Edgar Filing: GENZYME CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

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 number 0-14680

GENZYME CORPORATION

(Exact name of registrant as specified in its charter)

Massachusetts		06-1047163
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
500 Kendall Street, Cambridge, Massachusetts		02142
(Address of principal executive offices)		(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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o

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

The number of shares of Genzyme Stock outstanding as of July 31, 2007: 263,122,885

NOTE REGARDING REFERENCES TO OUR COMMON STOCK

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. Genzyme Corporation has one outstanding series of common stock, which we refer to as “Genzyme Stock.”

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements, including statements regarding:

· our plans to seek marketing approvals for our products in additional jurisdictions, including Myozyme and Thymoglobulin;

· our plans and our anticipated timing for pursuing additional indications and uses for our products and services, including Synvisc, Campath and Clolar and for pursuing approvals of Renvela and Synvisc-One;

· the timing and availability of data from clinical trials;

· the anticipated drivers for future growth of our products, including Renagel, Hectorol and Synvisc;

· estimates of the capacity of, and the projected timetable of approvals for, manufacturing and other facilities and production methods to support our products and services, including the larger-scale manufacturing process for Myozyme;

· our assessment of competitors and potential competitors and the anticipated impact of potentially competitive products on our revenues;

· our estimates of the potential markets for our products and services;

· our ability to meet the expected demand for our products, including Thymoglobulin and our ability to optimize the U.S. supply of Myozyme;

· Cerezyme contributing to revenues in the future;

· our proposed settlement of the litigation related to the consolidation of our former tracking stocks filed in the U.S. District Court for the Southern District of New York and expected dismissal of similar litigation currently pending in the Massachusetts Superior Court (MSC);

· our plans to pursue our rights with respect to insurance coverage for our proposed settlement under a director and officer liability insurance program;

· our assessment of the outcome, timetables and financial impact of litigation and other governmental proceedings and the potential impact of unasserted claims, including the approximately $64 million we expect to pay to settle litigation related to the consolidation of our former tracking stocks;

· the sufficiency of our cash, short- and long-term investments and cash flows from operations;

· U.S. and foreign income tax audits, including our provision for liabilities and assessment of the impact of settlement of the Internal Revenue Service, commonly referred to as the IRS, and foreign tax disputes;

· our estimates of cost to complete and estimated commercialization dates for in-process research and development, or IPR&D, programs;

· our expected future revenues, operations, expenditures, allocations and expenses, and the assumptions underlying those estimates;

· our projected future earnings and earnings per share;

· our assessment of the impact of recent accounting pronouncements, including Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards No., or FAS, 157, regarding fair value measurements, and FAS 159, regarding the fair value option for financial assets and financial liabilities and our assessment of the ongoing impact of FASB Interpretation No., or FIN, 48 regarding the accounting for income tax positions;

· our sales and marketing plans;

· our assessment of certain lots of Thymoglobulin finished goods inventory and expected timing of completion of review;

· our planned acquisition of Bioenvision, Inc., or Bioenvision, and the expected timing and payments related to the acquisition;

· our expected future contingent payments to Synpac (North Carolina), Inc., or Synpac; and

· our expected future payments related to our acquisitions, including milestone and royalty payments to the former shareholders of Surgi.B Chirugie et Medicine SAS, or Surgi.B, Wyeth, and Verigen Inc., or Verigen, and employee benefits and leased facilities acquired from AnorMED Inc., or AnorMED, and the expected timing of these payments.

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:

· our ability to successfully complete preclinical and clinical development of our products and services;

· our ability to secure regulatory approvals for our products, services and manufacturing facilities, and to do so in the anticipated timeframes;

· the content and timing of submissions to and decisions made by the United States Food and Drug Administration, commonly referred to as the FDA, the European Agency for the Evaluation of Medicinal Products, or EMEA, and other regulatory agencies related to our products and the facilities and processes used to manufacture our products (including FDA approval of larger-scale manufacturing of Myozyme);

· our ability to satisfy the post-marketing commitments made as a condition of the marketing approvals of Fabrazyme, Aldurazyme and Myozyme;

· our ability to manufacture sufficient amounts of our products for development and commercialization activities and to do so in a timely and cost-effective manner;

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

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

· the scope, validity and enforceability of patents and other proprietary rights held by third parties and their impact on our ability to commercialize our products and services;

· the accuracy of our estimates of the size and characteristics of the markets to be addressed by our products and services, including growth projections;

· market acceptance of our products and services in expanded areas of use and new markets;

· our ability to identify new patients for our products and services;

· our ability to increase market penetration both outside and within the United States for our products and services;

· the accuracy of our information regarding the products and resources of our competitors and potential competitors;

· 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;

· our ability to effectively manage wholesaler inventories of our products and the levels of compliance with our inventory management programs;

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

· the continued funding and operation of our joint ventures by our partners;

· our use of cash in business combinations or other strategic initiatives;

· our ability to negotiate final terms of a settlement agreement for the litigation related to the consolidation of our former tracking stocks;

· our ability to obtain approval from the court, plaintiffs and plaintiffs’ counsel to pay approximately $64 million to settle the litigation related to the consolidation of our former tracking stocks;

· the resolution of the dispute with our insurance carriers regarding our claim for coverage under a director and officer liability insurance program;

· the initiation of legal proceedings by or against us;

· the impact of changes in the exchange rate for the Euro and other currencies on our product and service revenues in future periods;

· our ability to successfully integrate the business we acquired from AnorMED;

· our ability to complete the planned acquisition of Bioenvision on the anticipated terms and timeline, including receipt of sufficient votes in favor of the merger from the Bioenvision shareholders;

· the number of diluted shares considered outstanding, which will depend on business combination activity, our stock price and any further changes in the accounting rules for the calculation of earnings per share;

· the estimates and input variables used in accounting for stock options and the related stock-based compensation expense;

· the outcome of our IRS and foreign tax audits; and

· the possible disruption of our operations due to terrorist activities, armed conflict, or outbreak of diseases such as severe acute respiratory syndrome (SARS) or avian influenza, including as a result of the disruption of operations of regulatory authorities, our subsidiaries, our manufacturing facilities and our customers, suppliers, distributors, couriers, collaborative partners, licensees and clinical trial sites.

We provide more detailed descriptions of these and other risks and uncertainties under the heading “Risk Factors,” included in this report. We encourage you to read those descriptions carefully. We caution investors not to place substantial reliance on the forward-looking statements contained in 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 REGARDING INCORPORATION BY REFERENCE

The U.S. 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 or will file 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®, Ceredase®, Fabrazyme®, Thyrogen®, Myozyme®, Renagel®, Campath®, Clolar®, Thymoglobulin®, Synvisc®, Seprafilm® and Hectorol® are registered trademarks, and Lymphoglobuline™, Sepra™, Mozobil™, Renvela™ and Synvisc-One™ are trademarks, of Genzyme or its subsidiaries. WelChol® is a registered trademark of Sankyo Pharma, Inc. Aldurazyme® is a registered trademark of BioMarin/Genzyme LLC. All rights reserved.

GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 2007
TABLE OF CONTENTS

		PAGE NO.
PART I.	FINANCIAL INFORMATION	7
ITEM 1.	Financial Statements	7
	Unaudited, Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2007 and 2006	7
	Unaudited, Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	8
	Unaudited, Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006	9
	Notes to Unaudited, Consolidated Financial Statements	10
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	64
ITEM 4.	Controls and Procedures	65
PART II.	OTHER INFORMATION	66
ITEM 1.	Legal Proceedings	66
ITEM 1A.	Risk Factors	66
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
ITEM 4.	Submission of Matters to a Vote of Security Holders	68
ITEM 6.	Exhibits	69
Signatures		70

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
(Unaudited, amounts in thousands, except per share amounts)

	Three Months Ended June 30,								Six Months Ended June 30,
	2007				2006				2007			2006
Revenues:
Net product sales		$	845,482			$	718,735		$	1,643,672		$	1,376,070
Net service sales		82,475				71,012			158,356			139,834
Research and development revenue		5,462				3,609			14,574			8,294
Total revenues		933,419				793,356			1,816,602			1,524,198
Operating costs and expenses:
Cost of products sold		163,252				133,957			317,976			254,469
Cost of services sold		54,346				51,376			102,085			97,814
Selling, general and administrative		339,480				273,480			608,501			504,149
Research and development		198,442				168,941			364,562			321,264
Amortization of intangibles		49,465				52,883			99,482			105,575
Total operating costs and expenses		804,985				680,637			1,492,606			1,283,271
Operating income		128,434				112,719			323,996			240,927
Other income (expenses):
Equity in income of equity method investments		5,945				3,854			11,557			6,100
Minority interest		15				2,750			3,927			5,196
Gains on investments in equity securities, net		143				66,967			12,931			74,909
Other		(278		)		(319		)	(803		)	(458		)
Investment income		17,246				12,563			33,465			22,641
Interest expense		(3,621		)		(4,035		)	(7,809		)	(8,473		)
Total other income		19,450				81,780			53,268			99,915
Income before income taxes		147,884				194,499			377,264			340,842
Provision for income taxes		(64,090		)		(60,002		)	(135,283		)	(105,371		)
Net income		$	83,794			$	134,497		$	241,981		$	235,471
Net income per share:
Basic		$	0.32			$	0.52		$	0.92		$	0.91
Diluted		$	0.31			$	0.49		$	0.88		$	0.86
Weighted average shares outstanding:
Basic		263,911				260,444			263,693			260,076
Diluted		280,564				276,312			280,244			276,560
Comprehensive income, net of tax:
Net income		$	83,794			$	134,497		$	241,981		$	235,471
Other comprehensive income (loss):
Foreign currency translation adjustments		8,636				50,091			21,246			77,733
Other, net of tax		(464		)		(219		)	(266		)	(277		)
Unrealized gains (losses) on securities, net of tax:
Unrealized gains (losses) arising during the period, net of tax		(4,516		)		28,577			5,362			35,938
Reclassification adjustment for gains (losses) included in net income, net of tax		313				(42,136		)	(7,848		)	(45,732		)
Unrealized losses on securities, net of tax		(4,203		)		(13,559		)	(2,486		)	(9,794		)
Other comprehensive income		3,969				36,313			18,494			67,662
Comprehensive income		$	87,763			$	170,810		$	260,475		$	303,133

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

GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited, amounts in thousands, except par value amounts)

	June 30, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	791,441			$	492,170
Short-term investments	89,010				119,894
Accounts receivable, net	826,516				746,746
Inventories	431,610				374,644
Prepaid expenses and other current assets	114,303				119,122
Deferred tax assets	131,305				136,925
Total current assets	2,384,185				1,989,501
Property, plant and equipment, net	1,742,651				1,610,593
Long-term investments	617,197				673,540
Note receivable—related party	—				7,290
Goodwill, net	1,299,940				1,298,781
Other intangible assets, net	1,420,481				1,492,038
Deferred tax assets—noncurrent	54,401				—
Investments in equity securities	76,975				66,563
Other noncurrent assets	59,035				52,882
Total assets	$	7,654,865			$	7,191,188
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	88,555			$	98,063
Accrued expenses	596,976				477,442
Income taxes payable	5,605				54,853
Deferred revenue and other income	12,828				14,855
Current portion of long-term debt and capital lease obligations	6,413				6,226
Total current liabilities	710,377				651,439
Long-term debt and capital lease obligations	116,388				119,803
Convertible notes	690,000				690,000
Deferred revenue—noncurrent	6,797				6,675
Deferred tax liabilities	—				10,909
Other noncurrent liabilities	52,883				51,651
Total liabilities	1,576,445				1,530,477
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value	—				—
Common stock, $0.01 par value	2,637				2,630
Additional paid-in capital	5,229,943				5,106,274
Notes receivable from stockholders	(15,362		)		(15,057		)
Accumulated earnings	588,503				312,659
Accumulated other comprehensive income	272,699				254,205
Total stockholders’ equity	6,078,420				5,660,711
Total liabilities and stockholders’ equity	$	7,654,865			$	7,191,188

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

GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)

	Six Months Ended June 30,
	2007			2006
Cash Flows from Operating Activities:
Net income	$	241,981		$	235,471
Reconciliation of net income to cash flows from operating activities:
Depreciation and amortization	162,827			165,356
Stock-based compensation	102,023			115,550
Provision for bad debts	4,569			3,893
Equity in income of equity method investments	(11,557		)	(6,100		)
Minority interest	(3,927		)	(5,196		)
Gains on investments in equity securities, net	(12,931		)	(74,909		)
Deferred income tax benefit	(55,026		)	(65,154		)
Tax benefit from employee stock-based compensation	8,349			11,432
Excess tax benefits from stock-based compensation	(565		)	(4,659		)
Other	3,048			(1,460		)
Increase (decrease) in cash from working capital changes (excluding impact of acquired assets and assumed liabilities):
Accounts receivable	(71,660		)	(56,826		)
Inventories	(47,312		)	(29,390		)
Prepaid expenses and other current assets	(1,589		)	3,218
Income taxes payable	(11,496		)	94,287
Accounts payable, accrued expenses and deferred revenue	69,434			(25,348		)
Cash flows from operating activities	376,168			360,165
Cash Flows from Investing Activities:
Purchases of investments	(412,067		)	(464,132		)
Sales and maturities of investments	496,986			396,460
Purchases of equity securities	(19,945		)	(5,277		)
Proceeds from sales of investments in equity securities	19,277			38,558
Purchases of property, plant and equipment	(180,041		)	(156,406		)
Distributions from equity method investments	10,900			12,000
Purchases of other intangible assets	(27,618		)	(43,109		)
Other	891			3,132
Cash flows from investing activities	(111,617		)	(218,774		)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock	68,174			57,080
Repurchase of common stock	(63,430		)	—
Excess tax benefits from stock-based compensation	565			4,659
Payments of debt and capital lease obligations	(3,356		)	(1,971		)
Increase (decrease) in bank overdrafts	15,935			(7,222		)
Minority interest contributions	4,136			5,232
Other	2,474			1,503
Cash flows from financing activities	24,498			59,281
Effect of exchange rate changes on cash	10,222			2,560
Increase in cash and cash equivalents	299,271			203,232
Cash and cash equivalents at beginning of period	492,170			291,960
Cash and cash equivalents at end of period	$	791,441		$	495,192

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

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 broad product and service portfolio is focused on rare disorders, renal diseases, orthopaedics, transplant, and diagnostic and predictive testing. We are organized into five financial reporting units, which we also consider to be our reporting segments:

· Renal, which develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure. The unit derives substantially all of its revenue from sales of Renagel (including sales of bulk sevelamer) and Hectorol;

· Therapeutics, which develops, manufactures and distributes therapeutic products, with an expanding 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 other specialty therapeutics, such as Thyrogen. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme, Myozyme and Thyrogen;

· Transplant, which develops, manufactures and distributes therapeutic products that address pre-transplantation, prevention and treatment of rejection in organ transplantation and other auto-immune disorders. The unit derives substantially all of its revenue from sales of Thymoglobulin;

· 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, the Sepra line of products, Carticel and Matrix-induced Autologous Chondrocyte Implantation, or MACI; and

· Genetics, which provides testing services for the oncology, prenatal and reproductive markets.

We report the activities of our diagnostic products, oncology, bulk pharmaceuticals and cardiovascular business units under the caption “Other.” We report our corporate, general and administrative operations and corporate science activities under the caption “Corporate.”

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

Our unaudited, consolidated financial statements for each period include the statements of operations and comprehensive income, 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 2006 data to conform to our 2007 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.

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 our 2006 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

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

Our unaudited, consolidated financial statements for each period include the accounts of our wholly owned and majority owned subsidiaries. As a result of our adoption of FIN 46R, “Consolidation of Variable Interest Entities,” we also consolidate certain variable interest entities for which we are the primary beneficiary. For consolidated subsidiaries in which we have less than a 100% interest, we record minority interest in our consolidated statements of operations for the ownership interest of the minority owner. We use the equity method of accounting to account for our investments in entities in which we have a substantial ownership interest (20% to 50%) which do not fall in the scope of FIN 46R, or over which we exercise significant influence. Our consolidated net income includes our share of the earnings of these entities.

Income Taxes

Effective January 1, 2007, we adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” which clarifies the accounting for income tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on the derecognition of previously recognized deferred tax items, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under FIN 48, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax position. The tax benefits recognized in our financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. For more information regarding the impact the adoption of FIN 48 had on our results of operations, financial condition and liquidity, see Note 13., “Provision for Income Taxes,” included in this report.

Recent Accounting Pronouncements

FAS 157, “Fair Value Measurements.” In September 2006, the FASB issued FAS 157, “Fair Value Measurements,” which provides enhanced guidance for using fair value to measure assets and liabilities. FAS 157 establishes a common definition of fair value, provides a framework for measuring fair value under accounting principles generally accepted in the United States and expands disclosure requirements regarding fair value measurements. FAS 157 will be effective for us as of January 1, 2008. We are currently evaluating the impact, if any, the adoption of FAS 157 will have on our financial position and results of operations.

FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115.” In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115,” which permits, but does not require, entities to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized in earnings at each subsequent reporting date. FAS 159 will be effective for us as of January 1, 2008 and cannot be adopted early unless FAS 157 is also adopted. We are currently evaluating the impact, if any, the adoption of FAS 159 may have on our financial position and results of operations.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

3. Stockholders’ Equity

Stock Repurchase

In May 2007, our board of directors authorized a stock repurchase program to repurchase up to an aggregate maximum amount of $1.5 billion or 20,000,000 shares of our outstanding common stock over the next three years. The repurchases are being made from time to time and can be effectuated through open market purchases, privately negotiated transactions, transactions structured through investment banking institutions, or by other means, subject to management’s discretion and as permitted by securities laws and other legal requirements. In June 2007, we repurchased a total of 968,485 shares of our common stock at an average price of $65.48 per share for $63.4 million of cash, including fees. We recorded the purchases in our consolidated balance sheet as of June 30, 2007 as a reduction to our common stock account for the par value of the repurchased shares and as a reduction to our additional paid-in capital account in accordance with the provisions of the Massachusetts Business Corporation Act, or MBCA.

In July 2004, the MBCA became effective and eliminated the concept of treasury shares. Under the MBCA, shares repurchased by Massachusetts corporations constitute authorized but unissued shares.

During the period from July 1, 2007 to August 7, 2007 we repurchased 1,840,253 additional shares of our common stock at an average price of $63.98 per share for $117.8 million of cash, including fees. These additional repurchases will be reflected in our consolidated balance sheet as of September 30, 2007.

Equity Plans

At our annual meeting of shareholders held on May 24, 2007, which we refer to as our 2007 Annual Meeting, our shareholders approved the merger of our 1997 Equity Incentive Plan into our 2004 Equity Incentive Plan and authorized an increase of 3,500,000 shares for issuance under our 2004 Equity Incentive Plan. Our 2004 Equity Incentive Plan authorizes the issuance of stock options, restricted stock and restricted stock units, or RSUs. We began issuing RSUs under our 2004 Equity Incentive Plan in connection with a general grant to employees in May 2007.

Our 1998 Director Stock Option Plan was due to expire in March 2008. On February 28, 2007, our board of directors approved our 2007 Director Equity Plan which was created to amend, restate and replace our 1998 Director Stock Option Plan. At our 2007 Annual Meeting, our shareholders also approved the 2007 Director Equity Plan. Similar to our 2004 Equity Incentive Plan, our 2007 Director Equity Plan authorizes the issuance of stock options, restricted stock and RSUs to our directors.

Employee Stock Purchase Plan

At our 2007 Annual Meeting, our shareholders approved an increase of 1,500,000 shares authorized for issuance under our 1999 Employee Stock Purchase Plan.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

3. Stockholders’ Equity (Continued)

Stock-Based Compensation Expense, Net of Estimated Forfeitures

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Pre-tax stock-based compensation expense, net of estimated forfeitures charged to:
Cost of products and services sold(1)	$	(6,865	)	$	(4,927	)	$	(12,761	)	$	(7,230	)
Selling, general and administrative expense	(35,248		)	(52,692		)	(57,747		)	(72,139		)
Research and development expense	(19,143		)	(25,269		)	(31,455		)	(36,126		)
Total	(61,256		)	(82,888		)	(101,963		)	(115,495		)
Less: tax benefit from stock options	18,703			27,577			31,135			37,925
Total stock-based compensation expense, net of tax	$	(42,553	)	$	(55,311	)	$	(70,828	)	$	(77,570	)
Per basic share	$	(0.16	)	$	(0.21	)	$	(0.27	)	$	(0.30	)
Per diluted share	$	(0.15	)	$	(0.20	)	$	(0.25	)	$	(0.28	)

(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,
	2007		2006			2007	2006
Stock-based compensation expense capitalized to inventory		$4,957		$	5,533	$7,839	$	8,263

In July 2006, we began amortizing stock-based compensation expense capitalized to inventory based on inventory turns.

At June 30, 2007, there was $325.9 million of pre-tax stock-based compensation expense, net of estimated forfeitures, related to unvested awards not yet recognized which are expected to be recognized over a weighted average period of 2.5 years.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

4. Net Income Per Share

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Net income—basic	$	83,794	$	134,497	$	241,981	$	235,471
Effect of dilutive securities:
Interest expense and debt fee amortization, net of tax, related to our 1.25% convertible senior notes	1,887		1,874		3,772		3,748
Net income—diluted	$	85,681	$	136,371	$	245,753	$	239,219
Shares used in computing net income per common share—basic	263,911		260,444		263,693		260,076
Effect of dilutive securities:
Shares issuable upon the assumed conversion of our 1.25% convertible senior notes	9,686		9,686		9,686		9,686
Stock options(1)	6,906		6,171		6,829		6,787
Restricted stock units(2)	50		—		25		—
Warrants and stock purchase rights	11		11		11		11
Dilutive potential common shares	16,653		15,868		16,551		16,484
Shares used in computing net income per common share—diluted(1,2)	280,564		276,312		280,244		276,560
Net income per common share:
Basic	$	0.32	$	0.52	$	0.92	$	0.91
Diluted	$	0.31	$	0.49	$	0.88	$	0.86

(1) We did not include the securities described in the following table in the computation of diluted earnings 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,

2007

2006

2007

2006

Shares issuable upon exercise of outstanding options

15,053

11,457

14,268

9,660

(2) We began issuing RSUs under our 2004 Equity Incentive Plan in connection with a general grant to employees in May 2007.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

5. Mergers and Acquisitions

Pending Acquisition of Bioenvision

On May 29, 2007, we entered into an agreement and plan of merger with Bioenvision and Witchita Bio Corporation, or Witchita Bio, one of our wholly owned subsidiaries, to acquire Bioenvision in an all-cash transaction valued at $5.60 per outstanding common share and $11.20 per outstanding preferred share (plus accrued but unpaid dividends), or approximately $345 million in aggregate. Pursuant to the merger agreement, on June 4, 2007, we and Witchita Bio commenced a cash tender offer to purchase all of the outstanding shares of Bioenvision common stock, par value $0.001 per share, including associated preferred stock purchase rights of Bioenvision, which we refer to as the Common Shares, at a purchase price of $5.60 per Common Share and to purchase all of the outstanding shares of Bioenvision Series A Convertible Participating Preferred Stock, par value $0.001 per share, which we refer to as Series A Preferred Shares, at a purchase price of $11.20 per Series A Preferred Share (plus accrued but unpaid dividends). On July 10, 2007, we completed the tender offer and purchased 8,398,098 Common Shares and 2,250,000 Series A Preferred Shares, or approximately 22% of the then outstanding shares of Bioenvision common stock on an as-converted basis, including 100% of the outstanding Series A Preferred Shares. Each Series A Preferred Share can be converted into approximately two Common Shares, and also carries a separate class vote over several corporate matters, including any merger or sale of substantially all of the assets of Bioenvision and authorization of any additional shares of Bioenvision common stock, as well as other features. In accordance with the terms of the merger agreement, Bioenvision will prepare a proxy statement to be mailed to its shareholders detailing the rationale for the merger and other material disclosures and calling a shareholder meeting to seek approval of the proposed merger before the end of 2007.

Acquisition of AnorMED

In November 2006, we acquired AnorMED, a publicly-held chemical-based biopharmaceutical company based in Langley, British Columbia, Canada, with a focus on the discovery, development and commercialization of new therapeutic products in the area of hematology, oncology and human immunodeficiency virus, or HIV. We paid gross consideration of $589.2 million in cash, including $584.2 million for the shares of AnorMED’s common stock outstanding on the date of acquisition and $5.0 million for acquisition costs. Net consideration was $569.0 million as we acquired AnorMED’s cash and cash equivalents totaling $20.2 million. We accounted for the acquisition as a business combination and accordingly, included AnorMED’s results of operations in our consolidated statements of operations from November 7, 2006, the date of acquisition.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

5. Mergers and Acquisitions (Continued)

The purchase price was allocated to the estimated fair value of the acquired tangible and intangible assets and assumed liabilities as follows (amounts in thousands, except share data):

Purchase of 43,272,085 shares of AnorMED common stock	$	584,173
Acquisition costs	5,000
Total purchase price	$	589,173
Cash and cash equivalents	$	20,220
Other current assets	6,340
Property, plant and equipment	758
Goodwill	31,703
Other intangible assets (to be amortized over 10 years)	3,500
In-process research and development	552,900
Deferred tax assets—noncurrent	27,380
Other noncurrent assets	573
Assumed liabilities:
Deferred tax liability	(25,288		)
Liabilities for exit activities	(7,733		)
Other liabilities	(21,180		)
Allocated purchase price	$	589,173

The allocation of purchase price was adjusted in 2007 to:

· write off $2.1 million of fixed assets associated with the acquisition;

· revise the estimated liabilities related to exit activities by $1.2 million; and

· adjust the deferred taxes by $(0.7) million.

The purchase price, as adjusted, was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed amounted to $31.7 million, which was allocated to goodwill. We expect that substantially all of the amount allocated to goodwill will be deductible for tax purposes.

The allocation of purchase price remains subject to potential adjustments, including adjustments for liabilities associated with certain exit activities and tax restructuring activities.

Acquisition of Synvisc Sales and Marketing Rights from Wyeth

In January 2005, we consummated an arrangement with Wyeth under which we reacquired the sales and marketing rights to Synvisc in the United States and certain European countries. In exchange for the sales and marketing rights, we made up-front payments totaling $127.0 million in cash to Wyeth and have also accrued contingent royalty payments to Wyeth totaling $142.1 million, of which $139.4 million had been paid as of June 30, 2007. Distribution rights (a component of other intangible assets, net) in our consolidated balance sheets as of June 30, 2007, includes a total of $270.4 million for the initial and contingent royalty payments (made or accrued) as of that date. We will make a series of additional

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

5. Mergers and Acquisitions (Continued)

contingent royalty and milestone payments to Wyeth based on the volume of Synvisc sales in the covered territories. These contingent royalty and milestone payments could extend out to June 2012, or could total a maximum of $298.2 million, whichever comes first.

The reacquired Synvisc distribution rights qualify as an asset rather than an acquired business. As a result, we do not provide pro forma results for this transaction.

In-Process Research and Development

In connection with five of our acquisitions since 2004, we have acquired various IPR&D projects. Substantial additional research and development will be required prior to any of our acquired IPR&D programs and technology platforms reaching technological feasibility. In addition, once research is completed, each product candidate acquired will need to complete a series of clinical trials and receive FDA or other regulatory approvals prior to commercialization. Our current estimates of the time and investment required to develop these products and technologies may change depending on the different applications that we may choose to pursue. We cannot give assurances that these programs will ever reach technological feasibility or develop into products that can be marketed profitably. In addition, we cannot guarantee that we will be able to develop and commercialize products before our competitors develop and commercialize products for the same indications. If products based on our acquired IPR&D programs and technology platforms do not become commercially viable, our results of operations could be materially adversely affected.

The following table sets forth IPR&D projects for companies and certain assets we have acquired since 2004 (amounts in millions):

Company/Assets Acquired	Purchase Price			IPR&D(1)			Programs Acquired	Discount Rate Used in Estimating Cash Flows(1)		Year of Expected Launch
AnorMED (2006)		$	589.2		$	526.8	Mozobil (stem cell transplant)		15%	2008-2013
					26.1		AMD070 (HIV)(2)		15%	—
					$	552.9
Avigen (2005)		$	12.0		$	7.0	AV201 (Parkinson’s disease)		N/A	2016
Bone Care (2005)		$	712.3		$	12.7	LR-103 (secondary hyperparathyroidism)		25%	2012
Verigen (2005)		$	12.7		$	9.5	MACI (cartilage repair)		24%	2012-2014
ILEX Oncology (2004)		$	1,080.3		$	96.9	Campath		11%	2009-2011
					113.4		Clolar		12%	2008-2011
					44.2		Tasidotin		16%	2011-2014
					$	254.5

(1) Management assumes responsibility for determining the valuation of the acquired IPR&D projects. The fair value assigned to IPR&D for each acquisition is estimated by discounting, to present value, the cash flows expected once the acquired projects have reached technological feasibility. The cash flows are probability-adjusted to reflect the risks of advancement through the product approval process. In estimating the future cash flows, we also considered the tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D projects and adjusted future cash flows for a charge reflecting the contribution to value of these assets.

(2) Year of expected launch is not provided for AMD070 at this time because we are assessing our future plans for this program.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

5. Mergers and Acquisitions (Continued)

Exit Activities

In connection with several of our acquisitions, we initiated integration plans to consolidate and restructure certain functions and operations, including the relocation and termination of certain personnel of these acquired entities and the closure of certain of the acquired entities’ leased facilities. These costs have been recognized as liabilities assumed in connection with the acquisition of these entities in accordance with Emerging Issues Task Force, or EITF, Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase or Business Combination,” and are subject to potential adjustments as certain exit activities are confirmed or refined. The following table summarizes the liabilities established for exit activities related to these acquisitions (amounts in thousands):

	Employee Related Benefits				Closure of Leased Facilities				Other Exit Activities				Total Exit Activities
Balance at December 31, 2005		$	2,249			$	199			$	8,117		$	10,565
Acquisition(1)		6,478				—				—			6,478
Revision of estimates		(165		)		(132		)		(750		)	(1,047		)
Payments		(2,457		)		(43		)		(7,367		)	(9,867		)
Balance at December 31, 2006		6,105				24				—			6,129
Revision of estimates		(75		)		1,307				—			1,232
Payments		(4,421		)		—				—			(4,421		)
Balance at June 30, 2007		$	1,609			$	1,331			$	—		$	2,940

(1) We expect to pay employee related benefits related to the acquisition of AnorMED through 2008.

Pro Forma Financial Summary

The following pro forma financial summary is presented as if the acquisition of AnorMED was completed as of January 1, 2006. These 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 the acquisition of AnorMED, such as IPR&D charges of $552.9 million, are included in the following pro forma financial summary as of January 1, 2006 (amounts in thousands, except per share amounts):

	Three Months Ended			Six Months Ended
	June 30, 2006			June 30, 2006
Total revenues		$	793,360		$	1,524,436
Net income (loss)		$	124,308		$	(186,054	)
Net income (loss) per share:
Basic		$	0.48		$	(0.72	)
Diluted		$	0.46		$	(0.72	)
Weighted average shares outstanding:
Basic		260,444			260,076
Diluted		276,312			260,076

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

6. Inventories

	June 30, 2007		December 31, 2006
	(Amounts in thousands)
Raw materials	$	126,613		$	100,698
Work-in-process	121,573			119,510
Finished goods	183,424			154,436
Total	$	431,610		$	374,644

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. Our total inventories at June 30, 2007 included $13.4 million of inventory for Renvela that has not yet been approved for sale.

Currently, we have four lots of Thymoglobulin finished goods inventory, valued at approximately $12 million, which we consider to be inventory at risk. We placed these lots on hold pending investigation and resolution of out of trend assay results we observed during quality testing. We anticipate completing our assessment of these lots during the second half of 2007. If we determine that any of these four lots do not meet the specifications for saleable product, we will have to write off the inventory for that lot as a charge to earnings.

7. Goodwill and Other Intangible Assets

Goodwill

The following table contains the change in our net goodwill during the six months ended June 30, 2007 (amounts in thousands):

	December 31, 2006			Adjustments				June 30, 2007
Renal(1)		$	305,528		$	(1,577	)	$	303,951
Therapeutics		354,709			—			354,709
Transplant(2)		157,591			2,563			160,154
Biosurgery		7,585			—			7,585
Other(3)		473,368			173			473,541
Net goodwill		$	1,298,781		$	1,159		$	1,299,940

(1) The adjustments to goodwill for Renal include adjustments associated with the acquisition of Bone Care International, Inc. or Bone Care.

(2) The adjustment to goodwill for Transplant includes purchase accounting adjustments from the November 2006 acquisition of AnorMED. We recorded $2.6 million of adjustments to the goodwill associated with AnorMED, primarily due to $2.1 million to write off fixed assets associated with the acquisition and $1.2 million of revisions to the estimates of liabilities related to exit activities, offset by $(0.7) million to adjust deferred taxes.

(3) The adjustments to Other goodwill primarily include contingent payments related to our acquisition of Equal Diagnostics, Inc. in July 2005 and foreign currency revaluation adjustments for goodwill denominated in foreign currencies.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

7. Goodwill and Other Intangible Assets (Continued)

Other Intangible Assets

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

	June 30, 2007								December 31, 2006
	Gross Other Intangible Assets		Accumulated Amortization				Net Other Intangible Assets		Gross Other Intangible Assets		Accumulated Amortization				Net Other Intangible Assets
Technology	$	1,506,121		$	(483,169	)	$	1,022,952	$	1,505,748		$	(424,650	)	$	1,081,098
Patents	194,560			(95,738		)	98,822		194,560			(87,063		)	107,497
Trademarks	60,227			(34,109		)	26,118		60,227			(31,439		)	28,788
License fees(1)	79,928			(24,345		)	55,583		77,807			(20,597		)	57,210
Distribution rights(2)	285,548			(107,300		)	178,248		260,073			(85,543		)	174,530
Customer lists(3)	67,083			(29,010		)	38,073		90,783			(48,760		)	42,023
Other	2,048			(1,363		)	685		2,045			(1,153		)	892
Total	$	2,195,515		$	(775,034	)	$	1,420,481	$	2,191,243		$	(699,205	)	$	1,492,038

(1) Includes a $2.5 million milestone payment to Synpac in June 2007 for the approval of Myozyme in Japan.

(2) Includes an additional $24.8 million of intangible assets resulting from additional payments made or accrued in 2007 in connection with our reacquisition of the Synvisc sales and marketing rights in several countries from Wyeth in January 2005.

(3) Reflects the write off, during the first quarter of 2007, of $23.7 million of fully amortized customer lists, related to our acquisition of Bone Care in July 2005.

All of our other intangible assets are amortized over their estimated useful lives. Total amortization expense for our other intangible assets was:

· $49.5 million for the three months ended June 30, 2007;

· $52.9 million for the three months ended June 30, 2006;

· $99.5 million for the six months ended June 30, 2007; and

· $105.6 million for the six months ended June 30, 2006.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

7. Goodwill and Other Intangible Assets (Continued)

The estimated future amortization expense for other intangible assets for the remainder of fiscal year 2007, the four succeeding fiscal years and thereafter is as follows (amounts in thousands):

Year ended December 31,	Estimated Amortization Expense(1)
2007 (remaining six months)		$	98,974
2008		207,465
2009		214,921
2010		228,038
2011		236,585
Thereafter		617,284

(1) Includes estimated future amortization expense for the Synvisc distribution rights based on the forecasted future sales of Synvisc and the resulting future contingent payments we will be required to make to Wyeth, and for the Myozyme patent and technology rights pursuant to a license agreement with Synpac based on forecasted future sales of Myozyme and the milestone payments we will be required to make to Synpac related to regulatory approvals. These contingent payments will be recorded as intangible assets when the payments are accrued. Estimated future amortization expense also includes estimated amortization expense for other arrangements involving contingent payments.

8. Investments in Equity Securities

We recorded the following gains on investments in equity securities, net of charges for impairment of investments, for the three and six months ended June 30, 2007 and 2006 (amounts in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007		2006
Gross gains on investments in equity securities:
Therapeutic Human Polyclonals, Inc. (THP)		$	—	$	—		$	10,848	$	—
Cambridge Antibody Technology Group plc (CAT)		—		69,359			—		69,359
BioMarin Pharmaceutical Inc. (BioMarin)		—		—			—		6,417
Other		143		501			2,083		2,026
Total		143		69,860			12,931		77,802
Less: charges for impairment of investments		—		(2,893		)	—		(2,893		)
Gains on investments in equity securities, net		$	143	$	66,967		$	12,931	$	74,909

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

8. Investments in Equity Securities (Continued)

Unrealized Gains (Losses)

At June 30, 2007, our stockholders’ equity included $17.7 million of unrealized gains and $0.1 million of unrealized losses related to our investments in equity securities.

9. Agreements with and Note Receivable from Dyax Corp

Agreements with Dyax Corp

In 2003, we acquired a 49.99% interest in Dyax-Genzyme LLC, a joint venture with Dyax Corp, or Dyax, for the development of DX-88 for hereditary angioedema, or HAE, and other chronic inflammatory diseases.

In February 2007, we agreed with Dyax to terminate our participation and interest in Dyax-Genzyme LLC effective February 20, 2007. In connection with this termination, we made a capital contribution of approximately $17 million in cash to Dyax-Genzyme LLC and Dyax purchased our interest in the joint venture for 4.4 million shares of Dyax common stock, valued at $16.9 million, based on the closing price of Dyax common stock on February 23, 2007. Dyax now owns all of the assets of the joint venture, including worldwide rights to develop and commercialize DX-88. Pursuant to the termination agreement, we agreed to:

· a 5 year standstill period during which we will not acquire any additional shares of Dyax;

· not enter into any future licensing or collaboration arrangements for the prevention and or treatment of hereditary, acquired or drug-induced angioedema for 2 years; and

· negotiate in good faith a transitional services agreement for us to provide certain services to Dyax, which we have entered into as of February 2007.

Prior to February 20, 2007, in accordance with FIN 46R, “Consolidation of Variable Interest Entities,” we consolidated the assets related to Dyax-Genzyme LLC, which were not significant and consisted primarily of lab equipment, net of their associated accumulated depreciation. We also recorded Dyax’s portion of the joint venture’s losses as minority interest in our consolidated statements of operations through February 20, 2007.

Note Receivable from Dyax

In May 2002, we extended to Dyax a $7.0 million line of credit. Dyax issued a senior secured promissory note in the principal amount of $7.0 million to us under which it can request periodic advances of not less than $250,000 in principal, subject to certain conditions. Advances under this note were due, together with any accrued but unpaid interest, in May 2005. In May 2005, Dyax exercised its right to extend the maturity of the note from May 2005 to May 2007.

In August 2006, we amended our $7.0 million secured promissory note receivable from Dyax to extend the maturity date from May 2007 to May 2010, eliminate the existing financial covenants and replace the original collateral on the note with a letter of credit from a major bank for $7.2 million.

Prior to May 24, 2007, we considered Dyax to be a related party because the chairman and chief executive officer of Dyax was a member of our board of directors. We recorded the principal and accrued interest due to us from Dyax prior to May 24, 2007 as a note receivable—related party in our unaudited,

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

9. Agreements with and Note Receivable from Dyax Corp (Continued)

consolidated balance sheet. On May 24, 2007, the term of this director expired and he decided not to stand for re-election, thus resigning from our board of directors. As a result, Dyax was no longer considered our related party and we recorded the principal and accrued interest due to us from Dyax in other noncurrent assets in our unaudited, consolidated balance sheet. As of June 30, 2007, $7.2 million of principal and accrued interest receivable remains due to us from Dyax under this note.

10. Joint Venture with BioMarin

We and BioMarin formed BioMarin/Genzyme LLC to develop and commercialize Aldurazyme, a recombinant form of the human enzyme alpha-L-iduronidase, used to treat an LSD known as mucopolysaccharidosis I, or MPS I. We record our portion of the income of BioMarin/Genzyme LLC in equity in income of equity method investments in our unaudited, consolidated statements of operations. Our portion of BioMarin/Genzyme LLC’s net income was:

· $6.5 million for the three months ended June 30, 2007, as compared to $4.6 million for the same period of 2006; and

· $12.6 million for the six months ended June 30, 2007, as compared to $8.0 million for the same period of 2006.

During the six months ended June 30, 2007, we received $10.9 million of cash distributions from BioMarin/Genzyme LLC.

Condensed financial information for BioMarin/Genzyme LLC is summarized below (amounts in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Revenue	$	29,127		$	23,530		$	55,948		$	44,862
Gross margin	22,434			17,846			42,957			32,791
Operating expenses	(9,560		)	(8,729		)	(18,034		)	(17,099		)
Net income	13,016			9,261			25,237			15,994

11. Revolving Credit Facility

As of June 30, 2007, no amounts were outstanding under our 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 terms of our 2006 revolving 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, 2007, we were in compliance with these covenants.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

12. Other Commitments and Contingencies

Legal Proceedings

We periodically become subject to legal proceedings and claims arising in connection with our business.

Through June 30, 2003, we had three outstanding series of common stock, which we referred to as tracking stocks; Genzyme General Stock (which we now refer to as Genzyme Stock), Biosurgery Stock and Molecular Oncology Stock. Four lawsuits have been filed against us regarding the exchange of all of the outstanding shares of Biosurgery Stock for shares of Genzyme Stock in connection with the elimination of our tracking stocks in July 2003. Each of the lawsuits is a purported class action on behalf of holders of Biosurgery Stock. The first case, filed in the MSC in May 2003, alleged a breach of the implied covenant of good faith and fair dealing in our charter and a breach of our board of directors’ fiduciary duties. The plaintiff in this case sought an injunction to adjust the exchange ratio for the tracking stock exchange. The MSC dismissed the complaint in its entirety in November 2003. Upon appeal, the Massachusetts Appeals Court upheld the dismissal by the MSC of the fiduciary duty claim, but reversed the earlier decision to dismiss the implied covenant claim. The Massachusetts Supreme Judicial Court (SJC) granted our petition for further appellate review. On June 4, 2007, the SJC reversed the Appeals Court’s decision and affirmed dismissal of the complaint in its entirety. On July 25, 2007, the SJC denied the plaintiff’s petition for rehearing. Two substantially similar cases were filed in the MSC in August and October 2003. These cases were consolidated in January 2004, and in July 2004, the consolidated case was stayed pending disposition of a fourth case, which was filed in the U.S. District Court for the Southern District of New York in June 2003. As amended, this complaint alleged violations of federal securities laws, as well as various state law claims, related to the exchange, on behalf of a certified class of holders of Biosurgery Stock as of May 8, 2003. On August 6, 2007, we reached an agreement-in-principle with counsel for the plaintiff class to settle and dismiss this case for approximately $64 million. This settlement is subject to the execution of a definitive settlement agreement and approval by the court. Because the members of the class in the New York action will release all claims, we anticipate that the settlement will, as a practical matter, resolve the consolidated case that remains pending in the MSC. We have submitted claims to our insurers for reimbursement of portions of the expenses incurred and to be incurred in connection with these cases; the insurer has purported to deny coverage. We intend to vigorously pursue our rights with respect to insurance coverage. As a result, we have recorded a liability for the settlement payment of approximately $64 million as a charge to selling, general and administrative expense, or SG&A, in our consolidated statement of operations in June 2007 and as an increase to accrued expenses in our consolidated balance sheet as of June 30, 2007.

We are not able to predict the outcome of other legal proceedings, to which we may become subject in the normal course of business or estimate the amount or range of any reasonably possible loss we might incur if we do not prevail in the final, non-appealable determinations of such matters. Therefore, we have no current accruals for these potential contingencies. We cannot provide you with assurance that other legal proceedings will not have a material adverse impact on our financial condition or results of operations.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

13. Provision for Income Taxes

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
	(Amounts in thousands)
Provision for income taxes	$	64,090		$	60,002		$	135,283		$	105,371
Effective tax rate	43		%	31		%	36		%	31		%

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

· our provision for state income taxes;

· the tax benefits from export sales;

· the tax benefits from domestic production activities;

· benefits related to tax credits;

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

· non-deductible stock-based compensation expenses; and

· non-deductible expenses associated with the settlement of litigation related to the consolidation of our former tracking stocks.

Effective January 1, 2007, we adopted FIN 48 and recognized a cumulative effect adjustment of $33.9 million to increase our retained earnings balance as of January 1, 2007, which consisted of $25.8 million to record the combined effect of our gain contingency and the change in the recognition standard pursuant to the settlement criteria of FASB Staff Position, or FSP, FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,” or FSP FIN 48-1, and $8.1 million resulting from our settlement of the IRS audit for tax years 2002 to 2003. After these adjustments, as of January 1, 2007, we had approximately $36.5 million of total gross unrealized tax benefits, of which approximately $26.6 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect our effective income tax rate in future periods. These gross unrealized tax benefits did not change significantly during the six months ended June 30, 2007.

We continue to recognize interest relating to unrecognized tax benefits within our provision for income taxes but have not recorded any amounts related to potential penalties. The amount of accrued interest related to unrecognized tax benefits within our provision for income taxes for the three and six months ended June 30, 2007, and our accrued interest related to unrecognized tax benefits as of January 1, 2007 and June 30, 2007 were not significant.

We are subject to U.S. federal income tax and various state, local and international income taxes in numerous jurisdictions, however, our only significant tax jurisdiction is the United States. We record liabilities for income tax contingencies based on our best estimate of the underlying exposures. We are currently under IRS audit for tax years 2004 to 2005, and in certain state and foreign jurisdictions from 2003 forward. We believe that we have provided sufficiently for all audit exposures and assessments. Settlement of these audits or the expiration of the statute of limitations on the assessment of income taxes for any tax year may result in an increase or reduction of future tax provisions. Any such tax or tax benefit would be recorded upon final resolution of the audits or expiration of the applicable statute of limitations.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

14. Segment Information

In accordance with FAS 131, “Disclosures about Segments of an Enterprise and Related Information,” we present segment information in a manner consistent with the method we use to report this information to our management. Applying FAS 131, we have five reporting segments as described in Note 1., “Description of Business,” to these consolidated financial statements.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Revenues:
Renal	$	172,249		$	148,980		$	337,926		$	286,570
Therapeutics	464,749			373,362			894,266			718,995
Transplant	43,424			41,212			84,701			75,478
Biosurgery	107,889			102,401			206,282			192,937
Genetics	73,714			61,041			139,872			118,493
Other	70,994			66,309			152,852			131,631
Corporate	400			51			703			94
Total	$	933,419		$	793,356		$	1,816,602		$	1,524,198
Income (loss) before income taxes:
Renal	$	66,446		$	42,273		$	126,090		$	74,071
Therapeutics(1)	278,981			251,032			566,331			481,986
Transplant(2)	(8,929		)	5,917			(13,743		)	10,351
Biosurgery(2)	16,294			13,198			26,051			17,248
Genetics	11,890			(2,445		)	15,632			(4,216		)
Other	(13,305		)	(13,466		)	(18,749		)	(23,981		)
Corporate(3)	(203,493		)	(102,010		)	(324,348		)	(214,617		)
Total	$	147,884		$	194,499		$	377,264		$	340,842

(1) Includes a $25.0 million upfront payment made to Ceregene, Inc., or Ceregene, in June 2007 in connection with a collaboration agreement for the development and commercialization of CERE-120, a gene therapy product for the treatment of Parkinson’s disease.

(2) The results of operations of acquired companies and assets and the amortization expense related to acquired intangible assets are included in segment results beginning on the date of acquisition.

(3) Loss before income taxes for Corporate includes our corporate, general and administrative and corporate science activities, all of the stock-based compensation expense, as well as net gains on investments in equity securities, interest income, interest expense and other income and expense items that we do not specifically allocate to a particular reporting segment. Loss before income taxes for Corporate for the three and six months ended June 30, 2007 includes a charge of $64.0 million for the proposed settlement, subject to court approval, of the litigation related to the consolidation of our former tracking stocks.

GENZYME CORPORATION AND SUBSIDIARIES
Notes To Unaudited, Consolidated Financial Statements (Continued)

14. Segment Information (Continued)

Segment Assets

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

	June 30, 2007		December 31, 2006
Segment Assets(1):
Renal	$	1,423,886		$	1,380,003
Therapeutics	1,162,177			1,094,520
Transplant	418,971			410,436
Biosurgery	479,564			477,334
Genetics	134,399			133,839
Other	844,763			851,343
Corporate(2)	3,191,105			2,843,713
Total	$	7,654,865		$	7,191,188

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

(2) Includes the assets related to our corporate, general and administrative operations, and corporate science activities that we do not allocate to a particular segment, including cash, cash equivalents, short- and long-term investments, net property, plant and equipment and net deferred tax assets.

Segment assets for Corporate consist of the following (amounts in thousands):

	June 30, 2007		December 31, 2006
Cash, cash equivalents, short- and long-term investments	$	1,497,648		$	1,285,604
Deferred tax assets, net	185,706			136,925
Property, plant & equipment, net	1,122,205			1,036,182
Investments in equity securities	76,975			66,563
Other	308,571			318,439
Total	$	3,191,105		$	2,843,713

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 “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 included under the heading “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.

INTRODUCTION

We are a global biotechnology company dedicated to making a major impact on the lives of people with serious diseases. Our broad product and service portfolio is focused on rare disorders, renal diseases, orthopaedics, organ transplant, and diagnostic and predictive testing. We are organized into five financial reporting units, which we also consider to be our reporting segments:

· Therapeutics, which develops, manufactures and distributes therapeutic products, with an expanding focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as LSDs, and other specialty therapeutics, such as Thyrogen. The unit derives substantially all of its revenue from sales of Cerezyme, Fabrazyme, Myozyme and Thyrogen;

· Genetics, which provides testing services for the oncology, prenatal and reproductive markets.

Update to Second Quarter Earnings Release

On July 25, 2007, we issued a press release containing our results of operations and financial condition for the three month period ended June 30, 2007, which we furnished as an exhibit under Form 8-K prior to hosting a conference call to discuss our second quarter financial results. Subsequent to July 25, 2007, two events occurred which have caused us to update our second quarter financial results in this Form 10-Q. Specifically:

· in the course of preparing our financial statements for this Form 10-Q, we identified that we had overstated our stock-based compensation expense, before taxes, for the three and six months ended June 30, 2007 by a total of $10.5 million, including a $7.8 million overstatement of SG&A and a $2.7 million overstatement of research and development expenses. The overstatements were discovered during the final review of the stock-based compensation expense calculations for the second quarter and resulted specifically from an incorrect calculation of (i) the vesting period for the RSUs we began issuing to our employees for the first time in May 2007 and (ii) the retirement vesting benefit of the RSUs granted to certain of our officers in May 2007. We have corrected the overstatement of our stock-based compensation that was reported in our second quarter earnings release; and

· on August 6, 2007, we reached an agreement-in-principle to settle and dismiss litigation related to the consolidation of our former tracking stocks for approximately $64 million, subject to court approval. As a result, we have recorded a liability for the settlement payment of approximately $64 million as a charge to SG&A in our consolidated statement of operations in June 2007 and as an increase to accrued expenses in our consolidated balance sheet as of June 30, 2007.

MERGERS AND ACQUISITIONS

Pending Acquisition of Bioenvision

On May 29, 2007, we entered into an agreement and plan of merger with Bioenvision and Witchita Bio, one of our wholly owned subsidiaries, to acquire Bioenvision in an all-cash transaction valued at $5.60 per outstanding common share and $11.20 per outstanding preferred share (plus accrued but unpaid dividends), or approximately $345 million in aggregate. Pursuant to the merger agreement, on June 4, 2007, we and Witchita Bio commenced a cash tender offer to purchase all of the outstanding shares of Bioenvision common stock, par value $0.001 per share, including associated preferred stock purchase rights of Bioenvision, which we refer to as the Common Shares, at a purchase price of $5.60 per Common Share and to purchase all of the outstanding shares of Bioenvision Series A Convertible Participating Preferred Stock, par value $0.001 per share, which we refer to as Series A Preferred Shares, at a purchase price of $11.20 per Series A Preferred Share (plus accrued but unpaid dividends). On July 10, 2007, we completed the tender offer and purchased 8,398,098 Common Shares and 2,250,000 Series A Preferred Shares, or approximately 22% of the then outstanding shares of Bioenvision common stock on an as-converted basis, including 100% of the outstanding Series A Preferred Shares. Each Series A Preferred Share can be converted into approximately two Common Shares, and also carries a separate class vote over several corporate matters, including any merger or sale of substantially all the assets of Bioenvision and the authorization of any additional shares of Bioenvision common stock, as well as other features. In accordance with the terms of the merger agreement, Bioenvision will prepare a proxy statement to be mailed to its shareholders detailing the rationale for the merger and other material disclosures and calling a shareholder meeting to seek approval of the proposed merger before the end of 2007.

Acquisition of AnorMED

In November 2006, we acquired AnorMED, a publicly-traded chemical-based biopharmaceutical company based in Langley, British Columbia, Canada, with a focus on the discovery, development and

commercialization of new therapeutic products in the area of hematology, oncology and human immunodeficiency virus, or HIV. We paid gross consideration of $589.2 million in cash, including $584.2 million for the shares of AnorMED’s common stock outstanding on the date of acquisition and $5.0 million for acquisition costs. Net consideration was $569.0 million as we acquired AnorMED’s cash and cash equivalents totaling $20.2 million. As part of the transaction, we acquired Mozobil, a late-stage product candidate in development for hematopoietic stem cell transplantation, which we have added to our Transplant business. Multiple early studies showed that Mozobil rapidly increases the number of stem cells that move out of the bone marrow and into a patient’s blood, which is an important step in preparing a patient for a stem cell transplant. On July 19, 2007, we announced the successful completion of a phase 3 clinical trial of Mozobil in non-Hodgkin’s lymphoma and on August 2, 2007, we announced the successful completion of a second phase 3 clinical trial of Mozobil in multiple myeloma. The trials met their respective primary and secondary endpoints. We accounted for the acquisition as a business combination and accordingly, we included AnorMED’s results of operations in our consolidated statements of operations from November 7, 2006, the date of acquisition.

Acquisition of Synvisc Sales and Marketing Rights from Wyeth

In January 2005, we consummated an arrangement with Wyeth under which we reacquired the sales and marketing rights to Synvisc in the United States and certain European countries. In exchange for the sales and marketing rights, we made up-front payments totaling $127.0 million in cash to Wyeth and have also accrued contingent royalty payments to Wyeth totaling $142.1 million, of which $139.4 million had been paid as of June 30, 2007. Distribution rights (a component of other intangible assets, net) in our consolidated balance sheets as of June 30, 2007, includes a total of $270.4 million for the initial and contingent royalty payments (made and accrued) as of that date. We will make a series of additional contingent royalty and milestone payments to Wyeth based on the volume of Synvisc sales in the covered territories. These contingent royalty and milestone payments could extend out to June 2012, or could total a maximum of $299.2 million, whichever comes first.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Our critical accounting policies and significant judgments and estimates are set forth under the heading “Management’s Discussion and Analysis of Genzyme Corporation and Subsidiaries’ Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in Exhibit 13 to our 2006 Form 10-K. Additional information regarding significant judgments, estimates and updates to our policies for Revenue Recognition, Income Taxes and Inventories are included below. Excluding these additional disclosures, there have been no significant changes to our other critical accounting policies or significant judgments and estimates since December 31, 2006.

Revenue Recognition

Product Sales

The timing of product shipments and receipts by the customer can have a significant impact on the amount of revenue recognized in a particular period. A significant portion of our products are sold at least in part through wholesalers and specialty distributors, along with direct sales to hospitals, homecare

providers, government agencies and physicians. Consequently, our net sales and quarterly growth comparisons may be affected by fluctuations in the buying patterns of our major distributors and other trade buyers, which may result from seasonality, pricing, wholesaler buying decisions or other factors. Inventory in the distribution channel consists of inventory held by wholesalers and specialty distributors, who are our customers, and inventory held by their retail customers, such as pharmacies and hospitals. Our revenue in a particular period can be impacted by increases or decreases in channel inventories. Significant increases in wholesaler or retail inventories could result in reduced purchases in subsequent periods, or product returns from the distribution channel due to overstocking, low end-user demand or product expiration.

We use a variety of data sources to determine the amount of inventory in the distribution channel. For most product lines, we receive data on sales and inventory levels directly from our primary customers. For key product lines in our Renal; and Therapeutics areas, our data sources also include prescription and wholesaler data purchased from external data providers. As part of our efforts to limit the amount of Renal and Therapeutics inventory held by distributors and to gain improved visibility into the distribution channel, we have executed agreements to limit the amounts of inventory they carry and to provide us ongoing reports to verify distributor inventory levels and sales data.

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. 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 due to the time delay between the recording of the accrual and its ultimate settlement.

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. 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, such as those within the same line of product or those within the same or similar therapeutic category.

Our provisions for product sales allowances reduced gross product sales as follows:

	Three Months Ended June 30,						Increase/ (Decrease)			Six Months Ended June 30,						Increase/ (Decrease)
	2007			2006			% Change			2007			2006			% Change
	(Amounts in thousands)
Product sales allowances:
Contractual adjustments	$	57,827		$	50,363			15	%	$	113,691		$	94,723			20	%
Discounts	48,137			32,013				50	%	81,482			56,818				43	%
Sales returns	5,704			2,495				>100	%	7,421			6,888				8	%
Total product sales allowances	$	111,668		$	84,871			32	%	$	202,594		$	158,429			28	%
Total gross product sales	$	957,150		$	803,606			19	%	$	1,846,266		$	1,534,499			20	%
Total product sales allowances as a percent of total gross product sales	12		%	11		%				11		%	10		%

Product sales allowances for contractual adjustments and discounts increased for the three and six months ended June 30, 2007, as compared to the same periods of 2006, primarily due to growth in overall gross product sales.

Total estimated product sales allowance reserves and accruals in our consolidated balance sheets increased to approximately $154 million as of June 30, 2007, as compared to approximately $129 million as of December 31, 2006, primarily due to increased product sales. Historically, our actual results have not differed materially from amounts recorded. The annual variation has been less than 0.5% of total product sales for each of the last three years.

Distributor Fees

EITF Issue No. 01-09, “Accounting for Consideration given by a Vendor to a Customer (including a Reseller of a Vendor’s Products)” specifies that 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, should be characterized as a reduction of revenue. We include such fees in contractual adjustments, which are recorded as a reduction to product sales. That presumption is overcome and the consideration should be characterized as a cost incurred if, and to the extent that, both of the following conditions are met:

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

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

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