<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 0-21481
TRANSKARYOTIC THERAPIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3027191
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
195 ALBANY STREET
CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 349-0200
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
At August 1, 1997, there were 18,395,854 shares of Common Stock, $.01 par
value, issued and outstanding. There were no issued and outstanding shares of
Preferred Stock.
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<PAGE> 2
Transkaryotic Therapies, Inc.
INDEX
-----
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets as of June 30, 1997 and
December 31, 1996 3
Condensed Statements of Operations for the Three and Six
Months Ended June 30, 1997 and 1996 4
Condensed Statements of Cash Flows for the Three and Six
Months Ended June 30, 1997 and 1996 5
Notes to Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
2
<PAGE> 3
PART I - Item 1 - Condensed Financial Statements
Transkaryotic Therapies, Inc.
<TABLE>
Condensed Balance Sheet
(unaudited)
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,166,703 $ 10,414,412
Marketable securities 68,271,572 75,840,830
Prepaid expenses and other current assets 474,897 817,812
------------ ------------
Total current assets 84,913,172 87,073,054
Property and equipment, net 3,104,534 3,237,402
Other assets 670,769 687,969
------------ ------------
$ 88,688,475 $ 90,998,425
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 719,667 $ 612,026
Accrued expenses 1,149,147 651,944
------------ ------------
Total current liabilities 1,868,814 1,263,970
Other long-term liabilities 59,733 89,600
Stockholders' equity:
Preferred stock, $1.00 par value, 10,000,000 shares authorized:
no shares issued and outstanding - -
Common stock, $.01 par value; 30,000,000 shares authorized;
16,684,458 shares issued and outstanding at June 30, 1997
(16,614,273 at December 31, 1996) 166,845 166,143
Additional paid-in capital 131,274,323 131,795,736
Accumulated deficit (40,582,668) (37,115,670)
Deferred compensation (4,138,894) (5,217,604)
Unrealized gain on marketable securities 40,322 16,250
------------ ------------
Total stockholders' equity 86,759,928 89,644,855
------------ ------------
$ 88,688,475 $ 90,998,425
============ ============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
3
<PAGE> 4
PART I - Item 1 - Condensed Financial Statements
Transkaryotic Therapies, Inc.
<TABLE>
Condensed Statements of Operations
(unaudited)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
License and research revenues $ 4,912,500 $ 137,500 $ 5,212,500 $ 1,975,000
Operating expenses:
Research and development 4,192,053 4,074,414 8,024,547 6,979,315
General and administrative 1,505,943 1,006,158 2,907,571 1,771,154
----------- ------------ ------------ ------------
5,697,996 5,080,572 10,932,118 8,750,469
----------- ------------ ------------ ------------
Loss from operations (785,496) (4,943,072) (5,719,618) (6,775,469)
Interest income 1,111,952 325,351 2,252,620 788,125
----------- ------------ ------------ ------------
Net income (loss) $ 326,456 $ (4,617,721) $ (3,466,998) $ (5,987,344)
=========== ============ ============ ============
Net income (loss) per share (pro forma in 1996) $ 0.02 $ (0.32) $ (0.21) $ (0.42)
=========== ============ ============ ============
Shares used to compute net income (loss) per
share (pro forma in 1996) 17,965,301 14,255,369 16,653,916 14,255,336
=========== ============ ============ ============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
4
<PAGE> 5
PART I - Item 1 - Condensed Financial Statements
Transkaryotic Therapies, Inc.
<TABLE>
Condensed Statements of Cash Flows
(unaudited)
<CAPTION>
Six Months Ended June 30,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,466,998) $ (5,987,344)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 810,408 789,401
Compensation expense related to
equity issuances 566,644 480,726
Changes in operating assets and liabilities 917,892 (188,856)
------------ ------------
Net cash used for operating activities (1,172,054) (4,906,073)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales of marketable securities 35,163,779 27,033,777
Purchases of marketable securities (27,570,449) (15,106,279)
Purchase of property and equipment (656,842) (526,889)
Changes in other assets 3,500 (235,608)
------------ ------------
Net cash provided by investing activities 6,939,988 11,165,001
------------ ------------
FINANCING ACTIVITIES:
Repurchase of common stock (15,643) -
------------ ------------
Net increase in cash and cash equivalents 5,752,291 6,258,928
Cash and cash equivalents at January 1 10,414,412 11,539,531
------------ ------------
Cash and cash equivalents at June 30 $ 16,166,703 $ 17,798,459
============ ============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
5
<PAGE> 6
PART I - Item 1 - Condensed Financial Statements
Transkaryotic Therapies, Inc.
Notes to Condensed Financial Statements (unaudited)
June 30, 1997 and 1996
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for the periods presented. The results of operations
for the interim period ended June 30, 1997 are not necessarily indicative of the
results to be expected for the year ended December 31, 1997.
These financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
1996 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
Certain reclassifications have been made to the 1996 financial
statements to conform to the 1997 presentation.
2. NET INCOME (LOSS) PER SHARE
For the quarter ended June 30, 1997, net income per share is computed
using the weighted average number of shares of common stock and common
equivalent shares from stock options and warrants outstanding. For 1996 and the
six months ended June 30, 1997, common equivalent shares are excluded as their
effect is antidilutive. For the three and six months ended June 30, 1996, the
weighted average number of shares also includes the common stock equivalents for
convertible preferred shares, assuming conversion at date of issuance, which
occurred upon the completion of the Company's initial public offering in October
1996. Pursuant to the requirements of the Securities and Exchange Commission,
shares and equivalent shares issued by the Company during the twelve-month
period prior to the public offering have been included in the calculations as if
they were outstanding for all periods prior to the initial public offering
whether or not they are anti-dilutive, using the treasury stock method.
Fully diluted earnings per share have not been presented as it does not
differ materially from primary earnings per share.
6
<PAGE> 7
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share", which
is required to be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements for calculating
basic earnings per share, the dilutive effect of stock options will be excluded.
The impact is not expected to result in a change in basic earnings (loss) per
share for the three and six months ended June 30, 1997 or in the pro forma
basic loss per share for the three and six months ended June 30, 1996. The
impact of Statement 128 on the calculation of fully diluted earnings per share
for these three and six month periods is not expected to be material.
3. LEGAL PROCEEDINGS
In April 1997, Amgen Inc. filed a civil action in the U.S. District
Court in Massachusetts against the Company and Hoechst Marion Roussel, Inc.
("HMRI"), its collaborative partner. The complaint in the action alleges that
GA-EPO and processes for producing GA-EPO infringe three Amgen patents and
requests that TKT and HMRI be enjoined from making, using or selling GA-EPO and
that the court award Amgen monetary damages. In May 1997, TKT and HMRI filed a
"Motion To Dismiss, Or, In The Alternative, For Summary Judgment" stating that
under 35 U.S.C. sec. 271(e)(1), TKT's and HMRI's activities do not constitute
infringement and further stating that "(n)either the product created by TKT nor
the process used by TKT and HMR infringes any valid claim of any of the Amgen
patents in suit." In July 1997, the court denied TKT's and HMRI's motion and
stated that the motion should instead be filed as a Motion for Summary Judgment.
Pursuant to the Amended and Restated License Agreement, dated March 1,
1995, by and between HMRI and TKT, HMRI has assumed the cost of defense of the
suit by Amgen. TKT will reimburse HMRI for its share of litigation expenses, as
defined, from future royalties received from the sale of GA-EPO. The Company and
HMRI believe that they have substantial defenses to the allegations in the
complaint and expect that their position will be thoroughly vindicated in court.
The Company can provide no assurance as to the outcome of this
litigation. A decision by the court in Amgen's favor, including the issuance of
an injunction against the manufacture and sale of GA-EPO by the Company and HMRI
in the United States, or any other conclusion of this litigation in a manner
adverse to the Company and HMRI, could have a material adverse effect on the
Company's business, financial condition and results of operations.
4. SUBSEQUENT EVENT
On August 4, 1997, the Company completed a directed public offering of
1,700,000 shares of common stock to a small number of accredited institutional
investors, resulting in net proceeds of approximately $53,000,000.
7
<PAGE> 8
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Since its inception in 1988, Transkaryotic Therapies, Inc. (the
"Company") has been primarily engaged in the development and commercialization
of products based on the Company's proprietary Gene Activation and gene therapy
technologies. No revenues have been derived from the sale of any products, and
the Company does not expect to receive revenues from product sales for a number
of years. The Company expects that its research and development expenditures
will increase substantially in future years as research and product development
efforts accelerate and clinical trials are broadened or initiated. With the
exception of 1995, the Company has incurred substantial annual operating losses
since inception and expects to incur substantial operating losses in the future.
At June 30, 1997, the Company's accumulated deficit was $40,583,000. As a
result, the Company is dependent upon existing cash resources, external
financing from equity and debt offerings or collaborative research and
development arrangements with corporate sponsors to finance its operations.
Results of operations may vary significantly from period to period
depending on, among other factors, the progress of the Company's research and
development efforts, the receipt, if any, of additional license fees and
milestone payments, the timing of certain expenses, and the establishment of
additional collaborative research agreements.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the accompanying
financial statements and the related footnotes thereto.
RESULTS OF OPERATIONS
For the Three Months Ended June 30, 1997 and 1996
-------------------------------------------------
License and research revenues totaled $4,913,000 and $138,000 for the
three months ended June 30, 1997 and 1996, respectively. All revenues were
earned from two collaborative agreements with Hoechst Marion Roussel, Inc.
("HMRI"). The increase of $4,775,000 in 1997 is principally due to $4,500,000
received upon the achievement of certain development milestones relating to the
Company's two Gene Activation collaborations with HMRI.
Research and development expenses totaled $4,192,000 in the second
quarter of 1997, as compared to $4,074,000 during the same period in 1996. The
increase in 1997 of $118,000, or 3%, was principally due to increases in
research and development staff, an increase in facilities costs for additional
leased space, offset, in part, by decreases in consulting and outside research
costs.
8
<PAGE> 9
General and administrative expenses were $1,506,000 in the three months
ended June 30, 1997, compared with $1,006,000 during the same period in 1996.
The increase in 1997 of $500,000, or 50%, is principally due to increases in
administrative employee costs, including several additions in administrative
personnel, and outside professional service fees related to costs associated
with being a public company.
Interest income was $1,112,000 and $325,000 for the three months ended
June 30, 1997 and 1996, respectively. The average cash and marketable securities
balances were $83,679,000 and $30,857,000 in 1997 and 1996, respectively. The
increase in interest income of $787,000, or 242%, is primarily attributable to
higher average balances in the respective three month periods.
The Company had net income of $326,000 for the three months ended June
30, 1997 and a net loss of $4,618,000 for the comparable period in 1996. While
profitable for the three months ended June 30, 1997, the Company does not expect
to be profitable in subsequent quarters of 1997 or for the year ended December
31, 1997. Earnings per share was $0.02 for the quarter ended June 30, 1997, as
compared to a pro forma loss per share of $0.32 in 1996. Weighted average common
and common equivalent shares outstanding were 17,965,000 for the first quarter
of 1997, as compared to 14,255,000 in 1996. The increase in 1997 is due to the
issuance of 2,500,000 shares of common stock in the Company's initial public
offering in October 1996, as well as the dilutive effect of stock options and
warrants. In 1996, common equivalent shares are ignored as their effect is
anti-dilutive.
For the Six Months Ended June 30, 1997 and 1996
-----------------------------------------------
License and research revenues totaled $5,213,000 and $1,975,000 for the
six months ended June 30, 1997 and 1996, respectively. All revenues were earned
from two collaborative agreements with HMRI. The increase of $3,238,000 in 1997
is principally due to $4,500,000 in milestones payments from HMRI. In 1996, the
Company received $1,975,000 in research funding from HMRI, as compared to
$713,000 in 1997.
Research and development expenses totaled $8,025,000 in the first six
months of 1997, as compared to $6,979,000 during the same period in 1996. The
increase in 1997 of $1,045,000, or 15%, was principally due to an increase in
research and development staff, an increase in facilities costs for additional
leased space and increases in consulting and outside research contract costs.
9
<PAGE> 10
General and administrative expenses were $2,908,000 in the six months
ended June 30, 1997, compared with $1,771,000 during the same period in 1996.
The increase in 1997 of $1,136,000, or 64%, is principally due to increases in
administrative employee costs, including several additions in administrative
personnel, and outside professional service fees related to costs associated
with being a public company.
Interest income was $2,253,000 and $788,000 for the six months ended
June 30, 1997 and 1996, respectively. The average cash and marketable securities
balances were $85,347,000 and $31,629,000 in 1997 and 1996, respectively. The
increase in interest income of $1,464,000, or 186%, is primarily attributable to
higher average balances in the respective six month periods.
The Company had a net loss of $3,467,000 and $5,987,000 for the six
months ended June 30, 1997 and 1996, respectively. Loss per share was $0.21 for
the six months ended June 30, 1997, as compared to a pro forma net loss per
share of $0.42 for the corresponding period in 1996. Weighted average common
shares and pro forma common shares outstanding were 16,654,000 and 14,255,000
respectively, in 1997 and 1996. The increase in 1997 is related principally to
the Company's initial public offering 2,500,000 shares of common stock in
October 1996.
LIQUIDITY AND SOURCES OF CAPITAL
Since its inception, the Company has financed its operations through
the sale of common and preferred stock, revenues from collaborative agreements
and interest income.
The Company had unrestricted cash, cash equivalents and marketable
securities totaling $84,438,000 at June 30, 1997. Cash equivalents and
marketable securities are invested principally in U.S. Treasury notes, agencies
of the U.S. government and money market funds.
Substantial additional funds will be required to support the Company's
research and development programs, for acquisition of technologies and
intellectual property rights, for preclinical and clinical testing of its
products, pursuit of regulatory approvals, acquisition of capital equipment,
expansion of laboratory and office facilities, establishment of production
capabilities and for general and administrative expenses. Until the Company's
operations generate significant revenues from product sales, cash reserves and
proceeds from equity and debt offerings and funding from collaborative
arrangements will be used to fund operations.
The Company expects to pursue opportunities to obtain additional
financing in the future through equity and debt financings, lease arrangements
related to capital equipment and collaborative research agreements. The source,
timing and availability of any future financing will depend principally upon
equity market conditions, interest rates and, more specifically, on the
Company's continued progress in its exploratory, preclinical and clinical
development programs. There can be no assurance that such funds will be
available on favorable terms, if at all.
10
<PAGE> 11
In August 1997, the Company completed a direct sale of 1,700,000
shares of common stock resulting in net proceeds of approximately $53,000,000.
The Company expects that its existing capital resources, together with revenues
from collaborative agreements and interest income, will be sufficient to fund
its operations through 2001. The Company's cash requirements may vary, however,
depending on numerous factors. Lack of necessary funds may require the Company
to delay, scale back or eliminate some or all of its research and product
development programs or to license its potential products or technologies to
third parties.
The Company is engaged in litigation with Amgen Inc. with respect to
the development of GA-EPO. See Note 3 to Notes to Condensed Financial
Statements, which is incorporated by reference herein.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about
the Company's confidence and strategies and the Company's expectations about
future products, technologies and opportunities, market demand or acceptance of
future products are forward looking statements that involve risks and
uncertainties. These uncertainties include commercialization or technology
delays or difficulties; timing and satisfactory completion of clinical trials;
patent and proprietary rights risks, including patent infringement litigation;
changes in governmental regulations; lengthy approval processes; impact of
competitive products and prices; development of manufacturing, distribution and
marketing capabilities; dependence on collaborative partners; product demand and
market acceptance risks; legal, economic and other risks detailed in Exhibit 99
to the Company's Quarterly Report on Form 10-Q, filed on August 13, 1997.
11
<PAGE> 12
PART II - Other Information
Item 1. Legal Proceedings
The Company is engaged in litigation with Amgen Inc. with respect to
the development of GA-EPO. See Note 3 to Notes to Condensed Financial
Statements, which is incorporated by reference herein.
The Company is currently involved, with respect to its gene therapy
technology, in an interference proceeding requested by the Company and declared
by the U.S. Patent and Trademark Office, as more fully described in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, filed
on March 28, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on Thursday, June
12, 1997, the following individuals were elected as directors of the Company:
<TABLE>
<CAPTION>
Votes
--------
Nominee For Withheld Broker Non-Votes
- ------- ---------- -------- ----------------
<S> <C> <C> <C>
William R. Miller 14,658,698 31,774 0
Rodman W. Moorhead, III 14,658,698 31,774 0
Richard F Selden 14,651,466 39,006 0
James E. Thomas 14,658,698 31,774 0
Peter Wirth 14,658,698 31,774 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits filed as part of this Form 10-Q are listed on the
Exhibit Index immediately preceding such Exhibits, which Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the three months ended
June 30, 1997.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSKARYOTIC THERAPIES, INC.
Date: August 13, 1997 By: /s/ Daniel E. Geffken
----------------------------------------
Daniel E. Geffken
Vice President, Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
13
<PAGE> 14
TRANSKARYOTIC THERAPIES, INC.
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
11 Statement Re: Computation of Loss Per Share
27 Financial Data Schedule (for EDGAR filing
purposes only)
99 Important Factors Regarding Forward Looking
Statements
14
<PAGE> 1
Transkaryotic Therapies, Inc.
<TABLE>
Exhibit 11
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 16,666,898 5,197,040 16,653,916 5,197,007
Effect of preferred stock - assumed converted
at date of issuance - 5,776,819 - 5,776,819
Weighted average common stock equivalent shares
resulting from stock options and warrants 1,298,403 - - -
Effect of common and common stock equivalent
shares issued by the Company during the twelve
month period immediately preceding the Company's
initial public offering in October 1996 (using the
treasury stock method) - 3,281,510 - 3,281,510
----------- ----------- ----------- -----------
Shares used to compute net loss per share 17,965,301 14,255,369 16,653,916 14,255,336
=========== =========== =========== ===========
Net income (loss) $ 326,456 $(4,617,721) $(3,466,998) $(5,987,344)
=========== =========== =========== ===========
Net income (loss) per share (pro forma in 1996) $ 0.02 $ (0.32) $ (0.21) $ (0.42)
=========== =========== =========== ===========
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TRANSKARYOTIC THERAPIES, INC.'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 16,166,703
<SECURITIES> 68,271,572
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 84,913,172
<PP&E> 9,745,220
<DEPRECIATION> 6,630,893
<TOTAL-ASSETS> 88,688,475
<CURRENT-LIABILITIES> 1,868,814
<BONDS> 0
0
0
<COMMON> 166,845
<OTHER-SE> 86,593,083
<TOTAL-LIABILITY-AND-EQUITY> 88,688,475
<SALES> 0
<TOTAL-REVENUES> 7,465,120
<CGS> 0
<TOTAL-COSTS> 10,932,118
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,466,998)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
<PAGE> 1
EXHIBIT 99
IMPORTANT FACTORS REGARDING FORWARD LOOKING STATEMENTS
PATENT LITIGATION
The biotechnology industry has been characterized by significant
litigation and interference proceedings regarding patents, patent applications
and other intellectual property rights, and many companies in the biotechnology
industry have attempted to employ intellectual property litigation to gain or
preserve a competitive advantage. For example, there has been substantial
intellectual property litigation between suppliers of erythropoietin throughout
the world.
The defense and prosecution of intellectual property suits and related
legal and administrative proceedings can be both costly and time consuming.
Litigation and interference proceedings could result in substantial expense to
the Company or its corporate partner and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation to which the Company may become a party could subject the Company to
significant liabilities to third parties or require the Company to seek licenses
from third parties. Although a number of patent and intellectual property
disputes in the biotechnology area have been settled through licensing or
similar arrangements, costs associated with any such arrangement may be
substantial and could include ongoing royalties. Furthermore, there can be no
assurance that necessary licenses would be available to the Company or its
corporate partner or would be available on acceptable terms. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company or its corporate partner from
manufacturing and selling some or all of its products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In April 1997, Amgen Inc. filed a civil action in the U.S. District
Court in Massachusetts against the Company and Hoechst Marion Roussel, Inc.
("HMRI"), its collaborative partner. The complaint in the action alleges that
GA-EPO and processes for producing GA-EPO infringe on Amgen's U.S. Patent
Numbers 5,547,933, 5,618,698, and 5,621,080 and requests that TKT and HMRI be
enjoined from making, using, or selling GA-EPO and that the court award Amgen
monetary damages. In May 1997, TKT and HMRI filed a "Motion To Dismiss, Or, In
The Alternative, For Summary Judgment" stating that under 35 U.S.C. sec.
271(e)(1), TKT's and HMRI's activities do not constitute patent infringement and
further stating that "(n)either the product created by TKT nor the process used
by TKT and HMR infringes any valid claim of any of the Amgen patents in suit."
In July 1997, the court denied TKT's and HMRI's motion and stated that the
motion instead should be refiled as a Motion for Summary Judgment. The Company
can provide no assurance as to the outcome of this litigation. A decision by the
court in Amgen's favor, including the issuance of an injunction against the
making, use or sale of GA-EPO by the Company and HMRI in the United States, or
any other conclusion of the
<PAGE> 2
litigation in a manner adverse to the Company and HMRI, would have a material
adverse effect on the Company's business, financial condition, and results of
operations. There can be no assurance that the Company will not in the future
become subject, in the United States or any other country, to additional patent
infringement claims, interferences and other litigation involving patents, or
any patents that may issue on any pending patent applications, including Amgen
patent applications.
With respect to gene therapy technology, the Company requested, and the
U.S. Patent and Trademark Office (the "PTO") declared in January 1996, an
interference regarding an issued patent with broad claims to ex vivo gene
therapy. The participants in the interference are TKT, Genetic Therapy, Inc. (a
wholly-owned subsidiary of Novartis AG) and Somatix Therapy Corporation
("Somatix"). Somatix subsequently merged into Cell Genesys, Inc. With the
possible exception of the patents involved in the interference, the Company
believes its Transkaryotic Therapy technology does not infringe on patents
issued to date. The PTO proceeding will determine the patentability of the
subject matter of the interference and which of the parties first developed this
subject matter. The process to resolve the interference can take many years. The
outcome of interferences can be quite variable: for example, none of the three
parties may receive the desired claims, one party may prevail, or a settlement
involving two or more of the parties may be reached. There can be no assurance
that TKT will prevail in this interference or that, even if it does prevail,
that the Company can meaningfully protect its proprietary position. In the event
TKT does not prevail in the interference, a January 1997 Federal Trade
Commission ("FTC") decision would then be relevant. The FTC accepted a consent
order to resolve anticompetitive concerns raised by the merger of Ciba-Geigy
Limited and Sandoz Limited into the newly formed Novartis AG. As part of the
consent order, the constituent entities of Novartis will be required to provide
all gene therapy researchers and developers with non-exclusive licenses to the
patent upon which Novartis is involved in the interference. The Company has
entered into an agreement with Somatix under which the Company's ability to
market its non-viral gene therapy products will not be affected should Somatix
win the interference.
Should any of its competitors have filed additional patent applications
in the U.S. that claim technology also invented by the Company, the Company may
have to participate in additional interference proceedings declared by the PTO,
all of which could result in substantial cost to the Company to determine its
rights or potential loss of rights.
PATENTS AND PROPRIETARY RIGHTS
The Company's success may depend in large part on its ability to obtain
patent protection for its Gene Activation and gene therapy processes and
potential products in the U.S. and other countries and to obtain the right to
use in its potential products genes or other technology that have been or may be
patented by others. Currently, the Company has two issued patents and 21 pending
patent applications in the U.S. to protect its proprietary methods and
processes; it has also filed foreign patent applications corresponding to
certain of these U.S. patent applications. In addition, the Company has entered
into several agreements to license
<PAGE> 3
proprietary rights from other parties. However, the patent situation in the
field of biotechnology generally is highly uncertain and involves complex legal,
scientific and factual questions. To date there has emerged no consistent policy
regarding the breadth of claims allowed in biotechnology patents. Accordingly,
there can be no assurance that patent applications relating to the technology
used by the Company will result in patents being issued or that, if issued, the
patents will not be challenged, invalidated or circumvented or will afford
protection against competitors with similar technology.
Many biotechnology and pharmaceutical companies, universities and
research institutions, including competitors with substantial resources, have
filed patent applications and have been issued patents potentially relating to
the Company's Gene Activation and gene therapy technologies. In addition,
certain competitors have filed patent applications and have been issued patents
relating to certain methods of producing therapeutic proteins that the Company
anticipates producing using its Gene Activation technology. The Company's Gene
Activation and gene therapy technologies and potential products may be found to
conflict or be alleged to conflict with patents which have been or may be
granted to competitors, universities or others. There are a substantial number
of biotechnology patent applications under review at the PTO. Because patent
applications in the U.S. are maintained in secrecy until patents issue, the
Company cannot be certain that others have not filed or maintained patent
applications for technology used by the Company or covered by the Company's
pending patent applications or that the Company was the first to file patent
applications for such technology. Competitors may have filed applications for,
or may have received patents and may obtain additional patents and proprietary
rights relating to, compositions of matter or processes that block or compete
with those of the Company. Furthermore, as is the case with any pending patent
application, competitors may attempt to amend existing applications to claim
rights to compositions of matter or processes that may block the Company. No
assurance can be given that the Company's products or processes may not infringe
patents that may issue under pending patent applications.
Although the Company has licensed proprietary rights to certain genes
(for example, for Factor VIII and Factor IX) to be used in its gene therapy
products, the Company presently has no proprietary rights to certain other genes
that it may later seek to use in its products and which may be the subject of
issued third party patents or pending patent applications. As a result, the
Company may be required to obtain licenses under third party patents in order to
market certain of its products. If such licenses are not made available to the
Company on acceptable terms, the Company will not be able to market such
products. In addition, under the Company's license and sublicense agreements,
the licensors and sublicensors may terminate these agreements upon the Company's
failure to meet certain specified milestones. Any such termination of an
existing license or sublicense by any such licensor or sublicensor, or any
inability by the Company to obtain any required license, could have a material
adverse effect on the Company's business.
The Company also relies upon unpatented proprietary technology,
processes and know-how, which the Company protects in part by confidentiality
agreements with its
<PAGE> 4
employees, consultants and certain contractors. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently developed by competitors.
EARLY STAGE OF DEVELOPMENT; COMMERCIAL UNCERTAINTY
TKT is at an early stage of development. All of the Company's potential
Gene Activation products are in research, preclinical development or early
clinical development. No revenues have been generated from product sales, and no
such revenues are expected for at least several years. The Gene Activation
products currently under development by the Company will require significant
additional development efforts, including extensive preclinical and clinical
testing and regulatory approval, prior to commercial use. There can be no
assurance that any Gene Activation products will ultimately be developed by the
Company and its corporate partners, or that, even if developed, these products
will receive regulatory approval. If approved, these products will compete with
established products of proven safety and efficacy, the manufacturers of which
can be expected to employ intellectual property challenges to commercialization
of these products. There can be no assurance that the Company's Gene Activation
products, if any, will be able to be commercialized or, if commercialized, that
they will be accepted by medical centers, hospitals, physicians or patients in
lieu of existing treatments. Accordingly, there can be no assurance that these
products can be successfully manufactured and marketed at prices that would
permit the Company and its corporate partners to operate profitably. The
Company's potential gene therapy products may be even further from commercial
introduction. Due to the early stage of development of the Company's potential
gene therapy products and the extensive research, development, preclinical and
clinical testing, and regulatory review process required before marketing
approval can be obtained, the Company cannot predict with certainty when it will
be able to commercialize any of its potential gene therapy products, if at all.
TECHNOLOGICAL UNCERTAINTY
Gene Activation and gene therapy are new and rapidly evolving
technologies. Existing preclinical data on the safety and efficacy of proteins
produced by the Company's Gene Activation technology are limited, and the
Company's Gene Activation products have not yet been tested in humans or are in
early clinical development. The Company's potential gene therapy products are
even further from commercial introduction. While many approaches to gene therapy
are being pursued by pharmaceutical and biotechnology companies and academic
institutions, there are currently no marketed gene therapy products, and
existing clinical data on the safety and efficacy of potential gene therapy
products are limited. The potential gene therapy products currently under
development by the Company will require substantial additional development
efforts, including extensive preclinical and clinical testing and the receipt of
regulatory approvals prior to commercial introduction. For any given disease,
gene therapy generally, as well as the Company's specific approach to gene
therapy, may not be efficacious or
<PAGE> 5
may prove to have undesirable and unintended side effects, toxicities or other
characteristics that may prevent or limit commercial use. There can be no
assurance that the Company's products will obtain approval from the U.S. Food
and Drug Administration (the "FDA") or equivalent foreign regulatory authorities
for any indication.
UNCERTAINTY ASSOCIATED WITH CLINICAL TRIALS
Subject to compliance with FDA regulations, TKT and its corporate
partners plan to undertake extensive clinical testing in humans to evaluate the
safety and efficacy of its Gene Activation and gene therapy products in
development. The Company's potential Gene Activation products have not yet been
tested in humans or are in early clinical development. The rate of completion of
clinical trials is dependent upon, among other factors, the enrollment of
patients. Patient accrual is a function of many factors, including the size of
the patient population, the proximity of patients to clinical sites, the
eligibility criteria for the study and the existence of competitive clinical
trials. Delays in planned patient enrollment in the anticipated Gene Activation
clinical trials may result in program delays, which could have a material
adverse effect on TKT. Even if clinical trials are completed, there can be no
assurance that the Company or its partners will be able to submit a Product
License Application ("PLA") to the FDA or comparable regulatory agencies in
foreign countries on the schedule anticipated or that such applications will be
reviewed and approved by such regulatory agencies in a timely manner. Of the
gene therapy products under development at the Company, only one is in Phase I
human clinical trials. The Company currently intends to seek a collaborative
partner prior to proceeding with further clinical development of this product.
There can be no assurance that the Company will be able to obtain authorization
from the FDA for additional human clinical testing of any of its gene therapy
products currently in research or preclinical development. There can be no
assurance that any authorized clinical testing will be completed successfully
within any specified time period, if at all, with respect to any potential
product. There also can be no assurance that such testing will show any
potential product to be safe or efficacious or that any such product will be
approved by the FDA for any indication. Furthermore, the Company or the FDA may
suspend clinical trials at any time if the subjects or patients participating in
such trials are being exposed to unacceptable health risks. There can be no
assurance that the Company will not encounter problems in clinical trials which
will cause the Company or the FDA to delay or suspend clinical trials.
UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS; LENGTHY APPROVAL PROCESS
The Company's research and development, preclinical testing, clinical
trials, facilities and manufacturing and marketing of its products will be
subject to extensive regulation by numerous governmental authorities in the U.S.
and other countries. The regulatory process for new therapeutic products, which
includes preclinical and clinical testing of each product to establish its
safety and efficacy, can take many years and require the expenditure of
substantial resources. Data obtained from preclinical and clinical activities
are susceptible to varying interpretations which could delay, limit or prevent
FDA regulatory approval. In addition, delays or rejections
<PAGE> 6
may be encountered based upon changes in FDA policy during the period of product
development and FDA regulatory review of each submitted License Application.
Similar delays may also be encountered and substantial resources expended in
foreign countries. There can be no assurance that even after such time and
expenditures, regulatory approval will be obtained for any Gene Activation or
gene therapy products developed by the Company. Moreover, if regulatory approval
of a product is granted, such approval may entail limitations on the indicated
uses for which it may be marketed and contain requirements for post-marketing
follow-up studies. Because gene therapy is a relatively new technology and
products for gene therapy have not been extensively tested in humans, the
regulatory requirements governing gene therapy products may be subject to
substantial additional review by various regulatory authorities in the U.S. and
abroad. These requirements may result in extensive delays in initiating clinical
trials of gene therapy products and in the regulatory approval process in
general.
Any of the foregoing effects of government regulation, as well as of
comparable foreign regulation, could delay the marketing of the Company's Gene
Activation and gene therapy products for a considerable or indefinite period of
time, materially increase the cost involved in developing, manufacturing and
marketing the Company's products, diminish or eliminate any competitive
advantage the Company may enjoy, or otherwise adversely affect the Company's
ability to conduct its business. Compliance with applicable government
regulations governing each of the Company's potential Gene Activation and gene
therapy products will require a significant commitment of time, money and effort
by the Company and its corporate partners with no assurances that any approval
will ultimately be granted on a timely basis, if at all.
HISTORY OF OPERATING LOSSES; FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL
FUNDING
The Company has experienced significant operating losses since its
inception in 1988. As of June 30, 1997, the Company had an accumulated deficit
of $40,583,000. The Company expects that it will continue to incur substantial
losses for at least several years and expects cumulative losses to increase as
the Company's research and development efforts expand. The Company expects that
such losses will fluctuate from quarter to quarter and that such fluctuations
may be substantial. There can be no assurance that the Company will ever achieve
sales or profitability.
The Company will require substantial funds to conduct research and
development (including preclinical and clinical testing) of its potential
products and to manufacture and market any products that are approved for
commercial sale. Based on its current operating plan, the Company believes that
its available cash will be adequate to satisfy its capital needs through 2001.
The Company's future capital requirements will depend on many factors, including
continued progress in its research and development programs, the magnitude of
these programs, the scope and results of clinical trials, the timing and receipt
of milestone payments, the time and costs involved in obtaining regulatory
approvals, the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, competing technological
and market developments, the ability of the Company to establish and maintain
<PAGE> 7
collaborative arrangements, and the cost of manufacturing and commercialization
activities. To date, the Company has not received any revenues from product
sales. The Company intends to seek additional funding through collaborative
arrangements or through public or private financings. There can be no assurance
that additional financing will be available on acceptable terms, if at all.
COMPETITION
The field of biotechnology is new and evolving, and it is expected to
continue to undergo significant and rapid technological change. Technological
developments could result in the Company's potential products becoming obsolete.
The Company's products and technologies will be subject to substantial
competition, both from other companies in the field of Gene Activation and gene
therapy and from companies which have other forms of treatment of the diseases
targeted by the Company.
The Company is initially focusing its Gene Activation efforts on
established products with proven safety and efficacy. The Company anticipates
that companies selling such products will compete vigorously. There can be no
assurance that the Company's Gene Activation products will be accepted by
medical centers, hospitals, physicians or patients in lieu of existing products,
or as to the effect of such competition on the market prices of the Company's
products.
Although the Company has a major corporate partner, many of the
Company's existing or potential competitors have substantially greater product
development capabilities and financial, scientific, marketing or human resources
than the Company. Similarly, other competitors of the Company may enter into
collaborative relationships with other companies having such greater resources.
In addition, certain of these competitors have significantly greater experience
than the Company in undertaking human clinical trials of new therapeutic
products. Accordingly, other companies may succeed in developing products
earlier than the Company, obtaining FDA approvals for such products more rapidly
than the Company, or developing products that are more effective or less costly
than those proposed to be developed by the Company. Furthermore, if the Company
is permitted to commence commercial sales of products, it may also be competing
with respect to commercial manufacturing and marketing capabilities, areas in
which it has no experience.
NO MANUFACTURING, DISTRIBUTION OR MARKETING CAPABILITY
Although the Company has a pilot gene therapy manufacturing facility
and believes it will be able to manufacture its potential products on a large
scale, the feasibility of large-scale manufacturing of such products has not
been demonstrated. If the Company is unable to develop or contract for
manufacturing capabilities on acceptable terms, the Company's ability to
commercialize its potential products would be materially adversely affected. If
the Company is delayed in establishing suitable manufacturing capabilities, the
Company's ability to conduct
<PAGE> 8
human clinical testing may be adversely affected, resulting in the delay of
submission of potential products for regulatory approval and initiation of new
development programs, which in turn could impair materially the Company's
competitive position and the possibility of the Company achieving profitability.
In addition, although the Company believes that its potential products will be
cost-effective, there can be no assurance that the Company will be able to
manufacture and distribute such products at a reasonable cost, that the Company
will be able to price such products competitively or, if priced competitively,
that the Company will be able to achieve margins sufficient to allow it to
achieve profitability.
The Company plans to provide its gene therapy products through central
manufacturing facilities. The establishment of these facilities will require
substantial additional funds and personnel and will require compliance with
extensive regulations applicable to such facilities. There can be no assurance
that such funds and personnel will be available on acceptable terms, if at all,
or that the Company will be able to comply with such regulations at acceptable
cost, if at all. In addition, in managing this expansion the Company may
encounter unforeseen regulatory, logistical or management problems or incur
unexpected operating costs. Failure or delays in establishing these facilities,
or the incurrence of unexpected operating costs, could adversely affect the
ability of the Company to manufacture and market its gene therapy products.
Furthermore, the Company has no experience in sales, marketing or distribution.
In order to market any of its gene therapy products, the Company must develop a
marketing and sales capability, either on its own or in conjunction with others.
There can be no assurance that the Company will be able to enter into any
arrangements for the marketing of its products, that such arrangements will be
successful, or that the Company will be able to obtain additional capital and
expertise to conduct such activities independently.
The Company has no manufacturing, sales, marketing or distribution
capabilities for its Gene Activation products. The Company's collaborative
partner, HMRI, is responsible for the manufacture, sales, marketing and
distribution of GA-EPO and the undisclosed second protein. With respect to
future Gene Activation products, the Company may seek collaborative partners or
may manufacture and commercialize the products on its own. There can be no
assurance that the Company will be successful in establishing such future
collaborative relationships or that the Company will be able to conduct such
activities independently.
DEPENDENCE ON KEY PERSONNEL
The Company's success is highly dependent on the retention of principal
members of its scientific and management staff. Furthermore, the Company's
future growth will require the hiring of significant numbers of qualified
scientific and management personnel. Accordingly, recruiting and retaining such
personnel in the future will be critical to the Company's success. There is
intense competition from other companies and research and academic institutions
for qualified personnel in the areas of the Company's activities, and there can
be no assurance that the Company will be able to continue to attract and retain
on acceptable terms the qualified personnel necessary for the development of its
business.
<PAGE> 9
DEPENDENCE ON HMRI AND OTHER COLLABORATIVE PARTNERS
The Company has entered into arrangements with HMRI on two of its Gene
Activation development programs and with another corporate partner on a gene
therapy development program. Each agreement with HMRI is subject to termination
without cause on short notice under certain circumstances, and there is no
assurance that in the future either partner will not exercise its termination
rights. The Company is relying on HMRI to develop, conduct clinical trials,
obtain regulatory approval for the sale of, manufacture and market GA-EPO and
the undisclosed second protein worldwide. There can be no assurance that HMRI
will devote the resources necessary to complete development of and commercialize
these two potential products. Should HMRI fail to develop and commercialize
these two potential products, the Company's business would be materially
adversely affected.
The Company's strategy for the research, development and
commercialization of certain of its potential products includes the possibility
that it will enter into various additional arrangements with corporate partners,
licensors, licensees and others. There can be no assurance that any further
arrangements will be effected in the future. Although the Company believes
parties to any existing and future arrangements, if entered into, would have
economic and other motivations to perform their contractual responsibilities in
full, the amount and timing of resources which they would devote to these
activities would not be within the control of the Company. There can be no
assurance that such parties would perform their obligations as expected or that
any revenue would be derived by the Company from such arrangements.
PRODUCT LIABILITY AND INSURANCE
The Company's business will in the future expose it to potential
product liability risks which are inherent in the testing, manufacturing and
marketing of human therapeutic products. Although the Company has clinical trial
liability insurance for trials conducted in the U.S., the Company does not
currently have any product liability insurance, and there can be no assurance
that it will be able to obtain or maintain such insurance on acceptable terms,
if at all, or that any insurance obtained will provide adequate protection
against potential liabilities. An inability to obtain insurance at acceptable
cost or otherwise protect against potential product liability claims, in
addition to exposing the Company to significant liabilities, could prevent or
inhibit the commercialization of products developed by the Company.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
The business and financial condition of pharmaceutical and
biotechnology companies will continue to be affected by the efforts of
government and third-party payors to contain or reduce the cost of health care
through various means. For example, in certain foreign markets, pricing and
profitability of prescription pharmaceuticals is subject to government control.
In particular, individual pricing negotiations are often required in each
country of the European Community, even if approval to market the drug is
obtained. In the U.S. there have been, and the Company
<PAGE> 10
expects that there will continue to be, a number of federal and state proposals
to implement similar government control. In addition, an increasing emphasis on
managed care in the U.S. has and will continue to increase the pressure on
pharmaceutical pricing. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted or the effect such proposals
or managed care efforts may have on its business, the announcement of such
proposals or efforts could have a material adverse effect on the Company's
ability to raise capital, and the adoption of such proposals or efforts could
have a material adverse effect on the Company's business, financial condition
and results of operations. Further, to the extent that such proposals or efforts
have a material adverse effect on other pharmaceutical companies that are
prospective corporate partners for the Company, the Company's ability to
establish corporate collaborations may be adversely affected. In addition, in
both domestic and foreign markets, sales of the Company's products, if any, will
be dependent in part on the availability of reimbursement from third party
payors, such as government and private insurance plans. Third party payors are
increasingly challenging the prices charged for medical products and services.
If the Company succeeds in commercializing products, there can be no assurance
that these products will be considered cost effective, that reimbursement will
be available, or if available, that the payor's reimbursement policies will be
adequate to permit the Company to realize a reasonable return.
