<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 MARCH 31, 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 April 30, 1997, there were 16,664,400 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 1 of 23 pages.
Exhibit Index appears on page 13.
<PAGE> 2
Transkaryotic Therapies, Inc.
<TABLE>
<CAPTION>
INDEX
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Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets as of March 31, 1997 and
December 31, 1996 3
Condensed Statements of Operations for the Three Months
Ended March 31, 1997 and 1996 4
Condensed Statements of Cash Flows for the Three
Months Ended March 31, 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 - 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBIT INDEX 13
</TABLE>
2
<PAGE> 3
PART 1 - Item 1 - Condensed Financial Statements
Transkaryotic Therapies, Inc.
Condensed Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,166,974 $ 10,414,412
Marketable securities 76,752,281 75,840,830
Prepaid expenses and other current assets 514,107 817,812
------------- -------------
Total current assets 83,433,362 87,073,054
Property and equipment, net 3,180,941 3,237,402
Other assets 696,119 687,969
============= =============
$ 87,310,422 $ 90,998,425
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 672,962 $ 612,026
Accrued expenses 588,299 651,944
------------- -------------
Total current liabilities 1,261,261 1,263,970
Other long-term liabilities 67,199 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;
16,660,551 shares issued and outstanding at March 31, 1997
(16,614,273 at December 31, 1996) 166,606 166,143
Additional paid-in capital 131,363,952 131,795,736
Accumulated deficit (40,909,125) (37,115,670)
Deferred compensation (4,513,121) (5,217,604)
Unrealized gain (loss) on marketable securities (126,350) 16,250
------------- -------------
Total stockholders' equity 85,981,962 89,644,855
============= =============
$ 87,310,422 $ 90,998,425
============= =============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
3
<PAGE> 4
PART 1 - Item 1 - Condensed Financial Statements
Transkaryotic Therapies, Inc.
Condensed Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
License and research revenues $ 300,000 $ 1,837,500
Operating expenses:
Research and development 3,832,495 2,904,901
General and administrative 1,401,628 764,996
----------- -----------
5,234,123 3,669,897
----------- -----------
Loss from operations (4,934,123) (1,832,397)
Interest income 1,140,668 462,774
----------- -----------
Net loss ($ 3,793,455) ($ 1,369,623)
=========== ===========
Net loss per share (pro forma in 1996) ($ 0.23) ($ 0.10)
=========== ===========
Shares used to compute net loss per share 16,640,887 14,255,303
=========== ===========
</TABLE>
4
See accompanying Notes to Condensed Financial Statements.
<PAGE> 5
PART 1 - Item 1 - Condensed Financial Statements
Transkaryotic Therapies, Inc.
Condensed Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(3,793,455) $(1,369,623)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 398,160 383,785
Compensation expense related to
equity issuances 279,699 108,000
Changes in operating assets and liabilities 300,996 (427,489)
----------- -----------
Net cash used for operating activities (2,814,600) (1,305,327)
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of marketable securities 11,984,683 5,090,893
Purchases of marketable securities (13,038,734) (10,643,403)
Purchase of property and equipment (331,349) (180,553)
Changes in other assets and liabilities (47,438) (15,011)
----------- -----------
Net cash used for investing activities (1,432,838) (5,748,074)
----------- -----------
Net decrease in cash and cash equivalents (4,247,438) (7,053,401)
Cash and cash equivalents at January 1 10,414,412 11,539,531
----------- -----------
Cash and cash equivalents at March 31 $ 6,166,974 $ 4,486,130
=========== ===========
</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)
March 31, 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 March 31, 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.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock options
and warrants are excluded as their effect is antidilutive. For the quarter ended
March 31, 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.
6
<PAGE> 7
In February 1997, the Financial Accounting Standards Board issued
Statement 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 loss per share for the first quarter
ended March 31, 1997 or in the pro forma basic loss per share for the first
quarter ended March 31, 1996. The impact of Statement 128 on the calculation of
fully diluted earnings per share for these quarters is not expected to be
material.
3. LEGAL PROCEEDINGS
In April 1997, Amgen Inc. initiated patent infringement proceedings
against the Company and Hoechst Marion Roussel, Inc. ("HMRI"), its collaborative
partner, in the U. S. District Court in Massachusetts. Amgen's suit claims that
the Company's Gene Activated erythropoietin ("GA-EPO") infringes on three Amgen
patents relating to Amgen's erythropoietin product, Epogen(R), and the processes
for its manufacture. Amgen seeks an injunction prohibiting the Company and HMRI
from manufacturing, importing, using, selling or offering to sell GA-EPO in the
United States.
Pursuant to the Amended and Restated License Agreement, dated March 1,
1995, by and between HMRI and the Company, HMRI has assumed the cost of defense
of the suit by Amgen. The Company 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.
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 March 31, 1997, the Company's accumulated deficit was $40,909,000. 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
operation 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 March 31, 1997 and 1996
Licenses fees and research revenues totaled $300,000 and $1,838,000 for
the three months ended March 31, 1997 and 1996, respectively. All revenues were
earned from collaborative agreements with Hoechst Marion Roussel, Inc. (HMRI).
The decrease of $1,538,000 in 1997 is due to the completion in 1996 of certain
phases of research performed by the Company.
Research and development expenses totaled $3,832,000 in the first
quarter of 1997, as compared to $2,905,000 during the same period in 1996. The
increase in 1997 of $927,000, or 32%, was principally due to an increase in
research and development staff to 96 from 81 and increases in consulting and
outside research contracts.
8
<PAGE> 9
General and administrative expenses were $1,402,000 in the quarter
ended March 31, 1997, compared with $765,000 during the same period in 1996. The
increase in 1997 of $637,000, or 83%, is principally due to increases in
administrative employee costs, including several additions to the senior
management team, and outside professional service fees, including legal fees.
Interest income was $1,141,000 and $463,000 for the three months ended
March 31, 1997 and 1996, respectively. The average cash and marketable
securities balances were $84,654,000 and $33,200,000 in 1997 and 1996,
respectively. The increase in interest income of $678,000 is primarily
attributable to higher average balances in the respective three month periods.
The Company had a net loss of $3,793,000 and $1,370,000 in the quarter
ended March 31, 1997 and 1996, respectively.
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 $82,919,000 at March 31, 1997. Cash equivalents and
marketable securities are invested 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.
9
<PAGE> 10
The Company expects that its existing capital resources, together with
revenues from collaborative agreements and interest income, will be sufficient
to fund its operations into 2000. 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
99.1 to the Company's Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on May 13, 1997.
10
<PAGE> 11
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.
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 preceeding 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 quarter ended
March 31, 1997.
11
<PAGE> 12
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: May 13, 1997 By: /s/ Daniel E. Geffken
---------------------------------
Daniel E. Geffken
Vice President, Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
12
<PAGE> 13
Transkaryotic Therapies, Inc.
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
Exhibit No. Description Page Number
----------- ----------- -----------
<S> <C> <C>
11 Statement Re: Computation of Loss
Per Share 14
27 Financial Data Schedule 15
99.1 Important Factors Regarding Forward
Looking Statements 16 - 23
</TABLE>
13
<PAGE> 1
Transkaryotic Therapies, Inc.
Exhibit 11
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Weighted average common shares outstanding 16,640,887 5,197,072
Effect of preferred stock - assumed converted
at date of issuance -- 5,776,819
Weighted average common stock equivalent shares
resulting from stock options and warrants -- --
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) -- 3,281,412
----------- -----------
Shares used to compute net loss per share 16,640,887 14,255,303
=========== ===========
Net loss ($ 3,793,455) ($ 1,369,623)
=========== ===========
Net loss per share (pro forma in 1996) ($ 0.23) ($ 0.10)
=========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 99.1
------------
IMPORTANT FACTORS REGARDING FORWARD LOOKING STATEMENTS
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 or preclinical 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. 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 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.
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
<PAGE> 2
may be patented by others. Currently, the Company has one issued 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 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 U.S. Patent and
Trademark Office (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. With respect to gene therapy technology, the
Company has been involved in one interference proceeding declared by the PTO in
order to determine the patentability of the technology and the priority of
invention and, thus, the right such technology in the U.S. 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.
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.
In April 1997, Amgen Inc. initiated patent infringement proceedings
against the Company and its collaborative partner, Hoechst Marion
Roussel, Inc. ("HMRI"), in the U.S. District Court in Massachusetts. Amgen's
suit claims that the Company's Gene Activated erythropoietin ("GA-EPO")
infringes on U.S. Patent Numbers 5,547,933, 5,618,698 and 5,621,080 relating to
Amgen's erythropoietin product, Epogen(R), and the processes for its
manufacture. Amgen seeks an
- 2 -
<PAGE> 3
injunction prohibiting the Company and HMRI from manufacturing, importing,
using, selling or offering to sell GA-EPO in the United States. 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.
However, 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.
In September 1996, the Company received a letter from Amgen stating,
without further elaboration that, in Amgen's opinion, any implication that the
Company will be able to commercialize GA-EPO in the United States is "materially
false and misleading." The Company has received an opinion of Hamilton, Brook,
Smith & Reynolds, P.C., counsel to the Company, that the technologies employed
by the Company and the method of their use in the Company's products do not
infringe U.S. Patent Numbers 4,703,008, 5,441,868 and 5,547,933, the principal
Amgen patents, and would not infringe such patents under the doctrine of
equivalents. Based upon this opinion as well as its and its counsel's review of
other relevant patents, the Company believes that it will be able to
commercialize GA-EPO in the United States upon successful completion of its
clinical trials and receipt of FDA approval. This opinion, however, is not
binding on any court, and 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, including the three referenced Amgen patents, or any patents
that may issue on any pending patent applications, including Amgen patent
applications.
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.
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.
- 3 -
<PAGE> 4
The Company also relies upon unpatented proprietary technology,
processes and know-how, which the Company protects in part by confidentiality
agreements with its 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.
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. None of the Company's Gene Activation products has entered clinical
trials. 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 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
- 4 -
<PAGE> 5
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 December 31, 1996, the Company had an accumulated
deficit of $37.1 million. 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 1999.
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
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
- 5 -
<PAGE> 6
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 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
- 6 -
<PAGE> 7
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.
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.
- 7 -
<PAGE> 8
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 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.
- 8 -
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