-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AlY5xCmcvb065fD2Ua07Ke29cSEH34n1g+bkIimFMsZI4go218mn52WjaLiIa+vn DARtdQt7u6932DorDwKfFA== 0000912057-00-023978.txt : 20000515 0000912057-00-023978.hdr.sgml : 20000515 ACCESSION NUMBER: 0000912057-00-023978 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSKARYOTIC THERAPIES INC CENTRAL INDEX KEY: 0000885259 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 043027191 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21481 FILM NUMBER: 629809 BUSINESS ADDRESS: STREET 1: 195 ALBANY ST CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6173490200 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2000 COMMISSION FILE NUMBER 0-21481 TRANSKARYOTIC THERAPIES, INC. (Exact name of registrant as specified in its charter) ---------------------- DELAWARE 04-3027191 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 195 ALBANY STREET CAMBRIDGE, MASSACHUSETTS 02139 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 349-0200 ---------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / X / No / / At April 30, 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. Transkaryotic Therapies, Inc. INDEX
Page Number ----------- 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
2 Part 1 -- Item 1 -- Condensed Consolidated Financial Statements Transkaryotic Therapies, Inc. Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except par values) March 31, December 31, 2000 1999 ------------- ------------- 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 ------------- ------------- 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 ------------- ------------- Total current liabilities 8,032 8,009 Long-term debt, less current maturities 11,000 11,500 ------------- ------------- Total liabilities 19,032 19,509 ------------- ------------- 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 ============= =============
See accompanying Notes to Condensed Consolidated Financial Statements. 3 Part 1 -- Item 1 -- Condensed Consolidated Financial Statements Transkaryotic Therapies, Inc. Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts) Three Months Ended March 31, 2000 1999 --------- -------- 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 ========= ========
See accompanying Notes to Condensed Consolidated Financial Statements. 4 Part 1-- Item 1 -- Condensed Consolidated Financial Statements Transkaryotic Therapies, Inc. Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands) Three Months Ended March 31, 2000 1999 ------------- ------------ 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) ------------- ------------ Net cash provided by (used for) investing activities (59,634) 2,624 ------------- ------------ FINANCING ACTIVITIES: Issuance of common stock 1,316 58 Repayment of long-term debt (500) - Proceeds from issuance of long-term debt - 2,364 ------------- ------------ 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 ============= ============
See accompanying Notes to Condensed Consolidated Financial Statements. 5 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 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 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 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 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 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 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 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 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 Transkaryotic Therapies, Inc. EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 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).
15 EX-10.33 2 EXHIBIT 10.33 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 -1- 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. -2- 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- 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- 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- 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- 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- 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- 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- EX-27 3 EXHIBIT 27
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 79,786 100,136 0 0 0 182,247 32,779 12,056 203,249 8,032 11,000 0 0 227 183,990 203,249 0 0 0 15,721 0 0 0 (13,099) 0 (13,099) 0 0 0 (13,099) (.58) (.58)
EX-99.1 4 EXHIBIT 99.1 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 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 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. 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 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 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 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 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, 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 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 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 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. -----END PRIVACY-ENHANCED MESSAGE-----