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EX-32.2 - EXHIBIT 32.2 - GENZYME CORPa2199511zex-32_2.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)    

ý

 

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

For the quarterly period ended June 30, 2010

Or

o

 

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

For the transition period from                               to                              

Commission File No. 0-14680

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

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

500 Kendall Street
Cambridge, Massachusetts

(Address of principal executive offices)

 

02142
(Zip Code)

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



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

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

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

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

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

        Number of shares of Genzyme Stock outstanding as of July 31, 2010: 254,839,847


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NOTE TO UPDATE SECOND QUARTER EARNINGS RELEASE

        On July 21, 2010, we issued a press release containing our financial results for the three month period ended June 30, 2010, which we furnished as an exhibit to a Current Report on Form 8-K prior to hosting a conference call. Subsequent to July 21, 2010, we identified additional inventories that did not meet our quality specifications. Our decision to discard these inventories has resulted in a second quarter write off of $6.5 million in addition to the $21.9 million write off previously reported. As a result, our second quarter net loss is $(3.8) million or $(0.01) per diluted share, compared with net income of $23.0 thousand or $0.00 per diluted share reported on July 21, 2010.

NOTE REGARDING REFERENCES TO GENZYME

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

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

    our expectations regarding Myozyme/Lumizyme revenues;

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

    our expectations that production interruption at our Haverhill, England manufacturing facility will not result in a supply constraint for Renagel/Renvela, the expected timing of new sevelamer carbonate production and the amount of additional costs we expect to incur during the third quarter of 2010 related to the remediation of this facility;

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

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

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

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

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

    the protection afforded by our patent rights; and

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    our expectations regarding the amortization of intangible assets related to our expected future contingent payments due to Bayer Schering Pharma A.G., or Bayer, Synpac (North Carolina), Inc., or Synpac, and Wyeth Pharmaceuticals (which is now a part of Pfizer Inc. and referred to as Pfizer).

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

    the possibility that current reduced supply allocations of Fabrazyme and Cerezyme need to last longer than expected or need to be more severe than expected because third-party oversight under the consent decree we agreed to with the United States Food and Drug Administration, or FDA, results in delays in product releases, our demand forecasts and estimates are inaccurate, productivity of the new Fabrazyme working cell bank does not increase and/or we experience any additional disruptions in our manufacturing processes or timeline;

    the possibility that we may encounter additional manufacturing problems due to variety of reasons, including equipment failures, viral or bacterial contamination, cell growth at lower than expected levels, fill-finish issues, disruptions in utility services to manufacturing facilities, human error or regulatory issues;

    our ability to maintain regulatory approvals for our products, services and manufacturing facilities and processes, including our Allston, Massachusetts manufacturing facility, which we refer to as our Allston facility, and to obtain approval for proposed changes to enhance our manufacturing processes and new manufacturing capacity, including our new manufacturing facility in Framingham, Massachusetts for Fabrazyme and Cerezyme or an additional bioreactor for the production of Myozyme/Lumizyme in our Geel, Belgium facility, which we refer to as our Geel facility, all in the anticipated time frames;

    our ability to successfully transition fill-finish operations for Cerezyme, Fabrazyme, Myozyme and Thyrogen out of our Allston facility and to our Waterford, Ireland plant and to Hospira, Inc., or Hospira, a third-party contract manufacturer, on the planned timelines because of delays in regulatory approval, manufacturing problems or for any other reason;

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

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

    the possibility that we may experience supply constraints for Thyrogen, and the extent of those constraints, if we are not able to transfer fill-finish activities to Hospira on the planned timelines because of delays in regulatory approval, manufacturing problems or for any other reason;

    the possibility that we are not able to repurchase some or all of the $1.0 billion remaining under our common stock repurchase plan or complete strategic transactions involving our genetic testing, diagnostic products and pharmaceutical intermediates business units in the expected timeframes or at all, or able to achieve anticipated levels of efficiencies and cost savings through the multi-year action plan we expect to begin implementing this year;

    the possibility that we are unable to transition Lumizyme patients to commercial product as quickly as anticipated;

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

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

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    competition from lower cost generic or biosimilar products;

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

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

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

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

    potential future product recalls or write offs of inventory, including the portions of Cerezyme, Myozyme and Thymoglobulin inventories that are being evaluated to ensure that such inventories meet quality specifications;

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

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

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

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

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

    the outcome of legal proceedings by or against us;

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

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

    general economic conditions; and

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

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

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NOTE REGARDING INCORPORATION BY REFERENCE

        The United States Securities and Exchange Commission, commonly referred to as the SEC, allows us to disclose important information to you by referring you to other documents we have filed with them. The information that we refer you to is "incorporated by reference" into this Form 10-Q. Please read that information.

NOTE REGARDING TRADEMARKS

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

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GENZYME CORPORATION AND SUBSIDIARIES

FORM 10-Q, JUNE 30, 2010

TABLE OF CONTENTS

 
   
  PAGE NO.  

PART I.

 

FINANCIAL INFORMATION

   
7
 

ITEM 1.

 

Financial Statements

   
7
 

 

Unaudited, Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009

   
7
 

 

Unaudited, Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009

   
8
 

 

Unaudited, Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009

   
9
 

 

Notes to Unaudited, Consolidated Financial Statements

   
10
 

ITEM 2.

 

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

   
41
 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   
91
 

ITEM 4.

 

Controls and Procedures

   
92
 

PART II.

 

OTHER INFORMATION

   
92
 

ITEM 1.

 

Legal Proceedings

   
92
 

ITEM 1A.

 

Risk Factors

   
95
 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   
95
 

ITEM 6.

 

Exhibits

   
96
 

Signatures

   
97
 

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PART I.    FINANCIAL INFORMATION

        

ITEM 1.    FINANCIAL STATEMENTS

        


GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

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

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2010   2009   2010   2009  

Revenues:

                         
 

Net product sales

  $ 974,922   $ 1,115,425   $ 1,946,547   $ 2,152,669  
 

Net service sales

    103,589     105,693     205,504     207,192  
 

Research and development revenue

    928     7,392     1,861     17,520  
                   
   

Total revenues

    1,079,439     1,228,510     2,153,912     2,377,381  
                   

Operating costs and expenses:

                         
 

Cost of products sold

    301,644     288,899     581,383     524,461  
 

Cost of services sold

    66,524     61,624     132,396     121,874  
 

Selling, general and administrative

    402,535     354,128     955,845     672,089  
 

Research and development

    225,558     210,522     446,488     417,447  
 

Amortization of intangibles

    67,891     63,945     138,875     121,543  
 

Contingent consideration expense

    10,021     9,090     72,570     9,090  
                   
   

Total operating costs and expenses

    1,074,173     988,208     2,327,557     1,866,504  
                   

Operating income (loss)

    5,266     240,302     (173,645 )   510,877  
                   

Other income (expenses):

                         
 

Equity in loss of equity method investments

    (870 )       (1,567 )    
 

Losses on investments in equity securities, net

    (31,562 )   (105 )   (31,399 )   (681 )
 

Gain on acquisition of business

        24,159         24,159  
 

Other

    356     (2,056 )   (246 )   (3,035 )
 

Investment income

    3,084     4,144     6,384     9,494  
                   
   

Total other income (expenses)

    (28,992 )   26,142     (26,828 )   29,937  
                   

Income (loss) before income taxes

    (23,726 )   266,444     (200,473 )   540,814  

Benefit from (provision for) income taxes

    19,953     (78,870 )   81,752     (157,754 )
                   

Net income (loss)

  $ (3,773 ) $ 187,574   $ (118,721 ) $ 383,060  
                   

Net income (loss) per share:

                         
 

Basic

  $ (0.01 ) $ 0.69   $ (0.45 ) $ 1.42  
                   
 

Diluted

  $ (0.01 ) $ 0.68   $ (0.45 ) $ 1.39  
                   

Weighted average shares outstanding:

                         
 

Basic

    265,270     269,958     265,760     270,406  
                   
 

Diluted

    265,270     274,852     265,760     276,225  
                   

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

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GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

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

 
  June 30,
2010
  December 31,
2009
 

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 681,807   $ 742,246  
 

Short-term investments

    152,706     163,630  
 

Accounts receivable, net

    890,244     899,731  
 

Inventories

    594,112     608,022  
 

Other current assets

    193,445     210,747  
 

Deferred tax assets

    183,698     178,427  
           
   

Total current assets

    2,696,012     2,802,803  

Property, plant and equipment, net

    2,846,148     2,809,349  

Long-term investments

    139,641     143,824  

Goodwill

    1,403,639     1,403,363  

Other intangible assets, net

    1,963,429     2,313,262  

Deferred tax assets-noncurrent

    522,311     376,815  

Investments in equity securities

    74,227     74,438  

Other noncurrent assets

    118,492     136,870  
           
   

Total assets

  $ 9,763,899   $ 10,060,724  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             
 

Accounts payable

  $ 130,323   $ 189,629  
 

Accrued expenses

    939,516     696,223  
 

Deferred revenue

    34,288     24,747  
 

Current portion of contingent consideration obligations

    155,898     161,365  
 

Current portion of long-term debt and capital lease obligations

    8,510     8,166  
           
   

Total current liabilities

    1,268,535     1,080,130  

Long-term debt and capital lease obligations

    1,105,956     116,434  

Deferred revenue-noncurrent

    12,338     13,385  

Long-term contingent consideration obligations

    821,311     853,871  

Other noncurrent liabilities

    80,354     313,252  
           
   

Total liabilities

    3,288,494     2,377,072  
           

Commitments and contingencies

             

Stockholders' equity:

             
 

Preferred stock, $0.01 par value

         
 

Common stock, $0.01 par value

    2,531     2,657  
 

Additional paid-in capital

    5,068,602     5,688,741  
 

Share purchase contract

    (200,000 )    
 

Accumulated earnings

    1,551,375     1,670,096  
 

Accumulated other comprehensive income

    52,897     322,158  
           
   

Total stockholders' equity

    6,475,405     7,683,652  
           
   

Total liabilities and stockholders' equity

  $ 9,763,899   $ 10,060,724  
           

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

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GENZYME CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

 
  Six Months Ended
June 30,
 
 
  2010   2009  

Cash Flows from Operating Activities:

             
 

Net income (loss)

  $ (118,721 ) $ 383,060  
 

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

             
   

Depreciation and amortization

    246,036     208,515  
   

Stock-based compensation

    92,390     109,831  
   

Provision for bad debts

    12,431     10,808  
   

Contingent consideration expense

    72,570     9,090  
   

Equity in loss of equity method investments

    1,567      
   

Gain on acquisition of business

        (24,159 )
   

Losses on investments in equity securities, net

    31,399     681  
   

Deferred income tax benefit

    (62,917 )   (50,632 )
   

Tax benefit from employee stock-based compensation

    28,392     9,239  
   

Excess tax benefit from (provision for) stock-based compensation

    5,372     (4,424 )
   

Other

    3,314     4,068  
   

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

             
     

Accounts receivable

    (71,630 )   (106,901 )
     

Inventories

    (47,156 )   21,795  
     

Other current assets

    (20,504 )   (903 )
     

Accounts payable, accrued expenses and deferred revenue

    132,615     30,278  
           
       

Cash flows from operating activities

    305,158     600,346  
           

Cash Flows from Investing Activities:

             
 

Purchases of investments

    (175,816 )   (64,394 )
 

Sales and maturities of investments

    187,220     150,739  
 

Purchases of equity securities

    (4,030 )   (7,363 )
 

Proceeds from sales of investments in equity securities

    4,134     1,473  
 

Purchases of property, plant and equipment

    (330,298 )   (318,324 )
 

Investments in equity method investment

    (1,466 )    
 

Acquisitions

        (117,073 )
 

Purchases of other intangible assets

    (6,155 )   (18,345 )
 

Other

    (7,661 )   (5,198 )
           
       

Cash flows from investing activities

    (334,072 )   (378,485 )
           

Cash Flows from Financing Activities:

             
 

Proceeds from issuance of common stock

    58,362     53,508  
 

Repurchases of our common stock

    (800,000 )   (107,134 )
 

Payments under shares purchase contract

    (200,000 )    
 

Excess tax benefits from (provision for) stock-based compensation

    (5,372 )   4,424  
 

Proceeds from issuance of debt, net

    994,387      
 

Payments of debt and capital lease obligations

    (4,549 )   (4,305 )
 

Increase (decrease) in bank overdrafts

    23,851     (14,303 )
 

Payment of contingent consideration obligation

    (61,336 )    
 

Other

    939     3,660  
           
       

Cash flows from financing activities

    6,282     (64,150 )
           

Effect of exchange rate changes on cash

    (37,807 )   2,113  
           

Increase (decrease) in cash and cash equivalents

    (60,439 )   159,824  

Cash and cash equivalents at beginning of period

    742,246     572,106  
           

Cash and cash equivalents at end of period

  $ 681,807   $ 731,930  
           

Supplemental disclosures of non-cash transactions:

             
 

Strategic Transactions—Note 6.

             
 

Goodwill and Other Intangible Assets—Note 8.

             
 

Long-Term Debt—Note 11.

             

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

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements

1. Description of Business

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

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

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

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

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

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

    Multiple Sclerosis, which is developing products, including alemtuzumab, for the treatment of MS and other auto-immune disorders.

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

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

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

    our former Hematologic Oncology segment is now referred to as "Hematology and Oncology" and now includes our transplant business unit, which previously was reported under the caption

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Notes to Unaudited, Consolidated Financial Statements (Continued)

1. Description of Business (Continued)

      "Other," but no longer includes our MS business unit, which is now reported as a separate reporting segment called "Multiple Sclerosis."

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

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

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

        In May 2010, we announced that we plan to pursue strategic alternatives for our genetic testing, diagnostic products and pharmaceutical intermediates business units. Possible alternatives include divestiture, spin-out or management buy-out. Our genetic testing business unit had revenue of approximately $371 million for the year ended December 31, 2009 and approximately $183 million for the six months ended June 30, 2010. Our diagnostic products business unit had revenue of approximately $167 million for the year ended December 31, 2009 and approximately $76 million for the six months ended June 30, 2010. Revenue from our pharmaceutical intermediates business unit for the same periods was significantly less in comparison.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

        Our unaudited, consolidated financial statements for each period include the statements of operations, balance sheets and statements of cash flows for our operations taken as a whole. We have eliminated all intercompany items and transactions in consolidation. We have reclassified certain 2009 data to conform to our 2010 presentation. We prepare our unaudited, consolidated financial statements following the requirements of the SEC for interim reporting. As permitted under these rules, we condense or omit certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States, or U.S. GAAP.

        These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and results of operations. Since these are interim financial statements, you should also read our audited, consolidated financial statements and notes included in Exhibit 99 to our Form 8-K filed with the SEC on June 14, 2010. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods. The balance sheet data as of December 31, 2009 that is included in this Form 10-Q was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP.

        Our unaudited, consolidated financial statements for each period include the accounts of our wholly owned and majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. We account for our investments in entities not subject to consolidation using the equity method of accounting if we have a substantial ownership interest (20% to 50%) in or exercise significant influence over the entity. Our consolidated net income (loss) includes our share of the earnings or losses of these entities. From January 1, 2008 to December 31, 2009 we consolidated the results of BioMarin/Genzyme LLC, an entity we formed with BioMarin Pharmaceutical Inc., or BioMarin, in 1998, because we determined that we were the primary beneficiary of BioMarin/Genzyme LLC. Upon consolidation of the entity, we recorded the assets and liabilities of BioMarin/

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

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


Genzyme LLC in our consolidated balance sheets at fair value. Effective January 1, 2010, in accordance with new guidance we adopted for consolidating variable interest entities, we no longer consolidate the results of BioMarin/Genzyme LLC because we determined that the entity does not have a primary beneficiary under the new guidance. As a result, we deconsolidated BioMarin/Genzyme LLC and no longer record the assets and liabilities in our consolidated balance sheets. Instead, effective January 1, 2010, we began to record our portion of BioMarin/Genzyme LLC's results in equity in loss of equity method investments in our consolidated statements of operations.

Revenue Recognition—Recent Healthcare Reform Legislation

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

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

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

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

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

These provisions did not have a significant impact on our results of operations or financial position for the six months ended June 30, 2010.

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

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

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

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

Accounts Receivable Related to Sales in Greece

        Total accounts receivable in our consolidated balance sheets includes approximately $57 million, net of reserves, as of both June 30, 2010 and December 31, 2009 of accounts receivable held by our subsidiary in Greece related to sales to government-owned or supported healthcare facilities in Greece. These sales are subject to significant payment delays due to government funding and reimbursement practices. We believe that this is an industry-wide issue for suppliers to these facilities. In May 2010, the government of Greece announced a plan for repayment of its debt to international pharmaceutical companies, which calls for immediate payment of accounts receivable balances that were established in 2005 and 2006. For accounts receivable established between 2007 and 2009, the government of Greece will issue non-interest bearing bonds, expected to be exchange tradable, with maturities ranging from 2 to 4 years. We recorded a charge of $7.2 million to bad debt expense, a component of selling, general and administrative expenses, or SG&A, in our consolidated statements of operations for the three and six months ended June 30, 2010 to write down the accounts receivable balances held by our subsidiary in Greece to present value using a 10% discount rate.

        In conjunction with this plan, the government of Greece also instituted price decreases of between 20% and 27% for all future pharmaceutical product sales. Because our customers in Greece are government owned or supported, we may also be impacted by declines in sovereign credit ratings or sovereign debt defaults. The government of Greece has recently required financial support from both the European Union and the International Monetary Fund, or IMF, to avoid defaulting on its sovereign debt. If significant additional changes occur in the availability of government funding in Greece, we may not be able to collect on amounts due from these customers. We do not expect this concentration of credit risk to have a material adverse impact on our financial position or liquidity.

Stock-Based Compensation

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

    time vesting stock options; and

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

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

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

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

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

        The fair values of our:

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

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

    PSUs subject to the cash flow return on investment performance metric, which includes both performance and service conditions, are estimated based on the market value of our stock on the date of grant. PSUs subject to the relative total shareholder return, or R-TSR performance metric, which includes both market and service conditions, are estimated using a lattice model with a Monte Carlo simulation. Compensation expense associated with our PSUs is initially based upon the number of shares expected to vest after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved, net of estimated forfeitures. Compensation expense for our PSUs is recognized over the applicable performance period, adjusted for the effect of estimated forfeitures.

Recent Accounting Pronouncements

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

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

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

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

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

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

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

  Requires new disclosures and clarifies some existing disclosure requirements about fair value measurements codified within ASC 820, "Fair Value Measurements and Disclosures," including significant transfers into and out of Level 1 and Level 2 investments of the fair value hierarchy. Also requires additional information in the roll forward of Level 3 investments including presentation of purchases, sales, issuances, and settlements on a gross basis. Further clarification for existing disclosure requirements provides for the disaggregation of assets and liabilities presented, and the enhancement of disclosures around inputs and valuation techniques.   Issued January 2010. Effective for the first interim or annual reporting period beginning after December 15, 2009, except for the additional information in the roll forward of Level 3 investments. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim reporting periods within those fiscal years.   We adopted the applicable provisions of this update, except for the additional information in the roll forward of Level 3 investments (as previously noted), in the first quarter of 2010. Besides a change in disclosure, the adoption of this update does not have a material impact on our consolidated financial statements. None of our instruments were reclassified between Level 1, Level 2 or Level 3 in 2010.

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

  Update provides amendments to Subtopic 815-15, "Derivatives and Hedging—Embedded Derivatives," to clarify the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another.   Issued March 2010. Effective at the beginning of each reporting entity's first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each reporting entity's first fiscal quarter beginning after issuance of this update.   We will adopt the provisions of this update for the third quarter of 2010. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements.

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

  Update provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions.   Issued April 2010. Effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted.   We will adopt the provisions of this update beginning January 1, 2011. We are currently assessing the impact the provisions of this update will have, if any, on our consolidated financial statements.

2010-19, "Foreign Currency Issues: Multiple Foreign Currency Exchange Rates."

  Update codifies the SEC Staff Announcement made at a March 18, 2010 meeting of the Emerging Issues Task Force, or EITF. The Staff Announcement provides the SEC staff's view on certain foreign currency issues related to investments in Venezuela.   Issued May 2010. Staff announcements made at EITF meetings are effective as of the announcement date, which for this update is March 18, 2010, unless otherwise noted.   We have adopted the provisions of this update beginning March 18, 2010. We don't believe the impact of highly inflationary accounting on differences between amounts recorded for financial reporting purposes versus the underlying U.S. dollar denominated values is material to our consolidated financial statements.

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GENZYME CORPORATION AND SUBSIDIARIES

Notes to Unaudited, Consolidated Financial Statements (Continued)

3. Fair Value Measurements

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

    fixed income investments;

    investments in publicly-traded equity securities;

    derivatives; and

    contingent consideration obligations.

Fair Value Measurement—Definition and Hierarchy

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

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

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

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

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

Valuation Techniques

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)


a probability-weighted income approach. The measurement is based on significant inputs not observable in the market. In periods of market inactivity, the observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. During the six months ended June 30, 2010, none of our instruments were reclassified between Level 1, Level 2 or Level 3.

        The following tables set forth our assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2010 and December 31, 2009 (amounts in thousands):

Description   Balance as of
June 30,
2010
  Level 1   Level 2   Level 3  

Fixed income investments(1):

 

Cash equivalents:

  Money market funds/other   $ 565,413   $ 565,413   $   $  
                           

 

Short-term investments:

 

U.S. Treasury notes

   
26,823
   
26,823
   
   
 

      Non U.S. Governmental notes     8,843         8,843      

      U.S. agency notes     72,093         72,093      

      Corporate notes—global     44,947         44,947      
                           

      Total     152,706     26,823     125,883      
                           

 

Long-term investments:

 

U.S. Treasury notes

   
59,150
   
59,150
   
   
 

      U.S. agency notes     20,962         20,962      

      Corporate notes—global     59,529         59,529      
                           

      Total     139,641     59,150     80,491      
                           

 

Total fixed income investments

    857,760     651,386     206,374      
                           

Equity holdings(1):

 

Publicly-traded equity securities

    38,267     38,267          
                           

Derivatives:

 

Foreign exchange forward contracts

    (501 )       (501 )    
                           

Contingent liabilities(2):

 

Contingent consideration obligations

    (977,209 )           (977,209 )
                           

Total assets (liabilities) at fair value

  $ (81,683 ) $ 689,653   $ 205,873   $ (977,209 )
                           

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Notes to Unaudited, Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

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

Fixed income investments(1):

 

Cash equivalents:

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

 

Short-term investments:

 

U.S. Treasury notes

   
41,040
   
41,040
   
   
 

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

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

      Corporate notes—global     54,825         54,825      

      Commercial paper     6,841         6,841      
                           

      Total     163,630     41,040     122,590      
                           

 

Long-term investments:

 

U.S. Treasury notes

   
29,793
   
29,793
   
   
 

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

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

      Corporate notes—global     81,143         81,143      
                           

      Total     143,824     29,793     114,031      
                           

 

Total fixed income investments

    910,563     673,942     236,621      
                           

Equity holdings(1):

 

Publicly-traded equity securities

    40,380     40,380          
                           

Derivatives:

 

Foreign exchange forward contracts

    4,284         4,284      
                           

Contingent liabilities(2):

 

Contingent consideration obligations

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

Total assets (liabilities) at fair value

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

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

(2)
Changes in the fair value of the contingent consideration obligations are recorded as contingent consideration expense, a component of operating expenses in our consolidated statements of operations. We recorded a total of $72.6 million of contingent consideration expense for the six months ended June 30, 2010 in our consolidated statements of operations, of which $(13.1) million was allocated to our Hematology and Oncology reporting segment and $85.7 million was allocated to our Multiple Sclerosis reporting segment. We recorded $9.1 million of contingent consideration expense for the six months ended June 30, 2009 in our consolidated statements of operations, including $4.3 million for our Hematology and Oncology reporting segment and $4.8 million for our Multiple Sclerosis reporting segment.

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Notes to Unaudited, Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

        Changes in the fair value of our Level 3 contingent consideration obligations during the six months ended June 30, 2010 were as follows (amounts in thousands):

Balance as of December 31, 2009

  $ (1,015,236 )

Payments

    68,940  

R&D reimbursement received

    (7,604 )

Contingent consideration expense(1)

    (72,570 )

Effect of foreign currency translation adjustments

    49,261  
       

Fair value at June 30, 2010

  $ (977,209 )
       

(1)
For the six months ended June 30, 2010, includes:
    $37.3 million of contingent consideration expense attributable to transaction gains and losses resulting from fluctuations in foreign currency exchange rates on liabilities that will be settled in a currency other than the entity's functional currency; and

    a $20.9 million reduction in contingent consideration expense related to changes in estimates.

        In June 2010, we issued $500.0 million aggregate principal amount of our 3.625% senior notes due in June 2015, which we refer to as our 2015 Notes, and $500.0 million aggregate principal amount of our 5.000% senior notes due in June 2020, which we refer to as our 2020 Notes, and, together with our 2015 Notes, as the Notes, as described in Note 11., "Long-Term Debt," to these consolidated financial statements. As of June 30, 2010 our:

    2015 Notes had a fair value of $509.1 million and a carrying value of $498.4 million; and

    2020 Notes had a fair value of $512.5 million and a carrying value of $495.9 million.

The fair values of our 2015 Notes and 2010 Notes were determined through a market-based approach using observable and corroborated sources; within the hierarchy of fair value measurements, these are classified as Level 2 fair values.

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

Derivative Instruments

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

Foreign Exchange Forward Contracts

        Generally, we enter into foreign exchange forward contracts with maturities of not more than 15 months. All foreign exchange forward contracts in effect as of June 30, 2010 and December 31, 2009 had maturities of 1 to 2 months. We report these contracts on a net basis. Net asset derivatives are included in other current assets and net liability derivatives are included in accrued expenses in our consolidated balance sheets.

        The following table summarizes the balance sheet classification of the fair value of these derivatives on both a gross and net basis as of June 30, 2010 and December 31, 2009 (amounts in thousands):

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

June 30, 2010

  $ 1,236   $ 1,737   $   $ 501  

December 31, 2009

  $ 9,834   $ 5,550   $ 4,284   $  

        Total foreign exchange (gains) and losses included in SG&A in our consolidated statements of operations includes unrealized and realized (gains) and losses related to both our foreign exchange forward contracts and our foreign currency assets and liabilities. The net impact of our overall unrealized and realized foreign exchange (gains) and losses for both the three and six months ended June 30, 2010 and 2009 was not significant.

        The following table summarizes the effect of the unrealized and realized net (gains)/losses related to our foreign exchange forward contracts on our consolidated statements of operations for the three and six months ended June 30, 2010 and 2009 (amounts in thousands):

 
   
  Net (Gain)/Loss Reported  
 
   
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  Statement of
Operations Location
 
Derivative Instrument
  2010   2009   2010   2009  

Foreign exchange forward contracts

  SG&A   $ 4,660   $ 18,728   $ (381 ) $ 7,898  

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Notes to Unaudited, Consolidated Financial Statements (Continued)

4. Net Income (Loss) Per Share

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

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2010   2009   2010   2009  

Net income (loss)—basic and diluted

  $ (3,773 ) $ 187,574   $ (118,721 ) $ 383,060  
                   

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

    265,270     269,958     265,760     270,406  

Effect of dilutive securities(1):

                         
 

Stock options(2)

        3,555         4,554  
 

Restricted stock units

        1,303         1,221  
 

Other

        36         44  
                   
   

Dilutive potential common shares

        4,894         5,819  
                   

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

    265,270     274,852     265,760     276,225  
                   

Net income (loss) per common share:

                         
 

Basic

  $ (0.01 ) $ 0.69   $ (0.45 ) $ 1.42  
                   
 

Diluted

  $ (0.01 ) $ 0.68   $ (0.45 ) $ 1.39  
                   

(1)
For the three and six months ended June 30, 2010, basic and diluted net loss per share are the same. We did not include the securities described in the following table in the computation of diluted net loss per share because these securities would have an anti-dilutive effect due to our net loss for those periods (amounts in thousands):

   
  Three Months Ended
June 30, 2010
  Six Months Ended
June 30, 2010
 
 

Stock options

    2,316     2,633  
 

Restricted stock units

    2,391     2,462  
 

Other

    148     198  
             
   

Total shares excluded from calculation of diluted loss per share

    4,855     5,293  
             
(2)
We did not include the securities described in the following table in the computation of diluted earnings (loss) per share because these securities were anti-dilutive during the corresponding period (amounts in thousands):

   
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
   
  2010   2009   2010   2009  
 

Shares issuable upon exercise of outstanding options

    23,158     19,732     21,903     14,191  
                     

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Notes to Unaudited, Consolidated Financial Statements (Continued)

5. Comprehensive Income (Loss)

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

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2010   2009   2010   2009  

Net income (loss)

  $ (3,773 ) $ 187,574   $ (118,721 ) $ 383,060  
                   

Other comprehensive income (loss):

                         
 

Foreign currency translation adjustments

    (141,890 )   153,780     (267,367 )   33,632  
                   
 

Pension liability adjustments, net of tax(1)

    (12 )       (21 )    
                   
 

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

                         
   

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

    (3,639 )   9,657     (1 )   (10,950 )
   

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

    (694 )   37     (1,872 )   (160 )
                   
   

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

    (4,333 )   9,694     (1,873 )   (11,110 )
                   
 

Other comprehensive income (loss)

    (146,235 )   163,474     (269,261 )   22,522  
                   

Comprehensive income (loss)

  $ (150,008 ) $ 351,048   $ (387,982 ) $ 405,582  
                   

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

(2)
Net of $2.5 million of tax for the three months ended and $1.1 million of tax for the six months ended June 30, 2010 and $(5.6) million of tax for the three months ended and $6.3 million of tax for the six months ended June 30, 2009.

6. Strategic Transactions

Purchase of In-Process Research and Development

        The following table sets forth the significant in-process research and development, or IPR&D, projects for the companies and assets we acquired between January 1, 2006 and June 30, 2010 (amounts in millions):

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

Bayer (2009)

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

          174.2   alemtuzumab for MS—ex-US     16 %   2013  
                             

        $ 632.9 (1)                
                             

Bioenvision, Inc., or Bioenvision (2007)

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

AnorMED Inc., or AnorMED (2006)

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

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

(2)
Expensed on acquisition date.

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

6. Strategic Transactions (Continued)

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

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

Pro Forma Financial Summary

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

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2009   2009  

Total revenues

  $ 1,280,470   $ 2,477,530  
           

Net income

  $ 163,425   $ 319,795  
           

Net income per share:

             
 

Basic

  $ 0.61   $ 1.18  
           
 

Diluted

  $ 0.59   $ 1.16  
           

Weighted average shares outstanding:

             
 

Basic

    269,958     270,406  
           
 

Diluted

    274,852     276,225  
           

7. Inventories

 
  June 30,
2010
  December 31,
2009
 
 
  (Amounts in thousands)
 

Raw materials

  $ 106,394   $ 123,434  

Work-in-process

    283,648     288,653  

Finished goods

    204,070     195,935  
           
 

Total

  $ 594,112   $ 608,022  
           

Manufacturing-Related Charges

Cerezyme and Fabrazyme

        In order to build a small inventory buffer to help us more consistently manage the resupply of Cerezyme to patients and reduce interruptions in shipping that occur in the absence of inventory, we began shipping Cerezyme to meet 50% of estimated product demand at the end of February 2010. Although we achieved our goal of building a small inventory buffer during the first quarter of 2010, we continued shipping at 50% of demand level due to an interruption in operations at our Allston facility

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Notes to Unaudited, Consolidated Financial Statements (Continued)

7. Inventories (Continued)


at the end of March 2010. The interruption resulted from an unexpected city electrical power failure that compounded issues with the plant's water system. Once production resumed, we continued shipping at the 50% demand level through the end of the second quarter of 2010. We supplied approximately the same amount of Cerezyme in July 2010 as we supplied in each of May 2010 and June 2010, and expect that supply will then increase in the following months. However, there will be regional variations when Cerezyme will be available, and in some countries, patients' infusion schedules may need to shift due to short-term shipping delays.

        Since the fourth quarter of 2009, we have been shipping Fabrazyme to meet approximately 30% of estimated product demand. We have been working to increase the productivity of the Fabrazyme manufacturing process, which has performed at the low end of the historical range since the re-start of production. We have developed a new working cell bank for Fabrazyme that has been approved by the FDA and the European Medicines Agency, or EMA. The new working cell bank has completed three runs and has had 30% greater productivity than the old working cell bank. We expect to continue shipping Fabrazyme at the 30% of demand level through the third quarter and increase shipments of Fabrazyme in the fourth quarter.

        We recorded $14.9 million of charges for the three months ended and $16.4 million of charges for the six months ended June 30, 2010 to cost of products sold in our consolidated statements of operations to write off Cerezyme and Fabrazyme work-in-process material that was unfinished when the interruption occurred, based on our determination that such material could not be finished, and other inventory for these products that did not meet the necessary quality specifications.

        We also recorded charges of $6.0 million for the three months and $7.1 million for the six months ended June 30, 2010 to cost of products sold in our consolidated statements of operations to write off certain lots of Thyrogen that did not meet the necessary quality specifications.

        We capitalize inventory produced for commercial sale, which may result in the capitalization of inventory prior to regulatory approval of a product. If a product is not approved for sale, it would result in the write off of the inventory and a charge to earnings. As of June 30, 2010, the amount of inventory for Fabrazyme related to the new working cell bank that has not yet been approved for sale was not significant.

Inventory Subject to Additional Evaluation and Release

        At any particular period, we may have certain inventory that requires further evaluation or testing to ensure that it meets appropriate quality specifications. As of June 30, 2010, we have approximately $16 million of inventory that is being evaluated or tested, including $6.3 million of Fabrazyme, $3.9 million of Myozyme and $3.6 million of Thymoglobulin. If we determine that this inventory, or any portion thereof, does not meet the necessary quality standards, it would result in a write off of the inventory and a charge to earnings.

Sevelamer Hydrochloride and Sevelamer Carbonate

        We manufacture the majority of our supply requirements for sevelamer hydrochloride (the active ingredient in Renagel) and sevelamer carbonate (the active ingredient in Renvela) at our manufacturing facility in Haverhill, England. In December 2009, equipment failure caused an explosion and fire at this facility, which damaged some of the equipment used to produce these active ingredients

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Notes to Unaudited, Consolidated Financial Statements (Continued)

7. Inventories (Continued)


as well as the building in which the equipment was located. As a result, we temporarily suspended production of sevelamer hydrochloride and sevelamer carbonate at this facility so the damaged equipment could be repaired. We resumed production of sevelamer hydrochloride in May 2010. We anticipate that the facility will resume production of sevelamer carbonate in the fourth quarter of 2010. We believe that we have adequate supply levels to meet the current demand for both Renagel and Renvela and do not anticipate there will be any supply constraints for either product while the facility undergoes repairs. We recorded $6.1 million of expenses, net of $2.4 million of insurance reimbursements, for the three months ended and $13.7 million, net of $5.4 million of insurance reimbursements, for the six months ended June 30, 2010, to cost of products sold in our consolidated statements of operations for Renagel and Renvela related to the remediation cost of our Haverhill, England manufacturing facility, including repairs and idle capacity expenses. We expect to incur approximately $10 million of additional costs related to the remediation of this facility in the third quarter of 2010.

8. Goodwill and Other Intangible Assets

        The following table contains the change in our goodwill during the six months ended June 30, 2010 (amounts in thousands):

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

Goodwill

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

Accumulated impairment losses(1)

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

Balance as of December 31, 2009

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

Net exchange differences arising during the period

                        (19 )   (19 )

Other changes in carrying amounts during the period

                        295     295  
                               

Balance as of June 30, 2010

  $ 339,563   $ 319,882   $ 7,584   $ 375,889   $ 318,059   $ 42,662   $ 1,403,639  
                               

Goodwill

  $ 339,563   $ 319,882   $ 110,376   $ 375,889   $ 318,059   $ 261,907   $ 1,725,676  

Accumulated impairment losses(1)

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

Balance as of June 30, 2010

  $ 339,563   $ 319,882   $ 7,584   $ 375,889   $ 318,059   $ 42,662   $ 1,403,639  
                               

(1)
Accumulated impairment losses include:

a $102.8 million pre-tax charge recorded in 2003 to write off the goodwill of our Biosurgery reporting segment's orthopaedics reporting unit; and

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Notes to Unaudited, Consolidated Financial Statements (Continued)

8. Goodwill and Other Intangible Assets (Continued)

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

Other Intangible Assets

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

 
  As of June 30, 2010   As of December 31, 2009  
 
  Gross
Other
Intangible
Assets
  Accumulated
Amortization
  Net
Other
Intangible
Assets
  Gross
Other
Intangible
Assets
  Accumulated
Amortization
  Net
Other
Intangible
Assets
 

Finite-lived other intangible assets:

                                     
 

Technology(1)

  $ 1,939,330   $ (942,470 ) $ 996,860   $ 2,180,232   $ (877,611 ) $ 1,302,621  
 

Distribution rights(2)

    446,427     (260,557 )   185,870     440,521     (227,726 )   212,795  
 

Patents

    188,651     (138,520 )   50,131     188,651     (131,898 )   56,753  
 

License fees

    98,272     (50,031 )   48,241     98,647     (47,052 )   51,595  
 

Customer lists

    87,421     (48,282 )   39,139     87,423     (43,822 )   43,601  
 

Trademarks

    60,608     (50,332 )   10,276     60,608     (47,623 )   12,985  
                           
 

Total finite-lived other intangible assets

    2,820,709     (1,490,192 )   1,330,517     3,056,082     (1,375,732 )   1,680,350  

Indefinite-lived other intangible assets:

                                     
 

IPR&D

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

Total other intangible assets

  $ 3,453,621   $ (1,490,192 ) $ 1,963,429   $ 3,688,994   $ (1,375,732 ) $ 2,313,262  
                           

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

(2)
Includes an additional $6.0 million for the six months ended June 30, 2010 for additional payments made or accrued in connection with the reacquisition of the Synvisc sales and marketing rights from Pfizer in January 2005. As of June 30, 2010, the contingent royalty payments to Pfizer payable under the agreement are substantially complete. We completed the contingent royalty payments to Pfizer related to North American sales of Synvisc in the first quarter of 2010 and anticipate completing the remaining contingent royalty payments to Pfizer related to sales of the product outside of the United States by first quarter of 2011, the amount of which is not significant.

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

8. Goodwill and Other Intangible Assets (Continued)

        As of June 30, 2010, the estimated future amortization expense for our finite-lived other intangible assets for the remainder of fiscal year 2010, the four succeeding fiscal years and thereafter is as follows (amounts in thousands):

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

2010 (remaining six months)

  $ 49,255   $ 91,146   $ 140,401  

2011

    119,112     175,060     294,172  

2012

    94,168     148,174     242,342  

2013

    29,545     131,432     160,977  

2014

    26,308     109,116     135,424  

Thereafter

    21,578     352,219     373,797  

(1)
Includes estimated future amortization expense for:

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

the technology intangible assets resulting from our acquisition of the worldwide rights to Fludara, which are being amortized based on the forecasted future sales of Fludara.

9. Investment in BioMarin/Genzyme LLC

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

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

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

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

        Effective January 1, 2010, in accordance with new guidance we adopted for consolidating variable interest entities, we were required to reassess our designation as primary beneficiary of

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Notes to Unaudited, Consolidated Financial Statements (Continued)

9. Investment in BioMarin/Genzyme LLC (Continued)

BioMarin/Genzyme LLC. Under the new guidance, the entity with the power to direct the activities that most significantly impact a variable interest entity's economic performance is the primary beneficiary. We have concluded that BioMarin/Genzyme LLC is a variable interest entity, but does not have a primary beneficiary because the power to direct the activities of BioMarin/Genzyme LLC that most significantly impact its performance, is, in fact, shared equally between us and BioMarin through our commercialization rights and BioMarin's manufacturing rights. Effective January 1, 2010, we no longer consolidate the results of BioMarin/Genzyme LLC and instead record our portion of the results of BioMarin/Genzyme LLC in equity in loss of equity method investments in our consolidated statements of operations. For the three and six months ended June 30, 2010, the results of BioMarin/Genzyme LLC and our portion of the results of BioMarin/Genzyme LLC were not significant.

10. Investment in Isis Pharmaceuticals, Inc. Common Stock

        We review for potential impairment the carrying value of each of our strategic investments in equity securities on a quarterly basis. The closing price per share of Isis Pharmaceuticals, Inc, or Isis, common stock exhibited volatility during 2009 and the six months ended June 30, 2010 and has remained below our historical cost since September 1, 2009, with closing prices since that date ranging from a high of $15.69 per share to a low of $8.66 per share. We considered all available evidence in assessing the decline in value of our investment in Isis common stock, including investment analyst reports and Isis's expected results and future outlook. However, despite such evidence if the fair value of any of our investments remain below our historical cost for a consecutive nine months, we will generally conclude that it is unclear over what period the stock price of our investment would recover and that any evidence suggesting that the investment would recover to at least our historical cost is not sufficient to overcome the presumption that the current market price is the best indicator of the value of this investment. Accordingly, given the significance and duration of the decline in value of our investment in Isis common stock as of June 30, 2010, we considered the decline in value of this investment to be other than temporary and we recorded a $32.3 million impairment charge to losses on investment in equity securities, net in our consolidated statements of operations for the three and six months ended June 30, 2010.

11. Long-Term Debt

    2015 and 2020 Senior Notes

        In June 2010, we sold $500.0 million aggregate principal amount of our 2015 Notes and $500.0 million aggregate principal amount of our 2020 Notes through institutional private placements to fund the $1.0 billion payment under our accelerated share repurchase agreement, as discussed in Note 12., "Stockholders' Equity," to these consolidated financial statements. We received net proceeds from the sale of the Notes of approximately $986.6 million, after deducting commissions and other expenses related to the offerings. We recorded the net proceeds in our consolidated balance sheets as of June 30, 2010 as:

    a $7.7 million increase to other noncurrent assets for the capitalized debt offering costs, including $6.3 million for commissions and $1.4 million of other offering expenses; and

    a $1.0 billion increase to long-term liabilities for the principal of the Notes, offset by $5.7 million for the debt discount on the Notes.

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Notes to Unaudited, Consolidated Financial Statements (Continued)

11. Long-Term Debt (Continued)

Both the debt offering costs and debt discount will be amortized to interest expense in our consolidated statements of operations. The debt offering costs have been allocated proportionately to our 2015 Notes and our 2020 Notes and are being amortized based on the term of each such group of the Notes. The debt discount for each group of the Notes will be amortized using the effective interest method. The 2015 Notes mature in June 2015 and the 2020 Notes mature in June 2020. Interest accrues on the Notes from June 17, 2010 and is payable semi-annually in arrears on June 15 and December 15 of each year starting on December 15, 2010.

        The Notes are our senior unsecured obligations and rank equally in right of payment with all of our other senior unsecured indebtedness from time to time outstanding. The Notes are fully and unconditionally guaranteed by one of our subsidiaries that also guarantees our indebtedness under our 2006 revolving credit facility. We may redeem the Notes in whole or in part at any time at a redemption price equal to the greater of:

    100% of the principal amount of the Notes redeemed; or

    the sum of the present values of the remaining scheduled payments of interest and principal thereon discounted at the Treasury Rate plus 25 basis points in the case of our 2015 Notes and 30 basis points in the case of our 2020 Notes.

We may be required to offer to repurchase the Notes at a purchase price equal to 101% of their principal amount if we are subject to certain changes of control.

Revolving Credit Facility

        In July 2006, we entered into a five-year $350.0 million senior unsecured revolving credit facility with JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, ABN AMRO Bank N.V., Citizens Bank of Massachusetts and Wachovia Bank, National Association, as co-documentation agents, and a syndicate of lenders, which we refer to as our 2006 revolving credit facility. The proceeds of loans under our 2006 revolving credit facility can be used to finance working capital needs and for general corporate purposes. We may request that our 2006 revolving credit facility be increased at any time by up to an additional $350.0 million in the aggregate, subject to the agreement of the lending banks, as long as no default or event of default has occurred or is continuing and certain other customary conditions are satisfied. Borrowings under our 2006 revolving credit facility will bear interest at various rates depending on the nature of the loan.

        As of June 30, 2010, we had approximately $9 million of outstanding standby letters of credit and no borrowings, resulting in approximately $341 million of available credit under our 2006 revolving credit facility, which matures July 14, 2011. The terms of this credit facility include various covenants, including financial covenants that require us to meet minimum interest coverage ratios and maximum leverage ratios. As of June 30, 2010, we were in compliance with these covenants.

12. Stockholders' Equity

Share Repurchase Plan

        In April 2010, our board of directors authorized a $2.0 billion share repurchase plan consisting of the near-term purchase of $1.0 billion of our common stock to be financed with proceeds of newly issued debt, and the purchase of an additional $1.0 billion of our common stock by June 2011. On

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Notes to Unaudited, Consolidated Financial Statements (Continued)

12. Stockholders' Equity (Continued)


June 17, 2010, we entered into an accelerated share repurchase agreement with Goldman Sachs & Co., or Goldman Sachs, under which we will repurchase $1.0 billion worth of shares of our common stock. Our effective per share purchase price will be based generally on the average of the daily volume weighted average prices per share of our common stock, less a discount, calculated during a period of up to four months. In connection with this agreement, we paid $1.0 billion to Goldman Sachs and received 15.6 million shares, of which:

    $800.0 million, or 80%, represents the value, based on the closing price of our common stock on June 17, 2010, of the 15.6 million shares of our common stock that Goldman Sachs delivered to us; and

    $200.0 million, or 20%, represents an advance payment that, depending on our effective per share purchase price, either will cover additional shares Goldman Sachs may be required to deliver to us or will be applied towards any additional amount that may be owed by us if our effective per share purchase price exceeds the closing price of our common stock on June 17, 2010.

We recorded the $1.0 billion payment to the bank as a decrease to stockholders' equity in our consolidated balance sheet as of June 30, 2010, consisting of decreases of $0.2 million in common stock and $799.8 million in additional paid-in capital as well as a $200.0 million share purchase contract receivable for the advance payment described above.

        The total number of shares ultimately repurchased will not be known until the calculation period ends and a final settlement occurs. Upon final settlement, we will either receive a settlement amount of additional shares of our common stock or be required to remit a settlement amount, payable, at our option, in cash or common stock. Shares repurchased under this agreement will be deemed authorized shares that are no longer outstanding.

Modification of Certain Stock Options and RSUs

        On May 26, 2010, in connection with our plan to approve strategic alternatives for our genetic testing, diagnostic products and pharmaceutical intermediates business units, the compensation committee of our board of directors approved certain modifications to the stock options and RSUs previously granted to the employees of those business units, to be effective as of the date of divestiture of each business unit. The post-termination exercise period for these stock options was modified to extend the post-termination exercise period from three months to one year. We used Black-Scholes valuation models, based on the following assumptions, to determine the valuation adjustment required for the extension of the post-termination exercise period, and recorded stock-based compensation expense using an expected term of seven months:

 
  New
Post-Termination
Period
  Original
Post-Termination
Period
 

Grant date fair value as of May 26, 2010

    $50.00     $50.00  

Term

    19 months     10 months  

Dividend

    0     0  

Volatility

    38.00 %   30.00 %

Risk-free interest rate

    0.63 %   0.32 %

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Notes to Unaudited, Consolidated Financial Statements (Continued)

12. Stockholders' Equity (Continued)

        Based on our analysis, we recorded an additional $9.1 million of stock-based compensation expense in our consolidated statements of operations for the three months ended June 30, 2010 for the valuation adjustment related to the modification of these stock options.

        On May 26, 2010, the compensation committee of our board of directors also approved the following modifications to certain RSUs granted to the employees of these three business units, to be effective as of the date of divestiture for each business unit, including:

    acceleration of the vesting of the RSUs granted in May 2008; and

    pro-ration of the vesting of the RSUs granted in May 2009 over a 19-month, instead of a three-year, period.

        Prior to these modifications, the RSUs granted in May 2008 had a grant date fair value of $68.48 per share and the RSUs granted in May 2009 had a grant date fair value of $58.66 per share based on the closing price of our common stock at the date of each grant. The modifications triggered a new measurement date for these RSUs and, as a result, we revalued these RSUs based on a new grant date fair value of $50.00 per share, the closing price of our common stock on the date of modification. We recorded a net reduction in stock-based compensation for these RSUs of $(2.9) million in our consolidated statements of operations for the three months ended June 30, 2010 to adjust the cumulative stock-based compensation expense recorded for these RSUs for the modifications, including:

    $(8.3) million for the reversal of the cumulative to-date stock-based compensation expenses recorded through May 25, 2010, prior to the modifications; offset, in part, by

    $5.4 million of stock-based compensation expenses for the period from May 26, 2010 through June 30, 2010 based on the new, reduced grant date fair value of these awards.

We expect to record approximately $13 million of additional stock-based compensation expense for these RSUs during the second half of 2010 as a result of these modifications.

Long-Term Incentive Program for Senior Executives

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

    time vesting stock options; and

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

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

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

    cash flow return on invested capital; and

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

12. Stockholders' Equity (Continued)

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

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

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

Performance Level
  Percentile Rank  

Threshold

    40th  

Target

    65th  

Maximum

    75th  

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

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

PSUs

        During the six months ended June 30, 2010, we granted a total of 223,066 PSUs with a weighted average grant date fair value of $49.86 per share to senior executives under our 2004 Equity Plan. The PSUs are subject to the attainment of certain performance criteria established at the beginning of the performance period, as described above, and cliff vest at the end of the performance period, which ends December 31, 2012. Compensation expense associated with our PSUs is initially based upon the number of shares expected to vest after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved, net of estimated forfeitures. Compensation expense for our PSUs is recognized over the applicable performance period, adjusted for the effect of estimated forfeitures.

        The fair value of PSUs subject to the cash flow return on investment performance metric, which includes both performance and service conditions, is estimated based on the market value of our stock on the date of grant. We use a lattice model with a Monte Carlo simulation to determine the fair value

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Notes to Unaudited, Consolidated Financial Statements (Continued)

12. Stockholders' Equity (Continued)


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

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

Expected dividend yield

  0%

Range of risk free rate of return

  1.33%-1.45%

Range of our expected stock price volatility

  35.11%-36.06%

Range of Peer Group expected stock price volatility

  21.27%-60.32%

Range of our average closing stock prices on the grant dates

  $51.83-$56.50

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

  $7.22-$348.13

Range of our historical total shareholder return on the grant dates

  5.75%-15.28%

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

  (19.78)%-23.22%

Stock-Based Compensation Expense, Net of Estimated Forfeitures

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

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2010   2009   2010   2009  

Pre-tax stock-based compensation expense, net of estimated forfeitures(1)

  $ (44,694 ) $ (65,167 ) $ (92,335 )   (109,773 )

Less: tax benefit from stock options

    13,476     15,144     26,548     27,733  
                   
   

Total stock-based compensation expense, net of tax

  $ (31,218 ) $ (50,023 ) $ (65,787 ) $ (82,040 )
                   

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

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2010   2009   2010   2009  

Stock-based compensation expense capitalized to inventory

  $ 4,038   $ 5,729   $ 7,840   $ 9,141  

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

        At June 30, 2010, there was $275.6 million of pre-tax stock-based compensation expense, net of estimated forfeitures, related to unvested awards not yet recognized which is expected to be recognized over a weighted average period of 2.2 years.

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Notes to Unaudited, Consolidated Financial Statements (Continued)

13. Commitments and Contingencies

FDA Consent Decree

        On May 24, 2010, we entered into a consent decree with the FDA relating to our Allston facility. Under the terms of the consent decree, we will pay an upfront disgorgement of past profits of $175.0 million. Conditioned upon our compliance with the terms of the consent decree, we may continue to ship Cerezyme and Fabrazyme, which are manufactured, filled and finished at the facility, as well as Thyrogen, which is filled and finished at the facility. In the United States, Thyrogen that is filled and finished at the facility will only be distributed based on medical necessity, in accordance with FDA criteria. The consent decree requires us to move our fill-finish operations out of the Allston facility for Thyrogen sold within the United States by November 22, 2010 and for Fabrazyme sold within the United States by November 24, 2010. We must move our fill-finish operations for all products sold outside of the United States by August 31, 2011. If we are not able to meet these deadlines, the FDA can require us to disgorge 18.5% of the revenue from the sale of any products that are filled and finished at the Allston facility after the applicable deadlines.

        The consent decree also requires us to implement a plan to bring the Allston facility operations into compliance with applicable laws and regulations. The plan must address any deficiencies previously reported to us or identified as part of a comprehensive inspection conducted by a third-party expert, who we are required to retain, and who will monitor and oversee our implementation of the plan. In 2009, we began implementing a comprehensive remediation plan, prepared with assistance from our compliance consultant, The Quantic Group, Ltd., or Quantic, to improve quality and compliance at the Allston facility. We intend to revise that plan to include any additional remediation efforts required in connection with the consent decree as identified by Quantic, who we are retaining as the third-party expert under the consent decree. The plan, as revised, which will be subject to FDA approval, is expected to take approximately 3-4 years to complete and will include a timetable of specified compliance milestones. If the milestones are not met in accordance with the timetable, the FDA can require us to pay $15,000 per day, per affected drug, until these compliance milestones are met. Upon satisfying the compliance requirements in accordance with the terms of the consent decree, we will be required to retain an auditor to monitor and oversee ongoing compliance at the Allston facility for an additional five years. The consent decree is subject to, and effective upon, approval by the U.S. District Court for the District of Massachusetts. The consent decree was filed with the U.S. District Court on May 24, 2010 and we are awaiting the court's approval.

Legal Proceedings

Federal Securities Litigation

        In July 2009 and August 2009, two purported securities class action lawsuits were filed in the U.S. District Court for the District of Massachusetts against us and our President and Chief Executive Officer. The lawsuits were filed on behalf of those who purchased our common stock during the period from June 26, 2008 through July 21, 2009 and allege violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Each of the lawsuits is premised upon allegations that we made materially false and misleading statements and omissions by failing to disclose instances of viral contamination at two of our manufacturing facilities and our receipt of a list of inspection observations from the FDA related to one of the facilities, which detailed observations of practices that the FDA considered to be deviations from good manufacturing practice, or GMP. The plaintiffs seek unspecified damages and reimbursement of costs, including attorneys' and

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Notes to Unaudited, Consolidated Financial Statements (Continued)

13. Commitments and Contingencies (Continued)


experts' fees. In November 2009, the lawsuits were consolidated in In Re Genzyme Corp. Securities Litigation and a lead plaintiff was appointed. In March 2010, the plaintiffs filed a consolidated amended complaint that extended the class period from October 24, 2007 through November 13, 2009. In June 2010, we filed a motion to dismiss the class action. If the action is not dismissed, we intend to defend this lawsuit vigorously.

Shareholder Demand Letters

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

Shareholder Derivative Actions

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

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

13. Commitments and Contingencies (Continued)


Court Actions have been consolidated in In Re Genzyme Derivative Litigation and the plaintiffs have agreed to a joint stipulation staying these cases until our board of directors has had sufficient time to exercise its duties and complete an appropriate investigation, which is ongoing. On July 9, 2010, one of the State Court Actions was dismissed without prejudice for plaintiffs' failure to serve process on the defendants. The Middlesex Court also ordered transfer and consolidation of the remaining two State Court Actions in the Suffolk Superior Court Business Litigation Session. The court has indicated that discovery in that action also will be stayed for some period pending the board of director's completion of its ongoing investigation in response to the shareholders demand.

Fabrazyme Patent Litigation

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

Other Matters

        We are party to a legal action brought by Kayat pending before the District Court in Nicosia, Cyprus. Kayat alleges that we breached a 1996 distribution agreement under which we granted Kayat the right to distribute melatonin tablets in the Ukraine, primarily by not providing products or by providing non-conforming products. Kayat further claims that due to the alleged breach, it suffered lost profits that Kayat claims it would have received under agreements it alleges it had entered into with subdistributors. Kayat also alleges common law fraud and violations of Mass. Gen. L. c. 93A and the Racketeer Influenced and Corrupt Organizations Act. Kayat filed its suit on August 8, 2002 and a trial began in Cyprus in December 2009. Kayat seeks damages for its legal claims and for expenses it claims it has incurred, including legal fees and advertising, promotion and other out-of-pocket expenses. We believe we acted appropriately in all regards, including properly terminating the agreement when we decided to exit the melatonin business, and we intend to defend this lawsuit vigorously.

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

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

14. Benefit from (Provision for) Income Taxes

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2010   2009   2010   2009  
 
  (Amounts in thousands)
 

Benefit from (provision for) income taxes

  $ 19,953   $ (78,870 ) $ 81,752   $ (157,754 )

Effective tax rate

    (84 )%   30 %   (41 )%   29 %

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

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

    our provision for state income taxes;

    domestic manufacturing benefits;

    benefits related to tax credits; and

    non-deductible stock-based compensation expenses totaling $9.1 million for the three months ended and $21.0 million for the six months ended June 30, 2010, as compared to $21.8 million for the three months ended and $31.5 million for the six months ended June 30, 2009.

        In addition, our tax benefit for both the three and six months ended June 30, 2010 includes:

    tax expenses resulting from the remeasurement of the deferred tax assets related to our acquisition from Bayer in 2009 in the amount of $9.9 million for the three months ended June 30, 2010 and $20.6 million for the six months ended June 30, 2010; and

    $10.0 million of tax benefits due to the realization, for U.S. income tax purposes, of prior periods' foreign income tax paid.

Our benefits from tax provisions for the six months ended June 30, 2010 also includes tax benefits in the amount of $15.2 million as a result of the resolution of tax examinations in major tax jurisdictions.

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

15. Segment Information

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

15. Segment Information (Continued)

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

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2010   2009   2010   2009  

Revenues:

                         
 

Personalized Genetic Health(1,3)

  $ 350,540   $ 581,728   $ 743,044   $ 1,131,688  
 

Renal and Endocrinology

    258,379     247,277     510,802     489,745  
 

Biosurgery

    163,982     139,327     301,348     258,849  
 

Hematology and Oncology(2)

    176,497     111,990     332,807     200,563  
 

Multiple Sclerosis(2)

        5,066         12,357  
 

Other

    129,753     142,568     265,612     283,171  
 

Corporate

    288     554     299     1,008  
                   
   

Total

  $ 1,079,439   $ 1,228,510   $ 2,153,912   $ 2,377,381  
                   

Income (loss) before income taxes:

                         
 

Personalized Genetic Health(1,3)

  $ 70,571   $ 332,700   $ 43,555   $ 684,495  
 

Renal and Endocrinology

    113,436     111,106     227,960     217,168  
 

Biosurgery

    61,608     33,750     90,603     62,083  
 

Hematology and Oncology(2)

    31,826     (17,030 )   40,196     (20,015 )
 

Multiple Sclerosis(2)

    (52,355 )   (2,161 )   (142,280 )   (18,607 )
 

Other(4)

    (447 )   15,013     3,781     10,215  
 

Corporate(5)

    (248,365 )   (206,934 )   (464,288 )   (394,525 )
                   
   

Total

  $ (23,726 ) $ 266,444   $ (200,473 ) $ 540,814  
                   

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

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

15. Segment Information (Continued)

    Income (loss) before income taxes for our Hematology and Oncology and Multiple Sclerosis reporting segments includes the following contingent consideration expenses (amounts in thousands):

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2010   2009   2010   2009  

Contingent consideration expenses:

                         
 

Hematology and Oncology

  $ (34,506 ) $ 4,330   $ (13,074 ) $ 4,330  
 

Multiple Sclerosis

    44,527     4,760     85,644     4,760  
                   
   

Total contingent consideration expenses

  $ 10,021   $ 9,090   $ 72,570   $ 9,090  
                   

    In addition, income (loss) before income taxes for our Multiple Sclerosis reporting segment includes a gain on acquisition of business of $24.2 million for the three and six months ended June 30, 2009 for which there were no comparable amounts in 2010. The fair value of the identifiable assets acquired of $1.03 billion exceeded the fair value of the purchase price for the transaction of $1.01 billion.

(3)
Includes a charge of $175.0 million recorded to SG&A for the six months ended June 30, 2010 for the upfront disgorgement of past profits provided for in the consent decree we entered into with the FDA. For more information about the consent decree, see Note 13., "Commitments and Contingencies," to these consolidated financial statements.

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

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

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Notes to Unaudited, Consolidated Financial Statements (Continued)

15. Segment Information (Continued)

Segment Assets

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

 
  June 30,
2010
  December 31,
2009
 

Segment Assets(1):

             
 

Personalized Genetic Health(2)

  $ 1,211,225   $ 1,525,602  
 

Renal and Endocrinology

    1,193,872     1,283,731  
 

Biosurgery

    482,117     509,064  
 

Hematology and Oncology

    1,343,840     1,406,684  
 

Multiple Sclerosis

    951,332     956,448  
 

Other

    447,740     462,978  
 

Corporate(3)

    4,133,773     3,916,217  
           
   

Total

  $ 9,763,899   $ 10,060,724  
           

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

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

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

 
  June 30,
2010
  December 31,
2009
 

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

  $ 974,154   $ 1,049,700  

Deferred tax assets, net

    706,009     555,242  

Property, plant & equipment, net

    1,986,309     1,787,054  

Investments in equity securities

    74,227     74,438  

Other

    393,074     449,783  
           
 

Total

  $ 4,133,773   $ 3,916,217  
           

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

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

        Note: All references to increases or decreases for the three months ended June 30, 2010 are as compared to the three months ended June 30, 2009. All references to increases or decreases for the six months ended June 30, 2010 are as compared to the six months ended June 30, 2009, unless otherwise noted.

INTRODUCTION

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

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

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

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

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

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

    Multiple Sclerosis, which is developing products, including alemtuzumab, for the treatment of MS and other auto-immune disorders.

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

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

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

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

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

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

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

        In May 2010, we announced a plan to pursue strategic alternatives for our genetic testing, diagnostic products and pharmaceutical intermediates business units. Possible alternatives include divestiture, spin-out or management buy-out. Our genetic testing business unit had revenue of approximately $371 million for the year ended December 31, 2009 and approximately $183 million for the six months ended June 30, 2010. Our diagnostic products business unit had revenue of approximately $167 million for the year ended December 31, 2009 and approximately $76 million for the six months ended June 30, 2010. Revenue from our pharmaceutical intermediates business unit for the same periods was significantly less in comparison. Transactions for these business units are targeted for the end of 2010.

Update to Second Quarter Earnings Release

        On July 21, 2010, we issued a press release containing our financial results for the three month period ended June 30, 2010, which we furnished as an exhibit to a Current Report on Form 8-K prior to hosting a conference call. Subsequent to July 21, 2010, we identified additional inventories that did not meet our quality specifications. Our decision to discard these inventories has resulted in a second quarter write off of $6.5 million in addition to the $21.9 million write off previously reported. As a result, our second quarter net loss is $(3.8) million or $(0.01) per diluted share, compared with net income of $23.0 thousand or $0.00 per diluted share reported on July 21, 2010.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

        Our critical accounting policies and significant judgments and estimates are set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and

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Estimates" in Part II., Item 7. to our 2009 Form 10-K. Excluding the addition of our policy for PSUs to our stock-based compensation policy, there have been no significant changes to our critical accounting policies or significant judgments and estimates since December 31, 2009. Additional information regarding our provisions and estimates for our product sales allowances, sales allowance reserves and accruals, and distributor fees and our revised stock-based compensation policy are included below.

Revenue Recognition

Product Sales Allowances

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

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

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

    Discounts—In some countries, we offer cash discounts for certain products as an incentive for prompt payment, which are generally a stated percentage off the sales price. We account for cash discounts by reducing accounts receivable by the full amounts of the discounts. We consider payment performance and adjust the accrual to reflect actual experience; and

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

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

 
  Three Months Ended
June 30,
   
   
  Six Months Ended
June 30,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  

Product sales allowances:

                                                 
 

Contractual adjustments

  $ 221,061   $ 149,049   $ 72,012     48 % $ 401,489   $ 285,229   $ 116,260     41 %
 

Discounts

    7,702     6,764     938     14 %   14,504     13,040     1,464     11 %
 

Sales returns

    7,711     9,375     (1,664 )   (18 )%   15,256     15,898     (642 )   (4 )%
                                       
   

Total product sales allowances

  $ 236,474   $ 165,188   $ 71,286     43 % $ 431,249   $ 314,167   $ 117,082     37 %
                                       

Total gross product sales

  $ 1,211,396   $ 1,280,613   $ (69,217 )   (5 )% $ 2,377,796   $ 2,466,836   $ (89,040 )   (4 )%
                                       

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

    20 %   13 %               18 %   13 %            

        Total product sales allowances increased for both the three and six months ended June 30, 2010, primarily due to:

    increased contractual adjustments totaling $48.0 million for the three months and $77.1 million for the six months for our Renal and Endocrinology reporting segment, and $18.6 million for the three months and $30.1 million for the six months for our Biosurgery reporting segment;

    $11.3 million for the three months and $26.6 million for the six months of increased product sales allowances for our Hematology and Oncology reporting segment primarily due to contractual adjustments related to sales of Campath, Fludara and Leukine, which we acquired from Bayer in May 2009; and

    changes in our overall product mix.

        These increases were offset, in part, by decreases of $6.3 million for the three months and $16.2 million for the six months in the aggregate product sales allowances for Cerezyme and Fabrazyme as a result of supply constraints.

        Total estimated product sales allowance reserves and accruals in our consolidated balance sheets increased approximately 11% to approximately $263 million as of June 30, 2010, as compared to approximately $236 million as of December 31, 2009, primarily due to increased contractual adjustments for our Renal and Endocrinology reporting segment and changes in the timing of certain payments. Our actual results have not differed materially from amounts recorded. The annual variation has been less than 0.5% of total product sales for the last three years.

Accounts Receivable Related to Sales in Greece

        Total accounts receivable in our consolidated balance sheets includes approximately $57 million, net of reserves, as of both June 30, 2010 and December 31, 2009 of accounts receivable held by our subsidiary in Greece related to sales to government-owned or supported healthcare facilities in Greece. These sales are subject to significant payment delays due to government funding and reimbursement practices. We believe that this is an industry-wide issue for suppliers to these facilities. In May 2010, the government of Greece announced a plan for repayment of its debt to international pharmaceutical companies, which calls for immediate payment of accounts receivable balances that were established in 2005 and 2006. For accounts receivable established between 2007 and 2009, the government of Greece will issue non-interest bearing bonds, expected to be exchange tradable, with maturities ranging from 2

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to 4 years. We recorded a charge of $7.2 million to bad debt expense, a component of SG&A, in our consolidated statements of operations for the three and six months ended June 30, 2010 to write down the accounts receivable balances held by our subsidiary in Greece to present value using a 10% discount rate.

        In conjunction with this plan, the government of Greece also instituted price decreases of between 20% and 27% for all future pharmaceutical product sales. Because our customers in Greece are government owned or supported, we may also be impacted by declines in sovereign credit ratings or sovereign debt defaults. The government of Greece has recently required financial support from both the European Union and the IMF to avoid defaulting on its sovereign debt. If significant additional changes occur in the availability of government funding in Greece, we may not be able to collect on amounts due from these customers. We do not expect this concentration of credit risk to have a material adverse impact on our financial position or liquidity.

Healthcare Reform Legislation

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

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

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

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

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

These provisions did not have a significant impact on our results of operations or financial position for the six months ended June 30, 2010.

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

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

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$28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. Beginning in 2013, a 2.3% excise tax will be imposed on sales of all medical devices except retail purchases by the public intended for individual use.

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

        We expect that the U.S. Congress and state legislatures will continue to review and assess healthcare proposals, and public debate of these issues will likely continue. We cannot predict which, if any, of such reform proposals will be adopted and when they might be adopted. In addition, we anticipate seeing continued efforts to reduce healthcare costs in many other countries outside the United States. For example, in May 2010, the Greek health ministry imposed a flat mandatory discount of 27% on medicinal products above a certain price level. This discount, however, does not apply to our orphan drugs or Thymoglobulin. The Greek health ministry has stated that this newly imposed pricing will apply up through August 31, 2010, at which time the ministry will issue new pricing for most medicinal products based on the average of the three lowest prices in the European Union, and at that time, also determine the pricing for orphan products. As another example, the German government has enacted legislation, effective August 2010, that among other things, increases mandatory discounts from 6% to 16% and imposes August 2009 pricing levels on pharmaceuticals through the end of 2013. We expect that our revenues would be negatively impacted if these or similar measures are implemented or maintained.

Distributor Fees

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

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

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

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

 
  Three Months Ended
June 30,
   
   
  Six Months Ended
June 30,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  

Distributor fees:

                                                 
 

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

  $ 5,685   $ 7,909   $ (2,224 )   (28 )% $ 11,745   $ 12,156   $ (411 )   (3 )%
 

Charged to SG&A

    1,547     3,481     (1,934 )   (56 )%   4,893     7,028     (2,135 )   (30 )%
                                       
   

Total distributor fees

  $ 7,232   $ 11,390   $ (4,158 )   (37 )% $ 16,638   $ 19,184   $ (2,546 )   (13 )%
                                       

Stock-Based Compensation

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

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

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

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RESULTS OF OPERATIONS

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

REVENUES

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

 
  Three Months Ended June 30,    
   
  Six Months Ended June 30,    
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  

Product revenue

  $ 974,922   $ 1,115,425   $ (140,503 )   (13 )% $ 1,946,547   $ 2,152,669   $ (206,122 )   (10 )%

Service revenue

    103,589     105,693     (2,104 )   (2 )%   205,504     207,192     (1,688 )   (1 )%
                                       
 

Total product and service revenue

    1,078,511     1,221,118     (142,607 )   (12 )%   2,152,051     2,359,861     (207,810 )   (9 )%

Research and development revenue

    928     7,392     (6,464 )   (87 )%   1,861     17,520     (15,659 )   (89 )%
                                       
 

Total revenues

  $ 1,079,439   $ 1,228,510   $ (149,071 )   (12 )% $ 2,153,912   $ 2,377,381   $ (223,469 )   (9 )%
                                       

Product Revenue

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

Reporting Segments
  Products   Approved Indications
Personalized Genetic Health   Cerezyme   Gaucher disease

 

 

Fabrazyme

 

Fabry disease

 

 

Myozyme/Lumizyme

 

Pompe disease

 

 

Aldurazyme

 

MPS I

 

 

Elaprase

 

MPS II

 

 

Royalties earned on sales of Welchol

 

Reduction of LDL in patients with hypercholesterolemia

 

 

Cholestagel

 

Reduction of LDL in patients with hypercholesterolemia

Renal and Endocrinology

 

Renagel/Renvela and bulk sevelamer

 

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

 

 

Hectorol

 

Secondary hyperparathyroidism in CKD patients

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

Biosurgery

 

Synvisc/Synvisc-One/Jonexa

 

Treatment of pain associated with osteoarthritis

 

 

Sepra products

 

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

Hematology and Oncology

 

Mozobil

 

Mobilization of hematopoietic stem cells

 

 

Thymoglobulin

 

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

 

 

Clolar

 

Relapsed and refractory ALL

 

 

Campath

 

Leukemia

 

 

Fludara

 

Leukemia and lymphoma

 

 

Leukine

 

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

Other

 

Diagnostic products

 

Infectious disease and cholesterol testing products

 

 

Pharmaceutical intermediates products

 

Pharmaceutical intermediates

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

 
  Three Months Ended June 30,    
   
  Six Months Ended June 30,    
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  

Personalized Genetic Health

  $ 350,517   $ 581,685   $ (231,168 )   (40 )% $ 743,001   $ 1,131,608   $ (388,607 )   (34 )%

Renal and Endocrinology

    258,229     247,269     10,960     4 %   510,486     489,724     20,762     4 %

Biosurgery

    151,807     127,113     24,694     19 %   278,068     236,241     41,827     18 %

Hematology and Oncology

    176,490     110,846     65,644     59 %   332,781     197,490     135,291     69 %

Other product revenue

    37,879     48,512     (10,633 )   (22 )%   82,211     97,606     (15,395 )   (16 )%
                                       
 

Total product revenue

  $ 974,922   $ 1,115,425   $ (140,503 )   (13 )% $ 1,946,547   $ 2,152,669   $ (206,122 )   (10 )%
                                       

Personalized Genetic Health

Regulatory and Manufacturing

FDA Consent Decree

        On May 24, 2010, we entered into a consent decree with the FDA relating to our Allston facility. Under the terms of the consent decree, we will pay an upfront disgorgement of past profits of $175.0 million. Conditioned upon our compliance with the terms of the consent decree, we may continue to ship Cerezyme and Fabrazyme, which are manufactured, filled and finished at the facility, as well as Thyrogen, which is filled and finished at the facility. In the United States, Thyrogen that is filled and finished at our Allston facility will only be distributed based on medical necessity, in accordance with FDA criteria. The consent decree requires us to move our fill-finish operations out of our Allston facility for Thyrogen sold within the United States by November 22, 2010 and for Fabrazyme sold within the United States by November 24, 2010. We must move our fill-finish operations for all products sold outside of the United States by August 31, 2011. If we are not able to meet these deadlines, the FDA can require us to disgorge 18.5 percent of the revenue from the sale of any products that are filled and finished at our Allston facility after the applicable deadlines.

        The consent decree also requires us to implement a plan to bring our Allston facility operations into compliance with applicable laws and regulations. The plan must address any deficiencies previously reported to us or identified as part of a comprehensive inspection conducted by a third-party expert, who we are required to retain, and who will monitor and oversee our implementation of the plan. In 2009, we began implementing a comprehensive remediation plan, prepared with assistance from our compliance consultant, Quantic, to improve quality and compliance at our Allston facility. We intend to revise that plan to include any additional remediation efforts required in connection with the consent decree as identified by Quantic, who we are retaining as the third-party expert under the consent decree. The plan, as revised, which will be subject to FDA approval, is expected to take approximately 3-4 years to complete and will include a timetable of specified compliance milestones. If the milestones are not met in accordance with the timetable, the FDA can require us to pay $15,000 per day, per affected drug, until these compliance milestones are met. Upon satisfying the compliance requirements in accordance with the terms of the consent decree, we will be required to retain an auditor to monitor and oversee ongoing compliance at our Allston facility for an additional five years. The consent decree is subject to, and effective upon, approval by the U.S. District Court for the District of Massachusetts. The consent decree was filed with the U.S. District Court on May 24, 2010 and we are awaiting the court's approval.

Manufacturing and Supply of Cerezyme and Fabrazyme

        In June 2009, we interrupted production of Cerezyme and Fabrazyme at our Allston facility after identifying a virus, Vesivirus 2117, in a bioreactor used for Cerezyme production. The virus we

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identified impairs the viability of cells used in the manufacturing process and is not known to cause infection in humans. We completed sanitization of the facility and resumed production there in the third quarter of 2009. Cerezyme and Fabrazyme inventories were not sufficient to avoid shortages.

        We resumed Cerezyme shipments in the fourth quarter of 2009. In order to build a small inventory buffer to help us more consistently manage the resupply of Cerezyme to patients and reduce interruptions in shipping that occur in the absence of inventory, we began shipping Cerezyme to meet 50% of estimated product demand at the end of February 2010. Although we achieved our goal of building a small inventory buffer during the first quarter of 2010, we continued shipping at the 50% of demand level due to an interruption in operations at our Allston facility at the end of March 2010. The interruption resulted from an unexpected city electrical power failure that compounded issues with the facility's water system. Once production resumed, we continued shipping at the 50% of demand level through the end of the second quarter of 2010. We supplied approximately the same amount of Cerezyme in July 2010 as we supplied in each of May 2010 and June 2010, and expect that supply will then increase in the following months. However, there will be regional variations when Cerezyme will be available, and in some countries, patients' infusion schedules may need to shift due to short-term shipping delays.

        Since the fourth quarter of 2009, we have been shipping Fabrazyme to meet approximately 30% of estimated product demand. We have been working to increase the productivity of the Fabrazyme manufacturing process, which has performed at the low end of the historical range since the re-start of production. We have developed a new working cell bank for Fabrazyme that has been approved by the FDA and EMA. The new working cell bank has completed three runs and has had 30% greater productivity than the old working cell bank. We expect to continue shipping Fabrazyme at the 30% of demand level through the third quarter and increase shipments of Fabrazyme in the fourth quarter of 2010.

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

Lumizyme Approval

        In May 2010, we received FDA approval to market Lumizyme, alglucosidase alfa produced at the 4000L scale in the United States. Lumizyme is the first treatment approved in the U.S. specifically to treat patents with late-onset Pompe disease. We produce Lumizyme at our Geel facility, where we have produced Myozyme at the 4000L scale since February 2009 when we received approval for the 4000L scale process in Europe. As of the first quarter of 2010, the majority of markets outside of the United States have transitioned to the 4000L scale product. At our Geel facility, we are adding a third bioreactor for the production of Myozyme/Lumizyme produced at the 4000L scale, for which we expect to receive FDA approval in mid-2011.

        We have implemented a Risk Evaluation and Mitigation Strategy, or REMS, which we call the Lumizyme ACE Program, to ensure that the appropriate patients receive Lumizyme commercially. We have initiated this program with the health care professionals involved in the Alglucosidase Alfa Temporary Access Program, or ATAP, the program created in 2007 through which we have provided therapy free of charge to nearly 200 patients prior to commercial approval of Lumizyme. We will keep ATAP open until August 20, 2010 to ensure that patients have uninterrupted therapy while working to enroll participants in the Lumizyme ACE Program. We have also begun working with U.S. health care

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professionals to enable those adult patients who have been waiting to access treatment to begin Lumizyme therapy.

Personalized Genetic Health Product Revenue

 
  Three Months Ended June 30,    
   
  Six Months Ended June 30,    
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  
 
  (Amounts in thousands)
 

Cerezyme

  $ 138,736   $ 298,087   $ (159,351 )   (53 )% $ 317,883   $ 594,057   $ (276,174 )   (46 )%

Fabrazyme

    39,484     134,302     (94,818 )   (71 )%   92,725     256,503     (163,778 )   (64 )%

Myozyme/Lumizyme

    92,054     79,273     12,781     16 %   178,113     146,665     31,448     21 %

Aldurazyme

    43,651     39,190     4,461     11 %   83,548     76,027     7,521     10 %

Other Personalized Genetic Health

    36,592     30,833     5,759     19 %   70,732     58,356     12,376     21 %
                                       
 

Total Personalized Genetic Health

  $ 350,517   $ 581,685   $ (231,168 )   (40 )% $ 743,001   $ 1,131,608   $ (388,607 )   (34 )%
                                       

        PGH product revenue decreased for the three and six months ended June 30, 2010, primarily due to the temporary suspension of production at our Allston facility in June 2009 during a time of already low levels of inventory for Cerezyme and Fabrazyme, resulting in supply constraints for Cerezyme and Fabrazyme since that time offset, in part, by:

    favorable exchange rate fluctuations for the six months ended June 30, 2010 offset, in part, by unfavorable exchange rates for the three months ended June 30, 2010;

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

    the addition of sales of Lumizyme after it received FDA approval in May 2010.

Cerezyme and Fabrazyme

        The supply constraint for Cerezyme adversely impacted Cerezyme revenue by $154.9 million for the three months ended June 30, 2010 and by $280.5 million for the six months ended June 30, 2010. The weakening of foreign currencies, primarily the Euro, against the U.S. dollar, adversely impacted Cerezyme revenue by $1.5 million for the three months ended June 30, 2010. Exchange rate fluctuations, primarily the Euro against the U.S. dollar, positively impacted Cerezyme revenue by $5.9 million for the six months ended June 30, 2010. Our results of operations are dependent on sales of Cerezyme and any reduction in revenue from sales of this product adversely affects our results of operations. Sales of Cerezyme were approximately 13% of our total revenue for the three months ended June 30, 2010, and 15% of our total revenue for the six months ended June 30, 2010 which reflect periods of supply constraint, as compared to approximately 24% and 25% for the same periods in 2009.

        The supply constraint for Fabrazyme adversely impacted Fabrazyme revenue by $94.2 million for the three months ended June 30, 2010 and by $166.6 million for the six month ended June 30, 2010. The weakening of foreign currencies against the U.S. dollar had no significant impact on Fabrazyme revenue for the three months ended June 30, 2010. Exchange rate fluctuations positively impacted Fabrazyme revenue by $2.3 million for the six months ended June 30, 2010.

        Under the FDA consent decree, we are required to move our fill-finish operations for Cerezyme and Fabrazyme out of our Allston facility. We are in the process of transferring these operations to Hospira.

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

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negatively affected by competitive products by Shire Human Genetic Therapies Inc., a business unit of Shire plc, or Shire, and Protalix Biotherapeutics Ltd., or Protalix. After our products experienced supply constraints, Shire and Protalix were able to offer their developmental therapies for the treatment of Gaucher disease to patients in the United States through an FDA-approved treatment investigational new drug application, or T-IND, protocol and to patients in the European Union and other countries through pre-approval access programs. Shire received marketing approval for VPRIV™ from the FDA in late February 2010 and announced that it will price this therapy lower than Cerezyme. Shire also received a positive opinion from the EMA Committee for Human Medicinal Product in June 2010. Shire has announced that it expects its manufacturing plant to be approved for commercial product in late 2011 or early 2012. Protalix submitted its new drug application, or NDA, for UPLYSO™ to the FDA in December 2009 and has been granted "fast track" designation with a Prescription Drug User Fee Act, or PDUFA, date of February 25, 2011. In December 2009, Protalix and Pfizer entered into an agreement to develop and commercialize UPLYSO. The FDA has granted orphan drug status to both Shire's and Protalix's therapies for the treatment of Gaucher disease. Outside of the United States, Fabrazyme currently competes with Replagal, a product marketed by Shire. In the United States, the FDA has approved a T-IND for Replagal. In August 2010, Shire reported that it had withdrawn its biologics license application, or BLA, for Replagal that it had submitted in December 2009 to the FDA, and for which it had been granted "fast track" designation, to consider updating it with additional clinical data. In June 2010, Shire closed enrollment in its T-IND in the United States for Replagal and announced plans to actively manage emergency requests for the drug from new patients.

        We are aware that some Gaucher and Fabry patients have switched to one of our competitors' therapies during the period of supply constraint and there is a risk that they may not switch back to our products, which would result in the loss of additional revenue for us. In April 2010, the EMA advised physicians to consider switching Fabry disease patients from Fabrazyme to Replagal based on its concerns that certain patients were not tolerating reduced dosages of Fabrazyme. We also have encouraged patients to switch to competitors products during the period of supply constraint. These actions may result in additional patients switching to our competitors' therapies. In July 2010, the EMA issued a temporary recommendation to physicians that new Fabry disease patients be treated with Replagal as an alternative to Fabrazyme because of continued supply shortages of Fabrazyme. In addition, the institution of treatment guidelines and dose conservation measures during the supply constraint present the risk that physicians and patients will not resume prior treatment or dosage levels after the supply constraint has ended, potentially resulting in further loss of revenue for us. Our estimates of the demand for Cerezyme and Fabrazyme and, as a result, estimates of our shipping allocations based on such demand, are impacted by patients switching to our competitors' therapies and by long-term adoption by patients of lower treatment or dosage levels.

Myozyme/Lumizyme

        Myozyme/Lumizyme revenue increased for the three and six months ended June 30, 2010 due to increased patient identification outside of the United States following the European approval in February 2009 and the U.S. approval in May 2010 of the product produced at our Geel facility using the 4000L scale process. We implemented a price increase for Myozyme/Lumizyme as of June 1, 2010 which had no significant impact on Myozyme/Lumizyme revenue for the three and six months ended June 30, 2010. The weakening of foreign currencies, primarily the Euro, against the U.S. dollar, adversely impacted Myozyme/Lumizyme revenue by $3.7 million for the three months ended June 30, 2010. Exchange rate fluctuations had no significant impact on Myozyme/Lumizyme revenue for the six months ended June 30, 2010.

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Aldurazyme

        Aldurazyme revenue increased for the three and six months ended June 30, 2010 due to increased patient identification worldwide as Aldurazyme was introduced into new markets. Exchange rate fluctuations had no significant impact on Aldurazyme revenue for the three and six months ended June 30, 2010.

Other Personalized Genetic Health

        Other PGH product revenue increased for the three and six months ended June 30, 2010, primarily due to increased sales of Elaprase attributable to the continued identification of new patients in our territories. We have rights to commercialize Elaprase in Japan and other Asia Pacific countries under an agreement with Shire. The strengthening of foreign currencies, primarily the Japanese yen, against the U.S. dollar, positively impacted Other PGH product revenue by $1.0 million for the three months ended June 30, 2010 and by $1.5 million for the six months ended June 30, 2010.

Renal and Endocrinology

 
  Three Months Ended June 30,    
   
  Six Months Ended June 30,    
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  
 
  (Amounts in thousands)
 

Renagel/Renvela (including sales of bulk sevelamer)

  $ 170,066   $ 175,398   $ (5,332 )   (3 )% $ 334,673   $ 345,997   $ (11,324 )   (3 )%

Hectorol

    41,863     28,981     12,882     44 %   83,888     62,011     21,877     35 %

Thyrogen

    46,300     42,860     3,440     8 %   91,925     81,686     10,239     13 %

Other Renal and Endocrinology

        30     (30 )   (100 )%       30     (30 )   (100 )%
                                       
 

Total Renal and Endocrinology

  $ 258,229   $ 247,269   $ 10,960     4 % $ 510,486   $ 489,724   $ 20,762     4 %
                                       

        Sales of Renagel/Renvela, including sales of bulk sevelamer, decreased for the three and six months ended June 30, 2010, primarily due to the effect of Renagel pricing in Brazil and the conversion of patients to Renvela in the United States. In 2009, we decreased the price of Renagel in Brazil in connection with successfully negotiating a government tender in the face of competition from two similar products that had been approved in that country. Total revenue for Renagel/Renvela, including sales of bulk sevelamer, reflects the increasing percentage of Renvela sales within the United States. The weakening of foreign currencies, primarily the Euro, against the U.S. dollar, had no significant impact on Renagel revenue for the three months ended June 30, 2010. Exchange rate fluctuations positively impacted Renagel revenue by $6.7 million for the six months ended June 30, 2010.

        We manufacture the majority of our supply requirements for sevelamer hydrochloride (the active ingredient in Renagel) and sevelamer carbonate (the active ingredient in Renvela) at our manufacturing facility in Haverhill, England. In December 2009, equipment failure caused an explosion and fire at this facility, which damaged some of the equipment used to produce these active ingredients as well as the building in which the equipment was located. As a result, we temporarily suspended production of sevelamer hydrochloride and sevelamer carbonate at this facility while repairs were made. We resumed production of sevelamer hydrochloride in May 2010. We anticipate that the facility will resume production of sevelamer carbonate in the fourth quarter of 2010. We believe that we have adequate supply levels to meet the current demand for both Renagel and Renvela and do not anticipate there will be any supply constraints for either product while the facility undergoes repairs. We recorded a total of $6.1 million of expenses, net of $2.4 million of insurance reimbursements, for the three months ended and a total of $13.7 million, net of $5.4 million of insurance reimbursements, for the six months ended June 30, 2010 to cost of products sold in our consolidated statements of operations for Renagel and Renvela related to the remediation cost of our Haverhill, England

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manufacturing facility, including repairs and idle capacity expenses. We expect to incur approximately $10 million of additional costs related to the remediation of this facility in the third quarter of 2010.

        Sales of Hectorol increased for the three and six months ended June 30, 2010, primarily due to price increases in the second and fourth quarters of 2009 and the first quarter of 2010. Sales of Hectorol also include an increase in sales volume due to the addition of the Hectorol 1mcg capsule formulation in August 2009.

        Renagel/Renvela and Hectorol currently compete with several other marketed products and will have additional competitors in the future. Competitive products, especially if they are lower cost generic or follow-on products, will adversely impact the revenues we recognize from Renagel/Renvela. Our core patents protecting Renagel/Renvela and Hectorol expire in 2014 in the United States. We are unable to accurately estimate the unfavorable qualitative and quantitative impact of the expiration of these patents on our future operations and liquidity, as the impact is dependent on numerous factors beyond our control. These factors include: the outcome of pending patent litigations; the timing of a competitive generic product's entry into the market; the number of generic products that actually enter the market and which markets generic entrants choose or are authorized to enter; the identity and the operational, manufacturing, distribution and marketing capabilities of the generic entrants; the reimbursement environment for the products in the United States and globally; and, in the case of Renagel/Renvela, requirements that the various regulatory agencies around the globe may impose on a manufacturer to demonstrate bioequivalence of these non-absorbed polymer-based products. Because these conditional events described above have not yet occurred, the current periods reflected in this filing have not been adversely affected; however, we expect the future impact to be unfavorable. See also "Some of our products may face competition from lower cost generic or follow-on products" under the heading "Risk Factors" in this filing.

        The Medicare Improvements for Patients and Providers Act of 2008, or MIPPA, directs the Centers for Medicare and Medicaid Services, or CMS, to establish a bundled payment system to reimburse dialysis providers treating patients with end stage renal disease, or ESRD. On July 26, 2010, CMS issued a final rule setting forth the dialysis bundled payment system that will begin on January 1, 2011. The final rule delays until 2014 the inclusion of ESRD-related oral drugs such as Renagel/Renvela and other oral phosphate binders that do not have an intravenous or injectable equivalent, in the bundled payment system. As a result, Renagel/Renvela will continue to be separately reimbursed by Medicare until 2014. However, beginning January 1, 2011, the bundled payment system will include ESRD-related IV drugs and biologics and their oral equivalents, including intravenous Vitamin D analogs and their oral equivalents such as Hectorol for Infusion and Hectorol capsules. We are in the process of evaluating the potential impact of the bundled payment system on our business.

        Sales of Thyrogen increased for the three months ended June 30, 2010, primarily due to a price increase in July 2009. Sales of Thyrogen increased for the six months ended June 30, 2010, primarily due to a price increase in July 2009. Exchange rate fluctuations, primarily the Euro against the U.S. dollar, positively impacted Thyrogen revenue by $1.1 million for the six months ended June 30, 2010. The weakening of foreign currencies, primarily the Euro against the U.S. dollar, had no significant impact on Thyrogen revenue for the three months ended June 30, 2010. Under the FDA consent decree, Thyrogen distributed in the United States and filled and finished at our Allston facility will only be distributed based on medical necessity, in accordance with FDA criteria. In addition, the consent decree requires us to move our fill-finish operations out of our Allston facility for Thyrogen sold within the United States by November 22, 2010 and for Thyrogen sold outside the United States by August 31, 2011. We are in the process of transferring these operations to Hospira, a third-party contract manufacturer.

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Biosurgery

 
  Three Months Ended June 30,    
   
  Six Months Ended June 30,    
   
 
 
  Increase/ (Decrease)   Increase/ (Decrease) % Change   Increase/ (Decrease)   Increase/ (Decrease) % Change  
 
  2010   2009   2010   2009  
 
  (Amounts in thousands)
 

Synvisc/Synvisc-One

  $ 107,686   $ 82,417   $ 25,269     31 % $ 187,193   $ 145,588   $ 41,605     29 %

Sepra products

    38,935     36,038     2,897     8 %   76,112     70,342     5,770     8 %

Other Biosurgery

    5,186     8,658     (3,472 )   (40 )%   14,763     20,311     (5,548 )   (27 )%
                                       
 

Total Biosurgery

  $ 151,807   $ 127,113   $ 24,694     19 % $ 278,068   $ 236,241   $ 41,827     18 %
                                       

        Biosurgery product revenue increased for the three and six months ended June 30, 2010, primarily due to increased sales for Synvisc/Synvisc-One due to the addition of Synvisc-One sales in the United States. We received marketing approval for Synvisc-One in the United States in February 2009. Exchange rate fluctuations, primarily the Euro against the U.S. dollar, positively impacted Biosurgery revenue by $2.2 million for the six months ended June 30, 2010. The weakening of foreign currencies, primarily the Euro against the U.S. dollar, had no significant impact on Biosurgery revenue for the three months ended June 30, 2010.

Hematology and Oncology

 
  Three Months Ended June 30,    
   
  Six Months Ended June 30,    
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  
 
  (Amounts in thousands)
 

Mozobil

  $ 22,141   $ 11,650   $ 10,491     90 % $ 41,107   $ 22,487   $ 18,620     83 %

Thymoglobulin

    58,232     53,632     4,600     9 %   111,142     104,287     6,855     7 %

Clolar

    25,520     19,708     5,812     29 %   50,208     37,868     12,340     33 %

Other Hematology and Oncology

    70,597     25,856     44,741     >100 %   130,324     32,848     97,476     >100 %
                                       

Total Hematology and Oncology

  $ 176,490   $ 110,846   $ 65,644     59 % $ 332,781   $ 197,490   $ 135,291     69 %
                                       

        Hematology and Oncology product revenue increased for the three and six months ended June 30, 2010, primarily due to:

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

    increased demand for Clolar globally; and

    the addition of sales of Campath, Fludara and Leukine beginning the end of May 2009 as a result of our acquisition from Bayer.

Exchange rate fluctuations had no significant impact on Hematology and Oncology revenue for the three and six months ended June 30, 2010.

Other Product Revenue

 
  Three Months Ended June 30,    
   
  Six Months Ended June 30,    
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  
 
  (Amounts in thousands)
 

Total Other product revenue

  $ 37,879   $ 48,512   $ (10,633 )   (22 )% $ 82,211   $ 97,606   $ (15,395 )   (16 )%
                                       

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        Other product revenue decreased for the three and six months ended June 30, 2010, primarily due to decreased demand for pharmaceutical intermediates products.

Service Revenue

        We derive service revenues primarily from the following sources:

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

 
  Three Months Ended June 30,    
   
  Six Months Ended June 30,    
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  

Personalized Genetic Health

  $ 23   $ 43   $ (20 )   (47 )% $ 43   $ 80   $ (37 )   (46 )%

Biosurgery

    11,771     11,344     427     4 %   22,317     21,176     1,141     5 %

Hematology and Oncology

        292     (292 )   (100 )%       737     (737 )   (100 )%

Other service revenue

    91,795     94,014     (2,219 )   (2 )%   183,144     185,199     (2,055 )   (1 )%
                                       
 

Total service revenue

  $ 103,589   $ 105,693   $ (2,104 )   (2 )% $ 205,504   $ 207,192   $ (1,688 )   (1 )%
                                       

        Service revenue decreased slightly for the three and six months ended June 30, 2010, primarily due to a decrease in genetic testing service revenue due to a decrease in demand for higher priced genetics testing services offset, in part, by an increase in Biosurgery service revenue due to increased demand for Carticel and MACI. Exchange rate fluctuations had no significant impact on service revenue for the three and six months ended June 30, 2010.

International Product and Service Revenue

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

 
  Three Months Ended June 30,    
   
  Six Months Ended June 30,    
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  

International product and service revenue

  $ 501,568   $ 606,988   $ (105,420 )   (17 )% $ 1,015,027   $ 1,158,100   $ (143,073 )   (12 )%

% of total product and service revenue

    47%     50%                 47%     49%              

        International product and service revenue decreased for the three and six months ended June 30, 2010, primarily due to a decrease in international sales volume for Cerezyme and Fabrazyme for the three and six months ended June 30, 2010 due to supply constraints.

        This decrease was offset, in part, by:

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Research and Development Revenue

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

 
  Three Months Ended June 30,    
   
  Six Months Ended June 30,    
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  

Renal and Endocrinology

  $ 150   $ 8   $ 142     >100 % $ 316   $ 21   $ 295     >100 %

Biosurgery

    404     870     (466 )   (54 )%   963     1,432     (469 )   (33 )%

Hematology and Oncology

    7     852     (845 )   (99 )%   26     2,336     (2,310 )   (99 )%

Multiple Sclerosis

        5,066     (5,066 )   (100 )%       12,357     (12,357 )   (100 )%

Other

    67     99     (32 )   (32 )%   256     381     (125 )   (33 )%

Corporate

    300     497     (197 )   (40 )%   300     993     (693 )   (70 )%
                                       
 

Total research and development revenue

  $ 928   $ 7,392   $ (6,464 )   (87 )% $ 1,861   $ 17,520   $ (15,659 )   (89 )%
                                       

        Total research and development revenue decreased for the three and six months ended June 30, 2010, primarily due to a decrease in Multiple Sclerosis research and development revenue as a result of our acquisition from Bayer and termination of the Campath profit share arrangement. As of May 29, 2009, the effective date of our acquisition from Bayer, we ceased recognizing research and development revenue for Bayer's reimbursement of a portion of the development costs for alemtuzumab for MS. The fair value of the research and development costs to be reimbursed by Bayer is accounted for as an offset to the contingent consideration obligations for alemtuzumab for MS.

GROSS PROFIT AND MARGINS

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

 
  Three Months Ended June 30,    
   
  Six Months Ended June 30,    
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  

Gross product profit

  $ 673,278   $ 826,526   $ (153,248 )   (19 )% $ 1,365,164   $ 1,628,208   $ (263,044 )   (16 )%

Product margin

    69%     74%                 70%     76%              

Gross service profit

  $ 37,065   $ 44,069   $ (7,004 )   (16 )% $ 73,108   $ 85,318   $ (12,210 )   (14 )%

Service margin

    36%     42%                 36%     41%              

Total gross product and service profit

  $ 710,343   $ 870,595   $ (160,252 )   (18 )% $ 1,438,272   $ 1,713,526   $ (275,254 )   (16 )%

Total product and service margin

    66%     71%                 67%     73%              

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Gross Product Profit and Product Margin

        Our overall gross product profit decreased for the three and six months ended June 30, 2010, primarily due to:

        These decreases were offset, in part, by:

        Our product margin decreased for the three and six months ended June 30, 2010, primarily due to:

        Gross product profit and gross product margin also decreased for the three and six months ended June 30, 2010 due to manufacturing-related charges as described below:

Gross product profit and gross product margin for the three and six months ended June 30, 2009 includes $14.2 million of charges for the initial costs related to the remediation of our Allston facility and $8.4 million of charges for the write off of Cerezyme work-in-process material recorded in June 2009.

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        Our gross product profit and product margin for the three months ended June 30, 2010 were also impacted by the unfavorable effect of foreign exchange rates on product sales outside of the United States, offset, in part, by the favorable effect of such rates on the cost of those products. Our gross product profit and product margin for the six months ended June 30, 2010 were also impacted by the favorable effect of foreign exchange rates on product sales outside of the United States, offset, in part, by the unfavorable effect of such rates on the cost of those products.

        We expect to incur approximately $10 million of additional costs related to the remediation of our Haverhill, England facility in the third quarter of 2010.

        At any particular period, we may have certain inventory that requires further evaluation or testing to ensure that it meets appropriate quality specifications. As of June 30, 2010, we have approximately $16 million of inventory that is being evaluated or tested, including $6.3 million of Fabrazyme, $3.9 million of Myozyme and $3.6 million of Thymoglobulin. If we determine that this inventory, or any portion thereof, does not meet the necessary quality standards, it would result in a write off of the inventory and a charge to earnings.

Gross Service Profit and Service Margin

        Our overall gross service profit and total service margin decreased for the three and six months ended June 30, 2010, primarily due to increased employee, rent and depreciation expenses for our genetic testing business unit.

OPERATING EXPENSES

Selling, General and Administrative Expenses

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

 
  Three Months Ended
June 30,
   
   
  Six Months Ended
June 30,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  

Selling, general and administrative expenses

  $ 402,535   $ 354,128   $ 48,407     14 % $ 955,845   $ 672,089   $ 283,756     42 %

% of total revenue

    37 %   29 %               44 %   28 %            

        SG&A increased for the three and six months ended June 30, 2010, primarily due to spending increases of:

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SG&A increased by $2.1 million for the three months ended June 30, 2010 due to unfavorable exchange rate fluctuations for the three months ended June 30, 2010. SG&A decreased by $6.2 million for the six months ended June 30, 2010 due to favorable exchange rate fluctuations for the six months ended June 30, 2010.

Research and Development Expenses

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

 
  Three Months Ended
June 30,
   
   
  Six Months Ended
June 30,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  

Research and development expenses

  $ 225,558   $ 210,522   $ 15,036     7 % $ 446,488   $ 417,447   $ 29,041     7 %

% of total revenue

    21 %   17 %               21 %   18 %            

        Research and development expenses increased for the three and six months ended June 30, 2010, primarily due to:

Research and development expense increased by $1.1 million for the three months ended June 30, 2010 due to unfavorable exchange rate fluctuations for the three months ended June 30, 2010. Research and development expense decreased by $1.7 million for the six months ended June 30, 2010 due to favorable exchange rate fluctuations for the six months ended June 30, 2010.

        These increases were partially offset by a spending decrease of:

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Amortization of Intangibles

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

 
  Three Months Ended
June 30,
   
   
  Six Months Ended
June 30,
   
   
 
 
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
  Increase/
(Decrease)
  Increase/
(Decrease)
% Change
 
 
  2010   2009   2010   2009  

Amortization of intangibles

  $ 67,891   $ 63,945   $ 3,946     6 % $ 138,875   $ 121,543   $ 17,332     14 %

% of total revenue

    6 %   5 %               6 %   5 %