<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000
COMMISSION FILE NUMBER 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 02139
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 349-0200
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes / X / No / /
At April 30, 2000, there were 22,683,306 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
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 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
Item 3. Quantitative and Qualitative Disclosures about Market 12
Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
</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) March 31, December 31,
2000 1999
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $79,786 $151,202
Marketable securities 100,136 41,293
Prepaid expenses and other current assets 2,325 2,054
------------- -------------
Total current assets 182,247 194,549
Property and equipment, net 20,723 20,384
Other assets 279 358
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Total assets $203,249 $215,291
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,128 $ 2,000
Accrued expenses 3,904 4,009
Current maturities of long-term debt 2,000 2,000
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Total current liabilities 8,032 8,009
Long-term debt, less current maturities 11,000 11,500
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Total liabilities 19,032 19,509
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Stockholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $.01 par value; 30,000 shares authorized;
22,683 and 22,592 shares issued and outstanding at
March 31, 2000 and December 31, 1999, respectively 227 226
Additional paid-in capital 313,102 311,817
Accumulated deficit (127,507) (114,408)
Deferred compensation (1,422) (1,645)
Accumulated other comprehensive loss (183) (208)
------------- -------------
Total stockholders' equity 184,217 195,782
============= =============
Total liabilities and stockholders' equity $203,249 $215,291
============= =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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
March 31,
2000 1999
--------- --------
<S> <C> <C>
License and research revenues $ -- $ 721
Operating expenses:
Research and development 12,684 9,958
General and administrative 3,037 1,564
--------- --------
15,721 11,522
--------- --------
Loss from operations (15,721) (10,801)
Interest income 2,622 1,343
--------- --------
Net loss $(13,099) $(9,458)
========= ========
Basic and diluted net loss per share $(0.58) $(0.49)
========= ========
Shares used to compute basic and diluted
net loss per share 22,630 19,154
========= ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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) Three Months Ended
March 31,
2000 1999
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(13,099) $(9,458)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 556 495
Compensation expense related to
equity issuances 193 264
Changes in operating assets and liabilities (248) 2,237
------------- ------------
Net cash used for operating activities (12,598) (6,462)
------------- ------------
INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities 11,984 31,688
Purchases of marketable securities (70,802) (25,616)
Purchases of property and equipment (895) (3,422)
Changes in other assets 79 (26)
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Net cash provided by (used for) investing activities (59,634) 2,624
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FINANCING ACTIVITIES:
Issuance of common stock 1,316 58
Repayment of long-term debt (500) -
Proceeds from issuance of long-term debt - 2,364
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Net cash provided by financing activities 816 2,422
------------- ------------
Net decrease in cash and cash equivalents (71,416) (1,416)
Cash and cash equivalents at January 1 151,202 31,760
============= ============
Cash and cash equivalents at March 31 $79,786 $30,344
============= ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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PART I -- Item 1 -- Condensed Consolidated Financial Statements
Transkaryotic Therapies, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 2000 and 1999
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-ActivatedTM proteins, Niche ProteinTM products and Gene Therapy.
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 only of
normal recurring adjustments, necessary for a fair presentation of the financial
condition, results of operations and cash flows for the periods presented. The
results of operations for the interim period ended March 31, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
These financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
1999 included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
2. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share is calculated under Statement of
Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share." Basic
earnings per share is calculated by dividing income available to common
stockholders by the weighted average common shares outstanding. 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 stock equivalents are shares assumed to be issued if outstanding stock
options and warrants were exercised. Basic and diluted net loss per share are
the same for the three months ended March 31, 2000 and 1999 since common
equivalent shares from stock options and warrants have been excluded as their
effect is antidilutive.
6
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3. COMPREHENSIVE INCOME
During the first quarter of 2000 and 1999, total comprehensive loss
amounted to $13,074,000 and $9,527,000, respectively.
4. LEGAL PROCEEDINGS
In April 1997, Amgen Inc. filed a civil action in the U.S. District
Court for the District of Massachusetts against the Company and Aventis Pharma
("Aventis"), formerly Hoechst Marion Roussel, Inc., the Company's collaborative
partner. The complaint in the action alleges that Gene-Activated(TM)
erythropoietin ("GA-EPOTM") and the processes for producing GA-EPO infringe
certain of Amgen's U.S. patents and requests that TKT and Aventis be enjoined
from making, using, or selling GA-EPO and that the District Court award Amgen
monetary damages.
In November 1997, the Company and Aventis filed a Motion for Summary
Judgment. On the same date, Amgen filed a Motion for Summary Judgment of
Infringement. The Company and Aventis opposed that Motion, stating that there
had been no infringement. In April 1998, the District Court granted TKT and
Aventis' Motion for Summary Judgment and denied Amgen's Motion for Summary
Judgment on the ground that all of the Company and Aventis' GA-EPO related
activities to that date had been solely for uses reasonably related to the
production of information for the submission to the U.S. Food and Drug
Administration for regulatory approval and, under the Waxman-Hatch Act, do
not constitute acts of patent infringement. The District Court, therefore,
administratively closed the case at that time.
At the request of the Company and Aventis, the District Court reopened
the case in June 1999. The District Court has set a trial date for May 2000.
After hearing pre-trial motions, in April 2000, the Court granted
Amgen's Motion for Summary Judgment of literal infringement on Claim 1 of U.S.
Patent No 5,955,422 against the Company and Aventis. The Court has not ruled
whether this claim is invalid or unenforceable. Those issues will be
determined at trial. The Court did not grant Summary Judgment on any of the
other claims of the patents involved in this suit. Issues concerning
infringement, invalidity, and unenforceability of those patents will be
argued and determined at the trial.
In addition, in July 1999, the Company commenced legal proceedings in
the U.K. against Kirin-Amgen, Inc. seeking a declaration that a U.K. patent held
by Kirin-Amgen will not be infringed by the sale of GA-EPO and that numerous
claims of Kirin-Amgen's U.K. patent are invalid. The trial is scheduled to
commence in 2001.
The Company can provide no assurance as to the outcome of either the
U.S. or U.K. proceedings. A decision by a court in Amgen's or Kirin-Amgen's
favor, including the issuance of an injunction against the making, using, or
selling of GA-EPO by the Company and Aventis in the U.S. or the U.K., or any
other conclusion of either litigation in a manner adverse to the Company and
Aventis, 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 Aventis and the Company, Aventis has assumed the legal cost
of the Amgen and Kirin-
7
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Amgen litigations. The Company is required to reimburse Aventis for the
Company's share of litigation expenses, as defined, from future royalties, if
any, received from the sale of GA-EPO and in certain other circumstances. The
Company and Aventis believe that they have substantial defenses to the
allegations in the complaint on the Massachusetts action and substantial grounds
for favorable action in the U.K. litigation.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. The effective date of this
bulletin was deferred to no later than the second fiscal quarter beginning after
December 15, 1999. SAB 101 requires companies to report any changes in revenue
recognition as a cumulative change in accounting principle at the time of
implementation in accordance with Accounting Principles Board Opinion No. 20,
"Accounting Changes." The Company has concluded that SAB 101 will not have a
material impact on the financial position or results of operations of the
Company.
In April 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB No. 25." The Interpretation will be
applied prospectively to new awards, modifications to outstanding awards, and
changes in employee status on or after July 1, 2000, except in certain
circumstances. The Company is currently in the process of evaluating the impact
this interpretation will have on its financial position and results of
operations.
8
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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 proprietary
development platforms: Gene-Activated proteins, Niche Protein products and Gene
Therapy. No revenues have been derived from the sale of any products, and the
Company does not expect to receive revenues from product sales until late 2000,
at the earliest. 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 March 31, 2000, the Company's
accumulated deficit was $127,507,000. As a result, the Company is dependent upon
existing cash resources, interest income, external financing from equity
offerings, debt financings 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 MARCH 31, 2000 AND 1999
There were no revenues earned for the three months ended March 31,
2000. License and research revenues totaled $721,000 for the three months ended
March 31, 1999. Revenues in 1999 were earned under collaborative agreements with
Sumitomo Pharmaceuticals Co. Ltd. and Aventis Pharma.
Research and development expenses totaled $12,684,000 for the three
months ended March 31, 2000, as compared to $9,958,000 during the same period in
1999. The increase in 2000 of $2,726,000, or 27%, was principally due to
increases in external development services and research and development staffing
in each of the Company's product development
9
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platforms. In particular, preclinical and clinical costs for the Company's Fabry
disease, Hunter syndrome and hemophilia A programs were significant components
of the increase. During the remainder of 2000, the costs related to both
preclinical and clinical programs are expected to increase significantly as
product development activities are initiated or expanded.
General and administrative expenses were $3,037,000 for the three
months ended March 31, 2000, compared with $1,564,000 during the same period in
1999. The increase in 2000 of $1,473,000, or 94%, was principally due to costs
in building a business development commercialization infrastructure,
particularly sales and marketing capabilities related to the commercialization
of products in the Company's Niche Protein product platform. During the
remainder of 2000, general and administrative costs are expected to increase
significantly as pre-launch activities related to the Company's Niche Protein
product platform accelerate.
Interest income was $2,622,000 and $1,343,000 for the three months
ended March 31, 2000 and 1999, respectively. The average cash and marketable
securities balances were $186,425,000 and $105,877,000 for the three months
ended March 31, 2000 and 1999, respectively. The increase in interest income of
$1,279,000 resulted from higher average cash and marketable securities balances,
as well as higher yields, in 2000.
The Company had a net loss of $13,099,000 and $9,458,000 for the three
months ended March 31, 2000 and 1999, respectively. Basic net loss per share was
$0.58 for the three months ended March 31, 2000, compared to a basic net loss
per share of $0.49 for the same period in 1999.
LIQUIDITY AND SOURCES OF CAPITAL
Since its inception, the Company has financed its operations through
the sale of common and preferred stock, borrowings under debt agreements,
revenues from collaborative agreements, and interest income.
The Company had unrestricted cash, cash equivalents and marketable
securities totaling $179,922,000 at March 31, 2000. Cash equivalents and
marketable securities are invested in U.S. Treasury notes, agencies of the U.S.
government, and money market funds.
In November 1999, the Company completed a private placement of
3,300,000 shares of Common Stock, resulting in net proceeds to the Company of
approximately $124,576,000.
The Company leased additional facilities in the fourth quarter of 1998
which will be used for research and development. In December 1998, the Company
obtained an unsecured term loan facility for up to $14,000,000 to finance the
capital costs related to the leased space. The loan is payable beginning in
December 1999 on the basis of a seven year amortization schedule over a five
year period, with a final payment for any remaining amount in September 2004.
The loan bears interest at either the prime rate or LIBOR plus 1.50% at the
Company's election. The weighted average interest rate of the loan was 7.6% as
of March 31, 2000. The note contains
10
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certain restrictive covenants, including, among other things, minimum cash and
tangible net asset requirements and limitations on the payment of dividends. At
March 31, 2000, $13,000,000 was outstanding under the term loan.
Even after lease of the new space referred to in the prior paragraph,
the Company's facilities may not be adequate to accommodate the Company's needs
beyond 2000. The Company currently expects to meet any additional facilities
requirements through development of a new facility or conversion of an existing
building. The Company intends to seek financing for all or a significant portion
of the cost of any additional facilities. There can be no guarantee that
financing will be available on favorable terms, if at all.
At December 31, 1999, the Company had net operating loss carryforwards
of approximately $100,287,000, which expire at various times through 2019. Due
to the degree of uncertainty related to the ultimate use of loss carryforwards
and tax credits, the Company has fully reserved against any potential tax
benefit. The future utilization of net operating loss carryforwards and tax
credits 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, establishment of sales and
marketing 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 offerings, debt
financings 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 offerings, 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 and debt 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 2002. 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.
11
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The Company is engaged in litigation with Amgen Inc. and Kirin-Amgen,
Inc. with respect to the development of GA-EPO. See Note 4 to Notes to Condensed
Consolidated Financial Statements. Pursuant to TKT's agreements with Aventis,
Aventis has assumed the cost of the litigation. The Company is required to
reimburse Aventis for the Company's share of litigation expenses from future
royalties, if any, otherwise payable by Aventis as to the sale of GA-EPO and in
certain other circumstances.
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-Activated
protein, Niche Protein product, or Gene Therapy 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 Biologics License Applications, whether the Company's products will receive
approval from the U.S. Food and Drug Administration or equivalent foreign
regulatory agencies, and, if such products receive approval, whether they will
be successfully marketed; the results of patent litigation in which the Company
is involved or may become involved; competition; the Company's dependence on
collaborators; and other risks set forth under the caption "Certain Factors That
May Affect Future Results" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, which are incorporated by reference herein.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not believe that there is any material market
risk exposure with respect to derivative or other financial instruments that
would require disclosure under this item.
12
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PART II - Other Information
Item 1. Legal Proceedings
The Company is engaged in litigation with Amgen Inc. and Kirin-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.
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
Current Report on Form 8-K dated April 26, 2000.
13
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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: May 12, 2000 By: /s/ Daniel E. Geffken
-------------------------------------
Daniel E. Geffken
Vice President, Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
14
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Transkaryotic Therapies, Inc.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
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<S> <C>
10.33 Employment agreement dated February 4, 2000 by and between
Dr. Joseph G. Harbarta and the Registrant
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 for the
year ended December 31, 1999).
</TABLE>
15
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EXHIBIT 10.33
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of February 4, 2000, between Transkaryotic Therapies,
Inc., a Delaware corporation (the "Company"), and Joseph G. Habarta, Ph.D. (the
"Executive").
1. EMPLOYMENT. The Company hereby employs the Executive and the Executive
hereby accepts employment with the Company upon the terms and conditions herein
set forth.
2. DUTIES. The Executive shall be engaged as a full-time employee to act as
the Company's Vice President, Quality and shall report to the Company's Founder
and Chief Executive Officer. The Executive shall perform the duties consistent
with such position as the Founder and Chief Executive Officer shall from time to
time reasonably designate. The Executive shall devote his entire time, attention
and energies to the business of the Company and shall not engage in any other
business activity or activities, whether or not such business activity is
pursued for gain, profit or other pecuniary advantage that, in the judgment of
the Company, may conflict with the proper performance of the Executive's duties
under this Agreement. Notwithstanding the foregoing, (a) with respect to
businesses which do not compete with the Company, the Executive may invest his
personal or family assets in such form or manner as will not require any
services on the part of the Executive in the operation of the affairs of the
companies in which such investments are made and in which his participation is
solely that of an investor, and (b) the Executive may purchase securities in any
corporation whose securities are regularly traded in recognized securities
markets, provided that such investments shall not result in his collectively
owning beneficially at any time one percent (1%) or more of the equity
securities of any corporation engaged in a business competitive to that of the
Company.
3. COMPENSATION.
(a) BASE SALARY. For services rendered under this Agreement, the Company
shall pay the Executive an annual salary of $200,000 (the "Base Salary"),
payable (after deduction of applicable withholding for Federal and state
income and payroll taxes) in equal semi-monthly installments. The Company
may review the Executive's compensation annually and make such increases to
the Base Salary as the Company determines are merited, based upon the
Executive's performance and consistent with the
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<PAGE>
Company's compensation policies as established by the Compensation
Committee of the Company's Board of Directors. Any such increase in annual
Base Salary shall be communicated to the Executive shortly after the
January meeting of the Board of Directors and shall be made effective on
the first day of January each year.
(b) BONUS. At least thirty (30) days prior to each calendar year under this
Agreement, the Company shall establish objective performance goals for the
Executive for such calendar year. Upon the attainment of such performance
goals, but subject to the overall performance of the Company during such
year, the Executive may be entitled to a bonus, as determined by the
Compensation Committee of the Company's Board of Directors. Within thirty
(30) days after the close of each such calendar year, the Company shall
evaluate the attainment of the performance goals for such calendar year and
determine the amount of any performance bonus payable hereunder. Any such
performance bonus shall be payable within ninety (90) days after the
calendar year to which it relates.
(c) FRINGE BENEFITS. In addition to Base Salary and Bonus payments under
Sections 3(a), (b), and (c) above, the Executive shall be eligible for and
participate in such fringe benefits, in accordance with the terms of each
such benefit, as shall be generally provided to executives of the Company,
including incentive compensation, the Company's 401(k) Plan, health and
dental insurance, and any retirement programs, stock options plans or
employee stock purchase plans which may be adopted from time to time during
the term hereof by the Company. Nothing herein contained shall be deemed to
preclude the Company from granting such additional compensation or benefits
to the Executive as it shall in its sole discretion determine.
(d) STOCK OPTIONS. Upon authorization by the Company's Board of Directors
or Compensation Committee, the Company will promptly grant the Executive
under the Company's 1993 Long-Term Incentive Plan (the "Plan") a stock
option to purchase an aggregate of seventy-five thousand (75,000) shares of
the Common Stock of the Company, par value $.01 per share, at a purchase
price of forty-six and 50/100 dollars ($46.50) per share. The stock options
will vest annually for a period of six (6) years on the anniversary date of
employment in installments of 12,500 options each. Such option shall be
exercisable during the ten (10) year period following its date of vesting
and shall be subject to all the terms and conditions of the Plan and the
Company's standard form of Stock Option Agreement, copies of which have
been delivered to the Executive separately.
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4. VACATION. During the term of this Agreement, the Executive shall be
entitled to fifteen (15) annual vacation days accrued at the rate of 1.25 days
per month.
5. SICK LEAVE. During the term of this Agreement, the Executive shall be
entitled to sick leave consistent with the Company's customary sick leave
policy.
6. EXPENSES. During the term of this Agreement, the Company shall reimburse
the Executive in accordance with the Company's customary policies for all
reasonable out-of-pocket expenses incurred by the Executive in connection with
the business of the Company and in performance of his duties under this
Agreement upon the Executive's presentation to the Company of an itemized
accounting of such expenses with reasonable supporting data.
7. TERM.
(a) The Executive's employment under this Agreement shall commence on
November 1, 1999 (the "Commencement Date") and shall continue until
terminated by the Company as provided in this Section 7(a) or by the
Executive as provided in Section 7(c) below. The Company may, at its
election, terminate the obligations of the Company under this Agreement as
follows:
(i) Upon at least sixty (60) days' prior written notice if the
Executive becomes physically or mentally incapacitated or is injured
so that he is unable to perform the services required of him hereunder
and such inability to perform continues for a period in excess of six
(6) months and is continuing at the time of such notice; or
(ii) For "Cause" upon prior written notice of such termination to the
Executive. For purposes of this Agreement, the Company shall have
"Cause" to terminate its obligations hereunder upon (a) the Company's
determination that the Executive has ceased or failed to substantially
perform his duties hereunder (other than as a result of his incapacity
due to physical or mental illness or injury), and at least thirty (30)
days' prior written notice to the Executive, (b) the Executive's
death, (c) the Company's determination that the Executive has engaged
or is about to engage in conduct materially injurious to the Company,
(d) the Executive's having been convicted of a felony, or (e) the
Executive's participation in
-3-
<PAGE>
activities proscribed by the provisions of Sections 2, 9, or 11 hereof
or material breach of any of the other covenants herein; or
(iii) Without Cause upon at least sixty (60) days' prior written
notice of such termination to the Executive.
(b) If, subsequent to six (6) months of the date the Executive's employment
hereunder commences, this Agreement is terminated pursuant to Section
7(a)(i) above, subject to Section 11(d) below, the Executive shall receive
severance pay until the fourth anniversary of the date hereof at the rate
of one hundred percent (100%) of Base Salary, reduced by applicable payroll
taxes and further reduced by the amount received by the Executive during
such period under any Company maintained disability insurance policy or
plan or under Social Security or similar laws. Such severance payments
shall be paid periodically to the Executive as provided in Section 3(a) for
the payment of Base Salary. If this Agreement is terminated at any time
pursuant to Section 7(a)(ii) above, the Executive shall receive no
severance pay. If this Agreement is terminated pursuant to Section
7(a)(iii) above, the Executive shall receive severance pay, for a period of
twelve (12) months from and after such termination, equal to the Base
Salary less the amount, if any, earned by the Executive during such twelve
(12) month period, whether as salary, consulting fees, deferred payments or
other direct or indirect compensation. Such severance payments (less
applicable withholding and payroll taxes) shall be paid periodically to the
Executive as provided in Section 3(a) for the payment of Base Salary.
(c) The Executive may terminate his employment under this Agreement upon
breach by the Company or for Good Reason. Termination of the Executive's
employment for "breach" shall mean in the event that the Company fails to
perform, in any material respect, its obligations under this Agreement,
after written notice to the Company setting forth in reasonable detail the
nature of such breach, if such breach remains uncured for a period of 90
days following such notice to the Company. Termination of the Executive's
employment for "Good Reason" shall only mean termination based on (i) a
substantial diminution in the responsibilities, duties, and powers of the
Executive including, without limitation, the Executive ceasing to be the
Vice President, Quality of the Company; and/or (ii) the relocation of the
Executive's present office location to an area more than 100 miles from the
metropolitan Boston area. In the event of termination of employment
pursuant to this paragraph (c), the Company shall pay to the Executive
severance pay for a period of twelve (12) months in an amount equal to
(x) 100% of the
-4-
<PAGE>
Executive's Base Salary immediately prior to such termination; plus,
(y) any bonus payment for the fiscal year preceding the year in which such
termination occurs that was earned but not paid at the date of such
termination. The Executive shall not be required to mitigate the amount of
any payment provided for in this paragraph (c) by seeking other employment
or otherwise, but the amount of any payment or benefit provided for in this
paragraph (c) shall be reduced by an amount equal to any compensation
earned by the Executive as a result of employment with another employer
after termination of employment with the Company, or otherwise.
(d) The Executive may terminate his employment under this Agreement for any
reason upon at least sixty (60) days' prior written notice. In the event of
any such termination of employment pursuant to this paragraph (d)
(excluding any termination of employment paragraph (c) above), the
Executive shall not be entitled to any severance payments.
8. REPRESENTATIONS. The Executive hereby represents to the Company that
(a) he is legally entitled to enter into this Agreement and to perform the
services and other obligations contemplated herein; (b) he has, and throughout
the term of this Agreement will continue to have, the full right, power and
authority, subject to no rights of third parties, to grant to the Company the
rights contemplated by Section 10 hereof; and (c) he is not subject to any
agreement, rule, regulation or policy of any university, research institution or
other third party inconsistent with the foregoing representations.
9. DISCLOSURE OF INFORMATION.
(a) The Executive recognizes and acknowledges that the Company's trade
secrets, know-how and proprietary processes as they may exist from time to
time (including, without limitation, information regarding methods,
cultures, vectors, plasmids, synthesis techniques, nucleic acid sequences,
purification techniques, and assay procedures) as well as the Company's
confidential business plans, and financial data are valuable, special, and
unique assets of the Company's business, access to and knowledge of which
are essential to the performance of the Executive's duties hereunder. The
Executive shall not, during or after the term of his employment by the
Company, in whole or in part, disclose such secrets, know-how, processes,
business plans, or financial data to any person, firm, corporation,
association, or other entity for any reason or purpose whatsoever, nor
shall the Executive make use of any such property for his own purposes or
for the benefit of any person, firm, corporation, or other entity (except
the Company) under any circumstances during or after the
-5-
<PAGE>
term of his employment, provided that after the term of his employment,
these restrictions shall not apply to such secrets, know-how, and processes
which the Executive can establish by competent proof:
(i) were known, other than under binder of secrecy, to the Executive
prior to his employment by the Company;
(ii) were passed into the public domain prior to or after their
development by or for the Company, other than through acts or
omissions attributable to the Executive; or
(iii) were subsequently obtained, other than under binder of secrecy,
from a third party not acquiring the information under an obligation
of confidentiality from the disclosing party.
(b) Upon termination of his employment hereunder, the Executive shall
promptly turn over to the Company all originals and copies which he
may have of any of the Company's confidential information described in
this Section 9.
10. INTELLECTUAL PROPERTY. The Executive hereby sells, transfers, and
assigns to the Company, or to any person or entity designated by the Company,
the entire right, title, and interest of the Executive in and to all inventions,
ideas, discoveries, and improvements (including, without limitation, all
microorganisms, strains, or cultures) whether patented or unpatented, and
copyrightable material made or conceived by the Executive, solely or jointly,
during the term hereof, which arise out of research or other activities
conducted by, for, or under the direction of the Company, whether or not
conducted at the Company's facilities, or which relate to methods, apparatus,
designs, products, processes, or devices, sold, leased, used, or under
consideration or development by the Company. The Executive acknowledges that all
copyrightable materials developed or produced by the Executive within the scope
of his employment constitute works made for hire. The Executive shall
communicate promptly and disclose to the Company, in such form as the Company
may reasonably request, all information, details, and data pertaining to any
such inventions, ideas, discoveries, and improvements; and the Executive shall
execute and deliver to the Company such formal transfers and assignments and
such other papers and documents and shall give such testimony as may be
necessary or required of the Executive to permit the Company or any person or
entity designated by the Company to file and prosecute patent applications and,
as to copyrightable material, to obtain copyrights thereof. Any such invention,
idea, discovery, or improvement disclosed by the Executive within one (1) year
following the termination of this Agreement shall be deemed to fall within the
-6-
<PAGE>
provisions of this Section 10 unless proved to have been first conceived and
made following such termination.
11. COVENANTS NOT TO COMPETE OR INTERFERE.
(a) Subject to Section 11(b) below, during the term of this Agreement and
the period ending twenty-four (24) months from and after the termination of
the Executive's employment hereunder, the Executive shall not engage in any
business (whether as an officer, director, owner, employee, partner,
consultant, advisor, or other direct or indirect participant) engaged in
the development of EX VIVO gene therapy and/or gene targeting and/or gene
activation methods and/or niche proteins and/or the sale of products or
rendering of services related to EX VIVO gene therapy and/or gene targeting
and/or gene activation and/or niche proteins and/or to any other activities
which directly compete with the Company's business activities. This
Agreement shall not be construed to restrict the Executive's right to be
employed as a faculty member of any university or employee of any nonprofit
agency or foundation after any termination of this Agreement where this
covenant not to compete shall continue to be in effect. During the period
in which this covenant not to compete is in effect the Executive also shall
not interfere with, disrupt, or attempt to disrupt the relationship,
contractual or otherwise, between the Company and any customer, supplier,
lessor, lessee, employee, consultant, research partner, or investor of the
Company.
(b) If this Agreement is terminated by the Company pursuant to Section
7(a)(iii) above, the provisions of the first sentence of Section 11(a)
shall apply until twelve (12) months from and after such termination.
(c) It is the desire and intent of the parties that the provisions of this
Section 11 shall be enforced to the fullest extent permissible under the
laws and public policies applied in each jurisdiction in which enforcement
is sought. Accordingly, if any particular Subsection or portion of this
Section 11 shall be adjudicated to be invalid or unenforceable, this
Section 11 shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only
with respect to the operation of this Section in the particular
jurisdiction in which such adjudication is made.
(d) In the event of any breach of the provisions of this Section 11 by the
Executive, any and all rights of the Executive to receive severance
payments under Section 7(b) above shall automatically terminate.
-7-
<PAGE>
12. INJUNCTIVE RELIEF. If there is a breach or threatened breach of the
provisions of Section 9, 10, or 11 of this Agreement, the Company shall be
entitled to an injunction, without bond, restraining the Executive from such
breach. Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies for such breach or threatened breach.
13. INSURANCE. The Company may, at its election and for its benefit, insure
the Executive against accidental loss or death, and the Executive shall submit
to such physical examinations and supply such information as may be required in
connection therewith.
14. NOTICES. Any notice required or permitted to be given under this
Agreement to the Executive shall be sufficient if in writing and if sent by
certified or registered mail to his residence, or in the case of the Company, to
Transkaryotic Therapies, Inc., 195 Albany Street, Cambridge, MA 02139,
Attention: Chief Executive Officer, or to such other offices or addresses as the
Company shall designate from time to time in writing to the Executive. Any such
notice shall be effective on the earlier of (a) the date on which it is
personally delivered or (b) three (3) days after it is deposited in the United
States mails, postage prepaid.
15. WAIVER OF BREACH. A waiver by the Company or the Executive of a breach
of any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the other party.
16. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the Commonwealth of
Massachusetts.
17. ASSIGNMENT. This Agreement may be assigned, without the consent of the
Executive, by the Company to any person, partnership, corporation or other
entity which succeeds to the business of the Company or which has purchased
substantially all the assets of the Company, provided such assignee assumes all
the liabilities of the Company hereunder.
18. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties and supersedes any prior understandings or agreements between the
Executive and the Company. This Agreement may be changed only by an agreement in
writing signed by the party against whom enforcement of any waiver, change,
modification, extension, or discharge is sought.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment Agreement as
of the date first above written.
TRANSKARYOTIC THERAPIES, INC.
By: /s/ Richard F Selden
-------------------------------
Richard F Selden, M.D., Ph.D.
Founder and Chief Executive
Officer
/s/ Joseph G. Habarta
-------------------------------
Joseph G. Habarta, Ph.D.
-9-
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<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, 1999 and presented elsewhere
by management from time to time.
WE ARE A PARTY TO LITIGATION WITH AMGEN AND KIRIN-AMGEN INVOLVING
GA-EPO-TM-
We and Aventis, our collaborator, are defendants in a civil patent
infringement lawsuit brought by Amgen Inc. in the U.S. District Court for the
District of Massachusetts. Amgen's complaint, which was filed in April 1997,
alleged that GA-EPO and the processes for producing GA-EPO infringe certain of
Amgen's U.S. patents. Amgen's complaint requested that we and Aventis be
enjoined from making, using, or selling GA-EPO and that the District Court award
Amgen monetary damages.
In April 1998, the District Court granted our and Aventis' Motion for
Summary Judgment of Non-Infringement in this case. The District Court based this
decision on the fact that all of our and Aventis' GA-EPO related activities
through that date had been conducted solely for uses reasonably related to the
production of information for submission to the FDA as part of seeking
regulatory approval to market GA-EPO. The District Court stated that, under the
Waxman-Hatch Act, these activities are not acts of patent infringement. The
District Court did not otherwise address the issue of whether our and Aventis'
activities that were challenged by Amgen would infringe Amgen's patents in the
future. The District Court ordered Amgen's remaining claim for Declaratory
Judgment of Future Infringement administratively closed, subject to being
reopened upon motion by either party for good cause shown.
In June 1999, we and Aventis filed a motion to reopen the case in the
District Court. The District Court granted this motion and scheduled the trial
for April, 2000.
In addition, in July 1999, we commenced legal proceedings in the U.K.
against Kirin-Amgen Inc. seeking a declaration that a U.K. patent held by
Kirin-Amgen will not be infringed by the sale of GA-EPO and that numerous claims
of the U.K. patent are invalid. The trial is expected to be held in 2001.
We can provide no assurance as to the outcome of either the U.S. or U.K.
proceedings. A court decision in Amgen's or Kirin-Amgen's favor, including the
issuance of an injunction against the making, using, or selling of GA-EPO by us
and Aventis in the U.S. or the U.K., or any other conclusion of either
litigation in a manner adverse to us and Aventis, would have a material adverse
effect on our business, financial condition, and results of operations.
Moreover, GA-EPO may be the subject of additional litigation.
Pursuant to our agreements with Aventis, Aventis has assumed the cost
of the Amgen and
<PAGE>
Kirin-Amgen litigations. We are required to reimburse Aventis for our share of
litigation expenses from future royalties, if any, payable by Aventis from the
sale of GA-EPO and in certain other circumstances.
WE MAY BE SUBJECT TO ADDITIONAL LITIGATION RELATING TO OUR INTELLECTUAL
PROPERTY RIGHTS
The biotechnology industry has been characterized by significant litigation
and interference and other proceedings regarding patents, patent applications,
and other intellectual property rights. In addition to the Amgen patent
litigation described under "--We are a party to litigation with Amgen and
Kirin-Amgen involving GA-EPO-TM-" and the patent interference described under
"--We are involved and may become involved in patent litigation or other
intellectual property proceedings relating to our Transkaryotic Therapy-TM-
technology which could result in liability for damages or stop our development
and commercialization efforts," we may become a party to additional patent
litigation and other proceedings in the future.
Certain of our competitors have filed patent applications and have been
issued patents relating to certain methods of producing therapeutic proteins. We
believe that the risk of our becoming involved in patent litigation is
significant with respect to the therapeutic proteins that we anticipate
producing.
An adverse outcome in any patent litigation or other proceeding involving
patents could subject us to significant liabilities to third parties and require
us to cease using the technology that is at issue or to license the technology
from third parties. We may not be able to obtain any required licenses on
commercially acceptable terms or at all.
The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our competitors may be able
to sustain these costs more effectively than we can because of their
substantially greater financial resources. Uncertainties resulting from the
initiation and continuation of patent litigation or other proceedings could have
a material adverse effect on our ability to compete in the marketplace.
In addition, hearings have been held by Congress with respect to the
Waxman-Hatch Act. Under the safe harbor provisions of the Waxman-Hatch Act,
activities conducted solely for uses reasonably related to the production of
information for submission to the FDA as part of seeking regulatory approval to
market a product are not acts of patent infringement. If legislation changing
the safe harbor provisions of the Waxman-Hatch Act were introduced in Congress
and enacted, competitors of ours that desire to bring U.S. patent infringement
actions against us might be able to do so at an earlier time than under the
existing law.
WE HAVE NOT GENERATED REVENUES FROM THE SALE OF PRODUCTS
We are at an early stage of development. We have not generated revenues
from the sale of products. We do not expect to derive any revenues from product
sales until late 2000, at the earliest. Each of our three product platforms
involves new and rapidly evolving technologies. All
<PAGE>
of our potential products are in research, preclinical testing, or clinical
development. We will need to conduct additional development efforts for all of
these products prior to seeking regulatory approval. Preclinical and clinical
data on the safety and efficacy of our potential products are limited. Our
potential products may not be efficacious or may prove to have undesirable or
unintended side effects, toxicities, or other characteristics that may prevent
or limit commercial use.
IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL, WE WILL NOT BE ABLE TO DEVELOP
AND COMMERCIALIZE ANY RELATED PRODUCTS
In order to obtain regulatory approvals for the commercial sale of our
potential products, we and our collaborators will be required to complete
extensive clinical trials in humans to demonstrate the safety and efficacy of
the products. We may not be able to obtain authority from the FDA or other
regulatory agencies to commence or complete these clinical trials.
The results from preclinical testing of a product that is under development
may not be predictive of results that will be obtained in human clinical trials.
In addition, the results of early human clinical trials may not be predictive of
results that will be obtained in larger scale, advanced stage clinical trials.
Furthermore, we, one of our collaborators, 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, or for other reasons.
The rate of completion of clinical trials is dependent in part upon the
rate of 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. In particular, the patient population for some of
our Niche Protein products is small. Delays in planned patient enrollment may
result in increased costs and program delays.
We and our collaborators may not be able successfully to complete any
clinical trial of a potential product within any specified time period. In some
cases, we may not be able to complete the trial at all. Moreover, clinical
trials may not show any potential product to be safe or efficacious. Thus, the
FDA and other regulatory authorities may not approve any of our potential
products for any indication.
Our business, financial condition, or results of operations could be
materially adversely affected if:
- we or our collaborators are unable to complete a clinical trial of one of
our potential products;
- the results of any clinical trial are unfavorable; or
- the time or cost of completing the trial exceeds our expectations.
<PAGE>
GENE THERAPY CLINICAL TRIALS HAVE BEEN SUSPENDED AND REGULATORY AUTHORITIES
ARE REVIEWING THE NEED FOR INCREASED REGULATION OF GENE THERAPY CLINICAL TRIALS
Due to recent adverse events that have occurred during gene therapy
clinical trials, conducted by other biotechnology and pharmaceutical companies
and institutions, the federal government, the FDA, industry organizations, and
institutions conducting gene therapy clinical trials have grown increasingly
concerned about the safety of gene therapy clinical trials. As a result, a
number of gene therapy clinical trials have been terminated or suspended. In
February 2000, Beth Israel placed a temporary moratorium on all gene therapy
clinical trials being conducted at its facility, including our clinical trial
for hemophilia A, due to national public policy concerns relating to gene
therapy trials. There had been no adverse events associated with our trial. Upon
review of our hemophilia A clinical trial safety data, Beth Israel resumed our
gene therapy clinical trial to treat hemophilia A two weeks after its initial
suspension. There can be no assurance that increased concern over gene therapy
trials generally will not lead the FDA or other regulatory agencies to impose
further regulation on gene therapy clinical trials. If greater regulations are
imposed on gene therapy research generally, the delays and costs involved in
complying with such greater regulation may impair our ability to complete
clinical trials already in progress and to conduct gene therapy clinical trials
in the future.
WE MAY NOT OBTAIN GOVERNMENT APPROVALS; THE APPROVALS PROCESS IS COSTLY AND
LENGTHY
The testing, manufacturing, labeling, advertising, promotion, export, and
marketing, among other things, of our products are subject to extensive
regulation by governmental authorities in the U.S. and other countries. The
regulatory approval process to obtain market approval for a new drug or biologic
takes many years and requires the expenditure of substantial resources. We have
had only limited experience in preparing applications and obtaining regulatory
approvals.
There can be no assurance that submission of an Investigational New Drug
Application will result in FDA authorization to commence clinical trials, or
that once clinical trials have begun, testing will be completed successfully
within any specific time period, if at all, with respect to any of our products.
Furthermore, we or the FDA may suspend clinical trials at any time on various
grounds, including a finding that the subjects or patients are being exposed to
unacceptable health risks. Once trials are complete and an application has been
submitted, the FDA may deny a BLA if applicable regulatory criteria are not
satisfied, may require additional testing or information, and/or may require
postmarketing testing and surveillance to monitor the safety or efficacy of a
product. The testing and approval process requires substantial time, effort, and
financial resources. We can provide no assurance that any approval will be
granted on a timely basis, if at all.
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 more uncertain than for other types of
products. This uncertainty may cause delays in the regulatory process relating
to our gene therapy products, including delays in our
<PAGE>
initiating clinical trials of these products. This uncertainty may also increase
the cost of obtaining regulatory approvals of our gene therapy products.
Both before and after approval is obtained, violations of regulatory
requirements may result in various adverse consequences, including the FDA's
delay in approving or refusal to approve a product, withdrawal of an approved
product from the market, and/or the imposition of criminal penalties against the
manufacturer and/or the BLA holder.
We will also be subject to a variety of foreign regulations governing
clinical trials and the sale of its products. Whether or not we have obtained
FDA approval, the comparable regulatory authorities of foreign countries must
also approve a product prior to the commencement of marketing of the product in
those countries. The approval process varies from country to country and the
time may be longer or shorter than that required for FDA approval.
WE FACE SIGNIFICANT COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING,
DEVELOPING, OR COMMERCIALIZING PRODUCTS BEFORE OR MORE SUCCESSFULLY THAN WE DO
The biotechnology industry is highly competitive and characterized by rapid
and significant technological change. Our competitors include pharmaceutical
companies, biotechnology firms, universities, and other research institutions.
Many of these competitors have substantially greater financial and other
resources than we do and are conducting extensive research and development
activities on technologies and products similar to or competitive with ours.
We may be unable to develop technologies and products that are more
clinically efficacious or cost-effective than products developed by our
competitors. Even if we obtain marketing approval for our product candidates,
many of our competitors have more extensive and established sales, marketing,
and distribution capabilities than we do. Litigation with third parties,
including our present litigation with Amgen, could delay our time to market for
certain products and enable our competitors to more quickly and effectively
penetrate certain markets.
Under our Gene-Activated protein program, we are developing fully human
versions of proteins that are currently-marketed. For instance, in the case of
GA-EPO, erythropoietin is marketed by Amgen and Johnson & Johnson in the U.S.;
F. Hoffmann-La Roche Ltd. (Boehringer Mannheim GmbH) and J&J (Janssen-Cilag) in
Europe; and Sankyo Company Ltd., Chugai Pharmaceutical Co., Ltd., and Kirin in
Japan.
Many of the protein products against which our Gene-Activated proteins
would compete have well-known brand names, have been promoted extensively, and
have achieved market acceptance by third party payors, hospitals, physicians,
and patients. Many of the companies that produce these protein products have
patents covering the techniques used to produce these products, which have
served as effective barriers to entry in the protein therapeutics market. As
with Amgen and its erythropoietin product, these companies may seek to block our
entry into the market by asserting that our Gene-Activated proteins infringe
their patents. Many of these companies are also seeking to develop and
commercialize new or potentially improved versions
<PAGE>
of their proteins.
We believe that the primary competition with respect to our Niche Protein
product program is from biotechnology and smaller pharmaceutical companies. In
particular, we believe that our major competition with respect to Fabry disease
and Gaucher disease is Genzyme Corporation. Genzyme is conducting late stage
clinical trials of a protein product for the treatment of Fabry disease and has
marketed a product for the treatment of Gaucher disease since 1991. Genzyme owns
or controls issued patents related to the production of protein products to
treat Fabry disease and Gaucher disease. The markets for some of our potential
Niche Protein products are quite small. As a result, if competitive products
exist, we may not be able successfully to commercialize our products.
Our gene therapy system will have to compete with other gene therapy
systems, as well as with conventional methods of treating targeted diseases and
conditions. In addition, new non-gene therapy treatments may be developed in the
future. A number of companies, including major biotechnology and pharmaceutical
companies, as well as development stage companies, are actively involved in this
field.
COMPETITORS PRODUCTS MAY RECEIVE ORPHAN DRUG EXCLUSIVITY AND THEREBY
PRECLUDE US FROM MARKETING OUR NICHE PROTEIN-TM- PRODUCTS AND WE MAY NOT BE ABLE
TO OBTAIN ORPHAN DRUG EXCLUSIVITY FOR OUR NICHE PROTEIN PRODUCTS
If a product which has an orphan drug designation from the FDA subsequently
receives the first marketing approval for the indication for which it has such
designation, the product is entitled to orphan drug exclusivity, i.e., the FDA
may not approve any other applications to market the same product for the same
indication, except in limited circumstances, for a period of seven years.
Obtaining orphan drug designations and orphan drug exclusivity for our Niche
Protein products may be critical to our success in this area. We may not be able
to obtain orphan drug designation or exclusivity for any of our potential
products or be able to maintain such designation or exclusivity for any of these
products. For example, if a competitive product is shown to be clinically
superior to our product, any orphan drug exclusivity we have obtained will not
apply to our product.
Our competitors may also seek orphan drug designations and obtain orphan
drug exclusivity for products competitive with our products before we obtain
marketing approval. We are aware that Genzyme is conducting late stage clinical
trials of a protein product for the treatment of Fabry disease for which it has
an orphan drug designation. If Genzyme's Fabry disease product receives
marketing approval before our Fabry disease product, it is likely that we would
not be permitted to market our product in the U.S. unless our product is shown
to be clinically superior to their product.
WE ARE DEPENDENT ON AVENTIS AND OTHER CORPORATE COLLABORATORS TO DEVELOP,
CONDUCT CLINICAL TRIALS, OBTAIN
<PAGE>
REGULATORY APPROVALS FOR, AND, MANUFACTURE, MARKET, AND SELL OUR PRINCIPAL
PRODUCTS
We are parties to collaborative agreements with third parties relating to
certain of our principal products. We are relying on Aventis to develop, conduct
clinical trials, obtain regulatory approvals for, and manufacture, market, and
sell GA-EPO and GA-II; Sumitomo to develop and commercialize Replagal for Fabry
disease in Japan and other Asian countries; and GI to develop and commercialize
Factor VIII gene therapy for hemophilia A in Europe. Our collaborators may not
devote the resources necessary or may otherwise be unable to complete
development and commercialization of these potential products. Our existing
collaborations are subject to termination without cause on short notice under
certain circumstances.
Our existing collaborations and any future collaborative arrangements with
third parties may not be scientifically or commercially successful. Factors that
may affect the success of our collaborations include the following:
- our collaborators may be pursuing alternative technologies or developing
alternative products, either on their own or in collaboration with others, that
may be competitive with the product as to which they are collaborating with us,
which could affect our collaborative partners' commitment to the collaboration
with us;
- reductions in marketing or sales efforts or a discontinuation of
marketing or sales of our products by our collaborators would reduce our
revenues, which will be based on a percentage of net sales by the collaborator;
- our collaborators may terminate their collaborations with us, which could
make it difficult for us to attract new collaborators or adversely affect the
perception of us in the business and financial communities; and
- our collaborators may pursue higher priority programs or change the focus
of their development programs, which could affect the collaborator's commitment
to us. Pharmaceutical companies have historically re-evaluated their development
priorities following mergers and consolidations. This could occur following the
closing of the merger between Hoechst Marion Roussel, Inc. and Rhone-Poulenc SA
into Aventis S.A., which was completed in late 1999.
WE MAY NOT BE ABLE TO OBTAIN PATENT PROTECTION FOR OUR DISCOVERIES
Our success will depend in large part on our ability to obtain patent
protection for our processes and products in the U.S. and other countries. The
patent situation in the field of biotechnology generally is highly uncertain and
involves complex legal and scientific questions. We may not be issued patents
relating to our technology. Even if issued, patents may be challenged,
invalidated, or circumvented. Our patents also may not afford us protection
against competitors with similar technology. Because patent applications in the
U.S. are maintained in secrecy until patents issue, third parties may have filed
or maintained patent applications for
<PAGE>
technology used by us or covered by our pending patent applications without our
being aware of these applications.
We may not hold proprietary rights to certain product patents, process
patents, and use patents related to our products or their methods of
manufacture. In some cases, these patents may be owned or controlled by third
parties. As a result, we may be required to obtain licenses under third party
patents to market certain of our potential products. If licenses are not
available to us on acceptable terms, we will not be able to market these
products.
We also rely upon unpatented proprietary technology, processes, and
know-how. We seek to protect this information in part by confidentiality
agreements with our employees, consultants, and other third party contractors.
These agreements may be breached, and we may not have adequate remedies for any
such breach. In addition, our trade secrets may otherwise become known or be
independently developed by competitors.
WE MAY LOSE IMPORTANT LICENSE RIGHTS IN SOME CIRCUMSTANCES
We are a party to a number of patent licenses that are important to our
business and expect to enter into additional patent licenses in the future.
These licenses impose various commercialization, sublicensing, royalty,
insurance, and other obligations on us. If we fail to comply with these
obligations, the licensor will have the right to terminate the license.
WE ARE INVOLVED AND MAY BECOME INVOLVED IN PATENT LITIGATION OR OTHER
INTELLECTUAL PROPERTY PROCEEDINGS RELATED TO OUR TRANSKARYOTIC THERAPY -TM-
TECHNOLOGY WHICH COULD RESULT IN LIABILITY FOR DAMAGES OR STOP OUR DEVELOPMENT
AND COMMERCIALIZATION EFFORTS
We are a party to a proceeding before the U.S. Patent and Trademark Office
to determine the patentability of our Gene Therapy technology. The participants
in the interference are TKT, Genetic Therapy, Inc., which is a wholly-owned
subsidiary of Novartis AG, Syntex (U.S.A.), which is a wholly-owned subsidiary
of Roche Holdings, Inc., and Somatix Therapy Corporation, which has been merged
into Cell Genesys, Inc. This proceeding will also determine which of the parties
first developed this technology. If the technology is patentable, the party that
first developed the technology will be awarded the U.S. patent rights.
The process to resolve an interference can take many years. We may not
prevail in this interference. Even if we do prevail, the decision in this
proceeding may not enable us meaningfully to protect our proprietary position in
the field of EX VIVO gene therapy.
If we do not prevail in this proceeding, a consent order issued by the
Federal Trade Commission in March 1997 may be relevant to us. The Federal Trade
Commission entered this consent order to resolve anti-competitive 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 are required
to provide all gene therapy researchers and developers with nonexclusive,
<PAGE>
royalty-bearing licenses to the Novartis patent which is involved in the
interference proceeding described above. In addition, we have entered into an
agreement with Cell Genesys under which we would be permitted to market our
non-viral gene therapy products pursuant to a royalty-free license agreement if
Cell Genesys wins the interference. Thus, we believe that we may only be
materially adversely affected if Syntex prevails in this proceeding.
EVEN IF WE OBTAIN MARKETING APPROVAL, OUR PRODUCTS WILL BE SUBJECT TO
ONGOING REGULATORY REVIEW
If regulatory approval of a product is granted, such approval may be
subject to limitations on the indicated uses for which the product may be
marketed or contain requirements for costly post-marketing studies. As to
products for which we obtain marketing approval, we, the manufacturer of the
product if other than us, and the manufacturing facilities will be subject to
continual review and periodic inspections by the FDA and other regulatory
authorities. The subsequent discovery of previously unknown problems with the
product, manufacturer, or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.
If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions, and criminal prosecution.
THE MARKET MAY NOT BE RECEPTIVE TO OUR PRODUCTS UPON THEIR INTRODUCTION
The commercial success of our products that are approved for marketing by
the FDA and other regulatory authorities will depend upon their acceptance by
the medical community and third party payors as clinically useful,
cost-effective, and safe. Each of our technology programs is new. As a result,
it may be difficult for us to achieve market acceptance of our products,
particularly for the first products for which we obtain marketing approval.
Other factors that we believe will materially affect market acceptance of
our products include:
- the timing of the receipt of marketing approvals and the countries in
which such approvals are obtained;
- the safety and efficacy of the product as compared to competitive
products; and
- the cost-effectiveness of the product and the ability to receive third
party reimbursement.
WE HAVE NOT BEEN PROFITABLE AND MAY REQUIRE ADDITIONAL FUNDING
<PAGE>
We have experienced significant operating losses since our inception in
1988. At, December 31, 1999, we had an accumulated deficit of approximately
$114.4 million. We expect that we will continue to incur substantial losses into
2001 and that our cumulative losses will increase until then as our research and
development, sales and marketing, and manufacturing efforts expand. We expect
that the losses that we incur will fluctuate from quarter to quarter and that
these fluctuations may be substantial. To date, we have not received revenues
from the sale of products.
We will require substantial funds to conduct research and development,
including preclinical testing and clinical trials of our potential products, and
to manufacture and market any products that are approved for commercial sale.
Our future capital requirements will depend on many factors, including the
following:
- continued progress in our research and development programs, as well as
the magnitude of these programs;
- the scope and results of our clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the cost of manufacturing activities;
- the cost of commercialization activities;
- the cost of our additional facilities requirements;
- our ability to establish and maintain collaborative arrangements;
- the timing, receipt, and amount of milestone and other payments from
collaborators;
- the timing, receipt, and amount of sales and royalties from our potential
products in the market;
- the costs involved in preparing, filing, prosecuting, maintaining, and
enforcing patent claims and other patent-related costs, including litigation
costs and the costs of obtaining any required licenses to technologies; and
- the cost of obtaining and maintaining licenses to use patented
technologies.
We may seek additional funding through collaborative arrangements and
public or private financings. Additional financing may not be available to us on
acceptable terms or at all.
If we raise additional funds by issuing equity securities, further dilution
to our then existing stockholders will result. In addition, the terms of the
financing may adversely affect the holdings
<PAGE>
or the rights of such stockholders. If we are unable to obtain funding on a
timely basis, we may be required to significantly curtail one or more of our
research or development programs. We also could be required to seek funds
through arrangements with collaborators or others that may require us to
relinquish rights to certain of our technologies, product candidates, or
products which we would otherwise pursue on our own.
WE HAVE LIMITED MANUFACTURING CAPABILITIES AND WILL DEPEND ON THIRD PARTY
MANUFACTURERS
We have limited manufacturing experience and no commercial scale
manufacturing capabilities. In order to continue to develop products, apply for
regulatory approvals, and, ultimately, commercialize any products, we will need
to develop, contract for, or otherwise arrange for the necessary manufacturing
capabilities.
We expect to manufacture certain of our products in our own manufacturing
facilities. We will require substantial additional funds and need to recruit
qualified personnel in order to build or lease and operate any manufacturing
facilities.
We currently rely upon third parties to produce material for preclinical
testing and clinical trial purposes. We expect to continue to do so in the
future. We also expect to rely upon third parties for the commercial production
of certain of our products if we succeed in obtaining necessary regulatory
approvals. There are a limited number of such third party manufacturers capable
of manufacturing for us. If we are unable to obtain or maintain contract
manufacturing of these products, or to do so on commercially reasonable terms,
we may not be able to complete development of these products or market them. To
the extent that we enter into manufacturing arrangements with third parties, we
are dependent upon these third parties to perform their obligations in a timely
manner and in accordance with applicable government regulations.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE AND CAPABILITIES
We have limited sales and marketing experience and capabilities. In order
to market our products, we will need to develop this experience and these
capabilities or rely upon third parties, such as our corporate collaborators, to
perform these functions. If we rely on third parties to sell, market, or
distribute our products, our success will be dependent upon the efforts of these
third parties in performing these functions. In many instances, we may have
little or no control over the activities of these third parties in selling,
marketing, and distributing our products. If we choose to conduct these
activities directly, as we plan to do with respect to some of our potential
products, we may not be able to recruit and maintain an effective sales force.
OUR SUCCESS IS DEPENDENT UPON THE RETENTION AND HIRING OF KEY PERSONNEL
Our success is highly dependent on the retention of principal members of
our scientific
<PAGE>
and administrative staff. Furthermore, our future growth will require hiring a
significant number of qualified scientific and administrative personnel.
Accordingly, recruiting and retaining such personnel in the future will be
critical to our success. There is intense competition from other companies and
research and academic institutions for qualified personnel in the areas of our
activities, and there can be no assurance that we will be able to continue to
attract and retain, on acceptable terms, the qualified personnel necessary for
the continued development of our business.
WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
ADEQUATE PRODUCT LIABILITY INSURANCE
Our business exposes us to the risk of product liability claims that is
inherent in the testing, manufacturing, and marketing of human therapeutic
products. Although we have clinical trial liability insurance, we do not
currently have any product liability insurance. We may not be able to obtain or
maintain such insurance on acceptable terms or at all. Moreover, any insurance
that we do obtain may not provide adequate protection against potential
liabilities. If we are unable to obtain insurance at acceptable cost or
otherwise protect against potential product liability claims, we will be exposed
to significant liabilities, which may materially and adversely affect our
business and financial condition. These liabilities could prevent or interfere
with our product commercialization efforts.
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT BY THIRD PARTY
PAYORS FOR OUR FUTURE PRODUCTS, WE MAY NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE
OUR PRODUCTS IN CERTAIN MARKETS
The availability of reimbursement by governmental and other third party
payors affects the market for any pharmaceutical product. These third party
payors continually attempt to contain or reduce the costs of health care by
challenging the prices charged for medical products and services. In certain
foreign countries, particularly the countries of the European Union, the pricing
of prescription pharmaceuticals is subject to governmental control.
Proposals have been considered periodically by the Health Care Financing
Administration of the United States Department of Health and Human Services to
reduce the reimbursement rate with respect to erythropoietin. Adoption by the
Health Care Financing Administration of any such proposal might have an adverse
effect on the pricing of GA-EPO.
In both the U.S. and certain foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the health care system.
Further proposals are likely. The potential for adoption of these proposals may
affect our ability to raise capital, obtain additional collaborative partners,
and market our products.
If we or our collaborators obtain marketing approvals for our products, we
expect to experience pricing pressure due to the trend toward managed health
care, the increasing influence of health maintenance organizations, and
additional legislative proposals. We may not be able to sell our products
profitably if reimbursement is unavailable or limited in scope or amount.
