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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-21481
TRANSKARYOTIC THERAPIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 04-3027191
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
195 Albany Street
Cambridge, Massachusetts
(Address of principal 02139
executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 349-0200
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
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As of March 6, 1998, the approximate aggregate market value of the voting
stock held by non-affiliates of the registrant was $238,585,000, based on the
last reported sale price of the Registrant's Common Stock on the Nasdaq National
Market as of the close of business on March 6, 1998. There were 18,944,864
shares of Common Stock outstanding as of March 6, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Document 10-K Part
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Specifically Identified Portions of the Registrant's
Proxy Statement for the Annual Meeting of Stockholders
to be held on May 19, 1998 III
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PART I
ITEM 1. BUSINESS
Summary
Transkaryotic Therapies, Inc. ("TKT(TM)" or "the Company") is a
biopharmaceutical company dedicated to the development and commercialization of
treatments for a wide range of human diseases. The Company has three product
development platforms -- Gene Activation, gene therapy, and Niche Proteins(TM).
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 $13 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(TM) 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 Gene Activated erythropoietin ("GA-EPO"),
which Hoechst Marion Roussel, Inc. ("HMRI"), the Company's collaborative
partner, advanced from Investigational New Drug application ("IND") submission
to initiation of Phase II trials in 1997. See "Item 3 -- Legal Proceedings."
The Company's gene therapy technology ("Transkaryotic Therapy(TM)") 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. In December 1997, the Company submitted an IND seeking
permission to start Phase I clinical trials of TKT's gene therapy approach to
the long-term delivery of Factor VIII for the treatment of Hemophilia A. The IND
became effective in January 1998, and the Company expects to commence Phase I
clinical trials in mid-1998.
TKT's Niche Protein platform is based on protein replacement for the
treatment of rare genetic diseases which are characterized by the absence of
certain metabolic enzymes. Since the defect in many of these disorders is
understood in depth, product development pathways have the potential to be
straightforward. The Company believes that manufacturing and marketing of these
products will require minimal investment in infrastructure and plans to
commercialize these products itself. During 1997, the Company, in collaboration
with the National Institutes of Health, conducted a Phase I clinical trial of
the [alpha]-galactosidase A protein ("[alpha]-gal") produced by the Company in
patients with Fabry disease.
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.
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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 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.
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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 $13 billion (1996 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 preselected, desirable locations within the cGene 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
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.
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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(TM) 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 ten largest
marketed proteins in 1996 was approximately $13 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 1996 Worldwide Protein Product Revenues (in millions)
<TABLE>
<CAPTION>
Protein Primary Indication Revenues
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<S> <C> <C>
Erythropoietin Anemia $3,200
Insulin Diabetes 2,200
G-CSF Neutropenia 1,800
Growth Hormone Short stature 1,700
[alpha]-Interferon Hepatitis/Cancer 1,100
Factor VIII Hemophilia A 1,100
(beta)-Interferon Multiple sclerosis 1,100
FSH Infertility 500
tPA Myocardial infarction 450
Glucocerebrosidase Gaucher disease 250
</TABLE>
TKT has focused its initial Gene Activation efforts on the development of
its GA-EPO(TM) 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
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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(TM) 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 a Phase I study conducted by HMRI in 1997, GA-EPO administration
exhibited a satisfactory safety profile and resulted in a dose-dependent
increase in hemocrit. In 1997, HMRI commenced a Phase II clinical trial of
GA-EPO. Subject to successful completion of this Phase II trial, the Company
expects that HMRI will initiate Phase III trials of GA-EPO in the second half of
1998.
The Company believes that GA-EPO will be reviewed within the FDA by the
Center for Biologics Evaluation and Research ("CBER"). 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.
Development Status of Other Gene Activation Products. In collaboration
with HMRI, TKT is developing a second, undisclosed protein. HMRI accepted for
development the Gene Activated cell line for the second protein in June 1997.
The Company expects HMRI to file an IND for this product in 1998.
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TKT believes that numerous development opportunities exist for Gene
Activated proteins. In addition to the two proteins that are the subjects of the
collaborations with HMRI, the Company is currently developing four other Gene
Activated proteins. These programs are in the research stage.
Gene Activation Collaborations and Commercialization Strategy
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, with its 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 and a second, undisclosed protein.
Under two licenses agreements, HMRI was granted exclusive rights to make,
use and sell, worldwide, the two products. HMRI is responsible, at its own
expense, for all worldwide development, manufacturing and marketing activities
for both products. Pursuant to the agreement pertaining to the second protein,
TKT also granted HMRI an option to commercialize certain aspects of TKT's gene
therapy technologies related to this protein. TKT has successfully generated
cell lines sufficient for scale-up to commercial production levels that have
been accepted by HMRI.
TKT has the potential to receive up to $125,000,000 ($58,000,000 for
GA-EPO and $67,000,000 for the second protein) from HMRI from the two alliances,
consisting of license fees, equity investments, milestones and research funding.
As of December 31, 1997, TKT had received approximately $54,000,000 of such
amount (approximately $24,000,000 for GA-EPO and approximately $30,000,000 for
the second protein). The remaining payments are contingent upon the achievement
of milestones in connection with the continued development of these products.
TKT also is entitled to royalties on sales of these two products.
TKT is actively pursuing a number of 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 and the second
protein, as well as from other pharmaceutical partners that successfully
develop, manufacture, and market other Gene Activated proteins. In the longer
term, the Company is also considering the development of 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. 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(TM), represents the fourth wave of protein
production -- a system that would restore the patient's natural ability to
produce a required therapeutic protein.
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TKT's approach to gene therapy is based on genetically modifying patients'
cells to produce and 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.
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 vs. non-viral -- viral gene therapy approaches use genetically modified
viruses to introduce genes into human cells by infection. 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. 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. In addition, such approaches have not allowed long-term production
of the therapeutic protein in animal models or patients.
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. Accordingly, these technologies may be 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
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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 tasks set forth
below (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) 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
epithelial cells properties
Proteins expressed Factor VIII, Factor IX, Growth All expressed at levels of
Hormone, Insulin, Interleukin-2, LDL at least 1 ug/million
receptor, [alpha]-gal cells/day
Transfection methodologies Electroporation, microinjection, All with efficiencies
applied polybrene and calcium phosphate greater than 1 stably
precipitation transfected cell per
thousand treated cells
Proteins characterized Factor VIII, Factor IX, Growth All with natural post-
Hormone, [alpha]-gal translational
modifications
In vivo expression observed Factor VIII, Factor IX, Growth All at physiologic levels
Hormone, Insulin in 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
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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.
These patient techniques have been successfully carried out in an ongoing
Phase I clinical trial of growth hormone as a treatment for cachexia (described
below). The 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 first gene therapy clinical
trial is a Phase I study based on the implantation of genetically modified skin
fibroblasts to express growth hormone in cancer patients at risk for cachexia.
The principal purpose of this study is to determine the safety of the Company's
gene therapy in humans. A total of 20 patients will be enrolled in five
escalating dosage blocks, with four patients per block. At December 31, 1997, 17
patients had been enrolled in the trial. Community physicians have injected the
modified cells under the skin of subjects; all patient procedures have been
performed on an out-patient basis. Preliminary data from this study suggests
that the administration of the genetically-engineered cells appears to be
well-tolerated. Prior to proceeding with further clinical development (beyond
Phase I) of this product, the Company intends to seek a collaborative partner.
In December 1997, the Company submitted an IND seeking permission to start
Phase I clinical trials of its gene therapy approach for the long-term delivery
of Factor VIII for the treatment of Hemophilia A. The IND became effective in
January 1998. The Company expects to commence Phase I clinical trials of this
product in 1998.
The Company believes that Transkaryotic Therapy offers several clinical
and commercial advantages over conventional treatments and other gene therapies
for targeted diseases, including:
o 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 implantation of such cells in the patient. In
studies of TKT's gene therapy system involving over 5,000 animals, no side
effects have been observed.
o 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.
o 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.
o 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.
o 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.
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o 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 other diseases,
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 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 A 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. As described
above, the Company expects to commence Phase I clinical trials of its gene
therapy approach for the long-term delivery of Factor VIII in 1998.
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
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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.
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. The manufacturing process takes up to six weeks.
It is essential to optimize the process to allow for a commercially-viable
product, and the Company believes it has accomplished such optimization. To
produce early clinical materials, TKT has constructed a pilot manufacturing
facility 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, the Company plans to construct a central
facility to serve the U.S. As the Company's product pipeline matures, the
Company believes that demand will increase, possibly requiring the Company to
construct an additional manufacturing facility in the U.S. Other gene therapy
companies have adopted a strategy based on locating a cell processing facility
in every large city (or potentially large hospital). TKT believes that the
requirements for strict quality control and the benefits of economy of scale are
better achieved using the central manufacturing strategy.
Niche Protein(TM) Product Development Platform
It is well established that certain genetic diseases are caused by the
deficiency of a single, well-defined protein. Therefore, the most direct
approach to treatment is to manufacture the missing protein and administer it to
the patient. TKT's Niche Protein development is focused on developing protein
replacement products to treat patients suffering from rare genetic diseases
characterized by protein deficiencies such as Fabry disease, Gaucher disease,
Hurler disease, phenylketonuria, Pompe disease, and Tay-Sachs disease.
Due to mutations in certain genes, individuals with these rare genetic
diseases are born lacking the ability to produce sufficient amounts of a
specific protein, resulting in symptoms which can be debilitating and,
ultimately, life threatening. Unfortunately, no effective treatment currently
exists for most of these rare diseases. The Company plans to develop and
commercialize products for a number of these diseases, with the goal of reducing
symptoms and potentially reversing progression of the disease.
TKT's Niche Protein(TM) Development Programs and Commercialization Strategy
The Company's product development strategy for its Niche Protein platform
is to leverage the Company's core competencies in gene expression, cell culture,
and protein characterization to create protein replacement products to treat
rare genetic diseases which are characterized by the absence of certain
metabolic enzymes. Since the defects in many of the diseases which the Company
intends to
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address with its Niche Protein platform are understood in depth, product
development pathways have the potential to be straightforward.
The Company believes that it will be able to arrange for proteins for its
Niche Protein program to be manufactured by pharmaceutical companies under the
terms of contract manufacturing agreements, thereby limiting the Company's fixed
cost investment in a commercial scale manufacturing facility. In addition, the
Company believes that it will be able effectively to serve Niche Protein markets
with a small, focused sales force, thereby limiting the Company's investment in
sales and marketing infrastructure. Thus, TKT views its Niche Protein program as
a near term opportunity to move into a series of markets with a cost-effective,
low-risk approach and thereby build a commercialization capability. TKT expects
to develop and commercialize these products in the U.S. and Europe and obtain
collaborative partners for Japan.
Fabry disease. TKT's first target in the Niche Protein program is Fabry
disease. Fabry disease is an X-linked lysosomal storage disease caused by the
deficiency of [alpha]-gal. The disorder is characterized by the accumulation of
lipids in lysosomes of vascular endothelial and smooth muscle cells and in a
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
several thousand Fabry disease 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 [alpha]-gal 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.
The Company believes that enzyme replacement therapy 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.
In 1997, the Company, in collaboration with the National Institutes of Health
under a collaborative research and development agreement ("CRADA"), conducted a
Phase I clinical trial designed to characterize the safety and pharmacokinetic
profile of [alpha]-gal. Ten patients with Fabry disease were treated with a
single dose of highly purified [alpha]-gal manufactured at TKT, with two
patients treated at each of five escalating dose levels. Plasma half-life and
[alpha]-gal enzyme activity were examined before and after treatment, along with
a series of clinical and laboratory safety assessments. Nine out of ten patients
showed a reduction of the toxic lipid that causes Fabry disease, with the
reduction observed in both liver and kidney. The treatment was well-tolerated,
and no clinically significant side-effects were observed. The half-life of the
enzyme appears to support dosing at intervals of one week or longer.
The Company has entered into a contract manufacturing agreement with a
major pharmaceutical company to produce [alpha]-gal. The Company plans to
initiate Phase II trials of its [alpha]-gal product in mid-1998.
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
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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),
Syntex (U.S.A.) (a wholly-owned subsidiary of Roche Holdings, Inc.), and Somatix
Therapy Corporation ("Somatix"). Somatix subsequently merged into Cell Genesys,
Inc. With the possible exception of the patent 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 four 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, the Company
can meaningfully protect its proprietary position.
In the event TKT does not prevail, a January 1997 Federal Trade Commission
("FTC") decision may then be relevant. The FTC entered a consent order to
resolve anticompetitive concerns raised by the merger of Ciba-Geigy Limited and
Sandoz Limited into 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.
At December 31, 1997, the Company had two issued U.S. patents and 27
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 issued U.S. patents and patent
applications relate to the Gene Activation platform 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, the Transkaryotic Therapy platform in general, the
Niche Protein Platform 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.
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.
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,
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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 or the
Company's existing patents will not be challenged, invalidated or circumvented
or will afford the Company protection against competitors with similar
technology. Any litigation or interference proceedings regarding patent or other
proprietary rights 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 regarding
patent and other intellectual property rights in the fields of all three of its
product platforms.
In April 1997, Amgen Inc. ("Amgen") filed a civil action in the U.S.
District Court in Massachusetts against the Company and HMRI relating to GA-EPO
and the processes for producing GA-EPO. See "Item 3 - Legal Proceedings."
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. In particular, 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 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
The Company believes that the primary competitive factors relating to the
products that it is developing include safety, efficacy, reliability,
distribution channels and price, and disease management services. In addition,
the length of time required for products to be developed and to obtain
regulatory
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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 can be no assurance that it will be
able to continue to do so.
Many of the Company's 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.
Smaller companies may obtain access to such skills and resources through
collaborative arrangements with pharmaceutical companies or academic
institutions.
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 existing established treatments or new approaches and
products developed and marketed by competitors. 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 the competitive
factors described above. 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.
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 $13 billion (1996 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.
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.
Niche Proteins(TM). For many of the disease targets of the Company's Niche
Protein program, there is currently no cure or effective treatment. Treatments
are generally focused on the management of the disease's clinical symptoms,
particularly pain. In general, the Company believes that these diseases may
represent markets too small to attract the resources of larger pharmaceutical
companies, but provide attractive commercial opportunities to smaller companies,
such as TKT. The Company believes its major competition with respect to Fabry
disease to be Genzyme Corporation.
The Orphan Drug Act of 1983 generally provides incentives to manufacturers
to undertake development and marketing of products to treat relatively rare
diseases or diseases where fewer than
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200,000 persons in the United States at the time of application for Orphan Drug
designation would be likely to receive the treatment. The Company believes that
many of the potential products in its Niche Protein program will qualify as
Orphan Drugs and intends to pursue Orphan Drug designations, where appropriate.
A drug that receives Orphan Drug designation by the FDA and is the first product
to receive FDA marketing approval for its stated product claim is entitled to a
seven-year exclusive marketing period in the United States for that product
claim.
There can be no assurance, however, that other companies will not seek an
Orphan Drug designation and obtain FDA marketing approval for a product
competitive with a Niche Protein product before the Company obtains such
approval. If another company obtains Orphan Drug marketing approval and receives
seven-year marketing exclusivity, it is possible that the Company would not be
permitted by the FDA to market a similar product in the United States during the
exclusivity period.
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 preclinical 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 preclinical testing. Preclinical 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 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
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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,
among other things, an unreasonable risk is presented to patients, or if the
design of the trial is insufficient to meet its stated objective.
After completion of clinical trials of a new product, FDA marketing
approval must be obtained. License applications submitted to the FDA have
historically taken two to five years to receive approval. The Company expects
that its products will be regulated as biologics. Traditionally, both a Product
License Application and an Establishment License Application have been required
prior to commercial marketing. The FDA will be proposing regulations to
implement the new Biologics License Application ("BLA") provision in the Food
and Drug Administration Modernization Act of 1997 (the "Act"), which allows for
a single license application. The Act sets as a goal for the FDA, but does not
require the review and action on a complete license application within 12
months. In addition, if the FDA determines that a product would be a significant
improvement in the safety or effectiveness of the treatment, diagnosis or
prevention of a serious or life threatening disease, the FDA may designate the
product for priority review, in which case the FDA's goal is to review and act
on the complete license application within six months of the submission date. To
the extent one of the Company's products might fall within the existing or
future BLA regulations for certain enumerated biotechnology products, these
regulations may provide guidance regarding FDA expectations. If the 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 the FDA by CBER. CBER currently has no "bioequivalence"
pathway for the rapid approval of closely- related biologics. 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 may 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 biologic,
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 make manufacturing changes and establish the
comparability of the product using physical, chemical, bioassay, preclinical
animal and/or pharmacological methods, without the need for additional clinical
trials.
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
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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.
Employees
As of December 31, 1997, the Company had 149 full-time employees,
including 124 in research and development. The Company's employees are not
covered by any collective bargaining agreement.
TKT considers relations with its employees to be good.
Trademarks
TRANSKARYOTIC THERAPIES(TM), TKT(TM), TRANSKARYOTIC THERAPY(TM), NICHE
PROTEIN(TM), GA-EPO(TM), GENE ACTIVATED(TM), and GA-(TM) are trademarks of the
Company.
ITEM 2. PROPERTIES
The Company leases a total of approximately 66,000 square feet of
laboratory and office space in buildings located in Cambridge, Massachusetts.
These facilities include pilot facilities for gene therapy and protein product
manufacturing.
The Company's current facilities may not be adequate to accommodate the
Company's needs beyond 2000. The Company currently expects to meet its
facilities requirements through development of a new facility or conversion of
an existing building. The Company expects to seek financing for all or a
significant portion of the cost of any new facility.
ITEM 3. LEGAL PROCEEDINGS
In April 1997, Amgen filed a civil action in the U.S. District Court in
Massachusetts against the Company and HMRI, the Company's collaborative partner.
The complaint in the action alleges that the Company's Gene Activation
development program for the production of 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 November 1997, TKT and HMRI filed a Motion for Summary Judgment on the
ground that all of TKT's and HMRI's activities to date have been reasonably
related to the development and submission of data to the FDA, and, under the
Waxman-Hatch Act, cannot constitute acts of patent infringement. On the same
date, Amgen filed a Motion for Summary Judgment of Infringement. TKT and HMRI
have opposed that motion, stating that there has been no infringement. Oral
arguments were heard in January 1998.
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
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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 Company is currently involved in a patent interference proceeding
before the PTO involving a patent and several patent applications in the gene
therapy field. See "Item 1 - Business -- Patents, Proprietary Rights and
Licenses."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICES OF THE REGISTRANT
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position held with the Company
- ---- --- ------------------------------
<S> <C> <C>
Richard F Selden, M.D., Ph.D. 39 President, Chief Executive Officer
Douglas A. Treco, Ph.D. 40 Senior Vice President, Research and Development
Christoph M. Adams, Ph.D. 41 Vice President, Business Development
Daniel E. Geffken 41 Vice President, Finance, Chief Financial Officer and
Secretary
Kurt C. Gunter, M.D. 43 Vice President, Clinical and Regulatory Affairs
</TABLE>
Each officer's term of office extends until the first meeting of the Board
of Directors following the next annual meeting of stockholders and until a
successor is elected and qualified.
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.
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
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<PAGE>
Department of Genetics, Harvard Medical School. He received a Ph.D. in
Biochemistry and Molecular Biology from the State University of New York, Stony
Brook.
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 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 an 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 February
1997, Mr. Geffken was Chief Financial Officer of CytoTherapeutics, Inc., a
biotechnology company, and from December 1995 to February 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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) The Company's Common Stock commenced trading on October 17, 1996 on
the Nasdaq National Market under the symbol "TKTX." As of March 6, 1998, there
were 183 holders of record of the Company's Common Stock.
The following table sets forth for the fiscal periods indicated the range
of high and low closing prices for the Company's Common Stock on the Nasdaq
National Market.
<TABLE>
<CAPTION>
High Low
----------- ----------
<S> <C> <C>
1997
Quarter Ended:
December 31....................................... $ 43 1/4 $ 27
September 30...................................... 44 3/4 27 3/4
June 30........................................... 32 1/4 12 3/4
March 31.......................................... 25 3/4 17
1996
Quarter Ended:
December 31 (beginning October 17, 1996).......... 20 1/2 13 1/2
</TABLE>
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<PAGE>
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain all future
earnings, if any, to fund the development and growth of its business and does
not anticipated paying any cash dividends on its Common Stock in the foreseeable
future.
(b) The following information is provided pursuant to Rule 463 under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Company's first registration statement filed pursuant to the Securities Act, and
updates the information previously reported in the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997:
Effective date of the
Registration Statement: October 16, 1996
Securities and Exchange
Commission file number: 333-10845
Use of Proceeds:
Working Capital $34,110,581
Note: The information reported in this Item 5(b) assumes that the
proceeds of the offering have been applied to the Company's
working capital requirements since the date of the offering,
before the use of any other source of cash.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company for the five years
ended December 31, 1997 are derived from the financial statements of the
Company. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included as Item 7 and the financial statements and related
footnotes included as Item 8 in this Form 10-K.
<TABLE>
<CAPTION>
Year ended December 31,
(in thousands, except per share amounts) 1997 1996 1995 1994 1993
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
License and research revenues $ 5,788 $ 4,225 $ 15,400 $ 10,000 $ --
Research and development expenses 18,111 14,019 10,529 9,126 6,253
Net income (loss) (12,871) (11,972) 2,074 (3,422) (9,083)
Basic net income (loss) per share (pro forma in 1996
and 1995) (0.74) (0.98) 0.19
Shares used to compute basic net income (loss) per
share (pro forma in 1996 and 1995) 17,394 12,262 10,862
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
December 31,
(in thousands) 1997 1996 1995 1994 1993
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
Cash and marketable securities $129,554 $ 86,255 $ 34,485 $ 7,579 $ 6,753
Total assets 134,948 90,998 39,218 13,472 11,409
Redeemable preferred stock -- -- 4,440 4,230 4,020
Total stockholders' equity 131,749 89,644 33,541 7,073 5,724
</TABLE>
The Company has implemented Statement of Financial Accounting Standards
No. 128, "Earnings Per Share", which requires the presentation of both basic and
diluted earnings per share in the Consolidated Statements of Operations. The per
share amounts presented above and in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", are based on the
basic weighted average shares outstanding unless specifically identified as
diluted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Since its inception in 1988, Transkaryotic Therapies, Inc. (the "Company")
has been primarily engaged in the development and commercialization of products
based on the Company's three product development platforms: Gene Activation,
gene therapy and Niche Proteins. No revenues have been derived from the sale of
any products, and the Company does not expect to receive revenues from product
sales until at least 1999. The Company expects that its research and development
expenditures will increase substantially in future years as product development
efforts accelerate. 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 December 31, 1997, the Company's
accumulated deficit was $49,987,000. As a result, the Company is dependent upon
existing cash resources, interest income, external financing from equity and
debt offerings and/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
consolidated financial statements and the related footnotes thereto.
Results of Operations
Years Ended December 31, 1997, 1996 and 1995
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<PAGE>
License and research revenues totaled $5,788,000, $4,225,000 and
$15,400,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
All revenues were earned from two collaborative agreements with HMRI. Included
in revenues in 1995 was an up front licensing fee payment of $10,000,000,
relating to the signing of an agreement for the development of a product based
on the Company's Gene Activation technology.
Research and development expenses totaled $18,111,000 in 1997, as compared
to $14,019,000 in 1996 and $10,529,000 in 1995. The increase in 1997 of
$4,092,000, or 29%, was principally due to increases in outside contracts and
collaborations, research and development staffing and laboratory supplies in
each of the Company's product development platforms. During 1998, these programs
are expected to increase significantly as product development activities are
initiated or expanded. The increase in 1996 of $3,490,000, or 33%, was
principally due to an increase in research and development staffing, increases
in laboratory supplies and an expansion of laboratory facilities and expenses
related thereto in each of the Company's product development platforms.
General and administrative expenses were $6,279,000 for the year ended
December 31, 1997, compared with $4,729,000 and $3,828,000 in 1996 and 1995,
respectively. The increases in 1997 and 1996 of $1,550,000, or 33%, and
$901,000, or 24%, respectively, were principally due to increases in
administrative employee costs and expenses associated with being a publicly-held
company.
Net interest income was $5,731,000, $2,551,000 and $1,116,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. The average cash and
marketable securities balances were $102,161,000, $48,673,000 and $20,294,000 in
1997, 1996 and 1995, respectively. Increased interest income was primarily
attributable to higher average balances in the respective years as a result of
the Company's initial public offering in October 1996 and follow-on offering in
July 1997.
The Company had a net loss of $12,871,000 and $11,972,000 in 1997 and
1996, respectively, and net income of $2,074,000 in 1995. Net income in 1995 was
principally due to the initial licensing fee of $10,000,000 paid by HMRI to the
Company.
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 $129,554,000 at December 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 July 1997, the Company completed a direct placement of 1,700,000 shares
of common stock, resulting in net proceeds to the Company of $52,900,000.
The Company's current facilities may not be adequate to accommodate the
Company's needs beyond 2000. The Company currently expects to meet its
facilities requirements through development of a new facility or conversion of
an existing building. The Company expects to seek financing for all or a
significant portion of the cost of any new facility.
In May 1994, the Company and HMRI entered into an agreement to
commercialize the Company's GA-EPO product. Under the terms of the agreement,
HMRI is obligated to pay the Company a total of $58,000,000 upon completion of
all milestones and objectives set forth in the agreement. As of December 31,
1997, the Company had received $24,000,000. The remaining $34,000,000 in
payments are contingent upon HMRI's achievement of certain GA-EPO clinical
development milestones. HMRI is responsible for
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<PAGE>
the worldwide development, manufacturing and marketing of GA-EPO, and the
Company is entitled to receive a royalty based on net sales.
In March 1995, the Company entered into a second agreement with HMRI to
commercialize a second, undisclosed Gene Activation product. Pursuant to the
agreement, the Company also granted HMRI an option to commercialize certain
aspects of the Company's gene therapy technologies applicable to this protein.
Under the terms of the agreement, HMRI is obligated to pay the Company a total
of $67,000,000 upon completion of all milestones and objectives set forth in the
agreement. At December 31, 1997, the Company had received $29,900,000. The
remaining $37,100,000 to be paid to the Company by HMRI consists primarily of
milestone payments contingent upon the development of the product resulting from
the licensed technology. HMRI is responsible for the worldwide development,
manufacturing and marketing of this product, and the Company is entitled to
receive a royalty based on net sales.
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $43,000,000, which expire at various times through 2012. The
Company believes that as of December 31, 1997, 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, 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 such time, if any, as the Company's operations
generate significant revenues from product sales, cash resources, interest
income and proceeds from equity and debt offerings and funding from
collaborative arrangements will be required 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
facilities and 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 into 2001. The Company's cash requirements may vary,
however, depending on numerous factors. Lack of necessary funds may require the
Company to delay, scale back or eliminate some or all of its research and
product development programs or to license its potential products or
technologies to third parties.
The Company is engaged in litigation with Amgen with respect to the
development of GA-EPO. See Note 10 to Notes to Consolidated Financial
Statements, which is incorporated by reference herein.
The Company has conducted an assessment of its software and related
systems and believes that it is year 2000 compliant.
Forward Looking Statements
Statements that are not historical facts, including statements about the
Company's confidence and strategies and its expectations about future products,
technologies and opportunities, market demand or
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<PAGE>
acceptance of future products are forward-looking statements. Without limiting
the foregoing, the words "believes", "anticipates", "plans", "expects",
"intends" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements, including, without limitation, whether any of the
Company's Gene Activation, gene therapy, or Niche Protein product candidates
will advance in the clinical trial process, the timing of such clinical trials,
whether the clinical trial results will warrant continued product development,
the timing of making required regulatory filings such as Investigational New
Drug applications, and other risks set forth below, under the caption "Certain
Factors That May Affect Future Results."
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ from those indicated by forward-looking statements made in this Annual
Report on Form 10-K for the year ended December 31, 1997 and presented elsewhere
by management from time to time.
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 filed a civil action in the U.S. District Court in
Massachusetts against the Company and HMRI, the Company's collaborative partner.
The complaint in the action alleges that the Company's Gene Activation
development program for the production of 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 November 1997, TKT and HMRI filed a Motion for Summary Judgment on the
ground that all of TKT and HMRI's activities to date have been reasonably
related to the development and submission of data to the FDA, and, under the
Waxman-Hatch Act, cannot constitute acts of patent infringement. On the same
date, Amgen filed a Motion for Summary Judgment of Infringement. TKT and HMRI
have opposed that motion, stating that there has been no infringement. Oral
arguments were heard in January 1998.
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,
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<PAGE>
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
PTO declared in January 1996, an interference regarding a third party's 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), Syntex (U.S.A.) (a wholly-owned subsidiary of Roche Holdings,
Inc.), and Somatix. Somatix subsequently merged into Cell Genesys, Inc. With the
possible exception of the patent 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 four
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 FTC decision may then
be relevant. The FTC entered 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 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. At December 31, 1997, the Company had two issued U.S. patents and 27
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 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 technologies and potential products
may be found to conflict or be alleged to conflict with patents which
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<PAGE>
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 do not infringe patents that may issue under pending patent
applications.
Although the Company has licensed proprietary rights to certain genes (for
example, for Factor VIII and Factor IX) to be used in its gene therapy products,
the Company presently has no proprietary rights to certain other genes that it
may later seek to use in its products and which may be the subject of issued
third party patents or pending patent applications. As a result, the Company may
be required to obtain licenses under third party patents in order to market
certain of its products. If such licenses are not made available to the Company
on acceptable terms, the Company will not be able to market such products. In
addition, under the Company's license and sublicense agreements, the licensors
and sublicensors may terminate these agreements upon the Company's failure to
meet certain specified milestones. Any such termination of an existing license
or sublicense by any such licensor or sublicensor, or any inability by the
Company to obtain any required license, could have a material adverse effect on
the Company's business.
The Company also relies upon unpatented proprietary technology, processes
and know-how, which the Company protects in part by confidentiality agreements
with its 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 products are in research,
preclinical development or clinical development. No revenues have been generated
from product sales, and no such revenues are expected until 1999 at the
earliest.
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 may 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
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<PAGE>
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.
All of TKT's potential Niche Protein products are in research, preclinical
development or clinical development. No revenues have been generated from
product sales, and the Company believes no such revenues will be realized until
at least 1999. Extensive research, development, preclinical and clinical testing
and the regulatory review process will be required before marketing approval can
be obtained. The Company cannot predict with certainty when it will be able to
commercialize any of its potential Niche Protein products, if at all.
Technological Uncertainty. Each of the Company's three product platforms
involves new and rapidly evolving technologies. All of the Company's potential
products are in pre-clinical or clinical stages of development and will require
substantial additional development efforts and regulatory approvals prior to
market introduction.
The Company's Gene Activation and Niche Protein products are either in
clinical development or have not yet been tested in humans. While certain of the
Company's potential gene therapy products are in or about to enter clinical
development, the Company believes that its product candidates in this area are
even further from commercial introduction. Existing preclinical and clinical
data on the safety and efficacy of the Company's potential products are limited.
For any given indication, the Company's potential products 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 any of the Company's products will obtain
approval from the FDA or equivalent foreign regulatory authorities for any
indication.
Uncertainty Associated with Clinical Trials. The Company's potential
products are in various stages of research or preclinical or clinical
development. 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 products in 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 license application 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, one (for
the treatment of cachexia) is in Phase I clinical trials and a second (for the
treatment of Hemophilia A) is the subject of an effective IND, but has not yet
entered a Phase I clinical trial. There can be no assurance that the Company
will be able to obtain authorization from the FDA for additional human clinical
testing for any of its other 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
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<PAGE>
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
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 products will require a significant commitment of time,
money and effort by the Company and its corporate partners with no assurances
that any approval will ultimately be granted on a timely basis, if at all.
History of Operating Losses; Future Capital Needs; Uncertainty of
Additional Funding. The Company has experienced significant operating losses
since its inception in 1988. As of December 31, 1997, the Company had an
accumulated deficit of $49,987,000. The Company expects that it will continue to
incur substantial losses until at least 1999 and expects cumulative losses to
increase until then 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. To date, the Company has not
received any revenues from product sales.
The Company will require substantial funds to conduct research and
development (including preclinical and clinical testing) of its potential
products and to manufacture and market any products that are approved for
commercial sale. Based on its current operating plan, the Company believes that
its available cash will be adequate to satisfy its capital needs through 2001.
The Company's future capital requirements will depend on many factors, including
continued progress in its research and development programs, the magnitude of
these programs, the scope and results of clinical trials, the timing and receipt
of milestone payments, the time and costs involved in obtaining regulatory
approvals, the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, competing technological
and market developments, the ability of the Company to establish and maintain
collaborative arrangements, and the cost of manufacturing and commercialization
activities. The Company
-29-
<PAGE>
also will require capital to fund the costs of its additional facilities
requirements. The Company intends to seek additional funding through
collaborative arrangements and/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 biotechnology industry is characterized by rapid and
significant technological change. 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 existing established treatments
or new approaches and products developed and marketed by its competitors. The
development by others of alternative or superior treatment methods could render
the Company's products obsolete or noncompetitive. 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 products and technologies will be subject to substantial
competition from companies engaged in the commercialization of therapeutic
proteins and gene therapy as well as from companies which have other forms of
treatment for the diseases targeted by the Company. Many of these 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. Smaller companies may obtain access to such skills
and resources through collaborative arrangements with pharmaceutical companies
or academic institutions.
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 against any Gene
Activation products offered by the Company or its collaborators. 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.
The Company's Niche Protein products are targeted at patients suffering
from rare genetic diseases. The Company anticipates that the market for such
products in some instances may be quite small, and that competition in the form
of competitive products could place significant pressure on TKT's ability to
successfully commercialize its products.
The Company's competitive position also depends on 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. There can be no assurance that the Company will be
successful in achieving these goals.
No Manufacturing or Distribution or Marketing Capabilities; Dependence on
Third Party Manufacturers. Although the Company has pilot gene therapy and Gene
Activation manufacturing facilities, it has only limited manufacturing
experience and no commercial scale manufacturing capabilities. The Company will
need to develop, contract for or otherwise arrange for such capabilities, for
example, through collaborative partners, to commercialize any of its products.
If the Company is delayed in establishing suitable manufacturing capabilities,
the Company's ability to conduct human clinical testing may be adversely
affected, resulting in the delay of submission of potential products for
regulatory approval and initiation of new development programs. In addition,
there can be no assurance that the Company will be able to manufacture products
at a reasonable cost, that the Company will be able to price products
competitively or, if priced competitively, that the Company will be able to
achieve margins sufficient to allow it to achieve profitability.
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<PAGE>
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.
To the extent that the Company contracts with third parties for the
manufacture of its products, the Company will be dependent on such third parties
to comply with the terms of the contracts and to manufacture for the Company on
a timely basis and in accordance with applicable regulations. Any failures by
third parties to person their contract obligations satisfactorily may delay
clinical trial development or the submission of products for regulatory
approval, impair the Company's ability to commercialize its products as planned
and deliver products on a timely basis or otherwise adversely affect the
Company's competitive position.
The Company has no product sales, marketing or distribution capabilities
or experience. In order to market any of its products, the Company must develop
sales, marketing and distribution capabilities, 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 sale, marketing and distribution 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. In addition, if the Company chooses to conduct such activities
directly, there can be no assurance that the Company will be able to recruit and
maintain a sales force or that a sales force will be able to successfully access
the markets for the Company's products.
Possibility of Orphan Drug Status. The Company believes that many of the
potential products in its Niche Protein platform may qualify as Orphan Drugs.
TKT intends to pursue this designation aggressively, where appropriate, with
respect to its Niche Protein products intended for patient populations in the
United States of less than 200,000. A drug that receives Orphan Drug designation
by the FDA and is the first product to receive FDA marketing approval for its
stated product claim is entitled to a seven-year exclusive marketing period in
the United States for that product claim. A drug that is considered by the FDA
to be different than a particular Orphan Drug is not barred from sale in the
United States during such seven-year exclusive marketing period. Furthermore,
Orphan Drug exclusivity can be terminated for a variety of reasons, including
that the manufacturer of an Orphan Drug cannot provide an adequate supply of the
product. There can be no assurance that Orphan Drug status will be afforded to
any of the Company's potential products, or, if afforded, that such designations
will be maintained. In addition, the Company could incur substantial costs in
asserting any rights to prevent such uses it may have under the Orphan Drug Act.
Legislation has in the past been introduced to limit the marketing
exclusivity provided for certain Orphan Drugs. Although the outcome of that
legislation, if reintroduced, is uncertain, there remains a possibility that
future legislation will limit the incentives currently afforded to the
developers of Orphan Drugs.
There can be no assurance that other companies will not seek such
designation and obtain FDA marketing approval before the Company obtains such
approval. If another company obtains Orphan Drug marketing approval and receives
seven-year marketing exclusivity, it is possible that the Company would not be
permitted by the FDA to market a similar product in the United States during the
exclusivity period.
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<PAGE>
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 an undisclosed second protein
worldwide. There can be no assurance that HMRI will devote the resources
necessary to complete development of and commercialize these two potential
products. Should HMRI fail to develop and commercialize these two potential
products, the Company's business would be materially adversely affected.
The Company's strategy for the research, development and commercialization
of certain of its potential products includes the possibility that it will enter
into various additional arrangements with corporate partners, licensors,
licensees and others. There can be no assurance that any further arrangements
will be effected in the future. Although the Company believes parties to any
existing and future arrangements, if entered into, would have economic and other
motivations to perform their contractual responsibilities in full, the amount
and timing of resources which they would devote to these activities would not be
within the control of the Company. There can be no assurance that such parties
would perform their obligations as expected or that any revenue would be derived
by the Company from such arrangements.
Product Liability and Insurance. The Company's business will in the future
expose it to potential product liability risks which are inherent in the
testing, manufacturing and marketing of human therapeutic products. Although the
Company has clinical trial liability insurance for trials conducted in the U.S.,
the Company does not currently have any product liability insurance, and there
can be no assurance that it will be able to obtain or maintain such insurance on
acceptable terms, if at all, or that any insurance obtained will provide
adequate protection against potential liabilities. An inability to obtain
insurance at acceptable cost or otherwise protect against potential product
liability claims, in addition to exposing the Company to significant
liabilities, could prevent or inhibit the commercialization of products
developed by the Company.
Uncertainty of Pharmaceutical Pricing and Reimbursement. The business and
financial condition of pharmaceutical and biotechnology companies will continue
to be affected by the efforts of government and third-party payors to contain or
reduce the cost of health care through various means. For example, in certain
foreign markets, pricing and profitability of prescription pharmaceuticals is
subject to government control. In particular, individual pricing negotiations
are often required in each country of the European Community, even if approval
to market the drug is obtained.
In the U.S. there have been, and the Company 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
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<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplementary data are included as
part of this Annual Report on Form 10-K:
Report on Independent Auditors
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations for the years ended December 31, 1997, 1996 and
1995
Statements of Stockholders' Equity for the period January 1, 1995 through
December 31, 1997
Statements of Cash Flows for the years ended December 31, 1997, 1996 and
1995
Notes to Financial Statements
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Transkaryotic Therapies, Inc.
We have audited the accompanying consolidated balance sheets of Transkaryotic
Therapies, Inc. (the Company) as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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 consolidated financial position of Transkaryotic
Therapies, Inc. at December 31, 1997 and 1996, and the results of its
consolidated operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
February 9, 1998
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<PAGE>
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except par values) December 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 23,922 $ 10,414
Marketable securities 105,632 75,841
Prepaid expenses and other current assets 551 818
--------- ---------
Total current assets 130,105 87,073
Property and equipment, net 4,505 3,237
Other assets 338 688
--------- ---------
$ 134,948 $ 90,998
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,656 $ 612
Accrued expenses 1,543 652
--------- ---------
Total current liabilities 3,199 1,264
Other long-term liabilities -- 90
Stockholders' equity:
Preferred stock, $1.00 par value, 10,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value; 30,000 shares
authorized, 18,929 and 16,614 shares issued and
outstanding at December 31, 1997 and 1996,
respectively 189 166
Additional paid-in capital 185,451 131,796
Accumulated deficit (49,987) (37,116)
Deferred compensation (3,940) (5,218)
Unrealized gain on marketable securities 36 16
--------- ---------
Total stockholders' equity 131,749 89,644
--------- ---------
$ 134,948 $ 90,998
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Year Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
License and research revenues
from Hoechst Marion Roussel, Inc. $ 5,788 $ 4,225 $ 15,400
Operating expenses:
Research and development 18,111 14,019 10,529
General and administrative 6,279 4,729 3,828
-------- -------- --------
24,390 18,748 14,357
-------- -------- --------
Income (loss) from operations (18,602) (14,523) 1,043
Interest income 5,731 2,551 1,116
-------- -------- --------
Income (loss) before provision
for income taxes (12,871) (11,972) 2,159
Provision for income taxes -- -- 85
-------- -------- --------
Net income (loss) $(12,871) $(11,972) $ 2,074
======== ======== ========
Net income (loss) per share (pro
forma in 1996 and 1995):
Basic $ (0.74) $ (0.98) $ 0.19
======== ======== ========
Diluted $ (0.74) $ (0.98) $ 0.18
======== ======== ========
Shares used in computing net income
(loss) per share (pro
forma in 1996 and 1995):
Basic 17,394 12,262 10,862
======== ======== ========
Diluted 17,394 12,262 11,351
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Cumulative
(in thousands) ----------------------- --------------------- Additional Accretion of
Paid-in Preferred
Shares Amount Shares Amount Capital Stock
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 1,349 $ 1,349 5,172 $ 52 $ 35,734 $ (1,230)
Issuance of convertible preferred stock 1,595 1,595 -- -- 22,524 --
Issuance of common stock, net -- -- 26 -- -- --
Deferred compensation related to restricted stock and
stock options granted -- -- -- -- 73 --
Compensation expense related to equity issuances -- -- -- -- -- --
Redeemable preferred stock dividend accretion -- -- -- -- -- (210)
Unrealized gain on marketable securities -- -- -- -- -- --
Net income -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 2,944 2,944 5,198 52 58,331 (1,440)
Issuance of convertible preferred stock 1,133 1,133 -- -- 22,388 --
Issuance of common stock, net -- -- 2,831 28 39,032 --
Deferred compensation related to restricted stock and
stock options granted -- -- -- -- 5,054 --
Compensation expense related to equity issuances -- -- -- -- -- --
Redeemable preferred stock dividend accretion -- -- -- -- -- (158)
Conversion of preferred stock into common stock (4,077) (4,077) 8,585 86 6,991 1,598
Unrealized loss on marketable securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 -- -- 16,614 166 131,796 --
Issuance of common stock, net -- -- 2,315 23 53,754 --
Deferred compensation related to stock options granted -- -- -- -- 526 --
Reversal of deferred compensation related to forfeited
restricted stock and stock options granted, net -- -- -- -- (625) --
Compensation expense related to equity issuances -- -- -- -- -- --
Unrealized gain on marketable securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 -- $ -- 18,929 $ 189 $ 185,451 $ --
========= ========= ========= ========= ========= =========
<PAGE>
<CAPTION>
Unrealized
Gain (Loss)
(in thousands) on Total
Accumulated Deferred Marketable Stockholders'
Deficit Compensation Securities Equity
--------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ (27,218) $ (1,593) $ (20) $ 7,074
Issuance of convertible preferred stock -- -- -- 24,119
Issuance of common stock, net -- -- -- --
Deferred compensation related to restricted stock and
stock options granted -- (73) -- --
Compensation expense related to equity issuances -- 422 -- 422
Redeemable preferred stock dividend accretion -- -- -- (210)
Unrealized gain on marketable securities -- -- 62 62
Net income 2,074 -- -- 2,074
--------- --------- --------- ---------
Balance at December 31, 1995 (25,144) (1,244) 42 33,541
Issuance of convertible preferred stock -- -- -- 23,521
Issuance of common stock, net -- -- -- 39,060
Deferred compensation related to restricted stock and
stock options granted -- (5,054) -- --
Compensation expense related to equity issuances -- 1,080 -- 1,080
Redeemable preferred stock dividend accretion -- -- -- (158)
Conversion of preferred stock into common stock -- -- -- 4,598
Unrealized loss on marketable securities -- -- (26) (26)
Net loss (11,972) -- -- (11,972)
--------- --------- --------- ---------
Balance at December 31, 1996 (37,116) (5,218) 16 89,644
Issuance of common stock, net -- -- -- 53,777
Deferred compensation related to stock options granted -- (526) -- --
Reversal of deferred compensation related to forfeited
restricted stock and stock options granted, net -- 625 -- --
Compensation expense related to equity issuances -- 1,179 -- 1,179
Unrealized gain on marketable securities -- -- 20 20
Net loss (12,871) -- -- (12,871)
--------- --------- --------- ---------
Balance at December 31, 1997 $ (49,987) $ (3,940) $ 36 $ 131,749
========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (12,871) $ (11,972) $ 2,074
Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating
activities:
Depreciation and amortization 2,092 1,575 1,488
Compensation expense related to equity
issuances 1,179 1,080 422
Changes in operating assets and liabilities:
Decrease (increase) in prepaid
expenses and other current assets 267 (721) 171
Increase in accounts payable 1,044 97 163
Increase in accrued expenses 801 21 3
--------- --------- ---------
Net cash provided by (used for) operating
activities (7,488) (9,920) 4,321
--------- --------- ---------
Investing activities:
Proceeds from sales of marketable securities 117,669 63,871 41,851
Purchases of marketable securities (147,440) (116,793) (59,762)
Purchase of property and equipment (2,936) (779) (558)
Decrease (increase) in other assets (74) (86) 59
--------- --------- ---------
Net cash used in investing activities (32,781) (53,787) (18,410)
--------- --------- ---------
Financing activities:
Issuance of common stock, net of expenses 53,777 39,060 --
Issuance of convertible preferred stock -- 23,521 24,119
Repayments of bank debt -- -- (1,097)
--------- --------- ---------
Net cash provided by financing activities 53,777 62,581 23,022
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 13,508 (1,126) 8,933
Cash and cash equivalents at January 1 10,414 11,540 2,607
--------- --------- ---------
Cash and cash equivalents at December 31 $ 23,922 $ 10,414 $ 11,540
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Basis of Presentation
Transkaryotic Therapies, Inc. ("TKT" or "the Company") is a biopharmaceutical
company engaged in the development and commercialization of products based on
its three proprietary product development platforms: Gene Activation, gene
therapy and Niche Proteins.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All intercompany activity has been eliminated.
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 U.S.
government and agency obligations. 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 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
("SFAS") No. 123, "Accounting for Stock-Based Compensation", and will continue
to account for its stock options plans in accordance with the provisions of APB
25.
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<PAGE>
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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
In 1997, the Financial Accounting Standards Board ("the FASB") issued SFAS No.
128, "Earnings per Share". SFAS No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Pursuant to the previous requirements of the Securities and
Exchange Commission ("SEC"), common and common equivalent shares issued by the
Company during the twelve month period prior to its initial public offering of
common stock in October 1996 had been included in the calculations as if they
were outstanding for all periods prior to the offering whether or not they were
anti-dilutive. In February 1998, the SEC issued Staff Accounting Bulletin 98
which, among other things, conformed prior SEC requirements to SFAS No. 128 and
eliminated inclusion of such shares in the computation of earnings (loss) per
share. All earnings (loss) per share amounts for all periods have been presented
and, where appropriate, restated to conform to SFAS No. 128 and SEC
requirements.
Net loss per share for 1997 is computed using the weighted average number of
common shares outstanding. Pro forma net income (loss) per share for 1996 and
1995 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. At December 31, 1995, the difference between basic and fully diluted
shares used in the computation of earnings per share is the approximately
490,000 weighted average common equivalent shares resulting from outstanding
common stock options and warrants. Historical earnings (loss) per share for 1996
and 1995 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 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which
is effective for all financial statements beginning after December 15, 1997. At
that time, the Company will be required to report and display comprehensive
income and its components in a full set of general purpose financial statements
and to reclassify earlier periods provided for comparative purposes.
Also in 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is required to be adopted on December
31, 1998. At that time, the Company will be required to change the way it
reports and discloses certain information about products and services,
geographic areas and major customers.
Adoption of these standards are not expected to have a material impact on the
Company's financial position or results of operations.
-40-
<PAGE>
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Marketable Securities
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
(in thousands) Gross Gross
Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
December 31, 1997 $124,795 $ 64 $ (28) $124,831
======== ======== ======== ========
December 31, 1996 $ 82,808 $ 39 $ (23) $ 82,824
======== ======== ======== ========
</TABLE>
These securities are classified in the accompanying balance sheet as follows:
<TABLE>
<CAPTION>
(in thousands) December 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash equivalents $ 19,199 $ 6,983
Marketable securities 105,632 75,841
-------- --------
$124,831 $ 82,824
======== ========
</TABLE>
Maturities of marketable securities held at December 31, 1997 are as follows:
<TABLE>
<S> <C>
(in thousands)
Less than one year $ 58,730
One through three years 66,101
----------
$ 124,831
==========
</TABLE>
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
(in thousands) December 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Leasehold improvements $ 6,083 $ 5,072
Laboratory equipment 4,056 2,844
Office furniture and equipment 1,877 1,172
------- -------
12,016 9,088
Less accumulated depreciation and amortization 7,511 5,851
------- -------
$ 4,505 $ 3,237
======= =======
</TABLE>
Depreciation and amortization expense on property and equipment was $1,668,000,
$1,540,000 and $1,463,000 in 1997, 1996 and 1995, respectively.
-41-
<PAGE>
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
(in thousands) December 31,
-------------------
1997 1996
------ ------
<S> <C> <C>
Salaries and benefits $ 556 $ 342
Professional fees 712 182
Other 275 128
------ ------
$1,543 $ 652
====== ======
</TABLE>
6. Stockholders' Equity
Common Stock
In July 1997, the Company completed a directed public offering of 1,700,000
shares of its common stock resulting in net proceeds to the Company of
approximately $52,900,000.
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, 1997, approximately 2,423,000 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.
Stock option activity under the plans is as follows:
<TABLE>
<CAPTION>
(in thousands, except share prices) 1997 1996 1995
-------------------- --------------------- --------------------
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 1 906 $ 0.36 136 $ 0.01 163 $ 0.01
Granted 247 21.51 793 0.42 14 0.01
Exercised (77) 2.35 -- 0.01 (8) 0.01
Canceled (100) 0.56 (23) 0.01 (33) 0.01
-------- -------- --------
Outstanding at December 31 976 5.76 906 0.36 136 0.01
======== ======== ======== ======== ======== ========
Options exercisable at December 31 137 $ 0.67 51 $ 0.01 28 $ 0.01
======== ======== ======== ======== ======== ========
Weighted average fair value per share of
options granted during the year $ 24.24 $ 6.59 $ 6.22
======== ======== ========
</TABLE>
-42-
<PAGE>
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The exercise price and life information in regard to significant option groups
outstanding at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
(in thousands, except share Exercisable
prices) ----------------------------
Weighted
Average
Number of Options Remaining Weighted Average Number of Weighted Average
Range of Exercise Prices Outstanding Contractual Life (Yrs.) Exercise Price Options Exercise Price
- ------------------------ -------------------- ----------------------- ----------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$0.01 745 7.93 $ .01 131 $ 0.01
15.00 15 8.84 15.00 5 15.00
16.75 - 24.25 162 9.26 20.78 1 21.00
27.13 - 35.00 21 9.69 32.70 -- --
38.50 - 42.50 33 9.90 38.72 -- --
-------------------- ---------
976 137
==================== =========
</TABLE>
Pursuant to the requirements of SFAS 123, the following are the pro forma net
income (loss) and net income (loss) per share for 1997, 1996 and 1995, as if the
compensation cost for the options had been determined based on the fair value at
the grant date for grants in 1997, 1996 and 1995, consistent with the provisions
of SFAS 123:
<TABLE>
<CAPTION>
(in thousands, except per share 1997 1996 1995
amounts) ----------------------------- -------------------------- ---------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------ ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (12,871) $ (13,729) $ (11,972) $ (12,783) $ 2,074 $ 2,080
Basic net income (loss) per share $ (.74) $ (.79) $ (0.98) $ (1.04) $ 0.19 $ 0.19
</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:
1997 1996 1995
------------- ------------- -------------
Expected life (years) 2.5-7.5 2.5-7.5 2.5-7.5
Interest rate 6.5% 5.79-6.30% 5.90-7.85%
Volatility .65 0.65 N/A
Forfeiture rate 10% 10.0% 10.0%
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 1997, 1996 and 1995 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 periods presented include only three years,
two years and one year, respectively, of option grants.
-43-
<PAGE>
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Stock Warrants
In conjunction with various debt and equity financings, the Company issued
warrants to purchase shares of common stock at prices ranging from $6.22 to
$7.78 per share. The warrants expire at various times through November 1998. At
December 31, 1997 and 1996, there were 168,000 and 817,000 warrants outstanding,
respectively. The Company has reserved shares of common stock for issuance upon
the exercise of these stock warrants.
7. 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. As of December 31, 1997, the Company has
received $53,900,000 from the sale of stock, nonrefundable licensing fees,
milestone payments related to the successful completion of certain development
milestones and contract research fundings. As part of these agreements, HMRI may
make additional payments of up to $71,100,000 upon achievement of certain
development milestones and pay royalties based on net sales of the two products.
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.
8. Employee Retirement Plan and Other Benefits
The Company maintains a qualified defined contribution plan covering
substantially all employees of the Company. The Company matches 50% of employee
contributions, up to 7% of compensation (5% prior to July 1997). Employer
contributions vest ratably over five years. The related expense was $159,000,
$91,000 and $83,000 in 1997, 1996 and 1995, respectively.
9. Income Taxes
Except for 1995, the Company has incurred operating losses. Since the Company
expects that it will continue to incur operating losses, 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, 1997, the Company had net operating loss carryforwards of
approximately $43,000,000 and research and development tax credits of
$3,007,000, which expire through 2012. During 1995, the Company utilized
approximately $1,600,000 of tax benefits from net operating loss carryforwards
to offset all but $85,000 of the current year tax provision. The future
utilization of these carryforwards is subject to an annual limitation when a
cumulative change in stock ownership of more than 50% occurs over a three year
period. Because of this limitation, it is possible that taxable income in future
years, which would otherwise be offset by net operating losses, will not be
offset and, therefore, will be subject to tax.
-44-
<PAGE>
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
(in thousands) December 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards$ $ 18,370 13,800
Research and development tax credits 3,050 2,635
Depreciation 1,350 1,068
Other 186 186
-------- --------
Total deferred tax assets 22,956 17,689
Valuation allowance (22,956) (17,689)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
</TABLE>
10. 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 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 November 1997, TKT and HMRI filed a Motion for Summary
Judgment on the ground that all of TKT and HMRI's activities to date have been
reasonably related to the development and submission of data to the FDA, and,
under the Waxman-Hatch Act, cannot constitute acts of patent infringement. On
the same date, Amgen filed a Motion for Summary Judgment of Infringement. TKT
and HMRI have opposed that motion, stating that there has been no infringement.
Pursuant to the Amended and Restated License Agreement, dated March 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, if any, 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.
-45-
<PAGE>
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company leases its facilities under operating leases which expire through
2002, subject to renewal provisions. Future annual minimum payments under all
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year ended
--------------
(in thousands)
<S> <C>
1998 $ 1,386
1999 355
2000 133
2001 122
2002 20
--------
$ 2,016
========
</TABLE>
Rent expense was $1,233,000, $1,068,000 and $992,000 in 1997, 1996 and 1995,
respectively.
-46-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the
caption "Executive Officers of the Company" in PART I hereof, and the remainder
is contained in the Company's Proxy Statement for the Company's Annual Meeting
of Stockholders to be held on May 19, 1998 (the "Proxy Statement") under the
caption "Proposal 1 - Election of Directors" and is incorporated herein by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the caption
"Executive Compensation" in the Company's Proxy Statement and is incorporated
herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is contained in the Company's Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Company's Proxy
Statement under the caption "Certain Transactions" and is incorporated herein by
this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Form 10-K:
1. Financial Statements. The following documents are filed as part
of this Annual Report on Form 10-K:
Report on Independent Auditors
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Statements of Stockholders' Equity for the period January 1,
1995 through December 31, 1997
-47-
<PAGE>
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Financial Statements
2. Financial Statement Schedules. The Company is not filing any
financial statement schedules as part of this Annual Report on
Form 10-K because they are not applicable or the required
information is included in the financial statements or notes
thereto.
3. Exhibits. The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual
Report on Form 10-K, and such Exhibit Index is incorporated
herein by reference.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
-48-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRANSKARYOTIC THERAPIES, INC.
By: /s/ Richard F Selden
---------------------------------
Richard F Selden
President and Chief
Executive Officer
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard F Selden President, Chief Executive Officer and March 30, 1998
- ------------------------------- Director (Principal Executive Officer)
Richard F Selden
/s/ Daniel E. Geffken Vice President, Finance and Chief March 30, 1998
- ------------------------------- Financial Officer (Principal Accounting
Daniel E. Geffken and Financial Officer)
/s/ Rodman W. Moorhead, III Director March 30, 1998
- -------------------------------
Rodman W. Moorhead, III
/s/ William R. Miller Director March 30, 1998
- -------------------------------
William R. Miller
/s/ James E. Thomas Director March 30, 1998
- -------------------------------
James E. Thomas
/s/ Peter Wirth Director March 30, 1998
- -------------------------------
Peter Wirth
</TABLE>
-49-
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (1)
3.2 Amended and Restated By-Laws of the Registrant, as amended
10.1 Stock Purchase Agreement, dated July 1988, by and between
Warburg, Pincus Capital Company, L.P. ("Warburg") and the
Registrant (2)
10.2 Amended and Restated Registration Rights Agreement, dated
November 3, 1993 and amended on May 13, 1994, March 1, 1995,
October 26, 1995, July 10, 1996 and August 7, 1996, by and
among the Registrant and certain holders of the Registrant's
Preferred Stock named therein (2)
10.3 Lease Agreement, dated January 1, 1994, by and between the
Trust under the Will of Harry F. Stimpson for office space at
195 Albany Street, Cambridge, Massachusetts (2)
10.4 Sublease Agreement, dated April 7, 1992, by and between the
Massachusetts Institute of Technology and the Registrant, for
office space located at 185 Albany Street, Cambridge,
Massachusetts (2)
10.5 1993 Non-Employee Directors' Stock Option Plan (2) (3)
10.6 1993 Long-Term Incentive Plan (2)
10.7 Form of Letter Agreement re: Confidentiality, Inventions and
Non-Disclosure (2)
10.8 Form of Letter Agreement re: Restricted Stock (2)
10.9 Form of Scientific Advisor Agreement (2)
10.10 Amended and Restated Promissory Note, dated June 16, 1993,
issued by the Registrant to Dr. Richard F. Selden, in the
original principal amount of $125,000 (2)
10.11 Amended and Restated Promissory Note, dated June 16, 1993,
issued by the Registrant to Dr. Douglas A. Treco, in the
original principal amount of $125,000 (2)
10.12 Amended and Restated Promissory Note, dated April 21, 1995,
issued by the Registrant to Dr. Christoph M. Adams, in the
original principal amount of $15,000 (2)
10.13 Amended and Restated Promissory Note, dated May 5, 1995,
issued by the Registrant to Dr. Christoph M. Adams, in the
original principal amount of $20,000 (2)
10.14 Employment Agreement, dated June 19, 1991, by and between Dr.
Richard F Selden and the Registrant (2) (3)
-50-
<PAGE>
10.15 Pledge Agreement, dated May 14, 1991, by and between Dr.
Richard F Selden and the Registrant (2)
10.16 Employment Agreement, dated July 26, 1991, by and between Dr.
Douglas A. Treco and the Registrant (2) (3)
10.17 Pledge Agreement, dated August 15, 1991, by and between Dr.
Douglas A. Treco and the Registrant (2)
10.18 Employment Agreement, dated November 20, 1993, by and between
Dr. Christoph M. Adams and the Registrant (2) (3)
10.19 Pledge Agreement, dated April 21, 1995, by and between Dr.
Christoph M. Adams and the Registrant (2)
10.20 Agreement, dated September 1, 1991, by and between Mr. William
R. Miller and the Registrant (2)
10.21 Agreement, dated July 30, 1993, by and between Warburg and the
Registrant (2)
10.22 Common Stock Purchase Warrant (2)
10.23 Collaboration and License Agreement, dated July 22, 1993 and
amended on May 30, 1996 (2) (4)
10.24 Amended and Restated License Agreement, dated March 1, 1995,
by and between Hoechst Marion Roussel, Inc. ("HMRI") and the
Registrant (2) (4)
10.25 License Agreement, dated March 1, 1995, by and between HMRI
and the Registrant (2) (4)
10.26 Agreement to Nominate, dated September 23, 1996, by and
between Warburg and the Registrant (2) (4)
10.27 Fifth Amendment to Registration Rights Agreement dated October
1, 1996 by and among the Registrant and certain holders of the
Registrant's Preferred Stock named therein (2)
10.28 Employment Agreement dated July 1, 1996 by and between Kurt C.
Gunter and the Registrant (3) (5)
10.29 Consulting Agreement dated November 1, 1996 by and between
Peter Wirth and the Registrant (3) (5)
10.30 Employment Agreement dated February 20, 1997 by and between
Daniel E. Geffken and the Registrant (6)
10.31 Form of Common Stock Purchase Agreement by and between each
Purchaser of shares in the Registrant's directed public
offering in August 1997 and the Registrant (6)
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
-51-
<PAGE>
27.1 Financial Data Schedule for the year ended December 31,
1997.
27.2 Restated Financial Data Schedules for the year ended
December, 31, 1996, the nine months ended September 30,
1996, the six months ended June 30, 1996 and the year
ended December 31, 1995.
- -------------------------------------
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-10845) and incorporated herein by reference.
(3) Management contract or compensation plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(4) Confidential treatment granted as to certain portions.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-31957) and incorporated herein by reference.
-52-
<PAGE>
Exhibit 3.2
TRANSKARYOTIC THERAPIES, INC.
AMENDED AND RESTATED BY-LAWS
ARTICLE I
OFFICERS
Transkaryotic Therapies, Inc. (the "Corporation") shall maintain a
registered office in the State of Delaware. The Corporation may also have other
offices at such other places either within or without the State of Delaware, as
the Board of Directors may from time to time designate or the business of the
Corporation may require.
ARTICLE II
STOCKHOLDERS
Section 1. Annual Meeting: The annual meeting of Stockholders for the
election of Directors and the transaction of any other business as may properly
come before such meeting shall be held on the first Monday in June of each year,
or as soon after such date as may be practicable, in such City and State and at
such time and place as may be designated by the Board of Directors, and set
forth in the notice of such meeting. If said day be a legal holiday, said
meeting shall be held on the next succeeding business day. At the annual meeting
any business may be transacted and any corporate action may be taken, whether
stated in the notice of meeting or not, except as otherwise expressly provided
by statute or the Certificate of Incorporation.
Section 2. Special Meetings: Special meetings of the Stockholders for any
purpose may be called at any time by the Board of Directors, the Chairman of the
Board, or if no Chairman has been elected, by the President and Chief Executive
Officer, and shall be called by the Chairman of the Board or, if none, by the
President and Chief Executive Officer at the request of the holders of a
majority of the outstanding shares of capital stock entitled to vote. Special
meetings shall be held at such place or places within or without the State of
Delaware as shall from time to time be designated by the Board of Directors and
stated in the notice of such meeting. At a special meeting no business shall be
transacted and no corporate action shall be taken other than that stated in the
notice of the meeting.
Section 3. Notice of Meetings: Written notice of the date, time and place
of any Stockholders' meeting, whether annual or special, shall be given to each
Stockholder entitled to vote thereat, by mailing the same to him at his address
as the same appears upon the records or the Corporation not less than ten (10)
nor more than sixty (60) days prior to the date of such meeting. Notice of any
adjourned meeting need not be given other than by announcement at the meeting so
adjourned, unless otherwise ordered in connection with such adjournment. Such
further notice, if any, shall be given as may be required by law.
Section 4. Waiver of Notice: Notice of meeting need not be given to any
Stockholder who submits a signed waiver of notice, in person or by proxy,
whether before or after the meeting. The attendance of any Stockholder at a
meeting, in person or by proxy, without protesting prior to the
<PAGE>
conclusion of the meeting the lack of notice of such meeting, shall constitute a
waiver of notice by him.
Section 5. Quorum: Any number of Stockholders, together holding at least a
majority of the capital stock of the Corporation issued and outstanding and
entitled to vote, who shall be present in person or by proxy at any meeting duly
called, shall constitute a quorum for all purposes except as may otherwise be
provided by law.
Section 6. Adjournment of Meetings: If less than a quorum shall attend at
the time for which a meeting shall have been called, the meeting may be
adjourned from time to time by a majority vote of the Stockholders present or by
proxy and entitled to vote thereat, without notice other than by announcement at
the meeting until a quorum shall attend. Any meeting at which a quorum is
present may also be adjourned in like manner and for such time or upon such call
as may be determined by a majority vote of the Stockholders present in person or
by proxy and entitled to vote thereat. At any adjourned meeting at which a
quorum shall be present, any business may be transacted and any corporate action
may be taken which might have been transacted at the meeting as originally
called.
Section 7. Voting: Each Stockholder entitled to vote at any meeting may
vote either in person or by proxy, duly appointed by instrument in writing
subscribed by such Stockholder and bearing a date not more than eleven months
prior to said meeting, unless said proxy provides for a longer period. The
holders of Common Stock shall be entitled to one vote in respect of each share
held on all matters submitted to a vote of shareholders. When a quorum is
present at any meeting, the holders of a majority of the stock present or
represented and voting on a matter (or if there are two or more classes of stock
entitled to vote as separate classes, then in the case of each such class, the
holders of a majority of the stock of that class present or represented and
voting on a matter) shall decide any matter to be voted upon by the Stockholders
at such meeting, except when a different vote is required by express provision
of law, the Certificate of Incorporation or these By-laws. Any election by
Stockholders shall be determined by a plurality of the votes cast by the
Stockholders entitled to vote at the election.
Section 8. Nomination of Directors: Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
Directors. Nomination for election to the Board of Directors of the Corporation
at a meeting of Stockholders may be made by the Board of Directors or by any
Stockholder of the Corporation entitled to vote for the election of Directors at
such meeting who complies with the notice procedures set forth in this Section
8. Such nominations, other than those made by or on behalf of the Board of
Directors, shall be made by notice in writing delivered to mailed by first class
United States mail, postage prepaid, to the Secretary, and received not less
than 60 days nor more than 90 days prior to such meeting; provided, however,
that if less than 70 days' notice or prior public disclosure of the date of the
meeting is given to Stockholders, such nomination shall have been mailed or
delivered to the Secretary not later than the close of business of the 10th day
following the date on which the notice of the meeting was mailed or such public
disclosure was made, whichever occurs first. Such notice shall set forth (a) as
to each proposed nominee (i) the name, age, business address and, if known,
residence address of each such nominee, (ii) the principal occupation or
employment of each such nominee, (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee, and (iv) any
other information concerning the nominee that must be disclosed as to nominees
in proxy solicitations pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such person's written consent to be named as
a nominee and to serve as a Director if elected); and (b) as to the Stockholder
giving the notice (i) the name and address, as they appear on the Corporation's
books, of such Stockholder and (ii) the class and number of shares of the
Corporation which are beneficially owned by such Stockholder. The Corporation
may require any proposed nominee to furnish such other information as may
reasonably
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be required by the Corporation to determine the eligibility of such proposed
nominee to serve as a Director of the Corporation.
The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
Section 9. Notice of Business at Annual Meetings: At an annual meeting of
the Stockholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (c) otherwise properly brought before an annual meeting
by a Stockholder. For business to be properly brought before an annual meeting
by a Stockholder, if such business relates to the election of Directors of the
Corporation, the procedures in Section 8 must be complied with. If such business
relates to any other matter, the Stockholder must have given timely notice
thereof in writing to the Secretary. To be timely, a Stockholder's notice must
be delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to Stockholders,
notice by the Stockholder to be timely must be so received not later than the
close of business on the 10th day following the date on which such notice of the
date of the meeting was mailed or such public disclosure was made, whichever
occurs first. A Stockholder's notice to the Secretary shall set forth as to each
matter the Stockholder proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's books, of the Stockholder proposing
such business, (c) the class and number of shares of the Corporation which are
beneficially owned by the Stockholder, and (d) any material interest of the
Stockholder in such business. Notwithstanding anything in these By-laws to the
contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this Section 9 and except that any
Stockholder proposal which complies with Rule 14a-8 of the proxy rules (or any
successor provision) promulgated under the Securities Exchange Act of 1934, as
amended, and is to be included in the Corporation's proxy statement for an
annual meeting of Stockholders shall be deemed to comply with the requirements
of this Section 9.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 9, and if he should so
determine, the chairman shall so declare to the meeting that any such business
not properly brought before the meeting shall not be transacted.
Section 10. Action Without Meeting: Unless otherwise provided in the
Certificate of Incorporation, any action required or permitted to be taken by
Stockholders for or in connection with any corporate action may be taken without
a meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and shall be delivered to the
Corporation by delivery to its registered office in Delaware by hand or
certified or registered mail, return receipt requested, to its principal place
of business or to an officer or agent of the Corporation having custody of the
book in which proceedings of meetings of stockholders are recorded. Each such
written consent shall bear the date of signature of each Stockholder who signs
the consent. No written consent shall be effective to take the corporate action
referred to therein unless written consents signed by a number of Stockholders
sufficient to take such
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action are delivered to the Corporation in the manner specified in this
paragraph within sixty days of the earliest dated consent so delivered.
If action is taken by consent of Stockholders and in accordance with the
foregoing, there shall be filed with the records of the meetings of stockholders
the writing or writings comprising such consent.
If action is taken by less than unanimous consent of Stockholders, prompt
notice of the taking of such action without a meeting shall be given to those
who have not consented in writing and a certificate signed and attested to by
the Secretary of the Corporation that such notice was given shall be filed with
the records of the meetings of stockholders.
In the event that the action which is consented to is such as would have
required the filing of a certificate under any provision of the General
Corporation Law of the State of Delaware, if such action had been voted upon by
the Stockholders at a meeting thereof, the certificate filed under such
provision shall state, in lieu of any statement required by such provision
concerning a vote of Stockholders, that written consent has been given under
Section 228 of said General Corporation Law and that written notice has been
given as provided in such Section 228.
Notwithstanding the foregoing, if at any time the Corporation shall have a
class of stock registered pursuant to the provisions of the Securities Exchange
Act of 1934, as amended, for so long as such class is registered, any action by
the Stockholders of such class must be taken at an annual or special meeting of
Stockholders and may not be taken by written consent.
Section 11. Organization. The Chairman of the Board, or in his absence the
Vice Chairman of the Board designated by the Chairman of the Board, or the
President, in the order named, shall call meetings of the Stockholder to order,
and shall act as chairman of such meeting; provided, however, that the Board of
Directors may appoint any Stockholder to act as chairman of any meeting in the
absence of the Chairman of the Board. The Secretary of the Corporation shall act
as secretary at all meetings of the Stockholders; but in the absence of the
Secretary at any meeting of the Stockholders, the presiding officer may appoint
any person to act as secretary of the meeting.
ARTICLE III
DIRECTORS
Section 1. Number and Qualifications: The Board of Directors shall consist
of not less than three (3) nor more than seven (7) Directors. The Directors need
not be Stockholders.
Section 2. Responsibilities: The general management of the affairs of the
Corporation shall be vested in the Board of Directors, which may delegate to
Officers, employees and to committees of Directors such powers and duties as it
may from time to time see fit, subject to the limitations hereinafter set forth,
and except as may otherwise be provided by law.
Section 3. Election and Term of Office: The Directors shall be elected by
the Stockholders at the annual meeting of Stockholders. If the election of
Directors shall not be held on the day designated by the By-laws, the Directors
shall cause the same to be held as soon thereafter as may be convenient. The
Directors chosen at any annual meeting shall hold office except as hereinafter
provided, until the next annual election and until the election and
qualification of their successors.
Section 4. Removal and Resignation of Directors: Any Director may be
removed from the Board of Directors, only for cause, by the holders of
two-thirds of the shares of outstanding stock
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entitled to vote at any special meeting of the Stockholders called for that
purpose, and the office of such Director shall forthwith become vacant. Any
Director may resign at any time. Such resignation shall take effect at the time
specified therein, and if no time be specified at the time of its receipt by the
Chairman of the Board or if no Chairman has been elected, by the President and
Chief Executive Officer, or by the Secretary. The acceptance of a resignation
shall not be necessary to make it effective, unless so specified therein.
Section 5. Filling of Vacancies: Any vacancy among the Directors,
occurring from any cause whatsoever, may be filled by a majority of the
remaining Directors, though less than a quorum, provided, however, that the
Stockholders removing any Director may at the same meeting fill the vacancy
caused by such removal, and provided further, that if the Directors fail to fill
any such vacancy, the Stockholders may at any special meeting called for that
purpose fill such vacancy. In case of any increase in the number of Directors,
the additional Directors may be elected by the Directors in office prior to such
increase. Any person elected to fill a vacancy shall hold office, subject to the
right of removal as hereinbefore provided, until the next annual election and
until the election and qualification of his successor.
Section 6. Regular Meetings: The Board of Directors shall hold an annual
meeting for the purpose of organization and the transaction of any business
immediately after the annual meeting of the Stockholders, provided a quorum is
present. Other regular meetings may be held at such times as may be determined
from time to time by resolution of the Board of Directors.
Section 7. Special Meetings: Special meetings of the Board of Directors
may be called at any time by the Chairman of the Board of Directors, if any, or
by the President and Chief Executive Officer.
Section 8. Notice and Place of Meetings: Regular meetings of the Board of
Directors may be held without notice at such time and place as shall be
designated by resolution of the Board of Directors. Notice shall be required,
however, for special meetings. Notice of any special meeting shall be
sufficiently given if mailed to each Director at his residence or usual place of
business at least two (2) days before the day on which the meeting is to be
held, or if sent to him at such place by telegraph or cable, or delivered
personally or by telephone not later than 24 hours prior to the time at which
the meeting is to be held. No notice of the annual meeting shall be required if
held immediately after the annual meeting or the Stockholders and if a quorum is
present. Notice of a meeting need not be given to any Director who submits a
signed waiver of notice before or after the meeting, nor to any Director who
attends the meeting without protesting the lack of notice prior thereto or at
its commencement.
Section 9. Business Transacted at Meetings: Any business may be transacted
and any corporate action may be taken at any regular or special meeting of the
Board of Directors at which a quorum shall be present, whether such business or
proposed action be stated in the notice of such meeting or not, unless special
notice of such business or proposed action shall be required by law.
Section 10. Quorum: A majority of the entire Board of Directors shall be
necessary to constitute a quorum for the transaction of business, and the acts
of a majority of the Directors present at a meeting at which a quorum is present
shall be the acts of the Board of Directors, unless otherwise provided by law,
the Certificate of Incorporation or these By-laws. If a quorum is not present at
a meeting of the Board of Directors, a majority of the Directors present may
adjourn the meeting to such time and place as they may determine without notice
other than announcement at the meeting until enough Directors to constitute a
quorum shall attend. When a quorum is once present to organize a meeting, it is
not broken by the subsequent withdrawal of any Directors.
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Section 11. Action Without a Meeting: Any action required or permitted to
be taken by the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board or the committee consent in writing to the
adoption of a resolution authorizing the action. The resolution and the written
consents thereto by the members of the Board or committee shall be filed with
the minutes of the proceedings of the Board or committee.
Section 12. Participation by Telephone: Any one or more members of the
Board or any committee thereof may participate in a meeting of the Board or such
committee by means of a conference telephone or similar communications equipment
allowing all persons participating in the meeting to hear each other at the same
time. Participation by such means shall constitute presence in person at a
meeting.
Section 13. Compensation: The Board of Directors may establish by
resolution reasonable compensation of all Directors for services to the
Corporation as Directors, including a fixed fee, if any, incurred in attending
each meeting. Nothing herein contained shall preclude any Director from serving
the Corporation in any other capacity, as an Officer, agent or otherwise, and
receiving compensation therefor.
ARTICLE IV
COMMITTEES
Section 1. Executive Committee: The Board of Directors, by resolution
passed by a majority of the entire Board, may designate three (3) or more
Directors to constitute an Executive Committee to hold office at the pleasure of
the Board, which Committee shall, during the intervals between meetings of the
Board of Directors, have and exercise all of the powers of the Board of
Directors in the management of the business and affairs of the Corporation,
subject only to such restrictions or limitations as the Board of Directors may
from time to time specify, or as limited by the Delaware General Corporation
Law, and shall have power to authorize the seal of the Corporation to be affixed
to all instruments which may require it. Any member of the Executive Committee
may be removed at any time, with or without cause, by a resolution of a majority
of the entire Board of Directors. Any person ceasing to be a Director shall ipso
facto cease to be a member of the Executive Committee. Any vacancy in the
Executive Committee occurring from any cause whatsoever may be filled from among
the Directors by a resolution of a majority of the entire Board of Directors.
Section 2. Other Committees: Other committees whose members are to be
Directors, may be appointed by the Board of Directors, which committees shall
hold office for such time and have such powers and perform such duties as may
from time to time be assigned to them by the Board of Directors or the committee
appointing them. Any member of such a committee may be removed at any time, with
or without cause, by the Board of Directors or the committee appointing such
committee. Any vacancy in a committee occurring from any cause whatsoever may be
filled by the Board of Directors or the committee appointing such committee.
Section 3. Resignation: Any member of a committee may resign at any time.
Such resignation shall be made in writing and shall take effect at the time
specified therein, or, if no time be specified, at the time of its receipt by
the Chairman of the Board, if any, the President and Chief Executive Officer or
the Secretary. The acceptance of a resignation shall not be necessary to make it
effective unless so specified therein.
Section 4. Quorum: A majority of the members of a committee shall
constitute a quorum. The act of a majority of the members of a committee present
at any meeting at which a quorum is present
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shall be the act of such committee. The members of a committee shall act only as
a committee, and the individual members thereof shall have no powers as such.
Section 5. Record of Proceedings: Each committee shall keep a record of
its acts and proceedings, and shall report the same to the Board of Directors
when and as required by the Board of Directors.
Section 6. Organization, Meetings, Notices: A committee may hold its
meetings at the principal office of the Corporation, or at any other place upon
which a majority of the committee may at any time agree. Each committee may make
such rules as it may deem expedient for the regulation and carrying on of its
meetings and proceedings, unless otherwise ordered by the Executive Committees
any notice of a meeting of such committee may be given by the Secretary or by
the chairman of the committee and shall be sufficiently given if mailed to each
member at his residence or usual place of business at least five (5) days before
the day on which the meeting is to be held, or if sent to him at such place by
telecopy, telegraph or cable, or delivered personally or by telephone not later
than 24 hours prior to the time at which the meeting is to be held.
Section 7. Compensation: The members of any committee shall be entitled to
such compensation as may be established by resolution of the Board of Directors.
ARTICLE V
OFFICERS
Section l. Number: The Officers of the Corporation shall be a President
and Chief Executive Officer, a Secretary and a Treasurer, and such Vice
Presidents and other Officers as may be appointed in accordance with the
provisions of Section 3 of this Article V. The Board of Directors, in its
discretion, may also elect a Chairman of the Board of Directors.
Section 2. Election, Term of Office and Qualifications: The Officers,
except as provided in Section 3 of this Article V, shall be chosen annually by
the Board of Directors. Each such Officer shall, except as herein otherwise
provided, hold office until the selection and qualification of his successor.
Any two or more offices may be held by the same person, except the offices of
President and Chief Executive Officer and Secretary.
Section 3. Other Officers: Other Officers, including, without limitation,
one or more Vice Presidents, Assistant Secretaries and Assistant Treasurers, may
from time to time be appointed by the Board of Directors, which other Officers
shall have such powers and perform such duties as may be assigned to them by the
Board of Directors or the Officer or committee appointing them. All such
Officers shall be corporate officers of the Corporation with the power to hind
the Corporation by acts within the scope or their authority.
Section 4. Removal of Officers: Any Officer of the Corporation may be
removed from office, with or without cause, by a vote of a majority of the Board
of Directors.
Section 5. Resignation: Any Officer of the Corporation may resign at any
time. Such resignation shall be in writing and shall take effect at the time
specified therein, and if no time be specified, at the time of its receipt by
the Chairman of the Board, if any, the President and Chief Executive Officer or
the Secretary. The acceptance of a resignation shall not be necessary in order
to make it effective, unless so specified therein.
Section 6. Filling of Vacancies: A vacancy in any office shall be filled
by the Board of Directors.
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Section 7. Compensation: The compensation of the Officers shall be fixed
by the Board of Directors, or by any committee upon whom such power may be
conferred by the Board of Directors.
Section 8. Chairman of the Board of Directors: The Chairman of the Board
of Directors, if one is elected, shall be a Director and shall preside at all
meetings of the Board of Directors and of the Stockholders at which he shall be
present. He shall have power to call special meetings of the Stockholders or of
the Board of Directors or of the Executive Committee at any time and shall have
such power and perform such other duties as may from time to time be assigned to
him by the Board of Directors.
Section 9. President and Chief Executive Officer: The President and Chief
Executive Officer shall have responsibility for the general direction of the
business affairs and property of the Corporation, and of its several Officers,
and shall have and exercise all such powers and discharge such duties as usually
pertain to the office of President and Chief Executive Officer. He shall have
responsibility for the day-to-day affairs of the Corporation, subject to the
control of the Board of Directors. He shall perform such duties as may be
assigned to him from time to time by the Board of Directors and shall, in the
absence of the Chairman of the Board, perform and carry out the functions of the
Chairman of the Board.
Section 10. Secretary: The Secretary shall attend all meetings of the
Board of Directors and of the Stockholders and record all votes and the minutes
of all proceedings in a book to be kept for that purpose, and shall perform like
duties for any Committee appointed by the Board. He shall give or cause to be
given notice of all meetings of Stockholders and special meetings of the Board
of Directors and shall perform such other duties as may be prescribed by the
Board of Directors. He shall keep in safe custody the seal of the Corporation
and affix it to any instrument when so authorized by the Board of Directors.
Section 11. Treasurer: The Treasurer shall have custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositaries as may be designated by the Board of Directors. He shall
disburse the funds of the Corporation as may he ordered by the Board, taking
proper vouchers for such disbursements, and shall render to the President and
Chief Executive Officer and Directors at the regular meetings of the Board, or
whenever they may require, an account of all his transactions as Treasurer and
of the financial condition of the Corporation. He may be required to give bond
for the faithful discharge of his duties.
ARTICLE VI
CAPITAL STOCK
Section 1. Issue of Certificates of Stock: Certificates of capital stock
shall be in such form as shall be approved by the Board of Directors. They shall
be numbered in the order of their issue, and shall be signed by the Chairman of
the Board of Directors, the President and Chief Executive Officer or any Vice
President, and by the Treasurer or any Assistant Treasurer or the Secretary or
any Assistant Secretary, and the seal of the Corporation or a facsimile thereof
shall be impressed, affixed or reproduced thereon. In case any Officer or
Officers who shall have signed any such certificate or certificates shall cease
to be such Officer or Officers of the Corporation, whether because of death,
resignation or otherwise, before such certificate or certificates shall have
been delivered by the Corporation, such certificate or certificates may
nevertheless be adopted by the Corporation and be issued and delivered as though
the person or persons who signed such certificate or certificates have not
ceased to be such Officer or Officers of the Corporation.
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Section 2. Registration and Transfer of Shares: The name of each person
owning a share of the capital stock or the Corporation shall be entered on the
books of the Corporation together with the number of shares held by him, the
numbers of the certificates covering such shares and the dates of issue of such
certificates. The shares of stock of the Corporation shall be transferable on
the books of the Corporation by the holders thereof in person, or by their duly
authorized attorneys or legal representatives, on surrender and cancellation of
certificates for a like number of shares, accompanied by an assignment of power
of transfer endorsed thereon or attached thereto, duly executed, and with such
proof of the authenticity of the signature as the Corporation or its agents may
reasonably require. A record shall be made of each transfer. The Board of
Directors may make other and further rules and regulations concerning the
transfer and registration of certificates for stock.
Section 3. Lost, Destroyed and Mutilated Certificates: The holder of any
stock of the Corporation shall immediately notify the Corporation of any loss,
theft, destruction or mutilation of the Certificates therefor. The Corporation
may issue a new certificate of stock in the place of any certificate theretofore
issued by it and alleged to have been lost, stolen or destroyed. The Board of
Directors may, in its discretion, require the owner of the lost, stolen or
destroyed certificate, or his legal representatives, to give the Corporation a
bond, in such sum not exceeding trouble the value of the stock and with such
surety or sureties as they may require, to indemnify it against any claim that
may be made against it by reason of the issue of such new certificate and
against all other liability in the premises, or may remit such owner to such
remedy or remedies as he may have under the laws of the State of Delaware.
ARTICLE VII
DIVIDENDS AND SURPLUS
Section 1. General Discretion of Directors: The Board of Directors shall
have power to fix and vary the amount to be set aside or reserved as working
capital of the Corporation, or as reserves, or for other proper purposes of the
Corporation, and, subject to the requirements of the Certificate of
Incorporation, to determine whether any part of the surplus or net profits of
the Corporation shall be declared in dividends and paid to the Stockholders, and
to fix the date or dates for the payment of dividends.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section l. Fiscal Year: The fiscal year of the Corporation shall commence
on the first day of January and end on the last day of December.
Section 2. Corporate Seal: The corporate seal shall be in such form as
approved by the Board of Directors and may be altered at its pleasure. The
corporate seal may be used by causing it or a facsimile thereof to be impressed,
affixed or reproduced by the Secretary or Assistant Secretary of the
Corporation.
Section 3. Notices: Except as otherwise expressly provided, any notice
required by these By-laws to be given shall be sufficient if given by depositing
the same in a post office or letter box in a sealed wrapper with first class
postage prepaid thereon and addresses to the person entitled thereto at his
address, as the same appears upon the books of the Corporation, or by
telecopying, telegraphing or cabling the same to such person at such address;
and such notice shall be deemed to be given at the time it was mailed,
telecopied, telegraphed or cabled.
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Section 4. Waiver it Notice: Any Stockholder or Director may at any time,
by writing or by telecopy, telegraph or cable, waive any notice required to be
given under these By-laws, and if any Stockholder or Director shall be present
at any meeting his presence shall constitute a waiver of such notice.
Section 5. Contracts, Checks, Drafts: The Board of Directors, except as
may otherwise be required by law, may authorize any Officer or Officers, agent
or agents, in the name of and on behalf of the Corporation to enter into any
contract or execute or deliver any instrument. All checks, drafts or other
orders for the payment of money, notes or other evidences of indebtedness issued
in the name of the Corporation, shall be signed by such Officer or Officers,
agent or agents of the Corporation, and in such manner, as shall be designated
from time to time by resolution of the Board of Directors.
Section 6. Deposits: All funds of the Corporation shall be deposited from
time to time to the credit of the Corporation in such bank or banks, trust
companies or other depositaries as the Board of Directors may select, and, for
the purpose of such deposit, checks, drafts, warrants and other orders for the
payment of money which are payable to the order of the Corporation, may be
endorsed for deposit, assigned and delivered by any Officer of the Corporation,
or by such agents of the Corporation as the Board of Directors, the Chairman of
the Board, if any, or the President and a Chief Executive Officer may authorize
for that purpose.
Section 7. Voting Stock of Other Corporations: Except as otherwise ordered
by the Board of Directors or the Executive Committee, the Chairman of the Board,
if any, or the President and Chief Executive Officer shall have full power and
authority on behalf of the Corporation to attend and to act and to vote at any
meeting of the stockholders of any corporation of which the Corporation is a
stockholder and to execute a proxy to any other person to represent the
Corporation at any such meeting, and at any such meeting the Chairman of the
Board, if any, or the President and Chief Executive Officer or the holder of any
such proxy, as the case may be, shall possess and may exercise any and all
rights and powers incident to ownership of such stock and which, as owner
thereof, the Corporation might have possessed and exercised if present. The
Board of Directors or the Executive Committee may from time to time confer like
powers upon any other person or persons.
Section 8. Indemnification of Officers and Directors: The Corporation
shall indemnify any and all of its Directors or Officers, who shall serve as an
Officer or Director of this Corporation or of any other corporation at the
request of this Corporation, to the fullest extent permitted under and in
accordance with the laws of the State of Delaware.
ARTICLE IX
AMENDMENTS
Section 1. By the Board of Directors: These By-laws may be altered,
amended or repealed or new by-laws may be adopted by the affirmative vote of a
majority of the Directors present at any regular or special meeting of the Board
of Directors at which a quorum is present.
Section 2. By the Stockholders: Except as otherwise provided in
Section 3, these By-laws may be altered, amended or repealed or new by-laws
may be adopted by the affirmative vote of the holders of a majority of the
shares of the capital stock of the Corporation issued and outstanding and
entitled to vote at any regular or special meeting of Stockholders, provided
notice of such alteration, amendment, repeal or adoption of new by-laws shall
have been stated in the notice of such regular or special meeting.
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Section 3. Certain Provisions: Notwithstanding any other provision of law,
the Certificate of Incorporation or these By-laws, and notwithstanding the fact
that a lesser percentage may be specified by law, the affirmative vote of the
holders of at least seventy-five percent (75%) of the shares of the capital
stock of the Corporation issued and outstanding and entitled to vote shall be
required to amend or repeal, or to adopt any provision inconsistent with
Sections 2, 7, 8, 9, 10 and 11 of Article II, Article III or Article IX of these
By-laws.
Dated: September 25, 1996.
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TRANSKARYOTIC THERAPIES, INC.
Amendment No. 1 to the Amended and Restated By-Laws
Pursuant to Section 109 of the Delaware Corporate Law, Article II, Section 1 of
the Corporation's Amended and Restated By-Laws is hereby amended and restated in
its entirety as follows:
Section 1: Annual Meeting: The annual meeting of Stockholders for the
election of Directors and the transaction of any other business as may
properly come before the such meeting shall be held within six months
after the end of each fiscal year of the corporation on a date to be fixed
by the Board of Directors or the President (which date shall not be a
legal holiday in the place where the meeting is to be held) at the time
and place to be fixed by the Board of Directors or the President and
stated in the notice of the meeting. At the annual meeting any business
may be transacted and any Corporate action may be taken, whether stated in
the notice of meeting or not, except as otherwise expressly provided by
statute or the Certificate of Incorporation.
Approved by Board of Directors on January 22, 1998.
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
Name Jurisdiction of Incorporation
- ---- -----------------------------
TKT Securities Corp. Massachusetts
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 Nos. 333-19915 and 333-19917) of Transkaryotic Therapies, Inc. of
our report dated February 9, 1998, with respect to the financial statements
of Transkaryotic Therapies, Inc. included in the Annual Report (Form 10-K)
for the year ended December 31, 1997.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 23,922
<SECURITIES> 105,632
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 130,105
<PP&E> 12,016
<DEPRECIATION> 7,511
<TOTAL-ASSETS> 134,948
<CURRENT-LIABILITIES> 3,199
<BONDS> 0
0
0
<COMMON> 189
<OTHER-SE> 131,560
<TOTAL-LIABILITY-AND-EQUITY> 134,948
<SALES> 0
<TOTAL-REVENUES> 5,788
<CGS> 0
<TOTAL-COSTS> 24,390
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,871)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,871)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,871)
<EPS-PRIMARY> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996, THE NINE
MONTHS ENDED SEPTEMBER 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1996, AND THE
YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 DEC-31-1995
<CASH> 10,414 11,401 17,798 11,540
<SECURITIES> 75,840 39,159 10,975 22,945
<RECEIVABLES> 309 31 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 87,074 50,921 29,017 34,582
<PP&E> 9,088 8,985 8,837 8,329
<DEPRECIATION> 5,851 5,466 5,082 4,331
<TOTAL-ASSETS> 90,998 55,615 33,626 39,218
<CURRENT-LIABILITIES> 1,264 1,645 1,059 1,057
<BONDS> 0 0 0 0
0 4,598 4,545 4,440
0 4,077 2,944 2,944
<COMMON> 166 52 52 52
<OTHER-SE> 89,478 45,132 (24,891) (30,546)
<TOTAL-LIABILITY-AND-EQUITY> 90,998 55,615 33,626 39,218
<SALES> 0 0 0 0
<TOTAL-REVENUES> 4,225 3,950 1,975 15,400
<CGS> 0 0 0 0
<TOTAL-COSTS> 18,748 13,788 8,750 14,357
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 13
<INCOME-PRETAX> (11,972) (8,404) (5,987) 2,159
<INCOME-TAX> 0 0 0 85
<INCOME-CONTINUING> (11,972) (8,404) (5,987) 2,074
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (11,972) (8,404) (5,987) 2,074
<EPS-PRIMARY> (0.98) (0.77) (0.55) .19
<EPS-DILUTED> (0.98) (0.77) (0.55) .18
</TABLE>
