GENZ Genzyme Corp. - Genzyme Corp. Common Stock (MM)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-K

 

 

Commission file number 0-14680

 

 

 

 

GENZYME CORPORATION

(Exact name of registrant as specified in its charter)

 

 

(617) 252-7500

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ      No  o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ

 

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  þ      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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ      No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ

 

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.

 

 

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

 

Aggregate market value of voting stock held by non-affiliates of the Registrant as of June 30, 2010: $12,259,385,395.

 

Number of shares of Genzyme Stock outstanding as of January 31, 2011: 261,188,111

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Proxy Statement filed no later than 120 days after the end of the fiscal year ended December 31, 2010, are incorporated by reference into Part III of this Form 10-K.

 

 

NOTE REGARDING REFERENCES TO GENZYME

 

Throughout this Form 10-K, the words “we,” “us,” “our” and “Genzyme” refer to Genzyme Corporation and its consolidated subsidiaries, and “our board” or “our board of directors” refers to the board of directors of Genzyme Corporation.

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements regarding future events and our future operations and results. Forward-looking statements include all statements that are not historical facts and can be identified by the use of words such as “expect,” “anticipate,” “target,” “goal,” “project,” “hope,” “intend,” “plan,” “believe,” “seek,” “estimate,” “continue,” “may,” “could,” “should,” “might,” variations of these words and other similar expressions. These forward-looking statements include information concerning our future results of operations; our business plans and strategies; the proposed acquisition of us by Sanofi-Aventis; our manufacture and supply of products, including Cerezyme and Fabrazyme; regulatory approvals, including approvals of product candidates and new and additional manufacturing facilities and operations; our compliance with the U.S. Food and Drug Administration, or FDA, consent decree relating to our Allston facility and the transfer of certain operations to other facilities; clinical trial results for our product candidates, including alemtuzumab for MS; the effects of legislation or regulations on our business, including the impact of legislation on reimbursement payments. Forward-looking statements are subject to risks and uncertainties and actual results may differ materially from those indicated by these statements. These risks and uncertainties include those described under the heading “—  Risk Factors” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7. of this report. You should not place substantial reliance on the forward-looking statements in this report. These statements are made only as of the date this report is filed with the Securities and Exchange Commission, and except as required under Federal securities laws and related rules and regulations, we do not undertake, and specifically decline, any obligation to update any of these statements.

 

NOTE REGARDING TRADEMARKS

 

Genzyme ^® , Cerezyme ^® , Fabrazyme ^® , Thyrogen ^® , Myozyme ^® , Lumizyme ^® , Renagel ^® , Renvela ^® , Campath ^® , Clolar ^® , Mozobil ^® , Thymoglobulin ^® , Synvisc ^® , Synvisc-One ^® , Sepra ^® , Seprafilm ^® , Carticel ^® , Epicel ^® and Hectorol ^® are our registered trademarks. MabCampath ^tm , Cholestagel ^tm , Evoltra ^tm , MACI ^tm and Jonexa ^tm are our trademarks. 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 report are the property of their respective owners. All rights reserved.

 

TABLE OF CONTENTS

 

 

 

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 and transplant and auto-immune disease. In addition to these areas, we are developing products focused on cardiovascular disease, neurodegenerative diseases and other areas of unmet medical need.

 

We were founded in 1981 and became a Massachusetts corporation in 1991. Our executive offices are located at Genzyme Center, 500 Kendall Street, Cambridge, Massachusetts 02142. Our phone number is (617) 252-7500. Our website address is www.genzyme.com. The contents of our website are not incorporated by reference into this report and you should not consider information provided on our website to be part of this report.

 

Segments

 

We are organized into five principal business units, which are also our reporting segments:

 

 

We restructured our prior business units and reporting segments effective January 1, 2010. For information on the revisions to our prior segment presentation, see “  — Introduction ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7. of this Form 10-K. All prior periods presented in this report have been revised to conform to our current segment presentation. For financial information by segment, including revenues, income (loss) and assets, and consolidated financial information by geographical area, including revenues and long-lived assets, see Note R., “ Segment Information ,” to our consolidated financial statements included in Part II, Item 8. of this Form 10-K.

 

Proposed Acquisition by Sanofi-Aventis

 

On February 16, 2011, we announced that we had entered into a merger agreement with Sanofi-Aventis, or Sanofi, pursuant to which Sanofi agreed to amend the consideration being offered in its previously commenced tender offer to purchase all outstanding shares of our common stock and, upon successful completion of the tender offer, we would become a subsidiary of Sanofi. The merger agreement further provides for the subsequent merger of a wholly-owned subsidiary of Sanofi with and into us, subject to shareholder approval, if required by applicable law. For more information about the merger agreement, including its terms and conditions, see “  — Proposed Acquisition by Sanofi-Aventis ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

Divestitures of Non-Core Businesses

 

In May 2010, we announced our plan to pursue strategic alternatives for our genetic testing business, diagnostic products business and pharmaceutical intermediates business. In November 2010, we completed the sale of our genetics testing business to Laboratory Corporation of America Holdings, or LabCorp, for net cash proceeds of $915.9 million. In January 2011, we completed the sale of our diagnostic products business to Sekisui Chemical Co., Ltd. for $265.0 million in cash. In February 2011, we completed the sale of our pharmaceutical intermediates business to International Chemical Investors Group, or ICIG. None of these businesses were included in our principal business units. For more information on these divestitures, see ‘‘  — Introduction ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

PRODUCTS AND PRODUCT CANDIDATES

 

Personalized Genetic Health

 

Our principal PGH products and our lead PGH product candidates, along with a general description of the disease, condition or use for which they are approved and/or for which approval is targeted, are set forth below:

 

 

 

Additional information about these and other PGH products is set forth below.

 

Cerezyme (imiglucerase for injection).   Cerezyme is a recombinant human enzyme that is used to treat Gaucher disease, an inherited, potentially life-threatening LSD. It is estimated that there are approximately 10,000 Gaucher patients worldwide. There are approximately 4,700 patients currently treated with Cerezyme. The principal markets for Cerezyme are the United States, Latin America and the European Union, or the EU.

 

Our results of operations are highly dependent on sales of Cerezyme, although our dependence is lessening as we diversify our product portfolio. Sales of Cerezyme totaled $719.6 million, or 18% of our total revenues in 2010; $793.0 million, or 20% of our total revenues in 2009; and $1.24 billion, or 30% of our total revenue in 2008. Cerezyme revenues in 2009 and 2010 reflect limited supply and shipments due to the production interruptions at our Allston manufacturing facility. For information about the production interruptions at the Allston facility and the supply of Cerezyme, see “  — Manufacturing and Supply of Cerezyme and Fabrazyme ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II., Item 7. of this Form 10-K.

 

Fabrazyme (agalsidase beta).   Fabrazyme is a recombinant human enzyme that is used to treat Fabry disease, an inherited, progressive and potentially life-threatening LSD. Fabry disease is estimated to affect between 5,000 and 10,000 people worldwide. The principal markets for Fabrazyme are the United States and the EU.

 

Sales of Fabrazyme totaled $188.2 million, or 5% of our total revenue in 2010; $429.7 million, or 11% of our total revenue in 2009; and $494.3 million, or 12% of our total revenue in 2008. Fabrazyme revenues in 2009 and 2010 reflect limited supply and shipments of product due to the production interruptions at our Allston facility. For information about the production interruptions at the Allston facility and the supply of Fabrazyme, see “  — Manufacturing and Supply of Cerezyme and Fabrazyme ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

 

Myozyme/Lumizyme (alglucosidase alfa).   Myozyme and Lumizyme are recombinant human enzymes used to treat Pompe disease, an inherited, progressive and often fatal LSD. We estimate that there are

approximately 10,000 Pompe patients worldwide. There are approximately 1,400 Pompe patients currently treated with Myozyme or Lumizyme worldwide, including approximately 350 patients in the United States.

 

Myozyme and Lumizyme have been marketed since 2006 and June 2010, respectively. The principal markets for these products are the United States and the EU. Both products are a recombinant form of the same human enzyme but are manufactured using different sized bioreactors. Myozyme is manufactured at a 4000 liter and 160 liter bioreactor scale and is used to treat Pompe disease in infants, children and adults. Lumizyme is manufactured at a 4000 liter bioreactor scale for use in the United States to treat Pompe disease in children and adults. In August 2010, we closed our Alglucosidase Alpha Temporary Access Program, or ATAP, the program we created in 2007 through which we provided therapy free of charge to Pompe patients prior to commercial approval of Lumizyme. Substantially all of the former ATAP patients were transferred to commercial Lumizyme treatment by the end of 2010.

 

Other PGH Products

 

Aldurazyme (laronidase).   Aldurazyme is a recombinant human enzyme that is used to treat Mucopolysaccharidosis I (MPS I), an inherited, progressive, and potentially life-threatening LSD. Aldurazyme is manufactured by BioMarin Pharmaceutical Inc., or BioMarin, with whom we have a joint venture and to whom we pay royalties based on net sales of Aldurazyme. For information about our relationship with BioMarin in connection with Aldurazyme, see “  — Key Strategic Relationships ” set forth below.

 

Elaprase (idursulfase).   Elaprase is a recombinant human enzyme developed by Shire Human Genetic Therapies, Inc., or Shire HGT, that is used to treat Mucopolysaccharidosis II (MPS II), also known as Hunter Syndrome, an inherited, progressive and potentially life-threatening LSD. We market and distribute Elaprase in Japan and other Asia Pacific countries under an agreement with Shire HGT.

 

Lead PGH Product Candidates

 

Eliglustat tartrate.   We are developing eliglustat tartrate for the treatment of Gaucher disease. We believe this product candidate, which is administered orally in capsule form, has the potential to transform the treatment experience of patients by providing a superior treatment alternative to bi-weekly infusions. Three-year data from our phase 2 trial of eliglustat tartrate suggests comparable efficacy to Cerezyme. We are currently enrolling patients in three phase 3 trials and anticipate product approval by the end of 2013.

 

Mipomersen.   In collaboration with Isis Pharmaceuticals Inc., or Isis, we are developing mipomersen for the treatment of patients with familial hypercholesterolemia, a genetic disorder resulting in very high cholesterol levels, who remain at significant cardiovascular risk using other treatments. We have completed four phase 3 trials and anticipate product approval in 2012. For more information about our relationship with Isis in connection with mipomersen, see “  — Key Strategic Relationships ” set forth below.

 

PGH Marketing and Distribution

 

We market and sell our PGH products directly to physicians, hospitals, treatment centers, pharmacies and government agencies through our employee sales force. These products are distributed through independent distributors or wholesalers.

Renal and Endocrinology

 

Our principal Renal and Endocrinology products, along with a general description of the disease, condition or use for which they are approved, are set forth below:

 

 

Additional information about these products is provided below.

 

Renagel (sevelamer hydrochloride)/Renvela (sevelamer carbonate).   Renagel and Renvela are oral phosphate binders used in CKD patients on dialysis to treat a condition called hyperphosphatemia, or elevated phosphorus levels, which is associated with heart and bone disease. Renvela is a second generation, buffered phosphate binder. In the United States, there are an estimated 395,000 dialysis patients, approximately 90% of whom receive a phosphate binder. There are an estimated 350,000 dialysis patients in the EU and 65,000 in Brazil. In the EU, Renvela is also approved to treat CKD patients not on dialysis but who have very high blood phosphorus levels.

 

The principal markets for Renagel are the United States, the EU and Brazil. The principal markets for Renvela, which was first marketed in 2007, are the United States and the EU. In 2010, Renvela was launched in the key EU markets of France, Spain, Italy and the U.K. We generally market Renagel and Renvela directly to nephrologists through our employee sales force and distribute these products through wholesalers and distributors. In Japan and several Pacific Rim countries, Renagel is developed and marketed by Chugai Pharmaceutical Co., Ltd. and its sublicensee, Kyowa Hakko Kirin Co., Ltd.

 

Our sales of Renagel and Renvela totaled $697.7 million, or 17% of our total revenue in 2010; $706.6 million, or 18% of our total revenue in 2009; and $677.7 million, or 16% of our total revenue in 2008.

 

Hectorol (doxercalciferol capsules and injections).   Hectorol is a prescription vitamin D product used in certain CKD patients to treat a condition called secondary hyperparathyroidism, which is associated with bone disease. Hectorol is approved for certain stage 3, stage 4 and stage 5 CKD patients. We estimate that there are between 2.0 million and 4.7 million individuals in the United States with stage 3, stage 4 and stage 5 CKD who have secondary hyperparathyroidism, although a significantly smaller number of patients are being treated for the condition. The principal market for Hectorol is the United States. We market Hectorol through our employee sales force primarily to nephrologists and distribute the product through wholesale distributors.

 

Thyrogen (thyrotropin alfa for injection).   Thyrogen is a recombinant human hormone that is used to allow thyroid cancer patients who have had their thyroid gland removed because of well-differentiated thyroid cancer to remain on hormone replacement therapy, and as a result avoid withdrawal symptoms, during follow-up testing and certain follow-up treatments. There are approximately 65,000 new patients diagnosed with well-differentiated thyroid cancer annually in the United States and EU combined, and we believe that Thyrogen has the potential to be used with approximately 70% of these patients. The principal markets for Thyrogen are the United States, the EU, Canada and Brazil. We market Thyrogen to endocrinologists principally through our employee sales force and, in limited instances, through contract sales forces. We distribute Thyrogen primarily through independent distributors. In Japan, Thyrogen is marketed and sold by Sato Pharmaceutical Co., Ltd.

Biosurgery

 

Our principal Biosurgery products, along with a general description of the disease, condition or use for which they are approved, are set forth below:

 

 

Additional information about these products is provided below.

 

Synvisc/Synvisc-One (hylan G-F 20).   Synvisc and Synvisc-One are viscosupplements used to treat pain associated with osteoarthritis, or OA, of certain joints. Synvisc is a triple-injection product and Synvisc-One is our next-generation, single-injection product. The principal viscosupplementation market is treatment of pain associated with OA of the knee. It is estimated that only 16% of the approximately 9 million people with OA of the knee that are eligible to be treated with a viscosupplement in the United States receive such treatment.

 

The principal markets for Synvisc are Japan, the United States and the EU. Synvisc was approved in Japan in September 2010. The principal markets for Synvisc-One are the United States and the EU, markets in which Synvisc-One was first approved in 2009. We generally market Synvisc and Synvisc-One through our employee sales force directly to physicians, hospitals and pharmacies. We distribute these products principally through independent distributors. Outside the United States, we also sell directly to clinics and hospitals. In Japan, Synvisc is marketed and distributed by Teijin Pharma Limited.

 

Seprafilm.   Seprafilm is a biomaterial-based membrane used in abdominal and pelvic surgeries to help reduce postoperative internal scar tissue called adhesions. Seprafilm is the first product approved in the United States that is clinically proven to reduce the incidence, extent and severity of postsurgical adhesions following abdominal and pelvic surgery. In the United States, is estimated that there are approximately 2.1 million abdominal and pelvic procedures, including approximately 1.3 million Caesarean sections, performed annually. The principal markets for Seprafilm are the United States and Japan. We market and distribute Seprafilm directly to hospitals primarily through our employee sales force in the United States and through contract sales forces and independent distributors in other markets. In Japan, Seprafilm is marketed and sold by Kaken Pharmaceuticals Co. Ltd.

 

Hematology and Oncology

 

Our principal HemOnc products, along with a general description of the disease, condition or use for which they are approved, are set forth below:

 

 

Additional information about these and other HemOnc products is provided below.

 

Thymoglobulin (anti-thymocyte globulin, rabbit).   Thymoglobulin is a polyclonal antibody used to treat acute rejection in organ transplants. In the United States, Thymoglobulin is approved to treat acute rejection in renal transplants. Thymoglobulin is approved in many countries outside the United States for additional uses, including the prevention and treatment of rejection in other organ transplants, the prevention and treatment of graft versus host disease, and the treatment of a blood disease called aplastic anemia. In the United States, Thymoglobulin is also subject to significant non-approved and non-promoted use to prevent acute rejection in renal transplants. There were approximately 15,000 kidney transplants performed in the United States in 2010.

It is estimated that acute immunosuppressant therapies such as Thymoglobulin were used in greater than 80% of these procedures. There are more than 65,000 kidney transplants estimated to take place annually worldwide.

 

The principal markets for Thymoglobulin are the United States, the EU and China. In the United States Thymoglobulin is sold through wholesalers and distributed by us. Outside the United States, we market Thymoglobulin through our employee sales force to transplant centers for use by transplant surgeons, nephrologists, hematologists and oncologists and distribute the product through wholesale distributors.

 

Clolar (clofarabine).   Clolar, which is marketed as Evoltra outside the United States, is a purine nucleoside analog used to treat acute lymphoblastic leukemia, or ALL, that has relapsed or is refractory, or non-responsive, to at least two prior courses of treatment in pediatric patients. Each year, an estimated 700 children worldwide, including approximately 300 in the United States, experience a second relapse of ALL and require additional therapy. Clolar is also subject to significant non-approved and non-promoted use to treat acute myeloid leukemia, or AML. The principal markets for Clolar are the United States and the EU. Generally, we market Clolar through our employee sales force to oncology specialists in hospital settings and distribute it though wholesale distributors. Clolar has also been granted orphan drug status for in the United States and the EU. We are supporting a study of Clolar for use in adult AML being sponsored by the National Cancer Research Institute.

 

Mozobil (plerixafor injection).   Mozobil is a small molecular compound used to facilitate the release of stem cells from bone marrow for autologous transplantation, or transplantation from the same person, in patients with certain blood cancers. It is used in connection with a growth hormone that stimulates bone marrow stem cell production. In the United States, Mozobil is approved to treat patients with multiple myeloma, or MM, and non-Hodgkin’s lymphoma, or NHL. In the EU, it is approved to treat patients with lymphoma and MM whose cells mobilize poorly. It is estimated that approximately 35,000 donor-recipient bone marrow stem cell transplants are performed each year globally for MM, NHL and Hodgkin’s lymphoma.

 

The primary markets for Mozobil are the United States and the EU, markets in which Mozobil was first marketed in 2009. We market Mozobil primarily through our employee sales force to hematologists, oncologists and transplant specialists in clinic and hospital settings. We generally distribute Mozobil through an independent distributor. Outside the United States, we also sell Mozobil directly to clinics and hospitals.

 

Other HemOnc Products

 

Campath (alemtuzumab).   Campath is a humanized monoclonal antibody use to treat a blood cancer called B-cell chronic leukemia, or B-CLL.

 

Fludara (fludarabine phosphate).   Fludara is a purine nucleotide analog that is used to treat B-CLL and low-grade NHL.

 

Leukine (sargramostim).   Leukine is a recombinant protein that is used for myeloid reconstitution after bone marrow transplants and to reduce infection after chemotherapy.

 

Multiple Sclerosis

 

Alemtuzumab.   We are developing alemtuzumab for the treatment of MS, a chronic and debilitating disease in which the body’s immune system attacks the central nervous system. Alemtuzumab is a humanized monoclonal antibody that binds to a specific target on certain immune system cells, resulting in the depletion of these cells while allowing the immune system to reconstitute itself. It is estimated that there are approximately 2.1 million MS patients worldwide. Worldwide sales of MS therapies exceeded $10.0 billion in 2009 and are expected to be $13.0 billion by 2012, driven by anticipated growth in the number of MS patients under treatment, price increases of current therapies and future therapies. Despite advances in the management of MS, there remains an unmet medical need for therapies with greater efficacy and improved convenience. We believe alemtuzumab’s mechanism of action is fundamentally different from current MS treatments and its anticipated once-yearly dosing regimen would be more convenient than the dosing regimens of many existing therapies that require frequent, and in some cases daily, injections.

We are currently developing alemtuzumab for the treatment of Relapsing-Remitting MS, or RRMS, the most common form of MS. Approximately 85% of patients with MS will have RRMS, with some of these patients later developing more severe forms of the disease. We have completed enrollment in two phase 3 clinical trials of alemtuzumab vs. Rebif ^® (a standard of care therapy) for the treatment of RRMS, from which we expect to obtain results in 2011. Five-year follow up data from our phase 2 study continues to show durable treatment benefit. In 2010, the FDA granted alemtuzumab “fast track” status for the treatment of RRMS. We anticipate product approval in the United States in the second half of 2012. Under an agreement with Bayer, we have worldwide commercialization rights to alemtuzumab and are primarily responsible for its development. For more information about our relationship with Bayer in connection with alemtuzumab, see “  — Key Strategic Relationships ” set forth below.

 

Our MS business unit currently has no approved products.

 

We are engaged in segments of the human healthcare products industry that are highly competitive. Our competitors in the United States and elsewhere include major pharmaceutical, biotechnology and generic and biosimilar manufacturers. Some of these competitors may have more extensive research and development, regulatory compliance, manufacturing, marketing and sales capabilities. Some competitors may have greater financial resources. These companies may succeed in developing products that are more effective or more economical than any that we have or may develop and may also be more successful than we are in manufacturing, marketing and selling products. In addition, technological advances or different approaches developed by one or more of our competitors may render our products obsolete, less effective or uneconomical. Each of our products faces different competitive challenges. A description of the competition faced by our principal products in each of our principal business units is set forth below.

 

Personalized Genetic Health

 

Cerezyme.   Cerezyme competes with VPRIV ^tm , a product manufactured and marketed by Shire plc, or Shire. VPRIV was approved in the United States in February 2010 and in the EU in August 2010. In addition, Protalix Biotherapeutics Ltd., or Protalix, and Pfizer Inc. are currently developing, UPLYSO ^tm to treat Gaucher disease. Protalix has applied for marketing approval for UPLYSO in the United States. Cerezyme competes on the basis of efficacy, safety, availability and price. Competition is also impacted by our and our competitors’ relationships with healthcare providers, patients and patient organizations. Our previous Cerezyme shortages created opportunities for our competitors and have resulted in a decrease in the number of patients using Cerezyme and a loss of our overall market share of Gaucher patients. For more information on these shortages and the impact on Cerezyme’s competitive position, see “  — Manufacturing and Supply of Cerezyme and Fabrazyme ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

 

Fabrazyme.   Fabrazyme competes outside the United States with Replagal, a product marketed by Shire. Fabrazyme is the only commercial product approved in the United States to treat Fabry disease. However, Replagal has been available in the United States on a non-commercial basis under a pre-approval access program since December 2009. In June 2010, Shire closed enrollment in the program and announced that it would continue to support a limited number of emergency pre-approval access requests. In August 2010, Shire reported that it had withdrawn its application for marketing approval for Replagal that it had submitted in December 2009 to the FDA, and for which it had been granted “fast track” status, to consider updating it with additional clinical data. In addition, Amicus Therapeutics and GlaxoSmithKline are developing Amigal ^tm , an oral, small molecule product to treat Fabry disease that is currently in phase 3 clinical trials. Fabrazyme competes on the basis of availability, efficacy, safety and price. Competition is also impacted by our and our competitors’ relationships with healthcare providers, patients and patient organizations. Our Fabrazyme shortages continue to create opportunities for our competitors and have resulted in a decrease in the number of patients using Fabrazyme and a loss of our overall market share of Fabry patients. For more information on these shortages and the impact on Fabrazyme’s competitive position, see “  — Manufacturing and Supply of Cerezyme and Fabrazyme ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

Myozyme/Lumizyme.   Myozyme and Lumizyme are the only products approved to treat Pompe disease. Myozyme was granted orphan drug status in the United States and the EU and, as a result, has limited marketing exclusivity in the United States until 2013 and in the EU until 2016. For more information on orphan drug exclusivity marketing, see “ Orphan Drug Act ” under “ Government Regulation — Other Government Regulation ” below.

 

Renal and Endocrinology

 

Renagel/Renvela.   Renagel and Renvela compete with several other phosphate binders, including PhosLo ^® , marketed by Fresenius Medical Care, Fosrenol ^® , marketed by Shire and generic formulations of these products. Renagel and Renvela compete primarily on the basis of safety and efficacy. Our core patents protecting Renagel and Renvela expire in 2014 in the United States and in the EU in 2015. In addition, our Renagel and Renvela patents are the subjects of Abbreviated New Drug Application, or ANDA, filings in the United States by generic drug manufacturers as described in more detail in “ Legal Proceedings ” in Part I, Item 3. of this Form 10-K and in the “  — Risk Factors ” section under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K under the heading “ Some of our products will likely face competition from lower cost generic or follow-on products. ”

 

Hectorol.   Hectorol competes primarily with several other vitamin D products, including Zemplar ^® , marketed by Abbott Laboratories, Inc., and calcitriol products, including Rocaltrol ^® , marketed by F. Hoffman-LaRoche Ltd. Hectorol competes primarily on the basis of efficacy. Our core patent protecting Hectorol in the United States expires in 2014. In addition, our Hectorol patents are the subjects of ANDA filings in the United States by generic drug manufacturers as described in more detail in “ Legal Proceedings ” in Part I, Item 3. of this Form 10-K and in the “  — Risk Factors ” section under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K under the heading “ Some of our products will likely face competition from lower cost generic or follow-on products. ”

 

Thyrogen.   Thyrogen has no approved product competitor.

 

Biosurgery

 

Synvisc/Synvisc-One.   Synvisc and Synvisc-One compete with several multiple injection viscosupplements in the United States and with several single injection and multiple injection viscosupplements outside the Unites States. In the United States, Synvisc-One is the only single-injection viscosupplement approved for treatment of pain associated with OA of the knee. We believe single-injection products generally have a competitive advantage over multiple injection products because of their greater ease of administration and patient compliance. Synvisc and Synvisc-One compete primarily on the basis of price, efficacy and product attributes, including viscosity, elasticity and molecular weight, duration of efficacy, and number of required injections.

 

Seprafilm.   In the United States, Seprafilm does not have significant on-label competition in the area of abdominal surgery, but does compete with several products in gynecologic surgery indications. Seprafilm’s primary competitor with respect to gynecological surgeries in the United States is Interceed ^® , a sheet adhesion barrier marketed by Gynecare Worldwide, a division of a Johnson & Johnson company. Seprafilm also competes with Interceed in Japan and with several adhesion prevention products in the EU. Seprafilm competes primarily based on efficacy, safety, price and ease of use.

 

Hematology and Oncology

 

Thymoglobulin.   Thymoglobulin competes with several products used for the prevention or treatment of acute rejection in renal transplant, including Novartis AG’s Simulect ^® , Pfizer Inc.’s ATGAM ^® , Fresenius Biotech GmbH’s ATG-Fresenius S ^® and corticosteroids. Thymoglobulin competes primarily on the basis of efficacy.

Clolar.   Clolar competes to a limited degree with certain generic chemotherapy agents. It also competes for a subset of the pediatric ALL market with Arranon ^® /Atriana ^® , marketed by GlaxoSmithKline. Clolar competes primarily on the basis of efficacy.

 

Mozobil.   Mozobil competes with alternative methodologies for mobilizing stem cells, which include the use of various chemotherapy agents in combination with growth factors and the use of growth factors alone. Mozobil competes based primarily on efficacy and price.

 

We have entered into strategic relationships with third parties that give us the right to develop, manufacture, market and/or sell products. Our key strategic relationships are described below.

 

Bayer Schering Pharma A.G.

 

In May 2009, we acquired from Bayer Schering Pharma A.G., or Bayer, worldwide rights to commercialize alemtuzumab for the treatment of MS. As part of this transaction, we also obtained worldwide rights to Campath, Fludara and Leukine. Prior to this transaction, we shared with Bayer the development of alemtuzumab and Bayer held the rights to commercialize the product for MS. Under our revised arrangement with Bayer we have primary responsibility for the product’s development while Bayer continues to fund development at the levels specified under the previous agreement and participates in a development steering committee. Bayer also retains an option to co-promote alemtuzumab for the treatment of MS. For additional information about our relationship with Bayer, see “  — Strategic Transactions ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

 

Isis Pharmaceuticals, Inc.

 

In January 2008, we obtained an exclusive, worldwide license from Isis to develop and commercialize mipomersen. Under our arrangement, we paid Isis a $175.0 million upfront nonrefundable license fee and $150.0 million for five million shares of Isis common stock. Isis is responsible, up to $125.0 million, for the development of mipomersen. Thereafter, we and Isis will share development costs for mipomersen equally. The initial funding commitment by Isis and shared development funding commitment end when the mipomersen program is profitable. Isis is eligible to receive up to $750.0 million in commercial milestone payments and up to $825.0 million in development and regulatory milestone payments. We will be responsible for marketing and sales expenses until mipomersen revenues are sufficient to cover such costs. Profits on mipomersen initially will be allocated 70% to us and 30% to Isis. The profit ratio would be adjusted on a sliding scale if and as annual revenues for mipomersen increase to $2.0 billion, at which point we would share profits equally with Isis. The results of our mipomersen program are included in the results of our Personalized Genetic Health segment. For additional information about our relationship with Isis, see “ Strategic Transactions ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

 

BioMarin Pharmaceutical Inc.

 

In 1998, we and BioMarin Pharmaceutical Inc., or BioMarin, formed a joint venture, BioMarin/Genzyme LLC, to develop and market Aldurazyme. Under our collaboration agreement, BioMarin/Genzyme LLC licenses all intellectual property relating to Aldurazyme on a royalty-free basis to us and to BioMarin. BioMarin holds the manufacturing rights, and we hold the global marketing rights for Aldurazyme. We pay BioMarin a tiered payment ranging from 39.5% to 50% of worldwide net product sales of Aldurazyme.

 

Manufacturing

 

Our manufacturing operations consist of bulk manufacturing, formulation and finish operations, including fill-finish and tableting activities, for our products and product candidates for both commercial and clinical

purposes. We also use third-party contract manufacturers to produce or assist in the production of certain of our products and product candidates. An overview of our manufacturing operations for each of our principal business units is provided below.

 

Personalized Genetic Health.   The table below indicates the bulk manufacturing and finish operations performed by us, including facility location, and those operations performed by contract manufacturers with respect to our principal PGH products.

 

 

Cerezyme and Fabrazyme are currently manufactured at our Allston facility using six 2000 liter bioreactors. We are constructing a new manufacturing facility in Framingham, Massachusetts that will include four bioreactors that can be used for Cerezyme and Fabrazyme production. We expect to receive U.S. approval for this new facility in the second half of 2011. For more information on the new Framingham facility and its expected impact on Cerezyme and Fabrazyme manufacturing and supply, see “  — Manufacturing and Supply of Cerezyme and Fabrazyme ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

 

Lumizyme and Myozyme produced at the 4000 liter bioreactor scale are manufactured at our Geel facility using two 4000 liter bioreactors. We are currently adding a third 4000 liter bioreactor at the facility for production of these products and expect to receive approval of the additional capacity by the end of 2011. In addition, we began construction of an additional manufacturing facility in Geel which will include two 4000 liter bioreactors for Lumizyme and Myozyme production. We expect to receive approval for this new facility in late 2014.

 

In connection with the FDA consent decree relating to our Allston facility, in 2010 we transferred our fill-finish operations for Fabrazyme and Myozyme 160L sold in the United States from the Allston facility to, respectively, Hospira Worldwide Inc., or Hospira, a contract manufacturer, and our Waterford facility. We expect to transfer fill-finish operations for Fabrazyme sold outside the United States from our Allston facility to Hospira during the first half of 2011. For more information on the FDA consent decree and the impact on our manufacturing operations, see “ FDA Consent Decree ” under “  — Government Regulation — Other Government Regulation ” below. We are currently expanding our finishing capacity at our Waterford facility, where Cerezyme, Lumizyme and Myozyme are currently fill-finished, and expect to increase fill-finish capacity at the facility by approximately 400%. We expect to receive product-specific approval for this additional capacity beginning in late 2011.

 

Renal and Endocrinology.   The table below indicates the bulk manufacturing and finish operations performed by us, including facility location, and those performed by contract manufacturers with respect to our principal Renal and Endocrinology products.

 

 

In response to the FDA consent decree, we transferred fill-finish operations for Thyrogen sold in the United States from our Allston facility to Hospira in 2010. Under the consent decree we are required to cease

fill-finish operations at the Allston facility for Thyrogen sold outside the United States by August 2011. For more information on the FDA consent decree and the impact on our manufacturing operations, see “ FDA Consent Decree ” “  — Government Regulation — Other Government Regulation ” below.

 

Biosurgery.   The table below indicates the bulk manufacturing and finish operations performed by us, including facility location, and those performed by contract manufacturers with respect to our principal Biosurgery products.

 

 

Hematology and Oncology.   The table below indicates the bulk manufacturing and finish operations performed by us, including facility location, and those performed by contract manufacturers with respect to our principal HemOnc products.

 

 

In 2010, we completed construction of a new manufacturing facility in Lyon, France for bulk manufacturing of Thymoglobulin. We expect the facility will be approved in 2011.

 

Multiple Sclerosis.   Bulk manufacturing of alemtuzumab for MS is performed by a contract manufacturer.

 

Raw Materials

 

Some raw materials and components needed for manufacturing our products are provided by third-party suppliers. Most of the principal materials we use in our manufacturing operations are available from more than one source and in quantities adequate to meet our needs. However, in some cases, we are required to obtain materials from specific sources pursuant to the terms of our regulatory approvals, in which case alternative sources must be approved before they can be used. In addition, certain chemicals or components necessary for manufacturing our products are only available from a single source. Raw materials used in manufacturing of our products may also be derived from biological sources. These biologically sourced raw materials are subject to unique contamination risks and their use may be restricted in certain countries.

 

Our research and development costs were $847.3 million in 2010, $833.9 million in 2009 and $1.29 billion in 2008. These costs consist of the cost of our own independent research and development efforts and the costs associated with collaborative research and development and in-licensing arrangements. Research and development costs, including upfront fees and milestones paid to collaboration partners, are expensed as incurred if the underlying products have not received regulatory approval and have no future alternative use.

 

In general, we pursue a policy of obtaining patent protection both in the United States and in selected countries outside the United States for subject matter we consider patentable and important to our business.

 

Owned Patents

 

Patents owned by us that we consider important to our business include the following:

 

Personalized Genetic Health

 

Cerezyme is protected by U.S. Patent Nos. 5,549,892 which expires on August 27, 2013; 6,451,600 which expires on September 17, 2019; and corresponding international counterparts. Myozyme/Lumizyme is

protected by U.S. Patent Nos. 6,118,045 which expires on August 18, 2018; 7,351,410 which expires on October 29, 2020 and 7,655,226 which expires on December 16, 2019; and corresponding international counterparts.

 

Renal and Endocrinology

 

Renagel and Renvela are protected by U.S. Patent Nos. 5,667,775 which expires on September 16, 2014; 5,496,545, 6,509,013, 7,014,846 and 7,459,151 which expire on August 11, 2013; and corresponding international counterparts. Renagel is also protected by U.S. Patent No. 6,733,780, which expires on October 18, 2020; and corresponding international counterparts. Renvela is also protected by U.S. Patent No. 6,858,203 which expires on September 20, 2013; and corresponding international counterparts. Hectorol (in capsule and injection form) is protected by U.S. Patent Nos. 5,602,116 which expires on February 11, 2014; and corresponding international counterparts. Hectorol for injection is also protected by U.S. Patent No. 7,148,211 which expires September 14, 2023. Thyrogen is protected by U.S. Patent Nos. 5,602,006 which expires on February 11, 2014; and 5,658,760, which expires on August 19, 2014; and corresponding international counterparts.

 

Biosurgery

 

Synvisc is protected by U.S. Patent Nos. 5,143,724 which expires on August 8, 2011; 5,399,351 which expires on March 21, 2012; and corresponding international counterparts. Seprafilm is protected by U.S. Patent No. 5,527,893 which expires on June 18, 2013; and corresponding international counterparts.

 

Hematology and Oncology

 

Mozobil is protected by U.S. Patent Nos. RE42,152 which expires on December 10, 2013; and 6,987,102 which expires on July 22, 2023; and corresponding international counterparts.

 

Licensed Patents

 

In addition, a portion of our proprietary position is based upon patents that we have licensed from others, either through collaboration or traditional license agreements. These licenses generally are worldwide, exclusive, for a fixed duration and require us to use reasonable or diligent efforts to develop and commercialize the relevant product and to pay on-going royalties on product sales. Our licensed patents that we consider important to our business include the following:

 

 

 

Unless otherwise stated, generally patents issued in the United States are effective for:

 

 

In some cases, the patent term can be extended to recapture a portion of the term lost during FDA regulatory review. The duration of foreign patents varies in accordance with local law.

We also rely on trade secrets, proprietary know-how and continuing technological innovation to develop and maintain a competitive position in our product areas. We generally require our employees, consultants and collaborators who have access to our proprietary information to sign confidentiality agreements.

 

Our patent position and proprietary technology are subject to certain risks and uncertainties. We reference information about these risks and uncertainties in the section entitled “  — Risk Factors, ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

 

Our products and services are sold around the world under brand-name trademarks and servicemarks. Trademark protection continues in some countries as long as the mark is used; in other countries, as long as it’s registered. Registrations generally are for fixed, but renewable, terms.

 

We consider our registered trademarks Genzyme ^® , Cerezyme ^® , Ceredase ^® , Fabrazyme ^® , Thyrogen ^® , Myozyme ^® , Lumizyme ^® , Renagel ^® , Renvela ^® , Hectorol ^® , Thymoglobulin ^® , Campath ^® , Clolar ^® , Mozobil ^® , Synvisc ^® , Synvisc-One ^® , Carticel ^® , Sepra ^® , Seprafilm ^® , Sepragel ^® , Seprapack ^® , Sepramesh ^® , Sepraspray ^® , Lipobridge ^® Captique ^® and Epicel ^® , together with our trademarks, Cholestagel ^tm , Evoltra ^tm , MACI ^tm , MabCampath ^tm , Jonexa ^tm , BioMarin/Genzyme LLC’s registered trademark Aldurazyme ^® ; Shire’s registered trademark Elaprase ^® ; Daiichi Sankyo’s registered trademark Welchol ^® ; and Alcafleu’s registered trademarks Fludara ^® and Leukine ^® , in the aggregate, to be of material importance to our business.

 

Generic Manufacturers and the ANDA Approval Process

 

Some of our drug products, including Renagel, Renvela, Hectorol, Clolar, Fludara and Mozobil are approved under the provisions of the United States Food, Drug and Cosmetic Act, or FDCA, and as a result, the patents protecting these products are subject to challenges by generic manufacturers under the ANDA generic drug approval process. The ANDA process allows generic manufacturers to challenge the innovator’s patent protection by submitting “Paragraph IV” certifications to the FDA in which the generic manufacturer claims that the innovator’s patent is invalid or will not be infringed by the manufacture, use, or sale of the generic product. A patent owner who receives a Paragraph IV certification may choose to sue the generic applicant for patent infringement. If such patent infringement lawsuit is brought within a statutory 45-day period, then a 30-month stay of FDA approval for the ANDA is triggered. In recent years, generic manufacturers have used Paragraph IV certifications extensively to challenge the applicability of patents on a wide array of innovative therapeutic products listed in the FDA’s Approved Drug Products List with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book. For more information regarding litigation involving us and potential competitors that have filed ANDAs relevant to our products, see “ Legal Proceedings ” in Part I, Item 3. of this Form 10-K. For more information about the risks ANDAs pose, see “ Some of our products will likely face competition from lower cost generic or follow-on products” under “ — Risk Factors ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

 

Regulation by governmental authorities in the United States and other countries is a significant factor in the development, manufacture, commercialization, pricing and reimbursement of our products and services.

 

FDA Approval

 

Most of our products and services require approval from the FDA and corresponding agencies in other countries before they can be marketed. In the United States, we market products that the FDA classifies as either “drugs,” “biologics” or “devices.” The activities required before drugs or biologics may be marketed in the United States include:

 

 

 

The FDA reviews all available data relating to safety, efficacy and quality and assesses the risk/benefit of a product before granting approval. The data assessed by the FDA in reviewing a BLA or NDA includes animal or pre-clinical testing data, chemistry and manufacturing controls data and clinical safety and efficacy data.

 

The FDA may grant accelerated approval for drugs and biologics on the basis of a surrogate endpoint reasonably likely to predict clinical benefit. In such cases, we are required to conduct post-approval clinical studies to confirm the clinical benefit of the surrogate endpoint that was the basis of the accelerated approval. These clinical studies require the collection of additional data before full approval will be given and can often be long-term commitments. Although the FDA has not historically invoked its authority to withdraw an accelerated approval, it may do so. We currently have a number of products approved under the accelerated approval mechanism.

 

Products that are classified as devices also require some form of FDA approval prior to marketing. Devices are classified as Class I, II or III, depending upon FDA requirements to assure their safety and effectiveness. In general, Class I and Class II devices are devices whose safety and effectiveness can reasonably be assured through general or specific controls, respectively. Class III devices are life sustaining or life supporting, or are of substantial importance in preventing impairment to health or pose an unreasonable risk of adverse effect. They are implantable devices or new devices which have been found not to be substantially equivalent to legally marketed devices. The steps required for approval of a Class III device include:

 

 

Typically, clinical testing of devices involves initial testing to evaluate safety and feasibility and expanded trials to collect sufficient data to prove safety and effectiveness. In addition, the procedures and the facilities used to manufacture the device are subject to review and approval by the FDA.

 

A device (other than a Class III device) that is proven to be substantially equivalent to a device marketed prior to May 28, 1976, when government regulations for devices were first introduced, can be marketed after clearance of a 510(k) application rather than the filing of an IDE application and a PMA. The 510(k) application must contain a description of the device, its methods of manufacture and quality control procedures and the results of testing to demonstrate that the device is substantially equivalent to the device already marketed.

 

The time and expense required to perform the clinical testing necessary to obtain FDA approval for regulated products can frequently exceed the time and expense of the research and development initially required to create the product. Even after initial FDA approval has been obtained, we could very likely be required to conduct further studies to provide additional data on safety or efficacy or, should we desire, to gain approval for the use of a product as a treatment for additional clinical indications. In addition, use of these products during testing and after marketing approval has been obtained could reveal side effects which, if serious, could limit uses, require a “black box warning” on the prescribing information package insert, require

a Risk Evaluation & Mitigation Strategy, or REMS, or in the most serious cases, result in a market withdrawal of the product or expose us to product liability claims. We are also subject to monetary penalties if we do not meet the timelines agreed to with the FDA for any post-approval requirements.

 

Approval Outside of the United States

 

For marketing outside the United States, we are subject to foreign regulatory requirements governing human clinical testing and marketing approval for our products. These requirements vary by jurisdiction, differ from those in the United States and may require us to perform additional pre-clinical or clinical testing regardless of whether FDA approval has been obtained. The amount of time required to obtain necessary approvals may be longer or shorter than that required for FDA approval. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required.

 

Our initial focus for obtaining marketing approval outside the United States is typically the EU. EU regulations and directives generally classify health care products either as medicinal products, medical devices or in vitro diagnostics. For medicinal products, marketing approval may be sought using one of three main procedures: the centralized procedure of the European Medicines Agency, or EMA, the decentralized/mutual recognition procedure or the national procedure (approval by one country only).

 

Under the centralized procedure, which is mandatory for biotechnology derived products, orphan designated products and products for specific therapeutic areas, applications are submitted to the EMA for an authorization which is valid for the EU. The EMA ensures a thorough evaluation of the application by its Committee for Human Medicinal Products, or CHMP, which draws from its scientific resources across Europe. If the drug product is proven to fulfill the requirements for quality, safety and efficacy, CHMP adopts a positive opinion that is transmitted to the European Commission for the marketing authorization to be granted.

 

Under the decentralized/mutual recognition procedure, a company selects a single EU member state to review its marketing authorization, and if approved, submits the authorization to other member states. The mutual recognition/decentralized procedure allows a company to receive national marketing authorizations through a coordinated process with EU member states. In the national procedure, the application is submitted simultaneously in selected or all member states.

 

After a marketing authorization has been granted, a company must submit periodic safety reports to the EMA (for the centralized procedure) or to the national health authorities (for the decentralized/mutual recognition and national procedures). These marketing authorizations must be renewed after each five year period. Since the EU does not have jurisdiction over reimbursement or pricing matters in its member states, it is necessary to deal with individual countries on such matters.

 

A marketing authorization may include post-marketing commitments to the health authorities. In July 2007, the European Commission’s Regulation on Penalties entered into force. This regulation authorizes the European Commission to impose sanctions on companies for non-completion of post-marketing commitments. These range from a fine of 10% of global revenue to removal of the product from the market.

 

EU regulations for products classified as medical devices have been implemented. Devices, such as our Sepra products, must receive marketing approval through a centralized procedure in which the device receives a CE Mark allowing distribution to all member states of the EU. The CE Mark certification requires us to receive International Standards Organization certification for each facility involved in the manufacture or distribution of the device. This certification comes only after the development of an all inclusive quality system, which is reviewed for compliance to International Quality Standards by a licensed “Notified Body” working within the EU. After certification is received, a product dossier is reviewed that attests to the product’s compliance with EU directive 93/42 European Economic Community, or EEC, for medical devices. Only after this point is a CE Mark granted.

 

Other Government Regulation

 

Good Manufacturing Practices.   The FDA, the EMA and other regulatory agencies regulate and inspect equipment, facilities and processes used in the manufacture of pharmaceutical and biologic products prior to

approving a product. If, after receiving approval from regulatory agencies, a company makes a material change in manufacturing equipment, location or process, additional regulatory review and approval may be required. All facilities and manufacturing techniques used for the manufacture of our products must comply with applicable regulations governing the production of pharmaceutical products known as Good Manufacturing Practices, or GMP.

 

The FDA, the EMA and other regulatory agencies also conduct regular, periodic visits to re-inspect equipment, facilities and processes following initial approval of a product. If, as a result of these inspections, it is determined that our equipment, facilities or processes do not comply with applicable regulations and conditions of product approval, regulatory agencies may issue warning or similar letters or may seek civil, criminal, or administrative sanctions against us.

 

FDA Consent Decree.   In May 2010, we entered into a consent decree with the FDA relating to our Allston facility. Pursuant to the consent decree, in November 2010, we paid $175.0 million to the FDA as disgorgement of past profits. The consent decree required us to cease fill-finish operations at the Allston facility for all products sold within the United States, which included Fabrazyme and Thyrogen, by November 2010. It also restricted promotion of Thyrogen fill-finished at the Allston facility to medically necessary use, as prescribed by the FDA. Fill-finish operations for products sold in the United States were transferred prior to the applicable deadlines to our Waterford facility and to Hospira. We are also required to cease fill-finish operations at the Allston facility for all products sold outside the United States, which similarly includes Fabrazyme and Thyrogen, by August 31, 2011. We could be subject to penalties equal to 18.5 percent of the revenue from the sale of any product fill-finished at the Allston facility after the applicable deadline. We expect to transfer remaining fill-finish operations from the Allston facility during the first half of 2011.

 

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 reported to us since October 2008 or identified as part of a comprehensive inspection conducted by a third-party expert, who we were 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 our Allston facility. We are revising that plan to include additional remediation efforts required in connection with the consent decree as identified by Quantic, who we have also retained to be the third-party expert under the consent decree. The plan, as revised, which will be subject to FDA approval, is expected to take approximately three to four 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. Conditioned upon our compliance with the terms of the consent decree, we may continue our bulk manufacturing operations at the facility, which includes bulk production of Cerezyme and Fabrazyme.

 

In addition to our payment of $175.0 million to the FDA, we have incurred, and will continue to incur, increased manufacturing operations costs in connection with the consent decree, including consultant fees and costs of implementing compliance measures. For more information about risks related to the consent decree, see “ Our products and manufacturing facilities are subject to significant government regulations and approvals, which are often costly and could result in adverse consequences to our business if we fail to comply with the regulations or maintain the approvals” under “  — Risk Factors ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

 

Orphan Drug Act.   The Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare diseases and conditions affecting fewer than 200,000 persons in the United States at the time of application for orphan drug designation. The first developer to receive FDA marketing approval for an orphan drug is entitled to a seven year exclusive marketing period in the United States for that product. However, a drug that the FDA considers to be clinically superior to, or different from, another approved orphan drug, even though for the same indication, may also obtain approval in the United States during the seven year exclusive

marketing period. In addition, holders of exclusivity for orphan drugs are expected to assure the availability of sufficient quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in the withdrawal of marketing exclusivity for the drug.

 

Legislation similar to the Orphan Drug Act has been enacted in other countries outside the United States, including the EU. The orphan legislation in the EU is available for therapies addressing chronic debilitating or life-threatening conditions that affect five or fewer out of 10,000 persons or are financially not viable to develop. The market exclusivity period is for ten years, although that period can be reduced to six years if, at the end of the fifth year, available evidence establishes that the product is sufficiently profitable not to justify maintenance of market exclusivity. The market exclusivity may be extended to twelve years if sponsors complete a pediatric investigation plan agreed upon with the relevant committee of the EMA.

 

Clinical Trial Registries and Results Databases.   Since 2005, we have posted information about ongoing and completed clinical trials on our website and other widely accessible sites, including the NIH-sponsored http://www.clinicaltrials.gov. In 2007, changes in both federal and state laws expanded the scope of trials requiring registration and public disclosure, increased the amount of information required to be included with the registration, and established new requirements for disclosing the results of completed trials. The 2007 legislation (the Food and Drug Administration Amendment Act of 2007, or the FDAAA of 2007) triggered a revision of our internal procedures to ensure compliance with the expanded requirements.

 

Specifically, the federal legislation requires disclosure of ongoing applicable clinical trials (including, specified device trials as well as drug trials) in http://www.clinicaltrials.gov within 21 days of first patient enrolled and of all pediatric post market device surveillance studies. In addition, beginning September 2008, the existing clinical trials registry was expanded to include a clinical trials results database. Full expansion was scheduled to be completed by September 2010 but has been delayed and revised timing for completion has not been provided. Results of completed applicable clinical trials must be disclosed in the results database within one year of trial completion, unless an extension is granted for pending regulatory action. We will continue to reassess these policies to seek to ensure that all applicable trials are registered and results disclosed. Failure to meet the requirements could result in penalties including civil monetary penalties.

 

Pediatric Regulation.   The FDAAA of 2007 reauthorized the Best Pharmaceuticals for Children Act, or BPCA, and the Pediatric Research Equity Act, or PREA. BPCA continues to offer manufacturers a 6-month market exclusivity incentive to conduct pediatric clinical studies at the request of the FDA. PREA requires manufacturers to file pediatric assessments, which may include actual pediatric data, a deferral of the pediatric obligation, or a waiver of the pediatric requirement, at the time of filing for all new drug and biologic submissions, as well as for certain supplemental applications. Pursuant to PREA, the FDA has the authority to require sponsors to conduct pediatric research as a contingency of the approval of an application or supplement or as a post-approval commitment. Under both BPCA and PREA, the FDA has the authority to mandate a pediatric label change subsequent to the filing of pediatric clinical data as well as publicly disseminate FDA reviews of pediatric clinical study data. The FDA’s increased oversight and authority regarding pediatric studies and subsequent labeling changes may result in regulatory delays and additional development costs for us.

 

In 2007, the EU Regulation on Medicines for Pediatric Use became effective. This regulation introduced new obligations on pharmaceutical companies to conduct research on their medicines in children, and subject to various conditions, offers the possibility of incentives for doing so, including exclusivity extensions.

 

Other Laws and Regulations.   Our operations are or may be subject to various federal, state and local laws, regulations and recommendations relating to the marketing of products and relationships with treating physicians, data protection, safe working conditions, laboratory and manufacturing practices, the export of products to certain countries, and the purchase, storage, movement, use and disposal of hazardous or potentially hazardous substances used in connection with our research work and manufacturing operations, including radioactive compounds and infectious disease agents. Although we believe that our safety procedures comply with the standards prescribed by federal, state and local regulations, the risk of contamination, injury or other accidental harm cannot be eliminated completely. In the event of an accident, we could be held liable

for any damages that result and any liabilities could exceed our resources. We are also subject to a variety of federal, state and local environmental protection measures.

 

Sales and Marketing

 

We are subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback and false claims statutes. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. The federal government has published regulations that identify “safe harbors” or exemptions for certain payment arrangements that do not violate the federal anti-kickback statute. We seek to comply with the safe harbors where possible. Due to the breadth of the statutory provisions, and the lack of guidance in the form of regulations or court decisions addressing some industry activities, it is possible that our practices might be challenged under anti-kickback or related laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third-party payors, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Promotion of drugs for uses outside their labeled indications, so called “off-label” promotion, recently has led to several financially significant settlement agreements by companies under the False Claims Act.

 

Our activities relating to the sale and marketing of, and price reporting for, our products are subject to scrutiny under these fraud and abuse laws. Violations of these laws may result in criminal and/or civil sanctions, including fines and civil monetary penalties, as well as possible exclusion from federal health care programs, including Medicare and Medicaid. Federal and state authorities are paying increased attention to the pharmaceutical, biotechnology and medical device industries in enforcement of these laws, and we have been named in several legal proceedings alleging violations and are currently subject to a U.S. government investigation into our marketing and promotion of Seprafilm. For more information about risks related to this and other legal proceedings, see “We incur substantial costs as a result of litigation and other proceedings.” under “  — Risk Factors ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K. We are subject to similar fraud and abuse laws outside the United States.

 

Legislation and regulations have been enacted by, or are pending in, various states to regulate sales and marketing practices of pharmaceutical, biotechnology and medical device manufacturers. These initiatives generally involve limitations or prohibitions on, and reporting to state agencies of, financial interactions between manufacturers and health care professionals and institutions. Similar initiatives have been introduced in Congress and in 2010, as part of comprehensive federal health reform legislation, Congress passed the Physician Payment Sunshine Act which will require disclosure, beginning March 31, 2013, of certain types of payments made to physicians and teaching hospitals. We have dedicated resources that monitor these developments and work to comply appropriately with them. We are subject to similar regulations outside of the United States.

 

Laws and regulations have been promulgated at federal and state levels in the United States and in foreign countries intended to combat counterfeit drug products. We seek to comply with those federal, state and foreign “pedigree” or similar laws or rules to the extent currently in effect. We have allocated resources to develop interoperable electronic systems to seek to comply with forthcoming product serialization and track and trace requirements.

 

Pricing and Reimbursement

 

Sales of our products and services depends, in part, on the availability and extent of reimbursement from third party payors, including governments and private insurance plans. Governments may regulate access to, prices of or reimbursement levels for our products to control costs or to affect levels of use of our products, and private insurers may be influenced by government reimbursement methodologies. Efforts by third party payors to reduce costs could decrease revenue from sales of our products and services.

Aspects of the U.S. System

 

We participate in the Medicaid rebate program. Participation is required for our products to be covered and reimbursed by the various state Medicaid programs as well as by the Medicare Part B program. Under the Medicaid rebate program, we pay a quarterly rebate for each unit of drug product that is reimbursed by Medicaid. The amount of the rebate for each of our products is set by law as a minimum 23.1% of the average manufacturer price, or AMP, of that product, or if it is greater, the difference between AMP and the best price, or BP, available from Genzyme to any customer. The rebate amount also includes an inflation adjustment if AMP increases greater than inflation. The inflation adjustment can cause the rebate amount to be significantly higher than the minimum 23.1% rebate mentioned above, particularly following our periodic price increases. The rebate amount is recomputed each quarter based on our reports of our current AMP and BP for each of our products. In addition, we are required to report AMP on a monthly basis. Computations are based on complex rules issued by the Medicaid program. Those rules have not been updated by Medicaid to accommodate extensive changes made to the rebate program by Congress when it enacted the collection of laws commonly referred to as the Affordable Care Act, ACA or Health Care Reform (i.e., the Patient Protection and Affordable Care Act, P.L. 111-148, or PPACA, enacted March 21, 2010; the Health Care and Education Reconciliation Act of 2010, P.L. 111-152, or HCERA, enacted March 21, 2010; and Section 204 of the Medicare and Medicaid Extenders Act of 2010, H.R. 4994).

 

We have policies and procedures in place that we update annually and more frequently as needed to incorporate changes in laws, regulations and Medicaid guidance, as well as product launches or other product-specific changes. We have updated our policies and procedures to be consistent with the ACA, and we will update the policies and procedures to comply with any regulations or other guidance that might be issued by Medicaid setting forth its interpretation and implementation of the changes enacted by the ACA. We follow those policies and procedures when calculating our AMPs and BPs. The terms of our participation in the Medicaid program impose an obligation to correct the prices reported in previous months and quarters, if necessary. Any such corrections could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction. In addition to retroactive rebates (and interest, if any), if we were found to have knowingly submitted false information to the government, in addition to other penalties available to the government, the statute provides for civil monetary penalties for each claim containing false information. In addition, Congress could further increase the minimum discount of 23.1% or increase the number of Medicaid-eligible individuals, thereby increasing our discounts to the Medicaid program and to other entities that receive discounts comparable to the Medicaid rebate. The ACA included an increase in the rebate effective January 2010 and, beginning in 2014, will increase the number of eligible individuals.

 

Participation in the Medicaid rebate program requires us to extend comparable discounts under the Public Health Service, or PHS, pharmaceutical pricing program administered by the Health Resources and Services Administration, or HRSA within the Department of Health and Human Services. The PHS pricing program extends discounts to community health clinics and other entities that receive health services grants from the PHS, as well as the many hospitals that serve a disproportionate share of financially needy patients. We have policies and procedures in place that are consistent with PHS pricing program requirements, and we update those policies and procedures annually and more frequently as needed to incorporate changes in laws, regulations and agency guidance. The ACA requires HRSA to implement numerous enhancements to the PHS pricing program and also expanded the number of hospitals eligible to participate in the program. With the exception of expanding the eligibility criteria to include more hospitals, HRSA has not implemented program changes required by the ACA. We will update the policies and procedures to comply with any regulations or other guidance that might be issued by HRSA setting forth its interpretation and implementation of the changes enacted by the ACA. Failure to extend mandated discounted pricing to eligible providers would expose us to retroactive pricing corrections and penalties. Congress could further increase the number of entities that receive discounts under the PHS program in the future thereby increasing the amounts of discounts required by federal law.

 

Medicare Part B covers drugs that are administered by physicians to Medicare patients, including our injected and infused drugs. Currently, Medicare reimburses physicians who purchase our Part B covered drugs an amount equal to the drug’s average sales price, or ASP, plus 6% and hospitals that use our Part B drugs in

the outpatient setting an amount equal to ASP plus 5%. Medicare has issued regulations and other guidance on how manufacturers are to calculate ASP. We have policies and procedures in place that are consistent with the Medicare rules and we calculate ASPs every quarter in accordance with those policies and procedures. We update those policies and procedures annually and more frequently as needed to incorporate changes in laws, regulations and Medicare guidance, as well as product launches or other product-specific changes. Medicare uses our calculated ASPs to set reimbursement. If we were to miscalculate ASP, then Medicare reimbursement also would be incorrect and we would be exposed to potential penalties such as those described in the Medicaid rebate program description above.

 

Part D of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or Medicare Part D, provides coverage to enrolled Medicare patients for self-administered drugs such as pills, tablets and creams, that do not need to be injected or infused by a physician. These include our products Renvela, Renagel and oral Hectorol. Medicare Part D is administered by private prescription drug plans approved by the U.S. government and each drug plan establishes its own Medicare Part D formulary for prescription drug coverage and pricing, which the drug plan may modify from time-to-time. Vendors solicit discounted pricing from manufacturers and commonly condition formulary placement on the availability of manufacturer discounts. Renagel/Renvela and Hectorol currently are well-positioned on the majority of formularies of nation-wide prescription drug plans participating in the Medicare Part D program as well as many of the large regional plans. However, in 2010, the Centers for Medicare and Medicaid Services, or CMS, announced that oral Hectorol would be included in the “dialysis payment bundle” beginning January 1, 2011 and that oral medications without intravenous equivalents, including our products Renvela and Renagel, would be included in the dialysis payment bundle beginning in 2014. This means that with respect to dialysis patients, our product oral Hectorol is no longer covered by Medicare Part D, because full reimbursement is included in the dialysis payment bundle, and beginning in 2014, the same will be the case for Renvela and Renagel. For more information about the dialysis payment bundle, including its impact on Hectorol sales and possible impact on future Renvela and Renagel sales, please see “  — Product Revenue — Renal and Endocrinology ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K. In addition to these changes, the U.S. Congress could significantly change the Medicare Part D program in the future, including requiring the federal government to negotiate discounts for our drugs or matching mandatory discounts to those required in other federal programs.

 

We also offer discounted pricing to federal agencies via the Federal Supply Schedule, or FSS. Participation is required for our products to be covered and reimbursed by the Veterans Administration, Department of Defense, Coast Guard, Public Health Service, the Medicare Part B program, and the various state Medicaid programs. FSS pricing is negotiated periodically with the Department of Veterans Affairs, or VA. Although FSS pricing is negotiated, it is intended to not exceed the price that we charge our most-favored non-federal customer for the drug. The minimum discount is statutorily set at approximately 24%. However, an inflation penalty applies and can cause the discount to increase significantly, particularly following our periodic price increases. The VA has issued complex regulations and other guidance on how manufacturers are to calculate annual increases in the FSS prices. We have policies and procedures in place that are consistent with these complex VA rules and we calculate FSS prices every quarter in accordance with those policies and procedures. We update those policies and procedures annually and more frequently as needed to incorporate changes in laws, regulations and agency guidance. If we were to miscalculate FSS prices, then federal agencies would pay incorrect amounts for our drugs and we would be exposed to potential penalties, including ineligibility of our drugs for reimbursement by federal agencies, state Medicaid programs and the PHS, and possibly false claims liability.

 

The TriCare retail program provides reimbursement for military personnel and their dependents when they purchase drugs from retail pharmacies instead of at military pharmacies. Prior to January 28, 2008, the Department of Defense was eligible for FSS pricing only on drugs dispensed by their military pharmacies and not on drugs dispensed by retail pharmacies. On January 28, 2008, federal legislation became effective that extended FSS pricing to the TriCare retail program. The Department of Defense subsequently issued regulations implementing the program. We entered into a rebate agreement with the Department of Defense that extended FSS pricing to the TriCare program that became effective on June 26, 2009. We have policies

and procedures in place that are consistent with TriCare program requirements and we update those policies and procedures annually and more frequently as needed to incorporate changes in laws, regulations and agency guidance. The TriCare retail program generally affects only our oral products because our injectable products would rarely, if ever, be purchased by patients at a retail pharmacy.

 

Reimbursement Outside of the United States

 

Outside the United States our products are paid for by a variety of payors, with governments being the primary source of payment. In many countries the government closely regulates drug pricing and reimbursement and often has significant discretion in determining whether a product will be reimbursed at all and, if it is, how much will be paid. Negotiating prices with governmental authorities can delay patient access to and commercialization of our products. Payors in many countries use a variety of cost-containment measures that can include referencing prices in other countries and using those reference prices to set their own price, mandatory price cuts and rebates. Recent budgetary pressures in many countries, particularly European countries, are causing governments to consider price cuts and other cost-containment measures. This international patchwork of price regulation has led to different prices across countries and some cross-border trade in our products from markets with lower prices.

 

As of February 22, 2011, we, had approximately 10,100 employees worldwide. In November 2010 and February 2011, we implemented the first and second phase of a workforce reduction plan pursuant to which we expect to eliminate a total of 1,000 positions by the end of 2011. For more information about our workforce reduction plan, see “  — Restructuring Activities ” under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

EXECUTIVE OFFICERS

 

The following is a list of our executive officers, their ages as of February 1, 2011 and their positions with us:

 

Mr. Termeer has served as our President and a Director since October 1983, as Chief Executive Officer since December 1985 and as Chairman of the Board since May 1988. Under his leadership, we have grown from a modest entrepreneurial venture to one of the world’s leading biotechnology companies. In 2008, he was appointed to Massachusetts Governor Deval Patrick’s Council of Economic Advisors, and he is a co-chair of the Leadership Council of the Massachusetts Life Sciences Collaborative. Mr. Termeer is also Chairman Emeritus of the New England Healthcare Institute, a nonprofit, applied research health policy organization he was instrumental in founding. He serves on the board of directors of the Pharmaceutical Research and Manufacturers of America. Mr. Termeer is Chairman of the Federal Reserve Bank of Boston’s board of directors, a board member of ABIOMED Inc., and a board member of Massachusetts Institute of Technology Corporation. He is a director of Massachusetts General Hospital, a board member of Partners HealthCare and a member of the Board of Fellows of Harvard Medical School.

 

Mr. Canute joined us as Executive Vice President and President of Global Manufacturing and Corporate Operations in March 2010. Prior to joining Genzyme, he held several manufacturing positions at Eli Lilly & Company from 1982 to 2007, including most recently President of Global Manufacturing Operations from 2004 to 2007. While at Eli Lilly, Mr. Canute also served as Vice President of Global Manufacturing from 2001 to 2004, Vice President of Global Pharmaceutical Manufacturing from 1999 to 2001 and General Manager of European Manufacturing Operations from 1998 to 1999.

 

Mr. Csimma has held the title Senior Vice President and Chief Human Resources Officer since March 2006. He joined us in July 2000 as Senior Vice President, Human Resources. Prior to joining Genzyme, he served as Vice President, Human Resources of Wyeth Ayerst Research, a pharmaceutical research organization, from August 1998 to July 2000. During that time, Mr. Csimma also served as Site Head, Genetics Institute, for Wyeth Ayerst. From May 1988 to August 1998, he served as Vice President, Human Resources and Operations of Genetics Institute, Inc., a biotechnology company, which was integrated into Wyeth Ayerst in March 1998.

 

Mr. DesRosier has served as Senior Vice President and General Counsel since October 2000 and as Chief Legal Officer since May 2008. Mr. DesRosier joined Genzyme in 1999 as Senior Vice President and Chief Intellectual Property Counsel. Before he joined Genzyme, Mr. DesRosier was assistant general counsel for patents at American Home Products Corp. Mr. DesRosier has also served as Vice President and Chief Patent Counsel for Genetics Institute Inc. and held several intellectual property positions at E.I. DuPont de Nemours and Company and New England Nuclear Corp.

 

Mr. Geraghty has served as a Senior Vice President of Genzyme since May 2003 and, prior to that, as Vice President since May 2001. He was President of Genzyme Europe from 1998 to 2002 and served as General Manager of Genzyme’s cardiovascular business from 2004 to 2008. He currently oversees Genzyme’s ongoing strategic review processes for non-core assets and related transactions, as well as strategic initiatives in emerging markets and global health. He serves as a Director of GTC Biotherapeutics (formerly Genzyme Transgenics Corporation) where he was Chairman from 1998 to 2001, and President and Chief Executive Officer from its founding in 1993 until 1997. Prior to joining Genzyme, Mr. Geraghty was Vice President of Marketing and Strategic Planning for Baxter/Caremark International. He has also worked as a consultant on international health care strategy at Bain and Company.

 

Dr. Meeker has served as Executive Vice President since May 2008 and as Chief Operating Officer since April 2010, with responsibility for our Personalized Genetic Health and Biosurgery businesses and our corporate manufacturing operations. From May 2008 until March 2009, he had responsibility for our transplant business. From March 2003 until May 2008, he served as Senior Vice President and President, LSD Therapeutics. Dr. Meeker joined Genzyme in 1994 and served as Vice President, Medical Affairs from October 1996 until June 1998; as Senior Vice President Medical Affairs from June 1998 through May 2000; and as Senior Vice President Genzyme Europe from May 2000 until March 2003. Prior to joining Genzyme, Dr. Meeker was director of the Pulmonary Critical Care Fellowship at the Cleveland Clinic. He was also an assistant professor of medicine at Ohio State University.

 

Dr. Moscicki became Senior Vice President for Clinical Development and Medical Affairs in June 2010. From May 2008 to May 2010 he served as Senior Vice President, Biomedical & Regulatory Affairs and he

has also served as Chief Medical Officer since September 1996. From September 1996 until May 2008, he served as Senior Vice President, Clinical, Medical and Regulatory Affairs. Dr. Moscicki joined us in March 1992 as Medical Director, became Vice President, Medical Affairs in early 1993 and served as Vice President, Clinical, Medical and Regulatory Affairs from December 1993 until September 1996. Since 1979, he has also been a physician staff member at the Massachusetts General Hospital and a faculty member at the Harvard Medical School.

 

Dr. Alan Smith joined us in August 1989 as Senior Vice President, Research, and became Chief Scientific Officer in September 1996. Prior to joining Genzyme, he served as Vice President — Scientific Director of Integrated Genetics, Inc., from November 1984 until its acquisition by us in August 1989. From October 1980 to October 1984, Dr. Smith was head of the Biochemistry Division of the National Institute for Medical Research, Mill Hill, London, England and from 1972 to October 1980, he was a member of the scientific staff at the Imperial Cancer Research Fund in London, England.

 

Mr. Sandford Smith has held the title of Executive Vice President since June 2006, Senior Vice President since January 2003 and President of our International Group since January 2000, with responsibility for the commercial activities for our products outside of the United States. He joined us in April 1996 and served as Vice President and General Manager of our International Group and President of our Therapeutics business. Prior to joining Genzyme, Mr. Smith served as President and Chief Executive Officer of Repligen Corporation. Before joining Repligen Corporation, Mr. Smith also served as Vice President of Business Development and Strategic Planning for the Pharmaceutical Group of Bristol-Myers Squibb Company.

 

Mr. Wirth joined us in January 1996 and has served as Executive Vice President since September 1996 with responsibility for our corporate development and legal activities. From September 1996 until May 2008, he also served as our Chief Legal Officer. From 2001 through October 2005, Mr. Wirth had responsibility for our drug discovery and development business. In addition, from September 1996 until June 2003, Mr. Wirth was responsible for our Oncology business. Prior to joining Genzyme, Mr. Wirth was a partner at Palmer and Dodge, a Boston law firm, where he was head of the firm’s technology group.

 

Mr. Wyzga has served as Executive Vice President, Finance since May 2003 and as Chief Financial Officer since July 1999. He joined us in February 1998 as Vice President and Corporate Controller and served as Senior Vice President, Corporate Controller from January 1999 until July 1999. He served as Senior Vice President, Finance from July 1999 until May 2003 and as Chief Accounting Officer from January 1999 until November 2008. From February 1997 to February 1998, Mr. Wyzga served as Chief Financial Officer of Sovereign Hill Software, Inc., a software company, and from 1991 to 1997 held various senior management positions with CACHELINK Corporation and Lotus Development Corporation. Prior to November 11, 2009, Mr. Wyzga was also a director of Altus Pharmaceuticals Inc., a developer of protein therapeutics that, on that date, filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Massachusetts.

 

You may obtain free copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after they are electronically filed or furnished to the SEC, on the Investor Relations section of our website at www.genzyme.com or by contacting our Investor Relations department at (617) 252-7570. The contents of our website are not incorporated by reference into this report and you should not consider information provided on our website to be part of this report.

Item 1A.  RISK FACTORS

 

We incorporate our disclosure related to risk factors under the “  — Risk Factors ” section, beginning on page 90, under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in Part II, Item 7. of this Form 10-K.

 

None.

 

 

Our principal manufacturing facilities are set forth below with their corresponding business segments. For further information about these facilities and our manufacturing operations, see “—  Manufacturing and Raw Materials ” under Part I, Item 1. of this Form 10-K.

 

 

We own all of these facilities, including the land on which they are located, except for the land at our Allston and Waterford facilities, which we hold subject to 65 year and 999 year leaseholds, respectively, and the land at our Geel facilities, which we similarly hold subject to long-term leaseholds. We conduct our product research and development activities primarily at laboratory facilities that we own in Framingham and Waltham, Massachusetts, as well as leased facilities in San Antonio, Texas and Cambridge, England. We conduct our administrative activities primarily at facilities we lease in Cambridge and Framingham, Massachusetts and San Antonio, Texas in the United States; Naarden and Almere, The Netherlands; Tokyo, Japan; and Rio de Janeiro, Brazil. Leases for our facilities typically contain standard commercial lease provisions, including renewal options (whenever possible), rent escalators and tenant responsibility for building operating expenses.

 

 

We are not able to predict the outcome of the lawsuits and matters described below 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 these lawsuits and matters.

 

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 Section 20(a) of the Securities Exchange Act of 1934, or the Exchange Act, and Rule 10b-5 promulgated thereunder. Each of the lawsuits is premised upon allegations that, among other things, we made materially false and misleading statements and omissions by failing to disclose instances of viral contamination at two of our manufacturing facilities and our receipt of a list of inspection observations from the FDA related to one of the facilities, which detailed observations of practices that the FDA considered to be deviations from GMP. The plaintiffs seek unspecified damages and reimbursement of costs, including attorneys’ and experts’ fees. In November 2009, the lawsuits were consolidated in In Re Genzyme Corp. Securities Litigation and a lead plaintiff was appointed. In March 2010, the plaintiffs filed a consolidated amended complaint that extended the class period from October 24, 2007 through November 13, 2009 and named additional individuals as defendants. In June 2010, we filed a motion

to dismiss the class action. The plaintiffs filed an opposition to our motion to dismiss in August 2010 and we filed a reply in support of our motion to dismiss in September 2010. Oral arguments on our motion to dismiss were heard on January 26, 2011.

 

On August 11, 2010, Jerry L. & Mena M. Morelos Revocable Trust filed a lawsuit allegedly on behalf of a putative class of shareholders in the U.S. District Court for the District of Massachusetts against us, our board of directors, certain executive officers, and Sanofi, or the Morelos Action. The suit alleges that our directors breached their fiduciary duties by attempting to sell Genzyme without regard to the effect of a potential transaction on shareholders, adopting processes and procedures that will not benefit shareholders and engaging in self-dealing in order to obtain personal benefits not shared equally by all shareholders in connection with a purported proposed merger. The suit alleges that certain of our directors are beholden to activist shareholders. The suit also alleges that we and Sanofi aided and abetted the purported breaches of fiduciary duties. The suit seeks, among other relief, (i) class action status, (ii) an order enjoining the defendants from consummating a transaction, unless and until we adopt procedures designed to obtain the best value for our shareholders, (iii) an order directing the defendants to exercise their fiduciary duties and commence a sales process that is in the best interest of shareholders, (iv) an order rescinding, to the extent already implemented, any transaction agreement, (v) an order imposing a constructive trust in favor of the plaintiff and the putative class upon any benefits improperly received by the defendants as a result of any transaction, and (vi) an award to plaintiffs of the costs of the action, including reasonable attorneys’ and experts’ fees and expenses.

 

On September 8, 2010, Bernard Malina filed a lawsuit allegedly on behalf of a putative class of shareholders in the U.S. District Court for the District of Massachusetts against us and our board of directors, or the Malina Action. The suit alleges that our directors breached their fiduciary duties by attempting to sell Genzyme without regard to the effect of a potential transaction on shareholders and engaging in a plan and scheme to obtain personal benefits at the expense of shareholders in connection with a purported proposed merger. The suit seeks, among other relief, (i) class action status, (ii) an order directing the defendants to exercise their fiduciary duties and commence a sales process that is in the best interest of shareholders, (iii) compensatory damages, and (iv) an award to plaintiffs of the costs of the action, including reasonable attorneys’, accountants’ and experts’ fees and expenses.

 

On September 9, 2010, Emanuel Resendes filed a lawsuit allegedly on behalf of a putative class of shareholders in the U.S. District Court for the District of Massachusetts against our board of directors and certain executive officers, or the Resendes Action. The suit alleges that our directors breached their fiduciary duties by attempting to sell Genzyme without regard to the effect of a potential transaction on shareholders and engaging in self-dealing in order to obtain personal benefits not shared equally by all shareholders in connection with a purported proposed merger. The suit seeks, among other relief, (i) class action status, (ii) an order enjoining the defendants from entering into any contract which harms the class or could prohibit the defendants from maximizing shareholder value, (iii) an order enjoining the defendants from initiating any defensive measures that would make the consummation of a transaction more difficult or costly for a potential acquiror, (iv) an order directing the defendants to exercise their fiduciary duties and refrain from advancing their own interests at the expense of the class and their fiduciary duties, and (v) an award to plaintiffs of the costs of the action, including reasonable attorneys’ and experts’ fees and expenses.

 

On September 14, 2010, William S. Field, Trustee u/a dated October 12, 1991, by William S. Field Jr., filed a lawsuit allegedly on behalf of a putative class of shareholders in the U.S. District Court for the District of Massachusetts against us, our board of directors and certain executive officers, or the Field Action. The suit alleges that our directors breached their fiduciary duties by failing to pursue a transaction that would provide the highest value reasonably available for shareholders and by not providing full and fair disclosure to shareholders. The suit seeks, among other relief, (i) class action status, (ii) an order appointing an independent special committee with authority to evaluate, negotiate and, if in the best interests of shareholders, accept the offer from Sanofi or other offers, (iii) an award to plaintiffs of the costs of the action, including reasonable attorneys’, accountants’ and experts’ fees and expenses and (iv) such other relief as the court deems proper.

On October 18, 2010, Warren Pinchuck filed a lawsuit allegedly on behalf of a putative class of shareholders in the U.S. District Court for the District of Massachusetts against us, our board of directors and certain executive officers, or the Pinchuck Action. The suit alleges that the defendants violated Section 14(e) of the Exchange Act by issuing a false and misleading Schedule 14D-9 statement and breached their fiduciary duties by, among other things, refusing to negotiate in good faith with Sanofi and by failing to allow due diligence to be performed to facilitate a higher offer being made by Sanofi or others. The suit seeks, among other relief (i) class action status, (ii) a declaration that the defendants have violated Section 14(e) of the Exchange Act, (iii) a declaration that the defendants have breached their fiduciary duties, (iv) an order enjoining the defendants from breaching their fiduciary duties by refusing to consider and respond to the proposed transaction in good faith, (v) an order enjoining the defendants from initiating any anti-takeover devices that would inhibit the defendants’ ability to maximize value for their shareholders, (vi) compensatory damages, to the extent injunctive relief is not granted, and (vii) an award to plaintiffs of the costs of the action, including reasonable attorneys’ and experts’ fees and expenses.

 

The plaintiffs and the defendants in the Morelos Action, Malina Action, Resendes Action, and Field Action filed a joint stipulation with the federal court seeking consolidation of the cases. That motion was granted on December 28, 2010, and the consolidated case is In Re Genzyme Corp. Shareholders Litigation . The plaintiffs filed an Amended Consolidated Complaint on January 18, 2011, and we have since filed a motion to dismiss the consolidated action.

 

STATE SECURITIES LITIGATION

 

On August 16, 2010, plaintiff Chester County Employees’ Retirement Fund filed a lawsuit allegedly on behalf of a putative class of shareholders in Massachusetts Superior Court (Middlesex County) against us and our board of directors, or the Chester Action. An amended complaint was filed in the Chester Action on September 2, 2010. The amended complaint alleges that the defendants breached their fiduciary duties by failing to adequately inform themselves regarding the potential offer by Sanofi or any offer by any other party and failing to pursue the best available transaction for shareholders. The suit seeks, among other relief, (i) class action status, (ii) an order enjoining the defendants from initiating any defensive measures designed to prevent shareholders from receiving and accepting a value-maximizing offer, (iii) an order directing the defendants to exercise their fiduciary duties to obtain a transaction in shareholders’ best interests, (iv) compensatory damages and (v) an award to plaintiffs of the costs of the action, including reasonable attorneys’ and experts’ fees and expenses. On September 23, 2010, by joint motion of the parties, the Chester Action was transferred to the Business Litigation Session of Suffolk County Superior Court in Boston, Massachusetts.

 

On August 17, 2010, Alan R. Kahn filed a lawsuit allegedly on behalf of a putative class of shareholders in the Massachusetts Superior Court (Middlesex County) against us, our board of directors, certain executive officers, and Sanofi, or the Kahn Action. The suit alleges that the defendants breached their fiduciary duties in approving a proposed transaction and failing to negotiate in good faith with Sanofi. The suit seeks, among other relief, (i) class action status, (ii) an order enjoining the defendants from initiating any defensive measures that would inhibit the defendants’ ability to maximize shareholder value, (iii) compensatory damages and (iv) an award to plaintiffs of the costs of the action, including reasonable attorneys’ and experts’ fees and expenses.

 

On September 1, 2010, David Shade filed a lawsuit allegedly on behalf of a putative class of shareholders in the Massachusetts Superior Court (Middlesex County) against us and our board of directors, or the Shade Action. The suit alleges that the defendants breached their fiduciary duties in rejecting all offers and approaches by Sanofi and refusing to engage in any negotiations with Sanofi. The suit seeks, among other relief, (i) class action status, (ii) a declaration that the defendants breached their fiduciary duties, (iii) compensatory damages and (iv) an award to plaintiffs of the costs of the action, including reasonable attorneys’ fees and expenses and experts’ fees.

 

On September 2, 2010, the Louisiana Municipal Police Employees’ Retirement System filed a lawsuit allegedly on behalf of a putative class of shareholders in the Massachusetts Superior Court (Middlesex County) against us and our board of directors, or the Louisiana Action. The suit alleges that the defendants breached

their fiduciary duties in rejecting all offers and approaches by Sanofi and refusing to engage in any negotiations with Sanofi. The suit seeks, among other relief, (i) class action status, (ii) a declaration that the defendants breached their fiduciary duties, (iii) compensatory damages and (iv) an award to plaintiffs of the costs of the action, including reasonable attorneys’ fees and expenses and experts’ fees.

 

On October 5, 2010, plaintiffs and the defendants in the Chester Action, Kahn Action, Shade Action and Louisiana Action filed a joint stipulation with the Business Litigation Session of Suffolk County Superior Court in the Chester Action seeking consolidation of the state cases. On the same day, the Court signed an order approving the consolidation of these cases in In Re Genzyme Corp. Shareholder Litigation . On October 18, 2010, plaintiffs filed a consolidated amended complaint allegedly on behalf of a putative class of shareholders against us and our board of directors, or the Consolidated State Action. The consolidated complaint alleges that the defendants breached their fiduciary duty by failing to properly inform themselves of Sanofi’s offer, by refusing to negotiate in good faith with Sanofi, and by attempting to thwart Sanofi’s proposed tender offer. The suit seeks, among other relief (i) class action status, (ii) a declaration that the defendants have breached their fiduciary duties, (iii) an order requiring the defendants to fully disclose all material information regarding the Schedule 14D-9 filed by us, (iv) compensatory damages and (v) an award to plaintiffs of the costs of the action, including reasonable attorneys’ and experts’ fees and expenses. In November 2010, we filed a motion to dismiss, and the plaintiffs filed an opposition to our motion to dismiss. We filed a reply in December 2010.

 

SHAREHOLDER DEMAND LETTERS

 

Since August 2009, we have received ten letters from shareholders demanding that our board of directors take action on our behalf 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 our board whether any action should be instituted on our behalf 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 our benefit.

 

The special committee’s investigation has been completed. The Special Committee recommended to our Board of Directors to reject the requests in the demand letters to initiate litigation. Our Board of Directors unanimously adopted the Special Committee’s recommendation in December 2010. Letters were sent to all counsel of the shareholders who had submitted a demand letter informing them of the Board’s action..

 

SHAREHOLDER DERIVATIVE ACTIONS

 

In December 2009, two actions were filed by shareholders derivatively for our 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, (together, 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 us 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 us to illegally sell stock they personally held in us. The plaintiffs generally seek, among other things, judgment in favor of us for the amount of damages sustained by us as a result of the alleged breaches of fiduciary duty, disgorgement to us of proceeds that certain of our directors and executive officers received from sales of our stock and all proceeds derived from their service as our directors or executives, and reimbursement of plaintiffs’ costs, including attorneys’ and experts’ fees. The District Court Actions have been consolidated in In Re Genzyme Corp. 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 our board of director’s completion of its ongoing investigation in response to the shareholders demand. As described above, our Board has unanimously adopted the Special Committee’s recommendation to reject the requests in the demand letters to initiate litigation.

 

On January 31, 2011, we filed motions to dismiss the consolidated District Court Action and the State Court Actions. Plaintiffs in both cases have filed motions seeking discovery in order to respond to the dismissal motions, and we plan to oppose these motions.

 

RENAGEL AND RENVELA PATENT LITIGATION

 

Beginning in January 2009, we received notices from Lupin Ltd. and Lupin Pharmaceuticals, Inc., or collectively Lupin, and Impax Laboratories, Inc., or Impax, that each had submitted to the FDA ANDAs containing Paragraph IV certifications and that each is seeking approval to market generic versions of Renagel (sevelamer hydrochloride) and Renvela (sevelamer carbonate).

 

Lupin was at the time seeking to market generic 400mg and 800mg sevelamer hydrochloride tablets and generic 800mg sevelamer carbonate tablets prior to the expiration of all of our Orange Book-listed patents protecting Renagel and Renvela. In March 2009, we filed a complaint against Lupin in the U.S. District Court for the District of Maryland. In the complaint, we alleged that Lupin’s proposed sevelamer hydrochloride products infringe U.S. Patent Nos. 5,496,545, 6,509,013, and 7,014,846, which expire in 2013, and U.S. Patent No. 5,667,775, which expires in September 2014, or the ’775 Patent. In May 2009, we amended the complaint against Lupin to include an allegation that Lupin’s proposed sevelamer hydrochloride products infringe U.S. Patent No. 7,459,151, which also expires in 2013. Lupin filed an answer and counterclaims, alleging that our asserted patents are invalid and/or not infringed by Lupin’s proposed generic sevelamer hydrochloride products and that our unasserted U.S. Patent No. 6,733,780, which expires in 2020, or the ’780 Patent, is not infringed by Lupin’s proposed generic sevelamer hydrochloride products. In August 2009, Lupin’s claim relating to the ’780 Patent was dismissed with prejudice. In May 2009, we filed a complaint against Lupin in the same court alleging that Lupin’s proposed sevelamer carbonate product infringes U.S. Patent Nos. 5,496,545, 6,509,013, 6,858,203, 7,014,846 and 7,459,151, which expire in 2013, and the ’775 Patent. Lupin filed an answer and counterclaims, alleging that our asserted patents are invalid and/or not infringed by Lupin’s proposed generic sevelamer carbonate products. In September 2009, all claims relating to the patents protecting Renagel and Renvela that expire in 2013 were dismissed without prejudice. At this time, Lupin is challenging only the ’775 Patent.

 

Impax is seeking to market generic 400mg and 800mg sevelamer hydrochloride tablets and generic 800mg sevelamer carbonate tablets after the expiration of the patents protecting Renagel and Renvela that expire in 2013. We filed complaints against Impax in the U.S. District Court for the District of Maryland for patent infringement with respect to Renagel in March 2009 and with respect to Renvela in April 2009. In both complaints, we alleged that Impax’s proposed sevelamer products infringe the ’775 Patent. Impax filed an answer and counterclaims with respect to both suits, alleging that the ’775 Patent and ’780 Patent are invalid and/or not infringed by Impax’s proposed generic sevelamer products. In September 2009, Impax dismissed its claims relating to the ’780 Patent without prejudice. At this time Impax is challenging only the ’775 Patent.

On May 24, 2010 we sued Watson Laboratories Inc., or Watson, in the U.S. District Court for the District of Maryland, alleging patent infringement of the ’775 patent. Watson is seeking to enter the market with a generic version of our 800mg Renvela tablet prior to the expiration of the ’775 patent.

 

During May and June 2010, we sued Impax, Lupin and Watson in the U.S. District Court for the District of Maryland for patent infringement of the ’775 patent based on their ANDA applications seeking approval of generic versions of our 0.8 g and 2.4 g Renvela ^® sachet products. In each of these actions, the generic defendant is seeking to enter the market prior to the expiration of the ’775 patent.

 

In May 2009, we received notice that Sandoz, Inc., or Sandoz, had submitted to the FDA an ANDA containing a Paragraph IV certification and that Sandoz, Inc., is seeking approval to market generic 400mg and 800mg sevelamer hydrochloride tablets after the expiration of the patents protecting Renagel that expire in 2013. In July 2009, we filed a complaint against Sandoz in the U.S. District Court for the District of Maryland alleging that Sandoz’s proposed generic products infringe the ’775 patent. Sandoz filed an answer and counterclaims alleging that the ’775 Patent and the ’780 patent are invalid and/or not infringed by Sandoz’s proposed generic sevelamer hydrochloride products. In the first quarter of 2010, the court granted our motion to dismiss Sandoz’s counterclaims with respect to the ’780 Patent. In June 2010, we brought a separate action in the same court against Sandoz alleging patent infringement of the ’775 patent in connection with another ANDA application by Sandoz in which they seek to market generic sevelamer carbonate tablets prior to the expiration of the ’775 patent.

 

In August 2009, we received notice that Endo Pharmaceuticals Inc., or Endo, had amended its ANDA to include a Paragraph IV certification with respect to the ’775 Patent and that Endo is seeking approval to market generic 400mg and 800mg sevelamer hydrochloride tablets after the expiration of the patents protecting Renagel that expire in 2013. In October 2009, we filed a complaint against Endo in the U.S. District Court for the District of Maryland alleging that Endo’s proposed generic products infringe the ’775 Patent. Endo filed an answer and counterclaims, alleging that the ’775 Patent is invalid and/or not infringed by Endo’s proposed generic sevelamer hydrochloride products. At this time Endo is challenging only the ’775 Patent.

 

HECTOROL PATENT LITIGATION

 

In January 2008, we received notice that Pentech Pharmaceuticals, Inc., or Pentech, had submitted to the FDA an ANDA containing a Paragraph IV certification and that Pentech is seeking approval to market a generic version of our Hectorol injection ampule product prior to the expiration of the following Orange Book-listed patents: U.S. Patent Nos. 6,903,083, which expires in 2021, or the ’083 Patent, 5,602,116, which expires in February 2014, or the ’116 Patent and 5,707,980, which expired in August 2008, or the ’980 Patent. In February 2008, we filed a lawsuit in the U.S. District Court for the Northern District of Illinois. In the complaint, we alleged that Pentech’s proposed injection ampule product infringed both the ’083 and ’116 Patents. We granted Pentech a covenant not to sue on the ’980 Patent in April 2008 and on the ’083 Patent in April 2009. In August 2009, the ’083 Patent was dedicated to the public. We continue to pursue our claims related to the ’116 Patent.

 

After we filed the lawsuit, Pentech assigned all interest in its ANDA to Cobrek Pharmaceuticals, Inc., or Cobrek. In June 2008, we filed an amended complaint to add Cobrek as a defendant. In September 2009, Pentech and Cobrek amended their pleadings to include a claim for attorneys’ fees. This amendment relates to our assertion of both the ’116 and ’083 Patents. A trial relating to the ’116 Patent was held by the District Court in the Northern District of Illinois during October and November of 2010, and we await a judgment by the court.

 

In December 2008, we received approval to market a new formulation of Hectorol that could be packaged in a single dose vial. This formulation is additionally protected by U.S. Patent No. 7,148,211, which expires in September 2023, or the ’211 Patent. In November 2009, we received notice that Cobrek submitted to the FDA an amended or supplemental ANDA containing a Paragraph IV certification and that Cobrek is seeking approval to market a generic version of our Hectorol injection vial product prior to the expiration of the Orange Book-listed ’083, ’116, ’980 and ’211 Patents. In January 2010, we filed a lawsuit in the U.S. District Court for the Northern District of Illinois alleging Cobrek’s proposed injection vial product infringes the ’116

and ’211 Patents. Currently, the ’211 Patent is the subject of an inter partes re-examination proceeding before the United States Patent and Trademark Office that was initiated by Cobrek.

 

In March 2009, we received notice that Eagle Pharmaceuticals, Inc., or Eagle, had submitted to the FDA an ANDA containing a Paragraph IV certification and that Eagle is seeking approval to market a generic version of our Hectorol injection ampule product prior to the expiration of our Orange Book-listed patents protecting the product. In April 2009, we filed a complaint against Eagle in the U.S. District Court for the District of Delaware alleging that Eagle’s proposed product infringes the ’116 Patent. Eagle filed an answer and counterclaims alleging that the ’116 Patent is invalid and/or not infringed and seeking declaratory judgment that the ’083 and ’211 Patents are invalid and/or not infringed by Eagle’s proposed injection ampule product. In November 2009, Eagle’s claims relating to the ’083 and ’211 Patents were dismissed without prejudice.

 

In June 2009, we received notice that Sandoz had submitted to the FDA an ANDA containing a Paragraph IV certification and that Sandoz is seeking approval to market a generic version of our Hectorol injection ampule product prior to the expiration of our Orange Book-listed patents protecting the product. In July 2009, we filed a complaint against Sandoz in the U.S. District Court for the District of Delaware alleging that Sandoz’s proposed injection ampule product infringes the ’116 Patent. Sandoz filed an answer and counterclaims, alleging the ’980 Patent is expired, unenforceable and not infringed by its proposed products and that the ’116, ’083 and ’211 Patents are invalid and not infringed. We moved for an order dismissing Sandoz’s counterclaims with respect to the ’083, ’211 and ’980 Patents, and Sandoz opposed our motion. The court ultimately denied the motion with respect to the ’083 and ’211 patents and granted the motion to dismiss the ’980 patent. Subsequently the parties agreed to dismiss all claims with respect to the ’211 and ’083 patents and currently only the ’116 patent remains in suit.

 

In addition, on May 21, 2010, we filed a separate complaint against Sandoz, in the U.S. District Court for the District of Delaware alleging patent infringement of the ’116 and ’211 patents. This action was based on notice provided to us by Sandoz of their ANDA, which seeks to market a generic version of our Hectorol for Injection product, as supplied in amber glass vials, prior to the expiration of the ’116 and ’211 patents.

 

In June 2009 we also received notice that Roxane Laboratories, Inc., or Roxane, had submitted to the FDA an ANDA containing a Paragraph IV certification and that Roxane is seeking approval to market generic versions of our 0.5 mcg and 2.5 mcg Hectorol capsule products prior to the expiration of our Orange Book-listed patents protecting these products. In July 2009, we filed a complaint against Roxane in the U.S. District Court for the District of Delaware alleging that Roxane’s proposed capsule products infringe the ’116 Patent. Roxane filed an answer, but asserted no counterclaims. On July 23, 2010, we brought a separate patent infringement action in the same court against Roxane alleging infringement of the ’116 patent in response to Roxane’s attempt to produce a generic version of our 1.0 mcg capsule product.

 

On June 10, 2010 we brought a patent infringement action in the U.S. District Court for the District of Delaware alleging infringement of the ’116 patent and the ’211 patent, against Anchen Pharmaceuticals, Inc., which is seeking to market generic versions of all three strengths (0.5 mcg, 1.0 mcg and 2.5 mcg) of our Hectorol capsule product.

 

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 plaintiff seeks damages for past infringement, including treble damages for alleged willful infringement and reimbursement of costs, including attorney’s fees.

OTHER MATTERS

 

We are party to a legal action brought by Kayat Trading, Ltd., or 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 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.

 

PART II

 

 

Market for Registrant’s Common Equity

 

Our common stock is traded on The Nasdaq Global Select Market (“NASDAQ”) system under the symbol “GENZ”.

 

As of February 17, 2011, there were 2,826 stockholders of record of our common stock.

 

The following table sets forth, for the periods indicated, the high and low sale price of our common stock as reported by NASDAQ.

 

 

We have never paid any cash dividends on any series of our common stock and we do not anticipate paying cash dividends in the foreseeable future.

 

Issuer Purchases of Equity Securities

 

Share Repurchase Plan

 

In April 2010, our board authorized a $2.0 billion share repurchase plan consisting of the near-term purchase of $1.0 billion of our common stock and the purchase of an additional $1.0 billion of our common stock by June 2011. In June 2010, we entered into an accelerated share repurchase agreement with Goldman Sachs under which we purchased $1.0 billion of our common stock at an effective purchase price of $63.79 per share. Pursuant to the agreement, in June 2010, we paid $1.0 billion to Goldman Sachs and received

15.6 million shares of our common stock. On October 21, 2010, upon final settlement under the agreement, we received an additional 121,344 shares from Goldman Sachs, which together with the shares received in June equaled a total of 15.7 million shares repurchased. The shares purchased are authorized and are no longer outstanding.

 

During the fourth quarter of 2010, we did not repurchase any additional common stock.

 

 

Our selected financial data below should be read in conjunction with our audited, consolidated financial statements and related notes contained in Part II, Item 8., “Financial Statements and Supplementary Data,” of this Form 10-K. For all periods presented, this selected financial data has been adjusted to reflect certain businesses as held for sale and as discontinued operations. For more information on these adjustments, see Note C, “Held For Sale and Discontinued Operations,” to our consolidated financial statements included in Part II, Item 8. of this Form 10-K.

 

CONSOLIDATED STATEMENTS OF OPERATIONS DATA

 

CONSOLIDATED BALANCE SHEET DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 discussion 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.

 

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 and transplant and auto-immune disease. In addition to these areas, we are developing products focused on cardiovascular disease, neurodegenerative diseases and other areas of unmet medical need.

 

We are organized into five principal business units, which are also our reporting segments:

 

 

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

 

 

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

 

We have revised our 2009 and 2008 segment disclosures to conform to our 2010 presentation.

 

We report the activities of our genetic testing, diagnostic products and pharmaceutical intermediates businesses under the caption of “Other.” In May 2010, we announced our plan to pursue strategic alternatives for these businesses. For additional details regarding the divestiture of these businesses, please see “Divestitures of Non-Core Businesses” set forth below.

 

Proposed Acquisition by Sanofi-Aventis

 

On February 16, 2011, we announced that we had entered into a definitive merger agreement with Sanofi-Aventis, or Sanofi, and a wholly-owned subsidiary of Sanofi, which we refer to as Purchaser, pursuant to which, on the terms and subject to the conditions contained in the merger agreement:

 

 

In addition, the merger agreement includes termination provisions for both us and Sanofi and provides that, in connection with the termination of the agreement under certain circumstances, we would be obligated to pay Sanofi a termination fee of $575 million. The consummation of the exchange offer and the merger are subject to conditions, including Sanofi’s acquisition of a majority of the outstanding shares of our common stock on a fully diluted basis, the effectiveness of a registration statement covering the contingent value rights, and the listing of the contingent value rights on the NASDAQ. Neither the exchange offer nor the merger is subject to a financing condition. We can provide no assurance that these transactions will be completed. Except where explicitly stated otherwise, information contained in this report does not take into account, or give any effect to, the impact of the proposed transactions with Sanofi. For additional details regarding the merger agreement and the tender offer, please see our Current Report on Form 8-K, dated February 16, 2011, and our Solicitation/Recommendation Statement on Schedule 14D-9 relating to the tender offer, including amendments on Schedule 14D-9/A, filed with the SEC.

 

FDA Consent Decree

 

In May 2010, we entered into a consent decree with the FDA relating to our Allston facility. Pursuant to the consent decree, in November 2010, we paid $175.0 million to the FDA as disgorgement of past profits. The consent decree required us to cease fill-finish operations at the facility for all products sold within the United States, which included Fabrazyme and Thyrogen, by November 2010. It also restricted promotion of Thyrogen fill-finished at the Allston facility to medically necessary use, as prescribed by the FDA. Fill-finish operations for products sold in the United States were transferred prior to the applicable deadlines to our Waterford facility and to Hospira Worldwide, Inc., or Hospira, a contract manufacturer. We are also required to cease fill-finish operations at the Allston facility for all products sold outside the United States, which similarly includes Fabrazyme and Thyrogen, by August 31, 2011. We could be subject to penalties equal to 18.5% of the revenue from the sale of any product fill-finished at the Allston facility after the applicable deadline. We expect to transfer remaining fill-finish operations from the Allston facility during the first half of 2011.

 

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 reported to us since October 2008 or identified as part of a comprehensive inspection conducted by a third-party expert, who we were

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 our Allston facility. We are revising that plan to include additional remediation efforts required in connection with the consent decree as identified by Quantic, who we have retained to be the third-party expert under the consent decree. The plan, as revised, which will be subject to FDA approval, is expected to take approximately three to four 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. Conditioned upon our compliance with the terms of the consent decree, we may continue our bulk manufacturing operations at the facility, which includes bulk production of Cerezyme and Fabrazyme.

 

In addition to our payment of $175.0 million to the FDA, we have incurred increased manufacturing operations costs in connection with the consent decree, including consultant fees and costs of implementing compliance measures. For more information about risks related to the consent decree, see “Our products and manufacturing facilities are subject to significant government regulations and approvals, which are often costly and could result in adverse consequences to our business if we fail to comply with the regulations or maintain the approvals” under the heading “Risk Factors” set forth below.

 

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 in a bioreactor used for Cerezyme production. We resumed Cerezyme shipments in the fourth quarter of 2009. In February 2010, we began shipping Cerezyme at a rate equal to 50% of estimated product demand in order to build a small inventory buffer to help us better manage delivery of the Cerezyme available. We continued shipping at 50% of estimated product demand through the second quarter of 2010, due in part to the impact of a second interruption in production in March 2010 resulting from a municipal electrical power failure that compounded issues with the facility’s water system. We increased supply of Cerezyme in the third quarter of 2010 and Cerezyme patients in the United States were able to begin to return to normal dosing levels in September. Cerezyme patients on a global basis were able to return to normal dosing in the fourth quarter of 2010.

 

Due to the June 2009 production interruption, low manufacturing productivity upon re-start of production and efforts to build a small inventory buffer, Fabrazyme shipments decreased in the fourth quarter of 2009 and we began shipping Fabrazyme at a rate equal to 30% of estimated product demand. 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 five runs and has had approximately 30% to 40% greater productivity than the prior working cell bank. Fabrazyme patients were able to begin doubling their doses in the fourth quarter of 2010. We expect to be able to fully supply global Fabrazyme demand for currently treated patients during the second half of 2011.

 

We expect to continue working with minimal levels of inventory of Cerezyme and Fabrazyme until after our new Framingham, Massachusetts manufacturing facility is approved, which we anticipated in the second half of 2011. We commenced validation runs at the facility for Fabrazyme in the first quarter of 2011 and expect that Fabrazyme manufactured in those runs will be available for use upon the facility’s approval. We intend to transfer Fabrazyme production occurring at our Allston facility to the Framingham facility once it is approved and use the resulting available capacity at our Allston facility for additional Cerezyme production. Until we are able to build sufficient inventory levels, any additional interruptions or delays in manufacturing Cerezyme or Fabrazyme will likely impact supply of these products. In response to the FDA consent decree, we transferred our fill-finish operations for Fabrazyme sold in the United States from our Allston facility to Hospira. We expect to transfer fill-finish operations for Fabrazyme sold outside the United States from the Allston facility to Hospira during the first half of 2011. We are also significantly expanding the fill-finish capacity of our Waterford facility for our PGH products, including Cerezyme and Fabrazyme, and anticipate receiving approval of this additional capacity beginning in late 2011.

Previous Cerezyme shortages and continuing Fabrazyme shortages created, and continue to create, opportunities for our competitors and have resulted in a decrease in the number of patients using these products and a loss of our overall market share of Gaucher and Fabry patients. Cerezyme competes with VPRIV ^tm , a product manufactured and marketed by Shire plc, or Shire. In addition, Protalix Biotherapeutics Ltd., or Protalix, and Pfizer are developing UPLYSO ^tm , their product to treat Gaucher disease. In response to the Cerezyme shortages, VPRIV and UPLYSO were allowed to be made available, prior to receiving marketing approval, to patients in the United States, the EU, and other countries under pre-approval access programs. VPRIV was approved in the United States in February 2010 and in the EU in August 2010. Protalix has applied for marketing approval for UPLYSO in the United States. VPRIV and UPLYSO have been granted orphan drug status by the FDA. Fabrazyme competes outside the United States with Replagal, a product marketed by Shire. Fabrazyme is the only commercial product approved in the United States to treat Fabry disease. However, Replagal has been available in the United States on a non-commercial basis under a pre-approval access program since December 2009. In June 2010, Shire closed enrollment in the program and announced that it would continue to support a limited number of emergency pre-approval access requests. In August 2010, Shire reported that it had withdrawn its application for marketing approval 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 April 2010, the EMA advised healthcare providers to consider switching Fabry disease patients from Fabrazyme to Replagal based on its concerns that certain patients were not tolerating reduced dosages of Fabrazyme. In July 2010, the EMA issued a temporary recommendation to healthcare providers that new Fabry disease patients be treated with Replagal as an alternative to Fabrazyme because of continued supply shortages of Fabrazyme. We also have encouraged patients to switch to competitors’ products during the period of supply constraints. Until we provide full, sustainable product supply, there may be additional patients that switch to competing products due to continued limited availability or uncertainty about continued availability of our products.

 

Lumizyme Approval

 

In May 2010, we received FDA approval to market Lumizyme, alglucosidase alfa produced at the 4000 liter bioreactor scale for use in the United States. Lumizyme is the first treatment approved in the United States specifically to treat patients with late-onset Pompe disease. In August 2010, we closed our Alglucosidase Alfa Temporary Access Program, or ATAP, the program we created in 2007 through which we provided therapy free of charge to Pompe patients prior to commercial approval of Lumizyme. Substantially all of the former ATAP patients were transferred to commercial treatment by the end of 2010. We manufacture Lumizyme, along with Myozyme, alglucosidase alfa produced at the 4000 liter bioreactor scale for use outside the United States, at our Geel facility. We are adding a third bioreactor at the Geel facility for Myozyme and Lumizyme production, for which we expect to receive FDA approval by the end of 2011. In addition, we have begun construction of another facility in Geel that will include two additional 4000 liter bioreactors for Myozyme and Lumizyme production. We believe that Myozyme and Lumizyme represent a commercial opportunity comparable to that represented by Cerezyme in the treatment of Gaucher disease.

 

Value Creation Plan

 

In May 2010, we announced a plan to increase shareholder value by focusing on our core businesses, capitalizing on near-term growth drivers, balancing revenue and earnings growth with cash flow return on investment, improving our operating margins by reducing costs and improving operational efficiencies across the company and optimizing our capital structure.

 

Divestitures of Non-Core Businesses

 

As part of our focus on our core businesses, we announced a plan in May 2010 to pursue strategic alternatives for our genetic testing, diagnostic products and pharmaceutical intermediates businesses. As of September 1, 2010, the applicable assets and liabilities of our genetic testing, diagnostic products and pharmaceutical intermediates businesses have been classified as held for sale in the accompanying consolidated balance sheets and depreciation and amortization of the applicable assets ceased as of such date. In addition,

as no significant involvement or continuing cash flows are expected from, or to be provided to, the genetic testing and diagnostic products businesses following the consummation of a sale transaction, both businesses have been reported as discontinued operations in our consolidated statements of operations. In November 2010, we completed the sale of our genetics testing business to Laboratory Corporation of America, or LabCorp, for net cash proceeds of $915.9 million. In January 2011, we completed the sale of our diagnostic products business to Sekisui Chemical Co., Ltd., or Sekisui, for $265.0 million in cash. In February 2011, we completed the sale of our pharmaceutical intermediates business to International Chemical Investors Group, or ICIG.

 

For all periods presented, our consolidated statements of operations have been recast to reflect the presentation of discontinued operations. See Note C., “ Held for Sale and Discontinued Operations ,” to our consolidated financial statements included in Part II, Item 8. of this Form 10-K for additional information. Our genetic testing business had revenues of approximately $339 million for the year ended December 31, 2010, approximately $371 million for the year ended December 31, 2009 and approximately $321 million for the year ended December 31, 2008. Revenue from our diagnostic products and pharmaceutical intermediate businesses were significantly less in comparison.

 

Cost Savings Program

 

As part of our efforts to reduce costs and increase operational efficiencies, we implemented a program in June 2010 to realize sustainable costs savings opportunities across the company. This multi-year initiative, designed with support by external consultants, focuses primarily on procurement improvements, spending reductions and workforce reductions. The program resulted in savings of approximately $26 million during the fourth quarter of 2010 and is expected to result in approximately $275 million in savings in 2011.

 

Restructuring Activities

 

As part of our cost savings program, we adopted a multi-phase workforce reduction plan to eliminate a total of 1,000 employees by the end of 2011. We implemented the first phase in November 2010, eliminating approximately 290 positions and implemented the second phase in February 2011, eliminating approximately 170 positions, including both filled and unfilled positions across various functions and locations. We incurred $28.3 million in charges in the fourth quarter of 2010 related to the first phase, primarily for severance and facility related costs. We expect to incur between $16.0 million and $23.0 million in charges in the first half of 2011 for similar costs related to the second phase. The 1,000 positions expected to be eliminated under the plan exclude the approximately 2,600 positions within our genetic testing, diagnostic products and pharmaceutical intermediates businesses, which we sold in late 2010 and early 2011.

 

Notes Offerings and Share Repurchase

 

As part of our efforts to optimize our capital structure, in June 2010, we repurchased $1.0 billion of common stock, receiving 15.6 million shares in June and 121,344 additional shares in October 2010. The repurchases were funded almost entirely by the proceeds from our sale of $1.0 billion in notes in June 2010, consisting of $500.0 million of 3.625% senior notes due 2015, or the 2015 Notes, and $500.0 million of 5.000% senior notes due 2020, or the 2020 Notes. For more information about the notes and the share repurchases, see “ Liquidity and Capital Resources” set forth below.

 

STRATEGIC TRANSACTIONS

 

2011:

 

Sale to ICIG

 

In February 2011, we completed the sale of our pharmaceutical intermediates business to ICIG. The consideration is comprised of earn out payments that are contingent on future cash flows and are therefore not reasonably assured. The accounting for the sale transaction will take place in the first quarter of 2011. As part of the sale transaction accounting, the contingent consideration will not be recorded and a resulting loss on

sale of business of between approximately $10 million and $16 million will be recorded. The future contingent payments will be recorded as a gain on sale of business in the period each payment is received.

 

Sale to Sekisui

 

In January 2011, we completed the sale of our diagnostic products business to Sekisui for $265.0 million in cash.

 

2010:

 

Sale to LabCorp

 

In November 2010, we completed the sale of our genetic testing business to LabCorp for cash proceeds of $915.9 million, which was net of $9.3 million of transaction related costs. We recorded a pre-tax gain on sale of $680.5 million, which is included in discontinued operations in our consolidated statements of operations.

 

2009:

 

Acquisition from Bayer

 

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

 

 

Prior to this transaction, we shared with Bayer the development and certain commercial rights to alemtuzumab for MS and Campath and received two-thirds of Campath net profits on U.S. sales and a royalty on foreign sales. Under our new arrangement with Bayer of alemtuzumab for MS, we have primary responsibility for the product’s development while Bayer continues to fund development at the levels specified under the previous agreement and participates in a development steering committee. We have worldwide commercialization rights, with Bayer retaining an option to co-promote alemtuzumab for MS. In exchange for the above, Bayer is eligible to receive the following contingent purchase price payments:

 

 

We are using Bayer for certain transition services and are purchasing commercial supply of Fludara and Leukine from Bayer. We have employed certain members of Bayer’s commercial teams for all three products and have an opportunity to employ certain members of Bayer’s manufacturing team if we acquire the Leukine facility. The transaction has been accounted for as a business combination and is included in our results of operations beginning on May 29, 2009, the date of acquisition. The results for the acquired products are

included in our HemOnc and MS reporting segments. The fair value of the consideration and acquired assets at the date of acquisition consisted of the following (amounts in thousands):

 

 

At closing, we paid a total of $113.2 million to Bayer, of which $70.8 million was refundable. The remaining nonrefundable amount of $42.4 million represents a payment for acquired inventory. A total of $61.8 million of the refundable amount was received in 2009. As of December 31, 2010, the remaining amount due from Bayer was not significant. The contingent consideration obligations are net of the continued funding expected to be received from Bayer for the development of alemtuzumab for MS. We determined the fair value of the contingent consideration obligations based on a probability-weighted income approach derived from revenue estimates and probability assessment with respect to regulatory approval of alemtuzumab for MS. The resultant probability-weighted cash flows were then discounted using discount rates of 11% for Campath, Fludara and Leukine and 13% for alemtuzumab for MS.

 

Of the $964.1 million total contingent consideration obligations recorded as of the acquisition date, $529.1 million related to Campath, Fludara and Leukine, and $435.0 million related to alemtuzumab for MS. Each period we revalue the contingent consideration obligations to their then fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction of contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in discount periods and rates, changes in the timing and amount of revenue estimates and changes in probability adjustments with respect to regulatory approval of alemtuzumab for MS.

 

As of December 31, 2010, the fair value of the total contingent consideration obligations was $961.3 million and was $1.02 billion as of December 31, 2009. We recorded contingent consideration expense in our consolidated statements of operations of $102.7 million in 2010 and $65.6 million in 2009. As of December 31, 2010, we have paid $189.4 million in contingent consideration payments to Bayer and have received $31.8 million in funding from Bayer for the development of alemtuzumab for MS since May 29, 2009.

 

At the date of acquisition, alemtuzumab for MS had not reached technological feasibility and did not have an alternative future use and is therefore considered to be IPR&D. We recorded the fair value of the purchase price attributable to IPR&D as an indefinite-lived intangible asset. We test the asset annually for impairment, or earlier if conditions warrant. Amortization of this asset will begin upon regulatory approval based on the then estimated useful life of the asset.

 

The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. We used a discount rate of 16% and cash flows that have been probability-adjusted to reflect the risks of advancement through the product approval process, which we believe are appropriate and representative of market participant assumptions. In estimating future cash flows, we also considered other tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value these assets.

The fair value of the identifiable assets acquired in this transaction of $1.03 billion exceeded the fair value of the purchase price of $1.01 billion. As a result, we recognized a gain on acquisition of business of $24.2 million in our consolidated statements of operations in 2009.

 

Selling, general and administrative expenses, or SG&A, in our 2009 consolidated statements of operations include approximately $5 million of acquisition-related costs, primarily legal fees, associated with the Bayer transaction.

 

Purchase of Intellectual Property from EXACT Sciences Corporation

 

In January 2009, we purchased certain intellectual property in the fields of prenatal testing and reproductive health from EXACT Sciences Corporation, or EXACT Sciences, for our genetics business and 3,000,000 shares of EXACT Sciences common stock. We paid EXACT Sciences total cash consideration of $22.7 million. Of this amount, we allocated $4.5 million to the acquired shares of EXACT Sciences common stock based on the fair value of the stock on the date of acquisition, which we recorded as an increase to investments in equity securities in our consolidated balance sheet as of March 31, 2009. As the purchased assets did not qualify as a business combination and have not reached technological feasibility nor have alternative future use, we allocated the remaining $18.2 million to the acquired intellectual property, which we recorded as a charge to discontinued operations in our consolidated statement of operations in March 2009.

 

2008:

 

Strategic Alliance with Osiris Therapeutics, Inc.

 

In October 2008, we entered into a strategic alliance with Osiris Therapeutics, Inc., or Osiris, whereby we obtained an exclusive license to develop and commercialize Prochymal and Chondrogen, mesenchymal stem cell products, outside of the United States and Canada. Osiris will commercialize Prochymal and Chondrogen in the United States and Canada. We paid Osiris a nonrefundable upfront payment of $75.0 million in November 2008, and a $55.0 million nonrefundable upfront license fee in July 2009. The results of these programs are primarily included in our immune mediated disease business, which are reported in Renal and Endocrinology in our segment disclosures.

 

Osiris will be responsible for completing, at its own expense, all clinical trials of Prochymal for the treatment of Graft versus Host Disease, or GvHD, and Crohn’s disease and clinical trials of Prochymal and Chondrogen through phase 2 for all other indications. Osiris will be responsible for 60% and we will be responsible for 40% of the clinical trial costs for phase 3 and 4 clinical trials of Prochymal (other than for the treatment of GvHD and Crohn’s disease) and Chondrogen. Osiris is eligible to receive:

 

 

Osiris is also eligible to receive tiered royalties from us on sales of Prochymal and Chondrogen outside of the United States and Canada.

 

In September 2009, Osiris announced that its two phase 3 trials evaluating Prochymal for the treatment of acute GvHD failed to meet their primary endpoints. Osiris is in the process of conducting a number of other clinical trials, including a phase 3 clinical trial for Crohn’s disease, that may trigger milestone payments upon completion.

 

Strategic Alliance with PTC Therapeutics, Inc.

 

In July 2008, we entered into a collaboration agreement with PTC Therapeutics, Inc., or PTC, to develop and commercialize ataluren, PTC’s novel oral therapy in late-stage development for the treatment of duchenne

muscular dystrophy, or DMD, and cystic fibrosis, or CF. Under the terms of the agreement, PTC will commercialize ataluren in the United States and Canada, and we will commercialize the treatment in all other countries. In connection with the collaboration agreement, we paid PTC a nonrefundable upfront payment of $100.0 million, which we recorded as a charge to research and development expense for our Personalized Genetic Health segment in our consolidated statements of operations during the third quarter of 2008. At its own expense, PTC will conduct and be responsible for the phase 2b trial of ataluren in DMD, the phase 2b trial of ataluren in CF and two proof-of-concept studies in other indications to be determined. Once these four studies have been completed, we and PTC will share research and development costs for ataluren equally. We and PTC will each bear the sales and marketing and other costs associated with the commercialization of ataluren in our respective territories. PTC is eligible to receive up to $337.0 million in milestone payments as follows:

 

 

PTC is also eligible to receive tiered royalties from sales of ataluren outside of the United States and Canada. The results of our ataluren program are included in the results of our Personalized Genetic Health segment disclosures.

 

Strategic Alliance with Isis

 

In January 2008, we entered into a strategic alliance with Isis, whereby we obtained an exclusive, worldwide license to develop and commercialize mipomersen, a lipid-lowering drug targeting apolipoprotein B-100, which is currently being developed for the treatment of familial hypercholesterolemia, or FH, an inherited disorder that causes exceptionally high levels of low density lipoprotein, or LDL, cholesterol. In February 2008, we made a nonrefundable payment to Isis of $150.0 million, of which $80.1 million was recorded as an other noncurrent asset on our consolidated balance sheets based on the fair value of the five million shares of Isis common stock we acquired in connection with the transaction. Due to certain trading restrictions on the common stock, we classify this investment as other noncurrent assets. We allocated the remaining $69.9 million to the mipomersen license, which we recorded as a charge to research and development expense in our consolidated statements of operations during the first quarter of 2008.

 

In June 2008, we finalized the terms of our license and collaboration agreement with Isis and paid Isis an additional $175.0 million upfront nonrefundable license fee. Under the terms of the agreement, Isis will be responsible, at its own expense, for up to $125.0 million for the development of mipomersen. Thereafter, we and Isis will share development costs for mipomersen equally. The initial funding commitment by Isis and shared development funding would end when the mipomersen program is profitable. In the event the research and development of mipomersen is terminated prior to Isis completing their funding obligation, we are not entitled to any refund of our $175.0 million upfront payment. Isis is eligible to receive up to $750.0 million in commercial milestone payments and up to $825.0 million in development and regulatory milestone payments.

 

We will be responsible for funding sales and marketing expenses until mipomersen revenues are sufficient to cover such costs. Profits on mipomersen initially will be allocated 70% to us and 30% to Isis. The profit ratio would be adjusted on a sliding scale if and as annual revenues for mipomersen increase to $2.0 billion, at which point we would share profits equally with Isis. The results of our mipomersen program are included in the results of our cardiovascular business, which are reported in our Personalized Genetic Health segment disclosures.

 

We account for our investment in Isis common stock on a cost basis due to certain trading restrictions imposed by Isis that prohibit us from selling our holdings of Isis common stock until the earlier of:

 

 

In June 2010, 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 recorded a $32.3 million impairment charge to gains (losses) on investments in equity securities, net in our consolidated statements of operations. As of December 31, 2010, our investment in Isis common stock had a carrying value of $47.9 million (or $9.57 per share) and a fair market value of $50.6 million (or $10.12 per share). We will continue to review the fair value of our investment in Isis common stock in comparison to our historical cost and in the future, if there is another decline in value and it becomes “other than temporary,” we will write down our investment in Isis common stock to its then current market value and record an impairment charge to our consolidated statements of operations.

 

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

 

The significant accounting policies and methods used in the preparation of our consolidated financial statements are described in Note A., “ Summary of Significant Accounting Policies ,” to our consolidated financial statements set forth in Part II, Item 8. of this Form 10-K. The preparation of consolidated financial statements under accounting principles generally accepted in the United States, or U.S. GAAP, requires us to make certain estimates and judgments that affect reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities in our financial statements. Our actual results could differ from these estimates under different assumptions and conditions. We believe that the following critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements:

 

 

Revenue Recognition

 

Product Sales

 

We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been shipped, title and risk of loss have passed to the customer and collection from the customer is reasonably assured. For sales to distributors that do not or can not bear the risk of loss, we recognize revenue when the product is sold through to hospitals or other healthcare providers. 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 wholesale distributors 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 wholesaler 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 affected 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 PGH, Renal and Endocrinology, Biosurgery and HemOnc 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 PGH, Renal and Endocrinology, Biosurgery and HemOnc 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.

 

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

 

 

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

 

 

Total product sales allowances increased in 2010, as compared to 2009, primarily due to:

 

 

These increases were partially offset by a decrease of $13.8 million in the aggregate product sales allowances for 2010 for our PGH reporting segment, which was primarily due to supply constraints associated with Cerezyme and Fabrazyme.

 

Total product sales allowances increased in 2009, as compared to 2008, primarily due to:

 

 

Total estimated product sales allowance reserves and accruals in our consolidated balance sheets increased approximately 40% to approximately $330 million as of December 31, 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. Our actual results have not differed materially from amounts recorded.

 

Accounts Receivable Related to Sales in Greece

 

Our consolidated balance sheets include accounts receivable, net of reserves, held by our subsidiary in Greece related to sales to government-owned or supported healthcare facilities in Greece of approximately $68 million as of December 31, 2010 and approximately $57 million as of December 31, 2009. Sales to government-owned or supported healthcare facilities in Greece were approximately $22 million in 2010 and approximately $23 million in 2009. Payment of these accounts is subject to significant 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 one to three 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 second quarter of 2010 to write down the accounts receivable balances held by our subsidiary in Greece to present value using a 11% risk adjusted discount rate.

 

The government of Greece has recently required financial support from both EU 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.

 

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:

 

 

Effective October 1, 2010, the new legislation re-defined the Medicaid AMP such that the AMP is calculated differently for our oral drugs and our injected/infused drugs, and such that Medicaid rebates increase for our oral drugs, Renagel, Renvela and oral Hectorol, and our product Leukine, but be insignificantly impacted for our other products.

 

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, 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 Veteran’s Administration, Department of Defense and TriCare retail pharmacy discount programs) made during the previous year. Sales of orphan drugs, however, are not included in the fee calculation. The related fees will be recorded as SG&A. The aggregated industry wide fee is expected to total approximately $28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. Beginning in 2013, a 2.3% excise tax will be imposed on sales of all medical devices except retail purchases by the public intended for individual use.

 

Presently, uncertainty exists as many of the specific determinations necessary to implement this new legislation have yet to be decided and communicated to industry participants. We have had to make several estimates with regard to important assumptions relevant to determining the financial impact of this legislation on our business due to the lack of available information and resulting uncertainty about how the legislation will be implemented. Our revenues in the United States decreased by approximately $7 million in 2010 as a result of this new legislation and are expected to decrease by approximately $25 million to $30 million in 2011.

 

We expect that the U.S. Congress and state legislatures will continue to review and assess healthcare proposals, including proposals to modify, repeal or not fund portions of the federal health care reform law enacted in March 2010, and public debate of these issues will likely continue. We cannot predict which, if

any, of such 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 2010, Spain cut prices for branded products by 7.5% and Portugal cut prices across the board by 6%. As another example, the German government enacted legislation that increases mandatory discounts from 6% to 16% on non-orphan drugs, freezes August 2009 pricing levels through the end of 2013, and limits free pricing on new products to one year following launch at which time they are subject to cost-effectiveness analysis, negotiation of price, and potential price ceilings. We expect that our revenues would be negatively impacted if these or similar cost-saving measures are adopted by other countries facing budget constraints.

 

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 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 is appropriately characterized as a cost incurred if, and to the extent that, both of the following conditions are met:

 

 

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):

 

 

Collaborations

 

We evaluate revenue from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting. We recognize revenue for a delivered item in a multiple element arrangement upon determination that:

 

 

The determination that multiple elements in an arrangement meet the criteria for separate units of accounting requires us to exercise our judgment.

 

We determine whether we should recognize revenue on a gross or net basis based on the relevant facts and circumstances which relate primarily to whether we act as a principal or agent in the process of generating revenues for the revenue transactions.

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 performance vesting restricted stock units, or PSUs, to our senior executives, which vest upon the achievement of certain financial performance goals, including cash flow return on investment and relative total shareholder return, or 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.

 

Income Taxes

 

We use the asset and liability method of accounting for deferred income taxes. We are subject to income taxes in both the United States and numerous foreign jurisdictions; however, our most significant tax jurisdictions are the U.S. federal and states. Significant judgments, estimates and assumptions regarding future events, such as the amount, timing and character of income, deductions and tax credits, are required in the determination of our provision for income taxes and whether valuation allowances are required against deferred tax assets. These judgments, estimates and assumptions involve:

 

 

We operate in many jurisdictions where the tax laws relating to the pricing of transactions between related parties are open to interpretation, which could potentially result in tax authorities asserting additional tax liabilities with no offsetting tax recovery in other countries.

 

Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate adjustments to the tax benefit and provision in future periods. We establish what we believe to be reasonable provisions for possible

consequences of audits by the tax authorities of the respective countries. The amount of such provisions is based on various factors, such as experience with previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences in interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective domicile. We develop our cumulative probability assessment of the measurement of uncertain tax positions using internal expertise, experience and judgment. Estimates are refined as additional information becomes known. Any outcome upon settlement that differs from our initial estimate may result in additional or lower tax expense in future periods. However, we do not believe it is possible to reasonably estimate the potential impact of changes to the assumptions, estimates and judgments identified because the resulting change to our tax liability, if any, is dependent on numerous factors, including among others: changes in tax law, the amount and nature of additional taxes potentially asserted by local tax authorities; the willingness of local tax authorities to negotiate a fair settlement through an administrative process; the impartiality of the local courts; and the potential for changes in the tax paid to one country to either produce, or fail to produce, an offsetting tax change in other countries.

 

We apply a two-step approach to recognize and measure uncertain tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the tax position will be sustained based on the technical merits of the tax position. The second step is the measurement of the tax benefit, which is the largest amount, using cumulative probability measure, which is likely to be realized upon ultimate audit settlement, including resolution of related appeals or litigation processes, if any. We consider many factors, including the factors described above, when evaluating and estimating our tax positions and tax benefits, which requires periodic adjustments and may not accurately forecast actual outcomes.

 

Inventories

 

We value inventories at cost or, if lower, fair value. We determine cost using the first-in, first-out method. We analyze our inventory levels quarterly and write down inventory, as a charge to cost of sales that has become obsolete due to anticipated product expiration, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. Expired inventory is disposed of and the related costs are written off. If actual market conditions are less favorable than those projected by management, additional inventory write downs may be required.

 

We capitalize inventory produced for commercial sale, which may result in the capitalization of inventory prior to regulatory approval of the product or the manufacturing facility where it is produced. The determination for capitalization is based on our judgment of probable future approval, commercial success and realizable value. Such judgment incorporates our knowledge and assessment of the regulatory review process for the product and manufacturing process, our required investment in the product or facility, market conditions, competing products and our economic expectations for the product post-approval relative to the risk of manufacturing the product prior to approval. In no event is inventory capitalized prior to completion of a phase 3 clinical trial and the completion of a series of successful validation runs from the facility. At the completion of these events, the product and the manufacturing process have reached technological feasibility, upon which we believe the likelihood of obtaining regulatory approval is high and probable future economic benefit in the product exists. If a product is not approved for sale or a manufacturing facility does not receive approval, it would likely result in the write off of the inventory and a charge to earnings.

 

We periodically review our inventories for excess or obsolete inventory and write down obsolete or otherwise unmarketable inventory to its estimated net realizable value. If the actual net realizable value is less than the value we estimate, or if there are any further determinations that inventory will not be marketable based on estimates of demand, additional inventory write downs will be required. Additionally, our products are subject to strict quality control and monitoring throughout the manufacturing process. Periodically, certain lots of inventory may fail to meet our quality specifications during the manufacturing process or prior to sale, or may expire. For such lots, we consider the factors affecting the decline in quality of the lot and assess the likelihood that the lot can be reworked into saleable product, or whether the lot is unmarketable. We record a charge to cost of products sold in our consolidated statement of operations to write off the value of any

unmarketable inventory in the period in which we determine that the product no longer meets our criteria for saleable product. The determination of what factors may cause a lot to fail to meet our quality standards, the assessment of whether we can rework the lot within the scope of the approved manufacturing process for the product and the likelihood that we can complete such rework in a timely fashion involve judgments that can affect the amount and timing of the charges we record to write off the value of unmarketable inventory.

 

In 2010, we wrote off approximately $16.4 million of Cerezyme and Fabrazyme work-in-process material related to the remediation of our Allston facility and $7.1 million of Thyrogen inventory that did not meet the necessary quality specifications. In 2009, we wrote off approximately $11 million of Cerezyme work-in-process material related to the remediation of our Allston facility and $9.2 million of Myozyme inventory costs related to terminated production runs at our Belgium facility. In 2008, we wrote off Myozyme inventory costs of $12.6 million related to terminated production runs at our Belgium facility.

 

Long-Lived and Intangible Assets

 

Property, Plant and Equipment

 

As of December 31, 2010, there was $2.93 billion of net property, plant and equipment on our consolidated balance sheet. We generally depreciate property, plant and equipment using the straight-line method over its estimated economic life, which ranges from 3 to 40 years. Determining the economic lives of property, plant and equipment requires us to make significant judgments that can materially impact our operating results. If our estimates require adjustment, it could have a material impact on our reported results.

 

In the ordinary course of our business, we incur substantial costs to purchase and construct property, plant and equipment. The treatment of costs to purchase or construct these assets depends on the nature of the costs and the stage of construction. Costs incurred in the initial design and evaluation phase, such as the cost of performing feasibility studies and evaluating alternatives, are charged to expense. Qualifying costs incurred in the committed project planning and design phase, and in the construction and installation phase, are capitalized as part of the cost of the asset. We stop capitalizing costs when an asset is substantially complete and ready for its intended use. Determining the appropriate period during which to capitalize costs, and assessing whether particular costs qualify for capitalization, requires us to make significant judgments. These judgments can have a material impact on our reported results.

 

Equipment and facilities used to manufacture products subject to FDA or other governmental regulation are required to comply with standards of those regulatory agencies. The activities necessary to obtain approval from these regulatory agencies are referred to as validation costs. We capitalize the cost of validating new equipment and facilities for the underlying manufacturing process. We begin capitalization when we consider the product and manufacturing process to have demonstrated technological feasibility, and end capitalization when the asset is substantially complete and ready for its intended use. Costs capitalized include incremental labor and direct material, and incremental fixed overhead. Determining whether to capitalize validation costs requires judgment, and can have a significant impact on our reported results. Also, if we were unable to successfully validate the manufacturing process for any future product, we would have to write off to current operating expense any validation costs that had been capitalized during the unsuccessful validation process. Costs to initiate new projects in an existing facility are treated as start-up costs and expensed as incurred. As of December 31, 2010, capitalized validation costs, net of accumulated depreciation, were $19.8 million.

 

Goodwill and Other Intangible Assets

 

As of December 31, 2010, there was approximately $1.36 billion of net goodwill and $1.82 billion of net other intangible assets on our consolidated balance sheet. We amortize finite intangible assets using the straight-line method over their estimated economic lives, which range from 1 and 15 years, or using the economic use method if that method results in significantly greater amortization than the straight-line method. Determining the economic lives of acquired finite intangible assets requires us to make significant judgment and estimates, and can materially impact our operating results. For certain acquired finite intangible assets, we may be required to make additional payments contingent upon meeting certain sales targets. We record amortization expense for these intangibles based on estimated future sales of the related products and include

in the determination of amortization all contingent payments that we believe are probable of being made. We apply this amortization model to our Synvisc distribution rights (acquired from Pfizer, formerly Wyeth), our license agreement with Synpac related to Myozyme patents and our technology intangible assets for Fludara related to our acquisition from Bayer. We review the sales forecasts of these products on a quarterly basis and assess the impact changes in the forecasts have on the rate of amortization and the likelihood that contingent payments will be made. Adjustments to amortization expense resulting from changes in estimated sales are reflected prospectively.

 

IPR&D

 

IPR&D represents the fair value assigned to incomplete technologies that we acquire, which at the time of acquisition have not reached technological feasibility and have no alternative future use. A technology is considered to have an alternative future use if it is probable that the acquirer will use the asset in its incomplete state as it exists at the acquisition date, in another research and development project that has not yet commenced, and economic benefit is anticipated from that use.

 

Substantial additional research and development will be required before any of our IPR&D programs reach technological feasibility. In addition, once research is completed, each underlying product candidate will need to complete a series of clinical trials and receive regulatory approvals prior to commercialization. Management assumes responsibility for determining the valuation of the acquired IPR&D programs. The fair value assigned to IPR&D for each acquisition is estimated by discounting, to present value, the future cash flows expected from the programs since the date of our acquisition. Accordingly, such cash flows reflect our estimates of revenues, costs of sales, operating expenses and income taxes from the acquired IPR&D programs based on the following factors:

 

 

The discount rates used are commensurate with the uncertainties associated with the economic estimates described above. The resulting discounted future cash flows are then probability-adjusted to reflect the different stages of development, the time and resources needed to complete the development of the product and the risks of advancement through the product approval process. In estimating the future cash flows, we also consider the tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D programs and adjust future cash flows for a charge reflecting the contribution to value of these assets. Such contributory tangible and intangible assets may include, but are not limited to, working capital, fixed assets, assembled workforce, customer relationships, patents, trademarks, and core technology.

 

Use of different estimates and judgments could yield materially different results in our analysis and could result in materially different asset values or expense. There can be no assurance that we will be able to successfully develop and complete the acquired IPR&D programs and profitably commercialize the underlying product candidates before our competitors develop and commercialize products for the same indications, or at all. Moreover, if certain of the acquired IPR&D programs fail, are abandoned during development, or do not receive regulatory approval, then we may not realize the value we have estimated and recorded in our financial statements on the acquisition date, and we may also not recover the research and development investment

made since the acquisition date to further develop that program. If such circumstances were to occur, our future operating results could be materially adversely impacted.

 

Asset Impairments

 

Impairment of Goodwill and Indefinite-Lived IPR&D

 

We are required to perform impairment tests for our goodwill and indefinite-lived IPR&D classified as indefinite-lived assets annually, which we perform in the third quarter of every year, and whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. For all of our acquisitions, various analyses, assumptions and estimates were made at the time of each acquisition specifically regarding product development, market conditions and cash flows that were used to determine the valuation of goodwill and intangibles. When we perform impairment tests in future years, the possibility exists that changes in forecasts and estimates from those used at the acquisition date could result in impairment charges.

 

We test goodwill using a two-step process. The first step compares the fair value of the reporting unit with the unit’s carrying value, including goodwill. When the carrying value of the reporting unit is greater than fair value, the unit’s goodwill may be impaired, and the second step must be completed to measure the amount of the goodwill impairment charge, if any. In the second step, the implied fair value of the reporting unit’s goodwill is compared with the carrying amount of the unit’s goodwill. If the carrying amount is greater than the fair values, the carrying value of the goodwill must be written down to its implied fair value. We determine the fair values by discounting, to present value, the estimated future cash flow of the reporting unit, which includes various analyses, assumptions and estimates including discount rates, projected results and estimated cash flows.

 

Effective January 1, 2009, all IPR&D we acquire through business combinations on or after January 1, 2009 is capitalized as an intangible asset on our consolidated balance sheets and periodically tested for impairment. We test our indefinite-lived IPR&D assets for impairment by comparing the face value of each IPR&D asset to our carrying value for the asset. If the carrying value is greater than the fair value of the asset, we are required to write down the value of the IPR&D asset to its implied fair value. We continue to test our indefinite-lived IPR&D assets for potential impairment until the projects are completed or abandoned.

 

We completed the required annual impairment tests for our $1.36 billion of net goodwill during the third quarter of 2010 and determined that none of our goodwill or IPR&D was impaired at that time.

 

In the fourth quarter of 2010, we received several offers to purchase our pharmaceutical intermediates business. The proposed consideration to be paid under the revised offers indicated that the carrying value of our pharmaceutical intermediates reporting unit might be in excess of its fair value less cost to sell. As a result, we re-assessed the fair value of the net assets of our pharmaceutical intermediates reporting unit. We calculated the fair value of the goodwill and determined that the goodwill assigned to our pharmaceuticals business was fully impaired and recorded a pre-tax impairment charge of $1.3 million in our consolidated statements of operations in December 2010 to write off the goodwill. We then analyzed the fair values of the other long-lived assets which consisted primarily of plant and equipment by discounting, to present value, the estimated future cash flows of the assets to be sold. Based on this analysis, we concluded that the fair value of the net assets of this reporting unit were lower than their carrying values. We recorded a charge for impaired assets of $25.6 million primarily related to the plant and equipment of our pharmaceutical intermediates reporting unit, which is described below under the caption “Critical Accounting Policies — Asset Impairments — Impairment of Tangible and Intangible Assets, Other Than Goodwill, and Finite-Lived IPR&D.”

 

In February 2011, we completed the sale of our pharmaceutical intermediates business. The consideration is comprised of earn out payments that are contingent on future cash flows and are therefore not reasonably assured. The accounting for the sale transaction will take place in the first quarter of 2011. As part of the sale transaction accounting, the consideration will not be recorded and a resulting loss on sale of business of between approximately $10 million and $16 million will be recorded. The future contingent payments will be recorded as a gain on sale of business in the period each payment is received.

No additional impairment charges were required for the remaining $1.36 billion of goodwill related to our other reporting units.

 

Impairment of Tangible and Intangible Assets, Other Than Goodwill, and Finite-Lived IPR&D

 

We periodically evaluate long-lived assets for potential impairment. We perform these evaluations whenever events or changes in circumstances suggest that the carrying value of an asset or group of assets is not recoverable. Upon discontinuation of the development of our advanced phosphate binder, as described above, we also tested the long-lived assets of our renal reporting unit for potential impairment. We determined that the fair value of the long-lived assets of our renal reporting unit continued to exceed their carrying value and, therefore, no impairment charge was required as a result of the termination of this program. In evaluating long-lived assets for potential impairment, we make several significant estimates and judgments, including:

 

 

Use of different estimates and judgments could yield significantly different results in this analysis and could result in materially different asset impairment charges.

 

As discussed above, the proposed consideration to be paid under the revised offers for our pharmaceutical intermediates business indicated that the carrying value of this reporting unit might be in excess of its fair value less cost to sell. As a result, we re-assessed the fair value of the net assets of our pharmaceutical intermediates reporting unit. We analyzed the fair values of the other long-lived assets which consisted primarily of plant and equipment by discounting, to present value, the estimated future cash flows of the assets to be sold. Based on this analysis, we concluded that the fair value of the net assets of this reporting unit were lower than their carrying values and recorded a pre-tax charge for impaired assets of $25.6 million in our consolidated statements of operations in December 2010.

 

Contingent Consideration Expense

 

Each period we revalue the contingent consideration obligations associated with certain acquisitions to their then fair value and record increases in the fair value as contingent consideration expense and record decreases in the fair value as a reduction of contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of revenue and expense estimates and changes in assumed probability adjustments with respect to regulatory approval. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense we record in any given period.

 

Investments in Debt and Equity Securities

 

We invest a portion of our excess cash balances in short-term and long-term marketable debt securities. The earnings on our investment portfolios may be adversely affected by changes in interest rates, credit ratings, collateral value, the overall strength of credit markets, and other factors that may result in other than temporary declines in the value of the securities.

 

We also invest in equity securities as part of our strategy to align ourselves with technologies and companies that fit with our strategic direction. Most often we will collaborate on scientific programs and research with the issuers of the securities.

 

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. 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 derivative and equity securities using market data from observable and corroborated sources. In periods of market inactivity, the observability of prices and inputs may be reduced for certain instruments.

 

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):

 

 

Product Revenue

 

The following table sets forth by reporting segment the products from which we derive the majority of our revenues, and a description of their approved indications:

 

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

 

 

2010 As Compared to 2009

 

Personalized Genetic Health

 

 

PGH product revenue decreased in 2010 due to supply constraints for Cerezyme and Fabrazyme.

 

The decrease in PGH product revenue attributable to supply constraints was offset in part by:

 

 

Cerezyme and Fabrazyme

 

Cerezyme revenue decreased in 2010 due to supply constraints for the product. 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 as a percentage of total revenues, for all periods presented, reflect periods of supply constraints due to the production interruptions at our Allston facility in June 2009 and March 2010. Sales of Cerezyme were approximately 18% of our total revenues in 2010, as compared to approximately 20% of our total revenues in 2009.

 

The supply constraints for Fabrazyme adversely impacted Fabrazyme revenue by approximately $244 million in 2010.

 

Myozyme/Lumizyme

 

Myozyme/Lumizyme revenue increased in 2010, due to increased patient identification outside of the United States following the European approval of Myozyme produced at the 4000L bioreactor scale in February 2009 and the launch of Lumizyme in the United States in May 2010. We implemented a price

increase for Myozyme as of June 1, 2010 which had no significant impact on Myozyme/Lumizyme revenue in 2010.

 

Aldurazyme

 

Aldurazyme revenue increased in 2010, due to increased patient identification worldwide.

 

Other Personalized Genetic Health

 

Other PGH product revenue increased in 2010, primarily due to increased sales of Elaprase, which benefited from 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.

 

Renal and Endocrinology

 

 

Renagel/Renvela revenues, including sales of bulk sevelamer, decreased slightly in 2010. This was primarily due to lower sales volume in Brazil offset by increased sales volume in the United States. In 2009, we decreased the price of Renagel in Brazil in connection with successfully negotiating an agreement with the government of Brazil despite competition from two similar products that had been approved in that country. This agreement was successfully negotiated again in the third quarter of 2010. Total revenue for Renagel/Renvela, including sales of bulk sevelamer, reflects the increasing percentage of Renvela sales within the United States.

 

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 so the damaged equipment could be repaired. We resumed production of sevelamer hydrochloride in May 2010 and production of sevelamer carbonate in October 2010. We recorded charges totaling $22.0 million, which is net of $9.9 million of insurance reimbursements, in 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. Remediation of this facility is substantially complete and we anticipate that any remaining costs related to the remediation will not be significant.

 

Hectorol revenue increased in 2010, primarily due to price increases in the fourth quarter of 2009 and the first quarter of 2010. Hectorol revenues also benefited from an increase in 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 will likely face competition from lower cost generic or follow-on products” under the heading “Risk Factors” below.

 

The Medicare Improvements for Patients and Providers Act of 2008, or MIPPA, directs the 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 includes 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.

 

Thyrogen revenues increased in 2010, primarily due to a price increase in July 2009 and an increase in sales for the product in Europe.

 

Biosurgery