Diversification can often cause uneasiness in an investor. It can be hard to determine whether an acquisition will result in a net benefit to shareholders or turn into the proverbial Lynchian di-worse-ification. But as Fools, we take advantage of hindsight's 20/20 vision to study what decisions provoked disasters or spawned millionaires and find a better prescription for our future-looking spectacles. Because of its many recent acquisitions, Genzyme (NASDAQ:GENZ) is a good case study. It released its 2004 annual results yesterday, allowing us to determine how well company leaders are managing the massive cash flow and, now, $1.1 billion in cash.

For 2004, revenues for Genzyme were up 40% to $2.2 billion from $1.57 billion, and a non-generally accepted accounting principles net income of $1.82 per diluted share represented a 36% improvement over 2003. Management confirmed its 2005 guidance of $2.5 billion to $2.7 billion in revenues and non-GAAP net income of $2.08 to $2.16 per diluted share. The $626 million jump in revenue for 2004 came mostly from acquisitions, consolidation of the company's tracking stock, an increase in the base business, and a $42 million benefit from foreign exchange rates. The impressive increase in net income stemmed from gross margins of 73%.

With the worldwide penetration of most of Genzyme's products, management's long-term plan to focus on investment in manufacturing has been highly successful, especially for gross margins. The facilities are running more efficiently because of the higher demand for products, and this year the full utilization of the European manufacturing facilities for kidney drug Renagel -- the company's second-largest revenue source -- will be of further benefit.

Gross margins also increased with the repurchase of the marketing rights for Synvisc in the U.S. and several European countries from Wyeth (NYSE:WYE). Synvisc -- a biosurgery product used to treat osteoarthritis in the knees -- should be one of the biggest successes for Genzyme this year, as revenues are expected to reach $210 million to $215 million. That's a mighty leap over last year's $88.3 million. If trials on its use in the hips, shoulders, and ankles prove to be positive, this could become a significant portion of the company's revenues. The rights for Synvisc and even greater manufacturing efficiencies have management pegging gross margins at 77% to 78% for 2005. It's safe to say these moves were highly beneficial for the company.

Revenues come from many sources as the company now touts products and services for rare inherited disorders, kidney disease, orthopedics, transplant and immune diseases, diagnostic testing, and -- after the acquisition of Ilex last February -- cancer. Ilex gives Genzyme a well-established cancer product pipeline, and the entire pipeline for Genzyme is quite impressive, with phase 2 and phase 3 trials expected to be completed this year.

Although this pipepline cost Genzyme nearly $1 billion, it provided three late-stage clinical trial oncology products -- tasidotin-HCL, CAMPATH, and CLOLAR -- for which trials will be completed this year. CLOLAR was approved the last week of December for children with relapsed or refractor acute lymphocitic leukemia. The approval was not a large success financially, as total oncology product revenue is expected to be $55 million to $60 million. But it was the immense potential of the Ilex pipeline that Genzyme wanted and could support with its cash horde, which Ilex did not have. This will be a major focus for the future, as demonstrated by the near-quadrupling of research and development money in the cancer pipeline for 2005.

Then there is the expected sale of one of Genzyme's newer enzyme replacement therapies, Aldurazyme -- used to treat mucopolysaccharidosis I (MPS I). Revenue is projected to be $60 million to $66 million versus $42.5 million in 2004. That met the sales guidance for the year, which may not seem like a big deal, but this was not even close to a sure thing after first-quarter results. Guidance of 50% revenue growth for this year became a minor success instead of the minor disappointment it had been. Aldurazyme is being commercially developed with BioMarin Pharmaceutical (NASDAQ:BMRN).

The verdict is still out on a number of acquisitions over the past year. But with some major decisions coming to fruition, shareholders can have more confidence that management can deliver on its promises. Those promises include 20% growth in non-GAAP EPS over the next few years. Of course, almost any biotech stock is a lot more risky than the boring pick-and-shovel companies that can often be undervalued. But hindsight shows that if I had purchased Genzyme two years ago, I would have doubled my investment.

For more Foolish analysis of Genzyme, see:

Fool contributor John Bluis owns no shares in the companies mentioned. The Motley Fool is investors writing for investors .