<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1998
Commission File Number 0-21481
TRANSKARYOTIC THERAPIES, INC.
(Exact name of registrant as specified in its charter)
----------------------
Delaware 04-3027191
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
195 Albany Street
Cambridge, Massachusetts 02139
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 349-0200
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes / x / No / /
At July 31, 1998, there were 19,068,227 shares of Common Stock, $.01 par
value, issued and outstanding. There were no issued and outstanding shares of
Preferred Stock.
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Transkaryotic Therapies, Inc.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 3
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13-14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
</TABLE>
2
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Part 1- Item 1- Condensed Consolidated Financial Statements
Transkaryotic Therapies, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
(in thousands, except par values) June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 22,830 $ 23,922
Marketable securities 97,878 105,632
Prepaid expenses and other current assets 503 551
---------- ------------
Total current assets 121,211 130,105
Property and equipment, net 4,086 4,505
Other assets 344 338
---------- ------------
$ 125,641 $ 134,948
---------- ------------
---------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 881 $ 1,656
Accrued expenses 1,960 1,543
---------- ------------
Total current liabilities 2,841 3,199
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;
19,066 and 18,929 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively 191 189
Additional paid-in capital 185,898 185,451
Accumulated deficit (60,090) (49,987)
Deferred compensation (3,231) (3,940)
Accumulated other comprehensive income 32 36
---------- ------------
Total stockholders' equity 122,800 131,749
---------- ------------
$ 125,641 $ 134,948
---------- ------------
---------- ------------
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
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Part 1- Item 1- Condensed Consolidated Financial Statements
Transkaryotic Therapies, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
License and research revenues $0 $4,913 $575 $5,213
Operating expenses:
Research and development 5,635 4,192 11,028 8,024
General and administrative 1,684 1,506 3,186 2,908
------------- ------------- ------------ -----------
7,319 5,698 14,214 10,932
------------- ------------- ------------ -----------
Loss from operations (7,319) (785) (13,639) (5,719)
Interest income 1,719 1,111 3,536 2,252
------------- ------------- ------------ -----------
Net income (loss) ($5,600) $326 ($10,103) ($3,467)
------------- ------------- ------------ -----------
------------- ------------- ------------ -----------
Basic net income (loss) per share ($ 0.29) $ 0.02 ($ 0.53) ($ 0.21)
------------- ------------- ------------ -----------
------------- ------------- ------------ -----------
Shares used to compute basic net income (loss)
per share 19,060 16,667 19,011 16,654
------------- ------------- ------------ -----------
------------- ------------- ------------ -----------
Diluted net income (loss) per share ($ 0.29) $ 0.02 ($ 0.53) ($ 0.21)
------------- ------------- ------------ -----------
------------- ------------- ------------ -----------
Shares used to compute diluted net income (loss)
per share 19,060 17,965 19,011 16,654
------------- ------------- ------------ -----------
------------- ------------- ------------ -----------
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
4
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Part 1- Item 1- Condensed Consolidated Financial Statements
Transkaryotic Therapies, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
(in thousands) Six Months Ended
June 30, 1998 June 30, 1997
-------------- ----------------
<S> <C> <C>
Operating activities:
Net loss $(10,103) $(3,467)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,089 810
Compensation expense related to
equity issuances 575 567
Changes in operating assets and liabilities (314) 918
---------- -----------
Net cash used for operating activities (8,753) (1,172)
---------- -----------
Investing activities:
Proceeds from sales of marketable securities 62,422 35,164
Purchases of marketable securities (54,668) (27,570)
Purchase of property and equipment (644) (657)
Changes in other assets and liabilities (32) 3
---------- -----------
Net cash provided by investing activities 7,078 6,940
---------- -----------
Financing Activities:
Repurchase of common stock (16)
Proceeds from exercise of options and warrants 583 -
---------- -----------
Net cash provided by (used for) financing activities 583 (16)
---------- -----------
Net increase (decrease) in cash and cash equivalents (1,092) 5,752
Cash and cash equivalents at January 1 23,922 10,415
---------- -----------
Cash and cash equivalents at June 30 $22,830 $16,167
---------- -----------
---------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
5
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Part 1- Item 1- Condensed Consolidated Financial Statements
Transkaryotic Therapies, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
June 30, 1998 and 1997
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 ProteinsTM.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for the periods presented. The results of operations
for the interim period ended June 30, 1998 are not necessarily indicative of the
results to be expected for the year ending December 31, 1998.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1997
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
2. BASIC AND DILUTED NET LOSS PER SHARE
In December 1997, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 128, "Earnings per Share". Under SFAS No. 128, primary
earnings per share computed in accordance with Opinion 15 has been replaced with
a simpler calculation called basic earnings per share. Basic earnings per share
is calculated by dividing income available to common stockholders by the
weighted average common shares outstanding. Fully dilutive earnings per share
did not change significantly but has been renamed diluted earnings per share.
Diluted earnings per share is calculated by dividing net income by the sum of
weighted average common shares outstanding during the period plus common stock
equivalents. Common equivalents are shares assumed to be issued if outstanding
stock options and warrants were exercised. The difference between the shares
used for the basic and diluted calculation for the three months ended June 30,
1997 was the inclusion of 1,298,000 common equivalent shares. Common equivalent
shares are not included in the per share calculations where the effect of their
inclusion would be antidilutive.
6
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3. COMPREHENSIVE INCOME
As of January 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components, including the requirement
that unrealized gains or losses on the Company's available-for-sale securities,
which prior to adoption were reported separately in stockholders' equity, be
included in other comprehensive income. The adoption of SFAS No. 130 had no
impact on the Company's net loss or stockholders' equity.
The Company has total comprehensive loss of $5,656,000 for the three months
ended June 30, 1998 and total comprehensive income of $493,000 for the three
months ended June 30, 1997. For the six months ended June 30 ,1998 and 1997,
total comprehensive loss was $10,107,000 and $3,443,000, respectively.
4. LEGAL PROCEEDINGS
In April 1997, Amgen Inc. filed a civil action in the U.S. District Court
in Massachusetts against the Company and Hoechst Marion Roussel, Inc.
("HMRI"), its collaborative partner. The complaint in the action alleged that
Gene Activated-TM- erythropoietin ("GA-EPO-TM-"), and processes for producing
GA-EPO infringe Amgen's U.S. Patent Numbers 5,547,933, 5,618,698, and
5,621,080 and requested 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 same date,
Amgen filed a Motion for Summary Judgment of Infringement. TKT and HMRI
opposed that motion, stating that there had been no infringement.
In April 1998, the U.S. District Court granted TKT and HMRI's Motion for
Summary Judgment and denied Amgen's Motion for Summary Judgment on the ground
that all of TKT and HMRI's GA-EPO related activities to date had been solely for
uses reasonably related to the production of information for submission to the
U.S. Food and Drug Administration (the "FDA") for regulatory approval and,
under the Waxman-Hatch Act, do not constitute acts of patent infringement. The
Court ordered Amgen's remaining claim for declaratory judgment of future
infringement administratively closed, to be reopened upon motion of either party
for good cause shown. The Court also stated that issuance by the FDA of a
product license presumably would show good cause to reopen that claim. Finally,
the Court stated that, should the case be reopened and should Amgen seek
preliminary equitable relief, the Court will combine the hearing on a
preliminary injunction with trial on the merits. The Company expects that the
case will be reopened.
7
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Should the case be reopened, the Company can provide no assurance as to the
outcome of the 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 such
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.
Pursuant to the Amended and Restated License Agreement, dated March 1995, by
and between HMRI and the Company, HMRI 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.
8
<PAGE>
PART I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Since its inception in 1988, Transkaryotic Therapies, Inc. ( "TKT" or 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 June 30, 1998, the
Company's accumulated deficit was $60,090,000. 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 operation
of the Company should be read in conjunction with the accompanying condensed
consolidated financial statements and the related footnotes thereto.
RESULTS OF OPERATIONS
For the Three Months Ended June 30, 1998 and 1997
There were no revenues earned for the three months ended June 30, 1998.
License and research revenues totaled $4,913,000 for the three months ended June
30, 1997. Revenues in 1997 consisted primarily of $4,500,000 earned upon the
achievement of certain development milestones relating to the Company's two Gene
Activation collaborations with HMRI.
Research and development expenses totaled $5,635,000 in the second quarter
of 1998, as compared to $4,192,000 during the same period in 1997. The increase
in 1998 of $1,443,000, or 34%, was principally due to an increase in research
and development staff, manufacturing costs, and outside services, as well as an
increase in depreciation of equipment.
9
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General and administrative expenses were $1,684,000 in the quarter ended
June 30, 1998, compared with $1,506,000 during the same period in 1997. The
increase in 1998 of $178,000, or 12%, is principally due to increases in
administrative employee costs.
Interest income was $1,719,000 and $1,111,000 for the three months ended
June 30, 1998 and 1997, respectively. The average cash and marketable securities
balances were $122,665,000 and $83,679,000 in 1998 and 1997, respectively. The
increase in interest income of $608,000 is primarily attributable to higher
average balances in 1998 as a result of the Company's follow-on offering in July
1997.
The Company had a net loss of $5,600,000 for the three months ended June 30,
1998 and net income of $326,000 for the three months ended June 30, 1997. Basic
net loss per share was $0.29 for the three months ended June 30, 1998 compared
to a basic net income per share of $0.02 for the same period in 1997. The
receipt of $4,500,000 from HMRI relating to the achievement of development
milestones relating to the Company's two Gene Activation collaborations with
HMRI was primarily responsible for the profitability in the second quarter of
1997.
For the Six Months Ended June 30, 1998 and 1997
License and research revenues totaled $575,000 and $5,213,000 for the six
months ended June 30, 1998 and 1997, respectively. All revenues were earned from
two collaborative agreements with HMRI. Revenues in 1997 included milestone
payments of $4,500,000 from with HMRI, relating to the achievement of
development milestones in he Company's two collaborative programs with HMRI.
Research and development expenses totaled $11,028,000 in the first six
months of 1998, as compared to $8,024,000 during the same period in 1997. The
increase in 1998 of $3,004,000, or 37%, was principally due to an increase in
research and development staff and related supplies, manufacturing costs,
outside services, clinical trial expenses, as well as an increase in
depreciation of equipment.
General and administrative expenses were $3,186,000 in the six months ended
June 30, 1998, compared with $2,908,000 during the same period in 1997. The
increase in 1998 of $278,000, or 10%, is principally due to increases in
administrative employee costs.
Interest income was $3,536,000 and $2,252,000 for the six months ended June
30, 1998 and 1997, respectively. The average cash and marketable securities
balances were $124,801,000 and $85,347,000 in 1997 and 1996, respectively. The
increase in interest income of $1,284,000, was primarily attributable to higher
average balances in the respective six month periods.
10
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The Company had a net loss of $10,103,000 and $3,467,000 for the six months
ended June 30, 1998 and 1997, respectively. Basic net loss per share was $0.53
for the six months ended June 30, 1998, as compared to a basic net loss per
share of $0.21 for the corresponding period in 1997.
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 $120,708,000 at June 30, 1998. Cash equivalents and
marketable securities are invested in U.S. Treasury notes, agencies of the U.S.
government and money market funds.
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 lease the new facility or seek
financing for all or a significant portion of the cost of any new facility.
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 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 Inc. with respect to the
development
11
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of GA-EPO. See Note 4 to Notes to Condensed Financial Statements.
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 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
(i) in the Company's Annual Report on Form 10-K under the caption "Certain
Factors That May Affect Future Results" which are incorporated herein by
reference and filed herewith as Exhibit 99.1, with the exception of the factor
titled "Patent Litigation" which is superseded by Exhibit 99.2 and (ii) in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,1998
under the caption "Forward Looking Statements -- Patent Litigation" which is
incorporated herein by reference and filed herewith as Exhibit 99.2.
12
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PART II - Other Information
Item 1. Legal Proceedings
The Company is engaged in litigation with Amgen Inc. with respect to the
development of GA-EPO. See Note 4 to Notes to Condensed Consolidated Financial
Statements, which is incorporated by reference herein.
Since 1996, the Company has been involved in a patent interference
proceeding before the United States Patent and Trademark Office involving a
patent and several patent applications in the gene therapy field.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on Tuesday May 19,
1998, the following individuals were elected as directors of the Company:
<TABLE>
<CAPTION>
Votes
Nominee For Withheld Broker Non-Votes
- ------- --- -------- ----------------
<S> <C> <C> <C>
William R. Miller 13,836,061 6,544 0
Rodman W. Moorhead, III 13,836,061 6,544 0
Richard F Selden 13,836,061 6,544 0
James E. Thomas 13,836,061 6,544 0
Peter Wirth 13,836,061 6,544 0
</TABLE>
Item 5. Other Information
Stockholder proposals submitted pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and intended to be
presented at the Company's 1999 Annual Meeting of Stockholders must be received
by the Company not later than December 16, 1998 in order to be considered for
inclusion in the Company's proxy materials for that meeting.
The Company's Amended and Restated By-Laws (the "By-Laws") also establish
advance notice procedures with respect to a stockholder nomination of candidates
for election as Directors ( a "Director Nomination") and for the conduct of
other business to be brought before an annual meeting by a stockholder ("Other
Business"). A notice regarding a Director Nomination or a proposal for Other
Business must be received by the Company not less than 60 days nor more than 90
days prior to the applicable stockholder meeting, provided, however, that in the
event that less than 70 days notice or prior disclosure of the date of the
meeting is given or made to the Company's stockholders, the notice must be
received by the Company not later than the tenth 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. Any such notice must contain certain
13
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specified information concerning the persons to be nominated and/or the Other
Business and the stockholder submitting the Director Nomination or proposal
for Other Business, all as set forth in the By-Laws. The presiding officer of
the meeting may refuse to acknowledge any Director Nomination or proposal for
Other Business not made in compliance with such advance notice requirements.
The advance notice provisions of the Company's By-Laws supersede the notice
requirements contained in recent amendments to Rule 14a-4 under the Exchange
Act. The Company has not yet publicly announced the date of the 1999 Annual
Meeting.
Director nominations or stockholder proposals for Other Business should be
mailed to Secretary, Transkaryotic Therapies, Inc. 195 Albany Street, Cambridge,
MA 02139.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits filed as part of this Form 10-Q are listed on the
Exhibit Index immediately preceding such Exhibits, which Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K
On April 20, 1998, the Registrant filed a report on Form 8-K
dated April 16, 1998 relating to the announcement that the United
States District Court in Boston had granted the Company and HMRI's
Motion for Summary Judgment of Non-infringement in Amgen Inc.'s patent
infringement action against the Company and HMRI.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSKARYOTIC THERAPIES, INC.
Date: August 14, 1998 By: /s/ Daniel E. Geffken
--------------------------------
Daniel E. Geffken
Vice President, Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
15
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Transkaryotic Therapies, Inc.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Statement Re: Computation of Loss per Share
27 Financial Data Schedule (for EDGAR filing
purposes only)
99.1 Certain Factors That May Affect Future Results
(as filed with the Company's Annual Report on
Form 10-K, except for the factor titled "Patent
Litigation" which is superseded by the section of
the same title, appearing under the caption
"Forward Looking Statements" in the
Company's Quarterly Report on Form 10-Q for the
quarter ended March 31,1998, filed as Exhibit
99.2 hereto).
99.2 Risks Related to Patent Litigation (as filed with
the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31,1998).
</TABLE>
<PAGE>
Exhibit 11
Statement Re: Computation of Loss per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
--------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 19,060 16,667 19,011 16,654
--------------- ------------- -------------- --------------
--------------- ------------- -------------- --------------
Net income (loss) ($ 5,600) $ 326 ($ 10,103) ($ 3,467)
--------------- ------------- -------------- --------------
--------------- ------------- -------------- --------------
Basic net income (loss) per share ($ 0.29) $ 0.02 ($ 0.53) ($ 0.21)
--------------- ------------- -------------- --------------
--------------- ------------- -------------- --------------
Weighted average common shares outstanding 19,060 16,667 19,011 16,654
Weighted average common equivalent shares
resulting from stock options and warrants - 1,298 - -
--------------- ------------- -------------- --------------
Shares used to compute net loss per share 19,060 17,965 19,011 16,654
--------------- ------------- -------------- --------------
--------------- ------------- -------------- --------------
Net income (loss) ($ 5,600) $ 326 ($ 10,103) ($ 3,467)
--------------- ------------- -------------- --------------
--------------- ------------- -------------- --------------
Diluted net income (loss) per share ($ 0.29) $ 0.02 ($ 0.53) ($ 0.21)
--------------- ------------- -------------- --------------
--------------- ------------- -------------- --------------
</TABLE>
<PAGE>
Exhibit 99.1
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
<PAGE>
Company to significant liabilities to third parties or require the Company to
seek licenses from third parties. Although a number of patent and intellectual
property disputes in the biotechnology area have been settled through licensing
or similar arrangements, costs associated with any such arrangement may be
substantial and could include ongoing royalties. Furthermore, there can be no
assurance that necessary licenses would be available to the Company or its
corporate partner or would be available on acceptable terms. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company or its corporate partner from
manufacturing and selling some or all of its products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
With respect to gene therapy technology, the Company requested, and the 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
<PAGE>
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 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.
<PAGE>
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 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.
<PAGE>
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 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
<PAGE>
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
<PAGE>
Company 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
<PAGE>
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.
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
<PAGE>
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.
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
<PAGE>
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 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.
<PAGE>
Exhibit 99.2
Risks Related to Patent Litigation
Patent Litigation. The biotechnology industry has been characterized by
significant litigation and interference proceedings regarding patents, patent
applications and other intellectual property rights, and many companies in the
biotechnology industry have attempted to employ intellectual property litigation
to gain or preserve a competitive advantage. For example, there has been
substantial intellectual property litigation between suppliers of erythropoietin
throughout the world.
In April 1997, Amgen Inc. filed a civil action in the U.S. District Court in
Massachusetts against the Company and Hoechst Marion Roussel, Inc. ("HMRI"), the
Company's collaborative partner. The complaint in the action alleged 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 requested 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
same date, Amgen filed a Motion for Summary Judgment of Infringement. TKT and
HMRI opposed that motion, stating that there had been no infringement.
In April 1998, the U.S. District Court granted TKT and HMRI's Motion for
Summary Judgment and denied Amgen's Motion for Summary Judgment on the ground
that all of TKT and HMRI's GA-EPO related activities to date had been solely for
uses reasonably related to the production of information for submission to the
FDA for regulatory approval and, under the Waxman-Hatch Act, do not constitute
acts of patent infringement. The Court ordered Amgen's remaining claim for
declaratory judgment of future infringement administratively closed, to be
reopened upon motion of either party for good cause shown. The Court also stated
that the issuance by the FDA of a product license presumably would show good
cause to reopen that claim. Finally, the Court stated that, should the case be
reopened and should Amgen seek preliminary equitable relief, the Court will
combine the hearing on a preliminary injunction with trial on the merits. The
Company expects that the case will be reopened.
Should the case be reopened, the Company can provide no assurance as to the
outcome of the 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 such
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
<PAGE>
party could subject the Company to significant liabilities to third parties or
require the Company to seek licenses from third parties. Although a number of
patent and intellectual property disputes in the biotechnology area have been
settled through licensing or similar arrangements, costs associated with any
such arrangement may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company or its corporate partner or would be available on
acceptable terms. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company or
its corporate partner from manufacturing and selling some or all of its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
With respect to gene therapy technology, the Company requested, and the U.S.
Patent and Trademark Office (the "PTO"), declared in January 1996, an
interference regarding 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 Federal Trade Commission (the "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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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<S> <C>
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