10-Q/A 1 a2198706z10-qa.htm 10-Q/A

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



FORM 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

Or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                               to                              

Commission File No. 0-14680

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

Massachusetts
(State or other jurisdiction of
incorporation or organization)
  06-1047163
(I.R.S. Employer Identification No.)

500 Kendall Street
Cambridge, Massachusetts
(Address of principal executive offices)

 

02142
(Zip Code)

(617) 252-7500
(Registrant's telephone number, including area code)



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

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o    No ý

        Number of shares of Genzyme Stock outstanding as of April 30, 2010: 266,868,620


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NOTE REGARDING REFERENCES TO GENZYME

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

NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This Form 10-Q contains forward-looking statements. These forward-looking statements include, among others, statements regarding:

    our expectations regarding the terms of a consent decree being negotiated with the United States Food and Drug Administration, or FDA, including the potential impact on Thyrogen supply, and when those negotiations are expected to be completed;

    our expectations regarding the duration and amount of the continuing supply allocations of Cerezyme and Fabrazyme and our assessment of the factors that will influence those allocations;

    our plans to increase bulk and fill-finish manufacturing capacity for Cerezyme, Fabrazyme and Myozyme and the expected timing of receipt of regulatory approvals;

    our assessment of the potential impact on our future revenues of healthcare reform legislation recently enacted in the United States;

    our expectations regarding Myozyme/Lumizyme revenues;

    our expectations for sales of Renagel/Renvela and Hectorol and the anticipated factors affecting the future growth of these products, including the proposed rule to establish a bundled payment system to reimburse dialysis providers;

    our expectations that production interruption at our Haverhill, England manufacturing facility will not result in a supply constraint for Renagel/Renvela, and the expected timing of new sevelamer carbonate production;

    our expectations regarding timing of regulatory approval for a new Leukine manufacturing facility;

    our assessment of competitors and potential competitors and the anticipated impact of potentially competitive products and services, including generic competition, on our revenues;

    our estimates of the cost to complete our research and development programs for companies and assets that we have acquired;

    our assessment of the financial impact of legal proceedings and claims on our financial position and results of operations;

    the sufficiency of our cash, investments and cash flows from operations and our expected uses of cash;

    our provision for potential tax audit exposures and our expectations regarding our unrecognized tax benefits;

    the protection afforded by our patent rights; and

    our expectations regarding the amortization of intangible assets related to our expected future contingent payments due to Bayer Schering Pharma A.G., or Bayer, Synpac (North Carolina), Inc., or Synpac, and Wyeth.

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

    the possibility that the final terms of the consent decree differ from the terms described in this report, that the negotiations with the FDA around the consent decree take longer than anticipated, or that we are unable to reach agreement with the FDA on final terms;

    the possibility that we are not able to repurchase some or all of the $2.0 billion of our common stock or complete strategic transactions involving our genetic testing, diagnostic products and pharmaceutical intermediates business units in the expected timeframes or at all, or that we are not able to complete a debt financing in the expected timeframe or in the anticipated amount, or at all, due to an unfavorable credit rating, unfavorable financing terms, unfavorable credit markets generally or any other reason;

    the possibility that current reduced supply allocations of Fabrazyme and Cerezyme need to last longer than expected or need to be more severe than expected because we are unable to finish work-in-process material that was in production when operations at our Allston, Massachusetts manufacturing facility, which we refer to as our Allston facility, were interrupted, third party oversight under a consent decree results in delays in product releases, our demand forecasts and estimates are inaccurate, and/or productivity of the new Fabrazyme working cell bank does not increase or we do not receive regulatory approval;

    the possibility that we may encounter additional manufacturing problems due to any reason, including equipment failures, viral or bacterial contamination, cell growth at lower than expected levels, fill-finish issues, power outages, human error or regulatory issues;

    our ability to maintain regulatory approvals for our products, services and manufacturing facilities and processes, including our Allston facility, and to obtain approvals in the anticipated timeframes, including FDA approval of alglucosidase alfa produced at the 4000L scale and approval for new manufacturing capacity and proposed changes to enhance our manufacturing processes;

    our ability to successfully transition fill-finish operations out of our Allston facility and to our Waterford, Ireland plant and a contract manufacturer on the planned timelines because of delays in regulatory approval or for any other reason;

    the possibility that we may be unable to produce new sevelamer hydrochloride and/or new sevelamer carbonate at our Haverhill, England facility in the expected time frames due to production problems or regulatory issues;

    the extent to which Gaucher and Fabry disease patients switch to competitors' products in place of Cerezyme or Fabrazyme or continue to reduce their doses of our products even after product supply stabilizes;

    the possibility that we may experience supply constraints for Thyrogen, and the extent of those constraints, if the FDA requires us to cease fill-finishing this product at Allston and we are not able to transfer fill-finish activities to a contract manufacturer on the planned timelines because of delays in regulatory approval or for any other reason;

    our ability to manufacture sufficient amounts of our products and maintain sufficient inventories, and to do so in a timely and cost-effective manner;

    the availability of reimbursement for our products and services from third party payors, the extent of such coverage and the accuracy of our estimates of the payor mix for our products;

    competition from lower cost generic or biosimilar products;

    the impact of legislative or regulatory changes, including implementation of the healthcare reform legislation recently enacted in the United States and the possibility that additional proposals to reduce healthcare costs may be adopted in the United States or elsewhere;

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    our ability and the ability of our collaboration partners to successfully complete preclinical and clinical development of new products and services within the anticipated timeframes and for anticipated indications;

    regulatory authorities' views regarding the safety, efficacy and risk-benefit profiles of our new or current products and our manufacturing processes;

    our ability to expand the use of current and next generation products in existing and new indications;

    potential future write offs of inventory or product recalls;

    our ability to obtain and maintain adequate patent and other proprietary rights protection for our products and services and successfully enforce these proprietary rights;

    our reliance on third parties to provide us with materials and services in connection with the manufacture of our products;

    our ability to continue to generate cash from operations and to effectively use our cash resources to grow our business;

    our ability to establish and maintain strategic license, collaboration and distribution arrangements and to successfully manage our relationships with licensors, collaborators, distributors and partners;

    the impact of changes in the exchange rates for foreign currencies on our product and service revenues in future periods;

    the outcome of legal proceedings by or against us;

    the possibility that our integration of the products and development programs acquired from Bayer may be more costly or time consuming than expected;

    the outcome of our Internal Revenue Service, or IRS, and foreign tax audits;

    general economic conditions; and

    the possible disruption of our operations due to terrorist activities, armed conflict, severe climate change, natural disasters or outbreak of diseases, including as a result of the disruption of operations of regulatory authorities or our subsidiaries, manufacturing facilities, customers, suppliers, distributors, couriers, collaborative partners, licensees or clinical trial sites.

        We refer to more detailed descriptions of these and other risks and uncertainties under the heading "Risk Factors" in Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations in Part I., Item 2. of this Form 10-Q. We encourage you to read those descriptions carefully. We caution investors not to place substantial reliance on the forward-looking statements contained in this Form 10-Q. These statements, like all statements in this Form 10-Q, speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.

NOTE REGARDING INCORPORATION BY REFERENCE

        The United States 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 them. The information that we refer you to is "incorporated by reference" into this Form 10-Q. Please read that information.

NOTE REGARDING TRADEMARKS

        Genzyme®, Cerezyme®, Fabrazyme®, Thyrogen®, Myozyme®, Renagel®, Renvela®, Campath®, Clolar®, Evoltra®, Mozobil®, Thymoglobulin®, Cholestagel®, Synvisc®, Synvisc-One®, Sepra®,

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Seprafilm®, Carticel®, Epicel®, MACI® and Hectorol® are registered trademarks, and Lumizyme™ and Jonexa™ are trademarks, of Genzyme or its subsidiaries. Welchol® is a registered trademark of Sankyo Pharma, Inc. Aldurazyme® is a registered trademark of BioMarin/Genzyme LLC. Elaprase® is a registered trademark of Shire Human Genetic Therapies, Inc. Prochymal® and Chondrogen® are registered trademarks of Osiris Therapeutics, Inc. Fludara® and Leukine® are registered trademarks licensed to Genzyme. All other trademarks referred to in this Form 10-Q are the property of their respective owners. All rights reserved.

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GENZYME CORPORATION AND SUBSIDIARIES

FORM 10-Q, MARCH 31, 2010

TABLE OF CONTENTS

 
   
  PAGE NO.  

PART I.

 

FINANCIAL INFORMATION

   
7
 

ITEM 1.

 

Financial Statements

   
7
 

 

Unaudited, Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009

   
7
 

 

Unaudited, Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009

   
8
 

 

Unaudited, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009

   
9
 

 

Notes to Unaudited, Consolidated Financial Statements

   
10
 

ITEM 2.

 

Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations

   
37
 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   
83
 

ITEM 4.

 

Controls and Procedures

   
83
 

PART II.

 

OTHER INFORMATION

   
84
 

ITEM 1.

 

Legal Proceedings

   
84
 

ITEM 1A.

 

Risk Factors

   
85
 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   
85
 

ITEM 6.

 

Exhibits

   
85
 

Signatures

   
86
 

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PART I.    FINANCIAL INFORMATION

        

ITEM 1.    FINANCIAL STATEMENTS

        


GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited, amounts in thousands, except per share amounts)

 
  Three Months Ended
March 31,
 
 
  2010   2009  

Revenues:

             
 

Net product revenue

  $ 971,625   $ 1,037,244  
 

Net service revenue

    101,915     101,499  
 

Research and development revenue

    933     10,128  
           
   

Total revenues

    1,074,473     1,148,871  
           

Operating costs and expenses:

             
 

Cost of products sold

    279,739     235,562  
 

Cost of services sold

    65,872     60,250  
 

Selling, general and administrative

    553,310     317,961  
 

Research and development

    220,930     206,925  
 

Amortization of intangibles

    70,984     57,598  
 

Contingent consideration expense

    62,549      
           
   

Total operating costs and expenses

    1,253,384     878,296  
           

Operating income (loss)

    (178,911 )   270,575  
           

Other income (expenses):

             
 

Equity in loss of equity method investments

    (697 )    
 

Other

    (439 )   (1,555 )
 

Investment income

    3,300     5,350  
           
   

Total other income

    2,164     3,795  
           

Income (loss) before income taxes

    (176,747 )   274,370  

Benefit from (provision for) income taxes

    61,799     (78,884 )
           

Net income (loss)

  $ (114,948 ) $ 195,486  
           

Net income (loss) per share:

             
 

Basic

  $ (0.43 ) $ 0.72  
           
 

Diluted

  $ (0.43 ) $ 0.70  
           

Weighted average shares outstanding:

             
 

Basic

    266,251     270,854  
           
 

Diluted

    266,251     277,628  
           

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

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GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited, amounts in thousands, except par value amounts)

 
  March 31,
2010
  December 31,
2009
 

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 643,337   $ 742,246  
 

Short-term investments

    162,011     163,630  
 

Accounts receivable, net

    904,102     899,731  
 

Inventories

    608,642     608,022  
 

Other current assets

    310,626     210,747  
 

Deferred tax assets

    181,318     178,427  
           
   

Total current assets

    2,810,036     2,802,803  

Property, plant and equipment, net

    2,824,099     2,809,349  

Long-term investments

    156,351     143,824  

Goodwill

    1,404,153     1,403,363  

Other intangible assets, net

    2,032,449     2,313,262  

Deferred tax assets-noncurrent

    401,370     376,815  

Investments in equity securities

    79,881     74,438  

Other noncurrent assets

    146,456     136,870  
           
   

Total assets

  $ 9,854,795   $ 10,060,724  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             
 

Accounts payable

  $ 175,764   $ 189,629  
 

Accrued expenses

    870,460     696,223  
 

Deferred revenue

    32,585     24,747  
 

Current portion of contingent consideration obligations

    158,493     161,365  
 

Current portion of long-term debt and capital lease obligations

    8,407     8,166  
           
   

Total current liabilities

    1,245,709     1,080,130  

Long-term debt and capital lease obligations

    113,389     116,434  

Deferred revenue-noncurrent

    12,870     13,385  

Long-term contingent consideration obligations

    875,184     853,871  

Other noncurrent liabilities

    80,415     313,252  
           
   

Total liabilities

    2,327,567     2,377,072  
           

Commitments and contingencies

             

Stockholders' equity:

             
 

Preferred stock, $0.01 par value

         
 

Common stock, $0.01 par value

    2,665     2,657  
 

Additional paid-in capital

    5,770,283     5,688,741  
 

Accumulated earnings

    1,555,148     1,670,096  
 

Accumulated other comprehensive income

    199,132     322,158  
           
   

Total stockholders' equity

    7,527,228     7,683,652  
           
   

Total liabilities and stockholders' equity

  $ 9,854,795   $ 10,060,724  
           

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

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GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

 
  Three Months Ended
March 31,
 
 
  2010   2009  

Cash Flows from Operating Activities:

             
 

Net income (loss)

  $ (114,948 ) $ 195,486  
 

Reconciliation of net income (loss) to cash flows from operating activities:

             
   

Depreciation and amortization

    122,688     98,958  
   

Stock-based compensation

    47,671     44,560  
   

Provision for bad debts

    2,449     5,762  
   

Contingent consideration expense

    62,549      
   

Equity in loss of equity method investments

    697      
   

Deferred income tax benefit

    (32,679 )   (24,376 )
   

Tax benefit from employee stock-based compensation

    3,624     6,549  
   

Excess tax benefit from stock-based compensation

    480     (3,492 )
   

Other

    2,663     2,814  
   

Increase (decrease) in cash from working capital changes (excluding impact of acquired assets and assumed liabilities):

             
     

Accounts receivable

    (31,463 )   (59,210 )
     

Inventories

    (28,225 )   818  
     

Other current assets

    (48,640 )   (22,659 )
     

Accounts payable, accrued expenses and deferred revenue

    139,598     12,565  
           
       

Cash flows from operating activities

    126,464     257,775  
           

Cash Flows from Investing Activities:

             
 

Purchases of investments

    (120,119 )   (13,292 )
 

Sales and maturities of investments

    105,796     75,058  
 

Purchases of equity securities

    (3,302 )   (4,870 )
 

Proceeds from sales of investments in equity securities

    3,077     1,264  
 

Purchases of property, plant and equipment

    (152,220 )   (161,561 )
 

Investments in equity method investment

    (1,466 )    
 

Purchases of other intangible assets

    (5,885 )   (8,056 )
 

Other

    (10,547 )   (47 )
           
       

Cash flows from investing activities

    (184,666 )   (111,504 )
           

Cash Flows from Financing Activities:

             
 

Proceeds from issuance of common stock

    30,075     34,526  
 

Repurchases of our common stock

        (107,134 )
 

Excess tax benefits from stock-based compensation

    (480 )   3,492  
 

Payments of debt and capital lease obligations

    (3,092 )   (2,653 )
 

Decrease in bank overdrafts

    (20,728 )   (3,392 )
 

Payment of contingent consideration obligation

    (31,600 )    
 

Other

    116     1,995  
           
       

Cash flows from financing activities

    (25,709 )   (73,166 )
           

Effect of exchange rate changes on cash

    (14,998 )   (1,773 )
           

Increase (decrease) in cash and cash equivalents

    (98,909 )   71,332  

Cash and cash equivalents at beginning of period

    742,246     572,106  
           

Cash and cash equivalents at end of period

  $ 643,337   $ 643,438  
           

Supplemental disclosures of non-cash transactions:

             
 

Strategic Transactions—Note 6.

             
 

Goodwill and Other Intangible Assets—Note 8.

             

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

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements

1. Description of Business

        We are a global biotechnology company dedicated to making a major impact on the lives of people with serious diseases. Our products and services are focused on rare inherited disorders, kidney disease, orthopaedics, cancer, transplant and immune disease, and diagnostic testing. Our commitment to innovation continues today with a substantial development program focused on these fields, as well as cardiovascular disease, neurodegenerative diseases, and other areas of unmet medical need.

        We are organized into five financial reporting units, which we also consider to be our reporting segments:

    Personalized Genetic Health, which develops, manufactures and distributes therapeutic products with a focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as lysosomal storage disorders, or LSDs, and cardiovascular disease. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme, Myozyme, Aldurazyme and Elaprase and royalties earned on sales of Welchol;

    Renal and Endocrinology, which develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure, and endocrine and immune-mediated diseases. The unit derives substantially all of its revenue from sales of Renagel/Renvela (including sales of bulk sevelamer), Hectorol and Thyrogen;

    Biosurgery, which develops, manufactures and distributes biotherapeutics and biomaterial-based products, with an emphasis on products that meet medical needs in the orthopaedics and broader surgical areas. The unit derives substantially all of its revenue from sales of Synvisc/Synvisc-One and the Sepra line of products;

    Hematology and Oncology, which develops, manufactures and distributes products for the treatment of cancer, the mobilization of hematopoietic stem cells and the treatment of transplant rejection and other hematologic and auto-immune disorders. The unit derives substantially all of its revenue from sales of Mozobil, Thymoglobulin, Clolar, Campath, Fludara and Leukine; and

    Multiple Sclerosis, which is developing a product for the treatment of MS.

        Effective January 1, 2010, based on changes in how we review our business, we re-allocated certain of our business units among our segments and adopted new names for certain of our reporting segments. Specifically:

    our former Genetic Diseases reporting segment is now referred to as "Personalized Genetic Health," or "PGH," and now includes our cardiovascular business unit, which previously was reported under the caption "Cardiometabolic and Renal," and our Welchol product line, which previously was reported as part of our bulk pharmaceuticals business unit under the caption "Other;"

    our former Cardiometabolic and Renal reporting segment is now referred to as "Renal and Endocrinology" and now includes our immune-mediated diseases business unit, which previously was reported under the caption "Other," but no longer includes our cardiovascular business unit; and

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

1. Description of Business (Continued)

    our former Hematologic Oncology segment is now referred to as "Hematology and Oncology" and now includes our transplant business unit, which previously was reported under the caption "Other," but no longer includes our MS business unit, which is now reported as a separate reporting segment called "Multiple Sclerosis."

        We report the activities of the following business units under the caption "Other": our genetic testing business unit, which provides testing services for the oncology, prenatal and reproductive markets; and our diagnostic products and pharmaceutical intermediates business units. These operating segments did not meet the quantitative threshold for separate segment reporting.

        We report our corporate, general and administrative operations and corporate science activities under the caption "Corporate."

        We have revised our 2009 segment disclosures to conform to our 2010 presentation.

        On May 6, 2010, we announced that we plan to pursue strategic alternatives for our genetic testing, diagnostic products and pharmaceutical intermediates business units. Options could include divestiture, spin-out or management buy-out. In 2009, our genetic testing business unit had revenue of approximately $371 million and revenue for our diagnostic products business unit was approximately $167 million. We expect these transactions to be completed in 2010.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

        Our unaudited, consolidated financial statements for each period include the statements of operations, balance sheets and statements of cash flows for our operations taken as a whole. We have eliminated all intercompany items and transactions in consolidation. We have reclassified certain 2009 data to conform to our 2010 presentation. We prepare 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 that are normally required by accounting principles generally accepted in the United States, or U.S. GAAP.

        These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and results of operations. Since these are interim financial statements, you should also read our audited, consolidated financial statements and notes included in Part II., Item 8. to our 2009 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. The balance sheet data as of December 31, 2009 that is included in this Form 10-Q was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP.

        Our unaudited, consolidated financial statements for each period include the accounts of our wholly owned and majority owned subsidiaries. We account for our investments in entities not subject to consolidation using the equity method of accounting if we have a substantial ownership interest (20% to 50%) in or exercise significant influence over the entity. Our consolidated net income (loss) includes our share of the earnings or losses of these entities. All intercompany accounts and transactions have been eliminated in consolidation.

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

2. Basis of Presentation and Significant Accounting Policies (Continued)

Revenue Recognition—Recent Healthcare Reform Legislation

        In March 2010, healthcare reform legislation was enacted in the United States, which contains several provisions that impact our business. Although many provisions of the new legislation do not take effect immediately, several provisions became effective in the first quarter of 2010. These include:

    an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% on our branded prescription drugs and an increase of 17.1% for our drugs that are approved exclusively for pediatric patients;

    the extension of the Medicaid rebate to managed care organizations that dispense drugs to Medicaid beneficiaries;

    the expansion of the 340(B) Public Health Services, or PHS, drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals and healthcare centers (this provision, however, does not apply to orphan drugs); and

    a requirement that the Medicaid rebate for a drug that is a "line extension" of a preexisting oral solid dosage form of the drug be linked in certain respects to the Medicaid rebate for the preexisting oral solid dosage form, such that the Medicaid rebate for most line extension drugs will be higher than it would have been absent the new law, especially if the preexisting oral solid dosage form has a history of significant price increases.

These provisions did not have a significant impact on our results of operations or financial position for the first quarter of 2010.

        Effective October 1, 2010, the new legislation re-defines the Medicaid average manufacturer price, or AMP, such that the AMP and, consequently, the Medicaid rebate are expected to increase for some of our drugs, in particular those that offer discounted pricing to customers.

        Beginning in 2011, the new law requires that drug manufacturers provide a 50% discount to Medicare beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap, which is known as the "donut hole." Also beginning in 2011, clinical laboratory fee schedule payments will be reduced by 1.75% over a period of five years and we will be required to pay our share of a new fee assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based upon each organization's percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare and Medicaid, the Department of Veterans Affairs, or VA, the Department of Defense, or DOD, and the TriCare retail pharmacy discount programs) made during the previous year. Sales of orphan drugs, however, are not included in the fee calculation. Final guidance relating to how we will be required to account for this fee is still pending, however, it is expected that the fee will be classified as either a reduction to net sales or an operating expense. The aggregated industry wide fee is expected to total approximately $28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. Beginning in 2013, a 2.3% excise tax will be imposed on sales of all medical devices except retail purchases by the public intended for individual use.

        Presently, uncertainty exists as many of the specific determinations necessary to implement this new legislation have yet to be decided and communicated to industry participants. We are still assessing the full extent that the U.S. healthcare reform legislation may have on our business.

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

2. Basis of Presentation and Significant Accounting Policies (Continued)

Stock-Based Compensation

        All stock-based awards to non-employees are accounted for at their fair value. We periodically grant awards, including time vesting stock options, time vesting restricted stock units, or RSUs, and performance vesting restricted stock units, or PSUs, under our employee and director equity plans. Beginning in 2010, our long-term incentive program for senior executives includes a combination of:

    time vesting stock options; and

    performance and market vesting awards, tied to the achievement of pre-established performance and market goals over a three-year performance period.

Approximately half of each senior executive's grant consists of time vesting stock options with the remainder in PSUs. Grants under our former long-term incentive program were comprised of time vesting stock options and time vesting RSUs.

        We record the estimated fair value of awards granted as stock-based compensation expense in our consolidated statements of operations over the requisite service period, which is generally the vesting period. Where awards are made with non-substantive vesting periods, such as where a portion of the award vests upon retirement eligibility, we estimate and recognize expense based on the period from the grant date to the date on which the employee is retirement eligible.

        The fair values of our:

    stock option grants are estimated as of the date of grant using a Black-Scholes option valuation model. The estimated fair values of the stock options, including the effect of estimated forfeitures, are then expensed over the options' vesting periods;

    time vesting RSUs are based on the market value of our stock on the date of grant. Compensation expense for time vesting RSUs is recognized over the applicable service period, adjusted for the effect of estimated forfeitures; and

    PSUs with both performance and service conditions are estimated based on the market value of our stock on the date of grant. The fair values of our PSUs with both market and service conditions are estimated as of the date of grant using a lattice model with a Monte Carlo simulation. Compensation expense associated with our PSUs is initially based upon the number of shares expected to vest after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved, net of estimated forfeitures. Compensation expense for our PSUs is recognized over the applicable performance period, adjusted for the effect of estimated forfeitures.

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

2. Basis of Presentation and Significant Accounting Policies (Continued)

Recent Accounting Pronouncements

        Periodically, accounting pronouncements and related information on the adoption, interpretation and application of U.S. GAAP are issued or amended by the Financial Accounting Standards Board, or FASB, or other standard setting bodies. Changes to the FASB Accounting Standards Codification™, or ASC, are communicated through Accounting Standards Updates, or ASUs. The following table shows FASB ASUs recently issued that could affect our disclosures and our position for adoption:

ASU Number   Relevant Requirements of ASU   Issued Date/Our Effective Dates   Status

2009-13 "Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force."

  Establishes the accounting and reporting guidance for arrangements under which a vendor will perform multiple revenue-generating activities. Specifically, the provisions of this update address how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting.   Issued October 2009. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted.   We will adopt the provisions of this update for the first quarter of 2011. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements.

2009-17 "Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities."

 

Consists of amendments to ASC 810, "Consolidation," which change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting should be consolidated. This is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance.

 

Issued December 2009. Effective for the first interim or annual reporting period after December 15, 2009.

 

We adopted the provisions of this update in the first quarter of 2010. The provisions of this update did not have any impact on our consolidated financial statements, other than for our interest in BioMarin/Genzyme LLC, as discussed in Note 9., "Investment in BioMarin/Genzyme LLC," below.

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

2. Basis of Presentation and Significant Accounting Policies (Continued)

ASU Number   Relevant Requirements of ASU   Issued Date/Our Effective Dates   Status

2010-06 "Improving Disclosures about Fair Value Measurements."

 

Requires new disclosures and clarifies some existing disclosure requirements about fair value measurements codified within ASC 820, "Fair Value Measurements and Disclosures," including significant transfers into and out of Level 1 and Level 2 investments of the fair value hierarchy. Also requires additional information in the roll forward of Level 3 investments including presentation of purchases, sales, issuances, and settlements on a gross basis. Further clarification for existing disclosure requirements provides for the disaggregation of assets and liabilities presented, and the enhancement of disclosures around inputs and valuation techniques.

 

Issued January 2010. Effective for the first interim or annual reporting period beginning after December 15, 2009, except for the additional information in the roll forward of Level 3 investments. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim reporting periods within those fiscal years.

 

We adopted the applicable provisions of this update, except for the additional information in the roll forward of Level 3 investments (as previously noted), in the first quarter of 2010. Besides a change in disclosure, the adoption of this update does not have a material impact on our consolidated financial statements. During the three months ended March 31, 2010, none of our instruments were reclassified between Level 1, Level 2 or Level 3.

2010-11, "Scope Exception Related to Embedded Credit Derivatives."

 

Update provides amendments to Subtopic 815-15, "Derivatives and Hedging—Embedded Derivatives, " to clarify the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another.

 

Issued March 2010. Effective at the beginning of each reporting entity's first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each reporting entity's first fiscal quarter beginning after issuance of this update.

 

We will adopt the provisions of this update for the third quarter of 2010. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements.

2010-17, "Milestone Method of Revenue Recognition—a consensus of the FASB Emerging Issues Task Force."

 

Update provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions.

 

Issued April 2010. Effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted.

 

We will adopt the provisions of this update beginning January 1, 2011. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements.

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

3. Fair Value Measurements

        A significant number of our assets and liabilities are carried at fair value. These include:

    fixed income investments;

    investments in publicly-traded equity securities;

    derivatives; and

    contingent consideration obligations.

Fair Value Measurement—Definition and Hierarchy

        Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. In determining fair value, we are permitted to use various valuation approaches, including market, income and cost approaches. We are required to follow an established fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available.

        The fair value hierarchy is broken down into three levels based on the reliability of inputs. We have categorized our fixed income, equity securities, derivatives and contingent consideration obligations within the hierarchy as follows:

    Level 1—These valuations are based on a "market approach" using quoted prices in active markets for identical assets. Valuations of these products do not require a significant degree of judgment. Assets utilizing Level 1 inputs include money market funds, U.S. government securities, bank deposits and exchange-traded equity securities.

    Level 2—These valuations are based primarily on a "market approach" using quoted prices in markets that are not very active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Fixed income assets utilizing Level 2 inputs include U.S. agency securities, including direct issuance bonds and mortgage-backed securities, asset-backed securities, corporate bonds and commercial paper. Derivative securities utilizing Level 2 inputs include forward foreign-exchange contracts.

    Level 3—These valuations are based on various approaches using inputs that are unobservable and significant to the overall fair value measurement. Certain assets and liabilities are classified within Level 3 of the fair value hierarchy because they have unobservable value drivers and therefore have little or no transparency. The fair value measurement of the contingent consideration obligations related to the acquisition from Bayer is valued using Level 3 inputs.

Valuation Techniques

        Fair value is a market-based measure considered from the perspective of a market participant who would buy the asset or assume the liability rather than our own specific measure. All of our fixed income securities are priced using a variety of daily data sources, largely readily-available market data and broker quotes. To validate these prices, we compare the fair market values of our fixed income investments using market data from observable and corroborated sources. We also perform the fair value calculations for our derivatives and equity securities using market data from observable and corroborated sources. We determine the fair value of the contingent consideration obligations based on

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)


a probability-weighted income approach. The measurement is based on significant inputs not observable in the market. In periods of market inactivity, the observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. During the three months ended March 31, 2010, none of our instruments were reclassified between Level 1, Level 2 or Level 3.

        The following tables set forth our assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2010 and December 31, 2009 (amounts in thousands):

Description   Balance as of
March 31,
2010
  Level 1   Level 2   Level 3  

Fixed income investments(1):

 

Cash equivalents:

  Money market funds/other   $ 534,143   $ 534,143   $   $  
                           

 

Short-term investments:

  U.S. Treasury notes     30,420     30,420          

      Non U.S. Governmental notes     7,229         7,229      

      U.S. agency notes     62,393         62,393      

      Corporate notes—global     60,969         60,969      

      Commercial paper     1,000         1,000      
                           

      Total     162,011     30,420     131,591      
                           

 

Long-term investments:

  U.S. Treasury notes     66,179     66,179          

      Non U.S. Governmental notes     1,624         1,624      

      U.S. agency notes     16,906         16,906      

      Corporate notes—global     71,642         71,642      
                           

      Total     156,351     66,179     90,172      
                           

 

Total fixed income investments

    852,505     630,742     221,763      
                           

Equity holdings(1):

 

Publicly-traded equity securities

    44,255     44,255          
                           

Derivatives:

 

Foreign exchange forward contracts

    701         701      
                           

Contingent liabilities(2):

 

Contingent consideration obligations

    (1,033,677 )           (1,033,677 )
                           

Total assets (liabilities) at fair value

  $ (136,216 ) $ 674,997   $ 222,464   $ (1,033,677 )
                           

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

 

Description   Balance as of
December 31,
2009
  Level 1   Level 2   Level 3  

Fixed income investments(1):

 

Cash equivalents:

  Money market funds/other   $ 603,109   $ 603,109   $   $  
                           

 

Short-term investments:

  U.S. Treasury notes     41,040     41,040          

      Non U.S. Governmental notes     4,114         4,114      

      U.S. Government agency notes     56,810         56,810      

      Corporate notes—global     54,825         54,825      

      Commercial paper     6,841         6,841      
                           

      Total     163,630     41,040     122,590      
                           

 

Long-term investments:

  U.S. Treasury notes     29,793     29,793          

      Non U.S. Governmental notes     4,873         4,873      

      U.S. Government agency notes     28,015         28,015      

      Corporate notes—global     81,143         81,143      
                           

      Total     143,824     29,793     114,031      
                           

 

Total fixed income investments

    910,563     673,942     236,621      
                           

Equity holdings(1):

 

Publicly-traded equity securities

    40,380     40,380          
                           

Derivatives:

 

Foreign exchange forward contracts

    4,284         4,284      
                           

Contingent liabilities(2):

 

Contingent consideration obligations

    (1,015,236 )           (1,015,236 )
                           

Total assets (liabilities) at fair value

  $ (60,009 ) $ 714,322   $ 240,905   $ (1,015,236 )
                           

(1)
Changes in the fair value of our fixed income investments and investments in publicly-traded equity securities are recorded in accumulated other comprehensive income, a component of stockholders' equity, in our consolidated balance sheets.

(2)
Changes in the fair value of the contingent consideration obligations are recorded as contingent consideration expense, a component of operating expenses in our consolidated statements of operations. We recorded a total of $62.5 million of contingent consideration expense in our consolidated statements of operations for the three months ended March 31, 2010, including $21.4 million for our Hematology and Oncology reporting segment and $41.1 million for our Multiple Sclerosis reporting segment, for which there were no comparable amounts in the same period of 2009.

        Changes in the fair value of our Level 3 contingent consideration obligations during the three months ended March 31, 2010 were as follows (amounts in thousands):

Balance as of December 31, 2009

  $ (1,015,236 )

Payments

    31,600  

Contingent consideration expense(1)

    (62,549 )

Effect of foreign currency adjustments

    12,508  
       

Fair value at March 31, 2010

  $ (1,033,677 )
       

(1)
Includes $35.5 million of contingent consideration expense for the three months ended March 31, 2010 related to changes in estimates.

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

        The carrying amounts reflected in our consolidated balance sheets for cash, accounts receivable, other current assets, accounts payable, accrued expenses, current portion of contingent consideration obligations and current portion of long-term debt and capital lease obligations approximate fair value due to their short-term maturities.

Derivative Instruments

        As a result of our worldwide operations, we face exposure to adverse movements in foreign currency exchange rates. Exposures to currency fluctuations that result from sales of our products in foreign markets are partially offset by the impact of currency fluctuations on our international expenses. We may also use derivatives, primarily foreign exchange forward contracts for which we do not apply hedge accounting treatment, to further reduce our exposure to changes in exchange rates, primarily to offset the earnings effect from short-term foreign currency assets and liabilities. We account for such derivatives at market value with the resulting gains and losses reflected within selling, general and administrative expenses, or SG&A, in our consolidated statements of operations. We do not have any derivatives designated as hedging instruments and we do not use derivative instruments for trading or speculative purposes.

Foreign Exchange Forward Contracts

        Generally, we enter into foreign exchange forward contracts with maturities of not more than 15 months. All foreign exchange forward contracts in effect as of March 31, 2010 and December 31, 2009 had maturities of 1 to 2 months. We report these contracts on a net basis. Net asset derivatives are included in other current assets and net liability derivatives are included in accrued expenses in our consolidated balance sheets.

        The following table summarizes the balance sheet classification of the fair value of these derivatives on both a gross and net basis as of March 31, 2010 and December 31, 2009 (amounts in thousands):

 
  Unrealized Gain/Loss on Foreign Exchange Forward Contracts  
 
   
   
  As Reported  
 
  Gross   Net  
 
  Asset
Derivatives
  Liability
Derivatives
  Asset
Derivatives
  Liability
Derivatives
 
As of:
  Other
current assets
  Accrued
expenses
  Other
current assets
  Accrued
expenses
 

March 31, 2010

  $ 1,338   $ 637   $ 701   $  

December 31, 2009

  $ 9,834   $ 5,550   $ 4,284   $  

        Total foreign exchange (gains) and losses included in SG&A in our consolidated statements of operations includes unrealized and realized (gains) and losses related to both our foreign exchange forward contracts and our foreign currency assets and liabilities. The net impact of our overall unrealized and realized foreign exchange (gains) and losses for both the three months ended March 31, 2010 and 2009 was not significant.

        The following table summarizes the effect of the unrealized and realized net gains related to our foreign exchange forward contracts on our consolidated statements of operations for the three months ended March 31, 2010 and 2009 (amounts in thousands):

 
   
  Three Months Ended
March 31,
 
 
  Statement of
Operations Location
 
Derivative Instrument
  2010   2009  

Foreign exchange forward contracts

  SG&A   $ (5,041 ) $ (10,828 )

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

4. Net Income (Loss) Per Share

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

 
  Three Months Ended
March 31,
 
 
  2010   2009  

Net income (loss)—basic and diluted

  $ (114,948 ) $ 195,486  
           

Shares used in computing net income (loss) per common share—basic

    266,251     270,854  

Effect of dilutive securities(1):

             
 

Stock options(2)

        5,553  
 

Restricted stock units

        1,138  
 

Other

        83  
           
   

Dilutive potential common shares

        6,774  
           

Shares used in computing net income (loss) per common share—diluted(1,2)

    266,251     277,628  
           

Net income (loss) per common share:

             
 

Basic

  $ (0.43 ) $ 0.72  
           
 

Diluted

  $ (0.43 ) $ 0.70  
           

(1)
For the three months ended March 31, 2010, basic and diluted net loss per share are the same. We did not include the securities described in the following table in the computation of diluted net loss per share because these securities would have an anti-dilutive effect due to our net loss for the period (amounts in thousands):

 
  Three Months Ended
March 31, 2010
 

Stock options

    2,949  

Restricted stock units

    2,534  

Other

    247  
       
 

Total shares excluded from calculation of diluted loss per share

    5,730  
       
(2)
We did not include the securities described in the following table in the computation of diluted earnings (loss) per share because these securities were anti-dilutive during the corresponding period (amounts in thousands):

 
  Three Months Ended
March 31,
 
 
  2010   2009  

Shares issuable upon exercise of outstanding options

    20,648     8,650  
           

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

5. Comprehensive Income (Loss)

        The components of comprehensive income (loss) for the periods presented are as follows (amounts in thousands):

 
  Three Months Ended March 31,  
 
  2010   2009  

Net income (loss)

  $ (114,948 ) $ 195,486  
           

Other comprehensive income (loss):

             
 

Foreign currency translation adjustments

    (125,477 )   (120,148 )
           
 

Pension liability adjustments, net of tax(1)

    (9 )    
           
 

Unrealized gains (losses) on securities, net of tax:

             
   

Unrealized gains (losses) arising during the period, net of tax

    3,638     (20,607 )
   

Reclassification adjustment of gains included in net income (loss), net of tax

    (1,178 )   (197 )
           
   

Unrealized gains (losses) on securities, net of tax(2)

    2,460     (20,804 )
           
 

Other comprehensive loss

    (123,026 )   (140,952 )
           

Comprehensive income (loss)

  $ (237,974 ) $ 54,534  
           

(1)
Tax amounts for all periods were not significant.

(2)
Net of $(1.4) million of tax for the three months ended March 31, 2010 and $11.9 million of tax for the three months ended March 31, 2009.

6. Strategic Transactions

Purchase of Intellectual Property from EXACT Sciences Corporation

        On January 27, 2009, we purchased certain intellectual property in the fields of prenatal testing and reproductive health from EXACT Sciences Corporation, or EXACT Sciences, for our genetics business unit and 3,000,000 shares of EXACT Sciences common stock. We paid EXACT Sciences total cash consideration of $22.7 million at that time. Of this amount, we allocated $4.5 million to the acquired shares of EXACT Sciences common stock based on the fair value of the stock on the date of acquisition, which we recorded as an increase to investments in equity securities in our consolidated balance sheet as of March 31, 2009. As the purchased assets did not qualify as a business combination and have not reached technological feasibility nor have alternative future use, we allocated the remaining $18.2 million to the acquired intellectual property, which we recorded as a charge to research and development expenses in our consolidated statements of operations in March 2009. Additional amounts we paid during the first quarter of 2010 and will pay in the future to EXACT Sciences under this agreement are not significant.

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

6. Strategic Transactions (Continued)

Purchase of In-Process Research and Development

        The following table sets forth the significant in-process research and development, or IPR&D, projects for the companies and assets we acquired between January 1, 2006 and March 31, 2010 (amounts in millions):

Company/Assets Acquired
  Purchase
Price
  IPR&D   Programs Acquired   Discount Rate
Used in
Estimating
Cash Flows
  Year of
Expected
Launch
 

Bayer (2009)

  $ 1,006.5   $ 458.7   alemtuzumab for MS—US     16 %   2012  

          174.2   alemtuzumab for MS—ex-US     16 %   2013  
                             

        $ 632.9 (1)                
                             

Bioenvision, Inc., or Bioenvision (2007)

  $ 349.9   $ 125.5 (2) Clolar(3)     17 %   2010-2016 (4)
                             

AnorMED Inc., or AnorMED (2006)

  $ 589.2   $ 526.8 (2) Mozobil(5)     15 %   2016  
                             

(1)
Capitalized as an indefinite-lived intangible asset.

(2)
Expensed on acquisition date.

(3)
Clolar is approved for the treatment of relapsed and refractory pediatric acute lymphoblastic leukemia, or ALL. The IPR&D projects for Clolar are related to the development of the product for the treatment of other medical issues.

(4)
Year of expected launch reflects both the ongoing launch of products for currently approved indications and the anticipated launch of the products in the future for new indications.

(5)
Mozobil received marketing approval for use in stem cell transplants in the United States in December 2008 and in Europe in July 2009. Mozobil is also being developed for tumor sensitization.

Pro Forma Financial Summary

        The following pro forma financial summary is presented as if the acquisition from Bayer was completed as of January 1, 2009. The pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated on that date, or of the future operations of the combined entities. Material nonrecurring charges related to this acquisition, such as a gain on acquisition of business of $24.2 million, are included in the pro forma financial summaries for the period presented (amounts in thousands, except per share amounts):

 
  Three Months Ended
March 31, 2009
 

Total revenues

  $ 1,197,060  
       

Net income

  $ 175,262  
       

Net income per share:

       
 

Basic

  $ 0.65  
       
 

Diluted

  $ 0.63  
       

Weighted average shares outstanding:

       
 

Basic

    270,854  
       
 

Diluted

    277,628  
       

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Notes to Unaudited, Consolidated Financial Statements (Continued)

7. Inventories

 
  March 31,
2010
  December 31,
2009
 
 
  (Amounts in thousands)
 

Raw materials

  $ 113,567   $ 123,434  

Work-in-process

    298,235     288,653  

Finished goods

    196,840     195,935  
           
 

Total

  $ 608,642   $ 608,022  
           

        In order to build a small inventory buffer to help us more consistently manage the resupply of Cerezyme to patients in approximately 100 countries and reduce interruptions in shipping that occur in the absence of inventory, we began shipping 50% of Cerezyme demand at the end of February 2010. Although we achieved our goal of building a small inventory buffer for Cerezyme during the first quarter of 2010, we announced in April 2010 that the 50% shipping allocation will be extended due to an interruption in operations at our Allston facility at the end of March 2010. The interruption resulted from an unexpected city electrical power failure that compounded issues with the plant's water system. The issues have been corrected and the facility is operational. We estimate that we will need to continue the 50% shipping allocation for two to three months. We are currently assessing whether approximately $7 million in the aggregate of Cerezyme and Fabrazyme work-in-process material, the majority of which is Cerezyme, that was unfinished when the interruption occurred can be finished and expect to complete our assessment over the next month. If we determine that this Cerezyme and/or Fabrazyme material cannot be finished, we will have to write off that inventory as a charge to cost of products sold in our consolidated statements of operations in the second quarter of 2010.

        We capitalize inventory produced for commercial sale, which may result in the capitalization of inventory prior to regulatory approval of a product. If a product is not approved for sale, it would result in the write off of the inventory and a charge to earnings. We have been working to increase the productivity of the Fabrazyme manufacturing process, which has performed at the low end of the historical range since the re-start of production, and have developed a new working cell bank for Fabrazyme that is in its second run. Regulatory approval of the new working cell bank is required. As of March 31, 2010, the amount of inventory for Fabrazyme related to the new working cell bank that has not yet been approved for sale was not significant.

Manufacturing-Related Charges

        We manufacture the majority of our supply requirements for sevelamer hydrochloride (the active ingredient in Renagel) and sevelamer carbonate (the active ingredient in Renvela) at our manufacturing facility in Haverhill, England. In December 2009, equipment failure caused an explosion and fire at this facility, which damaged some of the equipment used to produce these active ingredients as well as the building in which the equipment was located. As a result, we have temporarily suspended production of sevelamer hydrochloride and sevelamer carbonate at this facility while repairs are made. We resumed production of sevelamer hydrochloride in May 2010. We anticipate that the facility will resume production of sevelamer carbonate in the fourth quarter of 2010. We believe that we have adequate supply levels to meet the current demand for both Renagel and Renvela and do not anticipate there will be any supply constraints for either product while the facility undergoes repairs. During the first quarter of 2010, we recorded a total of $7.5 million of expenses, net of $3.0 million of insurance reimbursements, to cost of products sold in our consolidated statements of operations for

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Notes to Unaudited, Consolidated Financial Statements (Continued)

7. Inventories (Continued)


Renagel and Renvela related to the remediation cost of our Haverhill, England manufacturing facility, including repairs and idle capacity expenses.

8. Goodwill and Other Intangible Assets

        The following table contains the change in our goodwill during the three months ended March 31, 2010 (amounts in thousands):

 
  Personalized
Genetic
Health
  Renal and
Endocrinology
  Biosurgery   Hematology
and
Oncology
  Multiple
Sclerosis
  Other   Total  

Goodwill

  $ 339,563   $ 319,882   $ 110,376   $ 375,889   $ 318,059   $ 261,631   $ 1,725,400  

Accumulated impairment losses(1)

            (102,792 )           (219,245 )   (322,037 )
                               

Balance as of December 31, 2009

    339,563     319,882     7,584     375,889     318,059     42,386     1,403,363  

Net exchange differences arising during the period

                        494     494  

Other changes in carrying amounts during the period

                        296     296  
                               

Balance as of March 31, 2010

  $ 339,563   $ 319,882   $ 7,584   $ 375,889   $ 318,059   $ 43,176   $ 1,404,153  
                               

Goodwill

 
$

339,563
 
$

319,882
 
$

110,376
 
$

375,889
 
$

318,059
 
$

262,421
 
$

1,726,190
 

Accumulated impairment losses(1)

            (102,792 )           (219,245 )   (322,037 )
                               

Balance as of March 31, 2010

  $ 339,563   $ 319,882   $ 7,584   $ 375,889   $ 318,059   $ 43,176   $ 1,404,153  
                               

(1)
Accumulated impairment losses include:
    a $102.8 million pre-tax charge recorded in 2003 to write off the goodwill of our Biosurgery reporting segment's orthopaedics reporting unit; and

    a $219.2 million pre-tax charge recorded in 2006 to write off the goodwill of our genetic testing reporting unit.

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Notes to Unaudited, Consolidated Financial Statements (Continued)

8. Goodwill and Other Intangible Assets (Continued)

Other Intangible Assets

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

 
  As of March 31, 2010   As of December 31, 2009  
 
  Gross
Other
Intangible
Assets
  Accumulated
Amortization
  Net
Other
Intangible
Assets
  Gross
Other
Intangible
Assets
  Accumulated
Amortization
  Net
Other
Intangible
Assets
 

Finite-lived other intangible assets:

                                     
 

Technology(1)

  $ 1,939,700   $ (896,937 ) $ 1,042,763   $ 2,180,232   $ (877,611 ) $ 1,302,621  
 

Distribution rights(2)

    446,374     (246,832 )   199,542     440,521     (227,726 )   212,795  
 

Patents

    188,652     (135,209 )   53,443     188,651     (131,898 )   56,753  
 

License fees

    98,586     (48,576 )   50,010     98,647     (47,052 )   51,595  
 

Customer lists

    88,448     (46,306 )   42,142     87,423     (43,822 )   43,601  
 

Trademarks

    60,621     (48,984 )   11,637     60,608     (47,623 )   12,985  
                           
 

Total finite-lived other intangible assets

    2,822,381     (1,422,844 )   1,399,537     3,056,082     (1,375,732 )   1,680,350  

Indefinite-lived other intangible assets:

                                     
 

IPR&D

    632,912         632,912     632,912         632,912  
                           
 

Total other intangible assets

  $ 3,455,293   $ (1,422,844 ) $ 2,032,449   $ 3,688,994   $ (1,375,732 ) $ 2,313,262  
                           

(1)
For the year ended December 31, 2009, includes a gross technology intangible asset of $240.3 million and related accumulated amortization of $(24.0) million related to our consolidation of the results of BioMarin/Genzyme LLC. Effective January 1, 2010, under new guidance we adopted for consolidating variable interest entities, we no longer consolidate the results of this joint venture and no longer include this gross technology asset and the related accumulated amortization or a related other noncurrent liability in our consolidated balance sheets.

(2)
Includes an additional $5.9 million for the three months ended March 31, 2010 for additional payments made or accrued in connection with the reacquisition of the Synvisc sales and marketing rights from Wyeth in January 2005. As of March 31, 2010, the contingent royalty payments to Wyeth payable under the agreement are substantially complete. We completed the contingent royalty payments to Wyeth related to North American sales of Synvisc in the first quarter of 2010 and anticipate completing the remaining contingent royalty payments to Wyeth related to sales of the product outside of the United States by the end of 2010, the amount of which is not significant.

        All of our finite-lived other intangible assets are amortized over their estimated useful lives.

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Notes to Unaudited, Consolidated Financial Statements (Continued)

8. Goodwill and Other Intangible Assets (Continued)

        As of March 31, 2010, the estimated future amortization expense for our finite-lived other intangible assets for the remainder of fiscal year 2010, the four succeeding fiscal years and thereafter is as follows (amounts in thousands):

Year Ended December 31,
  Estimated
Revenue-
Based
Amortization
Expense(1)
  Estimated
Other
Amortization
Expense
  Total
Estimated
Amortization
Expense(1)
 

2010 (remaining nine months)

  $ 82,704   $ 137,218   $ 219,922  

2011

    119,184     175,081     294,265  

2012

    87,705     148,272     235,977  

2013

    28,970     131,432     160,402  

2014

    23,696     109,116     132,812  

Thereafter

    19,992     352,984     372,976  

(1)
Includes estimated future amortization expense for:

the Synvisc distribution rights based on the forecasted respective future sales of Synvisc and the resulting future contingent payments we may be required to make to Wyeth and the Myozyme patent and technology rights pursuant to a license agreement with Synpac based on forecasted future sales of Myozyme and the milestone payments we may be required to make to Synpac. These contingent payments will be recorded as intangible assets when the payments are accrued; and

the technology intangible assets resulting from our acquisition of the worldwide rights to the oncology products Campath, Leukine and Fludara, of which:

the assets related to Campath and Leukine are being amortized on a straight-line basis; and

the asset related to Fludara is being amortized based on the forecasted future sales of Fludara.

9. Investment in BioMarin/Genzyme LLC

        We and BioMarin Pharmaceutical Inc., or BioMarin, have entered into agreements to develop and commercialize Aldurazyme, a recombinant form of the human enzyme alpha-L-iduronidase, used to treat an LSD known as mucopolysaccharidosis, or MPS, I. Under the relationship, an entity we formed with BioMarin in 1998 called BioMarin/Genzyme LLC has licensed all intellectual property related to Aldurazyme and other collaboration products on a royalty-free basis to BioMarin and us. BioMarin holds the manufacturing rights and we hold the global marketing rights. We are required to pay BioMarin a tiered royalty payment ranging from 39.5% to 50% of worldwide net product sales of Aldurazyme.

        Prior to January 1, 2010, we determined that we were the primary beneficiary of BioMarin/Genzyme LLC and, as a result, we:

    consolidated the income (losses) of BioMarin/Genzyme LLC and recorded BioMarin's portion of BioMarin/Genzyme LLC's income (losses) as minority interest in our consolidated statements of operations; and

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Notes to Unaudited, Consolidated Financial Statements (Continued)

9. Investment in BioMarin/Genzyme LLC (Continued)

    recorded the assets and liabilities of BioMarin/Genzyme LLC in our consolidated balance sheets at fair value.

        Effective January 1, 2010, in accordance with new guidance we adopted for consolidating variable interest entities, we were required to reassess our designation as primary beneficiary of BioMarin/Genzyme LLC. Under the new guidance, the entity with the power to direct the activities that most significantly impact a variable interest entity's economic performance is the primary beneficiary. We have concluded that BioMarin/Genzyme LLC is a variable interest entity, but does not have a primary beneficiary because the power to direct the activities of BioMarin/Genzyme LLC that most significantly impact its performance, is, in fact, shared equally between us and BioMarin through our commercialization rights and BioMarin's manufacturing rights. Effective January 1, 2010, we no longer consolidate the results of BioMarin/Genzyme LLC and instead record our portion of the results of BioMarin/Genzyme LLC in equity in loss of equity method investments in our consolidated statements of operations. For the three months ended March 31, 2010, the results of BioMarin/Genzyme LLC and our portion of the results of BioMarin/Genzyme LLC were not significant.

10. Investment in Isis Pharmaceuticals, Inc. Common Stock

        As of March 31, 2010, our investment in Isis common stock had a carrying value of $80.1 million, or $16.02 per share, and a fair market value of $54.7 million, or $10.93 per share. The closing price per share of Isis common stock exhibited volatility during 2009 and the three months ended March 31, 2010 and has remained below our historical cost since September 1, 2009, with closing prices subsequent to that date ranging from a high of $15.69 per share to a low of $8.66 per share. We considered all available evidence in assessing the decline in value of our investment in Isis common stock, including investment analyst reports and Isis's expected results and future outlook, none of which suggests that the decline would be "other than temporary." Currently, the average 12-month price estimate for Isis common stock among some analysts is approximately $16 per share. As a result of our analysis, as of March 31, 2010, we consider the $25.5 million unrealized loss on our investment in Isis common stock to be temporary. We will continue to review the fair value of our investment in Isis common stock in comparison to our historical cost and in the future, if the decline in value has become "other than temporary," we will write down our investment in Isis common stock to its then current market value and record an impairment charge to our consolidated statements of operations.

11. Stockholders' Equity

Long-Term Incentive Program for Senior Executives

        From 2007 through 2009, our long-term incentive program for senior executives was comprised of equity awards in the form of time vesting stock options and time vesting RSUs. Beginning with 2010, the equity vehicles for our long-term incentive program for senior executives includes a combination of:

    time vesting stock options; and

    performance and market vesting awards comprised of PSUs, tied to the achievement of pre-established performance and market goals over a three-year performance period, and cash.

Approximately half of each senior executive's grant consists of time vesting stock options with the remainder in PSUs.

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Notes to Unaudited, Consolidated Financial Statements (Continued)

11. Stockholders' Equity (Continued)

        For the 2010 through 2012 performance period, the performance metrics are:

    cash flow return on invested capital; and

    relative total shareholder return, or R-TSR, measured against the performance of a subset of biotechnology peer companies (currently 28 companies) in the S&P 500 Health Care Index.

        Each metric is weighted equally. For both metrics, performance between the threshold level and the target level will be awarded in PSUs. The PSUs will be paid out in shares of our stock at the end of the three-year period if performance between the threshold level and target level is achieved. If performance above the target level is achieved, the portion of the award above the target level will be paid out in cash up to a predetermined maximum cash award. Since it is possible that the PSUs may not pay out at all, it is completely "at risk" compensation.

        In January 2010, the compensation committee of our board of directors approved a range for the three-year cash flow return on invested capital metric of 85% to 115%. For performance between 85% and 100% of the cash flow return on invested capital target, the payout range is 50% to 100% of the senior executive's target PSU award associated with this performance measure. Performance between 101% and 115% of the cash flow return on invested capital target will result in a cash payment that will be awarded based on performance achieved between target and maximum levels, up to a predetermined maximum.

        The committee also approved the following performance levels for R-TSR:

Performance Level
  Percentile Rank  

Threshold

    40th  

Target

    65th  

Maximum

    75th  

        For performance between the R-TSR threshold and target levels, the payout range is 35% to 100% of the senior executive's target PSU award associated with this performance measure. R-TSR performance between the target and maximum levels will result in a cash payment that will be awarded based on performance achieved between target and maximum levels, up to a predetermined maximum.

        If a participating senior executive's employment is terminated before the end of the performance period because of death, disability or retirement, payment of the PSU will be pro-rated to the date of termination based upon the company's actual achievement of performance levels at the end of the performance period. Upon a change in control, payment of a PSU will be paid out at the target performance level and pro-rated to the date of the change of control.

PSUs

        During February and March 2010, we granted a total of 214,386 PSUs with a weighted average grant date fair value of $50.10 per share to senior executives under our 2004 Equity Plan. The PSUs are subject to the attainment of certain performance criteria established at the beginning of the performance period, as described above, and cliff vest at the end of the performance period, which ends December 31, 2012. Compensation expense associated with our PSUs is initially based upon the number of shares expected to vest after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved, net of estimated

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Notes to Unaudited, Consolidated Financial Statements (Continued)

11. Stockholders' Equity (Continued)


forfeitures. Compensation expense for our PSUs is recognized over the applicable performance period, adjusted for the effect of estimated forfeitures.

        The fair value of PSUs subject to the cash flow return on investment performance metric, which includes both performance and service conditions, is estimated based on the market value of our stock on the date of grant. We use a lattice model with a Monte Carlo simulation to determine the fair value of PSUs subject to the R-TSR performance metric, which includes both market and service conditions. The lattice model requires various highly judgmental assumptions to determine the fair value of the awards. This model samples paths of our stock price and the stock prices of a group of peer companies in the S&P 500 Health Care Index, which we refer to as the Peer Group, and calculates the resulting change in cash flow multiple at the end of the forecasted performance period. This model iterates these randomly forecasted results until the distribution of results converge on a mean or estimated fair value.

        We used the following assumptions to determine the fair value of these awards:

 
  For the Three Months Ended
March 31, 2010
 

Expected dividend yield

    0%  

Range of risk free rate of return

    1.33%-1.45%  

Range of our expected stock price volatility

    35.11%-36.06%  

Range of Peer Group expected stock price volatility

    21.27%-60.32%  

Range of our average closing stock prices on the grant dates

    $51.83-$56.50      

Range of Peer Group average closing stock prices on the grant dates

    $7.22-$348.13      

Range of our historical total shareholder return on the grant dates

    5.75%-15.28%  

Range of historical total shareholder return for the Peer Group on the grant dates

    (19.78)%-23.22%  

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Notes to Unaudited, Consolidated Financial Statements (Continued)

11. Stockholders' Equity (Continued)

Stock-Based Compensation Expense, Net of Estimated Forfeitures

        We allocated pre-tax stock-based compensation expense, net of estimated forfeitures, based on the functional cost center of each employee as follows (amounts in thousands, except per share amounts):

 
  Three Months Ended
March 31,
 
 
  2010   2009  

Pre-tax stock-based compensation, net of estimated forfeitures

  $ (47,641 ) $ (44,606 )

Less: tax benefit from stock options

    13,072     12,589  
           
 

Total stock-based compensation expense, net of tax

  $ (34,569 ) $ (32,017 )
           

Effect per common share:

             
 

Basic and Diluted

  $ (0.13 ) $ (0.12 )
           

(1)
We also capitalized the following amounts of stock-based compensation expense to inventory, all of which is attributable to participating employees that support our manufacturing operations (amounts in thousands):

 
  Three Months Ended
March 31,
 
 
  2010   2009  

Stock-based compensation expense capitalized to inventory

  $ 3,802   $ 3,412  

        We amortize stock-based compensation expense capitalized to inventory based on inventory turns.

At March 31, 2010, there was $209.5 million of pre-tax stock-based compensation expense, net of estimated forfeitures, related to unvested awards not yet recognized which is expected to be recognized over a weighted average period of 1.6 years.

12. Commitments and Contingencies

Pending FDA Consent Decree

        In March 2010, the FDA notified us that it intended to take enforcement action to ensure that products manufactured at our Allston facility are made in compliance with good manufacturing practice, or GMP, regulations. We have received a draft consent decree from the FDA that provides for a potential up-front disgorgement of past profits of $175.0 million, which we have recorded as a charge to SG&A in our consolidated statements of operations for the first quarter of 2010 and as an increase to accrued expenses on our consolidated balance sheet as of March 31, 2010. We recorded this charge during the first quarter of 2010 because it is probable that we will have to pay this amount to the FDA and we can reasonably estimate the amount that will be paid. In addition, if the fill-finish operations at our Allston facility are still operating after deadlines for domestic and exported products, the draft provides for disgorgement of 18.5% of revenues from sales of products manufactured and distributed from our Allston facility after those deadlines. We and the FDA are having discussions regarding appropriate deadlines for moving fill-finish operations, as well as the details of the disgorgement provisions. Finally, if fill-finish operations are moved from our Allston facility but certain remediation

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Notes to Unaudited, Consolidated Financial Statements (Continued)

12. Commitments and Contingencies (Continued)


actions relating to overall GMP compliance are not met by deadlines over the coming years in a remediation plan to be approved by the FDA, the draft provides for payment of $15,000 per day per violation until the compliance milestones are met.

        We expect that the FDA will allow us to continue to ship our Cerezyme, Fabrazyme and Myozyme products that are produced or fill-finished at our Allston facility because the FDA has determined that these products meet the definition of "medical necessity" that would justify continued production of these products at Allston during the enforcement period. The FDA, however, has made a preliminary determination that Thyrogen, which is fill-finished at our Allston facility, does not meet the FDA's definition and may require us to cease fill-finishing the product at Allston when we enter into the consent decree. We are actively negotiating with the FDA the terms of the consent decree and presenting our view that there is also patient need for uninterrupted supply of Thyrogen. We expect that the negotiations will be completed during the second quarter of 2010.

Legal Proceedings

Federal Securities Litigation

        In July 2009 and August 2009, two purported securities class action lawsuits were filed in the U.S. District Court for the District of Massachusetts against us and our President and Chief Executive Officer. The lawsuits were filed on behalf of those who purchased our common stock during the period from June 26, 2008 through July 21, 2009 and allege violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Each of the lawsuits is premised upon allegations that we made materially false and misleading statements and omissions by failing to disclose instances of viral contamination at two of our manufacturing facilities and our receipt of a list of inspection observations from the FDA related to one of the facilities, which detailed observations of practices that the FDA considered to be deviations from GMP. The plaintiffs seek unspecified damages and reimbursement of costs, including attorneys' and experts' fees. In November 2009, the lawsuits were consolidated in In Re Genzyme Corp. Securities Litigation and a lead plaintiff was appointed. In March 2010, the plaintiffs filed a consolidated amended complaint that extended the class period from October 24, 2007 through November 13, 2009. We intend to defend this lawsuit vigorously.

Shareholder Demand Letters

        Since August 2009, we have received nine letters from shareholders demanding that our board of directors take action on behalf of Genzyme Corporation to remedy alleged breaches of fiduciary duty by our directors and certain executive officers. The demand letters are primarily premised on allegations regarding our disclosures to shareholders with respect to manufacturing issues and compliance with GMP and our processes and decisions related to manufacturing at our Allston facility. Several of the letters also assert that certain of our executive officers and directors took advantage of their knowledge of material non-public information about Genzyme to illegally sell stock they personally held in Genzyme. Our board of directors has designated a special committee of three independent directors to oversee the investigation of the allegations made in the demand letters and to recommend to the independent directors of the board whether any action should be instituted on behalf of Genzyme Corporation against any officer or director. The committee has retained independent legal counsel. If the independent members of our board of directors were to make a

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Notes to Unaudited, Consolidated Financial Statements (Continued)

12. Commitments and Contingencies (Continued)


determination that it was in our best interest to institute an action against any officers or directors, any monetary recovery would be to the benefit of Genzyme Corporation. The special committee's investigation is ongoing.

Shareholder Derivative Actions

        In December 2009, two actions were filed by shareholders derivatively for Genzyme's benefit in the U.S. District Court for the District of Massachusetts against our board of directors and certain of our executive officers after a ninety day period following their respective demand letters had elapsed (the "District Court Actions"). In January 2010, a derivative action was filed in Massachusetts Superior Court (Middlesex County) by a shareholder who has not issued a demand letter and in February and March 2010, two additional derivative actions were filed in Massachusetts Superior Court (Suffolk County and Middlesex County, respectively) by two separate shareholders after the lapse of a ninety day period following the shareholders' respective demand letters (collectively, the "State Court Actions").

        The derivative actions in general are based on allegations that our board of directors and certain executive officers breached their fiduciary duties by causing Genzyme to make purportedly false and misleading or inadequate disclosures of information regarding manufacturing issues, compliance with GMP, ability to meet product demand, expected revenue growth, and approval of Lumizyme. The actions also allege that certain of our directors and executive officers took advantage of their knowledge of material non-public information about Genzyme to illegally sell stock they personally held in Genzyme. The plaintiffs generally seek, among other things, judgment in favor of Genzyme for the amount of damages sustained by Genzyme as a result of the alleged breaches of fiduciary duty, disgorgement to Genzyme of proceeds that certain of our directors and executive officers received from sales of Genzyme stock and all proceeds derived from their service as directors or executives of Genzyme, and reimbursement of plaintiffs' costs, including attorneys' and experts' fees. The District Court Actions have been consolidated in In Re Genzyme Derivative Litigation and the plaintiffs have agreed to a joint stipulation staying these cases until our board of directors has had sufficient time to exercise its duties and complete an appropriate investigation, which is ongoing. In the State Court Actions, the parties are working to consolidate all three lawsuits. We intend to defend these lawsuits vigorously.

Fabrazyme Patent Litigation

        In October 2009, Shelbyzyme LLC filed a complaint against us in the U.S. District Court for the District of Delaware alleging infringement of U.S. patent 7,011,831 by "making, using, selling and promoting a method for the treatment of" Fabry disease. The '831 patent, which is directed to a method for treating Fabry disease, was issued in March 2006 and expired in March 2009. The plaintiffs seek damages for past infringement, including treble damages for alleged willful infringement and reimbursement of costs, including attorney's fees. We intend to defend this lawsuit vigorously.

Other Matters

        We are party to a legal action brought by Kayat pending before the District Court in Nicosia, Cyprus. Kayat alleges that we breached a 1996 distribution agreement under which we granted Kayat the right to distribute melatonin tablets in the Ukraine, primarily by not providing products or by

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Notes to Unaudited, Consolidated Financial Statements (Continued)

12. Commitments and Contingencies (Continued)


providing non-conforming products. Kayat further claims that due to the alleged breach, it suffered lost profits that Kayat claims it would have received under agreements it alleges it had entered into with subdistributors. Kayat also alleges common law fraud and violations of Mass. Gen. L. c. 93A and the Racketeer Influenced and Corrupt Organizations Act. Kayat filed its suit on August 8, 2002 and a trial began in Cyprus in December 2009. Kayat seeks damages for its legal claims and for expenses it claims it has incurred, including legal fees and advertising, promotion and other out-of-pocket expenses. We believe we acted appropriately in all regards, including properly terminating the agreement when we decided to exit the melatonin business, and we intend to defend this lawsuit vigorously.

        We are not able to predict the outcome of the lawsuits and matters described above or estimate the amount or range of any possible loss we might incur if we do not prevail in final, non-appealable determination of these matters. Therefore, we have not accrued any amounts in connection with the lawsuits and matters described above.

        Through June 30, 2003, we had three outstanding series of common stock, which we referred to as tracking stocks: Genzyme General Stock (which we now refer to as Genzyme Stock); Biosurgery Stock; and Molecular Oncology Stock. On August 6, 2007, we reached an agreement in principle to settle for $64.0 million the lawsuits related to our 2003 exchange of Genzyme Stock for Biosurgery Stock. We recorded a liability for the settlement payment of $64.0 million as a charge to SG&A in our consolidated statements of operations for the three months ended June 30, 2007. We paid the settlement in August 2007. The court approved the settlement in October 2007. We have submitted claims to our insurers for reimbursement of portions of the expenses incurred in connection with these cases; the insurers have denied coverage, and therefore, we have not recorded a receivable for any potential recovery from our insurers. In our lawsuit against our primary insurer, the court granted the insurer's motion to dismiss the suit in October 2009. We have appealed this judgment.

        We also are subject to other legal proceedings and claims arising in connection with our business. Although we cannot predict the outcome of these proceedings and claims, we do not believe the ultimate resolution of any of these existing matters would have a material adverse effect on our consolidated financial position or results of operations.

13. Benefit from (Provision for) Income Taxes

 
  Three Months Ended
March 31,
 
 
  2010   2009  
 
  (Amounts in thousands)
 

Benefit from (provision for) income taxes

  $ 61,799   $ (78,884 )

Effective tax rate

    35 %   29 %

        Our effective tax rate for both periods presented varies from the U.S. statutory tax rate as a result of:

    income and expenses taxed at rates other than the U.S. statutory tax rate;

    our provision for state income taxes;

    domestic manufacturing benefits;

    benefits related to tax credits;

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

13. Benefit from (Provision for) Income Taxes (Continued)

    tax benefits in the amount of $15.2 million as a result of the resolution of tax examinations in major tax jurisdictions;

    tax expenses in the amount of $10.7 million resulting from the remeasurement of the deferred tax assets related to our acquisition from Bayer in 2009 for the three months ended March 31, 2010; and

    non-deductible stock-based compensation expenses totaling $11.9 million for the three months ended March 31, 2010, as compared to $9.7 million for the three months ended March 31, 2009.

        We are currently under audit by various states and foreign jurisdictions for various years. We believe that we have provided sufficiently for all audit exposures. Settlement of these audits or the expiration of the statute of limitations on the assessment of income taxes for any tax year will likely result in a reduction of future tax provisions. Any such benefit would be recorded upon final resolution of the audit or expiration of the applicable statute of limitations.

14. Segment Information

        We present segment information in a manner consistent with the method we use to report this information to our management. Effective January 1, 2010, based on changes in how we review our business, we re-allocated certain of our business units amongst our segments and adopted new names for certain of our reporting segments. Under the new reporting structure, we are organized into five reporting segments as described above in Note 1., "Description of Business," to these consolidated financial statements. We have revised our 2009 segment disclosures to conform to our 2010 presentation.

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

 
  Three Months Ended March 31,  
 
  2010   2009  

Revenues:

             
 

Personalized Genetic Health(1)

  $ 392,504   $ 549,960  
 

Renal and Endocrinology

    252,423     242,468  
 

Biosurgery

    137,366     119,522  
 

Hematology and Oncology(2)

    156,310     88,573  
 

Multiple Sclerosis(2)

        7,291  
 

Other

    135,859     140,603  
 

Corporate

    11     454  
           
   

Total

  $ 1,074,473   $ 1,148,871  
           

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

14. Segment Information (Continued)

 

Income (loss) before income taxes:

             
 

Personalized Genetic Health(1,3)

  $ (27,024 ) $ 351,795  
 

Renal and Endocrinology

    114,542     106,062  
 

Biosurgery

    28,993     28,332  
 

Hematology and Oncology(2)

    8,388     (2,985 )
 

Multiple Sclerosis(2)

    (89,925 )   (16,445 )
 

Other(4)

    4,228     (4,798 )
 

Corporate(5)

    (215,949 )   (187,591 )
           
   

Total

  $ (176,747 ) $ 274,370  
           

(1)
Includes the impact of supply constraints for Cerezyme and Fabrazyme.

(2)
On May 29, 2009, we acquired the worldwide rights to the oncology products Campath, Fludara and Leukine and alemtuzumab for MS from Bayer. As of that date, we ceased recognizing research and development revenue for Bayer's reimbursement of a portion of the development costs for alemtuzumab for MS. The fair value of the research and development costs for alemtuzumab for MS that will be reimbursed by Bayer is accounted for as an offset to the contingent consideration obligations for alemtuzumab for MS.

Includes contingent consideration expense of $21.4 million for our Hematology and Oncology reporting segment and $41.1 million for our Multiple Sclerosis reporting segment for the three months ended March 31, 2010 for which there were no comparable amounts for the same period of 2009.

(3)
Includes a charge of $175.0 million recorded to SG&A for the three months ended March 31, 2010 for the potential up-front disgorgement of past profits provided for in the draft consent decree we received from the FDA. We recorded this charge because it is probable that we will have to pay this amount to the FDA and we can reasonably estimate the amount that will be paid.

(4)
Includes a charge of $18.2 million recorded to research and development expense in our consolidated statements of operations for the three months ended March 31, 2009, for intellectual property we acquired from EXACT Sciences in January 2009.

(5)
Loss before income taxes for Corporate includes our corporate, general and administrative and corporate science activities, all of our stock-based compensation expenses, as well as net gains on our investments in equity securities, investment income, interest expense and other income and expense items that we do not specifically allocate to a particular reporting segment.

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

14. Segment Information (Continued)

Segment Assets

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

 
  March 31, 2010   December 31, 2009  

Segment Assets(1):

             
 

Personalized Genetic Health(2)

  $ 1,356,806   $ 1,525,602  
 

Renal and Endocrinology

    1,230,601     1,283,731  
 

Biosurgery

    482,487     509,064  
 

Hematology and Oncology

    1,388,832     1,406,684  
 

Multiple Sclerosis

    951,327     956,448  
 

Other

    460,917     462,978  
 

Corporate(3)

    3,983,825     3,916,217  
           
   

Total

  $ 9,854,795   $ 10,060,724  
           

(1)
Assets for our five reporting segments and Other include primarily accounts receivable, inventory and certain fixed and intangible assets, including goodwill.

(2)
For the year ended December 31, 2009, includes a gross technology intangible asset of $240.3 million and related accumulated amortization of $(24.0) million related to our consolidation of the results of BioMarin/Genzyme LLC. Effective January 1, 2010, under new guidance we adopted for consolidating variable interest entities, we no longer consolidate the results of this joint venture and no longer include this gross technology asset and the related accumulated amortization or a related other noncurrent liability in our consolidated balance sheet.

(3)
Includes the assets related to our corporate, general and administrative operations, and corporate science activities that we do not allocate to a particular segment. Segment assets for Corporate consist of the following (amounts in thousands):

 
  March 31, 2010   December 31, 2009  

Cash, cash equivalents, short- and long-term investments in debt securities

  $ 961,699   $ 1,049,700  

Deferred tax assets, net

    582,688     555,242  

Property, plant & equipment, net

    1,813,697     1,787,054  

Investments in equity securities

    79,881     74,438  

Other

    545,860     449,783  
           
 

Total

  $ 3,983,825   $ 3,916,217  
           

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

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

        Note: All references to increases or decreases for the three months ended March 31, 2010 are as compared to the three months ended March 31, 2009.

INTRODUCTION

        We are a global biotechnology company dedicated to making a major impact on the lives of people with serious diseases. Our products and services are focused on rare inherited disorders, kidney disease, orthopaedics, cancer, transplant and immune disease, and diagnostic testing. Our commitment to innovation continues today with a substantial development program focused on these fields, as well as cardiovascular disease, neurodegenerative diseases, and other areas of unmet medical need.

        We are organized into five financial reporting units, which we also consider to be our reporting segments:

    Personalized Genetic Health, which develops, manufactures and distributes therapeutic products with a focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as LSDs, and cardiovascular disease. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme, Myozyme, Aldurazyme and Elaprase and royalties earned on sales of Welchol;

    Renal and Endocrinology, which develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure, and endocrine and immune-mediated diseases. The unit derives substantially all of its revenue from sales of Renagel/Renvela (including sales of bulk sevelamer), Hectorol and Thyrogen;

    Biosurgery, which develops, manufactures and distributes biotherapeutics and biomaterial-based products, with an emphasis on products that meet medical needs in the orthopaedics and broader surgical areas. The unit derives substantially all of its revenue from sales of Synvisc/Synvisc-One and the Sepra line of products;

    Hematology and Oncology, which develops, manufactures and distributes products for the treatment of cancer, the mobilization of hematopoietic stem cells and the treatment of transplant rejection and other hematologic and auto-immune disorders. The unit derives substantially all of its revenue from sales of Mozobil, Thymoglobulin, Clolar, Campath, Fludara and Leukine; and

    Multiple Sclerosis, which is developing a product for the treatment of MS.

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        Effective January 1, 2010, based on changes in how we review our business, we re-allocated certain of our business units among our segments and adopted new names for certain of our reporting segments. Specifically:

    our former Genetic Diseases reporting segment is now referred to as "Personalized Genetic Health," or "PGH," and now includes our cardiovascular business unit, which previously was reported under the caption "Cardiometabolic and Renal," and our Welchol product line, which previously was reported as part of our bulk pharmaceuticals business unit under the caption "Other;"

    our former Cardiometabolic and Renal reporting segment is now referred to as "Renal and Endocrinology" and now includes our immune-mediated diseases business unit, which previously was reported under the caption "Other," but no longer includes our cardiovascular business unit; and

    our former Hematologic Oncology segment is now referred to "Hematology and Oncology" and now includes our transplant business unit, which previously was reported under the caption "Other," but no longer includes our multiple sclerosis business unit, which is now reported as a separate reporting segment called "Multiple Sclerosis."

        We report the activities of the following business units under the caption "Other": our genetic testing business unit, which provides testing services for the oncology, prenatal and reproductive markets; and our diagnostic products and pharmaceutical intermediates business units. These operating segments did not meet the quantitative threshold for separate segment reporting.

        We report our corporate, general and administrative operations and corporate science activities under the caption "Corporate."

        We have revised our 2009 segment disclosures to conform to our 2010 presentation.

        On May 6, 2010, we announced that we plan to pursue strategic alternatives for our genetic testing, diagnostic products and pharmaceutical intermediates business units. Options could include divestiture, spin-out or management buy-out. In 2009, our genetic testing business unit had revenue of approximately $371 million and revenue for our diagnostic products business unit was approximately $167 million. We expect these transactions to be completed in 2010.

STRATEGIC TRANSACTIONS

Acquisition from Bayer

        On May 29, 2009, we completed a transaction with Bayer to:

    exclusively license worldwide rights to commercialize alemtuzumab for MS;

    exclusively license worldwide rights to alemtuzumab for B-cell chronic lymphocytic leukemia, or B-CLL, and all other indications, except for solid organ transplant (we refer to alemtuzumab for oncology indications as Campath);

    exclusively license Bayer's worldwide rights to the oncology products Fludara and Leukine; and

    acquire a new Leukine manufacturing facility located in Lynnwood, Washington, contingent upon the facility receiving FDA approval, which is expected in late 2011.

        Prior to this transaction, we shared with Bayer the development and certain commercial rights to alemtuzumab for MS and Campath and received two-thirds of Campath net profits on U.S. sales and a royalty on foreign sales. Under our new arrangement with Bayer, prior to regulatory approval of alemtuzumab for MS, we have primary responsibility for the product's development while Bayer continues to fund development at the levels specified under the previous agreement and participates in

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a development steering committee. We have worldwide commercialization rights, with Bayer retaining an option to co-promote alemtuzumab for MS. In exchange for the above, Bayer is eligible to receive contingent purchase price payments based on revenues from sales of the products and achievement of sales-based milestones. We will also pay Bayer to acquire the Leukine manufacturing facility following its FDA approval. The terms of these contingent purchase price payments are described in more detail in our 2009 Form 10-K. These contingent purchase price payments could amount to over $2.9 billion in total and extend, in certain circumstances, over more than ten years.

        The transaction was accounted for as a business combination and is included in our results of operations beginning on May 29, 2009, the date of acquisition. The results for Campath, Fludara and Leukine are included in our Hematology and Oncology reporting segment and the results for alemtuzumab for MS are included in our Multiple Sclerosis reporting segment. The fair value of the total consideration for this transaction was $1.01 billion, consisting of $42.4 million of cash payments net of refundable cash deposits, and $964.1 million of contingent consideration obligations. We allocated the purchase price to the identifiable assets acquired in this transaction based on their estimated fair values as of the date of acquisition, of which $136.4 million was allocated to inventory and $894.3 million was allocated to intangible assets. We recognized a gain on acquisition of business of $24.2 million in our consolidated statements of operations for the second quarter of 2009 representing the amount by which the fair value of the acquired assets of $1.03 billion exceeded the fair value of the purchase price of $1.01 billion.

        Each period we revalue the contingent consideration obligations to their then fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction of contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability adjustments with respect to regulatory approval of alemtuzumab for MS.

        As of December 31, 2009, the fair value of the total contingent consideration obligations was $1.02 billion. During the three months ended March 31, 2010:

    we paid $31.6 million of cash for contingent consideration payments to Bayer; and

    foreign currency exchange rate fluctuations favorably impacted the contingent consideration obligations resulting in a reduction of $12.5 million.

As of March 31, 2010, the fair value of the total contingent consideration obligations increased to $1.03 billion primarily due to changes in the assumed timing and amount of revenue and expense estimates. Accordingly, we recorded a total of $62.5 million of contingent consideration expense, of which $35.5 million is related to changes in estimates, in our consolidated statements of operations for the three months ended March 31, 2010 to reflect the increase in fair value, including $21.4 million for our Hematology and Oncology reporting segment and $41.1 million for our Multiple Sclerosis reporting segment. In April 2010, we received $7.6 million of funding from Bayer for the development of alemtuzumab for MS.

Purchase of Intellectual Property from EXACT Sciences Corporation

        On January 27, 2009, we purchased certain intellectual property in the fields of prenatal testing and reproductive health from EXACT Sciences for our genetics business unit and 3,000,000 shares of EXACT Sciences common stock. We paid EXACT Sciences total cash consideration of $22.7 million at that time. Of this amount, we allocated $4.5 million to the acquired shares of EXACT Sciences common stock based on the fair value of the stock on the date of acquisition, which we recorded as an increase to investments in equity securities in our consolidated balance sheet as of March 31, 2009. As the purchased assets did not qualify as a business combination and have not reached technological

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feasibility nor have alternative future use, we allocated the remaining $18.2 million to the acquired intellectual property, which we recorded as a charge to research and development expenses in our consolidated statements of operations in March 2009. Additional amounts we paid during the first quarter of 2010 and amounts we will pay in the future to EXACT Sciences under this agreement are not significant.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

        Our critical accounting policies and significant judgments and estimates are set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates" in Part II., Item 7. to our 2009 Form 10-K. Excluding the addition of our policy for PSUs to our stock-based compensation policy, there have been no significant changes to our critical accounting policies or significant judgments and estimates since December 31, 2009. Additional information regarding our provisions and estimates for our product sales allowances, sales allowance reserves and accruals, and distributor fees and our revised stock-based compensation policy are included below.

Revenue Recognition

Product Sales Allowances

        Sales of many biotechnology products in the United States are subject to increased pricing pressure from managed care groups, institutions, government agencies and other groups seeking discounts. We and other biotechnology companies in the U.S. market are also required to provide statutorily defined rebates and discounts to various U.S. government agencies in order to participate in the Medicaid program and other government-funded programs. In most international markets, we operate in an environment where governments may and have mandated cost-containment programs, placed restrictions on physician prescription levels and patient reimbursements, emphasized greater use of generic drugs and enacted across-the-board price cuts as methods to control costs. In some cases, we have estimated the potential impact of these allowances. The sensitivity of our estimates can vary by program, type of customer and geographic location. Estimates associated with Medicaid and other government allowances may become subject to adjustment in a subsequent period.

        We record product sales net of the following significant categories of product sales allowances:

    Contractual adjustments—We offer chargebacks and contractual discounts and rebates, which we collectively refer to as contractual adjustments, to certain private institutions and various government agencies in both the United States and international markets. We record chargebacks and contractual discounts as allowances against accounts receivable in our consolidated balance sheets. We account for rebates by establishing an accrual for the amounts payable by us to these agencies and institutions, which is included in accrued liabilities in our consolidated balance sheets. We estimate the allowances and accruals for our contractual adjustments based on historical experience and current contract prices, using both internal data as well as information obtained from external sources, such as independent market research agencies and data from wholesalers. We continually monitor the adequacy of these estimates and adjust the allowances and accruals periodically throughout each quarter to reflect our actual experience. In evaluating these allowances and accruals, we consider several factors, including significant changes in the sales performance of our products subject to contractual adjustments, inventory in the distribution channel, changes in U.S. and foreign healthcare legislation impacting rebate or allowance rates, changes in contractual discount rates and the estimated lag time between a sale and payment of the corresponding rebate;

    Discounts—In some countries, we offer cash discounts for certain products as an incentive for prompt payment, which are generally a stated percentage off the sales price. We account for

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      cash discounts by reducing accounts receivable by the full amounts of the discounts. We consider payment performance and adjust the accrual to reflect actual experience; and

    Sales returns—We record allowances for product returns at the time product sales are recorded. The product returns reserve is estimated based on the returns policies for our individual products and our experience of returns for each of our products. We also consider the product's lifecycle and possible competition pending, including generic products. If the price of a product changes or if the history of product returns changes, the reserve is adjusted accordingly. We determine our estimates of the sales return accrual for new products primarily based on the historical sales returns experience of similar products, or those within the same or similar therapeutic category.

        Our provisions for product sales allowances reduced gross product sales as follows (amounts in thousands):

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  

Product sales allowances:

                         
 

Contractual adjustments

  $ 180,296   $ 136,180   $ 44,116     32 %
 

Discounts

    6,630     6,275     355     6 %
 

Sales returns

    7,809     6,523     1,286     20 %
                     
   

Total product sales allowances

  $ 194,735   $ 148,978   $ 45,757     31 %
                     

Total gross product sales

  $ 1,166,360   $ 1,186,222   $ (19,862 )   (2 )%
                     

Total product sales allowances as a percent of total gross product sales

    17 %   13 %            

        Total product sales allowances increased for the three months ended March 31, 2010, primarily due to:

    $28.3 million for our Renal and Endocrinology reporting segment and $11.4 million for our Biosurgery reporting segment of increased contractual adjustments;

    the addition of $14.4 million of product sales allowances related to sales of Campath, Fludara and Leukine, which we acquired from Bayer in May 2009; and

    changes in our overall product mix.

        These increases were offset, in part, by a $11.2 million decrease in the aggregate product sales allowances for Cerezyme and Fabrazyme as a result of supply constraints. Total product sales allowances as a percentage of total gross product sales increased for the three months ended March 31, 2010, primarily due to decreased sales volumes for Cerezyme and Fabrazyme as a result of the supply constraints for which there was not a proportionate decrease in product sales allowances because these products generally have lower sales allowances.

        Total estimated product sales allowance reserves and accruals in our consolidated balance sheets increased approximately 9% to approximately $257 million as of March 31, 2010, as compared to approximately $236 million as of December 31, 2009, primarily due to increased contractual adjustments for or Renal and Endocrinology reporting segment and changes in the timing of certain payments. Our actual results have not differed materially from amounts recorded. The annual variation has been less than 0.5% of total product sales for the last three years.

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Accounts Receivable Related to Sales in Greece

        Total accounts receivable in our consolidated balance sheets as of March 31, 2010 and December 31, 2009 include sales to government-owned or supported healthcare facilities in Greece. These sales are subject to significant payment delays due to government funding and reimbursement practices. We believe that this is an industry-wide issue for suppliers to these facilities. The outstanding accounts receivable balances, net of reserves, held by our subsidiary in Greece related to such sales were approximately $57 million as of both March 31, 2010 and December 31, 2009. If significant changes occur in the availability of government funding, we may not be able to collect on amounts due from these customers. We do not expect this concentration of credit risk to have a material adverse impact on our financial position or liquidity.

Healthcare Reform Legislation

        In March 2010, healthcare reform legislation was enacted in the United States. Although many provisions of the new legislation do not take effect immediately, several provisions became effective in the first quarter of 2010. These include:

    an increase in the minimum Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1% on our branded prescription drugs and an increase of 17.1% for our drugs that are approved exclusively for pediatric patients;

    the extension of the Medicaid rebate to managed care organizations that dispense drugs to Medicaid beneficiaries;

    the expansion of the 340(B) PHS drug pricing program, which provides outpatient drugs at reduced rates, to include additional hospitals and healthcare centers (this provision, however, does not apply to orphan drugs); and

    a requirement that the Medicaid rebate for a drug that is a "line extension" of a preexisting oral solid dosage form of the drug be linked in certain respects to the Medicaid rebate for the preexisting oral solid dosage form, such that the Medicaid rebate for most line extension drugs will be higher than it would have been absent the new law, especially if the preexisting oral solid dosage form has a history of significant price increases.

These provisions did not have a significant impact on our results of operations or financial position for the first quarter of 2010.

        Effective October 1, 2010, the new legislation re-defines the Medicaid AMP such that the AMP and, consequently, the Medicaid rebate are expected to increase for some of our drugs, in particular those that offer discounted pricing to customers.

        Beginning in 2011, the new law requires drug manufacturers to provide a 50% discount to Medicare beneficiaries whose prescription drug costs cause them to be subject to the Medicare Part D coverage gap, which is known as the "donut hole". Also beginning in 2011, clinical laboratory fee schedule payments will be reduced 1.75% over a period of five years and we will be required to pay our share of a new fee assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based upon each organization's percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare and Medicaid and VA, DOD and TriCare retail pharmacy discount programs) made during the previous year. Sales of orphan drugs, however, are not included in the fee calculation. Final guidance relating to how we will be required to account for this fee is still pending, however, it is expected that the fee will be classified as either a reduction of net sales or an operating expense. The aggregated industry wide fee is expected to total approximately $28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. Beginning in 2013, a 2.3%

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excise tax will be imposed on sales of all medical devices except retail purchases by the public intended for individual use.

        Presently, uncertainty exists as many of the specific determinations necessary to implement this new legislation have yet to be decided and communicated to industry participants. We have made several estimates with regard to important assumptions relevant to determining the financial impact of this legislation on our business due to the lack of availability of both certain information and complete understanding of how the process of applying the legislation will be implemented. Although we are still assessing the full extent that the U.S. healthcare reform legislation may have on our business, we currently estimate that our revenues in the United States will be adversely impacted by less than approximately $20 million in 2010, with most of the impact occurring in the third and fourth quarters, and by approximately $30 million to $40 million in 2011.

        We expect that the United States Congress and state legislatures will continue to review and assess healthcare proposals, and public debate of these issues will likely continue. We cannot predict which, if any, of such reform proposals will be adopted and when they might be adopted. In addition, we anticipate seeing continued efforts to reduce healthcare costs in many other countries outside the United States. For example, in May 2010, the Greek health ministry imposed a flat mandatory discount of 27% on medicinal products above a certain price level. This discount, however, does not apply to our orphan drugs or Thymoglobulin. The Greek health ministry has stated that this newly imposed pricing is temporary and in two months the ministry will issue new pricing for most medicinal products based on the average of the three lowest prices in the European Union, and at that time, also determine the pricing for orphan products. As another example, the German government is expected to implement measures during the second half of 2010 that, among other things, increase mandatory discounts and impose a three-year price freeze on pharmaceutical prices, based on August 2009 pricing. We expect that our revenues would be negatively impacted if these or similar measures are implemented or maintained.

Distributor Fees

        Cash consideration (including a sales incentive) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor's products or services and, therefore, is appropriately characterized as a reduction in revenue. We include such fees in contractual adjustments, which are recorded as a reduction to product sales. That presumption is overcome and the consideration should be characterized as a cost incurred if, and to the extent that, both of the following conditions are met:

    the vendor receives, or will receive, an identifiable benefit (goods or services) in exchange for the consideration; and

    the vendor can reasonably estimate the fair value of the benefit received.

        We record service fees paid to our distributors as a charge to SG&A, a component of operating expenses, only if the criteria set forth above are met. The following table sets forth the distributor fees recorded as a reduction to product sales and charged to SG&A (amounts in thousands):

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  

Distributor fees:

                         
 

Included in contractual adjustments and recorded as a reduction to product sales

  $ 6,060   $ 4,247   $ 1,813     43 %
 

Charged to SG&A

    3,346     3,547     (201 )   (6 )%
                     
   

Total distributor fees

  $ 9,406   $ 7,794   $ 1,612     21 %
                     

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Stock-Based Compensation

        We use the Black-Scholes model to value both service condition and performance condition option awards. For awards with only service conditions and graded-vesting features, we recognize compensation cost on a straight-line basis over the requisite service period. For awards with performance conditions, we recognize stock-based compensation expense based on the graded-vesting method. Determining the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatility, forfeiture rates, and expected terms. The expected volatility rates are estimated based on historical and implied volatilities of our common stock. The expected term represents the average time that options that vest are expected to be outstanding based on the vesting provisions and our historical exercise, cancellation and expiration patterns. We estimate pre-vesting forfeitures when recognizing stock-based compensation expense based on historical rates and forward-looking factors. We update these assumptions at least on an annual basis and on an interim basis if significant changes to the assumptions are warranted.

        We issue PSUs to our senior executives, which vest upon the achievement of certain financial performance goals, including cash flow return on investment and R-TSR. The fair value of PSUs subject to the cash flow return on investment performance metric, which includes both performance and service conditions, is based on the market value of our stock on the date of grant. We use a lattice model with a Monte Carlo simulation to value PSUs subject to the R-TSR performance metric, which is a market condition. We recognize compensation cost for our PSUs on a straight-lined basis over the requisite performance period. Determining the appropriate amount to expense based on the anticipated achievement of the stated goals requires judgment, including forecasting future financial results. The estimate of expense is revised periodically based on the probability of achieving the required performance targets and adjustments are made as appropriate. The cumulative impact of any revision is reflected in the period of change. In the case of PSUs subject to the R-TSR performance metric, if the financial performance goals are not met, the award does not vest, no compensation cost is recognized and any previously recognized stock-based compensation expense is reversed.

        We review our valuation assumptions periodically and, as a result, we may change our valuation assumptions used to value share-based awards granted in future periods. Such changes may lead to a significant change in the expense we recognize in connection with share-based payments.

RESULTS OF OPERATIONS

        The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements.

REVENUES

        The components of our total revenues are described in the following table (amounts in thousands):

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  

Product revenue

  $ 971,625   $ 1,037,244   $ (65,619 )   (6 )%

Service revenue

    101,915     101,499     416      
                     
 

Total product and service revenue

  $ 1,073,540   $ 1,138,743   $ (65,203 )   (6 )%

Research and development revenue

    933     10,128     (9,195 )   (91 )%
                     
 

Total revenues

  $ 1,074,473   $ 1,148,871   $ (74,398 )   (6 )%
                     

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Product Revenue

        The following table sets forth our products and their related indications:

Reporting Segments   Products   Approved Indications
Personalized Genetic Health   Cerezyme   Gaucher disease

 

 

Fabrazyme

 

Fabry disease

 

 

Myozyme

 

Pompe disease

 

 

Aldurazyme

 

MPS I

 

 

Elaprase

 

MPS II

 

 

Royalties earned on sales of Welchol

 

Reduction of LDL in patients with hypercholesterolemia


Renal and Endocrinology


 


Renagel/Renvela and bulk sevelamer


 


Control of serum phosphorus in patients with chronic kidney disease, or CKD, on dialysis and in Europe in CKD patients both on and not on dialysis with serum phosphorus above a certain level

 

 

Hectorol

 

Secondary hyperparathyroidism in CKD patients

 

 

Thyrogen

 

An adjunctive diagnostic agent used in the follow-up treatment of patients with well-differentiated thyroid cancer and an adjunctive therapy in the ablation of remnant thyroid tissue in patients that have undergone thyroid removal

Biosurgery

 

Synvisc/Synvisc-One

 

Treatment of pain associated with osteoarthritis

 

 

Sepra products

 

Prevention of adhesions following various surgical procedures in the abdomen and pelvis

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Reporting Segments   Products   Approved Indications

Hematology and Oncology

 

Mozobil

 

Mobilization of hematopoietic stem cells

 

 

Thymoglobulin

 

Immunosuppression of certain types of cells responsible for organ rejection in transplant patients and treatment of aplastic anemia

 

 

Clolar

 

Acute leukemia

 

 

Campath

 

Leukemia

 

 

Fludara

 

Leukemia and lymphoma

 

 

Leukine

 

Reduction of the incidence of severe and life-threatening infections in older adult patients with AML following chemotherapy and certain other uses


Other


 


Diagnostic products


 


Infectious disease and cholesterol testing products

 

 

Pharmaceutical intermediates products

 

Pharmaceutical intermediates

        The following table sets forth our product revenue on a reporting segment basis (amounts in thousands):

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  

Personalized Genetic Health

  $ 392,484   $ 549,923   $ (157,439 )   (29 )%

Renal and Endocrinology

    252,257     242,455     9,802     4 %

Biosurgery

    126,261     109,128     17,133     16 %

Hematology and Oncology

    156,291     86,644     69,647     80 %

Other product revenue

    44,332     49,094     (4,762 )   (10 )%
                     
 

Total product revenue

  $ 971,625   $ 1,037,244   $ (65,619 )   (6 )%
                     

Personalized Genetic Health

Regulatory and Manufacturing

        In March 2010, the FDA notified us that it intended to take enforcement action to ensure that products manufactured at our Allston facility are made in compliance with GMP regulations. We have received a draft consent decree from the FDA that provides for an up-front disgorgement of past profits of $175.0 million, which we have recorded as a charge to SG&A in our consolidated statements of operations for the first quarter of 2010 and as an increase to accrued expenses in our consolidated balance sheets as of March 31, 2010. In addition, if the fill-finish operations at our Allston facility is still operating after deadlines for domestic and exported products, the draft provides for disgorgement of 18.5% of revenues from sales of products manufactured and distributed from our Allston facility after those deadlines. We and the FDA are having discussions regarding appropriate deadlines for moving fill-finish operations, as well as the details of the disgorgement provisions. Finally, if fill-finish operations are moved from our Allston facility but certain remediation actions relating to overall GMP compliance are not met by deadlines over the coming years in a remediation plan to be approved by

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the FDA, the draft provides for payment of $15,000 per day per violation until the compliance milestones are met.

        We expect that the FDA will allow us to continue to ship our Cerezyme, Fabrazyme and Myozyme products that are produced or fill-finished at our Allston facility because the FDA has determined that these products meet the definition of "medical necessity" that would justify continued production of these products at Allston during the enforcement period. The FDA, however, has made a preliminary determination that Thyrogen, which is fill-finished at our Allston facility, does not meet the FDA's definition and may require us to cease fill-finishing the product at Allston when we enter into the consent decree. We are actively negotiating with the FDA the terms of the consent decree and presenting our view that there is also patient need for uninterrupted supply of Thyrogen. We expect that the negotiations will be completed during the second quarter of 2010.

        In June 2009, we interrupted production of Cerezyme and Fabrazyme at our Allston facility after identifying a virus, Vesivirus 2117, in a bioreactor used for Cerezyme production. The virus we identified impairs the viability of cells used in the manufacturing process and is not known to cause infection in humans. We completed sanitization of the facility and resumed production there in the third quarter of 2009. Cerezyme and Fabrazyme inventories were not sufficient to avoid shortages.

        We resumed Cerezyme shipments in the fourth quarter of 2009. In order to build a small inventory buffer to help us more consistently manage the resupply of Cerezyme to patients in approximately 100 countries and reduce interruptions in shipping that occur in the absence of inventory, we began shipping 50% of Cerezyme demand at the end of February 2010. Although we achieved our goal of building a small inventory buffer during the first quarter of 2010, we announced in April 2010 that the 50% shipping allocation will be extended due to an interruption in operations at our Allston facility at the end of March 2010. The interruption resulted from an unexpected city electrical power failure that compounded issues with the plant's water system. The issues have been corrected and the facility is operational.

        We resumed shipments of vials of Fabrazyme at the beginning of the first quarter of 2010 and have been shipping Fabrazyme to meet approximately 30% of global demand. We have been working to increase the productivity of the Fabrazyme manufacturing process, which has performed at the low end of the historical range since the re-start of production, and have developed a new working cell bank for Fabrazyme that is in its second run.

        On April 21, 2010, we announced our estimate that we would need to continue the 50% shipping allocation for Cerezyme for two to three months and the 30% shipping allocation for Fabrazyme through the third quarter of 2010. At that time, we also announced that we expect to provide more precise supply updates for Cerezyme and Fabrazyme within a month, once additional information is available about whether we are able to finish approximately $7 million in the aggregate of Cerezyme and Fabrazyme work-in-process material, the majority of which is Cerezyme, that was unfinished when the interruption of operations occurred at our Allston facility, the productivity and timing for regulatory clearance of the new Fabrazyme working cell bank, the impact of the pending consent decree on product release timelines and our assessment for global demand.

        We will continue to work with minimal levels of inventory for Cerezyme and Fabrazyme until our new Framingham manufacturing facility is approved, which is anticipated to take place in late 2011. Any additional manufacturing delays will likely impact supply of these products. We are also working to transition fill-finish operations out of our Allston facility to our Waterford, Ireland plant and to a contract manufacturer. The fill-finish area of the Waterford facility is being expanded to accommodate the long-term growth of our PGH products, and we currently anticipate receiving approval of this new capacity in 2011.

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        We are pursuing FDA approval of alglucosidase alfa produced using a larger bioreactor scale process, which we refer to as Lumizyme in the United States. Since 2008, we had been seeking approval of the product in the United States using a 2000L scale process, but we stopped manufacturing the product at this scale in 2009. In November 2009, we received a complete response letter from the FDA regarding our application to produce at the 2000L scale stating that satisfactory resolution of deficiencies related to our Allston facility were required before the Lumizyme application could be approved. Based on subsequent conversations with the FDA, we decided to seek approval of the product produced at our Geel, Belgium facility using a 4000L scale process, which will also be known as Lumizyme in the United States. We submitted an amendment to the 2000L BLA to the FDA in December 2009, which the FDA has assigned a June 17, 2010 action date under the Prescription Drug User Fee Act, or PDUFA. Production of alglucosidase alfa at the larger 4000L scale is required to fulfill global demand. In Europe, we received approval for the 4000L scale process in February 2009 and, as of the first quarter of 2010, the majority of markets outside of the United States have transitioned to the 4000L scale product. At our Geel, Belgium facility, we are adding a third bioreactor for the production of Myozyme and approval is anticipated in mid-2011.

Personalized Genetic Health Product Revenue

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  
 
  (Amounts in thousands)
   
 

Cerezyme

  $ 179,147   $ 295,970   $ (116,823 )   (39 )%

Fabrazyme

    53,241     122,201     (68,960 )   (56 )%

Myozyme

    86,059     67,392     18,667     28 %

Aldurazyme

    39,897     36,837     3,060     8 %

Other Personalized Genetic Health

    34,140     27,523     6,617     24 %
                     
 

Total Personalized Genetic Health

  $ 392,484   $ 549,923   $ (157,439 )   (29 )%
                     

        PGH product revenue decreased for the three months ended March 31, 2010, primarily due to:

    the temporary suspension of production at our Allston facility in June 2009 during a time of already low levels of inventory for Cerezyme and Fabrazyme, resulting in supply constraints for Cerezyme and Fabrazyme since that time; offset, in part, by:

    favorable exchange rate fluctuations; and

    continued growth in sales volume for Myozyme, Aldurazyme and other PGH products, primarily Elaprase.

Cerezyme and Fabrazyme

        The supply constraint for Cerezyme adversely impacted Cerezyme revenue by $126.5 million for the three months ended March 31, 2010. The strengthening of foreign currencies, primarily the Euro, against the U.S. dollar, positively impacted Cerezyme revenue by $7.4 million for the three months ended March 31, 2010. Our results of operations are dependent on sales of Cerezyme and any reduction in revenue from sales of this product adversely affects our results of operations. Sales of Cerezyme were approximately 17% of our total revenue for the three months ended March 31, 2010, which reflect periods of supply constraint, as compared to approximately 26% for the same period in 2009.

        The supply constraint for Fabrazyme adversely impacted Fabrazyme revenue by $72.6 million for the three months ended March 31, 2010. The strengthening of foreign currencies, primarily the Euro,

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against the U.S. dollar, positively impacted Fabrazyme revenue by $2.1 million for the three months ended March 31, 2010.

        The Cerezyme and Fabrazyme supply constraints resulting from the suspension of production at our Allston facility have created opportunities for our competitors and our future sales may be negatively affected by competitive products that are being developed by Shire Human Genetic Therapies Inc., or Shire, and Protalix Biotherapeutics Ltd., or Protalix. After our products experienced supply constraints, Shire and Protalix were able to offer their developmental therapies for the treatment of Gaucher disease to patients in the United States through an FDA-approved treatment investigational new drug application, or IND, protocol and to patients in the European Union and other countries through pre-approval access programs. Shire submitted a new drug application, or NDA, to the FDA for its therapy in August 2009 and a Market Authorization Application, or MAA, to the European Medicines Agency, or EMA, in November 2009. Shire received marketing approval for its therapy from the FDA in late February 2010 and announced that it will price this therapy at a 15% savings over Cerezyme. Protalix submitted its NDA to the FDA in December 2009. Outside of the United States, Fabrazyme currently competes with Replagal, a product marketed by Shire. The FDA, however, has approved a treatment IND for Replagal and Shire has submitted a biologics license application, or BLA, with the FDA for this product and been granted "fast track" designation.

        We are aware that some Gaucher and Fabry patients have switched to one of our competitors' therapies during the period of supply constraint and there is a risk that they may not switch back to our products, which would result in the loss of additional revenue for us. In April 2010, the EMA advised physicians to consider switching Fabry disease patients from Fabrazyme to Replagal based on its concerns that certain patients were not tolerating reduced dosages of Fabrazyme. We also have encouraged patients to switch to competitors products during the period of supply constraint. These actions may result in additional patients switching to our competitors' therapies. In addition, the institution of treatment guidelines and dose conservation measures during the supply constraint present the risk that physicians and patients will not resume prior treatment or dosage levels after the supply constraint has ended, potentially resulting in further loss of revenue for us.

Myozyme/Lumizyme

        Myozyme revenue increased for the three months ended March 31, 2010 due to increased patient identification outside of the United States following the European approval in February 2009 of the product produced at our Belgium facility using the 4000L scale process. The strengthening of foreign currencies, primarily the Euro, against the U.S. dollar, positively impacted Myozyme revenue by $3.8 million for the three months ended March 31, 2010.

        We have provided alglucosidase alfa free of charge since 2007 under a temporary access program, and in December 2009 we agreed with the FDA to work with the 81 active study sites in the United States to enroll additional patients into this program. We plan to keep open the temporary access program until commercial approval of Lumizyme produced using the 4000L scale process in the United States. We are currently providing therapy free of charge to more than 200 patients in the United States. We have received a June 17, 2010 PDUFA date in connection with our supplemental BLA for Lumizyme produced at the 4000L scale. If the FDA approves Lumizyme, we would expect revenues for the product to increase in 2011.

Aldurazyme

        Aldurazyme revenue increased for the three months ended March 31, 2010 due to increased patient identification worldwide as Aldurazyme was introduced into new markets. The strengthening of foreign currencies, primarily the Euro, against the U.S. dollar, positively impacted Aldurazyme revenue by $1.7 million for the three months ended March 31, 2010.

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Other Personalized Genetic Health

        Other PGH product revenue increased for the three months ended March 31, 2010, primarily due to increased sales of Elaprase attributable to the continued identification of new patients in our territories. The strengthening of foreign currencies, primarily the Euro, against the U.S. dollar, had no significant impact on Other PGH product revenue for the three months ended March 31, 2010.

Renal and Endocrinology

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  
 
  (Amounts in thousands)
   
 

Renagel/Renvela (including sales of bulk sevelamer)

  $ 164,607   $ 170,599   $ (5,992 )   (4 )%

Hectorol

    42,025     33,030     8,995     27 %

Thyrogen

    45,625     38,826     6,799     18 %
                     
 

Total Renal and Endocrinology

  $ 252,257   $ 242,455   $ 9,802     4 %
                     

        Sales of Renagel/Renvela, including sales of bulk sevelamer, decreased for the three months ended March 31, 2010, primarily due to the effect of Renagel pricing in Brazil and the conversion of patients to Renvela in the United States. These effects were offset, in part, by increased end-user demand. In 2009, we decreased the price of Renagel in Brazil in connection with successfully negotiating a government tender in the face of competition from two similar products that had been approved in that country. Total revenue for Renagel/Renvela, including sales of bulk sevelamer, reflects the increasing percentage of Renvela sales within the United States. The strengthening of foreign currencies, primarily the Euro, against the U.S. dollar, positively impacted Renagel revenue by $6.4 million for the three months ended March 31, 2010.

        We manufacture the majority of our supply requirements for sevelamer hydrochloride (the active ingredient in Renagel) and sevelamer carbonate (the active ingredient in Renvela) at our manufacturing facility in Haverhill, England. In December 2009, equipment failure caused an explosion and fire at this facility, which damaged some of the equipment used to produce these active ingredients as well as the building in which the equipment was located. As a result, we have temporarily suspended production of sevelamer hydrochloride and sevelamer carbonate at this facility while repairs are made. We resumed production of sevelamer hydrochloride in May 2010. We anticipate that the facility will resume production of sevelamer carbonate in the fourth quarter of 2010. We believe that we have adequate supply levels to meet the current demand for both Renagel and Renvela and do not anticipate there will be any supply constraints for either product while the facility undergoes repairs. During the first quarter of 2010, we recorded a total of $7.5 million of expenses, net of $3.0 million of insurance reimbursements, to cost of products sold in our consolidated statements of operations for Renagel and Renvela related to the remediation cost of our Haverhill, England manufacturing facility, including repairs and idle capacity expenses.

        Sales of Hectorol increased for the three months ended March 31, 2010, primarily due to price increases in the second and fourth quarters of 2009. Sales of Hectorol also include an increase in sales volume due to the addition of the Hectorol 1mcg capsule formulation in August 2009.

        Renagel/Renvela and Hectorol currently compete with several other marketed products and will have additional competitors in the future. Competitive products, especially if they are lower cost generic or follow-on products, will negatively impact the revenues we recognize from Renagel/Renvela and Hectorol. See "Some of our products may face competition from lower cost generic or follow-on products," under the heading "Risk Factors" below.

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        In addition, our ability to maintain sales of Renagel/Renvela and Hectorol will depend on many other factors, including the availability of coverage and reimbursement under patients' health insurance and prescription drug plans and the ability of health care providers to improve patients' compliance with their prescribed doses. Also, the accuracy of our estimates of fluctuations in the payor mix and our ability to effectively manage wholesaler inventories and the levels of compliance with the inventory management programs we implemented for Renagel/Renvela and Hectorol with our wholesalers could impact the revenue from our Renal and Endocrinology reporting segment that we record from period to period.

        The Medicare Improvements for Patients and Providers Act of 2008, or MIPPA, directs the Centers for Medicare and Medicaid Services, or CMS, to establish a bundled payment system to reimburse dialysis providers treating patients with end stage renal disease, or ESRD. In September 2009, CMS proposed changes to the prospective payment system that would include drugs and biologicals used to treat ESRD in the bundled payment amount for dialysis treatments. The bundled rate is proposed to include drugs and biologicals that are currently reimbursed separately by Medicare, including intravenous Vitamin D analogs and their oral equivalents such as Hectorol, and oral phosphate binders such as Renagel/Renvela. CMS will issue a final rule in 2010 with an anticipated implementation date of January 2011. We are in the process of evaluating the potential impact of the proposed bundling on our business. We cannot predict whether CMS's final rule would include phosphate binders in the bundled payment.

        Sales of Thyrogen increased for the three months ended March 31, 2010, primarily due to worldwide volume growth, driven by an increase in the use of the product in thyroid remnant ablation procedures and a price increase in July 2009. The strengthening of foreign currencies, primarily the Euro, against the U.S. dollar, positively impacted Thyrogen revenue by $1.5 million for the three months ended March 31, 2010. As described above, we are negotiating a consent decree with the FDA with respect to our Allston facility, where Thyrogen is fill-finished. The FDA has made a preliminary determination that Thyrogen does not meet the FDA's definition of "medical necessity" that would justify continued production at Allston during the enforcement period, and may require us to cease fill-finishing the product when we enter into the consent decree. During our negotiations with the FDA, we are presenting our view that there is patient need for uninterrupted supply of Thyrogen. In October 2009, we initiated a process to transfer Thyrogen fill-finish operations to a contract manufacturer. Depending on the timing and terms of the final consent decree and the time required to receive FDA approval for our contract manufacturer, we could experience supply constraints for Thyrogen.

Biosurgery

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  
 
  (Amounts in thousands)
   
 

Synvisc/Synvisc-One

  $ 79,507   $ 63,171   $ 16,336     26 %

Sepra products

    37,177     34,304     2,873     8 %

Other Biosurgery

    9,577     11,653     (2,076 )   (18 )%
                     
 

Total Biosurgery

  $ 126,261   $ 109,128   $ 17,133     16 %
                     

        Biosurgery product revenue increased for the three months ended March 31, 2010, primarily due to increased sales for Synvisc/Synvisc-One due to the addition of Synvisc-One sales in the United States. We received marketing approval for Synvisc-One in the United States in February 2009. The strengthening of foreign currencies, primarily the Euro, against the U.S. dollar, positively impacted Biosurgery revenue by $1.6 million for the three months ended March 31, 2010. Sales of Synvisc/Synvisc-One are subject to seasonality in demand and typically decline in the first quarter.

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Hematology and Oncology

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  
 
  (Amounts in thousands)
   
 

Mozobil

  $ 18,966   $ 10,837   $ 8,129     75 %

Thymoglobulin

    52,910     50,655     2,255     4 %

Clolar

    24,688     18,160     6,528     36 %

Other Hematology and Oncology

    59,727     6,992     52,735     >100 %
                     

    Total Hematology and Oncology

  $ 156,291   $ 86,644   $ 69,647     80 %
                     

        Hematology and Oncology product revenue increased for the three months ended March 31, 2010, primarily due to:

    increased sales of Mozobil due to increased penetration of the product in the United States and the launch of the product in Europe in August 2009;

    increased demand for Clolar globally; and

    the addition of sales of Campath, Fludara and Leukine beginning in the second quarter of 2009 as a result of our acquisition from Bayer.

The strengthening of foreign currencies, primarily the Euro, against the U.S. dollar, positively impacted Hematology and Oncology revenue by $2.2 million for the three months ended March 31, 2010.

Other Product Revenue

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  
 
  (Amounts in thousands)
   
 

Total Other product revenue

  $ 44,332   $ 49,094   $ (4,762 )   (10 )%
                     

        Other product revenue decreased for the three months ended March 31, 2010, primarily due to decreased demand for pharmaceutical intermediates products, offset, in part, by increased demand for diagnostic products.

Service Revenue

        We derive service revenues primarily from the following sources:

    sales of Matrix-induced Autologous Chondrocyte Implantation, or MACI, a proprietary cell therapy product for cartilage repair, in Europe and Australia, Carticel for the treatment of cartilage damage in the United States, and Epicel for the treatment of severe burns, all of which are included in our Biosurgery reporting segment; and

    genetics business unit, which provides reproductive and oncology diagnostic testing services, and is included in Other service revenue.

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        The following table sets forth our service revenue on a segment basis (amounts in thousands):

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  

Personalized Genetic Health

  $ 20   $ 37   $ (17 )   (46 )%

Biosurgery

    10,546     9,832     714     7 %

Hematology and Oncology

        445     (445 )   (100 )%

Other service revenue

    91,349     91,185     164      
                     
 

Total service revenue

  $ 101,915   $ 101,499   $ 416      
                     

        Service revenue was relatively consistent for the three months ended March 31, 2010 as compared to the same period of 2009. The strengthening of foreign currencies, primarily the Euro, against the U.S. dollar, had no significant impact on service revenue for the three months ended March 31, 2010.

International Product and Service Revenue

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

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  

International product and service revenue

  $ 513,459   $ 551,111   $ (37,652 )   (7 )%

% of total product and service revenue

    48 %   48 %            

        International product and service revenue decreased for the three months ended March 31, 2010, primarily due to a decrease in international sales volume for Cerezyme and Fabrazyme for the three months ended March 31, 2010 due to supply constraints.

        This decrease was offset, in part, by:

    growth in the international sales volume of Myozyme, Aldurazyme, Elaprase, Thyrogen, Synvisc, Seprafilm, Thymoglobulin, Clolar and diagnostic products for the three months ended March 31, 2010;

    the addition of international product sales of Campath in the second quarter of 2009 in lieu of and in excess of international royalties formerly earned on sales of Campath prior to our transaction with Bayer;

    the addition of international sales of Fludara and additional sales of Campath in the second quarter of 2009, sales of Renvela for patients with CKD on dialysis and hyperphosphatemic patients not on dialysis in Europe in the second quarter of 2009 and sales of Mozobil in Europe in the third quarter of 2009; and

    the strengthening of foreign currencies, primarily the Euro, against the U.S. dollar, which positively impacted total product and service revenue by $29.9 million for the three months ended March 31, 2010.

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Research and Development Revenue

        The following table sets forth our research and development revenue on a segment basis (amounts in thousands):

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  

Renal and Endocrinology

  $ 166   $ 13   $ 153     >100 %

Biosurgery

    559     562     (3 )   (1 )%

Hematology and Oncology

    19     1,484     (1,465 )   (99 )%

Multiple Sclerosis

        7,291     (7,291 )   (100 )%

Other

    189     282     (93 )   (33 )%

Corporate

        496     (496 )   (100 )%
                     
 

Total research and development revenue

  $ 933   $ 10,128   $ (9,195 )   (91 )%
                     

        Total research and development revenue decreased for the three months ended March 31, 2010, primarily due to a decrease in Multiple Sclerosis research and development revenue as a result of our acquisition from Bayer and termination of the Campath profit share arrangement. As of May 29, 2009, the effective date of our acquisition from Bayer, we ceased recognizing research and development revenue for Bayer's reimbursement of a portion of the development costs for alemtuzumab for MS. The fair value of the research and development costs to be reimbursed by Bayer is accounted for as an offset to the contingent consideration obligations for alemtuzumab for MS.

GROSS PROFIT AND MARGINS

        The components of our total margins are described in the following table (amounts in thousands):

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  

Gross product profit

  $ 691,886   $ 801,682   $ (109,796 )   (14 )%

Product margin

    71 %   77 %            

Gross service profit

  $ 36,043   $ 41,249   $ (5,206 )   (13 )%

Service margin

    35 %   41 %            

Total gross product and service profit

  $ 727,929   $ 842,931   $ (115,002 )   (14 )%

Total product and service margin

    68 %   74 %            

Gross Product Profit and Product Margin

        Our overall gross product profit decreased for the three months ended March 31, 2010, primarily due to:

    decreased sales volume for Cerezyme and Fabrazyme;

    price decreases for Renagel outside of the United States, primarily in Brazil in connection with successfully negotiating a government tender in the face of competition from two similar products that had been approved in that country; and

    charges of $8.7 million for the amortization of inventory step-up of Campath, Fludara and Leukine resulting from our transaction with Bayer in May 2009 for which there are no comparable amounts in the same period of 2009.

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These decreases were offset, in part, by:

    increased sales volumes for Myozyme, Aldurazyme, Elaprase, Hectorol, Thyrogen, Synvisc, Seprafilm and Clolar; and

    the addition of sales of Mozobil in Europe beginning in August 2009 and the addition of sales of Fludara and Leukine and additional sales of Campath beginning in the second quarter of 2009 for which there are no comparable amounts in the first quarter of 2009.

        Our product margin decreased for the three months ended March 31, 2010, primarily due to:

    a shift in product mix to lower margin products attributable to the supply constraints for Cerezyme and Fabrazyme;

    the increase in sales volume for Myozyme, Aldurazyme and Elaprase, all of which are lower margin products; and

    the addition of sales of Fludara and Leukine and additional sales of Campath beginning in the second quarter of 2009, all of which are lower margin products.

        Our gross product profit and product margin for the three months ended March 31, 2010 were also impacted by the favorable effect of foreign exchange rates on product sales outside of the United States, offset, in part, by the unfavorable effect of such rates on the cost of those products.

        Our gross product profit and product margin for both the three months ended March 31, 2010 and 2009 includes the effect of manufacturing-related charges of:

    $10.8 million for the first quarter of 2010, of which $7.5 million, net of $3.0 million of insurance reimbursements, is related to the temporary suspension of production of sevelamer hydrochloride and sevelamer carbonate at and subsequent remediation of our Haverhill, UK facility resulting from an explosion and fire in December 2009; and

    $9.2 million for the first quarter of 2009 for the write off of Myozyme inventory costs related to incomplete production runs during that quarter at our Belgium facility.

        For purposes of this discussion, the amortization of product related intangible assets is included in amortization expense and, as a result, is excluded from cost of products sold and the determination of product margins described above.

Gross Service Profit and Service Margin

        Our overall gross service profit and total service margin decreased for the three months ended March 31, 2010, primarily due to increased employee, rent and depreciation expenses for our genetic testing business unit. Service revenue for our genetic testing business unit remained relatively consistent for the three months ended March 31, 2010.

OPERATING EXPENSES

Selling, General and Administrative Expenses

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

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  

Selling, general and administrative expenses

  $ 553,310   $ 317,961   $ 235,349     74 %

% of total revenue

    51 %   28 %            

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        SG&A increased for the three months ended March 31, 2010, primarily due to spending increases of:

    $175.2 million for PGH, primarily due to a charge of $175.0 million we recorded in our consolidated statements of operations relating to a draft consent decree we have received from the FDA that provides for a potential up-front disgorgement of past profits;

    $6.7 million for Renal and Endocrinology, primarily due to an increase in sales and marketing expenses related to the Renvela product launch and increased litigation expenses for Renagel/Renvela and Hectorol;

    $6.0 million for Biosurgery, primarily due to an increase in sales and marketing expenses related to the ongoing Synvisc-One post-launch activities;

    $14.5 million for Hematology and Oncology, primarily due to an increase in sales and marketing expenses to support the addition of Campath, Fludara and Leukine and sales force expansion to support the launch of Mozobil in Europe beginning in the third quarter of 2009; and

    $25.1 million for Corporate, primarily due to increased spending related to upgrading our information technology systems, including installation and implementation of a new enterprise resource planning system worldwide, the costs for which did not meet the criteria for capitalization, as well as increased employee benefit costs and stock-based compensation expenses.

SG&A increased by $8.3 million for the three months ended March 31, 2010 due to the unfavorable impact of the strengthening of foreign currencies, primarily the Euro, against the U.S. dollar.

Research and Development Expenses

        The following table provides information regarding the change in research and development expenses during the periods presented (amounts in thousands):

 
  Three Months Ended March 31,    
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  

Research and development expenses

  $ 220,930   $ 206,925   $ 14,005     7 %

% of total revenue

    21 %   18 %            

        Research and development expenses increased for the three months ended March 31, 2010, primarily due to:

    an $11.4 million increase in spending on our PGH research and development programs, primarily due to expenses related to the ongoing eliglustat tartrate phase 3b study and the expansion of our alglucosidase alfa temporary access program;

    a $7.4 million increase in spending on our Hematology and Oncology research and development programs, primarily due to increase in research and development spending related to Campath, Fludara and Leukine; and

    a $13.4 million increase in spending for Corporate, primarily due to increases in personnel, support services and consulting expenses.

Research and development expense increased by $2.8 million for the three months ended March 31, 2010 due to the unfavorable impact of the strengthening of foreign currencies, primarily the Euro, against the U.S. dollar.

        These increases were partially offset by a spending decrease of $17.2 million on research and development programs included under the category "Other," primarily due to a payment of $18.2 million to EXACT Sciences for the purchase of intellectual property in January 2009 for which there was no comparable amount for the three months ended March 31, 2010.

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Amortization of Intangibles

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

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease) % Change
 
 
  2010   2009  

Amortization of intangibles

  $ 70,984   $ 57,598   $ 13,386     23 %

% of total revenue

    7 %   5 %            

        Amortization of intangibles expense increased for the three months ended March 31, 2010, primarily due to the acquisition of the worldwide marketing and distribution rights to the oncology products Campath, Fludara and Leukine from Bayer and to additional amortization expense for the Synvisc sales and marketing rights we reacquired from Wyeth.

        As discussed in Note 8., "Goodwill and Other Intangible Assets," to our consolidated financial statements included in this Form 10-Q, we calculate amortization expense for the Synvisc sales and marketing rights we reacquired from Wyeth and the Myozyme patent and technology rights pursuant to a licensing agreement with Synpac by taking into account forecasted future sales of the products, and the resulting estimated future contingent payments we will be required to make. In addition, we also calculate amortization for the technology intangible assets for Fludara based on forecasted future sales of Fludara. We completed the contingent royalty payments to Wyeth related to North American sales of Synvisc in the first quarter of 2010 and anticipate completing the remaining contingent royalty payments to Wyeth related to sales of the product outside of the United States by the end of 2010, the amount of which is not significant. As a result, we expect amortization of intangibles expense to fluctuate over the next five years based on the future contingent payments to Synpac, as well as changes in the forecasted revenue for Fludara.

Contingent Consideration Expense

        The following table provides information regarding the change in contingent consideration expense during the periods presented (amounts in thousands):

 
  Three Months Ended
March 31,
   
   
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
  2010   2009

Contingent consideration expense

  $ 62,549   $   $ 62,549   N/A

% of total revenue

    6 %   N/A          

        In June 2009, we recorded contingent consideration obligations totaling $964.1 million for the acquisition date fair value of the contingent royalty and milestone payments due to Bayer based on future sales and the successful achievement of certain sales volumes for Campath, Fludara and Leukine and for alemtuzumab for MS.

        Any change in the fair value of the contingent consideration obligations subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimates of the sales volume for these products, will be recognized in earnings in the period the estimated fair value changes. The fair value estimates are based on the probability weighted sales volumes to be achieved for Campath, Fludara, Leukine and for alemtuzumab for MS over the earn-out period for each product. A change in the fair value of the acquisition-related contingent consideration obligations could have a material affect on our consolidated statements of operations and financial position in the period of the change in estimate.

        As of March 31, 2010, the fair value of the total contingent consideration obligations was $1.03 billion primarily due to changes in the assumed timing and amount of revenue and expense

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estimates. Accordingly, we recorded a total of $62.5 million of contingent consideration expenses, of which $35.5 million is related to changes in estimates, for the three months ended March 31, 2010 in our consolidated statements of operations to reflect the increase in the fair value, including $21.4 million for our Hematology and Oncology reporting segment and $41.1 million for our Multiple Sclerosis reporting segment.

Purchase of In-Process Research and Development

        The following table sets forth the significant IPR&D projects for the companies and assets we acquired between January 1, 2006 and March 31, 2010 (amounts in millions):

Company/Assets Acquired
  Purchase
Price
  IPR&D   Programs Acquired   Discount Rate
Used in
Estimating
Cash Flows
  Year of
Expected
Launch
  Estimated
Cost to
Complete
 

Bayer (2009)

  $ 1,006.5   $ 458.7   alemtuzumab for MS—US     16 %   2012   $ 175.4 (1)

          174.2   alemtuzumab for MS—ex-US     16 %   2013   $ 88.8 (2)
                                   

        $ 632.9 (3)                      
                                   

Bioenvision (2007)

  $ 349.9   $ 125.5 (4) Clolar(5)     17 %   2010-2016 (6) $ 23.7  
                                   

AnorMED (2006)

  $ 589.2   $ 526.8 (4) Mozobil(7)     15 %   2016   $ 18.3  
                                   

(1)
Does not include anticipated reimbursements from Bayer totaling approximately $44 million.

(2)
Does not include anticipated reimbursements from Bayer totaling approximately $16 million.

(3)
Capitalized as an indefinite-lived intangible asset.

(4)
Expensed on acquisition date.

(5)
Clolar is approved for the treatment of relapsed and refractory pediatric ALL. The IPR&D projects for Clolar are related to the development of the product for the treatment of other medical issues.

(6)
Year of expected launch reflects both the ongoing launch of the products for currently approved indications and the anticipated launch of the products in the future for new indications.

(7)
Mozobil received marketing approval for use in stem cell transplants in the United States in December 2008 and in Europe in July 2009. Mozobil is also being developed for tumor sensitization.

OTHER INCOME AND EXPENSES

 
  Three Months Ended
March 31,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009  
 
  (Amounts in thousands)
   
 

Equity in loss of equity method investments

  $ (697 )     $ (697 )   N/A  

Other

    (439 )   (1,555 )   1,116     72 %

Investment income

    3,300     5,350     (2,050 )   (38 )%
                     
 

Total other income

  $ 2,164   $ 3,795   $ (1,631 )   (43 )%
                     

Equity in Loss of Equity Method Investments

        Effective January 1, 2010, in accordance with changes in the guidance related to how we account for variable interest entities, we were required to reassess our designation as primary beneficiary of BioMarin/Genzyme LLC based on a control-based approach. Under this approach, an entity must have the power to direct the activities that most significantly impact a variable interest entity's economic performance in order to meet the requirements of a primary beneficiary. We have concluded that

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BioMarin/Genzyme LLC is a variable interest entity, but does not have a primary beneficiary because the power to direct the activities of BioMarin/Genzyme LLC that most significantly impact its performance, is, in fact, shared equally between us and BioMarin through our commercialization rights and BioMarin's manufacturing rights. Effective January 1, 2010, we no longer consolidate the results of BioMarin/Genzyme LLC and instead record our portion of the results of BioMarin/Genzyme LLC in equity in loss of equity method investments in our consolidated statements of operations.

Investment Income

        Our investment income decreased for the three months ended March 31, 2010 primarily due to a decrease in our average portfolio yield and lower average cash and investment balances.

BENEFIT FROM (PROVISION FOR) INCOME TAXES

 
  Three Months Ended
March 31,
 
 
  2010   2009  
 
  (Amounts in thousands)
 

Benefit from (provision for) income taxes

  $ 61,799   $ (78,884 )

Effective tax rate

    35 %   29 %

        Our effective tax rate for both periods presented varies from the U.S. statutory tax rate as a result of:

    income and expenses taxed at rates other than the U.S. statutory tax rate;

    our provision for state income taxes;

    domestic manufacturing benefits;

    benefits related to tax credits;

    tax benefits in the amount of $15.2 million as a result of the resolution of tax examinations in major tax jurisdictions;

    tax expenses in the amount of $10.7 million resulting from the remeasurement of the deferred tax assets related to our acquisition from Bayer in 2009 for the three months ended March 31, 2010; and

    non-deductible stock-based compensation expenses totaling $11.9 million for the three months ended March 31, 2010, as compared to $9.7 million for the three months ended March 31, 2009.

        We are currently under audit by various states and foreign jurisdictions for various years. We believe that we have provided sufficiently for all audit exposures. Settlement of these audits or the expiration of the statute of limitations on the assessment of income taxes for any tax year will likely result in a reduction of future tax provisions. Any such benefit would be recorded upon final resolution of the audit or expiration of the applicable statute of limitations.

LIQUIDITY AND CAPITAL RESOURCES

        We continue to generate cash from operations. We had cash, cash equivalents and short-and long-term investments of $961.7 million at March 31, 2010 and $1.05 billion at December 31, 2009.

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        The following is a summary of our statements of cash flows for the three months ended March 31, 2010 and 2009:

Cash Flows from Operating Activities

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

 
  Three Months Ended
March 31,
 
 
  2010   2009  

Cash flows from operating activities:

             

Net income (loss)

  $ (114,948 ) $ 195,486  

Non-cash charges, net

    210,142     130,775  
           

Net income, excluding net non-cash charges

    95,194     326,261  

Increase (decrease) in cash from working capital changes

    31,270     (68,486 )
           
 

Cash flows from operating activities

  $ 126,464   $ 257,775  
           

        Cash provided by operating activities decreased $131.3 million for the three months ended March 31, 2010, driven by a $231.1 million decrease in net income, excluding net non-cash charges, offset, in part, by a $99.8 million decrease in working capital, primarily due to the Cerezyme and Fabrazyme supply constraints and a corresponding reduction in collection activities for these products.

        Non-cash charges, net, increased by $79.4 million for the three months ended March 31, 2010, primarily attributable to:

    a $23.7 million increase in depreciation and amortization expenses; and

    a total of $62.5 million of contingent consideration expenses related to an increase in the fair value of the contingent consideration obligations recorded as a result of our acquisition from Bayer in May 2009.

Cash Flows from Investing Activities

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

 
  Three Months Ended
March 31,
 
 
  2010   2009  

Cash flows from investing activities:

             

Net sales (purchases) of investments, excluding investments in equity securities

  $ (14,323 ) $ 61,766  

Net purchases of investments in equity securities

    (225 )   (3,606 )

Purchases of property, plant and equipment

    (152,220 )   (161,561 )

Investments in equity method investment

    (1,466 )    

Purchases of other intangible assets

    (5,885 )   (8,056 )

Other investing activities

    (10,547 )   (47 )
           
 

Cash flows from investing activities

  $ (184,666 ) $ (111,504 )
           

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        For the three months ended March 31, 2010, net purchases of capital expenditures accounted for significant cash outlays for investing activities. During the three months ended March 31, 2010, we used $152.2 million in cash to fund the purchase of property, plant and equipment, primarily related to the ongoing expansion of our manufacturing capacity in the Republic of Ireland, France and Belgium, planned improvements at our Allston facility, the additional manufacturing capacity we are constructing in Framingham, Massachusetts and capitalized costs of an internally developed enterprise software system.

        For the three months ended March 31, 2009, investing activities used $161.6 million in cash to fund the purchase of property, plant and equipment, primarily related to the ongoing expansion of our manufacturing capacity in the Republic of Ireland and France, planned improvements at our Allston facility and capitalized costs of an internally developed enterprise software system.

Cash Flows from Financing Activities

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

 
  Three Months Ended
March 31,
 
 
  2010   2009  

Cash flows from financing activities:

             

Proceeds from the issuance of our common stock

  $ 30,075   $ 34,526  

Repurchases of our common stock

        (107,134 )

Excess tax benefits from stock-based compensation

    (480 )   3,492  

Payments of debt and capital lease obligations

    (3,092 )   (2,653 )

Decrease in bank overdrafts

    (20,728 )   (3,392 )

Payment of contingent consideration obligations

    (31,600 )    

Other financing activities

    116     1,995  
           
 

Cash flows from financing activities

  $ (25,709 ) $ (73,166 )
           

        Cash used by financing activities decreased by $47.5 million for the three months ended March 31, 2010, as compared to the same period of 2009, primarily driven by a $107.1 million decrease in cash used to repurchase shares of our common stock under our stock repurchase program offset by $31.6 million in contingent consideration payments to Bayer in the three months ended March 31, 2010, for which there were no comparable payments for the same period of 2009.

Revolving Credit Facility

        As of March 31, 2010, we had approximately $11 million of outstanding standby letters of credit issued against this facility and no borrowings, resulting in approximately $339 million of available credit under our 2006 revolving credit facility, which matures July 14, 2011. The terms of this credit facility include various covenants, including financial covenants that require us to meet minimum interest coverage ratios and maximum leverage ratios. As of March 31, 2010, we were in compliance with these covenants.

Contractual Obligations

        The disclosure of payments we have committed to make under our contractual obligations is set forth in Item 7. "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Liquidity and Capital Resources," to our 2009 Form 10-K. Excluding the $175.0 million of cash we may potentially be required to pay to the FDA under a consent decree we are negotiating with the agency, as described above, there have been no material changes to our contractual obligations since December 31, 2009.

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Financial Position

        We believe that our available cash, investments and cash flows from operations, together with our revolving credit facility and other available debt financing will be adequate to meet our operating, investing and financing needs in the forseeable future. Although we currently have substantial cash resources and positive cash flow, we have used or intend to use substantial portions of our available cash and may make additional borrowings for:

    amounts we may be required to pay to the FDA under a consent decree we are negotiating with the agency, including a potential $175.0 million upfront payment for the disgorgement of past profits;

    expanding and maintaining existing and constructing additional manufacturing facilities, including investing significant funds to expand our Allston, Geel, Belgium and Waterford, Ireland facilities and constructing a new manufacturing facility with capacity for Cerezyme and Fabrazyme;

    implementing process improvements and system updates for our biologics manufacturing operations;

    product development and marketing;

    strategic business initiatives;

    repurchasing shares of our common stock;

    upgrading our information technology systems, including installation and implementation of a new enterprise resource planning system worldwide;

    contingent payments under business combinations, license and other agreements, including a milestone payment to Synpac if sales of Myozyme reach $400.0 million, as well as payments related to our license of mipomersen from Isis, ataluren from PTC Therapeutics, Inc., or PTC, and Prochymal and Chondrogen from Osiris Therapeutics, Inc., or Osiris, as well as contingent consideration obligations related to our acquisition of the worldwide rights to the oncology products Campath, Fludara and Leukine and alemtuzumab for MS from Bayer (for more information on these payments please read Note C., "Strategic Transactions," to our consolidated financial statements included in Item 8 of our 2009 Form 10-K); and

    working capital and satisfaction of our obligations under capital and operating leases.

        On May 6, 2010, we announced that we will initiate a $2.0 billion stock repurchase program, under which we plan to purchase $1.0 billion of our common stock in the near term and financed by debt. We plan to repurchase the additional $1.0 billion during the next twelve months.

        In addition, we have several outstanding legal proceedings. Involvement in investigations and litigation can be expensive and a court may also ultimately require that we pay expenses and damages. As a result of legal proceedings, we also may be required to pay fees to a holder of proprietary rights in order to continue certain operations.

Off-Balance Sheet Arrangements

        We do not use special purpose entities or other off-balance sheet financing arrangements. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries. In addition, we have joint ventures and certain other arrangements that are focused on research, development, and the commercialization of products. Entities falling within the scope of ASC 810 are included in our consolidated statements of operations if we qualify as the primary beneficiary. Entities not subject to consolidation under ASC 810 are accounted for under the equity method of accounting if our ownership percent exceeds 20% or if we

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exercise significant influence over the entity. We account for our portion of the income (losses) of these entities in the line item "Equity in loss of equity method investments" in our consolidated statements of operations. We also acquire companies in which we agree to pay contingent consideration based on attaining certain thresholds.

Recent Accounting Pronouncements

        Periodically, accounting pronouncements and related information on the adoption, interpretation and application of U.S. GAAP are issued or amended by the FASB or other standard setting bodies. Changes to the ASC are communicated through ASUs. The following table shows FASB ASUs recently issued that could affect our disclosures and our position for adoption:

ASU Number   Relevant Requirements of ASU   Issued Date/Our Effective Dates   Status

2009-13 "Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force."

  Establishes the accounting and reporting guidance for arrangements under which a vendor will perform multiple revenue-generating activities. Specifically, the provisions of this update address how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting.   Issued October 2009. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted.   We will adopt the provisions of this update for the first quarter of 2011. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements.

2009-17 "Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities."

 

Consists of amendments to ASC 810, "Consolidation," which change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting should be consolidated. This is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance.

 

Issued December 2009. Effective the first interim or annual reporting period after December 15, 2009.

 

We adopted the provisions of this update in the first quarter of 2010. The provisions of this update did not have any impact on our consolidated financial statements other than for our interests in BioMarin/Genzyme LLC, as described in Note 9., "Investment in BioMarin/Genzyme LLC," to our consolidated financial statements included in this Form 10-Q.

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ASU Number   Relevant Requirements of ASU   Issued Date/Our Effective Dates   Status

2010-06 "Improving Disclosures about Fair Value Measurements."

 

Requires new disclosures and clarifies some existing disclosure requirements about fair value measurements codified within ASC 820, "Fair Value Measurements and Disclosures," including significant transfers into and out of Level 1 and Level 2 investments of the fair value hierarchy. Also requires additional information in the roll forward of Level 3 investments including presentation of purchases, sales, issuances, and settlements on a gross basis. Further clarification for existing disclosure requirements provides for the disaggregation of assets and liabilities presented, and the enhancement of disclosures around inputs and valuation techniques.

 

Issued January 2010. Effective for the first interim or annual reporting period beginning after December 15, 2009, except for the additional information in the roll forward of Level 3 investments. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim reporting periods within those fiscal years.

 

We adopted the applicable provisions of this update, except for the additional information in the roll forward of Level 3 investments (as previously noted), in the first quarter of 2010. Besides a change in disclosure, the adoption of this update does not have a material impact on our consolidated financial statements. During the three months ended March 31, 2010, none of our instruments were reclassified between Level 1, Level 2 or Level 3.

2010-11, "Scope Exception Related to Embedded Credit Derivatives."

 

Update provides amendments to Subtopic 815-15, "Derivatives and Hedging—Embedded Derivatives, " to clarify the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another.

 

Issued March 2010. Effective at the beginning of each reporting entity's first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each reporting entity's first fiscal quarter beginning after issuance of this update.

 

We will adopt the provisions of this update for the third quarter of 2010. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements.

2010-17, "Milestone Method of Revenue Recognition—a consensus of the FASB Emerging Issues Task Force."

 

Update provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions.

 

Issued April 2010. Effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted.

 

We will adopt the provisions of this update beginning January 1, 2011. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements.

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RISK FACTORS

        Our future operating results could differ materially from the results described in this report due to the risks and uncertainties related to our business, including those discussed below. In addition, these factors represent risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements. We refer you to our "Cautionary Note Regarding Forward-Looking Statements," which identifies forward-looking statements in this report. The risks described below are not the only risks we face. Additional risk and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations.

Manufacturing problems have caused inventory shortages, loss of revenues and unanticipated costs and may do so in the future.

        In order to generate revenue from our approved products, we must be able to produce sufficient quantities of the products to satisfy demand. Many of our products are difficult to manufacture. Our products that are biologics, for example, require processing steps that are more difficult than those required for most chemical pharmaceuticals. Accordingly, we employ multiple steps to attempt to control the manufacturing processes. Problems with these manufacturing processes, even minor deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims and insufficient inventory. In the past, we have had to write off and incur other charges and expenses for products that failed to meet internal or external specifications, including Thymoglobulin, or for products that experience terminated production runs, including Myozyme produced at the 4000L scale. We also have had to write off work-in-process materials and incur other charges and expenses associated with a viral contamination, described below, at two of our facilities. Similar charges could occur in the future.

        Certain of the raw materials required in the commercial manufacturing and the formulation of our products are derived from biological sources, including bovine serum and human serum albumin. Such raw materials are difficult to procure and may be subject to contamination or recall. Also, some countries in which we market our products may restrict the use of certain biologically derived substances in the manufacture of drugs. A material shortage, contamination, recall, or restriction on the use of certain biologically derived substances in the manufacture of our products could adversely impact or disrupt commercial manufacturing of our products or could result in a withdrawal of our products from markets. This, in turn, could adversely affect our ability to satisfy demand for our products, which could materially and adversely affect our operating results.

        In addition, we may only be able to produce some of our products at a very limited number of facilities and, therefore, have limited or no redundant manufacturing capacity for these products. For example, we manufacture all of our bulk Cerezyme and most of our bulk Fabrazyme products at our Allston facility, all of our bulk Myozyme produced at the 160L scale at our Framingham facility, and all of our bulk Myozyme produced at the 4000L scale at our Belgium facility. In some cases, we contract out the manufacturing of our products to third parties, of which there are only a limited number capable of executing the manufacturing processes we require. A number of factors could cause production interruptions at our facilities or the facilities of our third party providers, including equipment malfunctions, facility contamination, labor problems, raw material shortages or contamination, natural disasters, power outages, terrorist activities, or disruptions in the operations of our suppliers.

        In June 2009, we announced that we had detected a virus, Vesivirus 2117, that impairs cell growth in one of the bioreactors used at our Allston facility to produce Cerezyme. We believe the virus was likely introduced through a raw material used in the manufacturing process. We temporarily interrupted bulk production at the plant to sanitize the facility, which affected production of Cerezyme and

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Fabrazyme. Cerezyme and Fabrazyme inventories were not sufficient to meet global demand. In 2009, we confirmed that Vesivirus 2117 was the cause of declines in cell productivity in one previous instance in 2008 at our Allston facility and one previous instance in 2008 at our Belgium facility. We were able to detect the virus in 2009 at our Allston facility using a highly specific assay we had developed after standard tests were unable to identify the cause of the productivity declines that occurred in 2008. We are in the process of adding steps to increase the robustness of our raw materials screening, process monitoring for viruses and viral removal processes. Some of these steps are subject to regulatory approval. However, given the nature of biologics manufacturing, contamination issues could occur in the future from time to time at our facilities and some of these issues could materially and adversely affect our operating results.

        The steps in successfully producing our biologic products are highly complex and in the normal course are subject to equipment failures and other production difficulties. For example, since restarting Fabrazyme production at Allston, we have experienced cell growth at lower than expected levels. In addition, in March 2010, we experienced an interruption in operations at our Allston facility resulting from an unexpected city electrical power failure that compounded issues with the plant's water system, which resulted in continued supply limitation for Cerezyme and Fabrazyme. We also have experienced other shipment interruptions since restarting Cerezyme and Fabrazyme production. We will continue to work with minimal levels of inventory for Cerezyme and Fabrazyme until our new Framingham manufacturing facility is approved and any additional manufacturing delays will likely impact supply of these products.

The Cerezyme and Fabrazyme supply constraints resulting from the suspension of production at our Allston facility have created opportunities for our competitors.

        Outside of the United States, Fabrazyme competes with Replagal®, a product marketed by Shire plc. The FDA has approved a treatment protocol for Replagal and Shire has submitted a BLA with the FDA for Replagal and been granted "fast track" designation. For Cerezyme, Shire and Protalix were able to offer their developmental therapies for the treatment of Gaucher disease to patients in the United States through an FDA-approved treatment protocol and to patients in the European Union and other countries through pre-approval access programs. Shire received FDA approval of its therapy to treat Gaucher disease in February 2010 and announced that it will price this therapy at a 15% savings over Cerezyme. Shire submitted a MAA to the EMA for its therapy in November 2009. Shire also has announced that it has accelerated its manufacturing timeline for its therapy by almost 18 months. Protalix submitted its NDA to the FDA in December 2009 and has been granted "fast track" designation. Also in December 2009, Protalix and Pfizer entered into an agreement to develop and commercialize Protalix's therapy. The FDA has granted orphan drug status to both Shire's and Protalix's therapies for the treatment of Gaucher disease. In addition, Zavesca® is currently approved in the United States for patients with Gaucher disease for whom enzyme replacement therapy is unsuitable.

        The approval of treatment protocols and access programs for Shire's and Protalix's therapies has allowed physicians to treat Fabry and Gaucher disease patients with the therapies ahead of their commercial availability. Some Gaucher and Fabry patients have used our competitors' therapies during the period of supply constraint and there is a risk that they may not switch back to our products, which would result in the loss of additional revenue for us. In April 2010, the EMA advised physicians to consider switching Fabry disease patients from Fabrazyme to Replagal based on its concerns that certain patients were not tolerating reduced dosages of Fabrazyme. We also have encouraged patients to switch to competitive products during the period of supply constraint. These actions may result in additional patients switching to our competitors' therapies. In addition, the institution of treatment guidelines and dose conservation measures during the supply constraint presents the risk that physicians and patients will not resume regular treatment levels after the supply constraint has ended.

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Our activities, products and services are subject to significant government regulations and approvals, which are often costly and could result in adverse consequences to our business if we fail to comply with the regulations or maintain the approvals.

        Products that have received regulatory approval for commercial sale are subject to extensive continuing regulations relating to, among other things, testing, manufacturing, quality control, labeling and promotion. For example, we and certain of our third party suppliers are required to maintain compliance with GMP requirements, and are subject to inspections by the FDA, the EMA and comparable agencies in other jurisdictions to confirm such compliance. Failure to comply with applicable regulatory requirements could result in regulatory authorities taking actions such as:

    issuing warning letters;

    levying fines and other civil penalties;

    imposing consent decrees;

    suspending regulatory approvals;

    refusing to approve pending applications or supplements to approved applications;

    suspending manufacturing activities or product sales, imports or exports;

    requiring us to communicate with physicians and other customers about concerns related to actual or potential safety, efficacy, and other issues involving our products;

    mandating product recalls or seizing products; and

    criminal prosecution.

        In a Form 483 issued in October 2008, a follow up warning letter issued in February 2009, and a Form 483 issued in November 2009, the FDA has detailed observations from its 2008 and 2009 inspections of our Allston facility considered to be significant deviations from GMP compliance. In March 2010, the FDA notified us that it intended to take enforcement action to ensure that products manufactured at our Allston facility are made in compliance with GMP. We have received a draft consent decree from the FDA, which provides for an upfront disgorgement of past profits of $175.0 million, for disgorgement of 18.5% of revenues from future sales of products manufactured, filled and finished at our Allston facility if fill-finish operations are still conducted there for domestic and exported products after dates to be negotiated, and payment of $15,000 per day for products manufactured at the facility but filled and finished elsewhere if certain GMP remediation actions are not met by dates to be negotiated. We are actively negotiating with the FDA all of the terms of the consent decree. If we are unable to comply with the terms of the consent decree, we may incur substantial additional expenses and may not be able to produce some or all of our products.

        The FDA, the EMA and comparable regulatory agencies worldwide may require post-marketing clinical trials or patient outcome studies. We have agreed with the FDA, for example, to a number of post-marketing commitments as a condition to U.S. marketing approval for Fabrazyme, Aldurazyme, Myozyme, Clolar and Mozobil. In addition, holders of exclusivity for orphan drugs are expected to assure the availability of sufficient quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in the withdrawal of marketing exclusivity for the drug. As a result of the Fabrazyme supply constraint, we received a request from the FDA's Office of Orphan Products Development in July 2009 to provide a detailed explanation of the measures being taken to assure the availability of sufficient quantities of Fabrazyme within a reasonable time to meet the needs of patients. We also received the same request from the FDA in July 2009 with respect to Myozyme because of the limited supply of product produced using the 160L scale process in the United States. We have responded to both of the FDA's requests. Myozyme has exclusivity in the United States until April 2013. If the FDA were to withdraw exclusive approval for Myozyme, our competitors could have an

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opportunity to receive marketing approval in the United States for their products earlier than April 2013.

        In recent years, several states, including California, Vermont, Maine, Minnesota, Massachusetts, New Mexico and West Virginia, in addition to the District of Columbia, have enacted legislation requiring biotechnology, pharmaceutical and medical device companies to establish marketing compliance programs and file periodic reports on sales, marketing, and other activities. Similar legislation is being considered in other states. Many of these requirements are new and uncertain, and available guidance is limited. We could face enforcement action, fines and other penalties and could receive adverse publicity, all of which could harm our business, if it is alleged that we have failed to fully comply with such laws and related regulations.

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

        We have numerous products under development and devote considerable resources to research and development, including clinical trials.

        Before we can commercialize our product candidates, we need to:

    conduct substantial research and development;

    undertake preclinical and clinical testing, sampling activity and other costly and time-consuming measures;

    develop and scale-up manufacturing processes; and

    pursue marketing and manufacturing approvals and, in some jurisdictions, pricing and reimbursement approvals.

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

    failure of the product candidate in preclinical studies;

    delays or difficulty enrolling patients in clinical trials, particularly for disease indications with small patient populations;

    patients exhibiting adverse reactions to the product candidate or indications of other safety concerns;

    insufficient clinical trial data to support the effectiveness or superiority of the product candidate;

    our inability to manufacture sufficient quantities of the product candidate for development or commercialization activities in a timely and cost-efficient manner, if at all;

    our failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate, the facilities or the process used to manufacture the product candidate; or

    changes in the regulatory environment, including pricing and reimbursement, that make development of a new product or of an existing product for a new indication no longer desirable.

        Few research and development projects result in commercial products, and success in preclinical studies or early clinical trials often is not replicated in later studies. For example, in our pivotal study of hylastan for treatment of patients with osteoarthritis of the knee, hylastan did not meet its primary endpoint. In November 2009, we discontinued development of an advanced phosphate binder because although the advanced phosphate binder met its primary endpoint in its phase 2/3 trial, it did not demonstrate significant improvement in phosphate lowering compared to Renvela. In September 2009,

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our collaboration partner Osiris, to whom we have made substantial nonrefundable upfront payments, announced that its two phase 3 trials evaluating Prochymal for the treatment of acute Graft-versus-Host Disease failed to meet their primary endpoints, drawing into question the size of the market that may benefit from use of the product.

        We may decide to abandon development of a product or service candidate at any time, or we may be required to expend considerable resources repeating clinical trials or conducting additional trials, either of which would increase costs of development and delay any revenue from those programs.

        In addition, a regulatory authority may deny or delay an approval because it was not satisfied with the structure or conduct of clinical trials or due to its assessment of the data we supply. A regulatory authority, for instance, may not believe that we have adequately addressed negative safety signals. Clinical data are subject to varied interpretations, and regulatory authorities may disagree with our assessments of data. In any such case, a regulatory authority could insist that we provide additional data, which could substantially delay or even prevent commercialization efforts, particularly if we are required to conduct additional pre-approval clinical studies.

        We are also developing new products, such as mipomersen and ataluren, through strategic alliances and collaborations. If we are unable to manage these external opportunities successfully or if the product development process is unsuccessful, we will not be able to grow our business in the way that we currently expect.

If we fail to increase sales of several existing products and services or to commercialize new products and services in our pipeline, we will not meet our financial goals.

        Over the next few years, our success will depend substantially on our ability to increase revenue from our existing products and services. These products and services include our Cerezyme, Renvela, Synvisc-One, Fabrazyme, Myozyme, Aldurazyme, Thymoglobulin, Thyrogen, Clolar and Mozobil products, and our genetic testing services.

        Our ability to increase sales depends on a number of factors, including:

    our ability, and the ability of our collaborators, to efficiently manufacture sufficient quantities of each product to meet demand and to do so in a timely and cost efficient manner;

    acceptance by the medical community of each product or service;

    the availability of competing treatments that are deemed safer, more efficacious, more convenient to use, more cost effective, or having a more reliable source of supply;

    compliance with regulation by regulatory authorities of these products and services and the facilities and processes used to manufacture these products;

    the scope of the labeling approved by regulatory authorities for each product and competitive products or risk management activities, including Risk Evaluation and Mitigation Strategy, or REMS;

    the effectiveness of our sales force;

    the availability and extent of coverage, pricing and level of reimbursement from governmental agencies and third party payors; and

    the size of the patient population for each product or service and our ability to identify new patients.

        We expect regulatory action regarding several of our existing products in the coming months. Regulatory authorities denying or delaying these approvals would adversely impact our projected revenue and income growth. For example, we have encountered several delays in receiving marketing

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approval in the United States for alglucosidase alfa produced using a larger scale process, which has adversely impacted our revenues and earnings. We could face additional delays with this product or other products.

        Part of our growth strategy involves conducting additional clinical trials to support approval of expanded uses of some of our products, including Mozobil, Clolar and alemtuzumab for MS, pursuing marketing approval for our products in new jurisdictions and developing next generation products, such as eliglustat tartrate (formerly Genz-112638). The success of this component of our growth strategy will depend on the outcome of these additional clinical trials, the content and timing of our submissions to regulatory authorities and whether and when those authorities determine to grant approvals. Because the healthcare industry is extremely competitive and regulatory requirements are rigorous, we spend substantial funds marketing our products and attempting to expand approved uses for them. These expenditures depress near-term profitability with no assurance that the expenditures will generate future profits that justify the expenditures. For example, we received a complete response letter from the FDA in October 2009 for Clolar's use in adult AML in which the agency recommended that a randomized, controlled clinical study be conducted for label expansion of Clolar in this indication.

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

        The human healthcare products and services industry is extremely competitive. Other organizations, including pharmaceutical, biotechnology, device and genetic and diagnostic testing companies, and generic and biosimilar manufacturers, have developed and are developing products and services to compete with our products, services and product candidates. If healthcare providers, patients or payors prefer these competitive products or services or these competitive products or services have superior safety, efficacy, pricing or reimbursement characteristics, we will have difficulty maintaining or increasing the sales of our products and services. As described under the heading "The Cerezyme and Fabrazyme supply constraints resulting from the suspension of production at our Allston facility have created opportunities for our competitors," the virus at our Allston facility and associated production interruption have provided new opportunities for our competitors.

        There are currently two other marketed products aimed at treating Gaucher disease, the disease addressed by Cerezyme: Zavesca® and VPRIVTM. Zavesca is a small molecule oral therapy that has been approved in approximately thirty-five countries, including the United States, European Union and Israel, for use in patients with mild to moderate Type 1 Gaucher disease for whom enzyme replacement therapy is unsuitable. Zavesca has been sold in the European Union since 2003 and in the United States since 2004. VPRIV is an enzyme replacement therapy developed by Shire that received marketing approval in the United States in February 2010. In addition, an enzyme replacement therapy in development by Protalix to treat Gaucher disease is available to patients in the United States under an FDA-approved treatment protocol and Protalix has submitted an NDA to the FDA for its therapy. Both the Shire and Protalix therapies are available to patients in the European Union and other countries through pre-approval access programs.

        Replagal® is a competitive enzyme replacement therapy for Fabry disease, the disease addressed by Fabrazyme, which is approved for sale outside of the United States. In addition, the FDA has approved a treatment protocol for Replagal, which allows physicians to treat Fabry patients with the therapy ahead of commercial availability in the United States. Shire has submitted its BLA for Replagal to the FDA. We also are aware of a company that initiated a phase 3 clinical trial in June 2009 of an oral chaperone medication to treat Fabry disease.

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        Myozyme has marketing exclusivity in the United States until 2013 and in the European Union until 2016 due to its orphan drug status, although companies may seek to overcome the associated marketing exclusivity. In addition, we are aware of one company pursuing phase 1 clinical studies (after putting a phase 2 study on hold) for a small molecule pharmacologic chaperone treatment for Pompe disease.

        Renagel and Renvela compete with several other products for the control of elevated phosphorus levels in patients with CKD on hemodialysis, including PhosLo®, a prescription calcium acetate preparation marketed in the United States and Fosrenol®, a prescription lanthanum carbonate marketed in the United States, Europe, Canada and Latin America. Generic formulations of PhosLo were launched in the United States in 2008 and 2009. Renagel and Renvela also compete with over-the-counter calcium carbonate products such as TUMS® and metal-based options such as aluminum and magnesium. Our core patents protecting Renagel and Renvela expire in 2014 in the United States and in Europe in 2015. However, our Renagel and Renvela patents are the subjects of Abbreviated New Drug Application, or ANDA, filings in the United States by generic drug manufacturers as described in more detail in this Risk Factors section under the heading, "Some of our products may face competition from lower cost generic or follow-on products."

        Current competition for Synvisc/Synvisc-One includes: Supartz®/Artz®; Hyalgan®; Orthovisc®; Euflexxa™; Monovisc™, which is marketed in Europe and Turkey; and Durolane®, which is marketed in Europe and Canada. Durolane and Euflexxa are produced by bacterial fermentation, which may provide these products a competitive advantage over avian-sourced Synvisc/Synvisc-One. We believe that single injection products will have a competitive advantage over multiple injection products. Synvisc-One is currently the only single injection viscosupplementation product approved in the United States, but competitors are seeking FDA approval for their single injection products. Furthermore, several companies market products that are not viscosupplementation products but which are designed to relieve the pain associated with osteoarthritis. Synvisc/Synvisc-One will have difficulty competing with competitive products to the extent those products have a similar safety profile and are considered more efficacious, less burdensome to administer or more cost-effective.

        Competition for Campath for patients with B-CLL includes single agent and combination chemotherapy regimens; Rituxan®/MabThera®, which is marketed globally; Treanda®, which is marketed globally; and Arzerra™, which is marketed in the United States and recently received a conditional approval recommendation by the EMA. There are also other therapies under clinical study for the treatment of B-CLL, including lumiliximab and lenalidomide. Competition for Clolar for the treatment of pediatric patients 1 to 21 years old with relapsed or refractory ALL after at least two prior regimens includes cytarabine and mitoxantrone, which are available as generics with no significant commercial promotion, and Arranon®, which is indicated for the treatment of patients with T-cell ALL whose disease has not responded to or has relapsed following treatment with at least two chemotherapy regimens. T-cell ALL is estimated to represent less than 20% of pediatric ALL patients. In addition, there are anti-cancer agents in clinical trials for the treatment of relapsed pediatric ALL. Leukine primarily competes with two colony stimulating growth factors, Neupogen® and Neulasta®. The primary competition for Fludara is generic drugs.

        The examples above are illustrative and not exhaustive. Almost all of our products and services currently face competition. Furthermore, the field of biotechnology is characterized by significant and rapid technological change. Discoveries by others may make our products or services obsolete. For example, competitors may develop approaches to treating LSDs that are more effective, convenient or less expensive than our products and product candidates. Because a significant portion of our revenue is derived from products that address this class of diseases and a substantial portion of our expenditures is devoted to developing new therapies for this class of diseases, such a development would have a material negative impact on our results of operations.

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If we fail to obtain and maintain adequate levels of reimbursement for our products and services from third party payors, demand for our products and services will be significantly limited.

        Sales of our products and services are dependent, in large part, on the availability and extent of reimbursement from government health administration authorities, private health insurers and other third party payors. These third party payors may not provide adequate insurance coverage or reimbursement for our products and services, which could reduce demand for our products and services and impair our financial results.

        Third party payors are increasingly scrutinizing pharmaceutical budgets and healthcare expenses and are attempting to contain healthcare costs by:

    challenging the prices charged for healthcare products and services;

    limiting both the coverage and the amount of reimbursement for new therapeutic products;

    reducing existing reimbursement rates for commercialized products and services;

    denying or limiting coverage for products that are approved by the FDA, EMA or other governmental regulatory bodies but are considered experimental or investigational by third party payors; and

    refusing in some cases to provide coverage when an approved product is used for disease indications in a way that has not received FDA, EMA or other applicable marketing approval.

        Efforts by third party payors to reduce costs could decrease demand for our products and services. In March 2010, the U.S. Congress enacted healthcare reform legislation that imposes cost containment measures on the healthcare industry. Some states are also considering legislation that would control the prices of drugs. We believe that federal and state legislatures and health agencies will continue to focus on additional healthcare reform in the future.

        We encounter similar cost containment issues in countries outside the United States. In certain countries, including countries in the European Union and Canada, the coverage of prescription drugs, pricing and levels of reimbursement are subject to governmental control. Therefore, we may be unable to negotiate coverage, pricing or reimbursement on terms that are favorable to us. Moreover, certain countries reference the prices in other countries where our products are marketed. Thus, inability to secure adequate prices in a particular country may also impair our ability to maintain or obtain acceptable prices in existing and potential new markets. Government health administration authorities may also rely on analyses of the cost-effectiveness of certain therapeutic products in determining whether to provide reimbursement for such products. Our ability to obtain satisfactory pricing and reimbursement may depend in part on whether our products, the cost of some of which is high in comparison to other therapeutic products, are viewed as cost-effective. As in the United States, we expect to see continued efforts to reduce healthcare costs in our international markets. For example, the German government is expected to implement measures during the second half of 2010 that, among other things, increase mandatory discounts and impose a three-year price freeze on pharmaceutical pricing based on August 2009 pricing.

        Furthermore, governmental regulatory bodies, such as the CMS in the United States, may from time-to-time make unilateral changes to reimbursement rates for our products and services. For example, MIPPA directs CMS to establish a bundled payment system to reimburse dialysis providers treating ESRD patients. In September 2009, CMS proposed changes to the prospective payment system that would include drugs and biologicals used to treat ESRD patients in the bundled payment amount for dialysis treatments. The bundled rate is proposed to include drugs and biologicals that are currently reimbursed separately by Medicare, including intravenous Vitamin D analogs and their oral equivalents such as Hectorol, and oral phosphate binders such as Renagel/Renvela. CMS is expected to issue a final rule in 2010 with an anticipated implementation date of January 2011.

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        Changes to reimbursement rates, including implementation of CMS's proposed bundling rule in the United States, could reduce our revenue by causing healthcare providers to be less willing to use our products and services. Although we actively seek to ensure that any initiatives that are undertaken by regulatory agencies involving reimbursement for our products and services do not have an adverse impact on us, we may not always be successful in these efforts. In addition, when a new product is approved, the availability of government and private reimbursement for that product is uncertain as is the amount for which that product will be reimbursed. We cannot predict the availability or amount of reimbursement for our product candidates.

        The American Recovery and Reinvestment Act of 2009 provided significant funding for the federal government to conduct comparative effectiveness research. Although the U.S. Congress indicated that these studies are intended to improve the quality of health care, outcomes of such studies could influence reimbursement decisions. If, for example, any of our products or services were determined to be less cost-effective than alternatives, reimbursement for those products or services could be affected.

We may encounter substantial difficulties managing our growth.

        Several risks are inherent to our plans to grow our business. Achieving our goals will require substantial investments in research and development, sales and marketing, and facilities. For example, we are spending considerable resources building and seeking regulatory approvals for our manufacturing facilities. These facilities may not prove sufficient to meet demand for our products or we may not have excess capacity at these facilities. For example, we had been operating with lower than usual inventories for Cerezyme and Fabrazyme because we had allocated capacity for Myozyme production at our Allston facility to meet Myozyme's worldwide growth. When we interrupted production of Cerezyme and Fabrazyme at the facility in June 2009 in order to sanitize the facility after identifying a virus in a bioreactor used to produce Cerezyme, inventories of Cerezyme and Fabrazyme were not sufficient to avoid product shortages. We are constructing a new manufacturing facility with capacity for Cerezyme and Fabrazyme in Framingham, Massachusetts, expanding our Allston facility, and adding an additional 4000L bioreactor to produce Myozyme at our Belgium facility. We are also expanding our fill-finish capacity in Waterford, Ireland and working with a third party contract manufacturer to transfer fill-finish activities to the contract manufacturer for a portion of our Fabrazyme, Cerezyme and Myozyme production. If we experience a delay in completing these capacity expansions or securing regulatory approval for the new internal capacity or the fill-finish capacity from the contract manufacturer, we will not be able to build inventories in our expected timeframe.

        Building our facilities is expensive, and our ability to recover these costs will depend on increased revenue from the products produced at the facilities. In addition, to maintain product supply and to adequately prepare to launch a number of our late-stage product candidates, we must successfully implement a number of manufacturing projects on schedule, operate our facilities at appropriate production capacity, optimize manufacturing asset utilization, continue our use of third-party contract manufacturers and maintain a state of regulatory compliance.

        We produce relatively small amounts of material for research and development activities and pre-clinical trials. Even if a product candidate receives all necessary approvals for commercialization, we may not be able to successfully scale-up production of the product material at a reasonable cost or at all and we may not receive additional approvals in sufficient time to meet product demand. For example, the FDA has concluded that alglucosidase alfa produced in our larger scale bioreactors is a different product than alglucosidase alfa produced in our 160L bioreactors and required us to submit a separate BLA for the larger scale product. This delay in receipt of FDA approval has had an adverse effect on our revenue and earnings, and will continue to have an adverse effect until we receive FDA approval of alglucosidase alfa produced in our 4000L bioreactors.

        If we are able to increase sales of our products, we may have difficulty managing inventory levels. Marketing new therapies is a complicated process, and gauging future demand is difficult. With

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Renagel, for example, we have encountered problems in the past managing inventory levels at wholesalers. Comparable problems may arise with any of our products, particularly during market introduction.

        Growth in our business may also contribute to fluctuations in our operating results, which may cause the price of our securities to decline. Our revenue may fluctuate due to many factors, including changes in:

    wholesaler buying patterns;

    reimbursement rates;

    physician prescribing habits;

    the availability or pricing of competitive products; and

    currency exchange rates.

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

We rely on third parties to provide us with materials and services in connection with the manufacture of our products and the performance of our services.

        Some materials necessary for commercial production of our products, including specialty chemicals and components necessary for manufacture, fill-finish and packaging, are provided by unaffiliated third party suppliers. In some cases, such materials are specifically cited in our marketing applications with regulatory authorities so that they must be obtained from that specific source unless and until the applicable authority approves another supplier. In addition, there may only be one available source for a particular chemical or component. For example, we acquire polyalylamine, used in the manufacture of Renagel, Renvela, Cholestagel and Welchol, from Cambrex Charles City, Inc., and N925, which is necessary to manufacture our LSD products, from Invitrogen Corporation. These suppliers are the only sources for these materials currently qualified in our FDA drug applications for these products. Our suppliers also may be subject to FDA regulations or the regulations of other governmental agencies outside the United States regarding manufacturing practices. We may be unable to manufacture our products or to perform our services in a timely manner or at all if these third party suppliers were to cease or interrupt production or otherwise fail to supply sufficient quantities of these materials or products to us for any reason, including due to regulatory requirements or actions, adverse financial developments at or affecting the supplier, labor shortages or disputes, or contamination of materials or equipment. For example, we believe that a virus that we detected in one of our bioreactors used at our Allston facility to produce Cerezyme was likely introduced through a raw material used in the manufacturing process.

        We also source some of our manufacturing, fill-finish, packaging and distribution operations to third party contractors. The manufacture of products, fill-finish, packaging and distribution of those products requires successful coordination among these third party providers and us. Our inability to coordinate these efforts, the inability of a third party contractor to secure sufficient source materials, the lack of capacity available at a third party contractor, problems with manufacturing services provided by a third party contractor or any other problems with the operations of a third party contractor could require us to delay shipment of saleable products, to recall products previously shipped or impair our ability to supply products at all. This could increase our costs, cause us to lose revenue or market share and damage our reputation. Furthermore, any third party we use to manufacture, fill-finish or package

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our products to be sold must also be licensed by the applicable regulatory authorities. As a result, alternative third party providers may not be available on a timely basis or at all.

Our financial results are dependent on sales of Cerezyme.

        Sales of Cerezyme, our enzyme-replacement product for patients with Gaucher disease, totaled $179.1 million for the three months ended March 31, 2010, representing approximately 17% of our total revenue. Because our business is dependent on Cerezyme, negative trends in revenue from this product have had, and could continue to have, an adverse effect on our results of operations and cause the value of our common stock to further decline or fail to recover. In addition, we will lose revenue if alternative treatments for Gaucher disease gain commercial acceptance, if our marketing activities are restricted, or if coverage, pricing or reimbursement is limited. The patient population with Gaucher disease is not large. Because a significant percentage of that population already uses Cerezyme, opportunities for future sales growth are constrained. Furthermore, changes in the methods for treating patients with Gaucher disease, including treatment protocols that combine Cerezyme with other therapeutic products or reduce the amount of Cerezyme prescribed, could limit growth, or result in a decline, in Cerezyme sales. See "The Cerezyme and Fabrazyme supply constraints resulting from the suspension of production at our Allston facility have created opportunities for our competitors" above.

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

        Several of our strategic initiatives involve alliances with other biotechnology and pharmaceutical companies. The success of these arrangements is largely dependent on technology and other intellectual property contributed by our strategic partners or the resources, efforts, and skills of our partners. Disputes and difficulties in such relationships are common, often due to conflicting priorities or conflicts of interest. Merger and acquisition activity may exacerbate these conflicts. The benefits of these alliances are reduced or eliminated when strategic partners:

    terminate the agreements covering the strategic alliance or limit our access to the underlying intellectual property;

    fail to devote financial or other resources to the alliances and thereby hinder or delay development, manufacturing or commercialization activities;

    fail to successfully develop, manufacture or commercialize any products; or

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

        Furthermore, payments we make under these arrangements may exacerbate fluctuations in our financial results. In addition, under some of our strategic alliances, including Osiris, PTC and Isis, we make upfront and milestone payments well in advance of commercialization of products with no assurance that we will ever recoup these payments. We also may make equity investments in our strategic partners, as we did with EXACT Sciences in January 2009 and Isis in February 2008. Our strategic equity investments are subject to market fluctuations, access to capital and other business events, such as initial public offerings, the completion of clinical trials and regulatory approvals, which can impact the value of these investments. If any of our strategic equity investments decline in value and remain below cost for an extended duration, we may be required to write down our investment.

Our operating results and financial position may be negatively impacted when we attempt to grow through business combination transactions.

        We may encounter problems assimilating operations acquired in business combination transactions. These transactions often entail the assumption of unknown liabilities, the loss of key employees, and the diversion of management attention. Furthermore, in any business combination there is a substantial risk that we will fail to realize the benefits we anticipate when we decide to undertake the transaction.

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We have in the past taken significant charges for impaired goodwill and for impaired assets acquired in business combination transactions. We may be required to take similar charges in the future. We enter into most such transactions with an expectation that the acquired assets will enhance the long-term strength of our business. These transactions, however, often depress our earnings and our returns on capital in the near-term and the expected long-term benefits may never be realized. Business combination transactions also either deplete cash resources, require us to issue substantial equity, or require us to incur significant debt.

Our international sales and operating expenses are subject to fluctuations in currency exchange rates.

        A significant portion of our business is conducted in currencies other than our reporting currency, the U.S. dollar. We recognize foreign currency gains or losses arising from our operations in the period in which we incur those gains or losses. As a result, currency fluctuations among the U.S. dollar and the currencies in which we do business have caused foreign currency translation gains and losses in the past and will likely do so in the future. Because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates, we may suffer significant foreign currency translation losses in the future due to the effect of exchange rate fluctuations. For the three months ended March 31, 2010, the change in foreign exchange rates had a net favorable impact on our revenue, as compared to a net unfavorable effect for 2009.

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

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

    pay monetary damages;

    stop commercial activities relating to the affected products or services;

    obtain a license in order to continue manufacturing or marketing the affected products or services; or

    compete in the market with a different product or service.

        We have several ongoing legal proceedings on which we will continue to expand substantial sums. For example, we have initiated patent infringement litigation against several generic manufacturers. In addition, we are the subject of a consolidated purported securities class action lawsuit and three purported shareholder derivative lawsuits. We may be subject to additional actions in the future. For example, the federal government, state governments and private payors are investigating and have filed actions against numerous pharmaceutical and biotechnology companies, including Genzyme, alleging that the companies may have overstated prices in order to inflate reimbursement rates. Domestic and international enforcement authorities also have instituted actions under healthcare "fraud and abuse" laws, including anti-kickback and false claims statutes. Moreover, individuals who use our products or services, including our diagnostic products and genetic testing services, sometimes bring product and professional liability claims, and third parties with whom we do business sometimes bring breach of contract claims against us or our subsidiaries.

        Some of our products are prescribed by healthcare providers for uses not approved by the FDA, the EMA or comparable regulatory agencies. Although healthcare providers may lawfully prescribe our products for off-label uses, any promotion by us of off-label uses would be unlawful. Some of our practices intended to make healthcare providers aware of off-label uses of our products without engaging in off-label promotion could nonetheless be misconstrued as off-label promotion. Although we

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have policies and procedures in place designed to help assure ongoing compliance with regulatory requirements regarding off-label promotion, some non-compliant actions may nonetheless occur. Regulatory authorities could take enforcement action against us if they believe we are promoting, or have promoted, our products for off-label use.

        We have only limited amounts of insurance, which may not provide coverage to offset a negative judgment or a settlement payment. We may be unable to obtain additional insurance in the future, or we may be unable to do so on favorable terms. Our insurers may dispute our claims for coverage. For example, we are seeking from our insurers coverage amounting to approximately $30 million for reimbursement of portions of the costs incurred in connection with the litigation and settlement related to the consolidation of our tracking stocks. Any additional insurance we do obtain may not provide adequate coverage against any asserted claims.

        Regardless of merit or eventual outcome, investigations and litigation can result in:

    the diversion of management's time and attention;

    the expenditure of large amounts of cash on legal fees, expenses, and payment of damages;

    limitations on our ability to continue some of our operations;

    decreased demand for our products and services; and

    injury to our reputation.

Our international sales, clinical activities, manufacturing and other operations are subject to the economic, political, legal and business environments of the countries in which we do business, and our failure to operate successfully or adapt to changes in these environments could cause our international sales and operations to be limited or disrupted.

        Our international operations accounted for approximately 48% of our consolidated product and service revenue for the three months ended March 31, 2010. We expect that international product and service sales will continue to account for a significant percentage of our revenue for the foreseeable future. In addition, we have direct investments in a number of subsidiaries outside of the United States. Our international sales and operations could be limited or disrupted, and the value of our direct investments may be diminished, by any of the following:

    economic problems that disrupt foreign healthcare payment systems;

    the imposition of governmental controls, including foreign exchange and currency restrictions;

    less favorable intellectual property or other applicable laws;

    the inability to obtain any necessary foreign regulatory or pricing approvals of products in a timely manner;

    the inability to obtain third party reimbursement support for products;

    product counterfeiting and intellectual property piracy;

    parallel imports;

    anti-competitive trade practices;

    import and export license requirements;

    political instability;

    terrorist activities, armed conflict, or a pandemic;

    restrictions on direct investments by foreign entities and trade restrictions;

    changes in tax laws and tariffs;

    difficulties in staffing and managing international operations; and

    longer payment cycles.

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        Our international operations and marketing practices are subject to regulation and scrutiny by the governments of the countries in which we operate as well as the United States government. The United States Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business. We operate in many parts of the world that have experienced governmental corruption to some degree. Although we have policies and procedures designed to help ensure that we, our employees and our agents comply with the Foreign Corrupt Practices Act, or FCPA, and other anti-bribery laws, such policies and procedures may not protect us against liability under the FCPA or other laws for actions taken by our employees, agents and intermediaries with respect to our business. Failure to comply with domestic or international laws could result in various adverse consequences, including possible delay in the approval or refusal to approve a product, recalls, seizures, withdrawal of an approved product from the market, or the imposition of criminal or civil sanctions, including substantial monetary penalties.

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

        Our long-term success largely depends on our ability to market technologically competitive products. If we fail to obtain or maintain adequate intellectual property protection in the United States or abroad, we may not be able to prevent third parties from using our proprietary technologies. Our currently pending or future patent applications may not result in issued patents. Patent applications are typically confidential for 18 months following their earliest filing, and because third parties may have filed patent applications for technology covered by our pending patent applications without us being aware of those applications, our patent applications may not have priority over patent applications of others. In addition, our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products, or provide us with any competitive advantage. If a third party initiates litigation regarding our patents or those patents for which we have license rights, and is successful, a court could declare such patents invalid or unenforceable or limit the scope of coverage of those patents. Governmental patent offices and courts have not always been consistent in their interpretation of the scope and patentability of the subject matter claimed in biotechnology patents. Any changes in, or unexpected interpretations of, the patent laws may adversely affect our ability to enforce our patent position.

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

Some of our products may face competition from lower cost generic or follow-on products.

        Some of our drug products, for example Renagel, Renvela, Hectorol, Clolar, Fludara and Mozobil are approved under the provisions of the United States Food, Drug and Cosmetic Act, or FDCA, that render them susceptible to potential competition from generic manufacturers via the ANDA procedure. Generic manufacturers pursuing ANDA approval are not required to conduct costly and time-consuming clinical trials to establish the safety and efficacy of their products; rather, they are permitted to rely on the innovator's data regarding safety and efficacy. Thus, generic manufacturers can sell their products at prices much lower than those charged by the innovative pharmaceutical or biotechnology companies who have incurred substantial expenses associated with the research and development of the drug product.

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        The ANDA procedure includes provisions allowing generic manufacturers to challenge the innovator's patent protection by submitting "Paragraph IV" certifications to the FDA in which the generic manufacturer claims that the innovator's patent is invalid or will not be infringed by the manufacture, use, or sale of the generic product. A patent owner who receives a Paragraph IV certification may choose to sue the generic applicant for patent infringement. If such patent infringement lawsuit is brought within a statutory 45-day period, then a 30-month stay of FDA approval for the ANDA is triggered. In recent years, generic manufacturers have used Paragraph IV certifications extensively to challenge the applicability of patents listed in the FDA's Approved Drug Products List with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book, on a wide array of innovative therapeutic products. We expect this trend to continue and to implicate drug products with even relatively modest revenues.

        Renagel/Renvela and Hectorol are subjects of ANDAs containing Paragraph IV certifications. Renagel is the subject of ANDAs submitted by four companies, and Renvela is the subject of ANDAs submitted by three companies, containing Paragraph IV certifications. We have initiated patent litigation against the four ANDA applicants with respect to Renagel and against two ANDA applicants with respect to Renvela. At issue in the lawsuits is U.S. Patent No. 5,667,775, which expires in 2014 (the "'775 Patent"). See "Legal Proceedings" in Part I., Item 3. of our 2009 Form 10-K. If we are unsuccessful in these lawsuits, a generic manufacturer may launch its generic product prior to the expiration of the '775 Patent, but not before the expiration in 2013 of our other Orange Book-listed patents covering Renagel and Renvela. We are currently evaluating the Paragraph IV notice received from the third ANDA applicant with respect to Renvela.

        Our Hectorol (doxercalciferol) products (vial and capsule) are collectively the subject of ANDAs containing Paragraph IV certifications submitted by six companies. We have initiated patent litigation against four of these ANDA applicants. See "Legal Proceedings" in Part I., Item 3. of our 2009 Form 10-K. In all four cases we are pursuing claims with respect to our U.S. Patent No. 5,602,116 related to the use of Hectorol to treat hyperparathyroidism secondary to ESRD, which expires in 2014 (the "'116 Patent"). In one of the four cases, we are also pursuing claims with respect to our U.S. Patent No. 7,148,211 related to the formulation of our Hectorol vial product, which expires in 2023 (the "'211 Patent"). Our Hectorol capsule product is labeled for the treatment of secondary hyperparathyroidism in patients with CKD on dialysis and for those patients not on dialysis. In one of the four cases relating to our Hectorol capsule products, the ANDA filer is seeking approval of its generic 0.5µg capsule only for the treatment of patients with CKD who are not on dialysis, thereby attempting to avoid our '116 Patent. If we are unsuccessful in the patent infringement lawsuits that we have chosen to pursue against the ANDA filers, a generic manufacturer may launch its generic product prior to the expiration of our Orange-Book listed patents covering our Hectorol products.

        As for the two ANDA applicants against whom litigation was not initiated, they submitted Paragraph IV certifications with respect to only the '211 Patent. Because we did not initiate litigation, the FDA could approve the applicants' generic products upon the later of expiration or invalidation of the '116 Patent or expiration of the 180-day exclusivity, if any, accorded to the first ANDA filer. In April 2010, we received notice of another ANDA applicant seeking approval of generic versions of all three dosage strengths of our Hectorol capsules. This ANDA contained a Paragraph IV certification with respect to the '116 Patent. We are currently evaluating this notice.

        We also have two biologic products approved under the FDCA, Cerezyme and Thyrogen. This renders them susceptible to potential competition from follow-on or biosimilar manufacturers via the "505(b)2" pathway of the FDCA. As with an ANDA, the sponsor of a 505(b)2 application is permitted to rely, at least in part, on the safety and efficacy data of the innovator. For that reason, 505(b)(2) applicants may have a shorter time to approval than an applicant filing an NDA.

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        Other of our products, including Fabrazyme, Aldurazyme, Myozyme, Campath and Leukine (so-called "biotech drugs") were approved in the United States under the Public Health Service Act, or PHSA. The PHSA was amended by the March 2010 enactment of healthcare reform legislation, which, among other things, establishes an abbreviated approval pathway for "biosimilar" products. This approval process differs from the ANDA approval process in a number of significant ways. In particular, a biosimilar product could not be approved based on the safety and efficacy data of one of our products until 12 years after initial approval of our product. Biosimilar legislation has also been adopted in the European Union.

        If an ANDA filer or any biosimilar manufacturer were to receive approval to sell a generic or biosimilar version of one of our products, that product would become subject to increased competition and our revenue for that product would be adversely affected.

Guidelines, recommendations and studies published by various organizations can reduce the use of our products and services.

        Professional societies, practice management groups, private health/science foundations, and organizations involved in various diseases may publish guidelines, recommendations or studies to the healthcare and patient communities from time to time. Recommendations of government agencies or these other groups/organizations may relate to such matters as usage, dosage, route of administration, cost-effectiveness, and use of related therapies. Organizations like these have in the past made recommendations about our products and services and those of our competitors. Recommendations, guidelines or studies that are followed by patients and healthcare providers could result in decreased use of our products or services. The perception by the investment community or shareholders that recommendations, guidelines or studies will result in decreased use of our products or services could adversely affect prevailing market price for our common stock. In addition, our success also depends on our ability to educate patients and healthcare providers about our products and services and their uses. If these education efforts are not effective, then we may not be able to increase the sales of our existing products and services or successfully introduce new products and services to the market.

Legislative or regulatory changes may adversely impact our business.

        New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment for products and services, or sales, marketing or pricing may cause our revenue to decline. In addition, we may need to revise our research and development plans if a program or programs no longer are commercially viable. Such changes could cause our stock price to decline or experience periods of volatility.

        The pricing and reimbursement environment for our products may change in the future and become more challenging due to among other reasons, new healthcare legislation or fiscal challenges faced by government health administration authorities. In the United States, enactment of health reform legislation in March 2010 is expected to adversely affect our revenues through, among other provisions, the imposition of fees on certain elements of our businesses and an increase in the Medicaid rebate.

        On September 27, 2007, the Food and Drug Administration Amendment Act of 2007 was enacted, giving the FDA enhanced authority over products already approved for sale, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA's exercise of its new authority could result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, increased costs to assure compliance with new post-approval regulatory requirements, and potential restrictions on the sale or distribution of approved products.

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Credit and financial market conditions may exacerbate certain risk affecting our business.

        Sales of our products and services are dependent, in part, on the availability and extent of reimbursement from third party payors, including governments and private insurance plans. As a result of the current volatility in the financial markets, third-party payors may delay payment or be unable to satisfy their reimbursement obligations. A reduction in the availability or extent of reimbursement could negatively affect our product and service revenues.

        In addition, we rely upon third parties for certain aspects of our business, including collaboration partners, wholesale distributors for our products, contract clinical trial providers, contract manufacturers, and third-party suppliers. Because of the tightening of global credit and the volatility in the financial markets, there may be a delay or disruption in the performance or satisfaction of commitments to us by these third parties, which could adversely affect our business.

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

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

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

Importation of products may lower the prices we receive for our products.

        In the United States and abroad, many of our products are subject to competition from lower-priced versions of our products and competing products from other countries where government price controls or other market dynamics result in lower prices for such products. Our products that require a prescription in the United States may be available to consumers in markets such as Canada, Mexico, Taiwan and the Middle East without a prescription, which may cause consumers to seek out these products in these lower priced markets. The ability of patients and other customers to obtain these lower priced imports has grown significantly as a result of the Internet, an expansion of pharmacies in Canada and elsewhere that target American purchasers, an increase in U.S.-based businesses affiliated with these Canadian pharmacies and other factors. Most of these foreign imports are illegal under current United States law. However, the volume of imports continues to rise due to the limited enforcement resources of the FDA and the United States Customs Service, and there is increased political pressure to permit such imports as a mechanism for expanding access to lower-priced medicines. The importation of lower-priced versions of our products into the United States and other markets adversely affects our profitability. This impact could become more significant in the future.

Our investments in marketable securities are subject to market, interest and credit risk that may reduce their value.

        We maintain a portfolio of investments in marketable securities. Our earnings may be adversely affected by changes in the value of this portfolio. In particular, the value of our investments may be adversely affected by increases in interest rates, downgrades in the corporate bonds included in the portfolio, instability in the global financial markets that reduces the liquidity of securities included in

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the portfolio, and by other factors which may result in other than temporary declines in value of the investments. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio or sell investments for less than our acquisition cost.

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

        As of March 31, 2010, we had $961.7 million in cash, cash equivalents and short- and long-term investments, excluding our investments in equity securities.

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

    amounts we may be required to pay to the FDA under a consent decree we are negotiating with the agency, including a potential $175.0 million upfront payment for the disgorgement of past profits;

    expanding and maintaining existing and constructing new manufacturing facilities, including investing significant funds to expand our Allston, Geel, Belgium and Waterford, Ireland facilities and constructing a new manufacturing facility with capacity for Cerezyme and Fabrazyme;

    implementing process improvements and system updates for our biologics manufacturing operations;

    product development and marketing;

    strategic business initiatives;

    repurchasing shares of our common stock;

    upgrading our information technology systems, including installation and implementation of a new enterprise resource planning system worldwide;

    contingent payments under business combinations, license and other agreements, including a milestone payment to Synpac if sales of Myozyme reach $400.0 million, as well as payments related to our license of mipomersen from Isis, ataluren from PTC, and Prochymal and Chondrogen from Osiris, as well as contingent consideration obligations related to our acquisition of the worldwide rights to the oncology products Campath, Fludara, Leukine and alemtuzumab for MS from Bayer; and

    working capital and satisfaction of our obligations under capital and operating leases.

        On May 6, 2010, we announced that we will initiate a $2.0 billion stock repurchase program, under which we plan to purchase $1.0 billion of our common stock in the near term and financed by debt. We plan to repurchase the additional $1.0 billion during the next twelve months.

        In addition, we have several outstanding legal proceedings. Involvement in investigations and litigation can be expensive and a court may ultimately require that we pay expenses and damages. As a result of legal proceedings, we may also be required to pay fees to a holder of proprietary rights in order to continue certain operations.

        We continue to believe that our available cash, investments and cash flow from operations, together with our revolving credit facility and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future.

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Our business could be negatively affected as a result of a proxy fight.

        Icahn Partners LP and certain of its affiliates have begun a proxy contest relating to our 2010 annual meeting of shareholders, nominating their own slate of four nominees for election to our board of directors. If the proxy contest continues, our business could be adversely affected because:

    responding to proxy contests and other actions by activist shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees;

    perceived uncertainties as to our future direction may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners; and

    if individuals are elected to our board of directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plan and create additional value for our shareholders.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to potential loss from exposure to market risks represented principally by changes in foreign exchange rates, interest rates and equity prices. At March 31, 2010, we held a number of financial instruments, including investments in marketable securities and derivative contracts in the form of foreign exchange forward contracts. We do not hold derivatives or other financial instruments for speculative purposes. There have been no material changes in our market risks during the three months ended March 31, 2010 compared to the disclosures in Part II., Item 7A. of our 2009 Form 10-K.

ITEM 4.    CONTROLS AND PROCEDURES

        As of March 31, 2010, we evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2010.

        There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

Federal Securities Litigation

        In July 2009 and August 2009, two purported securities class action lawsuits were filed in the U.S. District Court for the District of Massachusetts against us and our President and Chief Executive Officer. The lawsuits were filed on behalf of those who purchased our common stock during the period from June 26, 2008 through July 21, 2009 and allege violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Each of the lawsuits is premised upon allegations that we made materially false and misleading statements and omissions by failing to disclose instances of viral contamination at two of our manufacturing facilities and our receipt of a list of inspection observations from the FDA related to one of the facilities, which detailed observations of practices that the FDA considered to be deviations from GMP. The plaintiffs seek unspecified damages and reimbursement of costs, including attorneys' and experts' fees. In November 2009, the lawsuits were consolidated in In Re Genzyme Corp. Securities Litigation and a lead plaintiff was appointed. In March 2010, the plaintiffs filed a consolidated amended complaint that extended the class period from October 24, 2007 through November 13, 2009. We intend to defend this lawsuit vigorously.

Shareholder Derivative Actions

        In December 2009, two actions were filed by shareholders derivatively for Genzyme's benefit in the U.S. District Court for the District of Massachusetts against our board of directors and certain of our executive officers after a ninety day period following their respective demand letters had elapsed (the "District Court Actions"). In January 2010, a derivative action was filed in Massachusetts Superior Court (Middlesex County) by a shareholder who has not issued a demand letter, and in February and March 2010, two derivative actions were filed in Massachusetts Superior Court (Suffolk County and Middlesex County, respectively) by two separate shareholders after the lapse of a ninety day period following the shareholders' respective demand letters (collectively, the "State Court Actions").

        The derivative actions in general are based on allegations that our board of directors and certain executive officers breached their fiduciary duties by causing Genzyme to make purportedly false and misleading or inadequate disclosures of information regarding manufacturing issues, compliance with GMP, ability to meet product demand, expected revenue growth, and approval of Lumizyme. The actions also allege that certain of our directors and executive officers took advantage of their knowledge of material non-public information about Genzyme to illegally sell stock they personally held in Genzyme. The plaintiffs generally seek, among other things, judgment in favor of Genzyme for the amount of damages sustained by Genzyme as a result of the alleged breaches of fiduciary duty, disgorgement to Genzyme of proceeds that certain of our board of directors and executive officers received from sales of Genzyme stock and all proceeds derived from their service as board of directors or executives of Genzyme, and reimbursement of plaintiffs' costs, including attorneys' and experts' fees.

        The District Court Actions have been consolidated in In Re Genzyme Derivative Litigation and the plaintiffs have agreed to a joint stipulation staying these cases until our board of directors has had sufficient time to exercise its duties and complete an appropriate investigation, which is ongoing. In the State Court Actions, the parties are working to consolidate all three lawsuits. We intend to defend these lawsuits vigorously.

ANDA Litigation

        As disclosed in our 2009 Form 10-K, we have initiated patent litigation against a number of companies that submitted to the FDA ANDAs containing Paragraph IV certifications seeking approval

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to market generic versions of Renagel, Renvela and Hectorol. One of the ANDA filers, Sandoz, Inc., is seeking approval to market generic 400mg and 800mg sevelamer hydrochloride tablets after the expiration of the patents protecting Renagel that expire in 2013. In July 2009, we filed a complaint against Sandoz in the U.S. District Court for the District of Maryland alleging that Sandoz's proposed generic products infringe U.S. Patent No. 5,667,775, which expires in 2014 (the "'775 Patent"). Sandoz filed an answer and counterclaims alleging that the '775 Patent and U.S. Patent No. 6,733,780, which expires in 2020 (the "'780 Patent") are invalid and/or not infringed by Sandoz's proposed generic sevelamer hydrochloride products. In the first quarter of 2010, the court granted our motion to