TRANSKARYOTIC THERAPIES INC, 424B4, 1997-07-31

TRANSKARYOTIC THERAPIES INC
424B4, 1997-07-31
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

Previous: BUCKLE INC, 11-K, 1997-07-31

Next: TCW/DW LATIN AMERICAN GROWTH FUND, 497J, 1997-07-31

<PAGE> 1
Filed pursuant to Rule 424(b)(4)
Registration Nos. 333-31957
333-32383

PROSPECTUS

1,700,000 SHARES

LOGO

TRANSKARYOTIC THERAPIES, INC.
COMMON STOCK

------------------------

All of the 1,700,000 shares of Common Stock being offered hereby are being
issued and sold by Transkaryotic Therapies, Inc. ("TKT" or the "Company"). The
Common Stock of the Company is traded on the Nasdaq National Market under the
symbol "TKTX." On July 29, 1997, the last reported sale price of the Company's
Common Stock, as reported on the Nasdaq National Market, was $32.75 per share.
See "Price Range of Common Stock."

------------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
================================================================================================
PRICE TO PUBLIC PLACEMENT FEE(1) PROCEEDS TO COMPANY(2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................... $32.50 $1.29 $30.71
- ------------------------------------------------------------------------------------------------
Total......................... $55,250,000 $2,193,750 $53,056,250
================================================================================================
</TABLE>

(1) The Placement Fee in the amount of $2,193,750 will be paid with respect to
the sale of certain of the shares of Common Stock offered hereby. See "Plan
of Distribution."

(2) Before deducting expenses payable by the Company, estimated at $120,000.

The Common Stock offered hereby is offered for sale by the Company to one
or more selected accredited institutional investors. It is expected that
delivery of certificates representing the shares of Common Stock will be made
against payment for the shares in Boston, Massachusetts on or about August 4,
1997.

The date of this Prospectus is July 30, 1997.
<PAGE> 2

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and financial statements appearing
elsewhere in this Prospectus. All references herein, unless the context
otherwise requires, to the "Company" or "TKT" refer to Transkaryotic Therapies,
Inc. This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements.

Transkaryotic Therapies, Inc. ("TKT" or the "Company") has developed two
proprietary technology platforms, Gene Activation and gene therapy. The
Company's Gene Activation technology is a proprietary approach to the large
scale production of therapeutic proteins which does not require the cloning of
genes and their subsequent insertion into nonhuman cell lines. Consequently, the
Company believes its Gene Activation technology avoids using patented approaches
to protein production associated with such conventional genetic engineering
which have served as effective barriers to competition in the $11 billion
therapeutic protein market. As a result, the Company believes it will be able to
develop and successfully commercialize a broad range of Gene Activated versions
of proteins which have proven medical utility, received marketing approval from
regulatory authorities and generated significant revenues in major markets.

The Company's most advanced Gene Activation development program is for the
production of Gene Activated erythropoietin ("GA-EPO"), for which Hoechst Marion
Roussel, Inc. ("HMRI"), the Company's collaborative partner, filed an
Investigational New Drug application ("IND") in May 1997. In April 1997, Amgen
Inc. filed a civil action in the U.S. District Court in Massachusetts against
the Company and HMRI. The complaint in the action alleges that GA-EPO and
processes for producing GA-EPO infringe 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 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.

The Company's gene therapy technology ("Transkaryotic Therapy") is a
non-viral, ex vivo system based on the genetic modification of a patient's cells
to produce and deliver therapeutic proteins for extended periods of time. The
Company's Transkaryotic Therapy system has produced target proteins at
therapeutic levels for the lifetime of animals without any side effects and
preliminary clinical testing suggests that the system appears to be
well-tolerated.

TKT believes that its proprietary Gene Activation technology represents a
new wave in the evolution of protein production technology. Gene Activation is
based on the observation that essentially all human cells contain genes encoding
commercially valuable proteins, but that these genes are generally "turned off"
in most cells. As opposed to conventional protein production technology based on
the cloning of human genes and their subsequent insertion into bacteria, yeast
or mammalian cells, Gene Activation bypasses the genetic "off switch" in the
human cell with DNA sequences including an "on switch" that allows the human
gene to express the desired protein in its natural setting. These Gene Activated
human cells are then grown in large numbers, and the protein of interest is
harvested, purified and readied for administration. The Company has successfully
applied its Gene Activation technology to the production of GA-EPO and has
demonstrated that the properties of cells generated by Gene Activation are
predictable and sufficient for scale-up to commercial production levels and that
the protein produced by these cells has the expected structural and functional
characteristics based on naturally produced erythropoietin.

3
<PAGE> 3

In June 1997, TKT received a broad Gene Activation patent (U.S. Patent
Number 5,641,670) covering cells modified by Gene Activation to produce
essentially any protein, with more than fifty proteins of therapeutic interest
in the claims.

In order to rapidly develop and exploit its Gene Activation technology, TKT
has entered into two strategic alliances with HMRI, the first in May 1994 and
the second in March 1995. HMRI and its pharmaceutical affiliates is one of the
largest pharmaceutical groups in the world with significant distribution
capabilities in all major markets. The alliances are focused on the development
of two products, GA-EPO, a protein hormone which is expected to compete in the
$2.9 billion (1995) worldwide market for erythropoietin, and a second,
undisclosed protein. In June 1997, HMRI accepted for development the Gene
Activated cell line for this second protein.

Under the terms of the alliances, if both products are successfully
developed, TKT has the potential to receive a total of $125 million in license
fees, equity investments, milestone payments and research funding from HMRI. To
date, TKT has received a total of $54 million from HMRI in connection with these
two alliances, consisting of $20 million in license fees, $20 million in equity
investments, $7 million in research funding and $7 million in milestone
payments. Under the terms of the agreements, HMRI is responsible for all
worldwide development, manufacturing and marketing. TKT has the potential to
receive a royalty based on net sales of these two products worldwide. The
Company believes that working with Gene Activated proteins having conventional
counterparts that are well known to regulatory authorities may allow their
clinical development to be accomplished in a focused and timely manner.

The Company's gene therapy technology is focused on the commercialization
of non-viral gene therapy products for the long-term treatment of a broad range
of human diseases. In Transkaryotic Therapy, a small sample of the patient's
cells are removed in an out-patient procedure and sent to the Company's pilot
manufacturing facility where the cells are genetically engineered to produce the
desired therapeutic protein. In Transkaryotic Therapy, DNA is inserted into
cells using physical or chemical techniques rather than viruses or other
infectious agents. After the cells and the protein have been tested by TKT to
ensure both safety and functionality, an appropriate number of the
genetically-engineered cells are returned to the physician and injected back
into the patient. TKT believes that the entire process will require
approximately six weeks to complete, after which the patient should be capable
of producing his or her own supply of the therapeutic protein for an extended
period of time. TKT believes that its Transkaryotic Therapy gene therapy system
is broadly enabling and well-suited to the treatment of chronic protein
deficiency states such as hemophilia, diabetes, and hypercholesterolemia. The
potential benefits of Transkaryotic Therapy include improved therapeutic
outcomes, the elimination of frequent and painful injections and attendant
patient compliance problems, a reduction in side effects associated with over
and underdosing of proteins, and significant reductions in the total cost of
therapy. Preliminary data from an initial Phase I safety study of genetically
modified cells indicate that the therapy appears to be well-tolerated.

The Company has successfully applied its gene therapy approach in a variety
of model systems, using a number of different cell types to express a variety of
therapeutically useful proteins. Cells engineered by the Company retain their
normal properties, are stably transfected at efficiencies adequate for
commercial application, express the proteins of interest at therapeutic levels
with natural post-translational modifications, and have delivered the
therapeutic protein of interest for the lifetime of experimental animals. The
Company is conducting a preclinical program of its Transkaryotic Therapy product
for the treatment of both Hemophilia A, based on the production and delivery of
coagulation Factor VIII, and for Fabry's disease, a lysosomal storage disorder,
based on the production and delivery of the enzyme a-galactosidase. In January
1997, the Company initiated a Phase I trial of the protein lacking in Fabry
disease. The Company anticipates that it will file INDs to commence gene therapy
clinical trials for both Fabry disease and Hemophilia A in 1997.

The Company's initial business strategy is to apply its Gene Activation
technology to the development and commercialization of several currently
marketed proteins. The Company's two strategic alliances with HMRI are the
primary focus of its Gene Activation activities, and TKT is actively pursuing
additional Gene Activation product candidates for commercialization either with
pharmaceutical partners or independently. In

4
<PAGE> 4

parallel, the Company plans to continue research and development of its
Transkaryotic Therapy system to develop a novel class of gene therapy treatments
for a variety of protein deficiency diseases. Taken together, the Company
believes its Gene Activation and gene therapy platforms are complementary
opportunities that offer the potential for the development of powerful product
pipelines that may have a significant impact in addressing society's healthcare
needs.

TKT was incorporated in Delaware in 1988. The Company's principal executive
offices are located at 195 Albany Street, Cambridge, Massachusetts 02139, and
its telephone number is (617) 349-0200.

5
<PAGE> 5
- --------------------------------------------------------------------------------

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered......................... 1,700,000 shares
Common Stock to be outstanding after the
offering................................... 18,395,419 shares(1)
Use of Proceeds.............................. Research, preclinical and clinical product
development, and other general corporate
purposes
Nasdaq National Market Symbol................ TKTX
</TABLE>

- ---------------
(1) Excludes (i) 774,354 shares issuable upon exercise of warrants outstanding
as of July 23, 1997; (ii) 2,188,062 shares of Common Stock reserved for
issuance under the Company's 1993 Long-term Incentive Plan, of which options
to purchase 946,277 shares are outstanding as of July 23, 1997; and (iii)
231,429 shares of Common Stock reserved for issuance under the Company's
1993 Non-Employee Director's Stock Option Plan, none of which have been
granted as of July 23, 1997. See "Capital Stock -- Warrants" and
"Management -- 1993 Long-term Incentive Plan" and Note 8 of Notes to
Financial Statements.

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
License and contract fee revenues..... $10,000 $15,400 $ 4,225 $ 1,838 $ 300
Costs and expenses:
Research and development........... 9,126 10,529 14,019 2,905 3,832
General and administrative......... 4,690 3,828 4,729 765 1,402
Interest income, net.................. 394 1,116 2,551 462 1,141
Provision for income taxes............ -- 85 -- -- --
Net income (loss)..................... $(3,422) $ 2,074 $(11,972) $(1,370) $(3,793)
Net income (loss) per share (pro forma
in 1995 and 1996)(1)............... $ .14 $ (0.81) $ (.10) $ (.23)
Shares used in computing net income
(loss) per share (pro forma in 1995
and 1996)(1)....................... 14,633 14,723 14,255 16,641
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.................. $ 82,919 $135,855
Working capital................................................... 82,172 135,108
Total assets...................................................... 87,310 140,246
Accumulated deficit............................................... (40,909) (40,909)
Total stockholders' equity........................................ 85,982 138,918
</TABLE>

- ---------------
(1) Computed on the basis described in Note 2 of Notes to Financial Statements.

(2) Adjusted to reflect the sale of 1,700,000 shares of Common Stock at the
public offering price of $32.50 per share and the application of the net
proceeds therefrom.
- --------------------------------------------------------------------------------

6
<PAGE> 6

RISK FACTORS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. Prospective purchasers of the
Common Stock offered hereby should carefully consider the following risk factors
in addition to the other information set forth in this Prospectus.

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. filed a civil action in the U.S. District Court
in Massachusetts against the Company and HMRI. 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 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.

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.

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

7
<PAGE> 7

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 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

8
<PAGE> 8

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 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 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

9
<PAGE> 9

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 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.

10
<PAGE> 10

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 March 31, 1997, the Company had an accumulated deficit
of $40.9 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 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

11
<PAGE> 11

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.

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

12
<PAGE> 12

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 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.

CONCENTRATION OF OWNERSHIP

Following this offering, the present officers, directors and holders of
more than 5% of the Company's stock will beneficially own approximately 54.1% of
the outstanding shares of the capital stock of the Company, assuming the
exercise of any shares which the individual has the right to acquire within 60
days of the date of this Prospectus. Accordingly, such persons will have the
ability to exercise significant influence over the management and policies of
the Company and to control the election of the Company's Board of Directors and
most other stockholder actions.

SHARES ELIGIBLE FOR FUTURE SALE AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE

Future sales of Common Stock by existing stockholders of the Company in the
public market following this offering could adversely affect the market price of
the Common Stock. The Company is unable to predict the effect, if any, that the
market sales of additional shares or the availability of such additional shares
for sale will have on the market price of the Common Stock.

13
<PAGE> 13

DILUTION; ABSENCE OF DIVIDENDS

Purchasers of the Shares of Common Stock offered hereby will experience
immediate and substantial dilution estimated at $24.95 per share in the net
tangible book value of their investment from the assumed public offering price.
Additional dilution will occur upon the exercise of outstanding options and
warrants. See "Dilution", "Management -- 1993 Long-term Incentive Plan" and
"Management -- 1993 Non-Employee Director Stock Option Plan" and "Description of
Capital Stock -- Warrants."

The Company has never paid dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain its earnings, if any, for the development of its
business. See "Dividend Policy."

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Restated Certificate of Incorporation
and By-laws could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common Stock.
Certain of such provisions allow the Company to issue preferred stock with
rights senior to those of the Common Stock and impose various procedural and
other requirements which could make it more difficult for stockholders to effect
certain corporate actions. See "Description of Capital Stock -- Preferred Stock"
and "Description of Capital Stock -- Delaware Law and Certain Charter and By-Law
Provisions."

VOLATILITY OF STOCK PRICE

The market price of the Company's Common Stock, like that of the common
stock of many other early-stage biotechnology companies, has been and may
continue to be highly volatile. Factors such as announcements of technological
innovations or new commercial products by the Company or its competitors,
disclosure of results of clinical testing or regulatory proceedings,
governmental regulation and approvals, developments in patent or other
proprietary rights, public concern as to the safety of products developed by the
Company and general market conditions may have a significant effect on the
market price of the Common Stock. In addition, the stock market has experienced
extreme price and volume fluctuations. This volatility has significantly
affected the market prices of securities of many biotechnology and
pharmaceutical companies for reasons frequently unrelated to or disproportionate
to the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.

14
<PAGE> 14

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be $52,936,250 at the public offering price of
$32.50 per share and after deduction of placement fees and estimated offering
expenses payable by the Company.

The Company intends to use the net proceeds of this offering for research,
preclinical and clinical product development and other general corporate
purposes. The amounts actually expended for each purpose may vary significantly
based upon numerous factors including the results of clinical trials, the timing
of regulatory approvals, technological advances, determinations concerning
commercial potential of particular products, the status of competitive products,
the progress of the Company's research and development programs, establishment
of collaborative arrangements with other companies and research institutions and
the availability of financing. Pending application of the net proceeds of this
offering as described above, the Company intends to invest such net proceeds in
investment grade, interest-bearing securities or in interest-bearing accounts.

Based upon its current operating plan, the Company believes that its
available cash, together with the proceeds of this offering and interest income,
will be adequate to satisfy its capital needs through 2001. The Company will
require substantial funds to conduct research and development and preclinical
and clinical testing of its potential products and to manufacture and market any
products that are approved for commercial sale. The Company intends to seek
additional funding through collaborative arrangements or through public or
private financings, but there can be no assurance that additional financing will
be available on acceptable terms or at all. See "Risk Factors -- History of
Operating Losses; Future Capital Needs; Uncertainty of Additional Funding."

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain all of its earnings, if any, for use in
its business and therefore does not anticipate paying any cash dividends in the
foreseeable future.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock began trading on the Nasdaq National Market on
October 17, 1996 under the symbol "TKTX". Prior to October 17, 1996, there was
no public market for the Common Stock or any other securities of the Company.

The following table sets forth, for the periods indicated, the range of the
high and low closing sale prices for the Company's Common Stock:

<TABLE>
<CAPTION>
QUARTER ENDED: HIGH LOW
---- ---
<S> <C> <C>
1997
March 31.................................................... $25 3/4 $17
June 30..................................................... 32 1/4 12 3/4
September 30 (through July 29).............................. 34 1/2 27 3/4

1996
December 31................................................. $20 1/2 $13 1/2
</TABLE>

As of July 29, 1997, there were approximately 129 holders of record of the
Company's Common Stock.

15
<PAGE> 15

CAPITALIZATION

The following table sets forth as of March 31, 1997 (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to reflect the sale of the 1,700,000 shares of Common Stock offered by
the Company hereby, after deducting offering expenses, at the public offering
price of $32.50 per share and the application of the net proceeds therefrom as
set forth in "Use of Proceeds". This table should be read in conjunction with
the financial statements, related notes and other financial information included
herein.

<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
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 authorized;
16,660,551 shares issued and outstanding; 18,360,551
shares, as adjusted(1)................................ $ 166 $ 183
Additional paid-in capital............................... 131,364 184,283
Accumulated deficit...................................... (40,909) (40,909)
Deferred compensation.................................... (4,513) (4,513)
Unrealized losses on investments......................... (126) (126)
-------- --------
Total stockholders' equity................................. $ 85,982 $138,918
======== ========
</TABLE>

16
<PAGE> 16

DILUTION

The net tangible book value of the Company, as of March 31, 1997, was
$85,602,084 or $5.14 per share. Net tangible book value per share represents the
total tangible assets of the Company, less total liabilities, divided by
16,660,551 shares of Common Stock outstanding. Assuming the receipt by the
Company of the net proceeds from the sale of the 1,700,000 shares of Common
Stock offered hereby at the public offering price of $32.50, the pro forma net
tangible book as of March 31, 1997 would have been $138,538,334 or $7.55 per
share. This represents an immediate increase of $2.41 per share to existing
stockholders and an immediate dilution of $24.95 per share to new investors (the
"New Investors"). The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Public offering price per share................................... $32.50
Net tangible book value per share as of March 31, 1997.......... $5.14
Increase per share attributable to New Investors................ 2.41
-----

Pro forma net tangible book value per share as of March 31, 1997
as adjusted for the offering.................................... 7.55
------

Dilution per share to New Investors............................... $24.95
======
</TABLE>

The foregoing table assumes no exercise of outstanding options or warrants
to purchase Common Stock. At July 23, 1997 there were outstanding options to
purchase an aggregate of 946,277 shares of Common Stock at a weighted average
price of $3.28 and outstanding warrants to purchase an aggregate of 774,354
shares of Common Stock at a weighted average price $7.52 per share. To the
extent these options or warrants are exercised, there will be further dilution
to existing stockholders and New Investors. At July 23, 1997, 2,188,062 shares
of Common Stock were reserved for issuance under the Company's 1993 Long-term
Incentive Plan and 231,429 shares were reserved for issuance under the Company's
1993 Non-Employee Directors' Stock Option Plan. See "Management -- 1993
Long-term Incentive Plan" and "Management -- 1993 Non-Employee Directors' Stock
Option Plan" and Note 8 of Notes to Financial Statements.

17
<PAGE> 17

SELECTED FINANCIAL DATA

The following selected financial data of the Company for the five years
ended December 31, 1996 are derived from the financial statements of the Company
which have been audited by Ernst & Young LLP, independent auditors. The
financial statements as of December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996, and the report of Ernst & Young LLP
relating thereto are included elsewhere herein. The financial data for the three
month periods ended March 31, 1996 and 1997 are derived from unaudited financial
statements included elsewhere herein. The unaudited financial statements include
all adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for the three months
ended March 31, 1997 are not necessarily indicative of results to be expected
for the entire year ended December 31, 1997. The following data should be read
in conjunction with the Company's Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included herein.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
License and contract fee
revenues.................. $ -- $ -- $10,000 $15,400 $ 4,225 $ 1,838 $ 300
Costs and expenses:
Research and
development............. 4,604 6,253 9,126 10,529 14,019 2,905 3,832
General and
administrative.......... 2,043 2,998 4,690 3,828 4,729 765 1,402
------- ------- ------- -------- -------- ------- -------
Total costs and expenses..... 6,647 9,251 13,816 14,357 18,748 3,670 5,234
Interest income.............. 247 168 394 1,116 2,551 462 1,141
Provision for income taxes... -- -- -- 85 -- -- --
------- ------- ------- -------- -------- ------- -------
Net income (loss)............ $(6,400) $(9,083) $(3,422) $ 2,074 $(11,972) $(1,370) $(3,793)
======= ======= ======= ======== ======== ======= =======
Net income (loss) per share
(pro forma in 1995 and
1996)(1).................. $ .14 $ (.81) $ (.10) $ (.23)
======== ======== ======= =======
Shares used in computing net
income (loss) per share
(pro forma in 1995 and
1996)(1).................. 14,633 14,723 14,255 16,641
</TABLE>

<TABLE>
<CAPTION>
AS OF
MARCH
AS OF DECEMBER 31, 31,
---------------------------------------------------- --------
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities......... $ 4,594 $ 6,753 $ 7,579 $ 34,485 $ 86,255 $ 82,919
Working capital.................. 4,264 5,565 5,948 33,525 85,809 82,172
Total assets..................... 7,129 11,409 13,472 39,218 90,998 87,310
Redeemable preferred stock....... 3,810 4,020 4,230 4,440 -- --
Accumulated deficit.............. (14,714) (23,797) (27,218) (25,144) (37,116) (40,909)
Total stockholders' equity....... 2,776 5,724 7,073 33,541 89,645 85,982
</TABLE>

- ---------------
(1) Computed on the basis described in Note 2 of Notes to Financial Statements.

18
<PAGE> 18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Since its inception in 1988, TKT 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
operations of the Company should be read in conjunction with the accompanying
financial statements and the related footnotes thereto.

RESULTS OF OPERATIONS

Three Months Ended March 31, 1997 and 1996

License 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 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%, is principally due to an increase in research and
development staff to 96 from 81 and increases in consulting and outside research
contracts.

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.

19
<PAGE> 19

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 has a net loss of $3,793,000 and $1,370,000 in the quarter
ended March 31, 1997 and 1996, respectively.

Years Ended December 31, 1996, 1995 and 1994

Revenues from licenses and contract fees totaled $4,225,000, $15,400,000,
and $10,000,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. All revenues were earned from two collaborative agreements with
HMRI. Included in revenues in both 1995 and 1994 were one-time up front
licensing fee payments of $10,000,000 from HMRI, relating to the signing of
agreements for the development of products based on the Company's Gene
Activation technology.

Research and development expenses totaled $14,019,000 in 1996, as compared
to $10,529,000 in 1995 and $9,126,000 in 1994. The increase in 1996 of
$3,490,000, or 33.1%, was principally due to an increase in research and
development staff to 94 from 75 and increases in laboratory supplies and outside
research contracts. The increase in 1995 of $1,403,000, or 15.4%, was
principally due to an increase in research and development staff to 75 from 65,
increases in laboratory supplies and an expansion of laboratory facilities and
expenses related thereto.

General and administrative expenses were $4,729,000 for the year ended
December 31, 1996, compared with $3,828,000 and $4,690,000 in 1995 and 1994,
respectively. The increase in 1996 of $901,000, or 23.5%, was due to an increase
of administrative employee costs and outside professional services fees. The
decrease in 1995 of $862,000, or 18.4%, primarily reflects one-time personnel
related costs of $662,000 incurred in 1994.

Net interest income was $2,551,000, $1,116,000, and $395,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. The average cash and
marketable securities balances were $48,673,000, $20,294,000 and $8,808,000 in
1996, 1995 and 1994, respectively. Increased interest income is primarily
attributable to higher average balances in the respective year.

The Company had a net loss of $11,972,000 in 1996, net income of $2,074,000
in 1995 and a net loss of $3,422,000 in 1994. Net earnings in 1995 and the
reduced net loss in 1994 are principally due to the up front licensing fees of
$10,000,000 paid by HMRI to the Company in each year.

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.

In August 1996, the Company completed a sale of preferred stock resulting
in net proceeds to the Company of $23,521,000. In October 1996, the Company
completed its initial public offering of Common Stock, resulting in net proceeds
to the Company of $34,110,000, and sold shares of Common Stock to HMRI resulting
in net proceeds to the Company of $4,950,000. Concurrent with the completion of
the initial public offering, all shares of preferred stock were automatically
converted into 8,785,455 shares of Common Stock pursuant to automatic conversion
terms contained in the Company's certificate of incorporation.

20
<PAGE> 20

$4 million in milestones payments, and $5 million for the purchase of shares of
Common Stock upon the closing of the Company's initial public offering. The
remaining $34 million in payments are based on HMRI's achievement of certain
GA-EPO clinical development milestones. HMRI is responsible for the worldwide
development, manufacturing and marketing of GA-EPO, and TKT will receive a
royalty based on net sales.

In March 1995, TKT entered into a second agreement with HMRI to
commercialize a second, undisclosed protein. Pursuant to the agreement, TKT also
granted to HMRI an option to commercialize certain aspects of TKT's gene therapy
technologies related to this protein. Under the terms of the agreement, HMRI is
obligated to pay to TKT a total of $67 million upon completion of all milestones
and objectives set forth in the agreement. To date, TKT has received a total of
approximately $30 million from HMRI under the second agreement, including
up-front fees of $10 million for a license to the Gene Activation technology for
the second protein, $10 million for the purchase of shares of the Company's
Class E Preferred Stock, $7 million to fund basic research at the Company and a
$3 million milestone payment. The remaining $37 million to be paid by HMRI to
TKT consists primarily of milestone payments based on the development of the
product resulting from the licensed technology.

At December 31, 1996, the Company had net operating loss carryforwards of
approximately $32 million, which expire through 2011. Since the Company expects
to incur substantial losses for at least several years, the Company believes
that as of December 31, 1996, it is more likely than not that all of the
deferred tax assets will not be realized and, therefore, no tax benefit for the
prior losses has been provided. The future utilization of net operating loss
carryforwards may be subject to limitation under the changes in stock ownership
rules of the Internal Revenue Code. Because of this limitation, it is possible
that taxable income in future years, which would otherwise be offset by net
operating losses, will not be offset and, therefore, will be subject to tax.

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.

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 1999. 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.

21
<PAGE> 21

BUSINESS

SUMMARY

Transkaryotic Therapies, Inc. ("TKT" or the "Company") has developed two
proprietary technology platforms, Gene Activation and gene therapy. The
Company's Gene Activation technology is a proprietary approach to the large
scale production of therapeutic proteins which does not require the cloning of
genes and their subsequent insertion into non-human cell lines. Consequently,
the Company believes its Gene Activation technology avoids using patented
approaches to protein production associated with such conventional genetic
engineering techniques which have served as effective barriers to competition in
the $11 billion therapeutic protein market. As a result, the Company believes it
will be able to develop and successfully commercialize a broad range of Gene
Activated versions of proteins which have proven medical utility, received
marketing approval from regulatory authorities and generated significant
revenues in major markets. The Company's most advanced Gene Activation
development program is for the production of Gene Activated erythropoietin
("GA-EPO"), for which Hoechst Marion Roussel, Inc. ("HMRI"), the Company's
collaborative partner, filed an Investigational New Drug application ("IND") in
May 1997.

The Company's gene therapy technology ("Transkaryotic Therapy") is a
non-viral, ex vivo system based on genetically modifying patients' cells to
produce and deliver therapeutic proteins for extended periods of time. In
preclinical animal studies, the Company's Transkaryotic Therapy system has
produced target proteins at therapeutic levels for the lifetime of the animal
without any side effects.

GENE ACTIVATION: TECHNOLOGY BACKGROUND

Protein Production: Three Technological Waves. The therapeutic value of
certain proteins produced by the human body has been known for decades. One of
the major advances in 20th-century medicine was the development of systems for
the large-scale production of therapeutic proteins outside the body. For
example, prior to the development of a manufacturing process for insulin more
than seventy years ago, patients with Type I (juvenile onset) diabetes were
offered no effective treatment and generally died of starvation at an early age.
Following the development of pharmaceutical insulin preparations for injection,
Type I diabetics could live long and relatively normal lives. During this first
wave of protein production technology, proteins were generally purified from
human or animal tissue. Insulin, for example, was isolated from the pancreas of
pigs and cattle, and growth hormone, for the treatment of short stature, was
isolated from the pituitaries of cadavers. During the second wave of protein
production technology, based on the cloning of human genes, proteins were
manufactured using conventional genetic engineering techniques. As a result, by
the mid-1980's, it became routine to engineer cells to produce therapeutic
proteins at levels that were substantially in excess of what could be obtained
by purification from tissue. However, since many of the proteins produced by
conventional genetic engineering techniques had previously been purified, the
patent protection afforded to this second wave of protein production technology
tended to focus on the genes encoding therapeutic proteins. Accordingly, many
patents have been issued covering isolated and purified DNA sequences encoding
such proteins, various vectors used to insert such DNA sequences into production
cell lines, and cell lines modified by the insertion of such DNA sequences. TKT
believes its proprietary Gene Activation technology represents the third wave in
the evolution of protein production technology in that it is based on the
activation of genes encoding therapeutic proteins in human cells rather than the
cloning and transfer of these genes. TKT's Gene Activation technology avoids
using the approach to protein production associated with the second wave, and
the Company believes this will allow it to develop and commercialize a large
number of therapeutic proteins, including many that are currently marketed.

Gene Structure and Regulation of Gene Expression. Recent advances in
molecular biology, cell biology, and genomics have led to a much better
understanding of the structure and function of human genes than was possible
only a few years ago. It is now generally accepted that virtually all genes
contain certain DNA sequences that provide information necessary for the cell to
assemble a specific sequence of amino acids that make up a protein ("coding DNA
sequences"). Thus each gene can be viewed as the blueprint for a particular
protein, and "gene expression" is the process which leads to the synthesis of
the protein it encodes. Gene expression is controlled by certain DNA sequences
which function as switches that "turn on" the gene and

22
<PAGE> 22

trigger the synthesis of the protein ("regulatory DNA sequences"). Despite the
staggering variety of proteins synthesized by the cells of the body, this
process is universal.

Essentially every human cell contains the same set of approximately 100,000
genes, but each cell type actually produces only a subset of the 100,000
proteins possible. For example, although essentially all human cells contain the
insulin gene, only certain cells of the pancreas actually produce insulin. The
regulatory switches that turn on gene expression in the appropriate cell type
also turn off gene expression in all other cell types. For this reason, only
pancreatic cells express insulin -- the regulatory DNA sequences normally
associated with the insulin gene prevent expression elsewhere in the body. TKT's
Gene Activation technology is based on activating previously silent genes by
bypassing regulatory DNA sequences set in the "off position" with regulatory DNA
sequences set in the "on position."

Conventional Recombinant Protein Production. By the 1970's, the clinical
benefits of several proteins were well-known and the potential benefit of many
others was envisioned. Based on a series of basic discoveries in the 1960's and
1970's, scientists learned to clone and manipulate genes of therapeutic
interest, leading directly to the birth of the biotechnology industry and the
large scale production of therapeutic proteins. To produce large quantities of a
therapeutic protein using conventional genetic engineering techniques,
scientists first clone the relevant human gene by isolating the coding DNA
sequences for the gene from the human cell and transferring them to bacteria,
where large quantities of the gene are copied. The cloned gene is then isolated
from the bacteria and placed in a test tube. In this test tube, the cloned gene
is then fused to appropriate regulatory DNA sequences, and the resulting DNA
fragment containing both the regulatory DNA sequences and the coding DNA
sequences is inserted into a non-human (mammalian, yeast, or bacterial) cell.
This genetically modified cell is then propagated in large bioreactors for
commercial-scale production of the protein.

TKT'S GENE ACTIVATION TECHNOLOGY

Although the conventional approach to recombinant protein production is
quite powerful, its use today faces certain commercial barriers and technical
limitations. The primary barrier is that biotechnology companies have sought and
obtained patent protection covering many of the techniques used to produce
commercially-marketed proteins using conventional genetic engineering
techniques. These patent rights have served as an effective entry barrier,
minimizing competition in the $11 billion (1995 worldwide revenues) protein
therapeutics market. In addition, conventional genetic engineering techniques
for protein production may face technical limitations arising from the need to
first clone the gene of interest. For certain proteins, this step adds to
development times, increases costs and is technically challenging. Technical
difficulties may also arise from the use of non-human production cell lines,
which may result in the production of proteins which may have therapeutically
significant differences from those naturally produced by the cells of the human
body. Furthermore, production processes based on conventional genetic
engineering may not have incorporated recent advances in cell culture systems
with significant efficiency and cost advantages as compared to processes
originally developed over a decade ago.

To overcome these commercial barriers and technical limitations, TKT has
developed Gene Activation technology for the production of therapeutic proteins
that does not rely on the manipulation of cloned genes. Using its proprietary
technology, TKT has succeeded in producing therapeutic proteins in human cells
by bypassing regulatory DNA sequences set in the "off position" with regulatory
DNA sequences set in the "on position" in order to activate the gene of
interest. The Company's Gene Activation technology does not require the
manipulation of the protein coding DNA sequences of the gene. The bypass of an
"off switch" with an "on switch" is accomplished by "gene targeting." Gene
targeting is a technology by which DNA fragments can be "cut and pasted"
precisely at pre-selected, desirable locations within the cell's genome. Gene
targeting can be thought of as molecular surgery, with the surgical tools
literally functioning at the molecular level. The technical term for gene
targeting, homologous recombination, reflects its underlying mechanism: cells
have the capacity to align two homologous DNA sequences (two sequences that are
quite similar) and exchange one with the other. In Gene Activation, the new
regulatory sequences are flanked with "homing" sequences and structural
sequences which allow the cell to exchange the new active regulatory sequences
in place of the

23
<PAGE> 23

old inactive ones. The new sequences must be introduced precisely in order to
allow the proper initiation of gene expression.

In order to manufacture a protein of therapeutic interest using Gene
Activation, a human cell line producing the protein must be generated. This cell
line will ultimately become the master cell bank for large scale manufacturing
and is generated as follows:

1. Determine the sequence of a portion of the regulatory DNA
sequences that control the gene of interest;

2. Build a "targeting fragment" by fusing homing sequences to a new
regulatory region known to be active in the human cell line chosen
for manufacturing;

3. Introduce the targeting fragment into the cell line;

4. Identify and propagate an activated cell line producing the
protein of interest; and

5. Optimize protein productivity and prepare the cell line for
commercial scale manufacturing.

The Company has successfully accomplished all of the steps described above
for GA-EPO. The results of TKT's work in this area have led to proof-of-concept
that (i) gene targeting can be used to direct the integration of regulatory and
structural sequences to a specific, pre-selected position in the genome, (ii)
the product of the targeting event is a cell containing an activated gene and
(iii) the protein production properties of cells created by Gene Activation are
predictable and suitable for, and have been successfully used in, large-scale
manufacturing. Accordingly, the Company believes that these methods may be used
to express a wide variety of therapeutically valuable proteins at levels
suitable for large-scale manufacturing purposes. Because the Gene Activation
process avoids many of the technical limitations of conventional recombinant
protein production technology, the Company also believes that the Gene
Activation process is at least as efficient as, and may be more cost effective
than, conventional genetic engineering techniques for protein production.

TKT'S GENE ACTIVATION PRODUCTS: GENE ACTIVATED ERYTHROPOIETIN

The Company's initial strategy in exploiting its technology is to
commercialize Gene Activated proteins that have proven medical utility, have
received marketing approval from regulatory authorities and have achieved
significant revenues in major markets. These protein products have experienced
high rates of acceptance among physicians and health care providers. The Company
believes, based primarily on information obtained from annual reports of public
companies and other published sources, that the total market for the eight
largest marketed proteins in 1995 was approximately $11 billion. See Table I. As
the number of new approved protein products increases and as the number of
approved indications for such products increases, the Company believes that the
market for these protein products will continue to experience substantial
growth. The Company also believes that the broad applicability of its Gene
Activation technology for protein production and the fact that many additional
proteins are currently in clinical development will provide a large number of
candidates for commercialization using TKT's Gene Activation technology.

TABLE I. ESTIMATED 1995 WORLDWIDE PROTEIN PRODUCT REVENUES (IN MILLIONS)

<TABLE>
<CAPTION>
PROTEIN PRIMARY INDICATION REVENUES
--------------------------------------------- ---------------------- --------
<S> <C> <C>
Erythropoietin............................... Anemia $2,900
Insulin...................................... Diabetes 1,900
G-CSF........................................ Neutropenia 1,700
Growth Hormone............................... Short stature 1,500
a-Interferon................................. Hepatitis/Cancer 1,000
Factor VIII.................................. Hemophilia A 950
tPA.......................................... Myocardial infarction 450
(LOGO)-Interferon............................ Multiple sclerosis 350
</TABLE>

24
<PAGE> 24

TKT has focused its initial Gene Activation efforts on the development of
its GA-EPO product in collaboration with HMRI. Erythropoiesis is the process by
which red blood cells (erythrocytes) are produced. When the body requires
additional red blood cells, the kidney normally produces erythropoietin, a
circulating protein hormone which stimulates the differentiation of certain
progenitor cells in the bone marrow. The kidney's critical role in red blood
cell production was determined in the 1950's, and erythropoietin was first
isolated and purified from the urine of patients with anemia in the 1970's (the
first wave). The gene encoding erythropoietin was cloned in the 1980's and used
for production of the protein using conventional genetic engineering techniques
(the second wave). Erythropoietins have been successfully used to treat anemia
associated with a variety of conditions, including the anemia of kidney failure
(which causes a reduction in the body's ability to produce the protein) and the
anemia of chemotherapy (which causes the destruction of a large number of bone
marrow progenitor cells).

GA-EPO Development Status. TKT has successfully applied its Gene
Activation technology to produce GA-EPO in human cells (the third wave). To
illustrate the underlying concept of the Gene Activation process, consider that
essentially all human cells contain the erythropoietin gene, yet only certain
cells of the kidney actually produce erythropoietin. In all other cells in the
human body, the erythropoietin gene is inactive. The erythropoietin gene is not
expressed in most human cells because regulatory sequences in those cells
prevent the protein from being made; the gene is controlled by a switch
("regulatory DNA sequences") that is permanently in the "off" position. The goal
of TKT's GA-EPO program was to remove this "off switch" in a human cell in which
the erythropoietin gene is inactive and, in effect, replace it with regulatory
sequences comprising an "on switch" to activate erythropoietin expression.

TKT has produced a GA-EPO producing cell line sufficient for scale-up to
commercial production levels. To accomplish this, TKT first studied the
regulatory region that prevents expression of the erythropoietin gene in most
human cells and developed an activation strategy. Next, a targeting fragment was
constructed by fusing certain homing sequences to a new regulatory region known
to be active in the human cell line chosen for manufacturing. The targeting
fragment was then introduced into the cell line under conditions appropriate for
homologous recombination to occur, and a resulting cell line that produced
GA-EPO was identified. The GA-EPO productivity of the cell line was optimized,
and the cells were prepared for commercial-scale manufacturing. At present, a
production cell line has been scaled up and successfully used to produce GA-EPO.
The purified protein has been subjected to an extensive series of analyses and
has the properties expected of a human erythropoietin preparation. In
particular, the protein has an appropriate molecular weight, amino acid
composition, amino acid sequence, secondary structure, and glycosylation
profile. GA-EPO has been shown to function in vitro and in vivo in a
dose-dependent manner. Finally, preclinical safety tests performed to date have
yielded satisfactory results. The Company believes that GA-EPO will be
functional in patients because extensive preclinical testing has demonstrated
that the protein has the structural and functional characteristics that would be
expected of a human erythropoietin preparation. In May 1997, HMRI filed an IND
to commence Phase I clinical trials.

The Company believes that GA-EPO is likely to be reviewed within FDA by the
Center for Biologics Evaluation and Research ("CBER"). This assumption is based
on the fact that erythropoietin products have historically been reviewed by CBER
and on the Company's preliminary discussions with CBER officials. CBER currently
has no "bioequivalence" pathway for the rapid approval of related biologics, and
the Company believes that GA-EPO will require a complete clinical and regulatory
program. However, the regulatory and clinical programs have the advantage of
focusing on Gene Activated products with conventional counterparts that are
well-known to regulatory authorities around the world (in contrast to a typical
new biologic, which has no related history concerning its safety and efficacy in
humans). Accordingly, TKT believes that clinical development can be accomplished
in a focused and timely manner.

GENE ACTIVATION COLLABORATIONS AND COMMERCIALIZATION STRATEGY

25
<PAGE> 25

protein. TKT has the potential to receive up to $125 million from HMRI
consisting of license fees, equity investments, milestones and research funding
in addition to royalties on the sales of the two products, of which $54 million
has been received to date. In addition, HMRI is responsible at its own expense
for all worldwide development, manufacturing and marketing activities.

In May 1994, TKT and HMRI (formerly named Marion Merrell Dow Inc.) entered
into an agreement to commercialize TKT's GA-EPO. Under the terms of the
agreement, HMRI is obligated to pay TKT a total of $58 million upon completion
of all milestones and objectives set forth in the agreement. To date, TKT has
received a total of $24 million, which includes up-front fees of $10 million for
a license to the Gene Activation technology for GA-EPO, $5 million for the
purchase of shares of the Company's Class D Preferred Stock, $4 million in
milestone payments, and $5 million for the purchase of shares of Common Stock
upon the closing of the Company's initial public offering. The remaining $34
million in payments are based on HMRI's achievement of certain GA-EPO clinical
development milestones. HMRI is responsible for the worldwide development,
manufacturing and marketing of GA-EPO, and TKT will receive a royalty based on
net sales.

In March 1995, TKT entered into a second agreement with HMRI to
commercialize a second, undisclosed protein. Pursuant to the agreement, TKT also
granted to HMRI an option to commercialize certain aspects of TKT's gene therapy
technologies related to this protein. Under the terms of the agreement, HMRI is
obligated to pay to TKT a total of $67 million upon completion of all milestones
and objectives set forth in the agreement. To date, TKT has received a total of
approximately $30 million from HMRI under the second agreement, including
up-front fees of $10 million for a license to the Gene Activation technology for
the second protein, $10 million for the purchase of shares of the Company's
Class E Preferred Stock, $7 million to fund basic research at the Company, and a
$3 million milestone payment. The remaining $37 million to be paid by HMRI to
TKT consists primarily of milestone payments based on the development of the
product resulting from the licensed technology. In June 1997, HMRI accepted for
development the Gene Activated cell line for this second protein. HMRI is
responsible for the worldwide development, manufacturing and marketing of the
product, and TKT will receive a royalty based on net sales.

In addition to the above transactions, in December 1995, HMRI purchased
$7.9 million of the Company's Class F Preferred Stock.

Having completed its responsibilities under its first Gene Activation
project by successfully generating a cell line sufficient for scale-up to
commercial production levels of GA-EPO that has been accepted by HMRI, TKT is
actively pursuing other Gene Activation product candidates. The Company believes
that its revenues from the commercialization of Gene Activated proteins will be
divided into three stages. In the short term, TKT will attempt to license out
additional proteins for development by pharmaceutical partners in return for
licensing and milestone payments as well as research funding. In the medium
term, the Company anticipates that it will receive royalty payments from HMRI
with respect to GA-EPO, as well as from pharmaceutical partners that
successfully manufacture and market its Gene Activated proteins. In the long
term, the Company will consider developing Gene Activation products
independently. Future Gene Activation products may include currently-marketed
proteins, proteins currently in late stage clinical development or proteins that
are in much earlier stages of development. At present, TKT intends to focus on
the currently-marketed products until products from these latter two categories
demonstrate clinical and commercial viability before embarking on development
programs. TKT believes that its focus on currently-marketed proteins for near-
term commercialization and on development-stage proteins for the long-term
appropriately utilizes Company resources, maximizes near-term commercial
potential and will allow the Company to build a strong Gene Activation product
pipeline for the future.

GENE THERAPY TECHNOLOGY

TKT's Gene Therapy Approach. The first three waves of protein production
have a critical feature in common: regardless of methodology, the proteins are
manufactured outside the human body. The Company believes that its approach to
gene therapy, Transkaryotic Therapy, represents the fourth wave of protein
production -- a system that would restore the patient's natural ability to
produce a required therapeutic protein. TKT's approach to gene therapy is based
on genetically modifying patients' cells to produce and

26
<PAGE> 26

deliver therapeutic proteins for extended periods. The Company believes the
approach will be safe, cost-effective and clinically superior to the
conventional delivery of proteins by injection. In preclinical animal studies, a
single administration of one of the Company's gene therapy products resulted in
the lifetime production and delivery of therapeutic proteins. The Company has
initiated a Phase I clinical study to determine the safety of its gene therapy
system, and preliminary data suggests that the administration of
genetically-engineered cells appears to be well-tolerated.

TKT believes its gene therapy system is broadly enabling and, accordingly,
may be applicable to the treatment of a wide range of human diseases. Because
TKT's gene therapy has demonstrated long-term delivery of therapeutic proteins
in animal model systems, the Company believes its approach may be well-suited to
the treatment of chronic protein deficiency states including hemophilia,
diabetes and hypercholesterolemia. The diseases targeted by TKT are
characterized by a significant unmet medical need, and the clinical goals that
must be achieved by TKT's gene therapy products are well-defined. The potential
benefits of TKT's gene therapy products include improved therapeutic outcome,
elimination of frequent painful injections and the problem of patient
compliance, a minimization of side effects due to over- or under-dosing of
conventional proteins and a reduction in costs.

There are a large number of technical approaches to gene therapy, but two
basic distinctions can be used to characterize the field. The first distinction
is viral versus non-viral -- viral gene therapy approaches use genetically
modified viruses to introduce genes into human cells by infection, and non-viral
approaches use noninfectious (chemical or physical) means to introduce the
genes. The second distinction is in vivo vs. ex vivo -- in vivo gene therapies
are based on the administration of DNA-based drugs directly to the patient,
whereas ex vivo gene therapies are based on removing a small number of cells
from a patient, introducing a gene into the cells and implanting the engineered
cells into the patient.

TKT's enabling gene therapy technology platform is a non-viral, ex vivo
system which the Company believes is significantly different from other
approaches to gene therapy. The Company believes that these differences will
allow for physiologic levels of protein expression in patients for extended
periods, a goal that historically has represented a major obstacle in
alternative gene therapy systems. The major alternative to TKT's system is based
on the use of genetically-modified retroviruses and adenoviruses to infect
patients' cells. The Company believes that such viral ex vivo approaches present
a significant safety risk due to the possibility of causing new viral infections
in patients and have not allowed long-term production of the therapeutic protein
in animal models or patients. Furthermore, to the best of the Company's
knowledge, neither viral nor non-viral in vivo gene therapy technologies have
allowed long-term or high level protein expression in the patient and are likely
best-suited for non-chronic applications such as immunotherapy. TKT believes
Transkaryotic Therapy is well-suited to allow safe and long-term delivery of
therapeutic proteins for the treatment of chronic protein deficiency states as
demonstrated by the long-term delivery of therapeutic proteins in animal models.

In order to develop a safe, effective, non-viral, ex vivo gene therapy
system, the Company believes that several major tasks must first be accomplished
in basic and preclinical settings. Each of the steps must be carried out to
allow the ultimate product to be manufactured efficiently, reproducibly and
cost-effectively, to be subjected to rigorous quality control to ensure safety
and to direct the long-term production and delivery of the therapeutic protein
in the patient. The first step involves the development of techniques for
obtaining and propagating the cell types of interest. Next, non-viral
methodologies must be developed that allow DNA fragments to be stably introduced
into these cells. DNA fragments containing the appropriate DNA regulatory
sequences fused to the desired protein encoding sequences, for example, must be
constructed and introduced into cells to generate genetically-engineered cells
which express the therapeutic protein at clinically relevant levels. After the
DNA fragments have been successfully introduced into human cells, methodologies
must then be developed which allow the engineered cells to properly process the
therapeutic protein. The final step involves the development of methods and
formulations for the implantation of the engineered cells.

TKT scientists have successfully accomplished all of the above tasks (Table
II) and, in model systems, have successfully delivered therapeutic proteins for
the lifetime of the experimental animals. Much of TKT's work has focused on gene
therapy using fibroblasts, a cell type present in the skin (and throughout the
body)

27
<PAGE> 27

that is readily obtained from patients and propagated in culture. The Company
has developed a variety of methodologies for the stable transfection of normal
human cells. "Stable transfection" means that the introduced DNA fragment
becomes part of a chromosome in the treated cell. One such methodology is
electroporation, a technique based on subjecting cells to a brief electrical
pulse. The pulse transiently opens small pores in the cell membrane that allow
the DNA fragments of interest to enter the cell. The technique is simple,
reproducible (it works for a variety of cell types and for cells derived from
newborns to the elderly), efficient (one electroporation provides many more
transfected cells than required for treatment) and cost-effective (less than one
dollar per reaction).

TABLE II. TKT'S GENE THERAPY SYSTEM: SUMMARY OF SELECTED TECHNICAL
ACCOMPLISHMENTS

<TABLE>
<CAPTION>
TASKS ACHIEVEMENT COMMENTS
- --------------------------------- --------------------------------- --------------------------------
<S> <C> <C>
Cell types propagated Fibroblasts, myoblasts, mammary Cells retain normal properties
epithelial cells
Proteins expressed Factor VIII, Factor IX, Growth All expressed at levels of at
Hormone, Insulin, Interleukin-2, least 1 ug/million cells/day
LDL receptor, a-galactosidase
Transfection methodologies
applied Electroporation, microinjection, All with efficiencies greater
polybrene and calcium phosphate than 1 stably transfected cell
precipitation per thousand treated cells
Proteins characterized Factor VIII, Factor IX, Growth All with natural post-
Hormone, a-galactosidase translation modifications
In vivo expression observed Factor VIII, Factor IX, Growth All at physiologic levels in
Hormone, Insulin animal models
</TABLE>

The Company believes it has developed the basic technologies required for a
safe and effective gene therapy approach which can be refined and optimized for
patient use. In patients, TKT envisions that the system would function as
follows:

1. The clinician would identify the patient to be treated and perform
a small skin biopsy.

2. In TKT's manufacturing facility, patient cells would be harvested
from the biopsy specimen.

3. The DNA fragment containing DNA regulatory sequences and protein
coding sequences would be introduced into the harvested cells by
electroporation. The DNA fragment and the electroporation
methodology would be the same for all patients with a given
disease.

4. A genetically-engineered cell expressing the therapeutic protein
would be identified, propagated, subjected to appropriate
characterization and quality control tests and formulated in a
syringe. The syringe would then be returned to the physician.

5. The physician would then inject the engineered cells under the
patient's skin as an outpatient procedure.

The above patient techniques have been successfully carried out in an
ongoing Phase I clinical trial. These procedures might vary based on the disease
to be treated. For example, different cell types, sites of implantation and
genes of interest could be advantageous for a given disease.

Clinical Development Status. The Company's approach to initial clinical
development of its enabling gene therapy technology is to evaluate product
safety in extremely conservative clinical settings. Towards this end, the
Company has initiated one Phase I clinical trial for the treatment of cancer
cachexia (the gradual wasting of the body) by growth hormone gene therapy and is
sponsoring a second Phase I clinical trial for the treatment of renal cancer and
malignant melanoma by Interleukin-2 gene therapy. Based on the data generated
from these studies, the Company believes it will be well-positioned to perform
clinical trials in patients with conditions that are not life-threatening. At
present, the Company intends to explore the possibility of further development
of these products in conjunction with corporate partners.

TKT's first Company-initiated trial began in the U.S. in late 1994
following both the validation of TKT's pilot manufacturing facility and FDA
review of the Company's IND. The Phase I study is based on the

28
<PAGE> 28

implantation of genetically modified skin fibroblasts to express growth hormone
in cancer patients at risk for cachexia. A total of 20 patients will be enrolled
with five escalating dosage blocks. Community physicians have injected the
modified cells under the skin of subjects; all patient procedures have been
performed on an out-patient basis. The major goal of the study is to develop a
safety profile of the product in humans. To date, 14 patients have been enrolled
in the trial and the therapy appears to be well tolerated. Due to the extremely
conservative inclusion and exclusion criteria for the trial, it is expected to
continue into late 1997.

The Company has also sponsored a Phase I study at the University of
Freiburg based on the delivery of Interleukin-2 by genetically modified skin
fibroblasts in order to restore or enhance the ability of the immune system to
attack the tumor cells in patients with renal cancer and malignant melanoma. All
manufacturing processes have been developed and performed by the University and
to date, the product appears to be well-tolerated.

Based on the results described above, the Company believes that
Transkaryotic Therapy offers several clinical and commercial advantages over
conventional treatments and other gene therapies for targeted diseases,
including:

- SAFETY. Transkaryotic Therapy does not use infectious agents such as
retroviruses to genetically engineer the patient's cells. TKT's non-viral
method of producing genetically engineered cells allows for extensive
safety testing prior to their implantation in the patient. In studies of
TKT's gene therapy system involving over 5,000 animals, no side effects
have been observed.

- LONG-TERM EXPRESSION. Transkaryotic Therapy is designed to produce
long-term results with a single treatment. In preclinical animal studies,
the Company has produced target proteins at therapeutic levels for the
lifetime of the animals, suggesting the possibility of long-term
effectiveness in humans.

- CONTROLLABILITY. Transkaryotic Therapy is designed to deliver
therapeutic proteins at levels which meet a patient's specific needs. The
Company believes that its gene therapy system will allow the physiologic
and pharmacologic regulation of expression. Further, the Company believes
that the treatment afforded by Transkaryotic Therapy will be readily
reversible so that therapy can be discontinued if no longer required.

- FLEXIBILITY. The Company has focused on genetically-engineering a wide
variety of human cell types because, although certain cell types are
useful in the gene therapy of particular diseases, no single cell type is
appropriate for the gene therapy of all diseases.

- EASE OF ADMINISTRATION. Transkaryotic Therapy will allow for the
administration of its products by a single injection under the patient's
skin on an out-patient basis. Furthermore, the potential long-term
effectiveness of the treatment could eliminate problems of patient
compliance.

- COST-EFFECTIVENESS. Transkaryotic Therapy takes advantage of the
patient's natural ability to synthesize therapeutic proteins for extended
periods. The potential benefits of Transkaryotic Therapy include improved
therapeutic outcome, the elimination of frequent painful injections and
patient compliance problems, a reduction of side effects due to
overdosing and underdosing of conventional proteins and significant
reductions in cost. Accordingly, the Company believes that its therapy
may be less costly than therapy using conventional protein
pharmaceuticals which require frequent administration.

TKT'S GENE THERAPY DEVELOPMENT PROGRAMS AND COMMERCIALIZATION STRATEGY

The Company is focusing its development efforts on gene therapy products
for the treatment of chronic diseases with straightforward and
well-characterized etiologies. For certain of these diseases, such as Hemophilia
A, effectiveness, dose ranges and safety have been clearly established in the
context of currently approved and marketed products. For others, such as Fabry
disease, preliminary in vitro and animal model data strongly suggest that the
long-term delivery of appropriate therapeutic proteins will effectively treat
the disease. The Company believes that this initial focus will provide strategic
advantages by allowing evaluation of Transkaryotic Therapy based on well
understood clinical parameters, thereby facilitating the regulatory approval
process. Furthermore, the Company believes that when administered as part of its
proprietary gene

29
<PAGE> 29

therapy system, these proteins may provide therapeutic benefits not achievable
using conventional methods of delivery.

Hemophilia A. When a blood vessel ruptures, an intricate series of events
allows the rapid formation of a clot in normal individuals. One of the
best-studied coagulation disorders is Hemophilia A, caused by a deficiency or
defect in protein coagulation Factor VIII. Patients with the disease experience
acute, debilitating and often life-threatening bleeding episodes. Depending on
the severity of the disease, bleeding may occur spontaneously or after minor
trauma. Conventional treatment consists of temporarily increasing the patient's
Factor VIII levels through infusions of plasma-derived or recombinantly-produced
Factor VIII. Factor VIII levels typically rise to therapeutic levels for only
two to three days following intravenous administration, then return to the
baseline subtherapeutic level, once again placing the patient at risk for a
serious bleeding episode. It is estimated that there are about 19,000 Hemophilia
A patients in the U.S. and Canada, 25,000 in Europe, and 4,000 in Japan. In the
U.S., an adult suffering from the disease receives Factor VIII protein treatment
only during bleeding crises at an average annual cost of approximately $65,000.

TKT's approach to the treatment of hemophilia is based on the production
and delivery of Factor VIII using Transkaryotic Therapy. The Company believes
that its Factor VIII gene therapy product has the potential to provide a
constant supply of therapeutic levels of the missing protein, effectively
eliminating the problem of rapid disappearance of the therapeutic protein. The
Company has produced clonal populations of human fibroblasts which have been
transfected to express Factor VIII in vitro, demonstrated that the protein is
properly processed and achieved protein expression in animals. The Company has
initiated preclinical studies for the product and intends to file an IND in
1997.

In July 1993, the Company entered into a Collaboration and License
Agreement with Genetics Institute, Inc. ("GI") relating to a joint development
and marketing program for a Hemophilia A gene therapy product based on the
Company's non-viral technology. The agreement provides that the parties will
collaborate to develop and commercialize a non-viral gene therapy product for
the treatment of Hemophilia A using TKT's proprietary technology and GI's
patented Factor VIII genes. Under the agreement, GI has granted TKT a
nonexclusive worldwide license under GI's patents covering truncated versions of
the gene encoding Factor VIII for use in certain non-viral gene therapy
applications. GI has agreed to pay a portion of the clinical development costs
of the product in the U.S., Canada and the European Community. TKT retained
exclusive manufacturing rights throughout the world and exclusive marketing
rights to all countries of the world except those in Europe. Subject to certain
conditions, GI received exclusive rights to market the product in Europe. The
agreement is terminable by GI in the event certain product development and
regulatory approval milestones are not reached.

Fabry Disease. Fabry disease is an X-linked lysosomal storage disease
caused by the deficiency of the enzyme a-galactosidase. The disorder is
characterized by the accumulation of lipids in lysosomes of vascular endothelial
and smooth muscle cells and in a wide variety of other tissues. Patients with
classic Fabry disease of early onset, generally in adolescence, show diverse
clinical manifestations including severe pain and cardiovascular and renal
complications. It is estimated that there are about 2,000 patients in the U.S.
and a total of approximately 5,000 patients in the developed world. Current
treatment of the disease is limited to the reduction of symptoms. Clinical
trials of enzyme replacement therapy in the late 1970's have been reported using
infusions of a-galactosidase purified from placenta, spleen or plasma. The
intravenous injection of the enzyme resulted in the transient reduction in the
plasma levels of the deleterious lipid but, due to the limited availability of
the enzyme obtained from human sources, insufficient quantities were available
for further studies.

The development of a safe and effective gene therapy product for the direct
delivery of a-galactosidase using a gene therapy approach could result in an
elimination of pain symptoms, the medium- and long-term cardiovascular and renal
complications and in an increased life expectancy and improved quality of life.
TKT has produced purified a-galactosidase from normal human fibroblasts and
demonstrated that the enzyme has the desired structural and functional
properties. Before proceeding to a gene therapy trial, it is important to
determine the safety and pharmacokinetics of the protein in humans. Towards
these ends, the Company filed an IND in November 1996 and initiated a small
Phase I clinical trial in January 1997 to study the protein.

30
<PAGE> 30

This study is being performed at the National Institute of Health ("NIH") under
a collaborative research and development agreement ("CRADA") executed in 1996.
Based on the data obtained, it is anticipated that this study will allow the
design of a follow-up gene therapy trial in 1997.

Long-term Gene Therapy Targets. The Company's long-term gene therapy
product development strategy is focused on products for the treatment of
commonly occurring diseases including both juvenile- and adult-onset diabetes,
hypercholesterolemia and osteoporosis. These are diseases for which either (i) a
proven therapeutic protein exists but effective treatment of the disease
requires complex patterns of regulation in the patient (for example, insulin is
widely used in the treatment of diabetes but delivery of insulin by conventional
methods is imprecise and does not prevent the serious complications of the
disease) or (ii) no protein has yet been proven effective in treating the
disease (for example, many proteins are thought to have potential in the
treatment of hypercholesterolemia, but that has yet to be proven conclusively in
patients).

Manufacturing. One of the critical aspects of any cell-based therapy is
the approach to manufacturing. As stated above, the manufacturing process takes
up to six weeks and it is essential to optimize the process to allow for a
commercially-viable product. The Company believes that this has been
accomplished and, for example, the Company believes that the cost for
manufacturing its single administration Factor VIII gene therapy product is less
than that for manufacture of a one year supply of purified Factor VIII protein
required by a typical patient. To produce early clinical materials, TKT has
constructed a pilot manufacturing facility that was designed to conform to FDA
guidelines for Current Good Manufacturing Practice ("cGMP"). For Phase III
clinical trials and commercialization, TKT intends to construct a cGMP-certified
facility.

The Company intends to manufacture its gene therapy products in central
manufacturing facilities. Initially, a single facility would be constructed to
serve the U.S. As the Company's product pipeline matures, it is anticipated that
demand will increase, possibly requiring the Company to construct an additional
central manufacturing facility in the U.S. Other gene therapy companies have
adopted a strategy wherein every large city (or potentially large hospital)
would have a cell processing facility, but TKT believes that the requirements
for strict quality control and the benefits of economy of scale are best
achieved using the central manufacturing strategy.

OTHER GENE THERAPY COLLABORATIONS

In 1994, the Company entered into a three-year collaboration with the
University of Freiburg. As part of that collaboration, TKT is sponsoring the
first gene therapy trial approved in Germany. The Phase I study is based on the
delivery of Interleukin-2 by genetically modified skin fibroblasts in order to
restore or enhance the ability of the immune system to attack the tumor cells in
patients with renal cancer and malignant melanoma. TKT has no role in the
manufacturing process. The trial was initiated in 1994, and 14 patients have
been enrolled to date. In addition to sponsoring the clinical trial, TKT has
certain rights to technologies developed for the non-viral gene therapy of
certain cancers.

In November 1995, the Company entered into a collaboration with the
Institute Pasteur (the "Institute") to study the gene therapy of Hurler disease,
a lysosomal storage disorder. The Institute has successfully delivered various
proteins in a number of animal models, and the Company and the Institute are
working to improve expression of the missing enzyme in human cells. In addition,
the Company has certain rights to related technologies developed at the
Institute.

In July 1996, the Company entered into a collaboration with the Women's and
Children's Hospital, Adelaide (the "Hospital") to study gene and protein
replacement for the mucopolysaccharidoses, a group of lysosomal storage
disorders, including Hunter syndrome. The Company and the Hospital plan to work
towards developing a series of therapies for these related diseases, building on
the Hospital's twenty years of experience in their molecular biology and
clinical features. In connection with the collaboration, TKT will pay the
Hospital a royalty on product sales and will reimburse the Hospital for a
portion of the patent costs associated with patent prosecution. The Company will
also provide the Hospital with funding for research in the field of
mucopolysaccharidoses diseases. TKT has secured the worldwide rights to any
products and/or patents resulting from the collaboration.

31
<PAGE> 31

PATENTS, PROPRIETARY RIGHTS AND LICENSES

Proprietary Issues. For many currently-marketed proteins, the product
manufactured using conventional genetic engineering techniques does not
represent the first time the protein was isolated and purified. As such, it was
generally not possible to obtain a broad composition of matter patent for many
of the currently-marketed proteins. In contrast, the isolated and purified DNA
sequences encoding these proteins, various vectors used to insert such DNA
sequences into production cell lines, cell lines modified by the insertion of
such DNA sequences, and corresponding methods (including methods of producing
proteins using this approach) led to issued patents in many cases. TKT believes
that, by completely avoiding the use of isolated and purified DNA sequences
encoding proteins of commercial interest, the Company's technology does not
infringe claims based on isolated and purified DNA sequences encoding such
proteins. Furthermore, the Company intends to avoid the use of technologies
(such as specific protein purification procedures) that are the subject of
patents that are not limited to protein products manufactured using conventional
genetic engineering techniques.

Over the past decade, there has been a dramatic increase in the number of
approaches to gene therapy under development in both academic and industrial
laboratories. A large number of patent applications have been filed in the U.S.
and worldwide relating to this work, and a number of gene therapy patents have
issued to date. 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, 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.

Currently, the Company has two issued patent and 21 pending patent
applications in the U.S. to protect its proprietary methods and processes; it
has also filed corresponding foreign patent applications for certain of these
U.S. patent applications. The U.S. patent applications relate to Gene Activation
in general, DNA sequences required for Gene Activation, vectors required for
Gene Activation, cells modified by Gene Activation, proteins produced by Gene
Activation, corresponding Gene Activation methods, Transkaryotic Therapy in
general, methods of propagating and transfecting cells, methods for obtaining
expression of therapeutic proteins and homologous recombination in cells, and
cells modified by the preceding methods. Where appropriate, the Company intends
to file, or cause to be filed on its behalf, additional patent applications
relating to future discoveries and improvements.

The Company believes that protection of the proprietary nature of its
products and technology is important to its business. Accordingly, it has
adopted and will maintain a vigorous program to secure and maintain such
protection. The Company's practice is to file patent applications with respect
to technology, inventions and improvements that are important to its business.
The Company also relies upon trade secrets, unpatented know-how, continuing
technological innovation and the pursuit of licensing opportunities to develop
and maintain its competitive position. There can be no assurance that others
will not independently develop substantially equivalent proprietary technology
or that the Company can meaningfully protect its proprietary position.

32
<PAGE> 32

As a general matter, patent positions in the fields of biotechnology and
biopharmacology are highly uncertain and involve complex legal, scientific and
factual matters. To date, there has emerged no consistent policy regarding the
breadth of claims allowed in biotechnology patents. Consequently, although TKT
plans to prosecute aggressively its applications and defend its patents against
third parties, there can be no assurance that any of the Company's patent
applications relating to the technology used by the Company will result in the
issuance of patents or that, if issued, such patents will not be challenged,
invalidated or circumvented or will afford the Company protection against
competitors with similar technology. Should the Company become involved in any
litigation or interference proceedings regarding patent or other proprietary
rights, such litigation or interference proceedings may result in substantial
cost to the Company, regardless of outcome and, further, may adversely affect
TKT's ability to develop, manufacture and market its products and to form
strategic alliances.

The Company's technologies and potential products may conflict with patents
which have been or may be granted to competitors, universities or others. As the
biotechnology industry expands and more patents are issued, the risk increases
that the Company's technologies and potential products may give rise to claims
that they infringe the patents of others. Such other persons could bring legal
actions against the Company claiming damages and seeking to enjoin
commercialization of a product or use of a technology. If any such actions are
successful, in addition to any potential liability for damages, the Company
could be required to obtain a license in order to continue to use such
technology or to manufacture or market such product or could be required to
cease using such product or technology. There can be no assurance that the
Company would prevail in any such action or that any license required under any
such patent would be made available or would be made available on acceptable
terms. The Company believes that there may be significant litigation in the Gene
Activation and gene therapy fields regarding patent and other intellectual
property rights.

In April 1997, Amgen Inc. filed a civil action in the U.S. District Court
in Massachusetts against the Company and HMRI. 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 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 patent infringement claims, interferences, and other litigation
involving patents, or any patents that may issue on any pending patent
applications, including Amgen patent applications.

To further protect its trade secrets and other proprietary property, the
Company requires all employees, Scientific Advisory Board members, consultants
and collaborators having access to such proprietary property to execute
confidentiality and invention rights agreements in favor of the Company before
beginning their relationship with the Company. While such arrangements are
intended to enable the Company to better control the use and disclosure of its
proprietary property and provide for the Company's ownership of proprietary
technology developed on its behalf, they may not provide meaningful protection
for such property and technology in the event of unauthorized use or disclosure.

Licensing. The Company has entered into several licensing agreements under
which it has acquired certain worldwide rights to use proprietary genes and
related technology in its non-viral gene therapy products: The Company has a
nonexclusive license for certain non-viral gene therapy applications from GI
with respect to GI's patented Factor VIII genes and a nonexclusive sublicense
for non-viral gene therapy applications from British Technology Group plc
("BTG") with respect to BTG's patented Factor IX gene. TKT's rights under

33
<PAGE> 33

these gene licenses and sublicenses are for the term of the last to expire
patent included in the licensed patent rights, subject to earlier termination in
the event of the Company's failure to meet certain specified milestones.
Although the Company is not currently in default under any of these agreements,
there can be no assurance that such defaults will not occur in the future.
Should such a default occur and any of these licenses or sublicenses be
terminated in the future, the Company could lose the right to continue to
develop one or more of its potential products, which loss could have a material
adverse effect upon the Company's business.

COMPETITION

Gene Activation. At present, the Company considers its primary competition
with respect to its Gene Activation technology to be companies involved in the
current production of therapeutic proteins. These companies have obtained patent
protection covering many of the techniques used to produce commercially-marketed
proteins using conventional genetic engineering techniques. These patent rights
have served as an effective entry barrier in the $11 billion (1995 worldwide
revenues) protein therapeutics market. Several pharmaceutical and biotechnology
companies have an established presence in the field of therapeutic protein
production. For example, erythropoietin is marketed by Johnson & Johnson ("J&J")
and Amgen in the U.S.; by Boehringer Mannheim GmbH and J&J in Europe; and by
Sankyo Company Ltd. and Chugai Pharmaceutical Co., Ltd. in Japan. These and
other competitors have substantially greater financial and other resources than
the Company, including larger research and development staffs and more
experience and capabilities in conducting research and development activities,
testing products in clinical trials, obtaining regulatory approvals and
manufacturing, marketing and distributing products. There can be no assurance
that TKT will succeed in developing and marketing technologies and products that
are more clinically efficacious and cost-effective than the more established
treatments or the new approaches and products developed and marketed by its
competitors.

The Company believes that the primary competitive factors in the market for
therapeutic proteins may include product safety, efficacy, distribution channels
and price, and disease management services. In addition, the length of time
required for products to be developed and to obtain regulatory and in some
cases, reimbursement approval are important competitive factors. The
biotechnology industry is characterized by rapid and significant technological
change. Accordingly, the Company's success will depend in part on its ability to
respond quickly to medical and technological changes through the development and
introduction of new products. The Company believes it competes favorably with
respect to these factors, although there is no assurance that it will be able to
continue to do so.

Gene Therapy. The Company's gene therapy system will have to compete with
other gene therapy systems as well as with conventional methods of treating the
diseases and conditions targeted by the Company and new non-gene therapy
treatments which may be developed in the future.

A number of commercial entities, including major established biotechnology
and pharmaceutical companies, as well as development stage entities, currently
are involved in the field of human gene therapy. Additional competitors may
enter the field in the future as gene therapy becomes better established. Some
of these existing competitors have and certain of these potential competitors
may have, substantially greater financial, technical, scientific, marketing or
other capabilities and resources than are available to the Company. Smaller
companies may obtain access to such skills and resources through collaborative
arrangements with pharmaceutical companies or academic institutions. Moreover,
existing or potential competitors may possess or acquire patents or other rights
to genes or technology which are necessary or useful for certain applications of
the Company's gene therapies, thereby hampering or preventing the Company from
exploiting such applications.

The Company is developing gene therapy products to address a variety of
diseases and conditions. For certain of the Company's potential products, an
important competitive factor may be timing of market entry. The speed with which
TKT can enter and complete human clinical trials and approval processes may
therefore be a significant competitive factor. The Company believes that product
efficacy, safety, reliability and price may also be important competitive
factors. The development by others of alternative or superior treatment methods
could render the Company's products obsolete or noncompetitive with respect to
some or all of these

34
<PAGE> 34

competitive factors. In addition, treatment methods not clearly superior to the
Company's could achieve greater market penetration through competitors' superior
sales, marketing or distribution capabilities. The Company's competitive
position also depends upon its ability to attract and retain qualified
personnel, obtain patent protection, secure licenses of necessary genes and
technology from third parties, or otherwise develop proprietary products or
processes and secure sufficient capital resources for the typically substantial
expenditures and period of time prior to commercial sales of each product.

GOVERNMENT REGULATION

All of the Company's products will require regulatory approval by U.S. and
foreign government agencies prior to commercialization in such countries. In
particular, protein therapeutics are subject to rigorous pre-clinical and
clinical testing, and other pre-market approval procedures administered by the
FDA and similar authorities in foreign countries. In addition, gene therapy is a
new technology, and regulatory approvals may be obtained more slowly than for
products produced using conventional technologies. In the U.S., various federal
and in some cases, state and local statutes and regulations also govern or
influence the manufacturing, labeling, storage, record keeping and marketing of
such products.

Obtaining approval from the FDA and other regulatory authorities for a
therapeutic product may take several years and involve substantial expenditures.
Moreover, ongoing compliance with applicable requirements can entail the
expenditure of substantial resources. Difficulties or unanticipated costs may be
encountered by the Company in its efforts to secure necessary governmental
approvals, which could delay or preclude the Company from marketing its
products.

The activities required before a new pharmaceutical agent may be marketed
in the U.S. begin with pre-clinical testing. Pre-clinical tests include
laboratory evaluation and animal studies to assess the potential safety and
efficacy of the product. The results of these studies must be submitted to the
FDA as part of an IND, which must be reviewed and cleared by the FDA before
proposed clinical testing can begin. Clinical trials are conducted in accordance
with specific federal regulations (known as Good Clinical Practices). The
clinical protocols detail the objectives of the study, the parameters to be used
to monitor safety and the efficacy criteria to be evaluated. Each clinical
protocol must be submitted to the FDA as part of an IND. Further, each clinical
study must be conducted under the auspices of an independent Institutional
Review Board ("IRB") at the institution at which the study will be conducted.
Each IRB will consider, among other things, ethical factors, the safety of human
subjects, and informed consent.

Clinical trials are typically conducted in three sequential phases. In
Phase I, clinical trials typically include a small number of subjects (often
healthy volunteers) to determine the early safety profile and the pattern of
drug distribution and metabolism. In Phase II, clinical trials are conducted
with larger groups of patients afflicted with a specific disease in order to
further test safety and determine optimal dose amounts, dose schedules, and
routes of drug administration. In Phase III, larger-scale, multi-center,
comparative clinical trials are conducted with patients afflicted with a target
disease in order to provide enough data for a valid statistical test of efficacy
and safety required by the FDA and others. In the case of products for life-
threatening disease, the initial human testing may be done in patients rather
than healthy volunteers. Since these patients are already afflicted with the
target disease, it is possible that such studies may provide results
traditionally obtained in Phase II trials. These trials are frequently referred
to as Phase I/II trials. Although some of the Company's products are being
considered for patients with life-threatening diseases, there can be no
assurance that the FDA will allow Phase I/II studies, or that if Phase I/II
studies are permitted, that this study design would shorten the development time
for any of the Company's products. The FDA receives reports on the progress of
each phase of clinical testing, and it may require the modification, suspension,
or termination of clinical trials if an unwarranted risk is presented to
patients, or if the design of the trial is insufficient to meet its stated
objectives.

After completion of clinical trials of a new product, FDA marketing
approval must be obtained. The Company expects that its products will be
regulated as biologics. Traditionally, both a Product License Application
("PLA") and an Establishment License Application ("ELA") have been required
prior to commercial marketing. The Company expects that both licenses will be
required for its gene therapy products.

35
<PAGE> 35

Recently the FDA has announced its intention to simplify the licensing process
for well-characterized biologics and put forth a regulatory mechanism to allow
for a single license application, a Biologics License Application ("BLA"), for
well-characterized biologics. The Company expects that its Gene Activation
products will fall into this category and require a BLA. License applications
submitted to the FDA have historically taken, typically, two to five years to
receive approval. In 1992, at the same time of passage of the Prescription Drug
User Fee Act, the FDA committed to reviewing and acting on a complete license
application within 12 months of the submission date. Nevertheless, if FDA
determines that an application is incomplete, or that important issues are
unanswered by the data in the application, approval times could be delayed
significantly. Notwithstanding the submission of relevant data, the FDA may
ultimately decide that the license application does not satisfy its criteria for
approval. Even if FDA clearances are obtained, a marketed product is subject to
continual review. Later discovery of previously unknown problems or failure to
comply with the applicable regulatory requirements may result in restriction on
the marketing of a product or withdrawal of the product from the market as well
as possible civil or criminal sanctions. In addition, the manufacturing facility
for the Company's products will be subject to FDA inspection for adherence to
cGMP prior to marketing clearance and periodically following approval. This will
require the Company to observe rigorous manufacturing specifications.

The Company believes that many of its Gene Activation products are likely
to be reviewed within FDA by CBER. CBER currently has no "bioequivalence"
pathway for the rapid approval of closely-related biologics, and the Company
believes that its Gene Activated products will be treated as new biologic
entities and require a complete regulatory and clinical program. However, these
programs will often have the advantage of focusing on Gene Activated products
with conventional, previously approved, counterparts that are well-known to
regulatory authorities around the world (in contrast to a typical new chemical
entity, which has no related history concerning its safety and efficacy in
humans). In April 1996, the FDA issued a document entitled "FDA Guidance
Concerning Demonstration of Comparability of Human Biological Products,
Including Therapeutic Biotechnology-derived Products." This document describes
situations in which a manufacturer can establish the equivalence of a modified
version of their own product using physical, chemical, and/or pharmacological
methods, without the need for additional clinical trials. This is a departure
from traditional doctrine, in which biologics were deemed too complex to compare
using such methods, and reflects the increased purity of many products and
technical advances in the analytical methods currently in use. Although an
approval pathway for bioequivalent biologics does not exist, the Company
believes that increased analytical sophistication and enhanced purity of
biologic products will facilitate the development and regulatory review of its
Gene Activation products.

In addition to regulations enforced by FDA, the Company is also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. The Company's research and development involves the controlled use
of hazardous materials, chemicals, biological materials and various radioactive
compounds. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company.

For marketing outside the U.S., the Company also is subject to foreign
regulatory requirements governing human clinic trials and marketing approval for
products. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary greatly from country to country.

FACILITIES

The Company leases a total of approximately 66,000 square feet of
laboratory and office space in buildings located in Cambridge, Massachusetts.
The Company has no manufacturing facility for protein production and, under the
agreements between the Company and HMRI for the commercialization of GA-EPO and
the second, undisclosed protein, HMRI is responsible for the manufacture of
these products. The Company believes that its existing facilities are adequate
to meet its current needs and that there is sufficient

36
<PAGE> 36

additional space at or in close proximity to its present facilities to
accommodate its requirements through 1999. The Company also believes that its
current facilities comply with all material zoning requirements and that it has
all necessary permits and authorizations for such facilities.

LEGAL PROCEEDINGS

The Company is currently involved in a patent interference proceeding
before the United Stated Patent and Trademark Office. See "Patents, Proprietary
Rights and Licenses."

EMPLOYEES

As of July 23, 1997, the Company had 137 full-time employees, including 99
scientists and 38 development, manufacturing and administrative personnel. The
Company's employees are not covered by any collective bargaining agreement. TKT
considers relations with its employees to be good.

37
<PAGE> 37

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The directors, executive officers and key employees of the Company are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------- ---- ------------------------------------------------
<S> <C> <C>
Richard F Selden, M.D., Ph.D.... 38 President; Chief Executive Officer and Director
Christoph M. Adams, Ph.D........ 40 Vice President, Business Development
Daniel E. Geffken............... 40 Vice President, Finance; Chief Financial Officer
Kurt C. Gunter, M.D............. 42 Vice President, Clinical and Regulatory Affairs
Douglas A. Treco, Ph.D.......... 39 Senior Vice President, Research and Development
William R. Miller(1)(2)......... 69 Director
Rodman W. Moorhead, III(1)...... 53 Director; Chairman of the Board
James E. Thomas(2).............. 37 Director; Secretary
Peter Wirth..................... 47 Director
</TABLE>

- ---------------
(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

Richard F Selden, M.D., Ph.D. is the founder of TKT. He has served as Chief
Scientific Officer, Chairman of the Scientific Advisory Board and a Director
since the Company's inception in 1988 and as President and Chief Executive
Officer since June 1994. Prior to founding TKT, Dr. Selden was an Instructor in
pediatrics at Harvard Medical School. He received an A.B. in Biology from
Harvard College, an A.M. in Biology from the Harvard University Graduate School
of Arts and Sciences, a Ph.D. in genetics from the Division of Medical Sciences
at Harvard Medical School and an M.D. from Harvard Medical School.

Christoph M. Adams, Ph.D., has served as Vice President, Business
Development of the Company since March 1994. From May 1991 to February 1994, Dr.
Adams was Business Development Manager and from 1989 to 1991, he was
International Product Manager at the Pharmaceuticals Division of Ciba-Geigy AG
in Basel, Switzerland. Dr. Adams received a Ph.D. in Organic Chemistry from the
University of Zurich and a M.B.A. from INSEAD, Fontainebleau, France.

Daniel E. Geffken has served as Vice President, Finance and Chief Financial
Officer of the Company since February 1997. From June 1993 to January 1997, Mr.
Geffken was Chief Financial Officer of CytoTherapeutics, Inc., a biotechnology
company, and from December 1995 to January 1997, he served as Vice President.
From 1991 until June 1993, Mr. Geffken was Vice President and Chief Financial
Officer of Andersen Group, Inc., a diversified holding company. He received a
B.S. in Economics from The Wharton School, University of Pennsylvania and an
M.B.A. from the Harvard Business School.

Kurt C. Gunter, M.D. has served as a consultant to the Company since
September 1993 and as Vice President, Clinical and Regulatory Affairs since July
1996. From September 1993 to June 1996, Dr. Gunter worked in the Department of
Laboratory Medicine at Children's National Medical Center, most recently as
Director of Stem Cell Processing, Hematology and Blood Donor Center. From 1988
to 1993, Dr. Gunter worked at the Center for Biologics Evaluation and Research
of the U.S. Food and Drug Administration as Acting Deputy Director, Division of
Cellular and Gene Therapies and Chief, Cytokine and Cell Biology Branch. He
received a B.S. in Biological Sciences from Stanford University and an M.D. from
the University of Kansas School of Medicine.

Douglas A. Treco, Ph.D. has directed research at the Company since its
inception in 1988. Since February 1997, he has served as the Senior Vice
President, Research and Development and from June 1993 to February 1997, he
served as Vice President, Director of Research and Development. From December
1990 to June 1993, he served as Director of Research. Prior to joining the
Company, Dr. Treco was a Research Fellow in Genetics, Department of Molecular
Biology, Massachusetts General Hospital and Department of Genetics,

38
<PAGE> 38

Harvard Medical School. He received a Ph.D. in Biochemistry and Molecular
Biology from the State University of New York, Stony Brook.

William R. Miller has served as a Director since September 1991. In January
1991, he retired as Vice Chairman of the Board of Directors of Bristol-Myers
Squibb, which position he had held since 1985. Mr. Miller is the Chairman of the
Board of Directors of Vion Pharmaceuticals, Inc. and SIBIA Neurosciences, Inc.,
a director of ImClone Systems, Inc., Isis Pharmaceuticals, Inc., St. Jude
Medical, Inc., Westvaco Corporation and Xomed Surgical Products, Inc. and an
Advisory Director of Chugai Pharmaceuticals, Inc.

Rodman W. Moorhead, III has served as Chairman of the Board of Directors
since May 1992. Since 1973, he has been with E.M. Warburg, Pincus & Co. LLC
("Warburg, Pincus"), a specialized financial services firm, where he currently
serves as a Senior Managing Director. He is also a director of Coventry
Corporation, NeXstar, Inc., Value Health, Inc., Xomed Surgical Products, Inc.
and a number of privately held companies.

James E. Thomas has served as a Director and Secretary of the Company since
May 1992. Mr. Thomas has served as a Managing Director of Warburg, Pincus since
January 1994, and prior to that served as Vice President from 1991 to 1994 and
Associate from 1989 to 1991. Mr. Thomas is also a director of Anergen, Inc.,
Celtrix Pharmaceuticals, Inc., Menley & James Laboratories, Inc., Xomed Surgical
Products, Inc. and a number of privately held companies.

Peter Wirth has served as a Director since February 1997. Mr. Wirth has
served as Executive Vice President and Chief Legal Officer of Genzyme
Corporation since October 1996. From January 1996 to October 1996, Mr. Wirth
served as Senior Vice President and General Counsel of Genzyme. Mr. Wirth was a
partner of Palmer & Dodge LLP, a Boston, Massachusetts law firm, from 1982
through October 1996. Mr. Wirth remains Of Counsel to Palmer & Dodge LLP.

The Company currently has five Directors. All Directors hold office until
the next annual meeting of stockholders or until their successors are duly
elected and qualified. The officers serve until the next annual meeting of the
Board of Directors or until their earlier resignation or removal.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries of each employee of the Company entitled to
a salary in excess of $150,000 and which exercises the authority of the Board
with respect to all incentive or stock option plans or arrangements established
by the Company. The Company also has an Audit Committee, which reviews the
results and scope of the audit and other services provided by the Company's
independent auditors.

DIRECTOR COMPENSATION

In general, the Company does not compensate Directors for service as
Directors but reimburses them for expenses incurred in connection with
attendance at meetings of the Board of Directors and committees thereof. Mr.
Miller is paid $1,000 for attendance at each meeting of the Board. For the
fiscal year ending December 31, 1996, Mr. Miller earned $4,000 in Director's
fees.

SCIENTIFIC ADVISORY BOARD

The Company is assisted in its research and development activities by its
Scientific Advisory Board ("SAB"), composed of leading scientists who meet
several times each year to review the Company's research and development
activities, discuss technological advances relevant to the Company and its
business, and otherwise assist the Company.

39
<PAGE> 39

In addition to Dr. Selden, who serves as Chairman of the Scientific
Advisory Board, and Dr. Treco, the following persons are members of the
Scientific Advisory Board:

Bruce Furie, M.D. is Professor of Medicine and Biochemistry at Tufts
University School of Medicine. Chief of the Division of Hematology-Oncology at
New England Medical Center, Director of the Hemophilia Center at New England
Medical Center, and Co-Director of the Center for Hemostasis and Thrombosis
Research at New England Medical Center. He received an M.D. from the University
of Pennsylvania School of Medicine in 1970. Dr. Furie studies the molecular
basis of blood coagulation and related clinical disorders, including hemophilia.

Barbara C. Furie, Ph.D. is Professor of Medicine and Biochemistry at Tufts
University School of Medicine, Co-Director of the Center for Hemostasis and
Thrombosis Research at New England Medical Center, and a member of the Division
of Hematology-Oncology, New England Medical Center. She received a Ph.D. in
Chemistry from the University of Pennsylvania in 1970. Dr. Furie studies the
molecular basis of blood coagulation and platelet membrane cell adhesion
molecules.

Walter Gilbert, Ph.D. is the Carl M. Loeb University Professor at Harvard
University. Since 1987, he has also served as Chairman of the Department of
Cellular and Developmental Biology at Harvard University. In 1980, Dr. Gilbert
(together with two others) received the Nobel Prize for Chemistry for his work
in developing one of the two rapid DNA sequencing techniques that have provided
a major stimulus to the study of gene structure. Dr. Gilbert received a Ph.D
from Cambridge University in 1957. His current research interests include
molecular biology, intron/exon genetic structure, G4-DNA in meiosis and early
development in the zebrafish.

Howard M. Goodman, Ph.D. is Professor of Genetics at Harvard Medical School
and Chief of the Department of Molecular Biology at Massachusetts General
Hospital. Dr. Goodman was a Professor of Biochemistry at the University of
California, San Francisco from 1970 to 1981. He received a Ph.D. in Biophysics
from Massachusetts Institute of Technology in 1964. Dr. Goodman studies the
molecular biology of hormones and peptides.

David D. Moore, Ph.D. is Associate Professor of Genetics in the Department
of Molecular Biology at Massachusetts General Hospital and in the Department of
Genetics at Harvard Medical School. He received a Ph.D. in Molecular Biology
from The University of Wisconsin, Madison in 1979. Dr. Moore studies the
molecular basis of hormone action and gene regulation in endocrine systems.

Gordon H. Sato, Ph.D. was, until his retirement in 1993, Director of the W.
Alton Jones Cell Science Center. Dr. Sato was a Professor of Biology at the
University of California San Diego from 1969 to 1983 and a Professor in the
Department of Biochemistry at Brandeis University from 1958 to 1969. He is a
member of the National Academy of Sciences. Dr. Sato received a Ph.D. in
Biophysics from the California Institute of Technology in 1955. Dr. Sato studies
the effects of hormones during cell culture.

Jack W. Szostak, Ph.D. is Professor of Genetics in the Department of
Molecular Biology at Massachusetts General Hospital and Department of Genetics
at Harvard Medical School. He received a Ph.D. in Biochemistry from Cornell
University in 1977. Dr. Szostak studies the mechanism of ribozyme function.

Except for Drs. Selden and Treco, each member of the SAB has entered into a
consulting agreement with the Company covering the terms of such person's
position as a consultant to the Company and member of the SAB. All scientific
advisors own shares of Common Stock of the Company, some of which shares are
subject to vesting. All of the Company's scientific advisors (other than Drs.
Selden and Treco) are employed by employers other than the Company and may have
other commitments to, or consulting or advisory contracts with, other entities
which may conflict or compete with their obligations to the Company. Generally,
scientific advisors are not expected to devote a substantial portion of their
time to Company matters.

40
<PAGE> 40

EXECUTIVE COMPENSATION

Summary Compensation Table. The table below sets forth certain
compensation information for the Chief Executive Officer of the Company and the
other executive officers of the Company whose salary and bonus for the fiscal
year ended December 31, 1996 exceeded $100,000 (collectively, the "Named
Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION(1) SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(2)
- -------------------------------- ---- -------- ----------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Richard F Selden, M.D., Ph.D.... 1996 $210,000 $100,000(3) 128,571 $ 10,499
President and 1995 200,000 86,000(4) -- 4,659
Chief Executive Officer
Douglas A. Treco, Ph.D.......... 1996 152,000 30,000(3) 25,714 3,945
Senior Vice President, 1995 134,000 30,000(4) -- 3,125
Research and Development
Christoph M. Adams, Ph.D........ 1996 152,000 6,000(3) 6,429 4,096
Vice President, 1995 142,000 17,500(4) -- 21,193(5)
Business Development
</TABLE>

- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those instances where the aggregate amount of such
perquisites and other personal benefits constituted less than the lesser of
$50,000 or 10% of the total amount of annual salary and bonus for the
executive officer for the year ended December 31, 1996.

(2) Includes the following: (a) the Company's contributions for Drs. Selden,
Treco and Adams under the Company's 401(k) Plan in the amount of $3,750 each
for fiscal 1996, and $3,750, $2,945, and $3,750, respectively, for fiscal
1995; and (b) the taxable portion of group term life insurance premiums paid
by the Company for Drs. Selden, Treco and Adams in the amounts of $195, $195
and $346, respectively, for fiscal 1996, and $180 each for fiscal 1995.

(3) Bonus earned in the year ended December 31, 1996 was paid in 1997.

(4) Bonus earned in the year ended December 31, 1995 was paid in 1996.

(5) Includes reimbursement by the Company for costs associated with relocation.

41
<PAGE> 41

Options Grants

Option Grant Table. The following table sets forth certain information
regarding options granted during the fiscal year ended December 31, 1996 by the
Company to the Named Executive Officers:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF MARKET STOCK PRICE
SECURITIES TOTAL EXERCISE PRICE ON APPRECIATION
UNDERLYING OPTIONS GRANTED OR DATE OF FOR OPTION TERM(1)
OPTIONS TO EMPLOYEES IN BASE PRICE GRANT EXPIRATION ----------------------------------
NAME GRANTED(#)(2) FISCAL YEAR(3) ($/SHARE) ($/SHARE) DATE 0%($) 5%($) 10%($)
- -------------------- ------------- --------------- ---------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard F Selden,
M.D., Ph.D. ...... 128,571 16.6% $ 0.01 $ 6.22 1/17/06 $798,426 $1,300,552 $2,070,911
Douglas A. Treco,
Ph.D. ............ 25,714 3.3% 0.01 6.22 1/17/06 159,684 260,108 414,179
Christoph M. Adams,
Ph.D. ............ 6,429 0.8% 0.01 6.22 1/17/06 39,924 65,032 103,553
</TABLE>

- ---------------
(1) Potential realizable value is based on an assumption that the market price
of the stock will appreciate at the stated rate, compounded annually, from
the date of grant until the end of the 10-year term. These values are
calculated based on rules promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate or projection of future
stock prices. Actual gains, if any, on stock option exercises will be
dependent upon the future performance of the price of the Company's Common
Stock, which will benefit all stockholders proportionately.

(2) Options granted under the Company's 1993 Long-term Incentive Plan. The
shares subject to these options vest in six equal annual installments
commencing on the first anniversary of the date of grant.

(3) Calculated based on an aggregate of 774,468 options granted under the
Company's 1993 Long-term Incentive Plan to employees during the fiscal year
ended December 31, 1996.

Option Exercises and Year-End Values. The following table sets forth
certain information concerning exercisable and unexercisable stock options held
by the Named Executive Officers as of December 31, 1996:

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES(1)

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(2)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard F Selden, M.D., Ph.D. ............. 0 128,571 $ 0 $ 2,377,278
Douglas A. Treco, Ph.D. ................... 0 25,714 0 475,452
Christoph M. Adams, Ph.D. ................. 17,143 40,715 317,012 752,820
</TABLE>

- ---------------
(1) No options were exercised during the fiscal year ended December 31, 1996 by
the Named Executive Officers.

(2) Value of unexercised in-the-money options represents the difference between
the last reported sales price of the Company's Common Stock as reported by
the Nasdaq National Market on December 31, 1996 ($18.50) and the exercise
price of the option, multiplied by the number of shares subject to the
option.

EMPLOYMENT AGREEMENTS

The Company is a party to employment agreements with certain of its
executive officers, including Drs. Selden, Adams and Treco. Each employment
agreement contains provisions for establishing the annual base salary of each
executive officer. Pursuant to the terms of the employment agreements, the 1997
annual base

42
<PAGE> 42

salary for each of Drs. Selden, Treco and Adams has been established at
$240,000, $175,000 and $160,000, respectively. Under the terms of such
employment agreements, if the employment of Drs. Selden, Treco or Adams is
terminated without cause, the Company is required to pay to such executive
severance payments at the executive's base salary rate for 18 months in the case
of Dr. Selden and 12 months in the case of Drs. Treco and Adams (a "Severance
Period"), to be reduced by an amount equal to the amount of any other
compensation earned by such individual during such Severance Period. The
executive shall be bound by certain non-compete obligations for two years after
termination of the employment or such longer period during which severance
payments are paid under the employment agreement.

1993 LONG-TERM INCENTIVE PLAN

The Company's 1993 Long-term Incentive Plan (the "1993 Incentive Plan") was
approved by the Board of Directors and the Company's stockholders in June 1993.
The 1993 Incentive Plan provides for awards in the form of stock options, stock
appreciation rights, restricted stock, long-term performance awards and stock
grants. Stock options may include options intended to qualify for preferential
tax treatment ("Incentive Stock Options") under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and nonstatutory stock options
that do not qualify for such treatment. Employees, consultants and advisors of
the Company are eligible for awards under the 1993 Incentive Plan, but Directors
who are not employees of or consultants to the Company are not eligible for such
awards.

The 1993 Incentive Plan is administered by the Compensation Committee,
which has complete authority to make awards under the 1993 Incentive Plan. No
member of the Compensation Committee is eligible to receive an award under the
1993 Incentive Plan, and no individual is eligible for membership on the
Compensation Committee within one year of having received an award under the
1993 Incentive Plan.

As amended to date, a total of 2,188,062 shares of Common Stock have been
reserved for issuance under the 1993 Incentive Plan. At July 23, 1997, awards
for 946,277 shares were outstanding under the 1993 Incentive Plan.

1993 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

The Company's 1993 Non-Employee Directors' Stock Option Plan (the "1993
Directors' Plan") was approved by the Board of Directors and the Company's
stockholders in June 1993. The 1993 Directors' Plan provides for automatic
option grants to each Director who (i) is not an employee of the Company or of
any subsidiary, affiliate or five or more percent stockholder of the Company and
(ii) does not own or hold any Common Stock which was purchased prior to the
approval of the 1993 Directors' Plan and which remains at the time the Director
is being considered for eligibility for any specific grant under the 1993
Directors' Plan subject to substantial risk of forfeiture under an agreement
entered into with the Company. Any Director who becomes such an employee shall
cease to be eligible for any further option grants under the 1993 Directors'
Plan while such an employee, but shall not, by reason of becoming such an
employee, cease to be eligible to retain options previously granted under the
1993 Directors' Plan.

Under the 1993 Directors' Plan, each eligible Director will receive an
option grant on the date immediately following each annual meeting of
stockholders. Each option grant shall consist of an option to acquire an
aggregate of 5,250 shares of Common Stock exercisable at a price equal to the
fair market value of the Common Stock at the time of the grant and vesting over
a period of three years. The 1993 Directors' Plan will be administered by the
Compensation Committee.

A total of 231,429 shares of Common Stock have been reserved for issuance
under the 1993 Directors' Plan. As of July 23, 1997, no awards for such shares
have been made under the 1993 Directors' Plan.

401(K) PLAN

In January 1992, the Company established the Company's 401(k) plan (the
"401(k) Plan") covering all full-time employees. Generally, an eligible employee
may become a participant in the 401(k) Plan on the first day of the month next
following completion of six months of employment. Pursuant to the 401(k) Plan,
an

43
<PAGE> 43

employee may elect to reduce his or her current compensation by up to 15 percent
(subject to an overall dollar limitation under the Code of $9,240 of 1995) and
have the amount of such reduction contributed to the 401(k) Plan. The 401(k)
Plan allows the Company to make matching contributions to the Plan, and the
Company currently makes matching contributions equal to 50 percent of the first
seven percent contributed to the 401(k) Plan by each employee during each six
month period. In 1996, the Company's matching contributions totalled $91,000.
The 401(k) Plan is intended to qualify under Section 401 of the Code so that
contributions by employees or the Company, and income earned thereon, are not
taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company will be deductible by the Company when made. The
administrator of the 401(k) Plan invests each employee's account at the
direction of each such employee, who can choose among certain investment
alternatives provided. As of March 31, 1997 94 of the 128 eligible employees
were enrolled in the 401(k) Plan.

LIMITATIONS ON DIRECTOR'S LIABILITY AND INDEMNIFICATION

The Company's Restated Certificate of Incorporation and Restated By-laws
provide that the Company indemnifies its Directors and officers and may
indemnify its employees and agents to the fullest extent permitted by the
General Corporation Law of the State of Delaware (the "Delaware Law"). In
addition, the Company's Restated Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware Law, the Directors are not personally
liable to the Company and its stockholders for monetary damages for breach of
fiduciary duty as Directors. This provision in the Restated Certificate of
Incorporation does not eliminate the fiduciary duty as a Director, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under Delaware Law. Each
Director is subject to liability for breach of the Director's duty of loyalty to
the Company for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law, for any willful or negligent
violation concerning the unlawful payment of dividends or the unlawful purchase
or redemption of stock, and for any transaction from which the Director derived
any improper personal benefit. This provision also does not affect a Director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws. The Company believes that these provisions
assist the Company in attracting and retaining qualified individuals to serve as
directors.

44
<PAGE> 44

CERTAIN TRANSACTIONS

On September 23, 1996, the Company entered into an Agreement to Nominate
with Warburg, Pincus Capital Company, L.P. ("Warburg"), a stockholder of the
Company, under which, commencing on October 16, 1996, the effective date of the
Company's Registration Statement on Form S-1, at each meeting of the Company's
stockholders at which directors are to be elected, the Company agreed to
nominate, recommend the election by the Company's stockholders and use its best
efforts to effect the election to the Board of Directors of the Company of (i)
two individuals designated by Warburg, so long as Warburg beneficially owns
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least
20% of the outstanding Common Stock of the Company and (ii) one individual
designated by Warburg, so long as Warburg beneficially owns (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) at least 10% or more, but less
than 20%, of the outstanding Common Stock of the Company. Rodman W. Moorhead,
III and James E. Thomas were nominated by the Company for election as directors
at the 1997 Annual Meeting of Stockholders pursuant to the Agreement to
Nominate.

Pursuant to the provisions of the Class D Preferred Stock Purchase
Agreement between the Company and HMRI, on October 22, 1996, the closing date of
the Company's initial public offering, the Company sold to HMRI 333,333 shares
of Common Stock at the initial public offering price of $15.00 per share for
aggregate consideration of approximately $5 million. In addition, with respect
to such shares, the Company granted to HMRI one demand registration right
exercisable after the expiration of the 180-day "lock-up" period that commenced
on October 16, 1996, the effective date of the Company's Registration Statement
on Form S-1, on substantially the same terms and conditions as the rights
contained in a certain Registration Rights Agreement by and among the Company
and certain stockholders named therein.

The Company entered into a three-year consulting agreement, dated November
1, 1996 (the "Consulting Agreement") with Peter Wirth, a director of the
Company, pursuant to which he provides consulting services to the Company. Under
the Consulting Agreement, Mr. Wirth was granted an option to purchase 15,000
shares of Common Stock at an exercise price of $15.00 per share vesting in three
equal annual installments beginning on the first anniversary of the date of the
Consulting Agreement. Mr. Wirth also receives an annual fee in the amount of
$50,000 paid quarterly in arrears. In January 1997, the Company paid to Mr.
Wirth $12,500 in fees for consulting services rendered to the Company in the
fiscal year ended December 31, 1996.

In May 1991, the Company issued to Richard F Selden, the President and
Chief Executive Officer of the Company, a promissory note in the principal
amount of $125,000. As amended in June 1993, interest accrues on the outstanding
principal balance at a rate equal to one percent above the average yield for
one-year United States Treasury Bills (approximately 6.78% during the year ended
December 31, 1996) and is due and payable in arrears. The Company has deferred
the payment of outstanding principal and interest accrued thereon since 1992. At
December 31, 1996, the outstanding principal balance and interest accrued
thereon was $139,641.

The Company believes that all transactions with affiliates have been made
on terms at least as favorable to the Company as could have been made for
similar transactions with unrelated third parties.

45
<PAGE> 45

PRINCIPAL STOCKHOLDERS

The following table sets forth information, as of June 30, 1997, regarding
the ownership of the Company's Common Stock by (i) the only persons known by the
Company to own more than five percent of the outstanding shares, (ii) all
directors and nominees of the Company, (iii) each of the executive officers of
the Company named in the Summary Compensation Table (the "Named Executive
Officers") and (iv) all directors and executive officers of the Company as a
group. The number of shares beneficially owned by each director or executive
officer is determined under rules of the Securities and Exchange Commission, and
the information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as to
which the individual has the sole or shared voting power or investment power and
also any shares which the individual has the right to acquire within 60 days of
June 30, 1997 through the exercise of any stock option or other right. Unless
otherwise indicated, each person has sole investment and voting power (or shares
such power with his or her spouse) with respect to the shares set forth in the
following table. The inclusion herein of any shares deemed beneficially owned
does not constitute an admission of beneficial ownership of such shares.

<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OF
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNED
- ------------------------------------ ------------ ------------------------
BEFORE AFTER
OFFERING(1) OFFERING
----------- --------
<S> <C> <C> <C>
Warburg, Pincus Capital Company, L.P.(2).................. 5,929,486 34.6% 31.4%
c/o E. M. Warburg, Pincus & Co. LLC
466 Lexington Avenue, 10th Floor
New York, NY 10017-3147
Hoechst Marion Roussel, Inc.(3)........................... 2,187,408 13.1% 11.9%
9300 Ward Parkway
Kansas City, MO 64114-1405
Biotech Target S.A.(4).................................... 1,677,500 10.1% 9.1%
c/o BB Biotech AG
Vordergasse 3
8200 Schaffhausen
CH/Switzerland
Christoph M. Adams, Ph.D.(5).............................. 23,785 * *
William R. Miller(6)...................................... 33,928 * *
Rodman W. Moorhead, III(7)................................ 5,929,486 34.6% 31.4%
Richard F Selden, M.D., Ph.D.(8).......................... 708,303 4.2% 3.8%
James E. Thomas(7)........................................ 5,929,486 34.6% 31.4%
Douglas A. Treco, Ph.D.(9)................................ 210,689 1.3% 1.1%
Peter Wirth............................................... 0 * *
All directors and executive officers as a group (9
individuals)(10)........................................ 6,926,905 40.2% 36.6%
</TABLE>

- ---------------
* Percentage is less than 1% of the total number of outstanding shares of
Common Stock of the Company.

(1) Number of shares deemed outstanding includes 16,684,458 shares outstanding
as of June 30, 1997, plus any shares subject to issuance upon exercise of
options or warrants held by the person or entity in question that are
currently exercisable or exercisable within 60 days after June 30, 1997.

(2) The sole general partner of Warburg, Pincus Capital Company, L.P.
("Warburg") is Warburg, Pincus & Co., a New York general partnership
("WP"). E.M. Warburg, Pincus & Co. LLC, a New York limited liability
company ("EMW LLC"), through a wholly-owned subsidiary, manages Warburg. WP
owns all of the outstanding stock of EMW LLC and, as the sole general
partner of Warburg, has a 20% interest in the profits of Warburg. EMW LLC
owns 0.9% of the limited partnership interests in Warburg. Lionel I. Pincus
is the managing partner of WP and the managing member of EMW LLC and may be
deemed to control both WP and EMW LLC. The members of EMW LLC are
substantially the same as the partners of WP. Rodman W. Moorhead, III,
Chairman of the Board of Directors, and

46
<PAGE> 46

James E. Thomas, a director of the Company, are Managing Directors and
members of EMW LLC and general partners of WP. As such, Messrs. Moorhead
and Thomas may be deemed to have an indirect pecuniary interest in an
indeterminate portion of the shares beneficially owned by Warburg and WP.
This includes 478,966 shares which may be acquired within 60 days of June
30, 1997 by each of Warburg, WP and EMW LLC upon the exercise of
outstanding warrants. The information presented herein is as reported in,
and based solely upon, a Schedule 13G filed with the Commission by Warburg,
WP and EMW LLC on February 13, 1997. Each of Warburg, WP and EMW LLC
reported beneficial ownership of and sole voting and dispositive power with
respect to all of such shares. These stockholders may be deemed to be a
group for purposes of Rule 13d-3 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").

(3) The information presented herein is as reported in, and based solely upon,
a Schedule 13D/A filed with the Commission on January 9, 1997 by Hoechst
Marion Roussel, Inc., a Delaware corporation ("HMRI"), and HMR Pharma,
Inc., a Delaware corporation. HMR Pharma, a wholly owned subsidiary of
Hoechst Aktiengesellschaft, a German corporation ("Hoechst AG"),
beneficially owns 98.2% of the outstanding common stock of HMRI. HMRI
reported beneficial ownership of and sole voting and dispositive power with
respect to all of such shares. HMR Pharma disclaims beneficial ownership of
all such shares within the meaning of Rule 13d-3 under the Exchange Act.
These stockholders may be deemed to be a group for purposes of Rule 13d-3
promulgated under the Exchange Act.

(4) The information presented herein at June 30, 1997 is based solely upon a
communication with BB Biotech AG, a Swiss corporation ("BB Biotech") on
July 28, 1997. Biotech Target S.A., a Panamanian corporation ("Biotech
Target"), is a wholly owned subsidiary of BB Biotech. Each of Biotech
Target and BB Biotech beneficially owns and shares voting and dispositive
power with respect to all of such shares. These stockholders may be deemed
to be a group for purposes of Rule 13d-3 promulgated under the Exchange
Act.

(5) Includes 23,785 shares of Common Stock issuable upon exercise of
outstanding stock options granted under the Company's 1993 Equity Incentive
Plan.

(6) Includes 5,000 shares of Common Stock issuable upon exercise of outstanding
stock options granted under the Company's 1993 Equity Incentive Plan.

(7) All of the shares indicated as owned by Messrs. Moorhead and Thomas are
owned directly by Warburg and are included herein because of the
affiliation of Messrs. Moorhead and Thomas with Warburg. Messrs. Moorhead
and Thomas disclaim beneficial ownership of these shares within the meaning
of Rule 13d-3 under the Exchange Act. See Note (2) above.

(8) Includes 21,428 shares of Common Stock issuable upon exercise of
outstanding stock options granted under the Company's 1993 Equity Incentive
Plan.

(9) Includes 4,285 shares of Common Stock issuable upon exercise of outstanding
stock options granted under the Company's 1993 Equity Incentive Plan.

(10) Includes 75,212 shares of Common Stock issuable upon exercise of
outstanding stock options granted under the Company's 1993 Equity Incentive
Plan. Also includes 478,966 shares which may be acquired within 60 days of
June 30, 1997 by each of Warburg, WP and EMW LLC upon the exercise of
outstanding warrants.

47
<PAGE> 47

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, $0.01 par value per share, and 10,000,000 shares of Preferred
Stock, $0.01 par value per share. As of the date of this Prospectus, the Company
had approximately 129 shareholders of record. Upon the closing of this offering,
the Company will have 18,395,419 shares of Common Stock outstanding.

The following summary contains an accurate description of the material
terms of the Company's Common Stock and Preferred Stock. Such summary is subject
to, and qualified in its entirety by, applicable law and by the provisions of
the Company's Amended and Restated Certificate of Incorporation and Amended and
Restated By-laws. See "Additional Information."

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the outstanding shares of Common
Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor, subject to any preferential dividend. Upon
the liquidation, dissolution or winding-up of the Company, holders of Common
Stock are entitled to receive ratably the net assets of the Company available
for distribution after the payment of all debts and other liabilities of the
Company and subject to the prior rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered hereby will be, when issued and paid for, fully paid and nonassessable.
The rights, preferences and privileges of holders of Common Stock are subject
to, and may be adversely affected by, the rights of holders of shares of any
series of Preferred Stock that the Company may designate and issue in the
future.

WARRANTS

The Company has issued warrants (the "Warrants") to various entities
exercisable for an aggregate of 774,354 shares of Common Stock with exercise
prices ranging from $6.22 to $7.78 per share and a weighted average exercise
price of $7.52 per share, in each case subject to adjustment. The Warrants have
expiration dates ranging to November 3, 1998. The holders of the Warrants are
entitled to certain registration rights with respect to the Common Stock
issuable upon the exercise thereof. See "Description of Capital Stock --
Registration Rights."

PREFERRED STOCK

The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
10,000,000 shares of Preferred Stock, in one or more series. Each such series of
Preferred Stock shall have such number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges as
shall be determined by the Board of Directors, which may include, among others,
dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences, conversion rights and preemptive rights.

The stockholders of the Company have granted the Board of Directors
authority to issue the Preferred Stock and to determine its rights and
preferences in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company. Upon the
closing of this offering, no shares of Preferred Stock will be outstanding. The
Company has no present plans to issue any shares of Preferred Stock.

48
<PAGE> 48

DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS

The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. In general, Section 203 prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
interested stockholder attained such status with the approval of the Board of
Directors and the business combination is approved in a prescribed manner. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock.

The Company's Restated Certificate of Incorporation contains certain
provisions permitted under the General Corporation Law of Delaware relating to
the liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. The Company's Restated Certificate of Incorporation also contains
provisions obligating the Company to indemnify its directors and officers to the
fullest extent permitted by the General Corporation Law of Delaware. The Company
believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as directors.

The Company's Restated Certificate of Incorporation and By-laws also
provide that any action required or permitted to be taken by the stockholders of
the Company may be taken only at a duly called annual or special meeting of
stockholders and that the affirmative vote of the holders of at least two-thirds
(66 2/3%) of the Company's outstanding voting securities is required to amend
such provision. These provisions could have the effect of delaying until the
next stockholders' meeting stockholder actions which are favored by the holders
of a majority of the outstanding voting securities of the Company, particularly
since special meetings of stockholders may be called only by the Board of
Directors, the Chief Executive Officer or upon the request of the holders of 51%
of the Company's voting securities. These provisions may also discourage another
person or entity from making a tender offer for the Common Stock, because such
person or entity, even if it acquired a majority of the outstanding voting
securities of the Company, would be able to take action as a stockholder (such
as electing new directors or approving a merger) only at a duly called
stockholders meeting, and not by written consent.

In addition, nomination for election to the Board of Directors at a meeting
of stockholders may be made either (i) by the Board of Directors or (ii) by a
stockholder who complies with certain notice provisions. The By-laws contain
similar advance notice provisions for stockholder proposals for action at
stockholder meetings. These provisions prevent stockholders from making
nominations for directors and stockholder proposals from the floor at any
stockholder meeting and require any stockholder making a nomination or proposal
to submit the name of the nominees for Board seats or such proposal, together
with certain information about the nominee or any stockholder proposal prior to
the meeting at which such director is to be elected or action os to be taken.
These provisions ensure that stockholders have adequate time to consider
nominations and proposals before action is required, but they may also have the
effect of delaying action if the proper procedures are followed.

REGISTRATION RIGHTS

Under the terms of a Registration Rights Agreement dated as of November 3,
1993 (as amended from time to time, the "Registration Rights Agreement") and
subject to certain conditions, certain stockholders are entitled to certain
rights with respect to registration under the Act of shares of Common Stock
received upon conversion of Preferred Stock in connection with the Company's
initial public offering ("Registrable Shares"). If the Company proposes to
register any of its securities under the Act, either for its own account or for
the account of other security holders, the Company is required under the
Registration Rights Agreement to use its best efforts to include such holders'
Registrable Shares in such registration, subject to such reduction as may be
required by the Company's underwriters. In addition, subject to certain
conditions, the holders of not

49
<PAGE> 49

less than 30% of the Registrable Shares may require the Company on not more than
two occasions to file a registration statement under the Act with respect to
such registrable securities.

In addition, HMRI has one demand registration right with respect to the
333,333 shares of the Company's Common Stock that it purchased upon the closing
of the Company's initial public offering in October 1996.

Pursuant to the provisions of the Registration Rights Agreement, the rights
to include any Registrable Securities in this offering have been waived.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Boston EquiServe.

50
<PAGE> 50

PLAN OF DISTRIBUTION

The Shares offered hereby are being offered for sale directly by the
Company to a limited number of accredited institutional investors and affiliates
of such accredited institutional investors in minimum purchase amounts of
500,000 shares, subject to the waiver of this minimum by the Company in its sole
discretion. The price of the Shares offered hereby was determined through
negotiations between the Company and prospective purchasers of the Shares.
Pacific Growth Equities, Inc. has been retained to act, on a best efforts basis,
as an agent (the "Placement Agent") for the Company in arranging sales of the
1,700,000 shares to be sold in the offering. The Placement Agent is not
obligated to purchase any of the shares offered hereby. No investor funds will
be accepted prior to the effectiveness of the Registration Statement. There can
be no assurance that the Company will be successful in selling any or all of the
Shares offered hereby.

The Company has agreed to pay to the Placement Agent a fee in the amount of
$2,193,750 with respect to the sale of certain of the shares offered hereby. The
Company has also agreed to indemnify the Placement Agent against certain
liabilities, including liabilities under the Securities Act.

The Chief Executive Officer and Chief Financial Officer of the Company,
with the assistance of other officers as needed, will participate in the sale of
the Shares to the purchasers. These participants, who will not receive any
compensation for these activities, will not be deemed to be brokers pursuant to
Rule 3a4-1 under the Securities Exchange Act of 1934, as amended. The Company
does not expect to offer or sell Shares in any state whose securities laws would
require that the Shares only be sold through licensed brokers or dealers.

51
<PAGE> 51

LEGAL MATTERS

The validity of the Common Stock to be issued in this offering is being
passed upon for the Company by Palmer & Dodge LLP, Boston, Massachusetts.

EXPERTS

The financial statements of Transkaryotic Therapies, Inc. at December 31,
1995 and 1996 and for each of the three years in the period ended December 31,
1996 appearing in this Prospectus and Registration Statement, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational reporting requirements of the
Exchange Act and in accordance therewith files reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the Commission's following Regional Offices: Chicago Regional
Office, Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and New York Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. Such reports and
other information can also be reviewed through the Commission's Web site
(http://www.sec.gov).

Additional information regarding the Company and the shares offered hereby
is contained in the Registration Statement on Form S-1 and the exhibits thereto
filed with the Commission under the Securities Act. This Prospectus does not
contain all of the information contained in such Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus
regarding the contents of any document or contract are qualified in their
entirety by reference to the copy of such contract or document filed as an
exhibit to the Registration Statement. For further information pertaining to the
Company and the shares, reference is made to the Registration Statement and the
exhibits thereto, which may be inspected without charge at, and copies thereof
may be obtained at prescribed rates from, the office of the Commission of 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.

52
<PAGE> 52

TRANSKARYOTIC THERAPIES, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2
Balance Sheets as of December 31, 1995 and 1996, March 31, 1997 (unaudited)........... F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the
three months ended March 31, 1996 and 1997 (unaudited).............................. F-4
Statements of Stockholders' Equity for the period January 1, 1994 through December 31,
1996 and the three months ended March 31, 1997 (unaudited).......................... F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996, and the
three months ended March 31, 1996 and 1997 (unaudited).............................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE> 53

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Transkaryotic Therapies, Inc.

We have audited the accompanying balance sheets of Transkaryotic Therapies,
Inc. (the Company) as of December 31, 1995 and 1996, and the related statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transkaryotic Therapies,
Inc. at December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.

Ernst & Young LLP

Boston, Massachusetts
February 14, 1997

F-2
<PAGE> 54

TRANSKARYOTIC THERAPIES, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- ------------
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 11,539,531 $ 10,414,412 $ 6,166,974
Marketable securities................................ 22,945,311 75,840,830 76,752,281
Prepaid expenses and other current assets............ 97,010 817,812 514,107
------------ ------------ ------------
Total current assets......................... 34,581,852 87,073,054 83,433,362
Property and equipment, net............................ 3,998,653 3,237,402 3,180,941
Other assets........................................... 637,014 687,969 696,119
------------ ------------ ------------
$ 39,217,519 $ 90,998,425 $ 87,310,422
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 515,335 $ 612,026 $ 672,962
Accrued expenses..................................... 541,352 651,944 588,299
------------ ------------ ------------
Total current liabilities.................... 1,056,687 1,263,970 1,261,261
Other long-term liabilities............................ 179,200 89,600 67,199
Redeemable preferred stock, $1.00 par value; 3,000
shares authorized, issued and outstanding at December
31, 1995, no shares authorized, issued and
outstanding at December 31, 1996 and March 31,
1997................................................. 4,440,273 -- --
Stockholders' equity:
Preferred stock, $1.00 par value, 3,813,386 shares
authorized at December 31, 1995 and 10,000,000
shares authorized at December 31, 1996 and March
31, 1997; 2,943,669 shares issued and outstanding
at December 31, 1995 and no shares issued and
outstanding at December 31, 1996 and March 31,
1997.............................................. 2,943,669 -- --
Common stock, $.01 par value; 15,000,000 shares
authorized at December 31, 1995 and 30,000,000
shares authorized at December 31, 1996 and March
31, 1997; 5,197,662, 16,614,273 and 16,660,551
shares issued and outstanding at December 31, 1995
and 1996 and March 31, 1997, respectively......... 51,977 166,143 166,606
Additional paid-in capital............................. 58,330,976 131,795,736 131,363,952
Accumulated deficit.................................... (25,143,705) (37,115,670) (40,909,125)
Deferred compensation.................................. (1,243,897) (5,217,604) (4,513,121)
Unrealized gain (loss) on marketable securities........ 42,612 16,250 (126,350)
Accretion of redeemable preferred stock dividends...... (1,440,273) -- --
------------ ------------ ------------
Total stockholders' equity................... 33,541,359 89,644,855 85,981,962
------------ ------------ ------------
$ 39,217,519 $ 90,998,425 $ 87,310,422
============ ============ ============
</TABLE>

See accompanying Notes to Financial Statements.

F-3
<PAGE> 55

TRANSKARYOTIC THERAPIES, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
License and research revenues
from Hoechst Marion Roussel,
Inc............................ $10,000,000 $15,400,000 $ 4,225,000 $ 1,837,500 $ 300,000
Operating expenses:
Research and development....... 9,125,732 10,528,615 14,018,852 2,904,901 3,832,495
General and administrative..... 4,690,399 3,827,995 4,728,861 764,996 1,401,628
----------- ----------- ------------ ----------- -----------
13,816,131 14,356,610 18,747,713 3,669,897 5,234,123
----------- ----------- ------------ ----------- -----------
Income (loss) from operations.... (3,816,131) 1,043,390 (14,522,713) (1,832,397) (4,934,123)
Interest income, net............. 394,530 1,116,081 2,550,748 462,774 1,140,668
----------- ----------- ------------ ----------- -----------
Income (loss) before provision
for income taxes............... (3,421,601) 2,159,471 (11,971,965) (1,369,623) (3,793,455)
Provision for income taxes....... -- 85,000 -- -- --
----------- ----------- ------------ ----------- -----------
Net income (loss)................ $(3,421,601) $ 2,074,471 $(11,971,965) $(1,369,623) $(3,793,455)
=========== =========== ============ =========== ===========
Net income (loss) per share (pro
forma in 1995 and 1996)........ $ 0.14 $ (0.81) $ (0.10) $ (0.23)
=========== ============ =========== ===========
Shares used in computing net
income (loss) per share (pro
forma in 1995 and 1996)........ 14,632,870 14,723,363 14,255,303 16,640,887
=========== ============ =========== ===========
</TABLE>

F-4
<PAGE> 56

TRANSKARYOTIC THERAPIES, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCRETION OF
----------------------- --------------------- PAID-IN PREFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK
---------- ---------- ---------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994............ 1,068,313 $1,068,313 5,294,101 $ 52,941 $ 30,841,863 $ (1,020,273)
Issuance of convertible preferred
stock................................ 280,367 280,367 -- -- 4,455,053 --
Repurchase of common stock............ (122,342) (1,223) (99,008) --
Deferred compensation related to
restricted stock and stock options
granted.............................. -- -- -- -- 535,667 --
Compensation expense related to equity
issuances............................ -- -- -- -- -- --
Redeemable preferred stock dividend
accretion............................ -- -- -- -- -- (210,000)
Unrealized loss on marketable
securities........................... -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- --
---------- ---------- ---------- -------- ------------- -----------
BALANCE AT DECEMBER 31, 1994.......... 1,348,680 1,348,680 5,171,759 51,718 35,733,575 (1,230,273)
Issuance of convertible preferred
stock................................ 1,594,989 1,594,989 22,524,334
Issuance of common stock.............. -- -- 30,957 310 (69) --
Repurchase of common stock............ -- -- (5,054) (51) 11 --
Deferred compensation related to
restricted stock and stock options
granted.............................. -- -- -- -- 73,125 --
Compensation expense related to equity
issuances............................ -- -- -- -- -- --
Redeemable preferred stock dividend
accretion............................ -- -- -- -- -- (210,000)
Unrealized gain on marketable
securities........................... -- -- -- -- -- --
Net income............................ -- -- -- -- -- --
---------- ---------- ---------- -------- ------------- -----------
BALANCE AT DECEMBER 31, 1995.......... 2,943,669 2,943,669 5,197,662 51,977 58,330,976 (1,440,273)
Issuance of convertible preferred
stock................................ 1,133,589 1,133,589 -- -- 22,387,828 --
Redeemable preferred stock dividend
accretion............................ -- -- -- -- -- (157,500)
Conversion of preferred stock into
common stock......................... (4,077,258) (4,077,258) 8,585,455 85,855 6,991,403 1,597,773
Issuance of common stock.............. -- -- 2,833,587 28,335 39,031,822 --
Repurchase of common stock............ -- -- (2,431) (24) 5 --
Deferred compensation related to
restricted stock and stock options
granted.............................. -- -- -- -- 5,053,702 --
Compensation expense related to equity
issuances............................ -- -- -- -- -- --
Unrealized loss on marketable
securities........................... -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- --
---------- ---------- ---------- -------- ------------- -----------
BALANCE AT DECEMBER 31, 1996.......... -- -- 16,614,273 166,143 131,795,736 --
Issuance of common stock
(unaudited).......................... -- -- 47,059 471 293 --
Repurchase of common stock
(unaudited).......................... -- -- (781) (8) (7,293) --
Reversal of deferred compensation
related to forfeited restricted stock
and stock options granted, net
(unaudited).......................... -- -- -- -- (424,784) --
Compensation expense related to equity
issuances (unaudited)................ -- -- -- -- -- --
Unrealized loss on marketable
securities (unaudited)............... -- -- -- -- -- --
Net loss (unaudited).................. -- -- -- -- -- --
---------- ---------- ---------- -------- ------------- -----------
BALANCE AT MARCH 31, 1997
(UNAUDITED).......................... -- $ -- 16,660,551 $166,606 $ 131,363,952 $ --
========== ========== ========== ======== ============= ===========

<CAPTION>
UNREALIZED
GAIN
(LOSS) ON TOTAL
ACCUMULATED DEFERRED MARKETABLE STOCKHOLDERS'
DEFICIT COMPENSATION SECURITIES EQUITY
------------ ------------ ---------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994............ $(23,796,575) $(1,422,431) $ -- $ 5,723,838
Issuance of convertible preferred
stock................................ -- -- -- 4,735,420
Repurchase of common stock............ -- -- -- (100,231)
Deferred compensation related to
restricted stock and stock options
granted.............................. -- (535,667) -- --
Compensation expense related to equity
issuances............................ -- 365,074 -- 365,074
Redeemable preferred stock dividend
accretion............................ -- -- -- (210,000)
Unrealized loss on marketable
securities........................... -- -- (19,248) (19,248)
Net loss.............................. (3,421,601) -- -- (3,421,601)
------------ ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1994.......... (27,218,176) (1,593,024) (19,248) 7,073,252
Issuance of convertible preferred
stock................................ 24,119,323
Issuance of common stock.............. -- -- -- 241
Repurchase of common stock............ -- -- -- (40)
Deferred compensation related to
restricted stock and stock options
granted.............................. -- (73,125) -- --
Compensation expense related to equity
issuances............................ -- 422,252 -- 422,252
Redeemable preferred stock dividend
accretion............................ -- -- -- (210,000)
Unrealized gain on marketable
securities........................... -- -- 61,860 61,860
Net income............................ 2,074,471 -- -- 2,074,471
------------ ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1995.......... (25,143,705) (1,243,897) 42,612 33,541,359
Issuance of convertible preferred
stock................................ -- -- -- 23,521,417
Redeemable preferred stock dividend
accretion............................ -- -- -- (157,500)
Conversion of preferred stock into
common stock......................... -- -- -- 4,597,773
Issuance of common stock.............. -- -- -- 39,060,157
Repurchase of common stock............ -- -- -- (19)
Deferred compensation related to
restricted stock and stock options
granted.............................. -- (5,053,702) -- --
Compensation expense related to equity
issuances............................ -- 1,079,995 -- 1,079,995
Unrealized loss on marketable
securities........................... -- -- (26,362) (26,362)
Net loss.............................. (11,971,965) -- -- (11,971,965)
------------ ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1996.......... (37,115,670) (5,217,604) 16,250 89,644,855
Issuance of common stock
(unaudited).......................... -- -- -- 764
Repurchase of common stock
(unaudited).......................... -- -- -- (7,301)
Reversal of deferred compensation
related to forfeited restricted stock
and stock options granted, net
(unaudited).......................... -- 424,784 -- --
Compensation expense related to equity
issuances (unaudited)................ -- 279,699 -- 279,699
Unrealized loss on marketable
securities (unaudited)............... -- -- (142,600) (142,600)
Net loss (unaudited).................. (3,793,455) -- -- (3,793,455)
------------ ----------- ---------- ------------
BALANCE AT MARCH 31, 1997
(UNAUDITED).......................... $(40,909,125) $(4,513,121) $ (126,350) $ 85,981,962
============ =========== ========== ============
</TABLE>

See accompanying Notes to Financial Statements.

F-5
<PAGE> 57

TRANSKARYOTIC THERAPIES, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................... $ (3,421,601) $ 2,074,471 $ (11,971,965) $ (1,369,623) $(3,793,455)
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization...... 1,252,734 1,488,318 1,574,953 383,785 398,160
Compensation expense related to
equity issuances................. 365,074 422,252 1,079,995 108,000 279,699
Changes in operating assets and
liabilities:
Decrease (increase) in prepaid
expenses and other current
assets........................... 434,035 171,138 (720,802) (160,310) 303,705
Increase (decrease) in accounts
payable.......................... (820,943) 162,650 96,691 (29,922) 60,936
Increase (decrease) in accrued
expenses......................... 276,988 2,521 20,992 (237,257) (63,645)
------------ ------------ ------------- ------------- -----------
Net cash provided by (used for)
operating activities............... (1,913,713) 4,321,350 (9,920,136) (1,305,327) (2,814,600)
------------ ------------ ------------- ------------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of marketable
securities......................... 6,821,432 41,850,807 63,870,842 5,090,893 11,984,683
Purchases of marketable securities... (9,414,673) (59,761,766) (116,792,723) (10,643,403) (13,038,734)
Purchase of property and equipment... (2,837,450) (558,243) (778,757) (180,553) (331,349)
Decrease (increase) in other
assets............................. (86,157) 59,012 (85,900) (15,011) (40,901)
------------ ------------ ------------- ------------- -----------
Net cash used in investing
activities......................... (5,516,848) (18,410,190) (53,786,538) (5,748,074) (1,426,301)
------------ ------------ ------------- ------------- -----------
FINANCING ACTIVITIES:
Issuance of convertible preferred
stock.............................. 4,735,420 24,119,323 23,521,417 -- --
Issuance (repurchase) of common
stock, net of expenses............. (100,231) 201 39,060,138 -- (6,537)
Repayments of bank debt.............. (399,202) (1,097,945) -- -- --
Proceeds from bank debt.............. 1,447,147 -- -- -- --
------------ ------------ ------------- ------------- -----------
Net cash provided by financing
activities......................... 5,683,134 23,021,579 62,581,555 -- (6,537)
------------ ------------ ------------- ------------- -----------
Net increase (decrease) in cash and
cash equivalents................... (1,747,427) 8,932,739 (1,125,119) (7,053,401) (4,247,438)
Cash and cash equivalents at
beginning of period................ 4,354,219 2,606,792 11,539,531 11,539,531 10,414,412
------------ ------------ ------------- ------------- -----------
Cash and cash equivalents at end of
period............................. $ 2,606,792 $ 11,539,531 $ 10,414,412 $ 4,486,130 $ 6,166,974
============ ============ ============= ============= ===========
</TABLE>

See Accompanying Notes to Financial Statements.

F-6
<PAGE> 58

TRANSKARYOTIC THERAPIES, INC.

NOTES TO FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Transkaryotic Therapies, Inc. (the "Company") is a biopharmaceutical
company engaged in the development and commercialization of therapeutic proteins
and gene therapy products for the long-term treatment and cure of a broad range
of human diseases. During 1996, the Company completed its initial public
offering of common stock, filed its second Investigational New Drug application
with the U. S. Food and Drug Administration and made progress in the development
of a number of its programs. As a result, the Company has determined that it is
no longer in its development stage.

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
Regulations 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.

2. SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Cash and cash equivalents include funds held in investments with original
maturities of three months or less. Marketable securities consist of investments
in agencies of the U.S. government and investment grade corporate notes. The
fair values for marketable securities are based on quoted market prices.

The Company determines the appropriate classification of cash equivalents
and marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company has classified such
holdings as available-for-sale securities, which are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity.

Financial instruments which potentially subject the Company to
concentrations of credit risk consist of temporary cash investments. The Company
maintains cash and cash equivalents with high-credit-quality financial
institutions and limits the amount of credit exposure to any one institution.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives of the respective asset,
ranging from three to five years. Leasehold improvements are stated at cost and
are amortized using the straight-line method over the term of the lease.

STOCK-BASED COMPENSATION

The Company accounts for qualified stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and, accordingly, recognizes no compensation expense for
the issue thereof. For certain non-qualified stock options granted, the Company
recognizes as compensation expense the excess of the deemed fair value of the
common stock issuable upon

F-7
<PAGE> 59

TRANSKARYOTIC THERAPIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

exercise over the aggregate exercise price of such options. The compensation is
amortized over the vesting period of each option or the recipient's term of
employment, if shorter.

The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(FAS 123), and will continue to account for its stock options plans in
accordance with the provisions of APB 25.

LICENSE AND RESEARCH REVENUE

Revenues from collaborative agreements are recognized as earned upon either
the execution of the underlying license agreement, the incurrence of
reimbursable expenses or the achievement of certain milestones.

INCOME TAXES

Deferred tax assets are determined based on differences between financial
reporting and income tax bases of assets and liabilities, as well as net
operating loss carryforwards, and are measured using the enacted tax rates and
laws that will be in effect when the differences reverse. Deferred tax assets
are reduced by a valuation allowance to reflect the uncertainty associated with
their ultimate realization.

NET INCOME (LOSS) PER SHARE

For all periods subsequent to the Company's initial public offering in
October 1996, historical net loss per share is computed using the weighted
average number of common shares outstanding.

Pro forma net income (loss) per share is computed using the weighted
average number of common shares, convertible preferred shares assuming
conversion at date of issuance, and dilutive equivalent shares from stock
options and warrants using the treasury stock method. 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 initial
public offering of the Company's common stock have been included in the
calculations as if they were outstanding for all periods prior to the initial
public offering in October 1996 whether or not they are anti-dilutive.
Historical earnings per share have not been presented since such amounts are not
deemed meaningful due to the significant change in the Company's capital
structure that occurred in connection with the initial public offering.

ACCOUNTING PRONOUNCEMENTS

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.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
establishes criteria for the recognition and measurement of impairment loss
associated with long-lived assets. The Company adopted this standard in the
first quarter of 1996. Adoption of this standard did not have a material impact
on the Company's financial position or results of operations.

F-8
<PAGE> 60

TRANSKARYOTIC THERAPIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FINANCIAL STATEMENT RECLASSIFICATIONS

Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform to the 1996 presentation.

3. MARKETABLE SECURITIES

The following is a summary of available-for-sale securities:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1995.................. $29,750,091 $ 44,886 $ (2,274) $29,792,703
=========== ======= ======== ===========
December 31, 1996.................. $82,807,773 $ 38,999 $ (22,749) $82,824,023
=========== ======= ======== ===========
</TABLE>

These securities are classified in the accompanying balance sheet as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cash equivalents.......................................... $ 6,847,392 $ 6,983,193
Marketable securities..................................... 22,945,311 75,840,830
----------- -----------
$29,792,703 $82,824,023
=========== ===========
</TABLE>

Maturities of marketable securities held at December 31, 1996 are as
follows:

<TABLE>
<S> <C>
Less than one year.............................. $77,716,798
One through three years......................... 5,107,225
-----------
$82,824,023
===========
</TABLE>

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Leasehold improvements...................................... $5,015,967 $5,072,136
Laboratory equipment........................................ 2,386,082 2,844,089
Office furniture and equipment.............................. 927,390 1,172,154
---------- ----------
8,329,439 9,088,379
Less accumulated depreciation and amortization.............. 4,330,786 5,850,977
---------- ----------
$3,998,653 $3,237,402
========== ==========
</TABLE>

Depreciation and amortization expense on property and equipment was
$1,233,000, $1,463,000 and $1,540,000 in 1994, 1995 and 1996, respectively.

F-9
<PAGE> 61

TRANSKARYOTIC THERAPIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Salaries and benefits.......................................... $177,937 $341,546
Professional fees.............................................. 157,815 182,298
Deferred rent.................................................. 89,600 89,600
Income taxes payable........................................... 85,000 --
Other.......................................................... 31,000 38,500
-------- --------
$541,352 $651,944
======== ========
</TABLE>

6. BANK DEBT

In February 1995, the Company repaid all outstanding bank debt.

7. REDEEMABLE PREFERRED STOCK

Upon the closing of the initial public offering of the Company's common
stock in October 1996, redeemable preferred stock and all rights to accrued
dividends thereon, totaling $4,598,000, were automatically converted into
200,000 shares of common stock of the Company.

8. STOCKHOLDERS' EQUITY

PREFERRED STOCK

All shares of preferred stock outstanding prior to the initial public
offering of the Company's common stock were automatically converted into
8,785,455 shares of common stock as of the date of the offering. In July 1996,
the Board of Directors authorized 10,000,000 shares of undesignated preferred
stock, par value of $.01 per share, none of which were issued or outstanding at
December 31, 1996.

COMMON STOCK

In July 1996, the Board of Directors authorized an increase in the number
of authorized shares of common stock to 30,000,000. In October 1996, the Company
completed an initial public offering of its common stock by selling 2,500,000
shares at $15 per share, resulting in net proceeds to the Company of
approximately $34,100,000. On the same date, the Company sold 333,333 shares of
its common stock to Hoechst Marion Roussel, Inc. ("HMRI") for total proceeds of
$5,000,000.

STOCK COMPENSATION PLANS

The Company has adopted several stock compensation plans which provide for
the issuance of incentive and nonqualified stock options, stock appreciation
rights, restricted stock, long-term performance awards and stock grants to
employees, Directors and consultants of the Company at prices determined by the
Board of Directors. At December 31, 1996, approximately 2,500,000 shares of
common stock have been reserved for issuance under the plans. Options vest
ratably over periods ranging from three to six years and are exercisable for ten
years from the date of grant.

F-10
<PAGE> 62

TRANSKARYOTIC THERAPIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Stock option activity under the plans is as follows:

<TABLE>
<CAPTION>
1994 1995 1996
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1....... 60,120 $ 0.01 163,344 $ 0.01 136,344 $ 0.01
Granted........................ 105,222 0.01 13,339 0.01 792,968 0.42
Exercised...................... -- 0.01 (7,660) 0.01 (288) 0.01
Canceled....................... 1,998 0.01 (32,679) 0.01 (22,713) 0.01
------- ----- ------- ----- ------- -----
Outstanding at December 31..... 163,344 $ 0.01 136,344 $ 0.01 906,311 $ 0.36
======= ===== ======= ===== ======= =====
Options exercisable
at December 31............... 5,414 $ 0.01 27,519 $ 0.01 50,578 $ 0.01
======= ===== ======= ===== ======= =====
Weighted average fair value per
share of options granted
during the year.............. $ 4.15 $ 6.22 $ 6.59
===== ===== =====
</TABLE>

The exercise price and life information in regard to significant option
groups outstanding at December 31, 1996 is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
NUMBER CONTRACTUAL EXERCISE NUMBER
OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE
- ----------- ----------- -------- -----------
<S> <C> <C> <C>
886,911.. 8.66 $ 0.01 50,578
15,000... 9.84 15.00 --
4,400 9.93 21.94 --
906,311 50,578
</TABLE>

Pursuant to the requirements of FAS 123, the following are the pro forma
net income (loss) and net income (loss) per share for 1995 and 1996, as if the
compensation cost for the options had been determined based on the fair value at
the grant date for grants in 1995 and 1996, consistent with the provisions of
FAS 123:

<TABLE>
<CAPTION>
1995 1996
-------------------------- -----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss)..................... $ 2,074,000 $2,080,000 $(11,972,000) $(12,783,000)
Net income (loss) per share........... $0.14 $0.14 $(0.81) $(0.87)
</TABLE>

The fair value of options issued pursuant to the plans at the date of grant
were estimated using the Minimum Value method for options granted prior to the
initial public offering and the Black-Scholes model for options granted
subsequent to the initial public offering. The estimation of the fair value of
these options at the date of grant used the following assumptions:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Expected life (years)................................... 2.5-7.5 2.5-7.5
Interest rate........................................... 5.90%-7.85% 5.79%-6.30%
Volatility.............................................. N/A 0.65
Forfeiture rate......................................... 10.0% 10.0%
</TABLE>

F-11
<PAGE> 63

TRANSKARYOTIC THERAPIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Company's volatility for the period prior to the initial public
offering was not used in the calculation of the fair value of the options. The
Company has never declared or paid dividends on any of its capital stock and
does not expect to in the foreseeable future.

The effects on 1995 and 1996 pro forma net income (loss) and net income
(loss) per share of expensing the estimated fair value of stock options issued
are not necessarily representative of the effects on reporting the results of
operations for future years as the period presented include only one year and
two years, respectively, of option grants.

STOCK WARRANTS

In conjunction with various debt and equity financings, the Company issued
warrants to purchase 817,000 shares of common stock at prices ranging from $6.22
to $7.78 per share. The warrants expire at various times through November 1998.
The Company has reserved shares of common stock for issuance upon the exercise
of these stock warrants.

9. LICENSE AND RESEARCH AGREEMENTS

In May 1994 and March 1995, the Company entered into license and stock
purchase agreements with HMRI, whereby HMRI was granted exclusive rights to
make, use and sell worldwide two therapeutic products produced under patent
rights and technologies owned by the Company. Under the terms of the agreements,
the Company received $10,000,000 in each of 1994 and 1995 as non-refundable
licensing fees. In 1995, the Company also received a milestone payment of
$2,000,000 for successful completion of certain research. In each of 1995 and
1996, the Company received $3,400,000 for contract research funding under these
agreements. As part of these agreements, HMRI may make additional payments of up
to $76,000,000 upon achievement of certain development milestones.

The Company has entered into licensing agreements with various universities
and research organizations. Under the terms of these agreements, the Company is
required to make payments of nonrefundable license fees and royalties on future
sales of products employing the technology.

10. EMPLOYEE RETIREMENT PLAN AND OTHER BENEFITS

The Company maintains a qualified defined contribution plan covering
substantially all employees who have completed at least six months of service to
the Company. The Company matches 50% of employee contributions, up to 5% of
compensation. Employer contributions vest ratably over five years after the
first year of service by the employee. The related expense was $57,000, $83,000
and $91,000 in 1994, 1995 and 1996, respectively.

In 1994, a former officer and director's association with the Company
terminated. As part of the separation agreement, the Company repurchased 16,071
shares of its common stock, forgave loans and related interest and made other
payments, which resulted in a charge against results of operations of $544,000.

11. INCOME TAXES

Except for 1995, the Company has incurred operating losses. Since the
Company expects that it will continue to incur substantial losses for at least
several years, no tax benefit for the prior operating losses or other deferred
tax assets has been provided given the uncertainty regarding their utilization.

At December 31, 1996, the Company had net operating loss carryforwards of
approximately $32,000,000 and research and development tax credits of
$2,635,000, which expire through 2011. During 1995, the Company utilized
approximately $1,600,000 of tax benefits from net operating loss carryforwards
to offset all but $85,000 of the current year tax provision. The future
utilization of these carryforwards is subject to an

F-12
<PAGE> 64

TRANSKARYOTIC THERAPIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

annual limitation when a cumulative change in stock ownership of more than 50%
occurs over a three year period. The Company believes that such ownership
changes have occurred and because of this limitation, it is possible that
taxable income in future years, which would otherwise be offset by net operating
losses, will not be offset and, therefore, will be subject to tax.

Significant components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 9,397,000 $ 13,800,000
Research and development tax credits.................. 2,479,000 2,635,000
Depreciation.......................................... 752,000 1,068,000
Other................................................. 40,000 186,000
------------ ------------
Total deferred tax assets............................... 12,668,000 17,689,000
Valuation allowance..................................... (12,668,000) (17,689,000)
------------ ------------
Net deferred tax assets................................. $ -- $ --
============ ============
</TABLE>

12. COMMITMENTS AND CONTINGENCIES

In April 1997, Amgen Inc. filed a civil action in the U.S. District Court
in Massachusetts against the Company and HMRI. The complaint in the action
alleges that Gene Activated Erythropoietin ("GA-EPO") and processes for
producing GA-EPO infringe 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.

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 making, use or sale of GA-EPO by the Company and HMRI in
the United States, or any other conclusion of the 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.

F-13
<PAGE> 65

TRANSKARYOTIC THERAPIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Company leases its facilities under operating leases which expire
through 2001, subject to renewal provisions. Future annual minimum payments
under all noncancelable operating leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDED:
-----------------------------------------------
<S> <C>
1997........................................... $1,156,000
1998........................................... 1,148,000
1999........................................... 117,000
2000........................................... 117,000
2001........................................... 117,000
Thereafter..................................... 19,000
----------
$2,674,000
==========
</TABLE>

Rent expense was $1,087,000, $992,000 and $1,068,000 in 1994, 1995 and
1996, respectively.

F-14
<PAGE> 66

================================================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 15
Dividend Policy....................... 15
Price Range of Common Stock........... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 22
Management............................ 38
Certain Transactions.................. 45
Principal Stockholders................ 46
Description of Capital Stock.......... 48
Plan of Distribution.................. 51
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 52
Index to Financial Statements......... F-1
</TABLE>

================================================================================

1,700,000 SHARES

[TKT LOGO]

TRANSKARYOTIC THERAPIES, INC.

------------------------
PROSPECTUS
JULY 30, 1997
------------------------

================================================================================