
Royalty revenue........................... 36 59 (39)% 109 107 2%
Research and development revenue.......... 704 -- N/A 2,110 -- N/A
------ ---- ------ ------
Total revenues........................ $1,224 $635 93% $3,915 $4,153 (6)%
====== ==== ====== ======
</Table>
Licensing revenue in the three and nine months ended September 30, 2001
included revenue recognized from a technology access fee associated with the
cancer antigen discovery agreement with Purdue Pharma, L.P. that began in the
fourth quarter of 2000 and from payments received under cancer diagnostic and
SAGE-TM- license agreements. Licensing revenue decreased as compared to the same
periods of 2000, due to a $2.0 million development milestone payment received in
the first quarter of 2000 under a license agreement with Schering-Plough Ltd.
for which no similar payment was received in 2001.
Research and development revenue in the three and nine month periods ended
September 30, 2001 was solely attributable to research performed on behalf of
the cancer antigen discovery agreement with Purdue Pharma.
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<Page>
COST OF REVENUE
Genzyme Molecular Oncology's cost of revenue includes:
- work performed on the cancer antigen discovery agreement with Purdue
Pharma; and
- royalties paid to third parties.
Cost of revenue increased in the three and nine months ended September 30,
2001 primarily as a result of the work performed under the Purdue Pharma cancer
antigen discovery agreement that began in the fourth quarter of 2000.
OPERATING EXPENSES
Genzyme Molecular Oncology's selling, general and administrative expenses
increased for the three and nine months ended September 30, 2001 as compared to
the same periods a year ago as a result of enhanced business development efforts
and increased expenses related to information technology, legal, accounting and
general management services.
Research and development expenses increased for the three and nine months
ended September 30, 2001 as compared to the same periods of last year. The
increase was primarily attributable to growth in the number of Genzyme Molecular
Oncology's cancer vaccine clinical trials from two to five, additional
investment in its dendritic-tumor cell fusion program and increased activity in
its antigen discovery and anti-angiogenesis programs.
AMORTIZATION OF INTANGIBLES
Genzyme Molecular Oncology's amortization of intangibles was attributable to
intangible assets acquired in connection with the acquisition of
PharmaGenics, Inc. in June 1997. These assets were fully amortized by the end of
the second quarter of 2000.
OTHER INCOME AND EXPENSE
Genzyme Molecular Oncology's other income decreased in the three months
ended September 30, 2001 due to a decrease in interest income that is
attributable to lower average cash balances. Interest expense was relatively
level for the three month periods ended September 30, 2001 and 2000. Other
income increased for the nine months ended September 30, 2001, as compared to
the same period of 2000, due to an increase in interest income that is
attributable to higher average cash balances. Interest expense decreased in the
nine months ended September 30, 2001, as compared to the same period of 2000,
due to the May 2000 repayment of $5.0 million that Genzyme Molecular Oncology
borrowed under our revolving credit facility. This amount was outstanding during
the first quarter of 2000.
TAX BENEFIT
As part of the acquisition of PharmaGenics in 1997, Genzyme Molecular
Oncology recorded a deferred tax liability of $7.6 million resulting from the
difference between the book and tax basis of the acquired completed technology.
Amortization of this deferred tax benefit was completed in the second quarter of
2000.
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<Page>
B. LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION
At September 30, 2001, we had cash, cash equivalents, and short- and
long-term investments of $1.1 billion, an increase of $443.9 million from
December 31, 2000.
Our operating activities generated $170.6 million of cash for the nine
months ended September 30, 2001. Operating activities were impacted by a net
loss of $105.8 million offset primarily by:
- $125.2 million of depreciation and amortization, of which $35.1 million
resulted from the depreciation of property, plant and equipment and
$90.1 million resulted from the amortization of intangible assets,
including intangible assets acquired in connection with our acquisitions
of GelTex, Biomatrix, Wyntek and Focal;
- $95.6 million of charges for IPR&D, of which $86.8 million was
attributable to our acquisition of Novazyme and $8.8 million was
attributable to our acquisition of Wyntek;
- $28.9 million from the equity in net losses of unconsolidated affiliates;
and
- $26.0 million from the loss on investments in equity securities.
Our investing activities utilized $671.4 million in cash for the nine months
ended September 30, 2001. Investing activities used:
- $435.8 million for our net purchases of investments;
- $123.2 million to fund purchases of property, plant and equipment of
which, $43.0 million resulted from our manufacturing capacity expansion in
both Ireland and the United Kingdom, $8.8 million resulted from an initial
payment towards our acquisition of a large-scale manufacturing facility in
Ireland, $12.4 million resulted from our manufacturing capacity expansion
in the United States and $11.1 million representing an aggregate of other
manufacturing relocations, expansions and rehabilitations world-wide;
- $23.5 million as payment for our purchase of all of the GDP Class A and
Class B limited partnership interests, net of $2.3 million of cash
acquired in connection with our acquisition of Focal;
- $54.8 million to fund the acquisition of Wyntek, net of cash acquired and
net of $5.2 million of cash acquired in connection with our acquisition of
Novazyme;
- $5.0 million of cash to purchase additional shares of Focal common stock;
and
- $31.3 million to fund our investments in unconsolidated affiliates.
During the nine months ended September 30, 2001, we received $74.5 million
of cash from the exercise of stock options and the purchase of shares under our
employee stock plans. Our financing activities used $2.1 million of cash to
repay bank overdrafts.
In January 2001, we purchased all of the outstanding Class A limited
partnership interests of GDP for a payment of approximately $25.7 million in
cash plus royalties payable over ten years on sales of certain Sepra-TM-
products. In August 2001, we purchased the two outstanding GDP Class B limited
partnership interests for a payment of $70,000 per Class B limited partnership
interest plus $40,000 of related costs and undertook the obligation to pay
additional royalties over ten years on sales of certain Sepra-TM- products. We
allocated the acquired limited partnership interests of GDP to Genzyme
Biosurgery and accounted for the acquisitions as purchases. We allocated the
purchase prices to the fair value of the intangible assets acquired and
goodwill, which we will amortize over eight or ten years depending upon the
asset classification.
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<Page>
In June 2001, we acquired all of the outstanding capital stock of Wyntek for
$65.0 million in cash. We allocated the acquisition to Genzyme General and
accounted for the acquisition as a purchase.
We have access to a $500.0 million revolving credit facility,
$150.0 million of which matures in December 2001 and $350.0 million of which
matures in December 2003. At December 31, 2000, $368.0 million was outstanding
under this facility, $150.0 million of which was allocated to Genzyme General
and $218.0 million of which was allocated to Genzyme Biosurgery. In May 2001,
Genzyme General repaid the $150.0 million Genzyme General had drawn under this
facility in December 2000 to finance a portion of the cash component of the
GelTex merger consideration. At September 30, 2001, $218.0 million remained
outstanding under the portion of the facility that matures in December 2003, all
of which was allocated to Genzyme Biosurgery. Borrowings under this facility
bear interest at LIBOR plus an applicable margin.
In May 2001, we completed the private placement of $575.0 million in
principal of 3% convertible subordinated debentures due May 2021. Net proceeds
from the offering were approximately $562.1 million. We have allocated the
principal amount of the debentures and the net proceeds from the offering to
Genzyme General. We will pay interest on these debentures on May 15 and
November 15 of each year using cash allocated to Genzyme General. The first
interest payment will be made on November 15, 2001. The debentures are
convertible, upon the satisfaction of certain conditions, into shares of Genzyme
General Stock at an initial conversion price of $70.30 per share. The conversion
price is subject to adjustments. Holders of the debentures may require us to
repurchase all or part of their debentures for cash on May 15, 2006, 2011 or
2016, at a price equal to 100% of the principal amount of the debentures plus
accrued interest through the date prior to the date of repurchase. Additionally,
if certain fundamental changes occur, each holder may require us to repurchase,
for cash, all or a portion of the holder's debentures. On or after May 20, 2004,
we may redeem for cash all or part of the debentures that have not previously
been converted or repurchased. Genzyme General used a portion of these proceeds
to repay the $150.0 million we had drawn under our revolving credit facility in
December 2000 and allocated to Genzyme General to finance a portion of the cash
consideration for the GelTex acquisition. Genzyme General expects to utilize the
remaining proceeds from the sale of the debentures for working capital and
general corporate purposes.
In August 2001, we completed the redemption of our $21.2 million in
principal of 5% convertible subordinated debentures due 2003. Prior to the
redemption date, the holders of the debentures elected to convert all of the
principal of the debentures into approximately 1,305,000 shares of Genzyme
General Stock. We paid approximately $3.2 million in cash for the accrued
interest on the debentures through the date of conversion using cash allocated
to Genzyme General.
In July 2001, Genzyme Biosurgery drew down $12.0 million of the
$15.0 million still available to it under the $25.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million
of the proceeds to pay a portion of the amounts it owes to Genzyme General.
Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as
needed each quarter in exchange for Biosurgery designated shares based on the
fair market value (as defined in our charter) of Biosurgery Stock at the time of
the draw. Biosurgery designated shares are shares of Biosurgery Stock that are
not issued and outstanding, but which our board of directors may issue, sell or
distribute without allocating the proceeds to Genzyme Biosurgery. At
September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under
this arrangement.
In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the
$15.0 million still available to it under the $30.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 333,333 Molecular Oncology designated shares. Under the terms of this
arrangement, Genzyme Molecular Oncology may draw down funds as needed each
quarter in exchange for Molecular Oncology designated shares based on the fair
market value (as defined in our
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charter) of Molecular Oncology Stock at the time of the draw. Molecular Oncology
designated shares are shares of Molecular Oncology Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Molecular Oncology. At September 30,
2001, $11.0 million remained available to Genzyme Molecular Oncology under this
arrangement.
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 we recorded $14.7 million of
outstanding principal and accrued interest to stockholders' equity because the
notes were received in exchange for the issuance of stock. As of September 30,
2001, the outstanding balance of these notes was $10.2 million.
Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and
commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not
initiate a Phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because
a Phase 3 trial of the product was not initiated by June 30, 2001, Genzyme
General had the right to elect to receive a refund of $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 plus accrued interest thereon at a rate of 13.5% per annum. On
August 2, 2001, Genzyme Biosurgery received notification from Genzyme General of
its election to receive the refund. Genzyme Biosurgery can pay the refund amount
in cash, Biosurgery designated shares or both. The refund is due and payable
within 90 days after Genzyme Biosurgery received the notice from Genzyme
General.
We believe that our available cash, investments and cash flow from
operations will be sufficient to fund our planned operations and capital
requirements for the foreseeable future. Although we currently have substantial
cash resources and positive cash flow, we intend to use substantial portions of
our available cash for:
- product development and marketing;
- expanding facilities;
- working capital; and
- strategic business initiatives.
Our cash reserves will be further reduced to pay principal and interest on
the following debt:
- $575.0 million in principal under our 3% convertible subordinated
debentures due May 15, 2021, which are convertible into shares of Genzyme
General Stock;
- $218.0 million in principal outstanding under our revolving credit
facility with a syndicate of commercial banks; and
- $10.0 million in principal under our 6.9% convertible subordinated note in
favor of UBS Warburg LLC that matures in May 2003 and is convertible into
shares of Biosurgery Stock.
If we use cash to pay or redeem any of the debt described above, including
principal and interest due on it, our cash reserves will be diminished. To
satisfy these and other commitments, we may have to obtain additional financing.
We cannot guarantee that we will be able to obtain any additional financing,
extend any existing financing arrangement, or obtain either on favorable terms.
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NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, 141, "Business Combinations" and SFAS
142, "Goodwill and Other Intangible Assets." SFAS 141 requires that all business
combinations be accounted for under the purchase method and that certain
acquired intangible assets in a business combination be recognized as assets
apart from goodwill. SFAS 142 requires that ratable amortization of goodwill and
certain intangible assets be replaced with periodic tests of the goodwill's
impairment and that other intangible assets be amortized over their useful
lives. SFAS 141 is effective for all business combinations initiated after
June 30, 2001 and for all business combinations accounted for by the purchase
method for which the date of acquisition is after June 30, 2001. The provisions
of SFAS 142 will be effective for fiscal years beginning after December 15,
2001, and will thus be adopted by us in fiscal year 2002. However, for goodwill
and intangible assets acquired after June 30, 2001, certain provisions of SFAS
142 will be effective from the date of acquisition. For the nine months ended
September 30, 2001, we had approximately $37.6 million of goodwill amortization,
however, the full impact of SFAS 141 and SFAS 142 on our financial statements
has not been determined.
SUBSEQUENT EVENTS
ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V.
We have satisfied all of the conditions to closing on our acquisition of
certain assets of Pharming N.V. that are set forth in the conditional agreement,
including receipt of approvals from the Commercial Court in Turnhout, Belgium,
the Province of Antwerp, Belgium and our board of directors, as well as a
favorable soil attestation for the land. We anticipate completing the
acquisition by mid-November and will allocate the purchase to Genzyme General.
As part of the purchase price for this acquisition, we have agreed to pay
approximately 6.5 million euros to trade creditors of Pharming N.V. We have also
agreed to assume certain liabilities related to governmental grants and the
lease for the land on which the manufacturing facilities in Geel, Belgium sit.
Pharming Group has publicly announced its intention to appeal the decision of
the Commercial Court in Turnhout, Belgium.
NEUROCELL-TM- JOINT VENTURE REFUND
Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme
Biosurgery's deadline to refund $20.0 million to Genzyme General in connection
with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because
a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30,
2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has
agreed to pay the refund and accrued interest in cash.
FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION
On October 22, 2001, we received a complete response letter from the FDA
related to our application to market Fabrazyme-TM- enzyme, an investigational
enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies
additional data and information the FDA requires to complete its review of our
Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for
Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted
for review under an accelerated approval mechanism. We received an initial
complete response letter from the FDA in December 2000 and submitted our
response to that letter in April 2001.
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GENZYME GENERAL
A DIVISION OF GENZYME CORPORATION
At September 30, 2001, Genzyme General had cash, cash equivalents, and
short- and long-term investments of $1.0 billion, an increase of $499.5 million
from December 31, 2000.
Genzyme General's operating activities generated $206.6 million of cash for
the nine months ended September 30, 2001. Operating activities were impacted by
Genzyme General's division net loss of $30.7 million, which was offset primarily
by:
- $77.8 million of depreciation and amortization, of which $22.7 million
resulted from the depreciation of property, plant and equipment and
$55.1 million resulted from the amortization of intangible assets,
including intangible assets acquired in connection with our acquisitions
of GelTex and Wyntek;
- $95.6 million of charges for IPR&D, of which $86.8 million was
attributable to our acquisition of Novazyme and $8.8 million was
attributable to our acquisition of Wyntek;
- $27.6 million from the equity in net losses of unconsolidated affiliates;
- $26.0 million from the loss on investments in equity securities; and
- $13.9 million attributable to the net change in working capital.
Genzyme General's investing activities utilized $640.2 million in cash for
the nine months ended September 30, 2001. Investing activities used:
- $443.6 million for Genzyme General's net purchases of investments;
- $113.1 million to fund purchases of property, plant and equipment, of
which, $43.0 million resulted from our manufacturing capacity expansion in
both Ireland and the United Kingdom, $8.8 million resulted from an initial
payment towards our acquisition of a large-scale manufacturing facility in
Ireland, $12.4 million resulted from our manufacturing capacity expansion
in the United States and $11.1 million representing an aggregate of other
manufacturing relocations, expansions and rehabilitations world-wide;
- $54.8 million to fund the acquisition of Wyntek, net of cash acquired and
net of $5.2 million of cash acquired in connection with our acquisition of
Novazyme; and
- $31.3 million to fund Genzyme General's investments in unconsolidated
affiliates.
During the nine months ended September 30, 2001, Genzyme General received
$72.6 million in cash from the exercise of stock options and purchase of shares
under our employee stock plans. Our financing activities used $1.4 million of
cash to repay bank overdrafts.
In June 2001, we acquired all of the outstanding capital stock of Wyntek for
$65.0 million in cash. We allocated the acquisition to Genzyme General and
accounted for the acquisition as a purchase.
Genzyme General, together with our other operating divisions, has access to
our $500.0 million revolving credit facility, $150.0 million of which matures in
December 2001 and $350.0 million of which matures in December 2003. At
December 31, 2000, $368.0 million was outstanding under this facility,
$150.0 million of which was allocated to Genzyme General and $218.0 million of
which was allocated to Genzyme Biosurgery. In May 2001, Genzyme General repaid
the $150.0 million it had drawn under this facility in December 2000 to finance
a portion of the cash component of the GelTex merger consideration. At
September 30, 2001, $218.0 million remained outstanding under the portion of the
facility that matures in December 2003, all of which was allocated to Genzyme
Biosurgery. Borrowings under this facility bear interest at LIBOR plus an
applicable margin.
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In May 2001, we completed the private placement of $575.0 million in
principal of 3% convertible subordinated debentures due 2021. Net proceeds from
the offering were approximately $562.1 million. We have allocated the principal
amount of the debentures and the net proceeds from the offering to Genzyme
General. We will pay interest on these debentures on May 15 and November 15 each
year using cash allocated to Genzyme General. The first interest payment will be
made on November 15, 2001. The debentures are convertible, upon the satisfaction
of certain conditions, into shares of Genzyme General Stock at an initial
conversion price of $70.30 per share. The conversion price is subject to
adjustment. Holders of the debentures may require us to repurchase all or part
of their debentures for cash on May 15, 2006, 2011 or 2016, at a price equal to
100% of the principal amount of the debentures plus accrued interest through the
date prior to the date of repurchase. Additionally, if certain fundamental
changes occur, each holder may require us to repurchase, for cash, all or a
portion of the holder's debentures. On or after May 20, 2004, we may redeem for
cash all or part of the debentures that have not previously been converted or
repurchased. Genzyme General used a portion of these proceeds to repay the
$150.0 million we had drawn under our revolving credit facility in
December 2000 and allocated to Genzyme General to finance a portion of the cash
consideration for the GelTex acquisition. Genzyme General expects to utilize the
remaining proceeds from the sale of the debentures for working capital and
general corporate purposes.
In August 2001, we completed the redemption of our $21.2 million in
principal of 5% convertible subordinated debentures due 2003. Prior to the
redemption date, the holders of the debentures elected to convert all of the
principal of the debentures into approximately 1,305,000 shares of Genzyme
General Stock. We paid approximately $3.2 million in cash for the accrued
interest on the debentures through the date of conversion using cash allocated
to Genzyme General.
In July 2001, Genzyme Biosurgery drew down $12.0 million of the
$15.0 million still available to it under the $25.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million
of the proceeds to pay a portion of the amounts it owes to Genzyme General.
Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as
needed each quarter in exchange for Biosurgery designated shares based on the
fair market value (as defined in our charter) of Biosurgery Stock at the time of
the draw. Biosurgery designated shares are shares of Biosurgery Stock that are
not issued and outstanding, but which our board of directors may issue, sell or
distribute without allocating the proceeds to Genzyme Biosurgery. At
September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under
this arrangement.
In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the
$15.0 million still available to it under the $30.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 333,333 Molecular Oncology designated shares. Under the terms of this
arrangement, Genzyme Molecular Oncology may draw down funds as needed each
quarter in exchange for Molecular Oncology designated shares based on the fair
market value (as defined in our charter) of Molecular Oncology Stock at the time
of the draw. Molecular Oncology designated shares are shares of Molecular
Oncology Stock that are not issued and outstanding, but which our board of
directors may issue, sell or distribute without allocating the proceeds to
Genzyme Molecular Oncology. At September 30, 2001, $11.0 million remained
available to Genzyme Molecular Oncology under this arrangement.
Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and
commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not
initiate a Phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because
a Phase 3 trial of the product was not initiated by June 30, 2001, Genzyme
General had the right to elect to receive a refund of $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 plus accrued interest thereon at a rate of 13.5% per annum. On
August 2, 2001, Genzyme Biosurgery received notification from Genzyme
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General of its election to receive the refund. Genzyme Biosurgery can pay the
refund amount in cash, Biosurgery designated shares or both. The refund is due
and payable within 90 days after Genzyme Biosurgery received the notice from
Genzyme General.
We believe that Genzyme General's available cash, investments and cash flow
from operations will be sufficient to fund its planned operations and capital
requirements for the foreseeable future. Although Genzyme General currently has
substantial cash resources and positive cash flow, it intends to use substantial
portions of its available cash for:
- product development and marketing;
- expanding facilities;
- working capital; and
- strategic business initiatives.
Genzyme General's cash reserves will be further reduced to pay principal and
interest on the $575.0 million in principal under our 3% convertible
subordinated debentures due May 15, 2021, which are convertible into shares of
Genzyme General Stock. If Genzyme General uses cash to pay or redeem any of this
debt, including principal and interest due on it, its cash reserves will be
diminished. In addition, Genzyme General's cash resources will be reduced to the
extent that the liabilities of Genzyme Biosurgery or Genzyme Molecular Oncology
affect our consolidated results of operations.
To satisfy these and other commitments, Genzyme General may have to obtain
additional financing. We cannot guarantee that Genzyme General will be able to
obtain any additional financing, extend any existing financing arrangement, or
obtain either on favorable terms.
SUBSEQUENT EVENTS
ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V.
We have satisfied all of the conditions to closing on our acquisition of
certain assets of Pharming N.V. that are set forth in the conditional agreement,
including receipt of approvals from the Commercial Court in Turnhout, Belgium,
the Province of Antwerp, Belgium and our board of directors, as well as a
favorable soil attestation for the land. We anticipate completing the
acquisition by mid-November and will allocate the purchase to Genzyme General.
As part of the purchase price for this acquisition, we have agreed to pay
approximately 6.5 million euros to trade creditors of Pharming N.V. We have also
agreed to assume certain liabilities related to governmental grants and the
lease for the land on which the manufacturing facilities in Geel, Belgium sit.
Pharming Group has publicly announced its intention to appeal the decision of
the Commercial Court in Turnhout, Belgium.
NEUROCELL-TM- JOINT VENTURE REFUND
Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme
Biosurgery's deadline to refund $20.0 million to Genzyme General in connection
with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because
a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30,
2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has
agreed to pay the refund and accrued interest in cash.
FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION
On October 22, 2001, we received a complete response letter from the FDA
related to our application to market Fabrazyme-TM- enzyme, an investigational
enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies
additional data and information the FDA requires to complete its review of our
Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for
Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted
for review by the FDA under an accelerated approval mechanism. We received an
initial complete response letter from the FDA in December 2000 and submitted our
response to that letter in April 2001.
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GENZYME BIOSURGERY
A DIVISION OF GENZYME CORPORATION
At September 30, 2001, Genzyme Biosurgery had cash, and cash equivalents, of
$41.6 million, a decrease of approximately $36.6 million from December 31, 2000.
Genzyme Biosurgery's operating activities used $12.5 million of cash for the
nine months ended September 30, 2001. Operating activities were impacted by
Genzyme Biosurgery's division net loss of $94.5 million offset primarily by:
- $47.3 million of depreciation and amortization, of which, $12.3 million
resulted from the depreciation of property, plant and equipment and
$35.0 million resulted from the amortization of intangible assets,
including intangible assets acquired in connection with our acquisitions
of Biomatrix and Focal; and
- $32.4 million attributable to the net change in working capital.
Genzyme Biosurgery's investing activities utilized $39.0 million in cash for
the nine months ended September 30, 2001. Investing activities used:
- $10.2 million of cash to fund capital expenditures;
- $23.5 million of cash as a payment for our purchase of all of the GDP
Class A and Class B limited partnership interests as described below, net
of $2.3 million of cash acquired in connection with our acquisition of
Focal; and
- $5.0 million of cash to purchase Focal common stock.
During the nine months ended September 30, 2001, we received $1.2 million in
cash from the exercise of stock options and the purchase of shares under our
employee stock plans. We also received $2.9 million from the partial payment of
notes receivable from our stockholders, see below for more information. Our
financing activities used $0.7 million of cash to repay bank overdrafts.
In January 2001, we purchased all of the outstanding Class A limited
partnership interests of GDP for a payment of approximately $25.7 million in
cash plus royalties payable over ten years on sales of certain Sepra-TM-
products. In August 2001, we purchased the two outstanding GDP Class B limited
partnership interests for a payment of $70,000 per Class B limited partnership
interest plus $40,000 of related costs, and undertook the obligation to pay
additional royalties over ten years on sales of certain Sepra-TM- products. We
allocated the acquired limited partnership interests of our GDP to Genzyme
Biosurgery and accounted for the acquisitions as purchases. We allocated the
purchase prices to the fair value of the intangible assets acquired and
goodwill, which we will amortize over eight or ten years depending upon the
asset classification.
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 of which matures in December 2003. At
December 31, 2000, $368.0 million was outstanding under this facility,
$150.0 million of which was allocated to Genzyme General and $218.0 million of
which was allocated to Genzyme Biosurgery. In May 2001, Genzyme General repaid
the $150.0 million it had drawn under this facility in December 2000 to finance
the cash component of the GelTex merger consideration. At September 30, 2001,
$218.0 million remained outstanding under the portion of the facility that
matures in December 2003, all of which was allocated to Genzyme Biosurgery.
Borrowings under this facility bear interest at LIBOR plus an applicable 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.
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In connection with our acquisition of Biomatrix, we assumed a 6.9%
convertible subordinated note in favor of UBS Warburg LLC that matures in
May 2003. At September 30, 2001, $10.0 million of the principal 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.
In July 2001, Genzyme Biosurgery drew down $12.0 million of the
$15.0 million still available to it under the $25.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million
of the proceeds to pay a portion of the amounts it owes to Genzyme General.
Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as
needed each quarter in exchange for Biosurgery designated shares based on the
fair market value (as defined in our charter) of Biosurgery Stock at the time of
the draw. Biosurgery designated shares are shares of Biosurgery Stock that are
not issued and outstanding, but which our board of directors may issue, sell or
distribute without allocating the proceeds to Genzyme Biosurgery. At
September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under
this arrangement.
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. As of
September 30, 2001, the outstanding balance of these notes was $10.2 million.
Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and
commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not
initiate a Phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because
a Phase 3 trial of the product was not initiated by June 30, 2001, Genzyme
General had the right to elect to receive a refund of $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 plus accrued interest thereon at a rate of 13.5% per annum. On
August 2, 2001, Genzyme Biosurgery received notification from Genzyme General of
its election to receive the refund. Genzyme Biosurgery can pay the refund amount
in cash, Biosurgery Stock designated shares or both. The refund is due and
payable 90 days after Genzyme Biosurgery received the notice from Genzyme
General.
We believe that Genzyme Biosurgery's cash resources, together with revenues
generated from its products and distribution agreements and from the anticipated
sale of certain assets, 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- viscosupplementation product;
- expanding facilities; and
- working capital.
Genzyme Biosurgery's cash needs may differ from those planned, however, as a
result of many factors, including the:
- results of research and development efforts;
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- 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;
- ability to satisfy regulatory requirements of the FDA and other
governmental authorities; and
- ability to sell its Snowden-Pencer-Registered Trademark- product lines.
Genzyme Biosurgery's cash reserves may be further reduced to pay principal
and interest on the following debt:
- $218.0 million in principal outstanding under our revolving credit
facility with a syndicate of commercial banks; and
- $10.0 million in principal under our 6.9% convertible subordinated note in
favor of UBS Warburg LLC that matures in May 2003 and is convertible into
shares of Biosurgery Stock.
If we use cash to pay or redeem this debt, including principal and interest
on it, our cash reserves will be diminished.
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, gynecological and cardiovascular surgery. In May 2001,
Genzyme Biosurgery terminated the production of Synvisc-Registered Trademark-
viscosupplementation product in Canada.
Genzyme Biosurgery will require significant additional financing to continue
operations at anticipated levels. We cannot guarantee that Genzyme Biosurgery
will be able to obtain any additional financing, extend any existing financing
arrangement, or obtain 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 sell to, or co-develop with third parties, rights to commercialize
technologies or products that it would otherwise have sought to commercialize
itself.
SUBSEQUENT EVENT
NEUROCELL-TM- JOINT VENTURE REFUND
Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme
Biosurgery's deadline to refund $20.0 million to Genzyme General in connection
with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because
a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30,
2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has
agreed to pay the refund and accrued interest in cash.
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GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
At September 30, 2001, Genzyme Molecular Oncology had cash and cash
equivalents of $11.2 million, a decrease of $19.0 million from cash, cash
equivalents and short-term investments of $30.2 million at December 31, 2000.
Genzyme Molecular Oncology's operating activities used $23.6 million of cash
for the first nine months of 2001. This is primarily due to Genzyme Molecular
Oncology's division net loss of $22.1 million for the nine months ended
September 30, 2001.
Genzyme Molecular Oncology's investing activities in the first nine months
of 2001 provided $7.8 million from the sales and maturities of investments.
During the nine months ended September 30, 2001, Genzyme Molecular Oncology
received $0.7 million in cash from the exercise of stock options and the
purchase of shares under our employee stock plans.
Genzyme Molecular Oncology, together with our other operating divisions, has
access to our $500.0 million revolving credit facility, $150.0 million of which
matures in December 2001 and $350.0 million of which matures in December 2003.
At September 30, 2001, $150.0 million was available under the portion of the
facility that matures in December 2001, and $132.0 million was available under
the portion of the facility that matures in December 2003. None of the
$218.0 million currently outstanding under these facilities is allocated to
Genzyme Molecular Oncology. Borrowings under this facility bear interest at
LIBOR plus a margin.
In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the
$15.0 million still available to it under the $30.0 million interdivisional
financing arrangement with Genzyme General in exchange for an additional reserve
of 333,333 Molecular Oncology designated shares. Under the terms of this
arrangement, Genzyme Molecular Oncology may draw down funds as needed each
quarter in exchange for Molecular Oncology designated shares based on the fair
market value (as defined in our charter) of Molecular Oncology Stock at the time
of the draw. Molecular Oncology designated shares are shares of Molecular
Oncology Stock that are not issued and outstanding, but which our board of
directors may issue, sell or distribute without allocating the proceeds to
Genzyme Molecular Oncology. At September 30, 2001, $11.0 million remained
available to Genzyme Molecular Oncology under this arrangement.
We anticipate that Genzyme Molecular Oncology's current cash resources,
together with amounts available from the following sources, will be sufficient
to fund its operations through the third quarter of 2002.
- anticipated revenues generated from license agreements;
- committed research funding from collaborators;
- the $11.0 million remaining under the interdivisional financing
arrangement with Genzyme General; and
- amounts available to Genzyme Molecular Oncology under our revolving credit
facilities.
Genzyme Molecular Oncology plans to spend substantial amounts of funds on,
among other things:
- research and development;
- pre-clinical and clinical testing;
- pursuing regulatory approvals; and
- working capital.
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Genzyme Molecular Oncology's cash needs may differ from those planned,
however, as a result of many factors, including the:
- results of research and development and clinical testing;
- achievement of milestones under existing licensing arrangements;
- ability to establish and maintain additional strategic collaborations and
licensing arrangements;
- costs involved in enforcing patent claims and other intellectual property
rights;
- market acceptance of novel approaches and therapies;
- development of competitive products and services; and
- ability to satisfy regulatory requirements of the FDA and other government
authorities.
Genzyme Molecular Oncology may require significant additional financing to
continue operations at anticipated levels. It cannot be guaranteed that Genzyme
Molecular Oncology will be able to obtain any additional financing, extend any
existing financing arrangement, or obtain either on terms that are considered
favorable. If Genzyme Molecular Oncology has insufficient funds or is unable to
raise additional funds, it may delay, reduce or eliminate certain of its
programs. Genzyme Molecular Oncology may also have to sell to, or co-develop
with, third parties rights to commercialize technologies or products that it
would otherwise have sought to commercialize itself.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to potential loss from financial market risks that may occur
as a result of changes in interest rates, equity prices, and foreign exchange
rates. Our exposure to these risks has not materially changed since
December 31, 2000.
We incorporate by reference our disclosure related to market risk which is
set forth under the heading "Management's Discussion and Analysis of Genzyme
Corporation and Subsidiaries' Financial Condition and Results of
Operations--Euro--The New European Currency;" "--Market Risk;" "--Interest Rate
Risk;" "--Foreign Exchange Risk;" and "--Equity Price Risk" in Exhibit 13.1 to
our 2000 Form 10-K.
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PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 26, 2001, we completed the acquisition of Novazyme
Pharmaceuticals, Inc., a privately-held Delaware corporation. The acquisition
was structured as a merger of a wholly-owned subsidiary of ours with and into
Novazyme pursuant to an Agreement and Plan of Merger dated as of August 6, 2001
among us, Rodeo Merger Corp. and Novazyme. Under the terms of the merger
agreement, we made an initial payment of 2,562,182 shares of Genzyme General
Stock to Novazyme shareholders, based on an exchange ratio of 0.5714 of a share
of Genzyme General Stock for each share of Novazyme common stock held at the
effective time of the merger (the "Initial Merger Consideration"), with cash
being paid in lieu of issuing any fractional shares of Genzyme General Stock.
The shares of Genzyme General Stock constituting the Initial Merger
Consideration were issued in a private placement under Section 4(2) of the
Securities Act of 1933. In connection with the acquisition, we delivered to all
Novazyme shareholders an information statement describing the proposed
acquisition and the companies involved. The Novazyme stock was held primarily by
accredited investors. The Novazyme stockholders that were not accredited
investors represented to us that they were either sophisticated or represented
by a sophisticated investor representative. Novazyme shareholders are also
eligible to receive two subsequent payments totaling $87.5 million, payable in
shares of Genzyme General Stock, if we receive U.S. marketing approval for the
first two products employing certain Novazyme technology within specified dates.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index immediately following the signature page to this
report on Form 10-Q.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K dated June 30, 2001 on July 12, 2001
to announce the completion of our acquisition of Focal, Inc.
We filed a Current Report on Form 8-K dated August 6, 2001 on August 22,
2001 to announce that we had entered into an Agreement and Plan of Merger with
Novazyme Pharmaceuticals, Inc.
We filed a Current Report on Form 8-K dated June 1, 2001 on August 28, 2001
to include the unaudited pro forma combined financial information which
describes the pro forma effect of our acquisitions of Focal, Inc. and Wyntek
Diagnostics, Inc. on the unaudited financial statements of operations of Genzyme
Corporation, Genzyme General, the division to which we allocated the assets,
liabilities and operations of Wyntek, and Genzyme Biosurgery, the division to
which we allocated the assets, liabilities and operations of Focal, for the six
months ended June 30, 2001.
We filed a Current Report on Form 8-K dated September 7, 2001 on
September 7, 2001 to include (1) the audited financial statements of Novazyme as
of December 31, 2000 and 1999 and for the year ended December 31, 2000 and the
periods from inception (April 16, 1999) to December 31, 1999 and 2000, including
the report of independent public accountants dated February 26, 2001 and
(2) the unaudited financial statements of Novazyme as of June 30, 2001 and
December 31, 2000 and for the six months ended June 30, 2001 and 2000 and the
period from inception (April 16, 1999) to June 30, 2001.
We filed a Current Report on Form 8-K dated September 20, 2001 on
September 20, 2001 to include the unaudited pro forma combined financial
information which describes the pro forma effect of our acquisition of Novazyme
on the unaudited statements of operations for the six months ended June 30, 2001
and the year ended December 31, 2000 and the unaudited balance sheet as of
June 30, 2001 of both Genzyme Corporation and Genzyme General, the division to
which we allocated the assets, liabilities and operations of Novazyme.
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GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<Table>
<Caption>
GENZYME CORPORATION
DATE: November 9, 2001 By: /s/ MICHAEL S. WYZGA
------------------------------------------
Michael S. Wyzga
SENIOR VICE PRESIDENT, FINANCE, CHIEF FINANCIAL
OFFICER; AND CHIEF ACCOUNTING OFFICER
</Table>
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GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 2001
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
*2 Agreement and Plan of Merger, dated as of August 6, 2001,
among Genzyme, Rodeo Merger Corp. and Novazyme
Pharmaceuticals, Inc. Filed as Exhibit 2.1 to Genzyme's
Current Report on Form 8-K filed on August 22, 2001.
*3.1 Restated Articles of Organization of Genzyme, as amended.
Filed as Exhibit 3 to Genzyme's Current Report on Form 8-K
filed on June 6, 2001.
*3.2 By-laws of Genzyme, as amended. Filed as Exhibit 3.2 to
Genzyme's Form 10-Q for the quarter ended September 30,
1999.
4.1 Warrant to purchase common stock issued by Novazyme
Pharmaceuticals, Inc. (f/k/a Targeted Therapy, Inc.). Filed
herewith.
4.2 Securities Purchase Agreement, dated as of April 17, 2001
and amended on September 26, 2001, by and among Novazyme
Pharmaceuticals, Inc. and several purchasers. Filed
herewith.
10.1 Contract for Sale, dated June 25, 2001, for the premises
located at the Industrial Development Authority Industrial
Park, Waterford County, Dublin, Ireland, (comprised in folio
4141L County Waterford) by and between Luxottica Ireland
Limited and Genzyme Ireland Limited (f/n/a Gosfend Limited).
Filed herewith.
10.2 Lease, dated September 3, 1990, for the land located at the
Industrial Development Authority Industrial Park, Waterford
Country, Dublin, Ireland (comprised in folio 4917 & 324IF
County Waterford) by and between the Industrial Development
Authority and Bausch & Lomb Ireland. Filed herewith
10.3 Deed of Transfer, dated July 2, 2001, between Luxottica
Ireland Limited and Genzyme Ireland Limited, related to the
Lease dated September 3, 1990 for the premises located at
the Industrial Development Authority Industrial Park,
Waterford, Dublin, Ireland (comprised in folio 4141L County
Waterford). Filed herewith.
10.4 Contract for Sale, dated August 2, 2001, for the land
located at the Industrial Development Authority Industrial
Park, Waterford County, Dublin, Ireland (comprised in folio
4917 County of Waterford) by the Industrial Development
Agency (Ireland) and Genzyme Ireland Limited. Filed
herewith.
10.5 Lease, dated August 24, 2001, for the land located at the
Industrial Development Authority Industrial Park, Waterford
County, Dublin, Ireland (comprised in folio 4917 County of
Waterford) by the Industrial Development Agency (Ireland)
and Genzyme Ireland Limited. Filed herewith.
</Table>
- ------------------------
* Indicates an exhibit previously filed with the Securities and Exchange
Commission and incorporated herein by reference. Exhibits filed with Forms
8-K and 10-Q of Genzyme Corporation were filed under Commission File
No. 0-14680.