**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington,D.C. 20549

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**FORM 10-Q**

**(Mark One)**

**x**                                 QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**For the quarterly period ended March 31, 2007**

**or**

**o**                                   TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**For the transition period from             to            **

**CommissionFile No. 0-14680**

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**GENZYME CORPORATION**(Exactname of registrant as specified in its charter)
| **Massachusetts**                                |   | **06-1047163**                        |
|--------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                 |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                  |   |                                  |
| **500 Kendall Street  Cambridge, Massachusetts** |   | **02142**                             |
| (Address of  principal executive offices)        |   | (Zip Code)                            |

 

**(617) 252-7500**(Registrant’s telephonenumber, including area code)

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Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes xNo o

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

Large accelerated filer x   Acceleratedfiler o   Non-acceleratedfiler o

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

The numberof shares of Genzyme Stock outstanding as of April 30, 2007: 264,047,459

 

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**NOTE REGARDINGREFERENCES TO OUR COMMON STOCK**

Throughout this Form 10-Q,the words “we,” “us,” “our” and “Genzyme” refer to Genzyme Corporation as awhole, and “our board of directors” refers to the board of directors of GenzymeCorporation. Genzyme Corporation has one outstanding series of common stock,which we refer to as “Genzyme Stock.”

**NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

This Form 10-Qcontains forward-looking statements, including statements regarding:

·                    ourplans to seek marketing approvals for our products in additional jurisdictions,including Myozyme;

·                    ourplans and our anticipated timing for pursuing additional indications and usesfor our products and services, including Synvisc, Campath and Clolar;

·                    thetiming and availability of data from clinical trials;

·                    theanticipated drivers for future growth of our products, including Renagel, Hectorol,Synvisc and Thymoglobulin;

·                    estimatesof the capacity of, and the projected timetable of approvals for, manufacturingand other facilities to support our products and services, including Myozyme;

·                    our assessmentof competitors and potential competitors and the anticipated impact ofpotentially competitive products on our revenues;

·                    estimatesof the potential markets for our products and services;

·                    ourability to meet the expected demand for Myozyme;

·                    ourassessment of the outcome, timetables and financial impact of litigation andother governmental proceedings and the potential impact of unasserted claims;

·                    thesufficiency of our cash, short-term investments and cash flows fromoperations;

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

·                    estimatesof cost to complete and estimated commercialization dates for in-processresearch and development, or IPR&D, programs;

·                    expectedfuture revenues, operations, expenditures and expenses, and the assumptionsunderlying those estimates;

·                    projectedfuture earnings and earnings per share;

·                    ourassessment of the impact of recent accounting pronouncements, includingFinancial Accounting Standards Board, or FASB, Statement of FinancialAccounting Standards No., or FAS, 157, regarding fair value measurements, andFAS 159, regarding the fair value option for financial assets and financialliabilities:

·                    oursales and marketing plans;

·                    ourexpected future contingent payment to Synpac (North Carolina), Inc., or Synpac;and

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·                    ourexpected future payments related to our acquisitions, including milestone androyalty payments to the former shareholders of Surgi.B Chirugie et MedicineSAS, or Surgi.B, and Wyeth, and employee benefits and leased facilitiesacquired from AnorMED Inc., or AnorMED, and the expected timing of thesepayments.

These statementsare subject to risks and uncertainties, and our actual results may differmaterially from those that are described in this report. These risks anduncertainties include:

·                    ourability to successfully complete preclinical and clinical development of ourproducts and services;

·                    ourability to secure regulatory approvals for our products, services andmanufacturing facilities, and to do so on the anticipated timeframes;

·                    thecontent and timing of submissions to and decisions made by the United StatesFood and Drug Administration, commonly referred to as the FDA, the EuropeanAgency for the Evaluation of Medicinal Products, or EMEA, and other regulatoryagencies;

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

·                    ourability to manufacture sufficient amounts of our products for development andcommercialization activities and to do so in a timely and cost-effectivemanner;

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

·                    ourability to obtain and maintain adequate patent and other proprietary rightsprotection for our products and services and successfully enforce ourproprietary rights;

·                    thescope, validity and enforceability of patents and other proprietary rights heldby third parties and their impact on our ability to commercialize our productsand services;

·                    theaccuracy of our estimates of the size and characteristics of the markets to beaddressed by our products and services, including growth projections;

·                    marketacceptance of our products and services in expanded areas of use and newmarkets;

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

·                    ourability to increase market penetration both outside and within the UnitedStates for our products and services;

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

·                    theavailability of reimbursement for our products and services from third partypayors, the extent of such coverage and the accuracy of our estimates of thepayor mix for our products;

·                    ourability to effectively manage wholesaler inventories of our products and thelevels of compliance with our inventory management programs;

·                    ourability to establish and maintain strategic license, collaboration anddistribution arrangements and to manage our relationships with licensors,collaborators, distributors and partners;

·                    thecontinued funding and operation of our joint ventures by our partners;

·                    ouruse of cash in business combinations or other strategic initiatives;

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·                    theresolution of litigation related to the consolidation of our tracking stocks;

·                    theinitiation of legal proceedings by or against us;

·                    theimpact of changes in the exchange rate for the Euro and other currencies on ourproduct and service revenues in future periods;

·                    ourability to successfully integrate the business we acquired from AnorMED;

·                    thenumber of diluted shares considered outstanding, which will depend on businesscombination activity, our stock price and any further changes in the accountingrules for the calculation of earnings per share;

·                    theestimates and input variables used in accounting for stock options and therelated stock-based compensation expense;

·                    theoutcome of our IRS and foreign tax audits; and

·                    thepossible disruption of our operations due to terrorist activities, armedconflict, or outbreak of diseases such as severe acute respiratory syndrome(SARS) or avian influenza, including as a result of the disruption ofoperations of regulatory authorities, our subsidiaries, our manufacturingfacilities and our customers, suppliers, distributors, couriers, collaborativepartners, licensees and clinical trial sites.

We provide more detaileddescriptions of these and other risks and uncertainties in Part II. Item1A. “Risk Factors,” of this report. We encourage you to read those descriptionscarefully. We caution investors not to place substantial reliance on theforward-looking statements contained in this report. These statements,like all statements in this report, speak only as of the date of this report(unless another date is indicated) and we undertake no obligation to update orrevise the statements.

**NOTE REGARDING INCORPORATIONBY REFERENCE**

The U.S. Securities andExchange Commission, commonly referred to as the SEC, allows us to discloseimportant information to you by referring you to other documents we have filedor will file with them. The information that we refer you to is “incorporatedby reference” into this Form 10-Q. Please read that information.

**NOTE REGARDINGTRADEMARKS**

Genzyme®, Cerezyme®, Ceredase®, Fabrazyme®, Thyrogen®, Myozyme®, Renagel®, Campath®, Clolar®, Synvisc®, Seprafilm® andHectorol® are registered trademarks, andLymphoglobulineTM, ThymoglobulinTM, SepraTM, MozobilTM and Synvisc-OneTM aretrademarks, of Genzyme or its subsidiaries. WelChol® isa registered trademark of Sankyo Pharma, Inc. Aldurazyme® isa registered trademark of BioMarin/Genzyme LLC. All rights reserved.

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**GENZYME CORPORATIONAND SUBSIDIARIES**

**FORM 10-Q,MARCH 31, 2007**

**TABLEOF CONTENTS**
|                   | ** ** | ** **                                                                                                                         | ** ** | **PAGE NO.** |
|-------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                                          |       | 6            |
| ITEM 1.           |       | Financial Statements                                                                                                               |       | 6            |
|              |       | Unaudited, Consolidated Statements of Operations and  Comprehensive Income for the Three Months Ended March 31, 2007 and 2006 |       | 6            |
|              |       | Unaudited,  Consolidated Balance Sheets as of March 31, 2007 and December 31,  2006                                      |       | 7            |
|              |       | Unaudited, Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2007 and 2006                          |       | 8            |
|              |       | Notes to Unaudited, Consolidated Financial Statements                                                                              |       | 9            |
| ITEM 2.           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations          |       | 24           |
| ITEM 3.           |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                        |       | 57           |
| ITEM 4.           |       | Controls and Procedures                                                                                                            |       | 58           |
| **PART II.** | ** ** | **OTHER  INFORMATION**                                                                                                             |       | 59           |
| ITEM  1.          |       | Legal  Proceedings                                                                                                                 |       | 59           |
| ITEM  1A.         |       | Risk Factors                                                                                                                       |       | 59           |
| ITEM 2.           |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                       |       | 60           |
| ITEM 6.           |       | Exhibits                                                                                                                           |       | 60           |
| Signatures        |       | 61                                                                                                                                 |

 

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**PART I.   FINANCIALINFORMATION**

**ITEM 1.   FINANCIALSTATEMENTS**

**GENZYME CORPORATION AND SUBSIDIARIESConsolidated Statements of Operations and Comprehensive Income(Unaudited, amounts in thousands, except per share amounts)**
|                                                                                     | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **March 31,**               | ** ** |
| ** **                                                                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Revenues:                                                                           |       |                             |       |   |   |
| Net product sales                                                                   |       | $                                | 798,190    |   | $ | 657,335 |   |
| Net service sales                                                                   |       | 75,881                           |       | 68,822 |   |
| Research and development  revenue                                                   |       | 9,112                            |       | 4,685 |   |
| Total revenues                                                                      |       | 883,183                          |       | 730,842 |   |
| Operating costs and expenses:                                                       |       |                             |       |   |   |
| Cost of products sold                                                               |       | 154,724                          |       | 120,512 |   |
| Cost of services sold                                                               |       | 47,739                           |       | 46,438 |   |
| Selling, general and  administrative                                                |       | 269,021                          |       | 230,669 |   |
| Research and development                                                            |       | 166,120                          |       | 152,323 |   |
| Amortization of  intangibles                                                        |       | 50,017                           |       | 52,692 |   |
| Total operating costs  and expenses                                                 |       | 687,621                          |       | 602,634 |   |
| Operating income                                                                    |       | 195,562                          |       | 128,208 |   |
| Other income (expenses):                                                            |       |                             |       |   |   |
| Equity in income of  equity method investments                                      |       | 5,612                            |       | 2,246 |   |
| Minority interest                                                                   |       | 3,912                            |       | 2,446 |   |
| Gains on investments in  equity securities, net                                     |       | 12,788                           |       | 7,942 |   |
| Other                                                                               |       | (525                             | )          | (139 | ) |
| Investment income                                                                   |       | 16,219                           |       | 10,078 |   |
| Interest expense                                                                    |       | (4,188                           | )          | (4,438 | ) |
| Total other income                                                                  |       | 33,818                           |       | 18,135 |   |
| Income before income  taxes                                                         |       | 229,380                          |       | 146,343 |   |
| Provision for income  taxes                                                         |       | (71,193                          | )          | (45,369 | ) |
| Net income                                                                          |       | $                                | 158,187    |   | $ | 100,974 |   |
| Net income per share:                                                               |       |                             |       |   |   |
| Basic                                                                               |       | $                                | 0.60       |   | $ | 0.39 |   |
| Diluted                                                                             |       | $                                | 0.57       |   | $ | 0.37 |   |
| Weighted average shares outstanding:                                                |       |                             |       |   |   |
| Basic                                                                               |       | 263,476                          |       | 259,709 |   |
| Diluted                                                                             |       | 279,924                          |       | 276,809 |   |
| Comprehensive income, net of tax:                                                   |       |                             |       |   |   |
| Net income                                                                          |       | $                                | 158,187    |   | $ | 100,974 |   |
| Other comprehensive income (loss):                                                  |       |                             |       |   |   |
| Foreign currency  translation adjustments                                           |       | 12,610                           |       | 27,642 |   |
| Other, net of tax                                                                   |       | 198                              |       | (58 | ) |
| Unrealized gains on securities, net of tax:                                         |       |                             |       |   |   |
| Unrealized gains arising  during the period, net of tax                             |       | 9,878                            |       | 7,361 |   |
| Reclassification  adjustment for gains included in net income, net of tax |       | (8,161                           | )          | (3,596 | ) |
| Unrealized gains on  securities, net of tax                                         |       | 1,717                            |       | 3,765 |   |
| Other comprehensive  income                                                         |       | 14,525                           |       | 31,349 |   |
| Comprehensive income                                                                |       | $172,712                         |       | $ | 132,323 |   |

 

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

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**GENZYME CORPORATION AND SUBSIDIARIESConsolidated Balance Sheets(Unaudited, amounts in thousands, except par value amounts)**
|                                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **ASSETS**                                                       |       |               |       |                  |       |   |   |
| Current assets:                                                  |       |               |       |                  |       |   |   |
| Cash and cash equivalents                                        |       | $                  | 687,765    |                  |       | $ | 492,170 |   |   |
| Short-term  investments                                          |       | 162,729            |       |                  | 119,894    |   |   |
| Accounts receivable, net                                         |       | 787,712            |       |                  | 746,746    |   |   |
| Inventories                                                      |       | 405,016            |       |                  | 374,644    |   |   |
| Prepaid expenses and  other current assets                       |       | 112,481            |       |                  | 119,122    |   |   |
| Deferred tax assets                                              |       | 130,852            |       |                  | 136,925    |   |   |
| Total current assets                                             |       | 2,286,555          |       |                  | 1,989,501  |   |   |
| Property, plant and  equipment, net                              |       | 1,670,848          |       |                  | 1,610,593  |   |   |
| Long-term  investments                                           |       | 599,631            |       |                  | 673,540    |   |   |
| Notes receivable—related  party                             |       | 7,052              |       |                  | 7,290      |   |   |
| Goodwill, net                                                    |       | 1,301,653          |       |                  | 1,298,781  |   |   |
| Other intangible assets,  net                                    |       | 1,454,383          |       |                  | 1,492,038  |   |   |
| Deferred tax assets—noncurrent                              |       | 22,032             |       |                  | —     |   |   |
| Investments in equity  securities                                |       | 81,227             |       |                  | 66,563     |   |   |
| Other noncurrent assets                                          |       | 51,284             |       |                  | 52,882     |   |   |
| Total assets                                                     |       | $                  | 7,474,665  |                  |       | $ | 7,191,188 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                   |       |               |       |                  |       |   |   |
| Current liabilities:                                             |       |               |       |                  |       |   |   |
| Accounts payable                                                 |       | $                  | 87,820     |                  |       | $ | 98,063 |   |   |
| Accrued expenses                                                 |       | 484,820            |       |                  | 477,442    |   |   |
| Income taxes payable                                             |       | 46,574             |       |                  | 54,853     |   |   |
| Deferred revenue and other  income                               |       | 35,780             |       |                  | 14,855     |   |   |
| Current portion of long-term  debt and capital lease obligations |       | 6,327              |       |                  | 6,226      |   |   |
| Total current  liabilities                                       |       | 661,321            |       |                  | 651,439    |   |   |
| Long-term debt and  capital lease obligations                    |       | 117,653            |       |                  | 119,803    |   |   |
| Convertible notes                                                |       | 690,000            |       |                  | 690,000    |   |   |
| Deferred  revenue—noncurrent                                |       | 6,422              |       |                  | 6,675      |   |   |
| Deferred tax liabilities                                         |       | —             |       |                  | 10,909     |   |   |
| Other noncurrent  liabilities                                    |       | 52,818             |       |                  | 51,651     |   |   |
| Total liabilities                                                |       | 1,528,214          |       |                  | 1,530,477  |   |   |
| Commitments and contingencies                                    |       |               |       |                  |       |   |   |
| Stockholders’ equity:                                       |       |               |       |                  |       |   |   |
| Preferred stock, $0.01  par value                                |       | —             |       |                  | —     |   |   |
| Common stock, $0.01 par  value                                   |       | 2,637              |       |                  | 2,630      |   |   |
| Additional paid-in  capital                                      |       | 5,185,584          |       |                  | 5,106,274  |   |   |
| Notes receivable from  stockholders                              |       | (15,209            | )          |                  | (15,057    | ) |   |
| Accumulated earnings                                             |       | 504,709            |       |                  | 312,659    |   |   |
| Accumulated other  comprehensive income                          |       | 268,730            |       |                  | 254,205    |   |   |
| Total stockholders’  equity                                 |       | 5,946,451          |       |                  | 5,660,711  |   |   |
| Total liabilities and stockholders’ equity                  |       | $                  | 7,474,665  |                  |       | $ | 7,191,188 |   |   |

 

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

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**GENZYME CORPORATION AND SUBSIDIARIESConsolidated Statements of Cash Flows(Unaudited, amounts in thousands)**
|                                                                                                                          | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                               | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Cash Flows from Operating Activities:**                                                                                |       |                             |       |   |   |
| Net income                                                                                                               |       | $                                | 158,187    |   | $ | 100,974 |   |
| Reconciliation of net income to cash flows from  operating activities:                                                   |       |                             |       |   |   |
| Depreciation and  amortization                                                                                           |       | 81,919                           |       | 82,391 |   |
| Stock-based compensation                                                                                                 |       | 40,737                           |       | 32,622 |   |
| Provision for bad debts                                                                                                  |       | 2,041                            |       | 1,749 |   |
| Equity in income of  equity method investments                                                                           |       | (5,612                           | )          | (2,246 | ) |
| Minority interest                                                                                                        |       | (3,912                           | )          | (2,446 | ) |
| Gains on investments in  equity securities, net                                                                          |       | (12,788                          | )          | (7,942 | ) |
| Deferred income tax  benefit                                                                                             |       | (24,328                          | )          | (24,350 | ) |
| Tax benefit from  employee stock-based compensation                                                                      |       | 3,715                            |       | 6,996 |   |
| Excess tax benefits from  stock-based compensation                                                                       |       | (264                             | )          | (2,892 | ) |
| Other                                                                                                                    |       | 1,049                            |       | 1,548 |   |
| Increase (decrease) in cash from working capital  changes (excluding impact of acquired assets and assumed liabilities): |       |                             |       |   |   |
| Accounts receivable                                                                                                      |       | (37,806                          | )          | (15,813 | ) |
| Inventories                                                                                                              |       | (25,048                          | )          | (9,035 | ) |
| Prepaid expenses and  other current assets                                                                               |       | (15                              | )          | (1,465 | ) |
| Income taxes payable                                                                                                     |       | 29,734                           |       | 41,108 |   |
| Accounts payable,  accrued expenses and deferred revenue                                                                 |       | (9,803                           | )          | (67,169 | ) |
| Cash flows from  operating activities                                                                                    |       | 197,806                          |       | 134,030 |   |
| **Cash Flows from Investing Activities:**                                                                                |       |                             |       |   |   |
| Purchases of investments                                                                                                 |       | (187,380                         | )          | (286,820 | ) |
| Sales and maturities of  investments                                                                                     |       | 219,440                          |       | 232,145 |   |
| Purchases of equity  securities                                                                                          |       | (17,518                          | )          | (4,392 | ) |
| Proceeds from sales of  investments in equity securities                                                                 |       | 16,121                           |       | 26,356 |   |
| Purchases of property,  plant and equipment                                                                              |       | (82,982                          | )          | (65,309 | ) |
| Distributions from  equity method investments                                                                            |       | 6,000                            |       | 8,000 |   |
| Purchases of other  intangible assets                                                                                    |       | (12,207                          | )          | (19,177 | ) |
| Other                                                                                                                    |       | 603                              |       | 1,864 |   |
| Cash flows from  investing activities                                                                                    |       | (57,923                          | )          | (107,333 | ) |
| **Cash Flows from Financing Activities:**                                                                                |       |                             |       |   |   |
| Proceeds from issuance  of common stock                                                                                  |       | 27,765                           |       | 28,104 |   |
| Excess tax benefits from  stock-based compensation                                                                       |       | 264                              |       | 2,892 |   |
| Payments of debt and  capital lease obligations                                                                          |       | (2,117                           | )          | (858 | ) |
| Increase (decrease) in  bank overdrafts                                                                                  |       | 29,528                           |       | (542 | ) |
| Minority interest  contributions                                                                                         |       | 4,136                            |       | 2,467 |   |
| Other                                                                                                                    |       | 2,482                            |       | 768 |   |
| Cash flows from  financing activities                                                                                    |       | 62,058                           |       | 32,831 |   |
| Effect of exchange rate  changes on cash                                                                                 |       | (6,346                           | )          | 1,099 |   |
| Increase in cash and  cash equivalents                                                                                   |       | 195,595                          |       | 60,627 |   |
| Cash and cash  equivalents at beginning of period                                                                        |       | 492,170                          |       | 291,960 |   |
| Cash and cash equivalents at end of period                                                                               |       | $                                | 687,765    |   | $ | 352,587 |   |

 

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

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**GENZYME CORPORATION AND SUBSIDIARIES Notes to Unaudited, Consolidated Financial Statements**

**1.**   Descriptionof Business

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

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

·       Therapeutics,which develops, manufactures and distributes therapeutic products, with anexpanding focus on products to treat patients suffering from genetic diseasesand other chronic debilitating diseases, including a family of diseases knownas lysosomal storage disorders, or LSDs and other specialty therapeutics, suchas Thyrogen. The unit derives substantially all of its revenue from sales ofCerezyme, Fabrazyme, Myozyme and Thyrogen;

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

·       Biosurgery,which develops, manufactures and distributes biotherapeutics and biomaterial-basedproducts, with an emphasis on products that meet medical needs in theorthopaedics and broader surgical areas. The unit derives substantially all ofits revenue from sales of Synvisc, the Sepra line of products, Carticel and Matrix-inducedAutologous Chondrocyte Implantation, or MACI; and

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

We report the activitiesof our diagnostic products, oncology, bulk pharmaceuticals and cardiovascularbusiness units under the caption “Other.” We report our corporate, general andadministrative operations and corporate science activities under the caption “Corporate.”

**2.**   Basisof Presentation and Significant Accounting Policies

***Basis of Presentation***

Our unaudited, consolidated financial statements foreach period include the statements of operations and comprehensive income,balance sheets and statements of cash flows for our operations taken as awhole. We have eliminated all intercompany items and transactions inconsolidation. We prepare our unaudited, consolidated financial statementsfollowing the requirements of the SEC for interim reporting. As permitted underthese rules, we condense or omit certain footnotes and other financialinformation that are normally required by accounting principles generallyaccepted in the United States. 

These financial statements include all normal andrecurring adjustments that we consider necessary for the fair presentation ofour financial position and results of operations. Since these are interimfinancial statements, you should also read our audited, consolidated financialstatements and notes included in our 2006 Form 10-K. Revenues, expenses, assetsand liabilities can vary from quarter to quarter. Therefore, the results andtrends in these interim financial statements may not be indicative of resultsfor future periods.

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

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

Our unaudited,consolidated financial statements for each period include the accounts of ourwholly owned and majority owned subsidiaries. As a result of our adoption ofFASB Interpretation No., or FIN, 46, “Consolidation of Variable InterestEntities,” we also consolidate certain variable interest entities for which weare the primary beneficiary. For consolidated subsidiaries in which we haveless than a 100% interest, we record minority interest in our statements ofoperations for the ownership interest of the minority owner. We use the equitymethod to account for investments in entities in which we have a substantialownership interest (20% to 50%) which do not fall in the scope of FIN 46, orover which we exercise significant influence. Our consolidated net incomeincludes our share of the earnings of these entities. All intercompany accountsand transactions have been eliminated in consolidation. We have reclassifiedcertain 2006 data to conform to our 2007 presentation.

***Income Taxes***

Effective January 1, 2007,we adopted the provisions of FIN 48, “Accountingfor Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109,” which clarifies the accounting for income tax positionsby prescribing a minimum recognition threshold that a tax position is requiredto meet before being recognized in the financial statements. FIN 48 alsoprovides guidance on the derecognition of previously recognized deferred taxitems, measurement, classification, interest and penalties, accounting ininterim periods, disclosure and transition. Under FIN 48, we mustrecognize the tax benefit from an uncertain tax position only if it is morelikely than not that the tax position will be sustained upon examination by thetaxing authorities, based on the technical merits of the tax position. The taxbenefits recognized in our financial statements from such a position aremeasured based on the largest benefit that has a greater than 50% likelihood ofbeing realized upon ultimate resolution. For more information regarding theimpact the adoption of FIN 48 had on our results of operations, financialcondition and liquidity, see Note 13., “Provision for Income Taxes,” in thisreport.

***Recent Accounting Pronouncements***

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

*FAS 159, “The Fair ValueOption for Financial Assets and Financial Liabilities—Including an Amendment ofFASB Statement No. 115.”*   In February 2007,the FASB issued FAS 159, “The FairValue Option for Financial Assets and Financial Liabilities—Including anAmendment of FASB Statement No. 115,” which permits, but does notrequire, entities to measure certain financial instruments and other assets andliabilities at fair value on an instrument-by-instrument basis. Unrealizedgains and losses on items for which the fair value option has been electedshould be recognized in earnings at each subsequent reporting date. FAS 159 iseffective for us as of January 1, 2008 and cannot be adopted early unlessFAS 157 is also adopted. We are currently evaluating the impact, if any,the adoption of FAS 159 may have on our financial position and results ofoperations.

10

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

**3.**   Stock-BasedCompensation

***Stock-Based Compensation Expense, Net of EstimatedForfeitures***

Werecorded pre-tax stock-based compensation expense, net of estimatedforfeitures, which were allocated based on the functional cost center of eachemployee as follows (amounts in thousands, except per share amounts):

| ** **                                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Pre-tax stock-based  compensation expense, net of estimated forfeitures(1): |       |                                             |       |   |   |
| Cost of products and services sold(2)                                       |       | $                                                | (5,896     | ) | $ | (2,303 | ) |
| Selling, general and administrative                                         |       | (22,499                                          | )          | (19,447 | ) |
| Research and development                                                    |       | (12,312                                          | )          | (10,857 | ) |
| Total                                                                       |       | (40,707                                          | )          | (32,607 | ) |
| Less: tax benefit  of stock options                                         |       | 12,432                                           |       | 10,348 |   |
| Stock-based compensation expense, net of tax                                |       | $                                                | (28,275    | ) | $ | (22,259 | ) |
| Per basic share                                                             |       | $                                                | (0.11      | ) | $ | (0.09 | ) |
| Per diluted share                                                           |       | $                                                | (0.10      | ) | $ | (0.08 | ) |

----

(1)          We also capitalized stock-basedcompensation expense to inventory of $2.9 million for the three monthsended March 31, 2007 and $2.7 million for the three months ended March 31,2006, all of which is attributable to participating employees that support ourmanufacturing operations.

(2)          We amortize stock-basedcompensation expense capitalized to inventory based on inventory turns.  For the three months ended March 31,2007, pre-tax stock-based compensation expense, net of estimatedforfeitures, charged to cost of products and services sold includes theamortization of $3.4 million of pre-tax stock-based compensationexpense previously capitalized to inventory in the third quarter of 2006. Therewere no similar amounts for the three months ended March 31, 2006, becausewe did not begin amortizing stock-based compensation expense capitalized toinventory until July 2006.

At March 31, 2007,there was $236.6 million of pre-tax stock-based compensation expense, netof estimated forfeitures, related to unvested awards not yet recognized which areexpected to be recognized over a weighted average period of 2.2 years.

11

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

**4.**   NetIncome Per Share

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

|                                                                                                             | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                  | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                  | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net income—basic                                                                                       |       | $                                | 158,187    |   | $ | 100,974 |   |
| Effect of dilutive  securities:                                                                             |       |                             |       |   |   |
| Interest expense and debt fee amortization, net of  tax, related to our 1.25% convertible senior notes |       | 1,886                            |       | 1,874 |   |
| Net income—diluted                                                                                     |       | $                                | 160,073    |   | $ | 102,848 |   |
| Shares used in computing net income per common  share—basic                                            |       | 263,476                          |       | 259,709 |   |
| Effect of dilutive  securities:                                                                             |       |                             |       |   |   |
| Shares issuable upon the assumed conversion of our  1.25% convertible senior notes                          |       | 9,686                            |       | 9,686 |   |
| Stock options(1)                                                                                            |       | 6,751                            |       | 7,403 |   |
| Warrants and stock purchase rights                                                                          |       | 11                               |       | 11 |   |
| Dilutive potential common shares                                                                            |       | 16,448                           |       | 17,100 |   |
| Shares used in  computing net income per common share—diluted(1)                                       |       | 279,924                          |       | 276,809 |   |
| Net income per share:                                                                                       |       |                             |       |   |   |
| Basic                                                                                                       |       | $                                | 0.60       |   | $ | 0.39 |   |
| Diluted                                                                                                     |       | $                                | 0.57       |   | $ | 0.37 |   |

----

(1)          Wedid not include the securities described in the following table in thecomputation of diluted earnings per share because these securities wereanti-dilutive during each such period (amounts in thousands):

| ** **                                                             | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                             | ** ** | **March 31,**               | ** ** |
| ** **                                                             | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Shares of Genzyme  Stock issuable upon exercise of outstanding options |       |                             | 13,483     |   |   |   | 7,863 |   |   |
|                                                                        |            |                                  |            |  |  |  |  |  |  |

 

**5.**   Mergersand Acquisitions

***Acquisition of AnorMED***

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

12

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

**5.**   Mergers and Acquisitions (Continued)

The purchase price wasallocated to the estimated fair value of the acquired tangible and intangibleassets and assumed liabilities as follows (amounts in thousands, except sharedata):

| Purchase of  43,272,085 shares of AnorMED common stock   |   | $        | 584,173 |   |
|----------------------------------------------------------|--------|----------|---------|--------|
| Acquisition costs                                        |   | 5,000    |    |
| Total purchase  price                                    |   | $        | 589,173 |   |
| Cash and cash equivalents                                |   | $        | 20,220  |   |
| Other current  assets                                    |   | 6,340    |    |
| Property, plant  and equipment                           |   | 758      |    |
| Goodwill                                                 |   | 31,779   |    |
| Other intangible  assets (to be amortized over 10 years) |   | 3,500    |    |
| In-process  research and development                     |   | 552,900  |    |
| Deferred tax  assets—noncurrent                     |   | 27,380   |    |
| Other noncurrent  assets                                 |   | 573      |    |
| Assumed  liabilities:                                    |   |     |    |
| Deferred tax liability                                   |   | (25,288) |    |
| Liabilities for exit activities                          |   | (7,809)  |    |
| Other                                                    |   | (21,180) |    |
| Allocated purchase price                                 |   | $        | 589,173 |   |

 

The allocation ofpurchase price was adjusted in March 2007 to:

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

·       revisethe estimated liabilities related to exit activities by $1.3 million; and

·       adjustdeferred taxes by $(0.7) million.

The purchase price, as adjusted, was allocated to thetangible and intangible assets acquired and liabilities assumed based on theirestimated fair values at the date of acquisition. The excess of the purchaseprice over the estimated fair value of the assets acquired and liabilitiesassumed amounted to $31.8 million, which was allocated to goodwill. Weexpect that substantially all of the amount allocated to goodwill will bedeductible for tax purposes.

The allocation of purchaseprice remains subject to potential adjustments, including adjustments for liabilitiesassociated with certain exit activities and tax restructuring activities.

***Acquisition of Synvisc Sales and Marketing Rights fromWyeth***

In January 2005, we consummated an arrangementwith Wyeth under which we reacquired the sales and marketing rights to Synviscin the United States and certain European countries. In exchange for the salesand marketing rights, we made up-front payments totaling $127.0 million incash to Wyeth and have also accrued contingent royalty payments to Wyethtotaling $130.8 million, of which $126.5 million had been paid as of March 31,2007. Distribution rights (a component of other intangible assets, net) in ourconsolidated balance sheets as of March 31, 2007 include a total of $258.1 millionfor the initial and contingent royalty payments (made or accrued) as of thatdate. We will make a series of additional 

13

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

**5.**   Mergers and Acquisitions (Continued)

contingent royalty andmilestone payments to Wyeth based on the volume of Synvisc sales in the coveredterritories. These contingent royalty and milestone payments could extend outto June 2012, or could total a maximum of $299.2 million, whichevercomes first.

The reacquired Synviscdistribution rights qualify as an asset rather than an acquired business. As aresult, we do not provide pro forma results for our reacquisition of theSynvisc distribution rights.

***In-Process Research and Development***

In connection with five of our acquisitions since2004, we have acquired various IPR&D projects. Substantial additionalresearch and development will be required prior to any of our acquiredIPR&D programs and technology platforms reaching technological feasibility.In addition, once research is completed, each product candidate acquired willneed to complete a series of clinical trials and receive FDA or otherregulatory approvals prior to commercialization. Our current estimates of thetime and investment required to develop these products and technologies maychange depending on the different applications that we may choose to pursue. Wecannot give assurances that these programs will ever reach technologicalfeasibility or develop into products that can be marketed profitably. Inaddition, we cannot guarantee that we will be able to develop and commercializeproducts before our competitors develop and commercialize products for the sameindications. If products based on our acquired IPR&D programs andtechnology platforms do not become commercially viable, our results ofoperations could be materially adversely affected.

The following table setsforth IPR&D projects for companies and certain assets we have acquiredsince 2004 (amounts in millions):

| Company/Assets Acquired | ** ** | ** ** | ** ** | **Purchase  Price** | ** ** | **IPR&D(1)** | ** ** | **Programs Acquired** | ** ** | **Discount Rate  Used in  Estimating  Cash  Flows(1)** | ** ** | **Year of  Expected  Launch** | ** ** | **Estimated  Cost to  Complete** | ** ** |
|------------------------------|------------|------------|------------|---------------------|------------|------------------|------------|----------------------------|------------|------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| AnorMED (2006)               |       |       | $          | 589.2               |       |             |       | $                          | 526.8      |                                                             |       | Mozobil (stem cell  transplant)    |       |                                  | 15         | % |   | 2008-2013 |   |   | $ | 125 |   |   |
|                              |       |       |       |                |       |             | 26.1       |                       |       | AMD070 (HIV)(2)                                                  |       |                               | 15         | %                                     |       | — |   |   | — |   |   |
|                              |       |       |       |                |       |             | $     | 552.9                      |       |                                                             |       |                               |       |                                  |       |   |   |   |   |   |   |   |
| Avigen (2005)                |       |       | $          | 12.0                |       |             |       | $                          | 7.0        |                                                             |       | AV201 (Parkinson’s disease)   |       |                                  | N/A        |   |   | 2016 |   |   | $ | 74 |   |   |
| Bone Care (2005)             |       |       | $          | 712.3               |       |             |       | $                          | 12.7       |                                                             |       | LR-103 (secondary                  |       |                                  |       |   |   |   |   |   |   |   |   |
|                              |       |       |       |                |       |             |       |                       |       | hyperparathyroidism)                                             |       |                               | 25         | %                                     |       | 2012 |   |   | $ | 15 |   |   |
| Verigen (2005)               |       |       | $          | 12.7                |       |             |       | $                          | 9.5        |                                                             |       | MACI (cartilage repair)            |       |                                  | 24         | % |   | 2012-2014 |   |   | $ | 20-$35 |   |   |
| ILEX Oncology (2004)         |       |       | $          | 1,080.3             |       |             |       | $                          | 96.9       |                                                             |       | Campath (alemtuzumab)              |       |                                  | 11         | % |   | 2009-2011 |   |   | $ | 194 |   |   |
|                              |       |       |       |                |       |             | 113.4      |                       |       | Clolar                                                           |       |                               | 12         | %                                     |       | 2008-2011 |   |   | $ | 99 |   |   |
|                              |       |       |       |                |       |             | 44.2       |                       |       | Tasidotin                                                        |       |                               | 16         | %                                     |       | 2011-2014 |   |   | $ | 44 |   |   |
|                              |       |       |       |                |       |             | $          | 254.5                      |       |                                                             |       |                               |       |                                  |       |   |   |   |   |   |   |   |

----

(1)                Management assumes responsibility fordetermining the valuation of the acquired IPR&D projects. The fair valueassigned to IPR&D for each acquisition is estimated by discounting, topresent value, the cash flows expected once the acquired projects have reachedtechnological feasibility. The cash flows are probability-adjusted to reflectthe risks of advancement through the product approval process. In estimatingthe future cash flows, we also considered the tangible and intangible assetsrequired for successful exploitation of the technology resulting from thepurchased IPR&D projects and adjusted future cash flows for a charge reflectingthe contribution to value of these assets.

(2)                Year of expected launch and estimated costto complete data is not provided for AMD070 at this time because we areassessing our future plans for this program.

14

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

**5.**   Mergersand Acquisitions(Continued)

*Exit Activities*

Inconnection with our acquisitions of SangStat Medical Corporation, or SangStat,in 2003 and AnorMED in 2006, we initiated integration plans to consolidate andrestructure certain functions and operations, including the relocation andtermination of certain personnel of these acquired entities and the closure ofcertain of the acquired entities’ leased facilities. These costs have beenrecognized as liabilities assumed in connection with the acquisition of theseentities in accordance with Emerging Issues Task Force, or EITF, IssueNo. 95-3, “Recognition of Liabilities in Connection with a Purchaseor Business Combination,” and are subject to potential adjustments as certainexit activities are confirmed or refined. The following table summarizes theliabilities established for exit activities related to these acquisitions(amounts in thousands):
|                                    | ** ** | **Employee  Related  Benefits** | ** ** | **Closure of  Leased  Facilities** | ** ** | **Other  Exit  Activities** | ** ** | **Total  Exit  Activities** | ** ** |
|------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Balance at  December 31, 2005 |       |                            | $          | 2,249                                   |       |                        |       | $                           | 199        |   |   |   | $ | 8,117 |   |   | $ | 10,565 |   |
| Acquisition(1)                     |       |                            | 6,478      |                                    |       |                        | —     |                        |       |   | — |   |   | 6,478 |   |
| Revision of estimates              |       |                            | (165       | )                                       |       |                        | (132       | )                           |       |   | (750 | ) |   | (1,047 | ) |
| Payments                           |       |                            | (2,457     | )                                       |       |                        | (43        | )                           |       |   | (7,367 | ) |   | (9,867 | ) |
| Balance at  December 31, 2006 |       |                            | 6,105      |                                    |       |                        | 24         |                        |       |   | — |   |   | 6,129 |   |
| Revision of estimates              |       |                            | —     |                                    |       |                        | 1,307      |                        |       |   | — |   |   | 1,307 |   |
| Payments                           |       |                            | (3,740     | )                                       |       |                        | —     |                        |       |   | — |   |   | (3,740 | ) |
| Balance at March 31, 2007     |       |                            | $          | 2,365                                   |       |                        |       | $                           | 1,331      |   |   |   | $ | — |   |   | $ | 3,696 |   |

----

(1)          Weexpect to pay employee related benefits related to the acquisition of AnorMEDthrough 2008.

***Pro Forma Financial Summary***

Thefollowing pro forma financial summary is presented as if the acquisition ofAnorMED was completed as of January 1, 2006. These pro forma combinedresults are not necessarily indicative of the actual results that would haveoccurred had the acquisition been consummated on that date, or of the futureoperations of the combined entities. Material nonrecurring charges related tothe acquisition of AnorMED, such as IPR&D charges of $552.9 million,are included in the following pro forma financial summary as of January 1,2006 (amounts in thousands, except per share amount):

| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **March 31, 2006**     | ** ** |
| Total revenues                             |       |                             | $          | 731,076 |   |   |
| Net loss                                   |       |                             | $          | (310,361 | ) |   |
| Net loss per  share—basic and diluted |       |                             | $          | (1.20 | ) |   |
| Weighted average  shares outstanding       |       |                             | 259,709    |   |   |

 

15

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

**6.**   Inventories

| ** **      | ** ** | **March 31,**                   | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2007**                             | ** ** | **2006**              | ** ** |
| ** **      | ** ** | **(Amounts in thousands)** | ** ** |
| Raw materials   |       | $                                    | 110,776    |                  |       | $ | 100,698 |   |   |
| Work-in-process |       | 111,287                              |       |                  | 119,510    |   |   |
| Finished goods  |       | 182,953                              |       |                  | 154,436    |   |   |
| Total           |       | $                                    | 405,016    |                  |       | $ | 374,644 |   |   |

 

**7.**   Goodwilland Other Intangible Assets

***Goodwill***

Thefollowing tables contains the change in our goodwill during the three monthsended March 31, 2007 (amounts in thousands):

| ** **    | ** ** | **As of  December 31,  2006** | ** ** | **Adjustments** | ** ** | **As of  March 31,  2007** | ** ** |
|---------------|------------|-----------------------------------------|------------|-----------------|------------|--------------------------------------|------------|
| Renal         |       |                                    | $          | 305,528         |       |                                 |       | $ | — |   |   | $ | 305,528 |   |
| Therapeutics  |       |                                    | 354,709    |            |       |                                 | —     |   |   | 354,709 |   |
| Transplant(1) |       |                                    | 157,591    |            |       |                                 | 2,699      |   |   | 160,290 |   |
| Biosurgery    |       |                                    | 7,585      |            |       |                                 | —     |   |   | 7,585 |   |
| Other(2)      |       |                                    | 473,368    |            |       |                                 | 173        |   |   | 473,541 |   |
| Goodwill      |       |                                    | $          | 1,298,781       |       |                                 |       | $ | 2,872 |   |   | $ | 1,301,653 |   |

----

(1)          The adjustment togoodwill for Transplant includes purchase accounting adjustments from theNovember 2006 acquisition of AnorMED. We recorded $2.7 million ofadjustments to the goodwill associated with AnorMED, primarily due to$2.1 million to write off fixed assets associated with the acquisition and$1.3 million of revisions to the estimates of liabilities related to exitactivities, offset by $0.7 million to adjust deferred taxes.

(2)          Theadjustments to Other goodwill primarily include contingent payments related toour acquisition of Equal Diagnostics, Inc., and foreign currency revaluationadjustments for goodwill denominated in foreign currencies.

16

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

**7.**   Goodwill and Other Intangible Assets (Continued)

***Other Intangible Assets***

Thefollowing table contains information about our other intangible assets for theperiods presented (amounts in thousands):
|                         | ** ** | **As of March 31, 2007** | ** ** | **As of December 31, 2006** | ** ** |
|-------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **              | ** ** | **Gross  Other  Intangible  Assets**         | ** ** | **Accumulated  Amortization**                   | ** ** | **Net  Other  Intangible  Assets** | ** ** | **Gross  Other  Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Other  Intangible  Assets** | ** ** |
| Technology              |       | $                                            | 1,505,973  |                                            |       | $ | (453,913 | ) |   | $ | 1,052,060 |   | $ | 1,505,748 |   |   | $ | (424,650 | ) |   | $ | 1,081,098 |   |
| Patents                 |       | 194,560                                      |       |                                            | (91,401    | ) |   | 103,159 |   | 194,560 |   |   | (87,063 | ) |   | 107,497 |   |
| Trademarks              |       | 60,227                                       |       |                                            | (32,774    | ) |   | 27,453 |   | 60,227 |   |   | (31,439 | ) |   | 28,788 |   |
| License fees            |       | 77,849                                       |       |                                            | (22,443    | ) |   | 55,406 |   | 77,807 |   |   | (20,597 | ) |   | 57,210 |   |
| Distribution  rights(1) |       | 272,588                                      |       |                                            | (97,118    | ) |   | 175,470 |   | 260,073 |   |   | (85,543 | ) |   | 174,530 |   |
| Customer lists(2)       |       | 67,082                                       |       |                                            | (27,035    | ) |   | 40,047 |   | 90,783 |   |   | (48,760 | ) |   | 42,023 |   |
| Other                   |       | 2,046                                        |       |                                            | (1,258     | ) |   | 788 |   | 2,045 |   |   | (1,153 | ) |   | 892 |   |
| Total                   |       | $                                            | 2,180,325  |                                            |       | $ | (725,942 | ) |   | $ | 1,454,383 |   | $ | 2,191,243 |   |   | $ | (699,205 | ) |   | $ | 1,492,038 |   |

----

(1)          Includes an additional$12.5 million of intangible assets resulting from additional payments madeor accrued in the first quarter of 2007 in connection with our reacquisition ofthe Synvisc sales and marketing rights in several countries from Wyeth in January 2005.

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

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

·       $50.0 millionfor the three months ended March 31, 2007; and

·       $52.7 millionfor the three months ended March 31, 2006.

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

| **Year Ended December 31,** | ** ** | ** ** | ** ** | **Estimated  Amortization  Expense(1)** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------------------|------------|
| 2007 (remaining  nine months)              |       |       | $          | 150,329                                 |       |   |
| 2008                                       |       |       | 207,037    |                                    |       |
| 2009                                       |       |       | 214,420    |                                    |       |
| 2010                                       |       |       | 227,321    |                                    |       |
| 2011                                       |       |       | 235,862    |                                    |       |
| Thereafter                                 |       |       | 616,633    |                                    |       |

----

(1)          Includesestimated future amortization expense for the Synvisc distribution rights basedon the forecasted respective future sales of Synvisc and the resulting futurecontingent payments we will be required to make to Wyeth, and for the Myozymepatent and technology rights pursuant to a license 

17

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

**7.**   Goodwill and Other Intangible Assets (Continued)

agreement withSynpac based on forecasted future sales of Myozyme and the milestone paymentswe will be required to make to Synpac related to regulatory approvals. Thesecontingent payments will be recorded as intangible assets when the payments areaccrued. Estimated future amoritization expense also includes estimatedamortization expense for other arrangements involving contingent payments.

**8.**   Investmentsin Equity Securities

Werecorded the following net realized gains on investments in equity securities duringthe periods presented (amounts in thousands):

| ** **                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Therapeutic Human  Polyclonals, Inc. (THP) |       | $                                                | 10,848     |   | $ | — |   |
| BioMarin  Pharmaceutical Inc. (BioMarin)        |       | —                                           |       | 6,417 |   |
| Other                                           |       | 1,940                                            |       | 1,525 |   |
| Gains on  investments in equity securities, net |       | $                                                | 12,788     |   | $ | 7,942 |   |

 

In March 2007, we recorded a $10.8 million gainin connection with the sale of the entire investment in the capital stock ofTHP held by our wholly-owned subsidiary, SangStat Medical, LLC, which hada zero cost basis, for net cash proceeds of $10.8 million.

At March 31, 2007,our stockholders’ equity includes $21.8 million of unrealized gains and$0.6 million of unrealized losses related to our strategic investments inequity securities.

**9.**   Agreementswith and Note Receivable from Dyax Corp

***Agreements with Dyax Corp***

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

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

·       a5 year standstill period during which we will not acquire any additional sharesof Dyax;

·       notenter into any future licensing or collaboration arrangements for theprevention and or treatment of hereditary, acquired or drug-induced angioedemafor 2 years; and

·       negotiatein good faith a transitional services agreement for us to provide certainservices to Dyax.

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

**9.**   Agreementswith and Note Receivable from Dyax Corp (Continued)

Prior to February 20, 2007, in accordance withFIN 46R, “Consolidation of Variable Interest Entities,” we consolidated theassets related to Dyax-Genzyme LLC, which were not significant and consistedprimarily of lab equipment net of their associated accumulated depreciation. Wealso recorded Dyax’s portion of this joint venture’s losses as minorityinterest in our consolidated statements of operations through February 20,2007.

***Note Receivable from Dyax***

In May 2002, we extended to Dyax a $7.0 millionline of credit. Dyax issued a senior secured promissory note in the principalamount of $7.0 million to us under which it can request periodic advances ofnot less than $250,000 in principal, subject to certain conditions. Advancesunder this note were due, together with any accrued but unpaid interest, in May 2005.In May 2005, Dyax exercised its right to extend the maturity of the notefrom May 2005 to May 2007.

In August 2006, we amended our $7.0 millionsecured promissory note receivable from Dyax to, extend the maturity date fromMay 2007 to May 2010, eliminate the existing financial covenants and  replace the original collateral on the notewith a letter of credit from a major bank for $7.0 million plus90 days of interest at Prime Rate plus 2%.

As of March 31, 2007, $7.1 million of principaland accrued interest receivable remains due to us from Dyax under this note,which we have recorded as a note receivable-related party in our unaudited,consolidated balance sheet. The termination of our participation and interestin the joint venture with Dyax has no effect on the note receivable.

We considered Dyax to be arelated party as of March 31, 2007, because the chairman and chief executiveofficer of Dyax was a member of our board of directors. As of March 31,2007, as a result of the additional 4.4 million shares of Dyax common stock wereceived in connection with the termination of our participation and interestin Dyax-Genzyme LLC, our ownership interest in Dyax was approximately 10%.

**10.**   JointVenture with BioMarin

We and BioMarin formed BioMarin/Genzyme LLC to developand commercialize Aldurazyme, a recombinant form of the human enzymealpha-L-iduronidase, used to treat an LSD known as mucopolysaccharidosis I, orMPS I. We record our portion of the income of BioMarin/Genzyme LLC in equity inincome of equity method investments in our unaudited, consolidated statementsof operations. Our portion of BioMarin/Genzyme LLC’s net income was$6.1 million for the three months ended March 31, 2007, as comparedto $3.4 million for the same period of 2006. During the three months ended March 31, 2007, we received$6.0 million of cash distributions from BioMarin/Genzyme LLC.

Condensedfinancial information for BioMarin/Genzyme LLC is summarized below (amounts inthousands):

| ** **          | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|
| ** **          | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Revenue             |       | $                                                | 26,822     |   | $ | 21,332 |   |
| Gross margin        |       | 20,523                                           |       | 14,945 |   |
| Operating  expenses |       | (8,474                                           | )          | (8,370 | ) |
| Net income          |       | 12,220                                           |       | 6,733 |   |
|                     |            |                                                  |            |  |  |  |  |

** **

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

**11.**   RevolvingCredit Facility

As of March 31, 2007,no amounts were outstanding under our five-year $350.0 million senior unsecuredrevolving credit facility with JPMorgan Chase Bank, N.A., as administrativeagent, Bank of America, N.A., as syndication agent, ABN AMRO Bank N.V.,Citizens Bank of Massachusetts and Wachovia Bank, National Association, asco-documentation agents, and a syndicate of lenders, which we refer to as our2006 revolving credit facility. The terms of our 2006 revolving credit facilityinclude various covenants, including financial covenants that require us tomeet minimum interest coverage ratios and maximum leverage ratios. As of March 31,2007, we were in compliance with these covenants.

**12.**   Commitmentsand Contingencies

***Legal Proceedings***

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

Four lawsuits have been filed against us regarding theexchange of all of the outstanding shares of Biosurgery Stock for shares ofGenzyme Stock in connection with the elimination of our tracking stocks in July 2003.Each of the lawsuits is a purported class action on behalf of holders ofBiosurgery Stock. The first case, filed in Massachusetts Superior Court in May 2003,alleged a breach of the implied covenant of good faith and fair dealing in ourcharter and a breach of our board of directors’ fiduciary duties. The plaintiffin this case sought an injunction to adjust the exchange ratio for the trackingstock exchange. The Court dismissed the complaint in its entirety in November 2003.Upon appeal, the Massachusetts Appeals Court upheld the dismissal by theSuperior Court of the fiduciary duty claim, but reversed the earlier decisionto dismiss the implied covenant claim. The Massachusetts Supreme Judicial Court(SJC) has granted our petition for further appellate review of the AppealsCourt decision reversing the dismissal of the implied covenant claim. The SJCheard oral arguments on December 4, 2006. A ruling on the appeal isanticipated in the first half of 2007. Two substantially similar cases werefiled in Massachusetts Superior Court in August and October 2003.These cases were consolidated in January 2004, and in July 2004, theconsolidated case was stayed pending disposition of a fourth case, which wasfiled in the U.S. District Court for the Southern District of New York in June 2003.This complaint initially alleged violations of federal securities laws, commonlaw fraud, and a breach of the merger agreement with Biomatrix, in addition tothe state law claims contained in the other cases. The plaintiffs initiallysought an adjustment to the exchange ratio, the rescission of the acquisitionof Biomatrix, and unspecified compensatory damages. In December 2005, theplaintiffs in this case filed an amended complaint in which they dropped all ofthe claims alleged in the initial complaint relating to the initial issuance ofBiosurgery Stock and the acquisition of Biomatrix, and narrowed the putativeclass to include only those individuals who held Biosurgery Stock on May 8,2003. We filed a motion to dismiss the amended complaint and to oppose theclass certification. The Court denied our motion to dismiss the amendedcomplaint and certified this case as a class action on behalf of allshareholders who held Biosurgery Stock on May 8, 2003. We filed a petitionasking the U.S. Court of Appeals for the Second Circuit to review the classcertification decision, which has been denied. Discovery in this action iscurrently ongoing. A trial in this matter is currently scheduled for August2007. We believe each of these cases is without merit and continue to defendagainst them vigorously.

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

**12.**   Commitments and Contingencies (Continued)

We are not able to predictthe outcome of the pending legal proceeding listed here, or other legalproceedings, to which we may become subject in the normal course of business orestimate the amount or range of any reasonably possible loss we might incur ifwe do not prevail in the final, non-appealable determinations of such matters.Therefore, we have no current accruals for these potential contingencies. Wecannot provide you with assurance that the legal proceedings listed here, orother legal proceedings, will not have a material adverse impact on ourfinancial condition or results of operations.

**13.**   Provisionfor Income Taxes

| ** **                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(Amounts in thousands)**             | ** ** |
| Provision for  income taxes |       | $                                                | 71,193     |   | $ | 45,369 |   |
| Effective tax rate          |       | 31                                               | %          | 31 | % |
|                             |            |                                                  |            |  |  |  |  |

 

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

·       ourprovision for state income taxes;

·       thetax benefits from export sales;

·       thetax benefits from domestic production activities;

·       benefitsrelated to tax credits;

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

·       non-deductiblestock-based compensation expenses totaling $7.8 million for the three monthsended March 31, 2007 and $5.5 million for the three months ended March 31,2006.

Effective January 1, 2007, we adopted FIN 48 andrecognized a cumulative effect adjustment of $33.9 million to increase ourretained earnings balance as of January 1, 2007, which consisted of $25.8million to record the combined effect of our gain contingency and the change inthe recognition standard pursuant to the settlement criteria of FASB StaffPosition, or FSP, FIN 48-1, “Definition of *Settlement*inFASB Interpretation No. 48,” or FSP FIN 48-1, and $8.1 millionresulting from our settlement of the IRS audit for tax years 2002 to 2003.After these adjustments, as of January 1, 2007, we had approximately $36.5million of total gross unrealized tax benefits, of which approximately $26.6million represents the amount of unrecognized tax benefits that, if recognized,would favorably affect our effective income tax rate in any future periods. Thesegross unrealized tax benefits did not change significantly during the threemonths ended March 31, 2007.

We continue to recognizeinterest relating to unrecognized tax benefits within our provision for incometaxes but have not recorded any amounts related to potential penalties. Theamount of accrued interest related to unrecognized tax benefits within ourprovision for income taxes for the three months ended March 31, 2007 and ouraccrued interest related to unrecognized tax benefits as of January 1,2007 and March 31, 2007 were not significant.

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

**13.**   Provisionfor Income Taxes (Continued)

We are subject to U.S.federal income tax and various state, local and international income taxes innumerous jurisdictions, however, our only significant tax jurisdiction is theUnited States. We record liabilities for income tax contingencies based on ourbest estimate of the underlying exposures. We are currently under IRS audit fortax years 2004 to 2005, and in certain state and foreign jurisdictions from2003 forward. We believe that we have provided sufficiently for all auditexposures and assessments. Settlement of these audits or the expiration of thestatute of limitations on the assessment of income taxes for any tax year mayresult in an increase or reduction of future tax provisions. Any such tax ortax benefit would be recorded upon final resolution of the audits or expirationof the applicable statute of limitations.

**14.**   SegmentInformation

In accordance with FAS 131, “Disclosures aboutSegments of an Enterprise and Related Information,” we present segmentinformation in a manner consistent with the method we use to report thisinformation to our management. Applying FAS 131, we have five reportingsegments as described in Note 1., “Description of Business,” to these financialstatements.

We have providedinformation concerning the operations of these reportable segments in thefollowing tables (amounts in thousands):

| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **March 31,**               | ** ** |
| ** **                         | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Revenues:                          |       |                             |       |   |   |
| Renal                              |       | $                                | 165,677    |   | $ | 137,590 |   |
| Therapeutics                       |       | 429,517                          |       | 345,633 |   |
| Transplant                         |       | 41,277                           |       | 34,266 |   |
| Biosurgery                         |       | 98,393                           |       | 90,536 |   |
| Genetics                           |       | 66,158                           |       | 57,452 |   |
| Other                              |       | 81,858                           |       | 65,322 |   |
| Corporate                          |       | 303                              |       | 43 |   |
| Total                              |       | $                                | 883,183    |   | $ | 730,842 |   |
| Income (loss) before income taxes: |       |                             |       |   |   |
| Renal                              |       | $                                | 59,645     |   | $ | 31,798 |   |
| Therapeutics                       |       | 287,349                          |       | 230,954 |   |
| Transplant(1)                      |       | (4,814                           | )          | 4,434 |   |
| Biosurgery(1)                      |       | 9,757                            |       | 4,051 |   |
| Genetics                           |       | 3,742                            |       | (1,772 | ) |
| Other                              |       | (5,444                           | )          | (10,515 | ) |
| Corporate(2)                       |       | (120,855                         | )          | (112,607 | ) |
| Total                              |       | $                                | 229,380    |   | $ | 146,343 |   |

----

(1)          Theresults of operations of acquired companies and assets and the amortizationexpense related to acquired intangible assets are included in segment resultsbeginning on the date of acquisition.

(2)          Lossbefore income taxes for Corporate includes our corporate, general andadministrative and corporate science activities, all of the stock-basedcompensation expense, as well as net gains on investments in equity securities,interest income, interest expense and other income and expense items that we donot specifically allocate to a particular reporting segment.

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

**14.**   Segment Information (Continued)

***Segment Assets***

Weprovide information concerning the assets of our reportable segments in thefollowing table (amounts in thousands):

| ** **          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------|------------|--------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Segment  Assets(1): |       |               |       |                  |       |   |   |
| Renal               |       | $                  | 1,258,407  |                  |       | $ | 1,380,003 |   |   |
| Therapeutics        |       | 1,136,342          |       |                  | 1,094,520  |   |   |
| Transplant          |       | 414,578            |       |                  | 410,436    |   |   |
| Biosurgery          |       | 470,903            |       |                  | 477,334    |   |   |
| Genetics            |       | 131,417            |       |                  | 133,839    |   |   |
| Other               |       | 921,868            |       |                  | 851,343    |   |   |
| Corporate(2)        |       | 3,141,150          |       |                  | 2,843,713  |   |   |
| Total               |       | $                  | 7,474,665  |                  |       | $ | 7,191,188 |   |   |

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

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

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

| ** **                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Cash, cash  equivalents, short- and long-term  investments |       | $                  | 1,450,125  |                  |       | $ | 1,285,604 |   |   |
| Deferred tax  assets, net                                  |       | 220,436            |       |                  | 136,925    |   |   |
| Property,  plant & equipment, net                 |       | 1,080,676          |       |                  | 1,036,182  |   |   |
| Investments in  equity securities                          |       | 81,227             |       |                  | 66,563     |   |   |
| Other                                                      |       | 308,686            |       |                  | 318,439    |   |   |
| Total                                                      |       | $                  | 3,141,150  |                  |       | $ | 2,843,713 |   |   |

 

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**ITEM2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF GENZYME CORPORATIONAND SUBSIDIARIES’ FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When reviewing thediscussion below, you should keep in mind the substantial risks anduncertainties that characterize our business. In particular, we encourage youto review the risks and uncertainties described under “Risk Factors” below.These risks and uncertainties could cause actual results to differ materiallyfrom those forecasted in forward-looking statements or implied by pastresults and trends. Forward-looking statements are statements thatattempt to project or anticipate future developments in our business; weencourage you to review the examples of forward-looking statements under “NoteRegarding Forward-Looking Statements” at the beginning of this report.These statements, like all statements in this report, speak only as of the dateof this report (unless another date is indicated), and we undertake noobligation to update or revise the statements in light of future developments.

**INTRODUCTION**

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

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

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

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

·       Biosurgery,which develops, manufactures and distributes biotherapeutics andbiomaterial-based products, with an emphasis on products that meet medicalneeds in the orthopaedics and broader surgical areas. The unit derivessubstantially all of its revenue from sales of Synvisc, the Sepra line ofproducts, Carticel and MACI; and

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

We report the activitiesof our diagnostic products, oncology, bulk pharmaceuticals and cardiovascularbusiness units under the caption “Other.” We report our corporate, general andadministrative operations and corporate science activities under the caption “Corporate.”

**MERGERS ANDACQUISITIONS**

***Acquisition of AnorMED***

In November 2006, we acquired AnorMED, apublicly-traded chemical-based biopharmaceutical company based in Langley,British Columbia, Canada with a focus on the discovery, development andcommercialization of new therapeutic products in the area of hematology,oncology and human immunodeficiency virus, or HIV. We paid gross considerationof $589.2 million in cash, including $584.2 million for the shares ofAnorMED’s common stock outstanding on the date of acquisition and 

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$5.0 million foracquisition costs. Net consideration was $569.0 million as we acquiredAnorMED’s cash and short-term investments totaling $20.2 million. As partof the transaction, we acquired Mozobil, a late-stage product candidate indevelopment for hematopoietic stem cell transplantation, which we have added toour Transplant business. Multiple earlier studies showed that Mozobil rapidlyincreases the number of stem cells that move out of the bone marrow and into apatient’s blood, which is an important step in preparing a patient for a stemcell transplant. We included AnorMED’s results of operations in ourconsolidated statements of operations from November 7, 2006, the date ofacquisition.

The allocation ofpurchase price was adjusted in March 2007 to:

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

·       revisethe estimated liabilities related to exit activities by $1.3 million; and

·       adjustdeferred taxes by $(0.7) million.

The purchase price, as adjusted, was allocated to thetangible and intangible assets acquired and liabilities assumed based on theirestimated fair values at the date of acquisition. The excess of the purchaseprice over the estimated fair value of the assets acquired and liabilitiesassumed amounted to $31.8 million, which was allocated to goodwill. Weexpect that substantially all of the amount allocated to goodwill will bedeductible for tax purposes.

The allocation of thepurchase price remains subject to potential adjustments, including adjustmentsfor liabilities associated with certain exit activities and tax restructuringactivities.

***Acquisition of Synvisc Sales and Marketing Rights fromWyeth***

In January 2005, weconsummated an arrangement with Wyeth under which we reacquired the sales andmarketing rights to Synvisc in the United States and certain European countries.In exchange for the sales and marketing rights, we made up-front paymentstotaling $127.0 million in cash to Wyeth and have also accrued contingentroyalty payments to Wyeth totaling $130.8 million, of which$126.5 million had been paid as of March 31, 2007. Distributionrights (a component of other intangible assets, net) in our consolidatedbalance sheets as of March 31, 2007 includes a total of $258.1 millionfor the initial and contingent royalty payments (made and accrued) as of thatdate. We will make a series of additional contingent royalty and milestonepayments to Wyeth based on the volume of Synvisc sales in the coveredterritories. These contingent royalty and milestone payments could extend outto June 2012, or could total a maximum of $299.2 million, whichevercomes first.

**CRITICAL ACCOUNTINGPOLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES**

Our critical accountingpolicies and significant judgments and estimates are set forth under theheading “Management’s Discussion and Analysis of Genzyme Corporation andSubsidiaries’ Financial Condition and Results of Operations—Critical AccountingPolicies and Significant Judgments and Estimates” in Exhibit 13 to our2006 Form 10-K. Additional information regarding significantjudgments, estimates and updates to our policies for Revenue Recognition andIncome Taxes are included below. Excluding these additional disclosures, therehave been no significant changes to our other critical accounting policies orsignificant judgments and estimates since December 31, 2006.

**Revenue Recognition**

***Product Sales***

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

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providers, governmentagencies and physicians. Consequently, our net sales and quarterly growthcomparisons may be affected by fluctuations in the buying patterns of our majordistributors and other trade buyers, which may result from seasonality,pricing, wholesaler buying decisions or other factors.  Inventory in the distribution channelconsists of inventory held by wholesalers and specialty distributors, who areour customers, and inventory held by their retail customers, such as pharmaciesand hospitals. Our revenue in a particular period can be impacted by increasesor decreases in channel inventories. Significant increases in wholesaler or retail inventories could resultin reduced purchases in subsequent periods, or product returns from thedistribution channel due to overstocking, low end-user demand or productexpiration.

We use a variety of datasources to determine the amount of inventory in the distribution channel. Formost product lines, we receive data on sales and inventory levels directly fromour primary customers. For key product lines in our Therapeutics and Renalareas, our data sources also include prescription and wholesaler data purchasedfrom external data providers. As part of our efforts to limit the amount ofTherapeutics and Renal inventory held by distributors and to gain improvedvisibility into the distribution channel, we have executed agreements to limitthe amounts of inventory they carry and provide ongoing reports to verifydistributor inventory levels and sales data.

***Product Sales Allowances***

Sales of many biotechnology products in the United States aresubject to increased pricing pressure from managed care groups, institutions,government agencies, and other groups seeking discounts. We and otherbiotechnology companies in the U.S. market are also required to providestatutorily defined rebates and discounts to various U.S. government agenciesin order to participate in the Medicaid program and other government-fundedprograms. In most international markets, we operate in an environment wheregovernments may and have mandated cost-containment programs, placedrestrictions on physician prescription levels and patient reimbursements,emphasized greater use of generic drugs and enacted across-the-board price cutsas methods to control costs.  Thesensitivity of our estimates can vary by program, type of customer andgeographic location. Estimates associated with Medicaid and other governmentallowances may become subject to adjustment in a subsequent period due to thetime delay between the recording of the accrual and its ultimate settlement.

We record product sales net of the followingsignificant categories of product sales allowances:

·       **Contractual adjustments**—We offer chargebacks and contractualdiscounts and rebates, which we collectively refer to as contractualadjustments, to certain private institutions and various government agencies inboth the United States and international markets. We record chargebacks andcontractual discounts as allowances against accounts receivable in ourconsolidated balance sheets. We account for rebates by establishing an accrualfor the amounts payable by us to these agencies and institutions, which isincluded in accrued liabilities in our consolidated balance sheets. We estimatethe allowances and accruals for our contractual adjustments based on historicalexperience and current contract prices, using both internal data as well asinformation obtained from external sources, such as independent market researchagencies and data from wholesalers. We continually monitor the adequacy ofthese estimates and adjust the allowances and accruals periodically throughouteach quarter to reflect our actual experience. In evaluating these allowances and accruals, we consider severalfactors, including significant changes in the sales performance of our productssubject to contractual adjustments, inventory in the distribution channel,changes in U.S. and foreign healthcare legislation impacting rebate orallowance rates, changes in contractual discount rates and the estimated lagtime between a sale and payment of the corresponding rebate;

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·       **Discounts**—In some countries, we offer cash discounts for certain productsas an incentive for prompt payment, which are generally a stated percentage offthe sales price. We account for cash discounts by reducing accounts receivableby the full amounts of the discounts. We consider payment performance andadjust the accrual to reflect actual experience; and

·       **Sales returns**—We record allowances forproduct returns as a reduction of revenue at the time product sales arerecorded. The product returns reserve is estimated based on the returnspolicies for our individual products and our experience of returns for each ofour products. If the history of product returns changes, the reserve isadjusted appropriately. We determine our estimates of the sales return accrualfor new products primarily based on the historical sales returns experience ofsimilar products, such as those within the same line of product or those withinthe same or similar therapeutic category.

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

| ** **                                                          | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **March 31,**               | ** ** |
| ** **                                                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Product sales  allowances:                                          |       |                             |       |   |   |
| Contractual adjustments                                             |       | $                                | 55,864     |   | $ | 44,360 |   |
| Discounts                                                           |       | 33,345                           |       | 24,805 |   |
| Sales returns                                                       |       | 1,717                            |       | 4,393 |   |
| Total product sales allowances                                      |       | $                                | 90,926     |   | $ | 73,558 |   |
| Total gross product sales                                           |       | $                                | 889,116    |   | $ | 730,893 |   |
| Product sales  allowances as a percent of total gross product sales |       | 10                               | %          | 10 | % |

 

Total estimated productsales allowance reserves and accruals in our consolidated balance sheetincreased to approximately $145 million as of March 31, 2007, as comparedto approximately $129 million as of December 31, 2006, primarily due toincreased product sales. Historically, our actual results have not variedsignificantly from the reserves provided for our product sales allowances.However, if our historical trends are not indicative of the future, our actualproduct sales are materially different from projected amounts, or if ourestimates prove to be materially different than actual occurrence, our resultscould be affected. To illustrate our sensitivity to changes in the productsales allowances and accruals process, a 1% change in the total provision forproduct sales allowances we recognized would have an approximately $9 millioneffect on our consolidated income before taxes for the three months endedMarch 31, 2007, as compared to an approximately $32 million effect on ourconsolidated loss before taxes for the year ended December 31, 2006.

***Distributor Fees***

EITF IssueNo. 01-09, “Accounting for Consideration given by a Vendor to aCustomer (including a Reseller of a Vendor’s Products)” specifies that cashconsideration (including a sales incentive) given by a vendor to a customer ispresumed to be a reduction of the selling prices of the vendor’s products orservices and, therefore, should be characterized as a reduction of revenue. Weinclude such fees in contractual adjustments, which are recorded as a reductionto product sales. That presumption is overcome and the consideration should becharacterized as a cost incurred if, and to the extent that, both of thefollowing conditions are met:

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

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·       the vendor can reasonablyestimate the fair value of the benefit received.

We record fees paid to ourdistributors for services as a charge to selling, general and administrativeexpenses, or SG&A, a component of operating expenses, only if the criteriaset forth above are met. The following table sets forth the distributor feesrecorded as a reduction to product sales and charged to SG&A (amounts inthousands):

| ** **                                                                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **March 31,**               | ** ** |
| ** **                                                                        | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Distributor fees:                                                                 |       |                             |       |   |   |
| Included in contractual adjustments and recorded as  a reduction to product sales |       | $                                | 3,092      |   | $ | 2,188 |   |
| Charged to SG&A                                                               |       | 2,976                            |       | 2,546 |   |
| Total distributor  fees                                                           |       | $                                | 6,068      |   | $ | 4,734 |   |

 

***IncomeTaxes***

Effective January 1, 2007, we adopted theprovisions of FIN 48, which clarifies the accounting for income tax positionsby prescribing a minimum recognition threshold that a tax position is requiredto meet before being recognized in the financial statements. FIN 48 alsoprovides guidance on the derecognition of previously recognized deferred taxitems, measurement, classification, interest and penalties, accounting ininterim periods, disclosure and transition. Under FIN 48, we must recognize thetax benefit from an uncertain tax position only if it is more likely than notthat the tax position will be sustained upon examination by the taxingauthorities, based on the technical merits of the tax position. The taxbenefits recognized in our financial statements from such a position aremeasured based on the largest benefit that has a greater than 50% likelihood ofbeing realized upon ultimate resolution.

We operate in numerous countries where our income taxreturns are subject to audit and adjustment by local tax authorities. Becausewe operate globally, the nature of the uncertain tax positions is often verycomplex and subject to change and the amounts at issue can be substantial. Wedevelop our cumulative probability assessment of the measurement of uncertaintax positions using internal expertise, experience, judgment and assistancefrom professional advisors. Estimates are refined as additional informationbecomes known. Any outcome upon settlement that differs from our best estimatemay result in additional or lower tax expense in future periods.

As of January 1,2007, we had approximately $36.5 million of total gross unrecognized taxbenefits. We continue to recognize interest related to unrecognized taxbenefits, of which approximately $26.6 million represents the amount of unrecognizedtax benefits that, if recognized, would favorably affect our effective incometax rate in any future periods. We continue to recognize interest related tounrecognized tax benefits within our provision for income taxes but have notrecorded any amounts related to potential penalties. The amount of accruedinterest related to unrecognized tax benefits included in our provision forincome taxes for the three months ended March 31, 2007 and our accruedinterest related to unrecognized tax benefits as of January 1, 2007 and March 31,2007 were not significant.

**A.**   RESULTSOF OPERATIONS

The following discussionsummarizes the key factors our management believes are necessary for anunderstanding of our consolidated financial statements.

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**REVENUES**

Thecomponents of our total revenues are described in the following table:

| ** **                        | ** ** | **Three Months Ended**     | ** ** | **Increase/**  | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                        | ** ** | **March 31,**                   | ** ** | **(Decrease)** | ** ** |
| ** **                        | ** ** | **2007**                             | ** ** | **2006**       | ** ** | **% Change** | ** ** |
| ** **                        | ** ** | **(Amounts in thousands)** | ** ** | ** **     | ** ** |
| Product revenue                   |       | $                                    | 798,190    |           | $          | 657,335 |   |   | 21 | % |   |
| Service revenue                   |       | 75,881                               |       | 68,822         |       |   | 10 | % |   |
| Total product and service revenue |       | 874,071                              |       | 726,157        |       |   | 20 | % |   |
| Research and  development revenue |       | 9,112                                |       | 4,685          |       |   | 94 | % |   |
| Total revenues                    |       | $                                    | 883,183    |           | $          | 730,842 |   |   | 21 | % |   |

 

**Product Revenue**

We derive productrevenue from sales of:

·       Renalproducts, including Renagel for the reduction of elevated serum phosphoruslevels in end-stage renal disease patients on hemodialysis, Hectorol forthe treatment of secondary hyperparathyroidism in patients on dialysis andthose with chronic kidney disease, or CKD, and bulk sevelamer;

·       Therapeutics products,including Cerezyme for the treatment of Gaucher disease, Fabrazyme for thetreatment of Fabry disease, Myozyme for the treatment of Pompe disease andThyrogen, which is an adjunctive diagnostic agent used in the follow-uptreatment of patients with well-differentiated thyroid cancer;

·       Transplantproducts for the treatment of immune-mediated diseases, primarilyThymoglobulin, which induces immunosuppression of certain types of cellsresponsible for organ rejection in transplant patients;

·       Biosurgeryproducts, including orthopaedic products, such as Synvisc, and the Sepra lineof products, such as Seprafilm; and

·       Otherproducts, including:

·        diagnosticproducts, including infectious disease and cholesterol testing products;

·        oncologyproducts, including Campath for the treatment of B-cell chronic lymphocyticleukemia in patients who have been treated with alkylating agents and who havefailed fludarabine therapy, and Clolar for the treatment of children (ages 1-21)with refractory or relapsed acute lymphoblastic leukemia after at least twoprior regimens; and

·        bulkpharmaceuticals, including WelChol, which is a mono and adjunctive therapy forthe reduction of LDL cholesterol in patients with primary hypercholesterolemia.

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Thefollowing table sets forth our product revenue on a reporting segment basis:

| ** **                                  | ** ** | **Three Months Ended**     | ** ** | **Increase/**  | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                                  | ** ** | **March 31,**                   | ** ** | **(Decrease)** | ** ** |
| ** **                                  | ** ** | **2007**                             | ** ** | **2006**       | ** ** | **% Change** | ** ** |
| ** **                                  | ** ** | **(Amounts in thousands)** | ** ** | ** **     | ** ** |
| Renal:                                      |       |                                 |       |           |       |   |   |   |   |
| Renagel (including sales of bulk sevelamer) |       | $                                    | 137,384    |           | $          | 118,655 |   |   | 16 | % |   |
| Hectorol                                    |       | 28,293                               |       | 18,904         |       |   | 50 | % |   |
| Total Renal                                 |       | 165,677                              |       | 137,559        |       |   | 20 | % |   |
| Therapeutics:                               |       |                                 |       |           |       |   |   |   |   |
| Cerezyme                                    |       | 263,791                              |       | 239,009        |       |   | 10 | % |   |
| Fabrazyme                                   |       | 100,664                              |       | 80,503         |       |   | 25 | % |   |
| Thyrogen                                    |       | 26,338                               |       | 22,993         |       |   | 15 | % |   |
| Myozyme                                     |       | 37,919                               |       | 2,051          |       |   | >100 | % |   |
| Other Therapeutics                          |       | 167                                  |       | 77             |       |   | >100 | % |   |
| Total Therapeutics                          |       | 428,879                              |       | 344,633        |       |   | 24 | % |   |
| Transplant:                                 |       |                                 |       |           |       |   |   |   |   |
| Thymoglobulin/Lymphoglobuline               |       | 39,442                               |       | 32,860         |       |   | 20 | % |   |
| Other Transplant                            |       | 1,655                                |       | 1,406          |       |   | 18 | % |   |
| Total Transplant                            |       | 41,097                               |       | 34,266         |       |   | 20 | % |   |
| Biosurgery:                                 |       |                                 |       |           |       |   |   |   |   |
| Synvisc                                     |       | 53,596                               |       | 53,263         |       |   | 1 | % |   |
| Sepra products                              |       | 23,115                               |       | 19,415         |       |   | 19 | % |   |
| Other Biosurgery                            |       | 10,572                               |       | 6,974          |       |   | 52 | % |   |
| Total Biosurgery                            |       | 87,283                               |       | 79,652         |       |   | 10 | % |   |
| Other product revenue                       |       | 75,254                               |       | 61,225         |       |   | 23 | % |   |
| Total product  revenue                      |       | $                                    | 798,190    |           | $          | 657,335 |   |   | 21 | % |   |

 

***Renal***

Sales of Renagel, including sales of bulk sevelamer,increased 16% to $137.4 million for the three months ended March 31,2007, as compared to the same period of 2006, primarily due to a$19.9 million increase related to increased customer volume, of which$14.2 million is primarily attributable to increased end-user demand worldwide,and $5.7 million is attributable to a 9.5% price increase for Renagel in theUnited States, which became effective in December 2006. The 9% increase inthe Euro against the U.S. dollar for the three months ended March 31,2007, as compared to the same period of 2006, positively impacted Renagelrevenue by $3.1 million in the first quarter of 2007. Sales of Renagel,including sales of bulk sevelamer, were 17% of our total product revenue forthe three months ended March 31, 2007, as compared to 18% for the sameperiod of  2006.

Hectorol, used to treat secondary hyperparathyroidismin patients on dialysis and those with CKD, is sold by our salesrepresentatives to nephrologists in the United States. Sales of Hectorolincreased 50% to $28.3 million for the three months ended March 31,2007 as compared to $18.9 million for the same period of 2006, primarilydue to higher end-user demand.

We conducted a 2,100-patient post-marketingstudy of Renagel called the Dialysis Clinical Outcomes Revisited, or DCOR,trial, which evaluated the ability of Renagel to improve patient morbidity andmortality and compared Renagel to calcium-based phosphate binders withrespect to overall morbidity and mortality. We released top-line datafrom this trial in July 2005 and presented the data at the AmericanSociety of Nephrology meeting in November 2005. While the study did notmeet its primary end-point of a 

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statistically significantreduction in mortality from all causes, in a pre-specified sub-groupanalysis, Renagel demonstrated a significant reduction in mortality from allcauses in patients 65 years of age or older and in patients using Renagel fortwo years or more. The DCOR study included morbidity data from the Centers forMedicare and Medicaid Services, or CMS, which were presented at the 2006 AmericanSociety of Nephrology, or ASN, meeting. This data showed patients receivingRenagel experienced lower rates of hospitalization, fewer days in the hospital,and reduced overall healthcare expenditures compared to patients treated withcalcium-based phosphate binders. In early 2007, Kidney International publishedfindings from the Renagel in New Dialysis, or RIND, study that showed asignificantly lower rate of death among patients using Renagel from the timethey began dialysis compared with those using calcium-based phosphate binders.

We expect sales of Renageland Hectorol to increase, driven primarily by growing patient access to theseproducts, including through the Medicare Part D program in the UnitedStates, and the continued adoption of the products by nephrologists worldwide.We expect adoption rates for Renagel to trend favorably as a result of our DCORtrial and the growing acceptance of the National Kidney Foundation’s 2003Kidney Disease Outcome Quality Initiative, or ­K/DOQI, Guidelines for BoneMetabolism and Disease in CKD and the RIND study. Renagel and Hectorol competewith several other products and our future sales may be impacted negatively bythese products. We discuss some of these competitors under the heading “RiskFactors—Our future success will depend on our ability to effectively developand market our products and services against those of our competitors” in thisreport. In addition, our ability to continue to increase sales of Renagel andHectorol will depend on many other factors, including our ability to optimizedosing and improve patient compliance with Renagel dosing, the availability ofreimbursement from third-party payors and the extent of coverage,including under the Medicare Part D program. Also, the accuracy of ourestimates of fluctuations in the payor mix and our ability to effectivelymanage wholesaler inventories and the levels of compliance with the inventorymanagement programs we implemented for Renagel and Hectorol with ourwholesalers, could impact the revenue from our Renal reporting segment that werecord from period to period.

***Therapeutics***

Therapeutics product revenue increased 24% to$428.9 million for the three months ended March 31, 2007, as comparedto the same period of 2006, primarily due to continued growth in sales ofCerezyme, Fabrazyme and Thyrogen and to the launch of Myozyme in the EuropeanUnion, United States and Canada in 2006.

The 10% growth in sales of Cerezyme to$263.8 million for the three months ended March 31, 2007, as comparedto the same period of 2006, is attributable to our continued identification ofnew Gaucher disease patients, particularly in international markets. Our pricefor Cerezyme has remained consistent from period to period. Although we expectCerezyme to continue to be a substantial contributor to revenues in the future,it is a mature product, and as a result, we do not expect that the current newpatient growth trend will continue. The 9% increase in the Euro against theU.S. dollar for the three months ended March 31, 2007, as compared to thesame period of 2006, positively impacted Cerezyme revenue by $7.4 million.

Our results of operations are highly dependent onsales of Cerezyme and a reduction in revenue from sales of this product wouldadversely affect our results of operations. Sales of Cerezyme wereapproximately 33% of our total product revenue for the three months ended March 31,2007, and 36% for the three months ended March 31, 2006. Revenue fromCerezyme would be impacted negatively if competitors developed alternativetreatments for Gaucher disease, and the alternative products gained commercialacceptance, if our marketing activities are restricted, or if coverage, pricingor reimbursement is limited. Although orphan drug status for Cerezyme, whichprovided us with exclusive marketing rights for Cerezyme in the United Statesfor seven years, expired in May 2001, we continue to have patents 

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protecting our method ofmanufacturing Cerezyme until 2010 and the composition of Cerezyme as made bythat process until 2013. The expiration of market exclusivity and orphan drugstatus will likely subject Cerezyme to increased competition, which maydecrease the amount of revenue we receive from this product or the growth ofthat revenue. We are aware of companies that have developed or have initiatedefforts to develop competitive products, and other companies may do so in the future.We discuss some of these competitors under the heading “Risk Factors—Our futuresuccess will depend on our ability to effectively develop and market ourproducts and services against those of our competitors,” in this report.

The 25% increase to $100.7 million for the threemonths ended March 31, 2007 in sales of Fabrazyme, as compared to the sameperiod of 2006, was primarily attributable to increased patient identificationworldwide as Fabrazyme is introduced into new markets. In addition, we recognized$2.5 million in March 2007 upon receiving reimbursement approval for pastshipments of Fabrazyme in Canada. The 9% increase in the Euro against the U.S.dollar for the three months ended March 31, 2007, as compared to the sameperiod of 2006, positively impacted Fabrazyme revenue by $2.3 million.

Sales of Thyrogen increased 15% to $26.3 millionfor the three months ended March 31, 2007, as compared to the same periodof 2006, due to worldwide volume growth. The 9% increase in the Euro againstthe U.S. dollar during the three months ended March 31, 2007, as comparedto the same period of 2006, did not have a material impact on Thyrogen revenue.

Sales of Myozyme were $37.9 million for the threemonths ended March 31, 2007 as compared to $2.1 million for the threemonths ended March 31, 2006. In March 2006, we received marketingauthorization for Myozyme in the European Union. We are introducing Myozyme ona country-by-country basis in the European Union, as pricing and reimbursementapprovals are obtained. In April 2006, the FDA granted marketing approvalfor Myozyme. We launched Myozyme in the United States in May 2006, inEurope a month later and in Canada in September 2006. Myozyme has receivedorphan drug designation in the United States, which provides seven years ofmarket exclusivity, and in the European Union, which provides ten years ofmarket exclusivity. In April 2007, Myozyme was approved for commercial sale in Japanand we expect to launch the product there following receipt of pricingapproval. We expect to file for approval in several additional countries in2007. The 9% increase in the Euro against the U.S. dollar during the threemonths ended March 31, 2007, as compared to the same period of 2006,positively impacted Myozyme revenue by $1.9 million.

***We currently manufacture Myozyme in theUnited States. We expect to begin Myozyme fill-finish at our facility inWaterford, Ireland in the third quarter of 2007, and to commence Myozymeengineering runs at our protein manufacturing facility in Geel, Belgium laterthis year. In addition, in the third quarter of 2007, we plan to file forapproval to expand manufacturing capacity at our existing manufacturingfacility in Allston, Massachusetts to enable us to meet the expected demand forMyozyme in the U.S. market going forward. We anticipate receiving a decisionfrom the FDA on that application by the end of 2007 and are taking severalsteps to optimize supply for the U.S. market during the review period. Highestpriority will be placed on ensuring that the treatment is available for all patientscurrently on Myozyme therapy, and for those in most urgent medical need,including all those who are 18 years or younger. Some will access Myozymeproduced at our expanded Allston facility during the review period through aclinical program designed to allow access prior to approval of themanufacturing process.***

***Transplant***

Transplant product revenue increased 20% to$41.1 million for the three months ended March 31, 2007, as comparedto the same period of 2006. The increase is primarily due to a $4.9 millionincrease in Thymoglobulin revenue as a result of a 4% price increase for Thymoglobulinin the United States which became effective in February 2007, a 7% priceincrease internationally for Thymoglobulin and increased utilization ofThymoglobulin in transplant procedures worldwide.

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We expect sales ofThymoglobulin to increase, driven primarily by our continued entry into newgeographical markets, together with an overall growth in solid organ and livingdonor renal transplants.

***Biosurgery***

Biosurgery product revenue increased 10% to$87.3 million for the three months ended March 31, 2007, as comparedto the same period of 2006. The increase was largely attributable to a $4.2 millionincrease in sales of Seprafilm and a $3.3 million increase in revenue relatedto our hyaluronic acid, or HA, products. The $4.2 million increase inSeprafilm revenue is primarily due to greater penetration into the UnitedStates and Japanese markets. The increase in revenue related to our HA productsis primarily due to the increase in orders for HA powder.

Synvisc sales were stable for the three months ended March 31,2007, as compared to the same period of 2006. Currently, Synvisc is deliveredthrough three injections at one-week intervals. In November 2006 wecompleted a pivotal trial evaluating Synvisc-One, a single-injection regimen ofSynvisc, which showed that patients who received a single-injection regimen ofSynvisc achieved a statistically significant improvement in pain fromosteoarthritis of the knee in 26 weeks compared to those using placebo. Weanticipate filing for approval of Synvisc-One in the U.S. in the first half of2007 and in the European Union in the second half of 2007. We expect to launchthis product in the European Union by the end of 2007 and in the United Statesin the first quarter of 2008. The clinical advantages of Synvisc-One have thepotential to expand the market for Synvisc.

We are aware of severalproducts that compete with Synvisc, several companies that have initiatedefforts to develop competitive products and several companies that marketproducts designed to relieve the pain of osteoarthritis. We discuss some ofthese competitors under the heading “Risk Factors—Our future success will dependon our ability to effectively develop and market our products and servicesagainst those of our competitors,’’ included in this report.

***Other Product Revenue***

Other product revenueincreased 23% to $75.3 million for the three months ended March 31,2007, as compared to the same period of 2006, primarily due to a 24%, or $5.4million, increase in sales of bulk pharmaceuticals, including WelChol. Theincrease in sales of bulk pharmaceuticals was primarily due to a 67%, or$6.0 million, increase for the three months ended March 31, 2007, ofbulk sales of and royalties earned on WelChol due to an increased demand fromour U.S. marketing partner, Sankyo Pharma, Inc. In addition, oncologyproduct revenue increased 72% to $16.7 million for the three months ended March 31,2007, as compared to the same period of 2006, due to an increase in demand forCampath and Clolar.

**Service Revenue**

We derive servicerevenue primarily from the following sources:

·       salesof MACI, a proprietary cell therapy product for cartilage repair in Europe andAustralia, Carticel for the treatment of cartilage damage, and Epicel for thetreatment of severe burns, all of which are included in our Biosurgeryreporting segment; and

·       geneticand pathology/oncology testing services, which are included in our Geneticsreporting segment.

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Thefollowing table sets forth our service revenue on a segment basis:

| ** **             | ** ** | **Three Months Ended**     | ** ** | **Increase/**  | ** ** |
|------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **             | ** ** | **March 31,**                   | ** ** | **(Decrease)** | ** ** |
| ** **             | ** ** | **2007**                             | ** ** | **2006**       | ** ** | **% Change** | ** ** |
| ** **             | ** ** | **(Amounts in thousands)** | ** ** | ** **     | ** ** |
| Renal                  |       | $                                    | —     |           | $          | 31 |   |   | (100 | )% |   |
| Biosurgery             |       | 9,362                                |       | 10,880         |       |   | (14 | )% |   |
| Genetics               |       | 66,158                               |       | 57,452         |       |   | 15 | % |   |
| Other                  |       | 361                                  |       | 459            |       |   | (21 | )% |   |
| Total service  revenue |       | $                                    | 75,881     |           | $          | 68,822 |   |   | 10 | % |   |

 

Service revenue attributable to our Biosurgeryreporting segment decreased 14% to $9.4 million for the three months endedMarch 31, 2007, as compared to the same period of 2006. The decrease isprimarily due to a decline in sales of Epicel due to a decrease in patientsrequiring this service.

Service revenueattributable to our Genetics reporting segment increased 15% to$66.2 million for the three months ended March 31, 2007, as comparedto the same period of 2006. The increase was primarily attributable tocontinued growth in sales of DNA and cancer testing services as well as theprenatal screening and diagnosis market.

**InternationalProduct and Service Revenue**

Asubstantial portion of our revenue was generated outside of the United States.The following table provides information regarding the change in internationalproduct and service revenue as a percentage of total product and servicerevenue during the periods presented:

| ** **                                 | ** ** | **Three Months Ended**     | ** ** | **Increase/**  | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                                 | ** ** | **March 31,**                   | ** ** | **(Decrease)** | ** ** |
| ** **                                 | ** ** | **2007**                             | ** ** | **2006**       | ** ** | **% Change** | ** ** |
| ** **                                 | ** ** | **(Amounts in thousands)** | ** ** | ** **     | ** ** |
| International  product and service revenue |       | $                                    | 411,019    |           | $          | 326,680 |   |   | 26 | % |   |
| % of total product and  service revenue    |       | 47                                   | %          | 45             | %          |   |   |   |   |
|                                            |            |                                      |            |                |            |  |  |  |  |  |  |

 

The 26% increase to $411.0 million ininternational product and service revenue for the three months ended March 31,2007, as compared to the same period of 2006, is primarily due to an $81.0 millionincrease in the combined international sales of Cerezyme, Fabrazyme and Myozymeprimarily due to an increase in the number of patients using these products incountries outside of the United States.

The Euro increased 9%against the U.S. dollar for the three months ended March 31, 2007, ascompared to the same period of 2006, positively impacting total product andservice revenue by $18.0 million.

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**Research andDevelopment Revenue**

Thefollowing table sets forth our research and development revenue on a segmentbasis:

| ** **                              | ** ** | **Three Months Ended**     | ** ** | **Increase/**  | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                              | ** ** | **March 31,**                   | ** ** | **(Decrease)** | ** ** |
| ** **                              | ** ** | **2007**                             | ** ** | **2006**       | ** ** | **% Change** | ** ** |
| ** **                              | ** ** | **(Amounts in thousands)** | ** ** | ** **     | ** ** |
| Therapeutics                            |       | $                                    | 638        |           | $          | 1,000 |   |   | (36 | )% |   |
| Transplant                              |       | 180                                  |       | —         |       |   | N/A |   |   |
| Biosurgery                              |       | 1,748                                |       | 4              |       |   | >100 | % |   |
| Other                                   |       | 6,243                                |       | 3,638          |       |   | 72 | % |   |
| Corporate                               |       | 303                                  |       | 43             |       |   | >100 | % |   |
| Total research  and development revenue |       | $                                    | 9,112      |           | $          | 4,685 |   |   | 94 | % |   |

 

Total research anddevelopment revenue increased $4.4 million for the three months ended March 31,2007, as compared to the same period of 2006, primarily due to increases inrevenue recognized by our Biosurgery reporting segment and Other research anddevelopment revenue. The increase in our biosurgery research and developmentrevenue is for work done related to dermal filler products as a result of newcontracts entered into with Mentor Corporation in September 2006, forwhich there was no comparable amount in the first quarter of 2006. Otherresearch and development revenue for the three months ended March 31,2007, includes $4.2 million of revenue for research and development workrelated to alemtuzumab for the treatment of multiple sclerosis that we performon behalf of Bayer Schering Pharma AG. Other research and development revenuealso includes revenue related to our pharmaceuticals and cardiovascularbusinesses.

**MARGINS**

Thecomponents of our total margins are described in the following table:

| ** **                              | ** ** | **Three Months Ended**     | ** ** | **Increase/**  | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                              | ** ** | **March 31,**                   | ** ** | **(Decrease)** | ** ** |
| ** **                              | ** ** | **2007**                             | ** ** | **2006**       | ** ** | **% Change** | ** ** |
| ** **                              | ** ** | **(Amounts in thousands)** | ** ** | ** **     | ** ** |
| Product margin                          |       | $                                    | 643,466    |           | $          | 536,823 |   |   | 20 | % |   |
| % of total  product revenue             |       | 81                                   | %          | 82             | %          |   |   |   |   |
| Service margin                          |       | $                                    | 28,142     |           | $          | 22,384 |   |   | 26 | % |   |
| % of total  service revenue             |       | 37                                   | %          | 33             | %          |   |   |   |   |
| Total product and  service gross margin |       | $                                    | 671,608    |           | $          | 559,207 |   |   | 20 | % |   |
| % of total product and  service revenue |       | 77                                   | %          | 77             | %          |   |   |   |   |

 

**Product Margin**

Our overall productmargin increased $106.6 million, or 20%, for the three months ended March 31,2007, as compared to the same period of 2006. This is primarily due to:

·       improvedmargins for Hectorol and Renagel due to price increases, increased customervolume and increased efficiency at our global manufacturing facilities as wellas the favorable foreign exchange rate for the Euro against the U.S. dollar;

·       anincrease in product margin for Cerezyme, Fabrazyme and Thyrogen due toincreased sales and improved unit costs;

·       improvedmargins for Myozyme due to the launch of Myozyme in the European Union, UnitedStates and Canada in 2006;

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·       anincrease in product margin for Seprafilm and other HA products due to increasedsales; and

·       anincrease in product margin for our oncology business due to the increase inglobal sales of Campath and Clolar.

These increases in product margin were partiallyoffset by a $3.5 million increase in stock-based compensation expenses comparedto the same period of 2006.

Total product margin as a percentage of productrevenue for the three months ended March 31, 2007 decreased slightly dueto an increase in sales of higher cost Thymoglobulin product that wasmanufactured in our Waterford, Ireland plant and was sold in 2007.

The amortization of productrelated intangible assets is included in amortization expense and, as a result,is excluded from cost of products sold and the determination of productmargins.

**Service Margin**

Our overall service margin increased$5.8 million, or 26%, for the three months ended March 31, 2007, ascompared to the same period of 2006. This is primarily due to the increase inrevenue from our DNA and cancer testing services as well as the prenatalscreening and diagnosis market in 2007.

Total service margin as apercent of total service revenue increased for the three months ended March 31,2007, as compared to the same period of 2006, primarily due to a decrease inpayroll costs related to Genetics services.

**OPERATING EXPENSES**

**Selling, Generaland Administrative Expenses**

Thefollowing table provides information regarding the change in SG&A duringthe periods presented:

| ** **                                    | ** ** | **Three Months Ended**     | ** ** | **Increase/**  | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                                    | ** ** | **March 31,**                   | ** ** | **(Decrease)** | ** ** |
| ** **                                    | ** ** | **2007**                             | ** ** | **2006**       | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | **(Amounts in thousands)** | ** ** | ** **     | ** ** |
| Selling, general  and administrative expenses |       | $                                    | 269,021    |           | $          | 230,669 |   |   | 17 | % |   |
| % of total revenue                            |       | 30                                   | %          | 32             | %          |   |   |   |   |
|                                               |            |                                      |            |                |            |  |  |  |  |  |  |

 

SG&A increased$38.4 million for the three months ended March 31, 2007, as comparedto the same period of 2006, primarily due to increases of:

·       $6.2 millionfor Renal products, primarily due to continued support of Renal’s internationalbusiness operations growth;

·       $8.9 millionfor Therapeutics products, primarily due to expenses incurred to prepare tolaunch Myozyme in additional countries during 2007;

·       $2.9 millionfor Transplant products, primarily due to expenses resulting from theacquisition of AnorMED in November 2006. Additional expenses were incurredfor marketing and pre-launch activities for Mozobil in 2007. Also contributingto this increase is spending on additional personnel to support the expansionof Thymoglobulin into new markets; and

·       $15.6 million forCorporate SG&A, primarily due to a $10.4 million increase in spendingon employee benefits, information technology and legal expenses as well as a$3.1 million increase in stock-based compensation expenses.

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**Research andDevelopment Expenses**

Thefollowing table provides information regarding the change in research anddevelopment expense during the periods presented:

| ** **                         | ** ** | **Three Months Ended**     | ** ** | **Increase/**  | ** ** |
|------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                         | ** ** | **March 31,**                   | ** ** | **(Decrease)** | ** ** |
| ** **                         | ** ** | **2007**                             | ** ** | **2006**       | ** ** | **% Change** | ** ** |
| ** **                         | ** ** | **(Amounts in thousands)** | ** ** | ** **     | ** ** |
| Research and  development expenses |       | $                                    | 166,120    |           | $          | 152,323 |   |   | 9 | % |   |
| % of total revenue                 |       | 19                                   | %          | 21             | %          |   |   |   |   |
|                                    |            |                                      |            |                |            |  |  |  |  |  |  |

 

Research anddevelopment expenses increased $13.8 million for the three months ended March 31,2007, as compared to the same period of 2006, primarily due to:

·       an$8.2 million increase in spending on certain Therapeutics research anddevelopment programs, including $2.0 million in spending for the Myozymeprogram and $3.2 million of spending for DX-88 for the treatment ofHAE as program costs planned for late 2006 were shifted to 2007;

·       a$7.4 million increase in spending on Transplant research and developmentprograms, primarily due to our acquisition of AnorMED in November 2006;

·       a$4.9 million increase in sepending on Other research and development programs,primarily on alemtuzumab for the treatment of multiple sclerosis; and

·       a$1.0 million increase in spending on Corporate research and developmentprograms primarily due to a $1.5 million increase in stock-based compensationexpenses.

These increases were partially offset by a $6.1million decrease in spending on our Renal programs due to the termination of ourcollaboration with RenaMed Biologics, Inc., or RenaMed, in 2006 and adecrease in research and development expenses of $2.0 million with respectto certain Therapeutics research and development programs, including $1.7million on our Cerezyme program, as patients completed clinical studies duringthe second quarter of 2006, resulting in a decrease in spending on follow-up monitoring.

**Amortization ofIntangibles**

Thefollowing table provides information regarding the change in amortization ofintangibles expense during the periods presented:

| ** **                   | ** ** | **Three Months Ended**     | ** ** | **Increase/**  | ** ** |
|------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                   | ** ** | **March 31,**                   | ** ** | **(Decrease)** | ** ** |
| ** **                   | ** ** | **2007**                             | ** ** | **2006**       | ** ** | **% Change** | ** ** |
| ** **                   | ** ** | **(Amounts in thousands)** | ** ** | ** **     | ** ** |
| Amortization of  intangibles |       | $                                    | 50,017     |           | $          | 52,692 |   |   | (5 | )% |   |
| % of total revenue           |       | 6                                    | %          | 7              | %          |   |   |   |   |
|                              |            |                                      |            |                |            |  |  |  |  |  |  |

 

Amortization of intangibles expense decreased$2.7 million for the three months ended March 31, 2007, as comparedto the same period of 2006, primarily due to the write off in the first quarterof 2007, of $23.7 million of fully amortized customer lists related to ouracquisition of Bone Care in July 2005.

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As discussed inNote 7., “Goodwill and Other Intangible Assets,” to our financialstatements included in this report, we calculate amortization expense for theSynvisc sales and marketing rights we reacquired from Wyeth and the Myozymepatent and technology rights acquired pursuant to a license agreement withSynpac by taking into account forecasted future sales of Synvisc and Myozyme,respectively, and the resulting estimated future contingent payments we will berequired to make to Wyeth and Synpac. As a result, we expect amortization ofintangibles to fluctuate over the next five years based on these futurecontingent payments.

**Purchase of In-ProcessResearch and Development**

In connection with five of our acquisitions since2004, we have acquired various IPR&D projects. Substantial additionalresearch and development will be required prior to any of our acquiredIPR&D programs and technology platforms reaching technological feasibility.In addition, once research is completed, each product candidate acquired willneed to complete a series of clinical trials and receive FDA or otherregulatory approvals prior to commercialization. Our current estimates of thetime and investment required to develop these products and technologies maychange depending on the different applications that we may choose to pursue. Wecannot give assurances that these programs will ever reach technologicalfeasibility or develop into products that can be marketed profitably. Inaddition, we cannot guarantee that we will be able to develop and commercializeproducts before our competitors develop and commercialize products for the sameindications. If products based on our acquired IPR&D programs and technologyplatforms do not become commercially viable, our results of operations could bematerially adversely affected.

Thefollowing table sets forth IPR&D projects for companies and certain assetsacquired since 2004 (amounts in millions):

| Company/Assets Acquired | ** ** | ** ** | ** ** | **Purchase  Price** | ** ** | **IPR&D(1)** | ** ** | **Programs Acquired** | ** ** | **Discount Rate  Used in  Estimating  Cash  Flows(1)** | ** ** | **Year of  Expected  Launch**      | ** ** | **Estimated  Cost to  Complete** | ** ** |
|------------------------------|------------|------------|------------|---------------------|------------|------------------|------------|----------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| AnorMED (2006)               |       |       | $          | 589.2               |       |             |       | $                          | 526.8      |                                                             |       | Mozobil (stem cell  transplant)         |       |                                  | 15         | % |   | 2008-2013 |   |   | $ | 125 |   |   |
|                              |       |       |       |                |       |             | 26.1       |                       |       | AMD070 (HIV)(2)                                                  |       |                                    | 15         | %                                     |       | — |   |   | — |   |   |
|                              |       |       |       |                |       |             | $     | 552.9                      |       |                                                             |       |                                    |       |                                  |       |   |   |   |   |   |   |   |
| Avigen (2005)                |       |       | $          | 12.0                |       |             |       | $                          | 7.0        |                                                             |       | AV201 (Parkinson’s disease)        |       |                                  | N/A        |   |   | 2016 |   |   | $ | 74 |   |   |
| Bone Care (2005)             |       |       | $          | 712.3               |       |             |       | $                          | 12.7       |                                                             |       | LR-103  (secondary hyperparathyroidism) |       |                                  | 25         | % |   | 2012 |   |   | $ | 15 |   |   |
| Verigen (2005)               |       |       | $          | 12.7                |       |             |       | $                          | 9.5        |                                                             |       | MACI (cartilage repair)                 |       |                                  | 24         | % |   | 2012-2014 |   |   | $ | 20-$35 |   |   |
| ILEX Oncology (2004)         |       |       | $          | 1,080.3             |       |             |       | $                          | 96.9       |                                                             |       | Campath (alemtuzumab)                   |       |                                  | 11         | % |   | 2009-2011 |   |   | $ | 194 |   |   |
|                              |       |       |       |                |       |             | 113.4      |                       |       | Clolar                                                           |       |                                    | 12         | %                                     |       | 2008-2011 |   |   | $ | 99 |   |   |
|                              |       |       |       |                |       |             | 44.2       |                       |       | Tasidotin                                                        |       |                                    | 16         | %                                     |       | 2011-2014 |   |   | $ | 44 |   |   |
|                              |       |       |       |                |       |             | $          | 254.5                      |       |                                                             |       |                                    |       |                                  |       |   |   |   |   |   |   |   |

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(1)                Management assumes responsibility fordetermining the valuation of the acquired IPR&D projects. The fair valueassigned to IPR&D for each acquisition is estimated by discounting, topresent value, the cash flows expected once the acquired projects have reachedtechnological feasibility. The cash flows are probability-adjusted to reflectthe risks of advancement through the product approval process. In estimatingthe future cash flows, we also considered the tangible and intangible assetsrequired for successful exploitation of the technology resulting from thepurchased IPR&D projects and adjusted future cash flows for a chargereflecting the contribution to value of these assets.

(2)                Year of expected launch and estimated costto complete data is not provided for AMD070 at this time because we areassessing our future plans for this program.

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**OTHER INCOME AND EXPENSES**

| ** **                                      | ** ** | **Three Months Ended**     | ** ** | **Increase/**  | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                                      | ** ** | **March 31,**                   | ** ** | **(Decrease)** | ** ** |
| ** **                                      | ** ** | **2007**                             | ** ** | **2006**       | ** ** | **% Change** | ** ** |
| ** **                                      | ** ** | **(Amounts in thousands)** | ** ** | ** **     | ** ** |
| Equity in income of  equity method investments  |       | $                                    | 5,612      |           | $          | 2,246 |   |   | >100 | % |   |
| Minority interest                               |       | 3,912                                |       | 2,446          |       |   | 60 | % |   |
| Gains on investments in  equity securities, net |       | 12,788                               |       | 7,942          |       |   | 61 | % |   |
| Other                                           |       | (525                                 | )          | (139           | )          |   | >100 | % |   |
| Investment income                               |       | 16,219                               |       | 10,078         |       |   | 61 | % |   |
| Interest expense                                |       | (4,188                               | )          | (4,438         | )          |   | (6 | )% |   |
| Total other income                              |       | $                                    | 33,818     |           | $          | 18,135 |   |   | 86 | % |   |

 

***Equity in Income ofEquity Method Investments***

Under this caption, werecord our portion of the results of our joint ventures with BioMarin andMedtronic, Inc., or Medtronic and our investment in Peptimmune, Inc.,or Peptimmune.

Equity in income of equitymethod investments increased more than 100% to $5.6 million for the threemonths ended March 31, 2007, as compared to the same period of 2006,primarily due to an increase of $2.7 million in our portion of the netincome of BioMarin/Genzyme LLC attributable to increased sales of Aldurazyme.

***Minority Interest***

In February 2007, weagreed with Dyax to terminate our participation and interest in Dyax-GenzymeLLC effective February 20, 2007. In connection with this termination, wemade a capital contribution of approximately $17 million in cash toDyax-Genzyme LLC, and Dyax purchased our interest in the joint venture for 4.4 millionshares of Dyax common stock, valued at $16.9 million, based on the closingprice of Dyax common stock on February 23, 2007. Prior to February 20,2007, in accordance with FIN 46R, we consolidated the assets related toDyax-Genzyme LLC, which were not significant and consisted primarily of labequipment net of their associated accumulated depreciation, and recorded Dyax’sportion of this joint venture’s losses as minority interest in our consolidatedstatements of operations through February 20, 2007.

***Gains on Investments in Equity Securities, net***

Werecorded the following net realized gains on investments in equity securities duringthe periods presented (amounts in thousands):

| ** **                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| THP                                             |       | $                                                | 10,848     |   | $ | — |   |
| BioMarin                                        |       | —                                           |       | 6,417 |   |
| Other                                           |       | 1,940                                            |       | 1,525 |   |
| Gains on  investments in equity securities, net |       | $                                                | 12,788     |   | $ | 7,942 |   |

 

In March 2007, werecorded a $10.8 million gain in connection with the sale of the entireinvestment in the capital stock of  THPheld by our wholly-owned subsidiary, SangStat Medical, LLC, which had a zerocost basis, for net cash proceeds of $10.8 million.

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***Investment Income***

Our investment incomeincreased 61% to $16.2 million for the three months ended March 31,2007, as compared to $10.1 million for the same period of 2006, primarilydue to higher average cash balances and an increase in our average portfolioyield.

***Interest Expense***

Our interest expensedecreased 6% to $4.2 million for the three months ended March 31,2007, as compared to $4.4 million for the same period of 2006, primarilydue to a $1.4 million decrease in capitalized interest and a$0.2 million decrease in interest related to our 2003 revolving creditfacility, which was terminated in July 2006. These decreases were offset inpart by a $1.4 million increase in interest expense related to asset retirementobligations, for which there was no similar amount in 2006.

**Provision for Income Taxes**

| ** **                  | ** ** | **Three Months Ended**     | ** ** | **Increase/**  | ** ** |
|-----------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                  | ** ** | **March 31,**                   | ** ** | **(Decrease)** | ** ** |
| ** **                  | ** ** | **2007**                             | ** ** | **2006**       | ** ** | **% Change** | ** ** |
| ** **                  | ** ** | **(Amounts in thousands)** | ** ** | ** **     | ** ** |
| Provision for  income taxes |       | $                                    | 71,193     |           | $          | 45,369 |   |   | 57 | % |   |
| Effective tax rate          |       | 31                                   | %          | 31             | %          |   |   |   |   |
|                             |            |                                      |            |                |            |  |  |  |  |  |  |

 

Oureffective tax rate for all periods varies from the U.S. statutory tax rate as aresult of:

·       ourprovision for state income taxes;

·       thetax benefits from export sales;

·       thetax benefits from domestic production activities;

·       benefitsrelated to tax credits;

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

·       non-deductiblestock-based compensation expenses totaling $7.8 million for the three monthsended March 31, 2007 and $5.5 million for the three months endedMarch 31, 2006.

Effective January 1, 2007, we adopted FIN 48 andrecognized a cumulative effect adjustment of $33.9 million to increase ourretained earnings balance as of January 1, 2007, which consisted of $25.8million to record the combined effect of our gain contingency and the change inthe recognition standard pursuant to the settlement criteria of FSP FIN 48-1,and $8.1 million resulting from settlement of our IRS audit for tax years 2002to 2003. After these adjustments, as of January 1, 2007, we had approximately$36.5 million of total gross unrealized tax benefits, of which approximately$26.6 million represents the amount of unrecognized tax benefits that, ifrecognized, would favorably affect our effective income tax rate in any futureperiods. These gross unrealized tax benefits did not change significantlyduring the three months ended March 31, 2007.

We continue to recognize interest relating tounrecognized tax benefits within our provision for income taxes but have notrecorded any amounts related to potential penalties. The amount of accruedinterest related to unrecognized tax benefits within our provision for incometaxes for the three months ended March 31, 2007 and our accrued interestrelated to unrecognized tax benefits as of January 1, 2007 andMarch 31, 2007 were not significant.

We are subject to U.S. federal income tax and variousstate, local and international income taxes in numerous jurisdictions, however,our only significant tax jurisdiction is the United States. We recordliabilities for income tax contingencies based on our best estimate of theunderlying exposures. We are 

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currently under IRS auditsfor tax years 2004 to 2005, and in certain state and foreign jurisdictions from2003 forward. We believe that we have provided sufficiently for all auditexposures and assessments. Settlement of these audits or the expiration of thestatute of limitations on the assessment of income taxes for any tax year mayresult in an increase or reduction of future tax provisions. Any such tax ortax benefit would be recorded upon final resolution of the audits or expirationof the applicable statute of limitations.

Management has concludedthat it is not reasonably possible that the total amounts of unrecognized taxbenefits will significantly increase or decrease within 12 months of thereporting date.

**B.   Liquidityand Capital Resources**

We continue to generatecash from operations. We had cash, cash equivalents and short- and long-terminvestments of $1.5 billion at March 31, 2007 and $1.3 billion at December 31,2006.

The following is a summaryof our statements of cash flows for the three months ended March 31, 2007and 2006.

***Cash Flows fromOperating Activities***

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

| ** **                                                                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                    | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                                                        |       |                             |       |   |   |
| Net income                                                                                                    |       | $                                | 158,187    |   | $ | 100,974 |   |
| Non-cash charges                                                                                              |       | 82,557                           |       | 85,430 |   |
| Decrease in cash  from working capital changes (excluding impact of acquired assets and assumed  liabilities) |       | (42,938                          | )          | (52,374 | ) |
| Cash flows from  operating activities                                                                         |       | $                                | 197,806    |   | $ | 134,030 |   |

 

Cash provided by operatingactivities increased $63.8 million for the three months ended March 31,2007, as compared to the same period of 2006, primarily driven by a$57.2 million increase in earnings, excluding non-cash charges, and a$9.4 million decrease in cash used for working capital.

***Cash Flows fromInvesting Activities***

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

| ** **                                                                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                             | ** ** | **March 31,**               | ** ** |
| ** **                                                                             | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Cash flows from  investing activities:                                                 |       |                             |       |   |   |
| Net sales (purchases)  of investments, excluding investments in equity securities |       | $                                | 32,060     |   | $ | (54,675 | ) |
| Net sales  (purchases) of investments in equity securities                             |       | (1,397                           | )          | 21,964 |   |
| Purchases of  property, plant and equipment                                            |       | (82,982                          | )          | (65,309 | ) |
| Distributions from  equity method investments                                          |       | 6,000                            |       | 8,000 |   |
| Purchases of  other intangible assets                                                  |       | (12,207                          | )          | (19,177 | ) |
| Other investing  activities                                                            |       | 603                              |       | 1,864 |   |
| Cash flows from  investing activities                                                  |       | $                                | (57,923    | ) | $ | (107,333 | ) |

 

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For the threemonths ended March 31, 2007, capital expenditures and acquisitionsaccounted for significant cash outlays for investing activities. During thethree months ended March 31, 2007, we used:

·       approximately$17 million for a capital contribution in connection with the terminationof our participation and interest in Dyax-Genzyme LLC;

·       $83.0 millionin cash to fund the purchase of property, plant and equipment, primarilyrelated to the ongoing expansion of our manufacturing capacity in the Republicof Ireland, the United Kingdom and Belgium, and the construction of a newresearch and development facility in Framingham, Massachusetts; and

·       $12.2 millionin cash for our reacquisition of the Synvisc sales and marketing rights fromWyeth.

These decreases incash were partially offset by cash provided by:

·       $32.1million in cash from the net sales of investments; and

·       $6.0 million of cashdistributions from our joint venture with BioMarin.

***Cash Flows from Financing Activities***

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

| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **March 31,**               | ** ** |
| ** **                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Cash flows from  financing activities:             |       |                             |       |   |   |
| Proceeds from  issuance of common stock            |       | $                                | 27,765     |   | $ | 28,104 |   |
| Excess tax  benefits from stock-based compensation |       | 264                              |       | 2,892 |   |
| Payments of debt  and capital lease obligations    |       | (2,117                           | )          | (858 | ) |
| Increase  (decrease) in bank overdrafts            |       | 29,528                           |       | (542 | ) |
| Minority interest  contributions                   |       | 4,136                            |       | 2,467 |   |
| Other financing  activities                        |       | 2,482                            |       | 768 |   |
| Cash flows from  financing activities              |       | $                                | 62,058     |   | $ | 32,831 |   |

 

**Dyax**

***Agreements withDyax***

In February 2007,we agreed with Dyax to terminate our participation and interest in Dyax-GenzymeLLC effective February 20, 2007. In connection with this termination, wemade a capital contribution of approximately $17 million in cash toDyax-Genzyme LLC and Dyax purchased our interest in the joint venture for4.4 million shares of Dyax common stock, valued at $16.9 million,based on the closing price of Dyax common stock on February 23, 2007. Dyaxnow owns all of the assets of the joint venture, including worldwide rights todevelop and commercialize DX-88. Pursuant to the termination agreement,we agreed to:

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

·       not enter into any futurelicensing or collaboration arrangements for the prevention and or treatment ofhereditary, acquired or drug-induced angioedema for 2 years; and

·       negotiatein good faith a transitional services agreement for us to provide certainservices to Dyax.

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***Note Receivablefrom Dyax***

In May 2002, weextended to Dyax a $7.0 million line of credit. Dyax issued a senior securedpromissory note in the principal amount of $7.0 million to us under which itcan request periodic advances of not less than $250,000 in principal, subjectto certain conditions. Advances under this note were due, together with anyaccrued but unpaid interest, in May 2005. In May 2005, Dyax exercisedits right to extend the maturity of the note from May 2005 to May 2007.

In August 2006, we amendedour $7.0 million secured promissory note receivable from Dyax to, extendthe maturity date from May 2007 to May 2010, eliminate the existingfinancial covenants and replace the original collateral on the note with aletter of credit from a major bank for $7.0 million plus 90 days ofinterest at Prime Rate plus 2%.

As of March 31, 2007,$7.1 million of principal and accrued interest receivable remains due to usfrom Dyax under this note which we have recorded as a note receivable-relatedparty in our unaudited, consolidated balance sheet. The termination of ourparticipation and interest in the joint venture with Dyax had no effect on the notereceivable.

We considered Dyax to be arelated party as of March 31, 2007, because the chairman and chiefexecutive officer of Dyax was a member of our board of directors. As of March 31,2007, as a result of the additional 4.4 million shares of Dyax common stock wereceived in connection with the termination of our participation and interestin Dyax-Genzyme LLC, our ownership interest in Dyax was approximately 10%.

***Revolving CreditFacility***

As of March 31, 2007,no amounts were outstanding under our 2006 revolving credit facility. The termsof our 2006 revolving credit facility include various covenants, includingfinancial covenants that require us to meet minimum interest coverage ratiosand maximum leverage ratios. As of March 31, 2007, we were in compliancewith these covenants.

***ContractualObligations***

The disclosure of paymentswe have committed to make under our contractual obligations is set forth underthe heading “Management’s Discussion and Analysis of Genzyme Corporation andSubsidiaries’ Financial Condition and Results of Operations—Liquidity andCapital Resources” in Exhibit 13 to our 2006 Form 10-K.Excluding additional contingent payments to Wyeth for the reacquisition of theSynvisc sales and marketing rights, and to the former shareholders of Surgi.Brelated to our acquisition of the rights to Surgi.B’s hernia repair products asdescribed above, as of March 31, 2007 there have been no material changesto our contractual obligations since December 31, 2006.

***Financial Position***

Webelieve that our available cash, investments and cash flows from operationswill be sufficient to fund our planned operations and capital requirements forthe foreseeable future. Although we currently have substantial cash resourcesand positive cash flow, we have used or intend to use substantial portions ofour available cash and may make additional borrowings under our 2006 revolvingcredit facility for:

·       productdevelopment and marketing;

·       businesscombinations and other strategic business initiatives;

·       expandingexisting and constructing new facilities;

·       contingentpayments under license and other agreements;

·       expandingstaff; and

·       workingcapital, including satisfaction of our obligations under capital and operatingleases.

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Our cash reserves may befurther reduced to pay principal and interest on the $690.0 million inprincipal under our 1.25% convertible senior notes due December 1, 2023.The notes are initially convertible into Genzyme Stock at a conversion price ofapproximately $71.24 per share. Holders of the notes may require us torepurchase all or any part of the notes for cash, common stock, or acombination, at our option, on December 1, 2008, 2013 or 2018, at a priceequal to 100% of the principal amount of the notes plus accrued and unpaidinterest through the date prior to the date of repurchase. Additionally, upon achange of control, each holder may require us to repurchase for cash, at 100%of the principal amount of the notes plus accrued interest, all or a portion ofthe holder’s notes. On or after December 1, 2008, we may redeem for cashat 100% of the principal amount of the notes plus accrued interest, all or partof the notes that have not been previously converted or repurchased.

In addition, we have severaloutstanding legal proceedings. Involvement in investigations and litigation canbe expensive and a court may ultimately require that we pay expenses anddamages. As a result of legal proceedings, we also may be required to pay feesto a holder of proprietary rights in order to continue certain operations. Wehave provided you details on one pending legal proceeding in the notes to ourconsolidated financial statements.

To satisfy these and othercommitments, we may have to obtain additional financing. We cannot guaranteethat we will be able to obtain any additional financing, extend any existingfinancing arrangement, or obtain either on favorable terms.

**Off-Balance Sheet Arrangements**

We do not use specialpurpose entities or other off-balance sheet financing arrangements. Weenter into guarantees in the ordinary course of business related to theguarantee of our own performance and the performance of our subsidiaries. Inaddition, we have joint ventures and certain other arrangements that are focusedon research, development, and the commercialization of products. Entitiesfalling within the scope of FIN 46R are included in our consolidated statementsof operations if we qualify as the primary beneficiary. Entities not subject toconsolidation under FIN 46R are accounted for under the equity method ofaccounting if our ownership percent exceeds 20% or if we exercise significantinfluence over the entity. We account for our portion of the income/losses ofthese entities in the line item “Equity in income (loss) of equity methodinvestments” in our statements of operations. We also acquire companies inwhich we agree to pay contingent consideration based on attaining certainthresholds.

**Recent Accounting Pronouncements**

*FAS 157, “Fair ValueMeasurements.”*   In September 2006, the FASBissued FAS 157, “Fair Value Measurements,” which provides enhancedguidance for using fair value to measure assets and liabilities. FAS 157establishes a common definition of fair value, provides a framework formeasuring fair value under accounting principles generally accepted in theUnited States and expands disclosure requirements regarding fair valuemeasurements. FAS 157 is effective for us as of January 1, 2008. Weare currently evaluating the impact, if any, the adoption of FAS 157 willhave on our financial position and results of operations.

*FAS 159, “The Fair ValueOption for Financial Assets and Financial Liabilities—Including an Amendment ofFASB Statement No. 115.”*   InFebruary 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Includingan Amendment of FASB Statement No. 115,” which permits, but doesnot require, entities to measure certain financial instruments and other assetsand liabilities at fair value on an instrument-by-instrument basis. Unrealizedgains and losses on items for which the fair value option has been electedshould be recognized in earnings at each subsequent reporting date. FAS 159is effective for us as of January 1, 2008 and cannot be adopted earlyunless FAS 157 is also adopted. We are currently evaluating the impact, ifany, the adoption of FAS 159 may have on our financial position andresults of operations.

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**RISK FACTORS**

Our future operatingresults could differ materially from the results described in this report dueto the risks and uncertainties related to our business, including thosediscussed below.

**Our financial results are highly dependent on sales ofCerezyme.**

We generate a significantportion of our revenue from sales of Cerezyme, our enzyme-replacementproduct for patients with Gaucher disease. Sales of Cerezyme totaled$263.8 million for the quarter ended March 31, 2007, representingapproximately 33% of our consolidated total product revenue. Because ourbusiness is highly dependent on Cerezyme, negative trends in revenue from thisproduct could have a significant adverse effect on our results of operationsand cause the value of our securities to decline substantially. We will loserevenue if alternative treatments gain commercial acceptance, if our marketingactivities are restricted, or if reimbursement is limited. In addition, thepatient population with Gaucher disease is not large. Because a significantpercentage of that population already uses Cerezyme, opportunities for futuresales growth are constrained. Furthermore, changes in the methods for treatingpatients with Gaucher disease, including treatment protocols that combineCerezyme with other therapeutic products or reduce the amount of Cerezymeprescribed, could limit growth, or result in a decline, in Cerezyme sales.

**If we fail to increase sales of several products andservices, we will not meet our financial goals.**

Overthe next few years, our success will depend substantially on our ability toincrease revenue from many different products and services. These products andservices include Renagel, Synvisc, Fabrazyme, Aldurazyme, Myozyme, Hectorol,Thymoglobulin, Thyrogen, Clolar, Campath and diagnostic testing services. Ourability to increase sales will depend on a number of factors, including:

·       acceptanceby the medical community of each product or service;

·       theavailability of competing treatments that are deemed more efficacious, moreconvenient to use, or more cost effective;

·       ourability, and the ability of our collaborators, to efficiently manufacturesufficient quantities of each product to meet demand and to do so in a costefficient manner;

·       regulationby the U.S. Food and Drug Administration, commonly referred to as the FDA, andthe European Agency for the Evaluation of Medicinal Products, or EMEA, andother regulatory authorities of these products and the facilities in whichthese products are manufactured;

·       thescope of the labeling approved by regulatory authorities for each product andcompetitive products;

·       theeffectiveness of our sales force;

·       theavailability and extent of coverage, pricing and level of reimbursement fromgovernmental agencies and third party payors; and

·       thesize of the patient population for each product or service and our ability toidentify new patients.

Part of our growthstrategy involves conducting additional clinical trials to support approval ofexpanded uses of some of our products, including Clolar and alemtuzumab, pursuingmarketing approval for our products in new jurisdictions and developing nextgeneration products such as Renvela and Synvisc-One. The success of thiscomponent of our growth strategy will depend on the outcome of these additionalclinical trials, the content and timing of our submissions to regulatoryauthorities and whether and when those authorities determine to grantapprovals.

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Because the healthcareindustry is extremely competitive and regulatory requirements are rigorous, wespend substantial funds marketing our products and attempting to expandapproved uses for them. These expenditures depress near-term profitability,with no assurance that the expenditures will generate future profits thatjustify the expenditures.

**Ourfuture success will depend on our ability to effectively develop and market ourproducts and services against those of our competitors.**

The human healthcare productsand services industry is extremely competitive. Other organizations, includingpharmaceutical, biotechnology, device and diagnostic testing companies, havedeveloped and are developing products and services to compete with ourproducts, services, and product candidates. If healthcare providers, patientsor payors prefer these competitive products or services or these competitiveproducts or services have superior safety, efficacy, pricing or reimbursementcharacteristics, we will have difficulty maintaining or increasing the sales ofour products and services.

Renagel competes with twoother products approved in the United States for the control of elevatedphosphorus levels in patients with chronic kidney failure on hemodialysis.Fresenius Medical Care markets PhosLo®, a calcium-based phosphate binder.Shire Pharmaceuticals Group plc, or Shire, markets 

 

Fosrenol®, a non-calcium based phosphatebinder. Renagel also competes with over-the-counter calcium carbonate productssuch as TUMS® and metal-based options such as aluminum andmagnesium.

Both the oral and theintravenous formulations of Hectorol face competition. Abbott Laboratoriesmarkets intravenous Calcijex® and intravenousZemplar® in the United States and Europe. More recentlyit has begun marketing an oral formulation of Zemplar in the United States.Hectorol faces competition from several other vitamin D hormone therapies usedto treat hyperparathyroidism and hyperproliferative diseases as well.

UCB S.A. has developedZavesca®, asmall molecule drug for the treatment of Gaucher disease, the disease addressedby Cerezyme. Zavesca has been approved in the United States, European Union andIsrael as an oral therapy for use in patients with mild to moderate Type 1Gaucher disease for whom enzyme replacement therapy is unsuitable. In addition,Shire reported top-line data from a phase 1/2 clinical trial for itsgene-activated glucocerebrosidase program, also to treat Gaucher disease, andannounced initiation of a phase 3 study in 2007. We are also aware of otherdevelopment efforts aimed at treating Gaucher disease.

Outside the United States,Shire is marketing ReplagalTM, a competitive enzyme replacement therapy forFabry disease which is the disease addressed by Fabrazyme. In addition, whileFabrazyme has received orphan drug designation, which provides us with sevenyears of market exclusivity for the product in the United States, othercompanies may seek to overcome our market exclusivity and, if successful,compete with Fabrazyme in the United States. We are aware of other developmentefforts aimed at treating Fabry disease.

Current competition forSynvisc includes Supartz®,a product manufactured by Seikagaku Kogyo that is sold in the United States bySmith & Nephew Orthopaedics and in Japan by Kaken Pharmaceutical Co.under the name Artz®;Hyalgan®, produced byFidia Farmaceutici S.p.A. and marketed in the United States by Sanofi-Aventis;Orthovisc®, produced byAnika Therapeutics, Inc., and marketed in the United States by Johnson &Johnson and marketed outside the United States through distributors; EuflexxaTM,a product manufactured and sold by Ferring Pharmaceuticals and marketed in theUnited States and Europe; and Durolane®,manufactured by Q-Med AB and distributed outside the United States by Smith &Nephew Orthopedics. We are aware of various viscosupplementation products onthe market or in development, but are unaware of any products that havephysical properties of viscosity, elasticity or molecular weight comparable tothose of Synvisc. Furthermore, several companies market products that 

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are notviscosupplementation products but which are designed to relieve the painassociated with osteoarthritis. Synvisc will have difficulty competing with anyof these products to the extent the competitive products are considered moreefficacious, less burdensome to administer or more cost-effective.

Several companies marketproducts that, like Thymoglobulin and Lymphoglobuline, are used for theprevention and treatment of acute rejection in renal transplant. These productsinclude Novartis’ Simulect®, Pfizer Inc.’s ATGAM®, Ortho Biotech’s Orthoclone OKT®3, Fresenius Biotech GmbH’sATG-Fresenius S® and the Roche Group’s Zenapax®. Competition in the acute transplantrejection market is driven largely by product efficacy due to the potentialdecreased long-term survival of transplanted organs as the result of an acuteorgan rejection episode.

The examples above areillustrative. Almost all of our products and services face competition.Furthermore, the field of biotechnology is characterized by significant andrapid technological change. Discoveries by others may make our products orservices obsolete. For example, competitors may develop approaches to treatingLSDs that are more effective, convenient or less expensive than our productsand product candidates. Because a significant portion of our revenue is derivedfrom products that address this class of diseases and a substantial portion ofour expenditures is devoted to developing new therapies for this class ofdiseases, such a development would have a material negative impact on ourresults of operations.

**If wefail to obtain adequate levels of reimbursement for our products from thirdparty payors, the commercial potential of our products will be significantlylimited.**

A substantial portion ofour domestic and international revenue comes from payments by third partypayors, including government health administration authorities and privatehealth insurers. Governments and other third party payors may not provideadequate insurance coverage or reimbursement for our products and services,which could impair our financial results.

Thirdparty payors are increasingly scrutinizing pharmaceutical budgets andhealthcare expenses and are attempting to contain healthcare costs by:

·       challengingthe prices charged for healthcare products and services;

·       limitingboth the coverage and the amount of reimbursement for new therapeutic products;

·       reducingexisting reimbursement rates for commercialized products and services;

·       limitingcoverage for the treatment of a particular patient to a maximum dollar amountor specified period of time;

·       denyingor limiting coverage for products that are approved by the FDA or othergovernmental regulatory bodies but are considered experimental orinvestigational by third party payors; and

·       refusingin some cases to provide coverage when an approved product is used for diseaseindications in a way that has not received FDA or other applicable marketingapproval.

Attempts by third partypayors to reduce costs in any of these ways could decrease demand for ourproducts. In addition, in certain countries, including countries in theEuropean Union and Canada, the coverage of prescription drugs, the pricing, andthe level of reimbursement are subject to governmental control. Therefore, wemay be unable to negotiate coverage, pricing and/or reimbursement on terms thatare favorable to us. Government health administration authorities may also relyon analyses of the cost-effectiveness of certain therapeutic products indetermining whether to provide reimbursement for such products. Our ability toobtain satisfactory pricing and reimbursement may depend in part on whether ourproducts, the cost of some of which is high in comparison to other therapeuticproducts, are viewed as cost-effective.

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Furthermore, governmentalregulatory bodies, such as the Centers for Medicare and Medicaid Services(CMS), may from time-to-time make unilateral changes to reimbursement rates forour products and services. These changes could reduce our revenues by causinghealthcare providers to be less willing to use our products and services.Although we actively seek to assure that any initiatives that are undertaken byregulatory agencies involving reimbursement for our products and services donot have an adverse impact on us, we may not always be successful in theseefforts. For example, in October 2006, the CMS announced a change to thebilling code for viscosupplementation products effective January 2007that, if unchanged, would have resulted in Medicare reimbursement for Synviscat a rate that is lower than the price healthcare providers are currentlypaying for the product. In December 2006, the CMS reversed its decision.If the CMS billing code decision had been left unchanged, our Synvisc revenueswould have been adversely affected because healthcare providers likely wouldhave been less willing to use Synvisc. Although the CMS ultimately reversed itsdecision and left the mechanism for calculating Synvisc reimbursement in 2007substantially similar to the reimbursement mechanism for 2006, we have no wayof knowing whether, at some point in the future, the CMS will change the methodfor reimbursing Synvisc or any of our other products and services in a way thatcould have an adverse effect on our revenues.

**Thedevelopment of new biotechnology products involves a lengthy and complexprocess, and we may be unable to commercialize any of the products we arecurrently developing.**

We have numerous productsunder development and devote considerable resources to research anddevelopment, including clinical trials.

Beforewe can commercialize our development-stage product candidates, we willneed to:

·       conductsubstantial research and development;

·       undertakepreclinical and clinical testing;

·       developand scale-up manufacturing processes; and

·       pursueregulatory approvals and, in some jurisdictions, pricing approvals.

Thisprocess involves a high degree of risk and takes many years. Our productdevelopment efforts with respect to a product candidate may fail for manyreasons, including:

·       failureof the product candidate in preclinical studies;

·       difficultyenrolling patients in clinical trials, particularly for disease indicationswith small populations;

·       patientsexhibiting adverse reactions to the product candidate or indications of othersafety concerns;

·       insufficientclinical trial data to support the effectiveness of the product candidate;

·       ourinability to manufacture sufficient quantities of the product candidate fordevelopment or commercialization activities in a timely and cost-efficientmanner;

·       ourfailure to obtain the required regulatory approvals for the product candidateor the facilities in which it is manufactured; or

·       changesin the regulatory environment, including pricing and reimbursement, that makedevelopment of a new product or indication no longer desirable.

Few research anddevelopment projects result in commercial products, and success in preclinicalstudies or early clinical trials often is not replicated in later studies. Wemay decide to abandon development of a product or service candidate at any timeor we may be required to expend considerable resources repeating clinicaltrials or conducting additional trials, either of which would increase costs ofdevelopment and delay any revenue from those product candidates.

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Our efforts to expand theapproved indications for our products and to gain marketing approval in newjurisdictions and to develop next generation products also may fail. Theseexpansion efforts are subject to many of the risks associated with completely newproducts and accordingly, we may fail to recoup the investments we makepursuing these strategies.

**We may encountersubstantial difficulties managing our growth.**

Several risks are inherent to our plans to grow ourbusiness. Achieving our goals will require substantial investments in researchand development, sales and marketing, and facilities. For example, we havespent considerable resources building and seeking regulatory approvals for ourmanufacturing plants. We cannot assure you that these facilities will provesufficient to meet demand for our products or that we will not have excesscapacity at these facilities. In addition, building our facilities isexpensive, and our ability to recover these costs will depend on increasedrevenue from the products produced at the facilities.

We produce relatively small amounts of material forresearch and development activities and pre-clinical trials. Even if a productcandidate receives all necessary approvals for commercialization, we may not beable to successfully scale up production of the product material at areasonable cost or at all.

If we are able to grow sales of our products, we mayhave difficulty managing inventory levels. Marketing new therapies is acomplicated process, and gauging future demand is difficult. With Renagel, forexample, we have encountered problems in the past managing inventory levels atwholesalers. Comparable problems may arise with any of our products,particularly during market introduction.

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

·       wholesalerbuying patterns;

·       reimbursementrates;

·       physicianprescribing habits;

·       theavailability or pricing of competitive products; and

·       currencyexchange rates.

We may also experiencefluctuations in our quarterly results due to price changes and salesincentives. For example, purchasers of our products, particularly wholesalers,may increase purchase orders in anticipation of a price increase and reduceorder levels following the price increase. We occasionally offer salesincentives and promotional discounts on some of our products and services thatcould have a similar impact. In addition, some of our products, includingSynvisc, are subject to seasonal fluctuation in demand.

**Our operating results and financial position may beimpacted when we attempt to grow through business combination transactions.**

We may encounter problemsassimilating operations acquired in business combination transactions. Thesetransactions often entail the assumption of unknown liabilities, the loss ofkey employees, and the diversion of management attention. Furthermore, in anybusiness combination, including our acquisition of AnorMED Inc., there is asubstantial risk that we will fail to realize the benefits we anticipate whenwe decide to undertake the transaction. We have in the past taken significantcharges for impaired goodwill and for impaired assets acquired in businesscombination transactions. We may be required to take similar charges in thefuture.

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**Manufacturing problems may cause product launchdelays, inventory shortages, recalls and unanticipated costs.**

In order to generate revenue from our approvedproducts, we must be able to produce sufficient quantities of the products.Many of our products are difficult to manufacture. Our products that arebiologics, for example, require product characterization steps that are moreonerous than those required for most chemical pharmaceuticals. Accordingly, weemploy multiple steps to attempt to control the manufacturing processes. Minordeviations in these manufacturing processes could result in unacceptablechanges in the products that result in lot failures, product recalls, productliability claims and insufficient inventory.

Certain of the raw materials required in thecommercial manufacturing and the formulation of our products are derived frombiological sources, including mammalian sources and human plasma. Such rawmaterials may be subject to contamination or recall. Also, some countries inwhich we market our products may restrict the use of certain biologicallyderived substances in the manufacture of drugs. A material shortage, contamination,recall, or restriction of the use of certain biologically derived substances inthe manufacture of our products could adversely impact or disrupt ourcommercial manufacturing of our products or could result in a mandatedwithdrawal of our products from the market. This too, in turn, could adverselyaffect our ability to satisfy demand for our products, which could materiallyand adversely affect our operating results.

In addition, we may only be able to produce certain ofour products at a very limited number of facilities and, in some cases, we relyon third parties to formulate and manufacture our products. For example, wemanufacture all of our Cerezyme and a portion of our Fabrazyme and Myozymeproducts at our facility in Allston, Massachusetts. A number of factors couldcause production interruptions at our facilities or the facilities of our thirdparty providers, including equipment malfunctions, labor problems, naturaldisasters, power outages, terrorist activities, or disruptions in the operationsof our suppliers.

Manufacturing is alsosubject to extensive government regulation. Regulatory authorities must approvethe facilities in which human healthcare products are produced. In addition,facilities are subject to ongoing inspections and minor changes inmanufacturing processes may require additional regulatory approvals, either ofwhich could cause us to incur significant additional costs and lose revenue.Furthermore, any third party we use to manufacture, fill-finish or package ourproducts to be sold must also be licensed by the applicable regulatoryauthorities. As a result, alternative third party providers may not be readilyavailable on a timely basis. 

**Guidelines andrecommendations published by various organizations can reduce the use of ourproducts.**

Professional societies,practice management groups, private health/science foundations, andorganizations involved in various diseases may publish guidelines orrecommendations to the healthcare and patient communities from time to time.Recommendations of government agencies or these other groups/organizations mayrelate to such matters as usage, dosage, route of administration,cost-effectiveness, and use of related therapies. Organizations like these havein the past made recommendations about our products and products of ourcompetitors. Recommendations or guidelines that are followed by patients andhealthcare providers could result in decreased use of our products. Theperception by the investment community or shareholders that recommendations orguidelines will result in decreased use of our products could adversely affectprevailing market price for our common stock. In addition, our success alsodepends on our ability to educate patients and healthcare providers about ourproducts and their uses. If these education efforts are not effective, then wemay not be able to increase the sales of our existing products or successfullyintroduce new products to the market.

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**Werely on third parties to provide us with materials and services in connectionwith the manufacture of our products.**

Certain materialsnecessary for commercial production of our products, including specialtychemicals and components necessary for manufacture, fill-finish and packaging,are provided by unaffiliated third party suppliers. In some cases, suchmaterials are specifically cited in our marketing application with regulatoryauthorities so that they must be obtained from that specific source unless anduntil the applicable authority approved another supplier. In addition, theremay only be one available source for a particular chemical or component. Forexample, we acquire polyalylamine (PAA), used in the manufacture of Renagel andWelChol, from Cambrex Charles City, Inc., the only source for thismaterial currently qualified in our FDA drug applications for these products.Our suppliers also may be subject to FDA regulations or the regulations ofother governmental agencies outside the United States regarding manufacturingpractices. We may be unable to manufacture our products in a timely manner orat all if these third party suppliers were to cease or interrupt production orotherwise fail to supply these materials or products to us for any reason,including due to regulatory requirements or actions, adverse financialdevelopments at or affecting the supplier, or labor shortages or disputes.

We also source some of ourmanufacturing, fill-finish, packaging and distribution operations to thirdparty contractors. The manufacture of products, fill-finish, packaging anddistribution of our products requires successful coordination among these thirdparty providers and Genzyme. Our inability to coordinate these efforts, thelack of capacity available at a third party contractor or any other problemswith the operations of these third party contractors could require us to delayshipment of saleable products, recall products previously shipped or couldimpair our ability to supply products at all. This could increase our costs,cause us to lose revenue or market share and damage our reputation.

**If our strategic alliances are unsuccessful, ouroperating results will be negatively impacted.**

Several of our strategicinitiatives involve alliances with other biotechnology and pharmaceuticalcompanies, including a joint venture with BioMarin Pharmaceutical Inc.with respect to Aldurazyme. The success of these and similar arrangements islargely dependent on technology and other intellectual property contributed byour strategic partners or the resources, efforts, and skills of our partners.Disputes and difficulties in such relationships are common, often due toconflicting priorities or conflicts of interest. Merger and acquisitionactivity may exacerbate these conflicts. The benefits of these alliances arereduced or eliminated when strategic partners:

·       terminatethe agreements or limit our access to the underlying intellectual property;

·       failto devote financial or other resources to the alliances and thereby hinder ordelay development, manufacturing or commercialization activities;

·       failto successfully develop, manufacture or commercialize any products; or

·       failto maintain the financial resources necessary to continue financing theirportion of the development, manufacturing, or commercialization costs of theirown operations.

Furthermore, payments wemake under these arrangements may exacerbate fluctuations in our financialresults. In addition, under some of our strategic alliances, we make milestonepayments well in advance of commercialization of products with no assurancethat we will ever recoup these payments. We also may make equity investments inour strategic partners, as we did with RenaMed Biologics, Inc., orRenaMed, in June 2005. Our strategic equity investments are subject tomarket fluctuations, access to capital and other business events, such asinitial public offerings, the completion of clinical trials and regulatoryapprovals, which can impact the value of these investments. For example, in October 2006,RenaMed suspended clinical trials of its renal assist device which was beingdeveloped to treat patients with acute renal failure, causing us to write offour entire investment in RenaMed. If any of our other 

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strategicequity investments decline in value and remain below cost for an extendedduration, we may incur additional financial statement charges.

**Governmentregulation imposes significant costs and restrictions on the development andcommercialization of our products and services.**

Our success will depend onour ability to satisfy regulatory requirements. We may not receive requiredregulatory approvals on a timely basis or at all. Government agencies heavilyregulate the production and sale of healthcare products and the provision ofhealthcare services. In particular, the FDA and comparable regulatory agenciesin foreign jurisdictions must approve human therapeutic and diagnostic productsbefore they are marketed, as well as the facilities in which they are made.This approval process can involve lengthy and detailed laboratory and clinicaltesting, sampling activities and other costly and time-consuming procedures.Several biotechnology companies have failed to obtain regulatory approvalsbecause regulatory agencies were not satisfied with the structure or conduct ofclinical trials. Similar problems could delay or prevent us from obtainingapprovals. Furthermore, regulatory authorities, including the FDA, may notagree with our interpretations of our clinical trial data, which could delay,limit or prevent regulatory approvals.

Therapiesthat have received regulatory approval for commercial sale may continue to faceregulatory difficulties. If we fail to comply with applicable regulatoryrequirements, regulatory authorities could take actions against us, including:

·       issuingwarning letters;

·       issuingfines and other civil penalties;

·       suspendingregulatory approvals;

·       refusingto approve pending applications or supplements to approved applications;

·       suspendingproduct sales and/or exports;

·       mandatingproduct recalls; and

·       seizingproducts.

Furthermore, the FDA andcomparable foreign regulatory agencies may require post-marketing clinicaltrials or patient outcome studies. We have agreed with the FDA, for example, toa number of post-marketing commitments as a condition to U.S. marketing approvalfor Fabrazyme, Aldurazyme and Myozyme. In addition, regulatory agencies subjecta marketed therapy, its manufacturer and the manufacturer’s facilities tocontinual review and periodic inspections. The discovery of previously unknownproblems with a therapy or the facility used to produce the therapy couldprompt a regulatory authority to impose restrictions on us, or could cause usto voluntarily adopt such restrictions, including withdrawal of one or more ofour products or services from the market.

**We may incur substantial costs as a result oflitigation or other proceedings.**

Athird party may sue us or one of our strategic collaborators for infringing thethird party’s patent or other intellectual property rights. Likewise, we or oneof our strategic collaborators may sue to enforce intellectual property rightsor to determine the scope and validity of third party proprietary rights. If wedo not prevail in this type of litigation, we or our strategic collaboratorsmay be required to:

·       paymonetary damages;

·       stopcommercial activities relating to the affected products or services;

·       obtaina license in order to continue manufacturing or marketing the affected productsor services; or

·       competein the market with a different product.

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We are also currentlyinvolved in litigation matters and investigations that do not involveintellectual property claims and may be subject to additional actions in thefuture. For example, we are currently defending several lawsuits brought inconnection with the elimination of our tracking stock in June 2003, someof which claim considerable damages. Also, the federal government, stategovernments and private payors are investigating and have begun to file actionsagainst numerous pharmaceutical and biotechnology companies, including Genzyme,alleging that the companies have overstated prices in order to inflatereimbursement rates. Domestic and international enforcement authorities alsohave instituted actions under healthcare “fraud and abuse” laws, includinganti-kickback and false claims statutes. Moreover, individuals who use ourproducts or services, including our diagnostic products and genetic testingservices, sometimes bring product and professional liability claims against usor our subsidiaries.

We may also become subjectto investigations by government authorities in connection with our businessactivities. For example, we are currently cooperating with an investigation ofBone Care by the United States Attorney for the Eastern District of New Yorkwhich was initiated in October 2004, when Bone Care received a subpoenarequiring it to provide a wide range of documents related to numerous aspectsof its business.

We believe some of ourproducts are prescribed by physicians for uses not approved by the FDA orcomparable regulatory agencies outside the United States. Although physiciansmay lawfully prescribe our products for off-label uses, any promotion by us ofoff-label uses would be unlawful. Some of our practices intended to makephysicians aware of off-label uses of our products without engaging inoff-label promotion could nonetheless be construed as off-label promotion.Although we have policies and procedures in place designed to help assureongoing compliance with regulatory requirements regarding off-label promotion,some non-compliant actions may nonetheless occur. Regulatory authorities couldtake enforcement action against us if they believe we are promoting, or havepromoted, our products for off-label use.

We have only limitedamounts of insurance, which may not provide coverage to offset a negativejudgment or a settlement payment. We may be unable to obtain additionalinsurance in the future, or we may be unable to do so on acceptable terms. Anyadditional insurance we do obtain may not provide adequate coverage against anyasserted claims.

Regardlessof merit or eventual outcome, investigations and litigations can result in:

·       diversionof management’s time and attention;

·       expenditureof large amounts of cash on legal fees, expenses, and payment of damages;

·       limitationson our ability to continue some of our operations;

·       decreaseddemand for our products and services; and

·       injury to our reputation.

**Ourinternational sales, clinical activities, manufacturing and other operationsare subject to the economic, political, legal and business environments of thecountries in which we do business, and our failure to operate successfully oradapt to changes in these environments could cause our international sales andoperations to be limited or disrupted.**

Ourinternational operations accounted for approximately 47% of our consolidatedproduct and service revenues for the quarter ended March 31, 2007. Weexpect that international product and service sales will continue to accountfor a significant percentage of our revenues for the foreseeable future. Inaddition, we have direct investments in a number of subsidiaries outside of theUnited States, primarily in the European Union, Latin America and Japan. Ourinternational sales and operations could be limited or disrupted, and the valueof our direct investments may be diminished, by any of the following:

·       economicproblems that disrupt foreign healthcare payment systems;

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·       fluctuationsin currency exchange rates;

·       theimposition of governmental controls;

·       lessfavorable intellectual property or other applicable laws;

·       theinability to obtain any necessary foreign regulatory or pricing approvals ofproducts in a timely manner;

·       theinability to obtain third party reimbursement support for products;

·       productcounterfeiting and intellectual property piracy;

·       parallelimports;

·       anti-competitivetrade practices;

·       importand export license requirements;

·       politicalinstability;

·       terroristactivities, armed conflict, or outbreak of diseases such as severe acuterespiratory syndrome (SARS) or avian influenza;

·       restrictionson direct investments by foreign entities and trade restrictions;

·       changesin tax laws and tariffs;

·       difficultiesin staffing and managing international operations; and

·       longerpayment cycles.

Our operations and marketing practices are alsosubject to regulation and scrutiny by the governments of the other countries inwhich we operate. In addition, the United States Foreign Corrupt Practices Actprohibits U.S. companies and their representatives from offering, promising,authorizing or making payments to foreign officials for the purpose ofobtaining or retaining business abroad. Failure to comply with domestic orforeign laws could result in various adverse consequences, including possibledelay in approval or refusal to approve a product, recalls, seizures,withdrawal of an approved product from the market, and/or the imposition ofcivil or criminal sanctions.

A significant portion ofour business is conducted in currencies other than our reporting currency, theU.S. dollar. We recognize foreign currency gains or losses arising from ouroperations in the period in which we incur those gains or losses. As a result,currency fluctuations among the U.S. dollar and the currencies in which we dobusiness have caused foreign currency transaction gains and losses in the pastand will likely do so in the future. Because of the number of currenciesinvolved, the variability of currency exposures and the potential volatility ofcurrency exchange rates, we may suffer significant foreign currency transactionlosses in the future due to the effect of exchange rate fluctuations.

**We may fail to adequately protect our proprietarytechnology, which would allow competitors or others to take advantage of ourresearch and development efforts.**

Our long-term success largely depends on our abilityto market technologically competitive products. If we fail to obtain ormaintain adequate intellectual property protection in the United States orabroad, we may not be able to prevent third parties from using our proprietarytechnologies. Our currently pending or future patent applications may notresult in issued patents. Patent applications are confidential for18 months following their filing, and because third parties may have filedpatent applications for technology covered by our pending patent applicationswithout us being aware of those applications, our patent applications may nothave priority over patent applications of others. In addition, our issuedpatents 

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may not contain claimssufficiently broad to protect us against third parties with similartechnologies or products, or provide us with any competitive advantage. If athird party initiates litigation regarding our patents, our collaborators’patents, or those patents for which we have license rights, and is successful,a court could declare our patents invalid or unenforceable or limit the scopeof coverage of those patents. Governmental patent offices and courts have notconsistently treated the breadth of claims allowed in biotechnology patents. Ifpatent offices or the courts begin to allow or interpret claims more broadly,the incidence and cost of patent interference proceedings and the risk ofinfringement litigation will likely increase. On the other hand, if patentoffices or the courts begin to allow or interpret claims more narrowly, thevalue of our proprietary rights may be reduced. Any changes in, or unexpectedinterpretations of, the patent laws may adversely affect our ability to enforceour patent position.

We also rely upon tradesecrets, proprietary know-how, and continuing technological innovation toremain competitive. We attempt to protect this information with securitymeasures, including the use of confidentiality agreements with employees,consultants, and corporate collaborators. These individuals may breach theseagreements and any remedies available to us may be insufficient to compensatefor our damages. Furthermore, our trade secrets, know-how and other technology mayotherwise become known or be independently discovered by our competitors.

**We may be required to license technology fromcompetitors or others in order to develop and commercialize some of ourproducts and services, and it is uncertain whether these licenses would beavailable.**

Third party patents may cover some of the products orservices that we or our strategic partners are developing or producing. Apatent is entitled to a presumption of validity and accordingly, we facesignificant hurdles in any challenge to a patent. In addition, even if we aresuccessful in challenging the validity of a patent, the challenge itself may beexpensive and require significant management attention.

To the extent valid thirdparty patent rights cover our products or services, we or our strategiccollaborators would be required to seek licenses from the holders of thesepatents in order to manufacture, use, or sell these products and services, andpayments under them would reduce our profits from these products and services.We may not be able to obtain these licenses on acceptable terms, or at all. Ifwe fail to obtain a required license or are unable to alter the design of ourtechnology to fall outside the scope of a third party patent, we may be unableto market some of our products and services, which would limit ourprofitability.

**Importation of products may lower the prices wereceive for our products.**

In the United States andabroad, many of our products are subject to competition from lower-pricedversions of our products and competing products from other countries wheregovernment price controls or other market dynamics result in lower prices forsuch products. Our products that require a prescription in the United Statesmay be available to consumers in markets such as Canada, Mexico, Taiwan and theMiddle East without a prescription, which may cause consumers to further seekout these products in these lower priced markets. The ability of patients andother customers to obtain these lower priced imports has grown significantly asa result of the Internet, an expansion of pharmacies in Canada and elsewherethat target American purchasers, the increase in U.S.-based businessesaffiliated with Canadian pharmacies marketing to American purchasers, and otherfactors. Most of these foreign imports are illegal under current United Stateslaw. However, the volume of imports continues to rise due to the limitedenforcement resources of the FDA and the United States Customs Service, andthere is increased political pressure to permit such imports as a mechanism forexpanding access to lower priced medicines. The importation of lower-pricedversions of our products into the United States and other markets adverselyaffects our profitability. This impact could become more significant in thefuture.

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**Legislative orregulatory changes may adversely impact our business.**

The United Statesgovernment and other governments have shown significant interest in pursuinghealthcare reform. Any government-adopted reform measures could adverselyimpact:

·       thepricing of healthcare products in the United States or internationally; and

·       theamount of reimbursement available from governmental agencies or other thirdparty payors.

New laws, regulations andjudicial decisions, or new interpretations of existing laws, regulations anddecisions, that relate to healthcare availability, methods of delivery orpayment for products and services, or sales, marketing or pricing may cause ourrevenue to decline, and we may need to revise our research and developmentprograms.

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

As of March 31, 2007, we had $1.5 billion incash, cash equivalents and short- and long-term investments, excludinginvestments in equity securities.

We intend to usesubstantial portions of our available cash for:

·       productdevelopment and marketing;

·       businesscombinations and other strategic business initiatives;

·       expandingexisting and constructing additional facilities;

·       expandingstaff; and

·       workingcapital, including satisfaction of our obligations under capital and operatingleases.

We may further reduce available cash reserves to payprincipal and interest on outstanding debt, including our $690.0 millionin principal of 1.25% convertible senior notes.

To satisfy our cashrequirements, we may have to obtain additional financing. We may be unable toobtain any additional financing or extend any existing financing arrangementsat all or on terms that we or our investors consider favorable.

**Our level ofindebtedness may harm our financial condition and results of operations.**

At March 31,2007, we had $697.8 million of outstanding indebtedness, excluding capitalleases. We may incur additional indebtedness in the future. Our level ofindebtedness will have several important effects on our future operations,including:

·       increasingour vulnerability to adverse changes in general economic and industryconditions; and

·       limitingour ability to obtain additional financing for capital expenditures,acquisitions and general corporate and other purposes.

Our ability to make payments and interest on ourindebtedness depends upon our future operating and financial performance.

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**ITEM3.**                Quantitative and Qualitative Disclosures AboutMarket Risk

**Market Risk**

We are exposed topotential loss from exposure to market risks represented principally by changesin interest rates, foreign exchange rates and equity prices. At March 31,2007, we held various derivative contracts in the form of foreign exchangeforward contracts. The derivatives contain no leverage or option features. Wealso held a number of other financial instruments, including investments inmarketable securities and various debt securities we issued. We do not holdderivatives or other financial instruments for trading purposes.

**Equity Price Risk**

We hold investments in alimited number of U.S. and European equity securities. We estimated thepotential loss in fair value due to a 10% decrease in the equity prices of marketablesecurities held at March 31, 2007 to be $5.6 million, as compared to$4.2 million at December 31, 2006. The increase is due to the purchase of4.4 million additional shares of Dyax common stock. This estimate assumesno change in foreign exchange rates from quarter-end spot rates andexcludes any potential risk associated with securities that do not have readilydeterminable market value.

**Interest Rate Risk**

We are exposed to potential loss due to changes ininterest rates. Our principal interest rate exposure is to changes in U.S.interest rates. Instruments with interest rate risk include short- andlong-term investments in fixed income securities. Other exposures tointerest rate risk include fixed rate convertible debt and fixed rate debt. Toestimate the potential loss due to changes in interest rates, we performed asensitivity analysis using the instantaneous adverse change in interest ratesof 100 basis points across the yield curve.

We used thefollowing assumptions in preparing the sensitivity analysis for our convertiblebonds:

·       convertiblenotes that are “in-the-money” at March 31, 2007 are consideredequity securities and are excluded;

·       convertiblenotes that are “out-of-the-money” at March 31, 2007 areanalyzed by taking into account both fixed income and equity components; and

·       convertiblenotes will mature on the first available date.

On this basis, we estimatethe potential loss in fair value that would result from a hypothetical 1% (100basis points) increase in interest rates to be $4.6 million as of March 31,2007, as compared to $4.2 million as of December 31, 2006.

**Foreign ExchangeRisk**

As a result of our worldwide operations, we may faceexposure to adverse movements in foreign currency exchange rates, primarily tothe Euro, British pound and Japanese yen. These exposures are reflected inmarket risk sensitive instruments, including foreign currency receivables andpayables, foreign exchange forward contracts and foreign equity holdings.

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As of March 31,2007, we estimate the potential loss in fair value of our foreign currencycontracts that would result from a hypothetical 10% adverse change in exchangerates to be $43.0 million, as compared to $34.2 million as of December 31,2006. The change from the prior period is primarily due to a new forwardcontract to hedge approximately $145 million of foreign currency exposurerelated to an intercompany note denominated in Euros, partially offset by an increasein foreign currency being held.

**ITEM 4.**                CONTROLSAND PROCEDURES

At the direction of our Chief Executive Officer andChief Financial Officer, we evaluated our disclosure controls and proceduresand internal control over financial reporting and concluded that: (1) ourdisclosure controls and procedures were effective as of March 31, 2007;and (2) no change in internal control over financial reporting occurredduring the quarter ended March 31, 2007 that has materially affected, oris reasonably likely to materially affect, such internal control over financialreporting.

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**PART II. OTHERINFORMATION**

**Item1.**                Legal Proceedings

***Legal Proceedings***

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

Four lawsuits have been filed against us regarding theexchange of all of the outstanding shares of Biosurgery Stock for shares ofGenzyme Stock in connection with the elimination of our tracking stocks in July 2003.Each of the lawsuits is a purported class action on behalf of holders ofBiosurgery Stock. The first case, filed in Massachusetts Superior Court (MSC)in May 2003, alleged a breach of the implied covenant of good faith andfair dealing in our charter and a breach of our board of directors’ fiduciaryduties. The plaintiff in this case sought an injunction to adjust the exchangeratio for the tracking stock exchange. The MSC dismissed the complaint in itsentirety in November 2003. Upon appeal, the Massachusetts Appeals Courtupheld the dismissal by the MSC of the fiduciary duty claim, but reversed theearlier decision to dismiss the implied covenant claim. The MassachusettsSupreme Judicial Court (SJC) has granted our petition for further appellatereview of the Appeals Court decision reversing the dismissal of the impliedcovenant claim. The SJC heard oral arguments on December 4, 2006. A rulingon the appeal is anticipated in the first half of 2007. Two substantiallysimilar cases were filed in the MSC in August and October 2003. Thesecases were consolidated in January 2004, and in July 2004, theconsolidated case was stayed pending disposition of a fourth case, which wasfiled in the U.S. District Court for the Southern District of New York in June 2003.This complaint initially alleged violations of federal securities laws, commonlaw fraud, and a breach of the merger agreement with Biomatrix, Inc., orBiomatrix, in addition to the state law claims contained in the other cases.The plaintiffs initially sought an adjustment to the exchange ratio, therescission of the acquisition of Biomatrix, and unspecified compensatorydamages. In December 2005, the plaintiffs in this case filed an amendedcomplaint in which they dropped all of the claims alleged in the initialcomplaint relating to the initial issuance of Biosurgery Stock and theacquisition of Biomatrix, and narrowed the putative class to include only thoseindividuals who held Biosurgery Stock on May 8, 2003. We filed a motion todismiss the amended complaint and to oppose the class certification. The Courtdenied our motion to dismiss the amended complaint and certified this case as aclass action on behalf of all shareholders who held Biosurgery Stock on May 8,2003. We filed a petition asking the U.S. Court of Appeals for the SecondCircuit to review the class certification decision, which has been denied.Discovery in this action is currently ongoing. A trial in this matter iscurrently scheduled for August 2007. We believe each of these cases is withoutmerit and continue to defend against them vigorously.

We are not able to predictthe outcome of the pending legal proceeding listed here, or other legalproceedings, to which we may become subject in the normal course of business orestimate the amount or range of any reasonably possible loss we might incur ifwe do not prevail in the final, non-appealable determinations of such matters.Therefore, we have no current accruals for these potential contingencies. Wecannot provide you with assurance that the legal proceedings listed here, orother legal proceedings, will not have a material adverse impact on our financialcondition or results of operations.

**Item1A.**        Risk Factors

We incorporate byreference our disclosure related to risk factors which is set forth under theheading “Management’s Discussion and Analysis of Genzyme Corporation andSubsidiaries’ Financial Condition and Results of Operations—Risk Factors” in Part I.,Item 2. of this Quarterly Report on Form 10-Q.

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**ITEM 2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We did not purchase anyshares of our common stock during the first quarter of our 2007 fiscal year.

**ITEM 6.**                EXHIBITS

(a)           Exhibits

See the Exhibit Index following the signature page tothis report on Form 10-Q.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                         | GENZYME CORPORATION |
|-------------------------|---------------------|
| Dated: May 8, 2007 | By:                 | /s/  MICHAEL S. WYZGA |
|                    |                | Michael S. Wyzga*Executive Vice President, Finance, Chief  Financial Officer, and Chief Accounting Officer* |

 

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**GENZYME CORPORATIONAND SUBSIDIARIES**

**FORM 10-Q,MARCH 31, 2007**

**EXHIBITINDEX**
| EXHIBIT NO. | ** ** | **DESCRIPTION**                                                                                                                                                               |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *3.1             |       | Restated Articles of Organization of Genzyme, as  amended. Filed as Exhibit 3.1 to Genzyme’s Registration Statement on  Form 8-A/A filed on May 28, 2004. |
| *3.2             |       | By-laws of Genzyme, as amended. Filed as  Exhibit 3.1 to Genzyme’s Form 8-K filed July 1, 2004.                                                           |
| 31.1             |       | Certification of the Chief Executive Officer  pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed  herewith.                                                     |
| 31.2             |       | Certification of the Chief Financial Officer  pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Filed  herewith.                                                     |
| 32.1             |       | Certification of the Chief Executive Officer  pursuant to section 906 of the Sarbanes-Oxley Act of 2002. Furnished  herewith.                                                 |
| 32.2             |       | Certification of the Chief Financial Officer  pursuant to section 906 of the Sarbanes-Oxley Act of 2002. Furnished  herewith.                                                 |

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*                    Indicatesexhibit previously filed with the SEC and incorporated herein by reference.Exhibits filed with Forms 10-K, 10-Q, 8-K, 8-A, 8-Bor Schedule 14A of Genzyme Corporation were filed under Commission File No. 0-14680.

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