Back to GetFilings.com
1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NO. 0-14680
GENZYME CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 06-1047163
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE KENDALL SQUARE 02139
CAMBRIDGE, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(617) 252-7500
(Registrant's telephone number, including area code)
-----------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
GENERAL DIVISION COMMON STOCK, PAR VALUE $0.01 ("GGD STOCK")
TISSUE REPAIR DIVISION COMMON STOCK, $0.01 PAR VALUE ("GTR STOCK")
GGD STOCK PURCHASE RIGHTS
GTR STOCK PURCHASE RIGHTS
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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 1, 1997: $2,098,604,234
Number of shares of the Registrant's GGD Stock outstanding as of March 1,
1997: 75,682,805
Number of shares of the Registrant's GTR Stock outstanding as of March 1,
1997: 13,188,459
-----------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 29, 1997 are incorporated by reference into Part III
of this Form 10-K.
================================================================================
2
NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Annual Report on Form 10-K for Genzyme Corporation ("Genzyme" or the
"Company") contains forward-looking statements concerning, among other things,
the Company's expected future revenues, operations and expenditures, estimates
of the potential markets for the Company's products and services, assessments of
competitors and potential competitors, projected timetables for the preclinical
and clinical development, regulatory approval and market introduction of the
Company's products and services and estimates of the capacity of manufacturing
and other facilities to support such products and services. These
forward-looking statements represent the expectations of Genzyme's management as
of the filing date of this Form 10-K. The Company's actual results could differ
materially from those anticipated by the forward-looking statements due to a
number of factors, including (i) the Company's ability to successfully complete
preclinical and clinical development and obtain timely regulatory approval and
patent and other proprietary rights protection for its products and services,
(ii) decisions, and the timing of decisions, made by the U.S. Food and Drug
Administration and other agencies regarding the indications for which the
Company's products may be approved, (iii) the actual size and characteristics of
markets to be addressed by the Company's products and services, (iv) market
acceptance of the Company's products and services, (v) the Company's ability to
obtain reimbursement for its products from third-party payers, where
appropriate, (vi) the accuracy of the Company's information concerning the
products and resources of competitors and potential competitors, and (vii) the
risks and uncertainties described under the caption "Factors Affecting Future
Operating Results" under Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Genzyme is a biotechnology and health care products company engaged in the
development of innovative products and services for major unmet medical needs.
The Genzyme General Division ("Genzyme General") develops and markets specialty
therapeutic, surgical and diagnostic products, pharmaceuticals and genetic
diagnostic services. The Company's activities to develop, manufacture and market
biological products for the treatment of cartilage damage, severe burns, chronic
skin ulcers and neurodegenerative diseases are conducted through the Genzyme
Tissue Repair Division ("Genzyme Tissue Repair").
Genzyme currently has two classes of common stock outstanding: General
Division Common Stock ("GGD Stock") and Tissue Repair Division Common Stock
("GTR Stock"). The GGD Stock and the GTR Stock are intended to reflect the value
and track the performance of Genzyme General and Genzyme Tissue Repair,
respectively. In January 1997, Genzyme signed a merger agreement providing for
the merger of PharmaGenics, Inc. ("PharmaGenics"), a company engaged in the
research and development of pharmaceuticals for the treatment of cancer, into
Genzyme in exchange for shares of a new Genzyme security to be designated
Genzyme Molecular Oncology Division Common Stock ("GMO Stock"). The GMO Stock is
intended to reflect the value and track the performance of Genzyme Molecular
Oncology, a new division proposed by Genzyme to develop and market novel
products and services for the diagnosis and treatment of cancer. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Subsequent Events.
For purposes of financial statement presentation, all of the Company's
programs, products, assets and liabilities are allocated to either Genzyme
General or Genzyme Tissue Repair. Notwithstanding this allocation, Genzyme
continues to hold title to all of the assets and is responsible for all of the
liabilities allocated to each of the divisions. Holders of GGD Stock and GTR
Stock have no specific claim against the assets attributed to the division whose
performance is associated with the class of stock they hold. Liabilities or
contingencies of either division that affect Genzyme's resources or financial
condition could affect the financial condition or results of operations of both
divisions.
Ceredase(R), Cerezyme(R), InSight(R), Pleur-evac(R), Tevdek(R),
Thora-Klex(R), Thyrogen(R) and Vianain(R) are registered trademarks of the
Company. CARTICEL(R) is a registered service mark of Genzyme. Contrast(TM),
Direct LDL(TM), EndoCABG(TM), HAL-S(TM), MelaPure(TM), N-geneous(TM),
Sepracoat(TM), Seprafilm(TM), and Sepragel(TM) are trademarks and Epicel(SM),
3
Epicel ASAP(SM) and MASDA(SM) are service marks of the Company. NeuroCell(TM)-PD
and NeuroCell(TM)-HD are trademarks of Diacrin, Inc. ("Diacrin"). Provisc(R) is
a registered trademark of Alcon Laboratories, Inc. ("Alcon"). Pulmozyme(R) is a
registered trademark of Genentech, Inc.
GENZYME GENERAL
OVERVIEW
Genzyme General's Specialty Therapeutics business unit markets Ceredase(R)
enzyme and Cerezyme(R) enzyme, products for the treatment of Gaucher disease.
The Company's results of operations are highly dependent on sales of these
products which, for 1996, totaled $264.6 million. Other specialty therapeutic
products under development include Thyrogen(R) hormone for use in the diagnosis
and treatment of thyroid cancer and gene therapy products for the treatment of
cystic fibrosis ("CF"), cancer, Gaucher disease and cardiovascular disease.
Genzyme General's Surgical Products business unit was formed in July 1996
by combining the business of Deknatel Snowden Pencer, Inc. ("DSP"), a
privately-held company acquired in July by Genzyme that specializes in the
development, manufacture and marketing of cardiovascular devices, precision
surgical instruments and specialty surgical products, with Genzyme General's
line of biomaterial products based on hyaluronic acid ("HA") for use in limiting
the formation of post-operative adhesions (the "Sepra Products").
Genzyme General's Diagnostic Services business unit ("Genzyme Genetics")
applies advanced biotechnology to develop and provide high quality,
sophisticated genetic diagnostic services to health care providers throughout
the U.S. and internationally.
Genzyme General's Diagnostic Products business unit ("Genzyme Diagnostics")
is a primary supplier of diagnostic components (enzymes, substrates, antibodies
and antigens), bulk reagents and devices (including infectious disease kits, the
Direct LDL(TM) and N-geneous(TM) HDL cholesterol test kits and rapid tests for
detection of pregnancy, Strep A and mononucleosis) to manufacturers of clinical
diagnostic reagents and kits as well as directly to clinical reference
laboratories. Genzyme Diagnostics also manufacturers and sells a broad line of
antibody and antigen based ELISA test kits. In addition, Genzyme Diagnostics
distributes a broad line of cytokine and apoptosis research products to
academic, industrial and governmental laboratories.
Genzyme General's Pharmaceuticals business unit ("Genzyme Pharmaceuticals")
develops, manufactures and sells a range of active drug substances,
pharmaceutical intermediates, synthetic phospholipids, peptides and chemicals
to the pharmaceutical and health care industries. Genzyme Pharmaceuticals also
markets MelaPure(TM) brand melatonin, a dietary supplement.
RELATED ENTITIES
GENZYME DEVELOPMENT PARTNERS, L.P. In 1989, Genzyme sponsored Genzyme
Development Partners, L.P. ("GDP"), a research and development limited
partnership that raised $36.75 million through the private placement of limited
partnership interests and warrants to purchase shares of the Company's common
stock. A wholly-owned subsidiary of Genzyme is the general partner of GDP and
holds a 1% partnership interest therein. The Company entered into a contract
with GDP to perform research and development of the Sepra Products for which the
Company was reimbursed its costs plus a 10% fee. The program to develop and
market the Sepra Products is allocated to Genzyme General.
All of GDP's capital available to fund development of the Sepra Products
was spent by the end of the first quarter of 1994. Additional funds will be
required to complete the development and clinical testing of Sepracoat(TM) and
Sepragel(TM). While Genzyme is not obligated to fund additional development of
the Sepra Products, it has funded such development since the first quarter of
1994 and will continue such funding during 1997.
Under the terms of the various agreements between GDP and Genzyme, GDP has
the exclusive right to sell Seprafilm(TM), Sepracoat(TM), Sepragel(TM),
HAL-S(TM) and other HA-based surgical products in the U.S. and Canada through a
joint venture with Genzyme (the "Joint Venture"). Genzyme was granted back an
exclusive license to sell these products outside the U.S. and Canada subject to
a royalty on European sales of these products under certain circumstances.
The Joint Venture was formed in 1989 for the purpose of manufacturing and
marketing GDP's products and commenced operations in 1996 following approval in
August by the U.S. Food and Drug Administration (the "FDA") to market
Seprafilm(TM) in the U.S. (the "Business Commencement Date"). Under the
agreement between GDP and Genzyme governing the Joint Venture (the "Joint
Venture Agreement"), GDP has contributed to the Joint Venture the use of its
technology and $200,000, and Genzyme has contributed its agreement to
manufacture and market the Sepra Products, to make non-interest bearing loans
to the Joint Venture in the amount of any working capital deficiency, to make
capital contributions to the extent deemed necessary by the two venturers in
connection with the business of the Joint Venture and to allow the use of such
trademarks, tradenames and logos as the venturers shall determine to be
necessary and advisable for manufacturing and marketing the Sepra Products. The
cost of Sepra Products purchased by the Joint Venture from Genzyme is
determined pursuant to a formula in the Joint Venture Agreement.
2
4
The Joint Venture Agreement calls for GDP and Genzyme to determine,
following the Business Commencement Date, the allocation of profits and losses
between the parties and the level of reimbursement to Genzyme for providing
general and administrative services to the Joint Venture.
In March 1997, GDP and Genzyme amended and restated the Joint Venture
Agreement (as so amended and restated, the "Amended and Restated Joint Venture
Agreement") to address matters the original Joint Venture Agreement provided
were to be agreed upon on or about the Business Commencement Date and to
address certain other matters. The Amended and Restated Joint Venture Agreement
is retroactive to August 17, 1996, the date of the first commercial sale of
Seprafilm(TM), and provides that:
(1) losses generated by the Joint Venture are allocated (a) the first
$200,000 to GDP and then (b) 40% to GDP and 60% to Genzyme, provided however,
that to the extent a loss allocated to GDP would, pursuant to the terms of GDP
partnership agreement, be allocated to the general partner rather than the
limited partners, such loss is allocated 100% to Genzyme; and
(2) profits are allocated (a) the first $5.6 million to GDP, (b) the
next $8.4 million to Genzyme and (c) thereafter, 40% to GDP and 60% to Genzyme.
The Amended and Restated Joint Venture Agreement also provides that
Genzyme will receive no reimbursement for the general and administrative
services it provides to the Joint Venture until the first year in which the
Joint Venture is projected to generate revenues in excess of $25 million at
which time, Genzyme will receive a quarterly commission equal to 10% of the
Joint Venture's revenues for such quarter. In connection with arriving at
agreement on the foregoing matters, the parties also agreed to amend the Joint
Venture Agreement to provide GDP with enhanced oversight mechanisms, including
an audit right, and to eliminate Genzyme's unilateral right to withdraw from
the Joint Venture.
In connection with negotiating the Amended and Restated Joint Venture
Agreement, the Joint Venture entered into an exclusive marketing and
distribution agreement (the "Marketing and Distribution Agreement") with
Genzyme whereby Genzyme will act as sole distributor of the Sepra Products for
the Joint Venture. The Joint Venture agreed to sell Sepra Products to Genzyme
at the price at which Genzyme is selling the applicable products to the end
user less a distributor's discount (subject to a minimum purchase price) and
also agreed to reimburse Genzyme for certain costs incurred in connection with
market introduction of the Sepra Products. The economic terms of the proposed
Marketing and Distribution Agreement are intended to be substantially similar
to those applicable if Genzyme provided such services in its capacity as a
venturer rather than as a distributor. At the request of a special committee of
directors of the general partner consisting of the two directors who are not
affiliated with Genzyme, Genzyme also entered into a tax indemnification
agreement (the "Tax Indemnification Agreement") with GDP in which Genzyme
agreed, subject to certain limitations, to indemnify the limited partners
against loss of the benefits of certain research and development deductions
certain limited partners have taken (net of potential tax savings due to any
resultant higher tax basis in the limited partnership interests). The Tax
Indemnification Agreement can be waived by GDP in connection with a purchase of
GDP by Genzyme.
2A
5
The Joint Venture will be dissolved (a) upon purchase by Genzyme of all of
the limited partnership interests (as described below), (b) if Genzyme does not
exercise its option to purchase the limited partnership interests (i) upon the
sale, license or other disposition of all or a substantial part of its
technology by GDP or (ii) upon 90 days' notice by either venturer at any time
after the expiration of a one-year period commencing after the option to
purchase the limited partnership interests expires, whichever shall first occur,
(c) by operation of law, (d) upon the bankruptcy, retirement, withdrawal or
dissolution of Genzyme, (e) upon mutual consent of Genzyme and GDP or (f) upon
the election by GDP if Genzyme fails to establish to the satisfaction of GDP
that it is capable of and has undertaken to manufacture the Joint Venture's
requirements for the products for a specified period.
Genzyme has the option to buy all of the limited partnership interests in
GDP for an initial payment of either cash or GGD Stock or a combination thereof,
at its option, equal to $25.7 million (which amount will be recovered by
Genzyme as a credit against subsequent royalty payments) and quarterly royalty
payments for a period of ten years after the buy-out date equal to 10% of
product sales in the U.S. and Canada (and 6% of such sales in Europe, but only
to the extent necessary to meet certain projections made in connection with the
initial capitalization of GDP) and 5% of any revenues derived by Genzyme from
sales in the U.S. and Canada (and 3% in Europe, but only in the instances cited
above) of non-HA-based products that are competitive with GDP's products. The
option to purchase all of the limited partnership interests is exercisable
during a 90-day period commencing on August 31, 2001, but such commencement date
will be accelerated under certain circumstances.
GENZYME TRANSGENICS CORPORATION. In February 1993, Genzyme formed Genzyme
Transgenics Corporation ("GTC") and transferred to it all assets and liabilities
of its business in the field of transgenic technology as applied to the
development and production of recombinant proteins for therapeutic and
diagnostic uses in exchange for shares of GTC's stock. In addition, Genzyme
exclusively licensed to GTC all patents, licenses and other intellectual
property in the field (excluding that related to a CF-related protein). As of
December 31, 1996, Genzyme owned approximately 43% of GTC.
In March 1996, Genzyme and GTC entered into a Convertible Debt and
Development Funding Agreement under which (i) Genzyme has made available to GTC
a $10 million credit line of 7% debt payable on March 31, 1998 and convertible
by either party into shares of GTC common stock, (ii) Genzyme has agreed to fund
the development costs associated with transgenic recombinant antithrombin III
("ATIII"), and (iii) in exchange for funding such development costs and for
making available the credit line, Genzyme has received the right to co-market
ATIII with GTC throughout the world, other than Asia. The agreement to fund the
ATIII program was due to expire on March 31, 1997. The parties have agreed to
extend the agreement until June 30, 1997 and are negotiating an agreement to
provide for long-term development of the AT-III program. There can be no
assurance that Genzyme and GTC will reach a definitive agreement to provide for
such development and, if no agreement is reached, Genzyme's co-marketing rights
will terminate.
3
6
Under other contractual arrangements between Genzyme and GTC, Genzyme
General may engage GTC to perform transgenic research and development on
proteins of interest to Genzyme. GTC has contracted with Genzyme for
purification and protein chemistry research and development services to be
performed by Genzyme General. Genzyme leases laboratory and office space to GTC
and provides it with certain administrative and support services for which GTC
pays fees based on Genzyme's costs.
NEOZYME II CORPORATION. Neozyme II Corporation ("Neozyme II") was formed in
March 1992 to contract with Genzyme to conduct research, development and
clinical testing of biotherapeutic products for the treatment of CF. In May
1992, Genzyme and Neozyme II completed an initial public offering of units which
resulted in gross proceeds to Neozyme II of approximately $84.5 million. On
October 28, 1996, Genzyme completed a tender offer for the outstanding units of
Neozyme II for $45 per unit in cash in which 98.8% of the units were tendered
and accepted for payment at an aggregate purchase price of $107.4 million. Each
unit consisted of one share of callable common stock of Neozyme II ("Callable
Common Stock") and one warrant to purchase two shares of GGD Stock and .135
share of GTR Stock. On December 6, 1996, Neozyme II was merged with a subsidiary
of Genzyme and the remaining outstanding shares of Callable Common Stock were
cancelled and converted into the right to receive $29.00 per share in cash. The
Callable Warrants included in the untendered units separated from the shares of
Callable Common Stock converted in the merger and became exercisable on December
6, 1996.
SPECIALTY THERAPEUTICS
Genzyme General's strategy is to use its technological strengths,
particularly its ability to modify and produce DNA and proteins and its
expertise in fermentation, carbohydrate engineering and gene therapy, to develop
safe and effective therapeutic products to address major unmet medical needs.
Genzyme General is currently selling Ceredase(R) enzyme and Cerezyme(R) enzyme
and has several therapeutic products in various stages of the research,
development, clinical testing and regulatory review processes. There can be no
assurance that any of the products under development will be successfully
completed or that FDA approval of any of these product will be obtained.
SPECIALTY THERAPEUTICS PRODUCT PORTFOLIO
=============================================================================================================
Partners and
Product/Program Indication/Application Status(1) Collaborators
- --------------- ---------------------- --------- -------------
Ceredase(R) enzyme/ Treatment of Gaucher Commercial sales
Cerezyme(R) enzyme disease
- -------------------------------------------------------------------------------------------------------------
Thyrogen(R) recombinant Diagnosis and treatment Phase III clinical trial
human thyroid stimulating of thyroid cancer
hormone metastases
- -------------------------------------------------------------------------------------------------------------
Transgenic antithrombin Control of blood clotting Phase I/II clinical trial Genzyme Transgenics
III during coronary artery Corporation
bypass surgery
- -------------------------------------------------------------------------------------------------------------
Gene therapy
CFTR/adenovirus Cystic fibrosis Pilot clinical study
vector
CFTR/lipid vector Cystic fibrosis Pilot clinical study
MART 1/adenovirus Metastatic malignant Pilot clinical study National Cancer Institute
vector melanoma
gp100/adenovirus Metastatic malignant Pilot clinical study National Cancer Institute
vector melanoma
4
7
Partners and
Product/Program Indication/Application Status(1) Collaborators
- --------------- ---------------------- --------- -------------
Ex vivo stem Gaucher disease Pilot clinical study University of Pittsburgh,
cells/retrovirus IntroGene B.V.
vector
Various proprietary Cardiovascular disease Research Duke University,
vectors for gene University of California
therapy at San Diego
- -------------------------------------------------------------------------------------------------------------------
[alpha]-galactosidase Fabry disease Preclinical development
- -------------------------------------------------------------------------------------------------------------------
Prolactin Maintenance of immune Preclinical development
system function
- -------------------------------------------------------------------------------------------------------------------
Chitinase Anti-fungal agent Preclinical development
- -------------------------------------------------------------------------------------------------------------------
(1) Research status indicates work up to and including small scale production of the targeted product. Preclinical
development status includes work done to increase yields and standardize manufacturing processes and studies
in animals to support an application to the FDA to commence clinical testing in humans. Human clinical trials
for products classified by the FDA as "drugs" or "biologics" are generally conducted in three phases: Phase I,
to determine safety and pharmacokinetics in healthy subjects; Phase II, to provide preliminary evidence of
efficacy in the patient population targeted by the product; and Phase III, sometimes referred to as pivotal
trials, to provide data for proof of safety and effectiveness. Pilot clinical studies are clinical trials for
novel therapies, such as gene therapies, where the product is initially tested in the patient population
targeted by the product for safety, pharmacokinetics and preliminary evidence of efficacy. Following
completion of the pivotal clinical studies, an application for marketing approval of a new drug (an "NDA") or
licensure of a biological product (a "PLA") is submitted to the FDA.
===================================================================================================================
CEREDASE(R) ENZYME (ALGLUCERASE INJECTION) AND CEREZYME(R) ENZYME
(IMIGLUCERASE INJECTION). Treatment with Ceredase(R) enzyme or Cerezyme(R)
enzyme replacement therapy currently represents the only safe and effective
treatment for Gaucher disease, a seriously debilitating, sometimes fatal genetic
disorder caused by a deficiency in an important enzyme in the body called
glucocerebrosidase ("GCR"). This deficiency results in the accumulation of the
lipid glucocerebroside in the body. The disease is characterized by an enlarged
liver or spleen, anemia, bleeding problems, bone and joint pain, fatigue and
orthopedic complications such as repeated fractures and bone erosion.
Ceredase(R) enzyme is a modified form of human GCR in which glycoprotein
remodeling technology has been used to target GCR to the cells where the lipid
accumulation occurs. Cerezyme(R) enzyme is a recombinant form of GCR which has
been remodeled in a similar manner.
Genzyme General is marketing these products directly to physicians,
hospitals and treatment centers worldwide through a highly trained sales force.
This marketing effort is directed at identifying and initiating treatment for
the 5,000 Gaucher patients Genzyme General believes exist worldwide. Currently,
approximately one-third of these patients are receiving treatment. Ceredase(R)
enzyme and Cerezyme(R) enzyme, together, are available in approximately 50
countries worldwide. Ceredase(R) enzyme has received marketing approval in 14
countries, most recently Japan and Belgium, with applications pending in two
other countries. Genzyme is the first biotechnology company to obtain drug
approval in Japan without a partner. Cerezyme(R) enzyme has received marketing
approval in four countries, most recently in Canada and Portugal, with
applications pending in the European Union and other countries.
Genzyme General produces Ceredase(R) enzyme from an extract of human
placental tissue supplied by Pasteur Merieux, a French company that is the only
significant commercial source of this material. The current supply available is
not sufficient to produce enough Ceredase(R) enzyme to supply all present
patients. To address supply constraints, Genzyme developed Cerezyme(R) enzyme.
In October of 1996, Genzyme General received FDA approval to manufacture
Cerezyme(R) enzyme in a new, large-scale manufacturing plant located in Boston,
Massachusetts. Once an uninterrupted supply of Cerezyme(R) enzyme can be
produced by the new plant, patients receiving Ceredase(R) enzyme will be
converted
5
8
to Cerezyme(R) enzyme. Genzyme General will be required to continue
manufacturing Ceredase(R) enzyme until the process of patient conversions is
completed, which is expected to occur during the fourth quarter of 1998. Any
disruption in the supply or manufacturing process of Ceredase(R) enzyme during
the conversion period or in the supply or manufacturing process of Cerezyme(R)
enzyme may have a material adverse effect on revenue.
THYROGEN(R) HORMONE. Genzyme General is developing Thyrogen(R) hormone, a
recombinant form of human thyroid stimulating hormone, for use as an adjunct to
the approximately 100,000 to 200,000 diagnostic and therapeutic procedures
undertaken each year to detect and treat metastases of thyroid cancer. Genzyme
General believes that the administration of Thyrogen(R) hormone may increase the
effectiveness and result in fewer adverse side effects for patients undergoing
current standard medical procedures for thyroid cancer.
Thyrogen(R) hormone was demonstrated to be safe and effective in
stimulating the uptake of radioiodine for whole body scanning in a 1992 Phase
I/II clinical study. A Phase III multi-center clinical study completed late in
1993 provided evidence that the use of Thyrogen(R) hormone prior to diagnostic
scanning greatly improved the quality of life in 94% of thyroid cancer patients
tested and was effective in producing scans that were as good as or better than
conventional scans in 86% of those patients. To confirm the results of this
study, Genzyme General is conducting a second Phase III study, results from
which are expected to be available in mid-1997. If the current study confirms
the prior results, marketing applications are expected to be filed by the end of
1997 in the U.S. and Europe and by early 1998 in Canada. Following its NDA
filing, Genzyme plans to make Thyrogen(R) hormone available to patients in the
U.S. who meet certain criteria under a treatment IND that allows Genzyme to
gather additional information regarding use of the product while recovering
appropriate costs of the product and the treatment.
TRANSGENIC ANTITHROMBIN III. ATIII is a human blood protein that acts as
an anticoagulant. Depressed levels of ATIII can lead to increased risk of
thrombosis (clotting) in patients with either hereditary ATIII deficiency or an
acquired ATIII deficiency often associated with multiple disease states, such as
sepsis, various surgeries, multiple trauma and liver disease.
Natural ATIII derived from donated human plasma currently is sold worldwide
for multiple indications. GTC is developing a transgenic source for ATIII to
address anticipated growth in the market to treat ATIII deficiency by protein
replacement therapy. Genzyme General and GTC believe that current sources of
plasma derived ATIII will be inadequate to address this growth. In combination
with Tufts University School of Veterinary Medicine and SMI Genzyme Limited, a
joint venture between GTC and Sumitomo Metal Industries, Ltd., GTC has developed
a herd of transgenic goats at its production facility in central Massachusetts
that produce active recombinant ATIII.
In October 1996, GTC announced that the results of a Phase I trial
conducted in the United Kingdom showed transgenic ATIII was well tolerated in
healthy subjects. In December 1996, GTC commenced a Phase I/II clinical trial of
transgenic ATIII in the U.S.. In this trial, the product will be administered to
27 patients undergoing coronary artery bypass grafting in a dose-escalating
study to determine the safety of transgenic ATIII in this patient population.
GTC expects to complete the trial during the first half of 1997. Genzyme General
is funding the development of transgenic ATIII pursuant to an agreement with GTC
under which Genzyme General has obtained co-marketing rights for the product
outside of Asia. See "Related Entities -- Genzyme Transgenics Corporation."
GENE THERAPY
OVERVIEW. Gene therapy is an innovative technology being developed by
Genzyme General to treat CF, cancer, Gaucher disease and cardiovascular disease.
Gene therapy involves the delivery of a gene responsible for production of a
particular protein of interest into cells of a patient in order to trigger the
cell to produce the encoded protein for some therapeutic purpose.
Genzyme General's gene therapy research began in 1991 as part of its
efforts to develop novel treatments for CF on behalf of Neozyme I Corporation
("Neozyme I"). Genzyme acquired the CF program from Neozyme I and transferred it
to Neozyme II in 1992. Genzyme acquired Neozyme II in October 1996. See
"Business-- Related Entities." Since 1991, Genzyme General has expended over $60
million in gene therapy research and has established a broad proprietary core
technology base that includes gene delivery systems, in vitro and in vivo model
systems, production capabilities and a dedicated clinical and regulatory staff.
6
9
Because of the innovative nature of gene therapy and public policy issues
surrounding the insertion of new genetic information into cells, Genzyme General
expects that early clinical evaluation will continue to entail especially
careful testing in a limited number of patients. Genzyme General is currently
conducting pilot clinical studies of gene therapy products. The timing and
results of these initial studies will determine whether and when pivotal trials
to determine safety and effectiveness will be undertaken. These pivotal trials
may involve large groups of patients for lengthy periods of time in order to
address the uncertainties surrounding insertion of new genetic information into
humans and to show clinical effectiveness in the treatment of a progressive
disease.
CYSTIC FIBROSIS. CF is the most common fatal genetic disease affecting the
Caucasian population. Approximately one in every 2,500 infants in the U.S. is
born with the disease and there currently are approximately 30,000 cystic
fibrosis patients in North America. CF is caused by a mutation in the gene
responsible for determining the molecular structure of a protein called cystic
fibrosis transmembrane conductance regulator ("CFTR"). Although improvements
have been made over the last 20 years in alleviating certain symptoms of the
disease and delaying its progress, the underlying disease remains untreated and
patients have an average life expectancy of only 29 years.
Genzyme General's work has concentrated on a gene therapy approach to
correct the basic defect in CF cells whereby the mutant genes are augmented with
genes that would enable the patient's cells to produce normal CFTR protein.
Genzyme General's scientists have demonstrated that the defective ion transport
mechanism present in airway cells taken from CF patients can be corrected in
vitro by the insertion of normal CFTR genes into the cells. The techniques for
inserting genetic material into cells outside the body are not expected to be
useful in gene therapy for CF, however, because there is no practical way to
remove, treat and implant the treated cells in the airways of CF patients. For
this reason, Genzyme General's proposed gene therapy product will likely need to
be administered directly to the airways of the lung. Genzyme General also
believes that its gene therapy product would need to be readministered
periodically as the transferred gene ceases to function or is lost and as the
treated cells naturally die and are replaced.
Viral Vectors. In 1993, Genzyme General and collaborators at the
University of Iowa conducted a small study in CF patients using an
adenovirus-gene product administered to nasal epithelium. Results collected from
the study showed that it is possible to correct the biochemical defect in CF
cells in nasal epithelium in vivo. The study results, published in October 1993,
were the first published report of a successful gene transfer in CF patients and
the first successful application of an adenovirus vector in gene therapy. In a
1995 publication reporting the results of a similar study, however, researchers
from the University of North Carolina questioned the efficacy of gene transfer
using adenovirus. In addition, data from a study involving repeat administration
of Genzyme's second generation adenovirus vector to the nasal epithelium of CF
patients showed that, although the virus appeared safe, a complex immune
response to the adenovirus was measured in almost all patients. This and other
data obtained in animals and submitted for publication in 1995 suggest that
immune response may limit the efficacy of repeat dose therapy with adenovirus.
During the fourth quarter of 1994, Genzyme General received Recombinant DNA
Advisory Committee ("RAC") approval and submitted a protocol to the FDA for a
two part safety study involving administration of its second generation
adenovirus vector to the lungs of up to 40 CF patients via bronchoscope and
aerosol. Bronchoscopic administration commenced in the first quarter of 1995,
and aerosol administration commenced in September 1995. Additionally, in
September 1995, Genzyme switched to the use of a third-generation adenovirus
vector with an improved safety profile as part of this same study. The study is
currently ongoing.
In parallel with these clinical studies, Genzyme General is conducting
extensive research into proving the safety and efficacy of adenovirus.
Particular emphasis is being placed on immunology, since it now appears that new
vectors or methods need to be developed so as to reduce the patient's immune
response and to increase the efficacy of adenovirus vectors. Such improvements
may be necessary in order for adenovirus vectors to be clinically useful in
chronic therapy.
Non-Viral Vectors. In addition to pursuing adenovirus and other viral
vectors, Genzyme General is developing lipid-DNA complexes as vectors for gene
therapy. Genzyme General believes that lipid-based vectors may offer advantages
due to their reduced immunogenicity and ease of manufacture relative to viral
vectors. Genzyme General has synthesized, evaluated and filed patent
applications on numerous new lipids. Several of these have shown significantly
greater activity in vivo than commercially available lipids. To augment its
internal efforts, Genzyme has entered into arrangements with third parties to
gain access to non-viral gene delivery technologies. To date, the most
significant such arrangement is an exclusive license agreement with Vical, Inc.
executed in October 1996 for Vical's
7
10
cytofectins for use as non-viral gene delivery vectors for treating CF. The
plasmid expression system containing the DNA also affects expression efficiency,
and Genzyme General has designed various new plasmid constructs to enhance
expression. Although substantial progress has been made in both lipid and
plasmid constructs, currently the optimal formulation of the best lipid-DNA
complex is still less efficient than adenovirus as measured in single dose in
vivo experiments.
In December 1993, a Genzyme General collaborator received RAC approval for
a CF nasal protocol utilizing a lipid-DNA complex containing DMRIE, one of
Vical's proprietary cytofectins. This study commenced in September 1995 and is
currently ongoing. In December 1994, Genzyme General also initiated a
collaboration with a British academic group for purposes of further studying
Genzyme General's proprietary lipid-DNA complexes.
In December 1995, Genzyme General submitted an IND to the FDA for a nasal
study using a proprietary lipid-DNA complex developed by Genzyme General. The
study was initiated in January 1996 by Genzyme and its collaborators at the
University of Iowa and completed in the second quarter of 1996. The study
entailed the administration of the lipid-DNA complex to one nostril of nine CF
patients and administration of the DNA plasmid alone to the patients' other
nostril as a control. Although the results showed that the lipid-DNA compound
was well tolerated, they did not demonstrate the lipid-DNA compound to be
superior to the plasmid DNA in improving ion exchange across the cell membrane.
Also in the second quarter of 1996, Genzyme General completed a safety
study in which the lipid alone was delivered in aerosol form to the lungs of 15
non-CF volunteers. The study showed that aerosolized delivery of the lipid to
the lung was well tolerated. Based on these results, a pilot study involving
aerosol administration of a lipid- DNA complex to the lungs of CF patients was
initiated in the fourth quarter in the United Kingdom. This study is ongoing.
CANCER. There are currently several approaches that can be taken to treat
cancer using gene therapy. Some of these approaches are limited by the inability
of current gene delivery technology to affect every cell in a tissue. To address
these limitations, Genzyme General has focused on two approaches that it
believes may be effective with the current generation of gene delivery vehicles:
immunotherapy and cytotoxic or "suicide" genes. Genzyme General believes that
combinatorial strategies employing two or more gene therapy approaches, or a
gene therapy approach with traditional chemotherapeutic or radiological therapy,
will be useful in treating aggressive forms of the disease, particularly
metastatic cancer.
Immunotherapy - MART-1 and gp100 for Melanoma. Melanoma is a cancer of
the skin affecting melanocytes, the normal cells that color the skin, and is
commonly associated with overexposure to the sun. Melanoma is far more serious
than other types of skin cancer, accounting for three quarters of all deaths
from skin cancer despite representing only 5% of all such cases. The incidence
of melanoma is increasing at a faster rate than that of any other type of cancer
in the U.S. Over 38,000 new cases of melanoma will be diagnosed and more than
7,000 deaths from this disease are projected to occur in the U.S. during 1997.
Worldwide, incidence of melanoma is estimated to be 90,000 new cases per year.
Genzyme General's melanoma gene therapy program has centered on the
delivery of the MART-1 and gp100 genes to dendritic cells to elicit systemic
anti-melanoma T cell responses. Under a Collaborative Research and Development
Agreement ("CRADA") with the National Cancer Institute ("NCI"), Genzyme General
has constructed, in conjunction with Dr. Steven Rosenberg at the NCI, adenoviral
vectors incorporating the MART-1 or gp100 tumor antigen genes. In vitro studies
have demonstrated that cells which do not express either tumor antigen become
targets for destruction by antigen specific T cells following infection with an
adenovirus incorporating the appropriate tumor antigen genes. Subsequent
preclinical animal studies at the NCI demonstrated that: (i) prior immunization
with an adenovirus incorporating the gp100 tumor antigen gene can provide
protection against melanoma cells; (ii) adoptive transfer of spleen cells
derived from animals immunized with the adenovirus carrying the gene
incorporating gp100 can confer protection against melanoma tumor cells,
suggesting that the virus is indeed able to elicit T cell response and (iii)
immunization with the gp100 virus can dramatically reduce the number of lung
metastases in a model of established melanoma particularly when co-administered
with interleukin-2, a T cell growth factor.
These promising preclinical results led to the initiation of two pilot
clinical studies, designed by Dr. Rosenberg and which are currently underway at
the NCI. In these studies, adenovirus vectors carrying either the MART-1
(Ad2/MART-1) or gp100 (Ad2/gp100) gene are being evaluated for safety,
immunologic reactivity and potential
8
11
therapeutic effect when administered alone or in conjunction with recombinant
interleukin-2. Patients in these studies have metastatic melanoma and have not
received alternative therapies during the four weeks prior to administration.
Preliminary results from these studies indicate that the adenoviral vectors
are safe and well tolerated, and that a small but significant number of the 34
patients immunized with Ad2/MART-1 have shown significant tumor regression
following administration of the adenovirus. Clinical evaluation is in process to
determine whether immunization with the adenoviral vector leads to the
generation of an anti-melanoma antigen specific cytotoxic T cell response. Data
gathered from these studies should enable Genzyme General to identify baseline
clinical parameters that correlate with a favorable response to the vaccine and
establish patient inclusion criteria for a Phase II clinical trial. Genzyme
General has the option to license the MART-1 and gp100 genes from the NCI for
use in adenoviral gene therapy for melanoma.
Suicide Gene Therapy for Liver Cancer. Approximately 18,000 new cases
of primary liver cancer are diagnosed in the U.S. each year, and the disease
accounts for approximately 14,000 deaths in the U.S. annually. The annual number
of deaths worldwide from liver cancer is estimated to exceed 250,000, with the
five-year survival rate for localized liver cancer being only 15%. If detected
at an early stage, surgical removal (resection) of the affected portion of the
liver is possible, but diagnosis usually occurs too late for this treatment to
be of benefit. The median survival for patients with non-resectable liver cancer
is about six months.
Genzyme General is collaborating with Dr. Jack Wands at Massachusetts
General Hospital on the development of gene therapies to treat liver cancer. Dr.
Wands has developed proprietary antibodies that can be utilized to target the
delivery of a gene therapy vector to hepatocellular carcinoma ("HCC") cells.
Genzyme General and Dr. Wards are also exploring the use of antibody targeted
vectors to deliver suicide genes to HCC cells. Genzyme General has an option to
license Dr. Ward's technology for gene therapy of HCC.
GAUCHER DISEASE. Genzyme General is collaborating with the University of
Pittsburgh and IntroGene, B.V., in the development of a hematopoietic stem cell
gene therapy for Gaucher disease. A pilot clinical study is in process at the
University of Pittsburgh to determine the safety of an ex vivo retroviral vector
approach. Two patients have completed the treatment protocol to date. Both of
the treated patients have detectable levels of circulating GCR enzyme activity.
The study is currently ongoing.
CARDIOVASCULAR DISEASE. In December 1996, Genzyme General entered into
collaborations with scientists at Duke University and the University of
California, San Diego ("UCSD"), to develop gene therapies for congestive heart
failure, vein graft failure, and restenosis. Additionally, through its
collaboration with UCSD, Genzyme General will be developing a gene therapy
application to protect heart tissue from oxygen damage that can occur during
various types of cardiac procedures. Each collaboration calls for Genzyme
General to provide vectors and research funding to support pre-clinical research
by the academic collaborator and future clinical trials in exchange for rights
to any products resulting from the collaboration.
Other Specialty Therapeutics
[ALPHA]-GAL. Genzyme General is developing a recombinant form of the human
enzyme [alpha]-galactosidase ("[alpha]-Gal") as a treatment for Fabry disease, a
usually fatal inherited disorder of lipid metabolism estimated to afflict
between 2,000 and 4,000 people worldwide. Fabry disease patients experience
clinical symptoms which include pain, numbness, cardiac disease, cerebrovascular
complications and deterioration of kidney function; death general occurs between
40 and 50 years of age. There is no known treatment for the underlying disease
and current medical practice involves pain management and kidney dialysis and/or
transplantation to reduce symptoms.
Genzyme General believes that protein replacement therapy is a rational
approach to the treatment of Fabry disease. To date, it has successfully
produced the recombinant [alpha]-Gal enzyme in mammalian cells and has shown it
can reduce lipid levels in the plasma and tissues of a Fabry mouse model. The
development program is currently focused on producing sufficient quantities of
enzyme for pilot clinical studies, which are expected to begin in late 1997 or
early 1998.
PROLACTIN. Genzyme General is developing a recombinant form of the human
hormone prolactin for use as an immune stimulant. Prolactin acts as a cytokine
on a broad array of immune cell types including lymphocytes, macrophages, bone
marrow and natural killer cells. Potential clinical applications include
immunologic/hematopoietic reconstitution for myelosuppressed and
immunocompromised patient populations and as a vaccine adjuvant.
9
12
To date, Genzyme General has demonstrated the utility of prolactin in
several in vitro and in vivo models and has produced sufficient quantities of
prolactin from mammalian cells to begin pilot clinical studies. Its development
program is currently focused on initiating a Phase I safety/pharmacokinetic
study in the second half of 1997 and identifying a lead clinical indication for
evaluation in 1998.
CHITINASE. Genzyme General is evaluating recombinant human chitinase as a
therapeutic agent for treating systemic fungal infections. These types of
infections are often observed in immunosuppressed individuals such as patients
with AIDS.
Fungi contain the polysaccharide chitin as a component in their cell walls.
It is believed that chitinase, a chitin degrading enzyme produced by human
macrophages, may normally play a role in fighting fungal infections. It is
believed that by augmenting chitinase levels systemically, it may be possible to
significantly enhance the body's capacity to eliminate these type of microbial
infections in immunosuppressed patients. Current therapies for fighting fungal
infections such as amphotericin B are moderately effective but exhibit
significant dose-limiting toxicities. The U.S. market size for a new safe and
effective anti-fungal agent is estimated to be between $250 million and $500
million per year.
Genzyme General has produced recombinant human chitinase in a mammalian
expression system, purified significant quantities of the protein and is in the
process of screening its antifungal activity in a number of different well
characterized cell culture and animal model systems. Data from these studies are
expected to be available in fourth quarter of 1997.
SURGICAL PRODUCTS
The Surgical Products business unit develops, manufactures and markets four
principal product lines: the Sepra Products, cardiovascular fluid management
systems (chest drainage and autotransfusion systems), surgical closure systems
(sutures and needles) and surgical instruments (cardiovascular punches and other
cardiovascular, plastic surgery, endoscopic and general instruments). The fluid
management, closure, and instrument product lines were acquired in 1996 through
Genzyme's acquisition of DSP. DSP employs a 110-person sales force, 60 of which
are located in the U.S., to market products directly to cardiac, general,
gynecologic, colon and rectal surgeons and hospital purchasing departments
throughout the U.S. and Europe. Genzyme General plans to increase the number of
DSP sales representatives in the U.S. to 100 by the end of 1997.
SEPRA PRODUCTS. Genzyme General is developing and selling the Sepra
Products to be used during surgical procedures to limit the formation of
postoperative adhesions. Adhesions are fibrous structures that connect tissues
or organ surfaces that are not normally joined. They are an undesirable side
effect of the body's normal healing process following damage to tissue.
Adhesions can cause significant complications such as bowel obstruction
following abdominal surgery, infertility and pain following gynecological
surgery and restricted limb motion following musculoskeletal surgery. Adhesions
that form as a result of cardiac surgery can increase the complexity, duration
and risk of subsequent cardiac surgery.
The Sepra Products portfolio is comprised of the following products:
* SEPRAFILM(TM) BIORESORBABLE MEMBRANE is a solid formulation of
modified HA and is used to separate and protect tissues and organs that
have been damaged by surgery. The membrane is designed to last several days
in the body.
* SEPRACOAT(TM) COATING SOLUTION is a liquid formulation of HA that,
when used to coat tissues and organ surfaces at the start of and throughout
surgical procedures, forms a temporary physical barrier that may protect
tissues during surgery.
* SEPRAGEL(TM) BIORESORBABLE GEL is a highly viscous gel form of
modified HA and is intended to be used to separate and protect tissues and
organs that have been damaged by surgery. Sepragel(TM) is intended to be
used in laparoscopic procedures and on tissue surfaces that are
inaccessible to Seprafilm(TM). Similar to Seprafilm(TM), the gel is
designed to last several days in the body.
The programs to develop the Sepra Products achieved a number of significant
milestones in 1996. During the third quarter of 1996, the FDA granted approval
to market Seprafilm(TM) in any open abdominal or pelvic surgery. On behalf of
the Joint Venture with GDP, Genzyme General launched Seprafilm(TM) broadly in
the U.S. during the fourth quarter through the DSP sales force. The U.S. sales
force is focusing its efforts on the top 1,000 hospitals that perform 80% of the
targeted procedures for Seprafilm(TM) and the chiefs of surgery at key
institutions and the clinical investigator group and their associates who are
familiar with the product. Genzyme General believes the market opportunity for
Seprafilm(TM) in the U.S. comprises an estimated 3.1 million surgeries annually:
1.8 million open abdominal and 1.3 million open pelvic procedures that carry a
risk of postoperative adhesion-related complications. At the end of February in
the U.S., 476 hospitals had purchased Seprafilm(TM), an increase of 37 percent
from the end of December, and the reorder rate for the product had increased to
39 percent. Revenues from Seprafilm(TM) sales during 1996 were not material.
In February 1996, Seprafilm(TM) was granted the Approval of Conformity
Certificate (the "CE Mark") in accordance with the European Medical Devices
Directive. The CE Mark signifies that a product meets quality standards
necessary for marketing in the 18 countries of the European Union and the
European Economic Area. Genzyme General launched Seprafilm(TM) in Europe during
the second quarter of 1996. Genzyme General believes the number of open
10
13
abdominal and open pelvic procedures that carry a risk of postoperative
adhesion-related complications in Europe is approximately 2 million surgeries
per year. In February 1997, Genzyme signed an agreement with Kaken
Pharmaceutical Co., Ltd. ("Kaken"), Tokyo, to market the Sepra Products in
Japan. Under the terms of this agreement, Kaken was granted co-marketing rights
for Seprafilm(TM) and Sepracoat(TM) in Japan in exchange for a distribution
rights fee and milestone payments to Genzyme. Kaken was also granted an option
to acquire co-marketing rights to Sepragel(TM) in Japan. Genzyme and Kaken will
share equally in the profits of all Sepra Products sold by Kaken.
In January 1996, Genzyme filed a PMA to market Sepracoat(TM) for use in
abdominal, pelvic and cardio-thoracic surgical procedures. In February 1997, the
FDA notified Genzyme that an advisory panel meeting will be held on May 5, 1997
to review the PMA for Sepracoat(TM). The advisory panel will make a
recommendation to the FDA regarding approval of the PMA. The panel's
recommendation will be considered in the FDA's final review of the PMA, but is
not binding on the FDA. Sepracoat(TM) was also granted the CE Mark in 1996 and
Genzyme General initiated marketing efforts for Sepracoat(TM) in Europe during
the fourth quarter of 1996. Sepracoat(TM) is being marketed in Denmark, France,
German, Italy, the Netherlands, Sweden and the United Kingdom as a complement to
Seprafilm(TM).
During the third quarter, Genzyme General received an IDE from the FDA for
Sepragel(TM) and commenced Phase I/II studies of the product for use in
abdominal and gynecological procedures.
A clinical trial for HAL-S(TM) synovial fluid replacement was completed in
November 1995. HAL-S(TM) is a liquid formulation of HA intended to be used
during arthroscopic surgery to maintain normal joint function and reduce pain
and inflammation following surgery. The study evaluated patients undergoing
arthroscopic surgery for repair of meniscal tears, a type of knee damage. The
data from the study showed some improvement in the rehabilitation rate of
patients that received HAL-S(TM). In light of the relatively modest improvement
and small potential market size, however, further development of HAL-S(TM) has
been suspended.
Genzyme General believes that successful initial market penetration and
subsequent maintenance of market share for Seprafilm(TM) and Sepracoat(TM)
require a specialized hospital-based sales force and has deployed the DSP sales
force to accelerate the market introduction of these products in the U.S. and
Europe. Substantial additional efforts to educate surgeons and hospital
administrators as to the benefits of these products will be required, however,
in order for the products to penetrate target markets and gain broad market
acceptance. There can be no assurance that Genzyme General will be successful in
its efforts to implement a commercialization strategy for the Sepra Products.
Funding for the development of the Sepra Products has been provided by GDP,
which has the exclusive right to commercialize these products in the U.S. and
Canada through the Joint Venture. GDP also has the right to a royalty on the
Genzyme General's European sales of these products under certain circumstances.
Since the first quarter of 1994, Genzyme General has funded development of the
Sepra Products on behalf of GDP on an annual basis and is continuing such
funding during 1997. See "Related Entities--GDP."
CARDIOVASCULAR FLUID MANAGEMENT SYSTEMS. This product line consists
primarily of self-contained, disposable chest drainage devices used to drain
blood from the chest cavity following open heart surgery, other surgical
procedures and trauma. If the chest cavity is not properly drained, the patient
may suffer collapsed lungs, which often results in death. In 1967, DSP
introduced the first self-contained, disposable chest drainage unit, Pleur-
evac(R), which quickly became the market leader in chest drainage devices, a
position it still holds today. DSP also sells autotransfusion devices that allow
the collection of blood shed by the patient and its reinfusion postoperatively,
thus eliminating the risks associated with blood transfusions. In December 1995,
DSP acquired a line of dry suction- controlled chest drainage and
autotransfusion devices sold under the Thora-Klex(R) brand name. These products
offer certain advantages over the existing systems sold by DSP and command
higher per unit prices.
SURGICAL CLOSURE SYSTEMS. Surgical sutures, which are sold in packs
consisting of suture/needle combinations, are DSP's oldest product line. DSP
developed Tevdek(R) surgical sutures in 1950, the first coated Dacron-based
suture, followed by Silky Polydek, a softer, easier to handle and tie suture.
DSP emphasizes high quality specialty sutures for cardiovascular and plastic
surgery, utilizing special materials, advanced metallurgy and packaging
innovations. Approximately 50% of DSP's U.S. sales are attributable to high
margin "specials" in which individual surgeons order nonstandard products and
customized suture/needle combinations for specific procedures.
11
14
SURGICAL INSTRUMENTS. DSP sells cardiovascular punches, which are used
during coronary artery bypass surgery to make cleanly cut holes, and hand-held,
reusable instruments such as needleholders, scissors, forceps, graspers,
dissectors and retractors. DSP's instruments are used in cardiovascular,
plastic, endoscopic and general surgery and are sold directly to the surgeon,
the key decision maker on purchases of specialty instruments.
In January 1997, DSP launched a full line of instruments for use in
endoscopic coronary artery bypass graft ("CABG") procedures. This new line is
being marketed under the brand name EndoCABG(TM) System and was the first full
line of instruments for this type of surgery approved by the FDA. The EndoCABG
System includes both disposable and reusable instruments and includes the
complete set of instruments required to perform cardiac bypass grafting
endoscopically.
Traditional cardiac surgery requires the surgeon to saw open the breastbone
to gain access to the heart. Patients who undergo these procedures have severe
scarring, an increased risk of infection, and long recovery periods following
surgery. The new field of minimally invasive cardiac surgery allows the surgeon
to work on the heart through a relatively small incision without cutting the
breastbone. Through the use of endoscopes and specially designed forceps,
scissors, and retractors, the surgeon can perform the same procedure without
exposing the patient to as much pain, trauma, and postoperative risk. A
less-invasive alternative to open heart surgery, balloon angioplasty, was
introduced in the 1980s. Although this procedure offers patients less pain,
trauma and a shorter recovery period, the disadvantage is that a high rate of
arteries becoming blocked again so that patients often need repeat treatment,
sometimes as soon as six months after the initial procedure. About 500,000
single bypass and balloon angioplasty procedures are performed annually in the
U.S. By the year 2000, DSP believes that at least half of these procedures
could be replaced by minimally invasive CABG procedures in which the
EndoCABG(TM) System could be used.
In conjunction with the introduction of the EndoCABG(TM) System, DSP
entered into two agreements to expand the product line and to extend its use to
other cardiac procedures. Under one agreement, the EndoCABG(TM) System will be
expanded so that surgeons can stop the heart with the aid of an aortic occlusion
balloon developed by the Cook Group of Bloomington, Indiana. Under this
agreement, Cook will manufacture the balloons and DSP will market them
exclusively. DSP expects to begin offering the balloons as part of the
EndoCABG(TM) System in the first half of 1998. The other agreement covers a
product development and marketing alliance with CarboMedics, Inc. of Austin,
Texas, a leading manufacturer of mechanical heart valves. Together, the
companies are developing a system of instrumentation and supplies which will
allow cardiac surgeons to introduce CarboMedics's mechanical heart valves
through a small incision in the patient's chest wall. The companies expect to
launch instruments for valve replacement procedures later this year.
During 1996, DSP also signed agreements with leading endoscopic training
centers in the U.S. and Europe. Both centers will use the EndoCABG(TM) System
for minimally invasive cardiac surgery. Since September 1996, the Advanced
Laproscopic Training Center in Atlanta has trained 40 surgeons to perform the
new minimally invasive cardiac surgery using DSP's EndoCABG(TM) System.
Beginning in February 1997, the European Institute of Telesurgery of Strasbourg,
France, has provided European surgeons with the same training offered in the
U.S.
DIAGNOSTIC SERVICES
Genzyme Genetics applies advanced biotechnology to develop and provide high
quality, sophisticated genetic diagnostic services to physicians, hospitals,
universities, medical centers, clinical laboratories, genetic centers and
managed care organizations in the U.S. and internationally through a national
network of laboratories. Testing services currently marketed by Genzyme Genetics
include prenatal genetic diagnostic services, DNA-based diagnosis of a number of
genetic diseases, including some cancers. Genzyme Genetics also employs over 70
board certified genetics professionals who interpret results and provide genetic
counseling and support services to medical practitioners and their patients.
12
15
DIAGNOSTIC SERVICES PORTFOLIO
Product/Program Indication/Application Status
- --------------- ---------------------- ------
Biochemical testing Screening for certain fetal Commercial
chromosomal abnormalities service
Prenatal cytogenetics Detection of fetal chromosomal Commercial
abnormalities service
InSight(R) molecular genetic testing Rapid detection of selected fetal Commercial
chromosomal abnormalities service
DNA testing Detection of single gene Commercial
disorders (CF, Fragile X, service
Huntington's Disease, Gaucher
Disease, etc.)
MASDA(SM) Service Detection of CF mutations Commercial
Genetic profiling service
Cancer Testing -- cancer Applications used singly or in Commercial
cytogenetics, fluorescent in-situ tandem for detection and service
hybridization "FISH", DNA prognosis of various forms of
cancer
Fetal cell separation Detection of fetal chromosomal Preclinical
abnormalities development
CLAMSS Detection of unknown mutation Research
PRENATAL AND POSTNATAL GENETIC DIAGNOSTIC SERVICES. Genzyme Genetics offers
three types of genetic diagnostic services: biochemical testing, classical and
molecular cytogenetic testing, and DNA testing. Biochemical testing services
consist primarily of a widely used screening test (AFP3) to determine if further
prenatal genetic testing is appropriate. Classical and molecular cytogenetic
testing involves the analysis of fetal cells obtained through amniocentesis or
chorionic villi sampling ("CVS") to evaluate chromosomal abnormalities. DNA
testing is performed to determine the likelihood that the subject has, or is a
carrier for, a specific genetic disorder.
Genzyme Genetics's strategy is to expand its genetic diagnostics business
by providing a comprehensive range of high quality testing services in a timely,
accurate and convenient manner; by aggressively marketing its services through a
direct sales force; and by maintaining an active research and development
program that enables it to introduce additional testing services based on new
technologies. Genzyme Genetics also has an active program to expand its
laboratory operations through acquisitions. In furtherance of this strategy,
Genzyme Genetics acquired Genetrix, Inc., a Phoenix-based network of prenatal
and cancer genetic testing laboratories, in May 1996.
The InSight(R) test, a faster cytogenetic test based on in situ
hybridization of chromosome-specific DNA probes, was introduced by Genzyme
Genetics in 1991. This technology permits identification of the most frequently
occurring chromosomal abnormalities within 48 hours, as compared to the one to
three weeks required to perform classical cytogenetic testing (karyotyping). The
InSight(R) analysis is provided in conjunction with a complete karyotype.
Genzyme Genetics's cancer diagnostic services based on cytogenetics and a
series of supporting tests currently focus primarily on various forms of
leukemias and lymphomas. Genzyme Genetics also provides testing for numerous
genetic diseases including, fragile X syndrome, spinal muscular atrophy,
Huntington's disease, polycystic kidney disease, sickle cell anemia, and
hemophilia.
13
16
MASDA(SM) SERVICE. Accurate tests for detection of the genetic components
of disease are likely to require the analysis of multiple genes as well as
multiple mutations within these genes. For example, defects in any one of at
least four genes can result in hereditary nonpolyposis colon cancer, and in just
two of those genes more than 100 mutations have been reported. There is,
therefore, a crucial need for methods of rapidly detecting mutations in genes of
known sequence. To meet this need, Genzyme Genetics developed its patented
Multiplex Allele-Specific Diagnostic Assay (the "MASDA(SM) Service"), which can
analyze in a single assay up to 500 samples simultaneously for over 100 known
mutations.
To use the MASDA(SM) Service, a mixture of hundreds of probes is
constructed with each probe specific to one mutation. Individual DNA samples
from numerous patients are then placed in a specific location in an array and
exposed to the probe mixture. Patient samples that contain at least one mutation
will be detected with a positive "signal." By identifying which probe(s) bind to
the patient sample, the exact mutation(s) are revealed. Positive samples are
also treated to produce a visual banding pattern that is unique for each
mutation. This pattern is automatically interpreted by computer analysis to
provide results.
The MASDA(SM) Service not only analyzes different patient samples with
different disease indications in a single assay, it also identifies multiple
mutations in one or more genes in a single patient's DNA sample. In addition,
only those samples with a positive signal need to be tested further in the
mutation identification step. Eliminating samples that lack mutations from
further analysis produces considerable cost savings when compared to
conventional testing methods in which each sample has to undergo extensive
analysis before a negative report can be confirmed.
Genzyme Genetics is pursuing a number of commercialization strategies for
the MASDA(SM) Service. In February 1997, Genzyme Genetics launched a 70-mutation
CF test. Previous CF tests could only identify 32 or fewer mutations, thereby
producing negative results for people with rare mutations. In addition, the
MASDA(SM) Service is also being used to provide genetic profiling services for
clinical trials being conducted by pharmaceutical companies.
Genzyme Genetics has established a federally certified clinical trials
laboratory to support diagnostic assay development using the MASDA(SM) Service.
Ongoing oncology studies in this laboratory include studies of colorectal cancer
with Kaiser Permanente of Northern California and the University of California,
San Francisco and of hereditary breast cancer with the Dana Farber Cancer
Institute. In addition, the laboratory provides population segmentation services
for internal drug development programs and external customers. These studies are
designed to identify genetic markers that might provide information about the
severity of a disease as well as the likelihood that a patient might respond
either favorably or adversely to a therapy.
DEVELOPMENT PROGRAMS. Genzyme Genetics maintains an active program aimed at
identifying and developing new technologies and methods of performing genetic
tests and applying these methods to improve and expand its menu of testing
services. In its own research laboratories and in collaboration with others,
Genzyme Genetics is developing additional platforms for complex mutational
analysis and conducts major research and development programs in such areas as
genomics and rare cell separation and analysis methods.
The MASDA(SM) Service is designed to detect known mutations. Genzyme
Genetics is also developing related technology, called cleavage- and ligation
associated mutation specific sequencing or "CLAMSS," to detect and identify
unknown mutations. These techniques address situations where many different
mutations in a gene give rise to a disease state, but where no single mutation
is responsible for a significant percentage of disease.
In 1995, Genzyme Genetics, together with its collaborators, announced the
full identification of the PKD1 gene, which causes polycystic kidney disease, a
common genetic disorder that leads to renal failure by middle age in most
affected individuals. This group is also involved in the discovery of the gene
for the most common cause of inherited cardiac arrhythmia, long QT syndrome,
also known as "sudden death syndrome."
Genzyme Genetics also continues its efforts to develop methods and
procedures to isolate and genetically analyze fetal cells obtained from maternal
blood samples. The program has demonstrated the feasibility of a separation
technology involving the use of combinations of antibodies that bind selectively
to specific cell types and has developed appropriate immobilization and
analytical methods. At this point, however, the process does not meet Genzyme
Genetics consistency standards well enough to commercialize it as a diagnostic
test.
14
17
Fetal cells obtained from maternal blood serum could potentially be used in
lieu of cells derived from amniotic fluid or chorionic villi for genetic
testing, thereby avoiding the risk associated with amniocentesis or CVS. Genzyme
Genetics believes that successful development of techniques which permit
prenatal genetic testing of samples obtained from mothers on a low risk basis,
using rapid low cost detection methods, can result in a substantial expansion of
the market for prenatal testing. Significant resources continue to be focused on
this research program.
DIAGNOSTIC PRODUCTS
Genzyme Diagnostics is a primary supplier of diagnostic components
(enzymes, substrates, antibodies and antigens), bulk reagents and devices to
manufacturers of clinical diagnostic reagents and kits as well as directly to
clinical reference laboratories. It also manufactures and sells a broad line of
antibody and antigen based ELISA test kits. In addition, Genzyme Diagnostics
distributes a broad product line of research products to academic, industrial
and governmental laboratories for use in immunology and cell biology and has
developed manufacturing expertise in enzyme fermentation, purification, reagent
formulation and immunoassay test development.
DIAGNOSTIC PRODUCTS PORTFOLIO
Product/Program Indication/Application Status
- --------------- ---------------------- ------
Cardiovascular products -- Direct Clinical diagnostic testing Product sales
LDL(TM), N-geneous(TM) HDL, ApoE Elisa
and Lp(a) Cholesterol Tests
Diagnostic enzymes, substrates and Raw materials for clinical chemistry Product sales
antibodies and immunoassays for diagnostic
manufacturers
OEM reagents and kits Immunodiagnostic and clinical Product sales
chemistry kits for diagnostic
manufacturers
Research products Research in immunology and cell Product sales
biology, primarily for apoptosis
and cytokines
Rapid tests OEM sales and end-user distribution Product sales
for pregnancy and infectious
disease tests
CARDIOVASCULAR PRODUCTS. Genzyme Diagnostics sells devices and reagents for
the quantification of LDL and HDL cholesterol levels. In October 1996, Genzyme
Diagnostics launched the N-geneous HDL(TM) cholesterol test in the U.S. The new
test, which is being distributed by Genzyme Diagnostics under a worldwide
agreement with the manufacturer of the test, Daiichi Pure Chemicals Co., Ltd.,
of Tokyo, measures how much high-density lipoprotein cholesterol is present in a
patient's serum. Because the N-geneous HDL(TM) test can be conducted completely
on an automated clinical chemistry analyzer, it is simpler than other HDL
cholesterol tests currently on the market, which require manual pretreatment of
patient samples. The automation of HDL testing with the N-geneous(TM) test will
provide laboratories with significant operational benefits and enable them to
improve results by reducing the probability of error introduced by sample
handling and manual sample pretreatment. Genzyme Diagnostics estimates the U.S.
market for the N-geneous HDL(TM) test to be between 50 and 100 million tests per
year and the global market at approximately 200 million tests per year. In
addition to the U.S., Genzyme Diagnostics is the exclusive marketing partner
for the N-geneous HDL(TM) test in Europe and the rest of the world, with the
exception of Asia, where Genzyme holds co-exclusive distribution rights.
Genzyme Diagnostics has also developed and commercialized an in vitro
diagnostic test kit (the Direct LDL(TM) test kit) for the direct measurement of
LDL cholesterol in blood samples. The correlation between elevated blood
cholesterol levels and increased risk of coronary heart disease, one of the
leading causes of death in the U.S., is well established. A high level of LDL
cholesterol in the blood indicates an increased risk of coronary heart disease.
Prior to the approval of the Direct LDL(TM) test kit, there was no routine
direct standardized test for measuring LDL cholesterol and LDL cholesterol
levels were derived using several indirect measurements and estimates, each
contributing a potential source of error to the calculation. Genzyme
Diagnostics is working to replace the Direct LDL(TM) test kit with a
homogeneous method similar to HDL.
DIAGNOSTIC INTERMEDIATES. Genzyme Diagnostics produces and sells critical
components such as diagnostic enzymes, substrates and reagents for use in
diagnostic kits used for blood analysis in clinical chemistry
15
18
laboratories. One primary area of emphasis is pancreatic function, where Genzyme
Diagnostics provides enzymes, substrates, bulk reagents and patented
methodologies for amylase and lipase determination to diagnostic kit
manufacturers. Genzyme Diagnostics is also a primary supplier of cholesterol
enzymes used in testing for coronary heart disease. Sales of its diagnostic
intermediates are made to over 200 manufacturers and users of diagnostic kits
worldwide through its own technical sales representatives in the U.S. and Europe
and through distributors in Japan.
ELISA TEST KITS. Genzyme Diagnostics manufactures and sells a broad range
of ELISA test kits for infectious disease and endocrinology determinations. In
addition, it supplies monoclonal and polyclonal antibodies plus other
immunoassay raw materials to immunodiagnostic kit manufacturers. Patented
Contrast(TM) rapid tests for pregnancy, Strep A and infectious mononucleosis
determination are also becoming key contributors to Genzyme Diagnostics's
product portfolio.
RESEARCH PRODUCTS. Genzyme Diagnostics research products consist of a
comprehensive line of cytokines, growth factors, antibodies, proteins and
cytokine and apoptosis ELISA systems which play an integral role in activating
and modulating the body's immune system. These research products are used
primarily to conduct research in the areas of immunology and cellular biology.
PHARMACEUTICALS
Genzyme Pharmaceuticals develops, manufactures and sells a range of active
drug substances, pharmaceutical intermediates, synthetic phospholipids,
peptides, biomolecules and chemicals to the pharmaceutical and health care
industries. These products utilize the division's capabilities in multi-step
organic chemical synthesis, fermentation, enzymology and carbohydrate
technology.
PHARMACEUTICALS PRODUCT PORTFOLIO
Product/Program Indication/Application Status
- --------------- ---------------------- ------
MelaPure(TM) melatonin Dietary supplement Product sales
Clindamycin phosphate Treatment of serious infections Product sales
Hyaluronic acid Ophthalmic products & research Product sales
applications
Active drug substances and Production of oral, topical and Product sales
pharmaceutical intermediates parenteral drugs
Fine chemicals Production of pharmaceutical Product sales
intermediates and electronic chemicals
Synthetic phospholipids Drug delivery systems and Product sales
pharmaceutical components
Synthetic peptides Production of final dosage form Product sales
therapeutics
Amino acid derivatives Production of synthetic peptides Product sales
MELAPURE(TM) MELATONIN. In 1995, melatonin, a synthetic human hormone
present in a variety of foods and marketed as a dietary supplement, became the
largest selling chemical product manufactured by Genzyme Pharmaceuticals.
Genzyme Pharmaceuticals supplies bulk quantities of melatonin to manufacturers
of final dosage form product and is marketing its MelaPure(TM) brand melatonin
outside the U.S. in a finished dosage form product.
16
19
Although total melatonin revenues in 1996 increased over 1995, sales declined
materially during the second half of 1996 due to declining market demand.
Genzyme Pharmaceuticals does not expect that melatonin sales will return to the
levels experienced during the first half of 1996 during 1997. Melatonin is
regulated as a drug in many countries and, therefore, cannot be marketed without
prior regulatory approval in those countries. Genzyme Pharmaceuticals plans to
start a clinical trial of MelaPure(TM) melatonin for a sleep disorder
indication, which if successful will broaden the market opportunity for
MelaPure(TM) as a regulated product.
CLINDAMYCIN PHOSPHATE. Genzyme Pharmaceuticals currently produces and sells
clindamycin phosphate, an off-patent antibiotic widely used by hospitals for the
treatment of infections. Clindamycin phosphate is sold to pharmaceutical
companies in the U.S., Europe, Japan and the Middle East through Genzyme
Pharmaceuticals' worldwide sales organization.
HYALURONIC ACID. Genzyme Pharmaceuticals currently produces and sells bulk
hyaluronic acid (HA) for a number of applications. Under an agreement with
Alcon, Genzyme Pharmaceuticals supplies pharmaceutical grade HA powder to Alcon
for incorporation into Provisc(R), an HA-based ophthalmic surgical aid product,
which Alcon introduced in 1994. Genzyme Pharmaceuticals also receives a royalty
based on Alcon's product sales. Hyaluronic acid is also sold to a number of
customers for various research and development applications.
ACTIVE DRUG SUBSTANCES AND PHARMACEUTICAL INTERMEDIATES. Genzyme
Pharmaceuticals currently produces drug substances for leading ethical
pharmaceutical companies for formulation into a variety of dosage forms. It also
supplies various pharmaceutical intermediaries which are converted to active
drug substances by the customer.
FINE CHEMICALS. Genzyme Pharmaceuticals has developed a range of high value
fine chemicals and chiral intermediates based on its proprietary technology in
complex organic chemistry. These products include various synthetic starting
materials and liquid crystal chemicals for the electronics industry. It markets
these products through its own sales force directly to chemical and
pharmaceutical companies worldwide.
SYNTHETIC PHOSPHOLIPIDS. Phospholipids are the major structural components
of cell membranes. They are useful in drug delivery systems, emulsion
formulations and as components of pharmaceutical products such as liposomes.
Genzyme Pharmaceuticals has developed proprietary technology for the large scale
manufacture of synthetic phospholipids with high purity and consistency and
currently produces and sells synthetic phospholipids to pharmaceutical and
biotechnology companies for use in the formulation and delivery of certain of
their products.
SYNTHETIC PEPTIDES AND AMINO ACID DERIVATIVES. Synthetic peptides are a
class of biologically active compounds comprised of chains of amino acids. Many
of these compounds have applications as active drug compounds and are used by
the pharmaceutical industry in final dosage form preparations. Genzyme
Pharmaceuticals is a commercial scale GMP manufacturer of synthetic peptides for
many such applications. Amino acid derivatives are the materials used in the
production of synthetic peptides. In addition to producing these materials for
use in its own peptide manufacturing processes, Genzyme Pharmaceuticals sells
amino acid derivatives to the pharmaceutical industry for use in the manufacture
of peptides.
COMPETITION
Genzyme General is engaged in a segment of the human health care products
industry that is extremely competitive. Competitors in the U.S. and elsewhere
are numerous and include major pharmaceutical, chemical, surgical device and
biotechnology companies, many of which have substantially greater resources than
Genzyme. These companies may succeed in developing products that are more
effective than any that have been or may be developed by Genzyme General and may
also prove to be more successful than Genzyme General in producing and marketing
their products.
Each of Genzyme General's business units faces different competitive
challenges:
SPECIALTY THERAPEUTICS
17
20
CEREDASE(R) ENZYME AND CEREZYME(R) ENZYME. Although Genzyme General is not
aware of any current effective alternative to its products for the treatment for
Gaucher disease (Ceredase(R) enzyme and Cerezyme(R) enzyme), competition
potentially could come from other protein replacement therapies or gene therapy.
Genzyme General believes that its proprietary production techniques, exclusive
raw material source for Ceredase(R) enzyme and, to a certain extent, the orphan
drug status of its products give it a number of advantages over potential
competitors using protein replacement therapy for the treatment of Gaucher
disease. Gene therapy techniques are still in experimental stages. Genzyme
General believes that the principal factors that will affect competition for
Ceredase(R) enzyme and Cerezyme(R) enzyme will be clinical effectiveness and
absence of adverse side effects. One company is attempting to develop an
alternative form of recombinant GCR by producing the enzyme in insect cells and
modifying it by applying a coating of polyethylene glycol.
CF. There are a number of organizations, both academic and commercial,
engaged in developing therapies to treat either the symptoms of CF or the cause
of the disease. Several groups are developing gene therapy approaches to the
disease and also have received FDA and RAC approval to initiate limited human
studies of CF gene therapy. In addition, other organizations are investigating
pharmacological and biological agents that would treat CF. One such product,
Pulmozyme(R), which was developed by Genentech, Inc., currently is on the
market. These groups may succeed in developing gene therapy products before
Genzyme General, in obtaining patent protection that may effectively block
Genzyme General from commercializing its gene therapy products or in developing
other drug therapies that relieve the symptoms of CF and, thus, compete with
products under development by Genzyme General.
CANCER. Competition in the field of cancer diagnostics and therapeutics is
intense. Many competitors in this field have greater financial and human
resources, more experience in research, preclinical and clinical development,
superior expertise in obtaining regulatory approvals and more extensive
production and marketing infrastructure than Genzyme General. Genzyme General is
aware of clinical trials sponsored by Rhone-Poulenc Rorer relating to gene
therapy for cancer and expects that other large companies will be initiating
gene therapy clinical trials in the near future. Genzyme General also relies on
its collaborators for support in some of its cancer research and development
programs and intends to rely on these partners for preclinical evaluation and
clinical development of its potential products and services. Certain of its
collaborators are conducting multiple product development programs in fields
similar to those that are the subject of the partner's alliance with Genzyme
General. For instance, the NCI, with whom Genzyme General is collaborating
regarding the use of adenoviral vectors incorporating the MART1 and gp100 tumor
antigen genes for the treatment of melanoma, is currently working with others on
non-adenoviral vector delivery systems for these antigens. Any product candidate
of Genzyme General, therefore, may be subject to competition with a potential
product under development by a third party, including Genzyme General's
collaborators.
SURGICAL PRODUCTS
SEPRA PRODUCTS. Genzyme General believes that its expertise in developing
proprietary fermentation processes and its access to proprietary strains of
micro-organisms used in its HA production process will give it a competitive
advantage in the marketing of the Sepra Products. Its anti-adhesion products
may face significant competition, however, from other HA-based products, from
non-HA-based products and from changes in surgical techniques that would obviate
the use of HA. Genzyme General believes that the principal factor that will
affect competition in this area is acceptance of the product by surgeons, which
depends, in large part, upon product performance, safety and price.
DSP. DSP competes in three medical device categories: cardiovascular fluid
management systems, surgical closure systems and surgical instruments. In each
of these categories, DSP's principal methods of competing are continued
innovative product development, the performance and breadth of its product
lines, brand name recognition, sales force training and educational services,
including sponsorship of training programs in advanced surgical techniques.
DSP's key product in the cardiovascular fluid management category is the
Pleur-evac(R) chest drainage product. DSP believes that it leads the chest
drainage category with a majority share and that this position is sustainable
due to a broad product line possessing patented features and brand name
recognition. The surgical closure category is dominated by Ethicon, a subsidiary
of Johnson & Johnson, and Sherwood, a division of American Home Products
Corporation. DSP had focused on the cardiovascular suture market within this
category and believes that favorable demographics such as the aging population
and lengthening life expectancies will provide continued growth in this market.
Competition within the surgical instruments category varies by segment, such as
cardiovascular, endoscopic and plastic surgery instruments, with no one company
dominating the entire category. Unique features and product innovation within
its surgical instruments line, such as the recently launched EndoCABG(TM)
System, have allowed DSP to compete effectively across this category and to hold
a majority share of the cardiovascular punch segment.
18
21
DIAGNOSTIC SERVICES. The U.S. market for prenatal cytogenetic and
biochemical testing is divided among approximately 500 laboratories, many of
which offer both types of testing. Of this total group, less than 20
laboratories market their services nationally. Genzyme Genetics believes that
the industry as a whole is still quite fragmented, with the top 20 laboratories
accounting for approximately 50% of market revenues, and with no individual
company, including Genzyme Genetics, accounting for more than 18% of the total.
Competitive factors in the genetic diagnostics services business generally
include reputation of the laboratory, range of services offered, pricing,
convenience of sample collection and pick-up, quality of analysis and reporting
and timeliness of delivery of completed reports. Genzyme Genetics believes that
its research and development program, which has enabled it to develop and
introduce testing services based on new technology, and its active sales and
marketing force have played significant roles in the rapid growth of its genetic
diagnostics services business. In addition to Genzyme Genetics, several
companies and academic groups are attempting to develop fetal cell separation
techniques. Genzyme Genetics believes that its combination of separation and
analytical technologies will give it a competitive advantage.
DIAGNOSTIC PRODUCTS. Genzyme Diagnostics acts as a primary supplier of
enzymes and substrates, and generally does not compete with its customers in the
sale of complete diagnostic kits. This philosophy enables Genzyme Diagnostics to
maintain unique relationships with major diagnostic kit manufacturers and to
engage with them in development efforts to produce new or improved kits. The
market in the diagnostic products industry is mature and competition is based on
price, reliability of supply and the purity and specific activity of products.
PHARMACEUTICALS. Competition in the pharmaceuticals business is affected
primarily by production efficiency, product quality and price. Genzyme
Pharmaceuticals believes that its success in this market is due to its technical
expertise and selection of high-value, small volume products that minimize
direct competition with larger production operations in commodity products.
PATENTS AND PROPRIETARY TECHNOLOGY
Genzyme General pursues a policy of obtaining patent protection both in the
U.S. and in selected foreign countries for subject matter considered patentable
and important to its business. In addition, a portion of Genzyme's proprietary
position is based upon patents that Genzyme has licensed from others. These
license agreements generally require Genzyme to pay royalties upon
commercialization of products covered by the licensed technology. In general,
patents issued in the U.S. are effective for a period of seventeen years from
date of issue, although the GATT legislation changes this to twenty years from
the filing date for applications filed after June 8, 1995. The duration of
foreign patents varies in accordance with applicable local law. Genzyme General
also relies on trade secrets, proprietary know-how and continuing technological
innovation to develop and maintain a competitive position in its product areas.
Genzyme's employees, consultants and corporate partners who have access to its
proprietary information have signed confidentiality agreements. Genzyme
General's patent position and proprietary technology are subject to certain
risks and uncertainties. See "Factors Affecting Future Operating
Results--Uncertainty Regarding Patents and Protection of Proprietary Technology"
under Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GOVERNMENT REGULATION
Governmental regulation, in the U.S. and other countries, is a significant
factor in the production and marketing of many of Genzyme General's products and
in its ongoing research and development activities.
FDA REGULATION. In the U.S., products that do not achieve their principal
intended purpose through chemical action within or on the body and which are not
dependent upon being metabolized by the patient's body in order to be effective
are classified by the FDA as "devices" while other products are classified as
"drugs" or "biologics." Ceredase(R) enzyme and Cerezyme(R) enzyme are regulated
in the U.S. as drugs, as are Thyrogen(R) hormone, Prolactin and Chitinase. Its
gene therapy products, [alpha]-Gal and ATIII are regulated as biologics. The
Sepra Products and DSP's products are regulated as devices. The Direct LDL(TM)
and N-geneous(TM) HDL cholesterol tests are classified as an in vitro diagnostic
devices.
The activities required before drugs or biologics may be marketed in the
U.S. include (i) preclinical laboratory tests, in vitro and in vivo preclinical
studies and formulation and stability studies, (ii) the submission to the FDA
and
19
22
approval of an application for human clinical testing (an "IND"), (iii) adequate
and well controlled human clinical trials to prove the safety and effectiveness
of the drug or biologic, (iv) the submission of a New Drug Application ("NDA")
for a drug or a Product License Application ("PLA") for a biologic or a BLA for
biologics identified by the FDA as "Specified Biologics" and (v) the approval
by the FDA of the NDA, BLA or PLA.
In addition to product approval, the manufacturer of the product may have
to obtain an establishment license (for a biologic that is not considered well
characterized) or a pre-approval Good Manufacturing Practices ("GMP") inspection
(for a drug or well-characterized biologic) from the FDA. Since any license
granted by the FDA is both site and process specific, any material change by a
company in the manufacturing process, equipment or location necessitates
additional FDA review and approval.
Products that are classified as devices also require FDA approval prior to
marketing. Devices are classified as Class I, II or III, depending upon the
information available to assure their safety and effectiveness. In general,
Class I and Class II devices are devices whose safety and effectiveness can
reasonably be assured through general or specific controls, respectively. Class
III devices are life sustaining, life supporting or implantable devices or new
devices which have been found not to be substantially equivalent to legally
marketed devices. The steps required for approval of a Class III device include
(i) preclinical laboratory tests and in vitro and in vivo preclinical studies,
(ii) the submission to the FDA and approval of an investigational device
exemption (an "IDE") to allow initiation of clinical testing, (iii) human
clinical studies to prove safety and effectiveness of the device, (iv) the
submission of a PMA and (v) the approval by the FDA of the PMA. Typically,
clinical testing of devices involves initial testing to evaluate safety and
feasibility and expanded trials to collect sufficient data to prove safety and
effectiveness. In addition, the procedures and the facilities used to
manufacture the device are subject to review and approval by the FDA.
A device (other than a Class III device) which is proved to be
substantially equivalent to a device marketed prior to May 28, 1976, when
government regulations for devices were first introduced, can be marketed after
approval of a 510(k) application rather than the filing of an IDE and a PMA. The
510(k) application must contain a description of the device, its methods of
manufacture and quality control procedures and the results of testing to
demonstrate that the device is substantially equivalent to the device already
marketed.
The time and expense required to perform the clinical testing necessary to
obtain FDA approval can far exceed the time and expense of the research and
development initially required to create the product. Even after initial FDA
approval has been obtained, further studies may be required to provide
additional data on safety or to gain approval for the use of a product as a
treatment for clinical indications other than those initially targeted. In
addition, use of these products during testing and after marketing approval has
been obtained could reveal side effects which, if serious, could delay, impede
or prevent marketing approval, limit uses, force a recall of the product or
expose Genzyme General to product liability claims.
REGULATION OUTSIDE THE U.S.. For marketing outside the U.S., Genzyme
General is subject to foreign regulatory requirements governing human clinical
testing and marketing approval for its products. These requirements vary by
jurisdiction, differ from those in the U.S. and may necessitate additional
pre-clinical or clinical testing whether or not FDA approval has been obtained.
Generally, Genzyme General's initial focus for obtaining marketing approval
outside the U.S. is Europe. European Union ("EU") Directives ("regulations")
generally classify products either as medicinal products or devices. For
medicinal products, like those produced by Genzyme, marketing approval may be
sought using either the centralized procedure of the Committee for Proprietary
Medicine or Products (the "CPMP") or the decentralized (mutual recognition)
process. The CPMP centralized procedure results in a recommendation in all
member states, while the EU multi-state process involves country by country
approval. EU regulations for products classified as devices have been
implemented for some devices. Devices such as Genzyme's Sepra Products must
receive market approval through a centralized procedure, where the device
receives a CE mark allowing distribution to all member states of the European
Union. For those devices where EU regulations have not been implemented,
marketing approval must be obtained on a country by country basis. The CE mark
certification requires the company to receive International Standards
Organization (ISO) certification for each facility involved in the manufacture
or distribution of the device. This certification only comes after the
development of an all inclusive quality system which is reviewed for compliance
to International Quality Standards by a licensed "Notified Body" working within
the EU. After certification is received a product dossier is reviewed which
attests to the product's compliance with EU directive 93/42/EEC for medical
devices. Only after this point is a CE mark granted
20
23
Ceredase(R) enzyme has been registered for sale in the EU through a CPMP
centralized procedure. Genzyme General expects Cerezyme(R) enzyme, Thyrogen(R)
hormone, [alpha]-Gal, Prolactin, Chitinase and the gene therapy products also
will be regulated through centralized CPMP procedure. Seprafilm(TM) and
Sepracoat(TM) have been granted the CE Mark. Genzyme will apply for a CE Mark
for all products sold by DSP.
ORPHAN DRUG ACT. The Orphan Drug Act provides incentives to manufacturers
to develop and market drugs for rare diseases and conditions affecting fewer
than 200,000 persons in the U.S. at the time of application for orphan drug
designation. The first developer to receive FDA marketing approval for an orphan
drug is entitled to a seven-year exclusive marketing period in the U.S. for that
product. However, a drug that is considered by the FDA to be clinically superior
to or different from another approved orphan drug, even though for the same
indication, is not barred from sale in the U.S. during the seven-year exclusive
marketing period. Genzyme General has been accorded orphan drug status for
Ceredase(R) enzyme and Cerezyme(R) enzyme and has received orphan drug
designation for a number of other products currently under development,
including gene therapy products and Thyrogen(R) hormone.
Legislation has been periodically introduced in recent years, however, to
amend the Orphan Drug Act. Such legislation has generally been directed to
shortening the period of automatic market exclusivity and granting certain
marketing rights to simultaneous developers of a drug. The effect on Genzyme of
any amendments ultimately adopted cannot be assessed at this time. It believes
that the commercial success of these products including Ceredase(R) enzyme and
Cerezyme(R) enzyme will depend more significantly on the associated safety and
efficacy profile and on the price relative to competitive or alternative
treatments and other marketing characteristics of each product than on the
exclusivity afforded by the Orphan Drug Act. Additionally, these products may be
protected by patents, exclusive raw material supply contracts and other means.
OTHER GOVERNMENT REGULATION. Genzyme General's operations are or may be
subject to various laws, regulations and recommendations relating to safe
working conditions, laboratory practices, the experimental use of animals and
the purchase, storage, movement, import and export and use and disposal of
hazardous or potentially hazardous substances, including radioactive compounds
and infectious disease agents used in connection with its research work. The
extent of government regulation which might result from future legislation or
administrative action cannot be predicted.
GENZYME TISSUE REPAIR
OVERVIEW
Genzyme Tissue Repair is a leading developer of biological products for the
treatment of cartilage damage, severe burns, chronic skin ulcers, and
neurodegenerative diseases. Genzyme Tissue Repair believes that strong
capabilities in three groups of core technologies -- cell processing,
therapeutic protein development and biomaterials engineering -- enhance its
ability to successfully develop and market a portfolio of novel products and
services for unmet medical needs in the field of tissue repair. Two services,
the CARTICEL(R) Autologous Chondrocyte Service (the "CARTICEL(R) Service") for
repair of knee cartilage damage and the Epicel(SM) Service for permanent skin
replacement for burn victims, and currently are on the market. Development
programs to improve the performance and expand the applications of each of these
services are ongoing. In addition, Genzyme Tissue Repair is developing
recombinant human transforming growth factor beta2 ("TGF-(beta)2") for the
treatment of chronic skin ulcer.
Genzyme Tissue Repair further expanded its product pipeline in 1996 through
a joint venture with Diacrin to develop and commercialize two cellular therapies
neurodegenerative diseases -- NeuroCell(TM)-PD for the treatment of Parkinson's
disease and NeuroCell(TM)-HD for the treatment of Huntington's disease. These
programs are in Phase I clinical trials and involve implantation of porcine
fetal cells to regenerate damaged brain tissue. The joint venture combines
Diacrin's expertise in developing populations of tranplantable porcine fetal
cells with Genzyme Tissue Repair's expertise in cell-based therapies. Genzyme
Tissue Repair will provide 80% of the first $50 million in funding for these
programs and by the joint venture.
CARTILAGE REPAIR
THE CARTICEL(SM) SERVICE
21
24
BACKGROUND AND MARKET OPPORTUNITY. Once damaged, joint cartilage does not
normally regenerate in the body. In addition to causing pain and restricted
mobility, chronic injuries to joint cartilage over time may lead to debilitating
osteoarthritis and can severely hinder a person's normal activities and
occupation.
Many patients with joint cartilage damage undergo arthroscopic surgery to
smooth the surface of the damaged area. Other surgical procedures, such as
microfracture, drilling, and abrasion, allow bone marrow cells to infiltrate the
defect, resulting in the formation of a fibrous cartilage tissue that is less
durable and resilient than normal articular cartilage. These procedures may
provide symptomatic relief, but the benefit usually lasts only a few years,
especially if the patient's pre-injury activity level is maintained.
More severe and chronic forms of knee cartilage damage can lead to greater
deterioration of the joint cartilage and may eventually lead to total knee joint
replacements. Approximately 200,000 total knee replacement operations are
performed annually at a cost of about $25,000 each. The artificial joint
generally lasts only 10 to 15 years and is considered a poor option for people
under the age of 50.
DESCRIPTION OF THE CARTICEL(R) SERVICE. The CARTICEL(R) Service employs a
proprietary process to grow a patient's own cartilage cells for use in treating
damaged knee cartilage. The treatment, also called autologous chondrocyte
implantation ("ACI"), was initially developed at the University of Gotenburg
and Sahlgrenska University Hospital, Gotenburg, Sweden, in an effort to provide
a better therapy for people with joint cartilage damage. The new treatment is
used primarily in patients with cartilage damage to the femoral condyle, an area
of the knee formed by the end of the thigh bone. Patients with this type of
damage generally display symptoms which include locking, catching, localized
pain, and swelling.
The CARTICEL(R) Service starts when an orthopedic surgeon provides Genzyme
Tissue Repair with a biopsy of healthy cartilage from the patient. Technicians
at the company's cell processing facilities in Cambridge and Framingham,
Massachusetts, use proprietary methods to grow millions of new cells for that
patient. The cells are then delivered to the hospital, where the surgeon
implants them into the defect using the ACI procedure. In this procedure, the
physician removes damaged tissue and prepares the defect for introduction of the
cultured cells. A small piece of the periosteum, the membrane covering a bone,
is taken from the patient's lower leg and sutured over the defect to hold the
cells in place. The cultured cells are then implanted under the periosteum in
the defect, where they form a matrix that integrates with surrounding cartilage
to fill the defect.
In addition to standardized cartilage cell processing, the CARTICEL(R)
Service includes an integrated program of surgeon training and rigorous
collection and analysis of outcomes data, which is aimed at providing broad
surgeon access and achieving and maintaining high quality patient outcomes. In
order to gain access to the service, surgeons must complete comprehensive
training in the ACI procedure. Genzyme Tissue Repair's training programs include
clinical, technical and practical orientation modules, providing a concentrated
exposure to ACI technology. Physician training consists of lectures, practice of
the surgical technique and an orientation regarding reimbursement and billing
procedures. As of December 31, 1996, Genzyme Tissue Repair had trained 1,463
surgeons in this program.
CLINICAL RESULTS. At a meeting of the American Academy of Orthopedic
Surgeons ("AAOS"), Genzyme Tissue Repair's academic collaborator, Lars Peterson,
M.D., Ph.D., of the University of Gotenburg, reported results of a study of 92
patients treated more than two years ago with ACI. The results showed that 96%
of those with a single defect on the femoral condyle had good to excellent
results in
22
25
a clinical assessment using five different rating scales. The new data also
support the addition of osteochondritis dissecans ("OCD") as an indication for
ACI. OCD is the separation of a fragment of cartilage and underlying bone from
the articular surface. Of patients treated for this type of lesion, 89% had good
to excellent results. Good to excellent results were also reported in 75% of
patients who had concurrent repair of damage to their anterior cruciate
ligament, in addition to treatment of a cartilage defect on the femoral condyle.
Patients with lesions on the knee cap showed less improvement, however, as only
62% of these patients had good to excellent results. A retrospective analysis of
the medical records of the patients in this study, using the five rating scales,
revealed that their knees were, on average, in poor condition before treatment.
As part of the study, Peterson and his colleagues took 25 biopsies of the
ACI grafts from 14 of the 92 patients. Treatment failures were over-represented
among these biopsies, because patients with good clinical outcomes generally did
not want to undergo the invasive biopsy-collection procedure. In a blinded
fashion, an independent investigator examined the overall tissue appearance and
cellular appearance and evaluated the biopsies using polarized light and
immunohistochemical techniques. The evaluation revealed that 13 of the 25
biopsies were composed of hyaline-like cartilage (the kind normally found on
joint surfaces) with a surface layer of fibrous cartilage (the remnants of a
tissue cap used to hold the autologous cells in place). Six biopsies were
composed of combined hyaline and fibrous cartilage. Six were composed of
fibrous cartilage. Correlation of the histological results with the clinical
data showed that hyaline-like repair tissue was associated with improved
clinical outcomes, while fibrous repair tissue was associated with poor
outcomes. The results of this study confirmed those published two years ago in
the NEW ENGLAND JOURNAL OF MEDICINE, in which Peterson reported on the first 23
patients to undergo 2-year follow-up evaluations.
Genzyme Tissue Repair believes that clinical data collection for analysis
of surgical outcomes will be critical to document and expand the use of the
CARTICEL(R) Service. Accordingly, Genzyme Tissue Repair has established a
registry of patients who receive cells from the CARTICEL(R) Service and requires
that each surgeon obtain consent from the surgeon's institutional review board
("IRB") to collect outcomes data under a protocol developed by Genzyme Tissue
Repair. Data from the registry on 42 patients who had been treated more than 12
months prior to the time of data collection and 121 patients who had been
treated six months prior to data collection were presented at the AAOS meeting
held in February 1997. The registry data showed statistically significant
improvement at both six months and 12 months following ACI treatment with cells
grown by the CARTICEL(R) Service. These improvements were seen in four key
measures: clinician and patient evaluations of overall knee condition, patient
reports of symptoms, and knee examination results. Genzyme Tissue Repair is also
planning a five-year post-marketing evaluation study that will compare the
safety and effectiveness of the CARTICEL(R) Service to other treatment options
available to repair damaged knee cartilage.
GOVERNMENT REGULATION. Based on discussions with the Center for Devices
and Radiological Health, Genzyme Tissue Repair introduced the CARTICEL(R)
Service in March 1995 as an unregulated device. In the absence of specific
regulation, Genzyme Tissue Repair developed a comprehensive manufacturing
process that established rigorous quality standards for autologous cell
services. These standards included internal and external assessments of the
manufacturing and quality system. This system was recently inspected by the FDA
in connection with the Biologics License Application submitted by Genzyme
Tissue Repair described below.
In April 1995, the FDA contacted Genzyme Tissue Repair and asked for more
information regarding the regulatory status of the CARTICEL(R) Service.
Following this request, Genzyme Tissue Repair filed a formal request in May of
1995 with the FDA Commissioner's office to review the regulatory status of the
CARTICEL(R) Service and determine appropriate regulatory jurisdiction. The FDA
was provided with information regarding Genzyme Tissue Repair's quality
standards and the policies that Genzyme Tissue Repair established for the
CARTICEL(R) Service, as well as answers to specific technical questions. The
FDA responded to Genzyme Tissue Repair's request for designation in July 1995,
confirming in its response Genzyme Tissue Repair's belief that a formal
regulatory framework appropriate to the CARTICEL(R) Service had not yet been
established. Furthermore, the FDA informed Genzyme Tissue Repair that it
intended to hold a public hearing to explore the