-----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, OkE5LkpoX+1JxGVMCle+s7NmhshD9lbSBQanNgSwsJzo5D86pmIPK/ne3M1pRAcS 4N7zIZ7h3odH5b0JLizMyQ== 0000912057-01-515275.txt : 20010515 0000912057-01-515275.hdr.sgml : 20010515 ACCESSION NUMBER: 0000912057-01-515275 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 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: 1632676 BUSINESS ADDRESS: STREET 1: 195 ALBANY ST CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6173490200 10-Q 1 a2049338z10-q.txt 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, 2001 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, 2001, there were 22,760,191 shares of Common Stock, $.01 par value, outstanding. 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, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings 25 - 26 Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES 27
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, 2001 2000 ------------------- ------------------- ASSETS Current assets: Cash and cash equivalents $ 45,665 $ 49,445 Marketable securities 175,043 196,011 Prepaid expenses and other current assets 2,527 1,842 ------------------- ------------------- Total current assets 223,235 247,298 Property and equipment, net 32,797 23,597 Other assets 1,524 1,498 ------------------- ------------------- Total assets $ 257,556 $ 272,393 =================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,071 $ 3,986 Accrued expenses 8,530 8,550 Current maturities of long-term debt 2,000 2,500 ------------------- ------------------- Total current liabilities 13,601 15,036 Long-term debt, less current maturities 9,000 9,500 Stockholders' equity: Series A convertible preferred stock, $.01 par value, 10 shares authorized; 10 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively 1 1 Series B preferred stock, $.01 par value, 1,000 shares authorized; no shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively - - Common stock, $.01 par value; 100,000 shares authorized; 22,753 and 22,700 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively 228 227 Additional paid-in capital 413,288 413,242 Accumulated deficit (179,461) (165,429) Deferred compensation (668) (860) Accumulated other comprehensive income 1,567 676 ------------------- ------------------- Total stockholders' equity 234,955 247,857 ------------------- ------------------- Total liabilities and stockholders' equity $ 257,556 $ 272,393 =================== ===================
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, 2001 2000 ---------------- ----------------- License and research revenues $ 1,218 $ - Operating expenses: Research and development 16,506 12,684 Selling, general and administrative 4,959 3,037 ---------------- ----------------- 21,465 15,721 ---------------- ----------------- Loss from operations (20,247) (15,721) Other income (expense): Gain on sale of investment 2,785 - Interest income, net 3,430 2,622 ---------------- ----------------- 6,215 2,622 ---------------- ----------------- Net loss $(14,032) $(13,099) ================ ================= Basic and diluted net loss per share $ (0.62) $ (0.58) ================ ================= Shares used to compute basic and diluted net loss per share 22,718 22,630 ================ =================
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, 2001 2000 --------------- ---------------- OPERATING ACTIVITIES: Net loss $(14,032) $(13,099) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,340 556 Compensation expense related to equity issuances 180 193 Changes in operating assets and liabilities (1,568) (248) --------------- ---------------- Net cash used for operating activities (14,080) (12,598) --------------- ---------------- INVESTING ACTIVITIES: Proceeds from sales and maturities of marketable securities 50,320 11,984 Purchases of marketable securities (28,401) (70,802) Purchases of property and equipment (10,540) (895) Changes in other assets (26) 79 --------------- ---------------- Net cash provided by (used for) investing activities 11,353 (59,634) --------------- ---------------- FINANCING ACTIVITIES: Issuance of common stock 58 1,316 Repayment of long-term debt (1,000) (500) --------------- ---------------- Net cash provided by (used for) financing activities (942) 816 Effect of exchange rate changes on cash and cash equivalents (111) - --------------- ---------------- Net decrease in cash and cash equivalents (3,780) (71,416) Cash and cash equivalents at January 1 49,445 151,202 --------------- ---------------- Cash and cash equivalents at March 31 $ 45,665 $ 79,786 =============== ================
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, 2001 and 2000 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 position, results of operations and cash flows for the periods presented. The results of operations for the interim period ended March 31, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2000 included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Gene-Activated(R)and the TKT(R)logo are registered trademarks of Transkaryotic Therapies, Inc. Niche Protein(TM), Replagal(TM), and Transkaryotic Therapy(TM), are trademarks of Transkaryotic Therapies, Inc. Dynepo(TM)is a trademark of Aventis Pharmaceuticals, Inc. ("Aventis"). 2. BASIC AND DILUTED NET LOSS PER SHARE The Company calculates net loss per share in accordance with Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share." Basic earnings per share is computed using the weighted average shares outstanding. Basic net loss per share was equivalent to diluted net loss per share for the three months ended March 31, 2001 and 2000 since common equivalent shares from preferred stock and stock options have been excluded as their effect is antidilutive. 3. COMPREHENSIVE INCOME The Company had a total comprehensive loss of $13,141,000 and $13,074,000 for the three months ended March 31, 2001 and 2000, respectively. The items of comprehensive income consist primarily of unrealized gains (losses) on marketable securities. 6 4. LEGAL PROCEEDINGS The Company cannot provide assurance as to the outcome of any legal proceedings. A decision by a court in the U.S. or in any other jurisdiction in a manner adverse to the Company could have a material adverse effect on the Company's business, financial position, and results of operations. DYNEPO(TM) PATENT LITIGATION As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, the Company and Aventis are involved in a patent infringement action with Amgen, Inc. ("Amgen"). In January 2001, the U.S. District Court for the District of Massachusetts ruled that the Company infringed eight of eighteen claims asserted by Amgen. In particular, the District Court ruled that the asserted claims of U.S. Patent No. 5,547,933 are not infringed (and, if this finding is in error, that the asserted claims are invalid); that the asserted claims of U.S. Patent 5,618,698 are not infringed; that Claims 2, 3 and 4 of U.S. Patent No. 5,621,080 are valid, enforceable and infringed under the doctrine of equivalents; that Claims 1, 3, 4 and 6 of U.S. Patent No. 5,756,349 are valid, enforceable and literally infringed, but that Claim 7 of the `349 patent is not infringed; and that Claim 1 of U.S. Patent No. 5,955,422 is valid, enforceable and literally infringed. Amgen did not seek and was not awarded monetary damages. In January 2001, TKT and Aventis filed a Notice of Appeal from the Judgment of the District Court with the U.S. Court of Appeals for the Federal Circuit in this case. The Company believes it has strong grounds for appeal. Amgen filed a Notice of Cross-Appeal in February 2001 with the U.S. Court of Appeals for the Federal Circuit. In addition, in July 1999, Aventis and the Company commenced legal proceedings in the U.K. against Kirin-Amgen, Inc. ("Kirin-Amgen"), seeking a declaration that a U.K. patent held by Kirin-Amgen will not be infringed by the Company's activities related to Dynepo and that certain claims of Kirin-Amgen's U.K. patent are invalid. The English High Court of Justice ruled that one of four claims of the patent asserted by Amgen was infringed by the Company and Aventis. The Company believes it has strong grounds for appeal and filed a Notice of Appeal in April 2001. Pursuant to an Amended and Restated License Agreement, dated March 1995, between Aventis and the Company, Aventis has assumed the legal costs of the Amgen and Kirin-Amgen litigation. The Company will reimburse Aventis for the Company's share of the litigation expenses, as defined, from future royalties, if any, received from the sale of Dynepo and in certain other circumstances. 7 REPLAGAL(TM) PATENT LITIGATION In July 2000, Genzyme Corporation ("Genzyme") and Mount Sinai School of Medicine of New York University ("Mt. Sinai") filed a patent infringement suit against the Company in the U.S. District Court for the District of Delaware, alleging that the manufacture, use, intended sale, and/or intended offer for sale of the Company's Replagal(TM) product infringes one or more claims of U.S. Patent No. 5,356,804. Genzyme and Mt. Sinai seek injunctive relief and an accounting for damages. Discovery proceedings commenced in February 2001, and the District Court has scheduled trial in this action to begin in March 2002. 5. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities- Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements establish accounting and reporting standards for derivative instruments and for hedging activities. Currently, the Company does not hold derivative instruments and has not entered into any hedging arrangements. The Company does not hedge its foreign currency exposures. Thus, the Company anticipates that the adoption of SFAS 133 will not have a material impact on the Company's financial position or 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, the Company has been primarily engaged in the development and commercialization of products based on the Company's three proprietary development platforms: Gene-Activated(R) proteins, Niche Protein(TM) products and gene therapy. The Company anticipates approval for its Replagal product in Europe in mid-2001. However, as of March 31, 2001, no revenue has been derived from the sale of any products. With the exception of 1995, the Company has incurred substantial annual operating losses since inception and expects to incur significant operating losses until substantial product sales are generated. Until substantial product sales are generated, 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. At March 31, 2001, the Company's accumulated deficit was $179,461,000. Results of operations may vary significantly from period to period depending on, among other factors, the receipt, if any, and timing of approvals to market the Company's products either in the U.S. or abroad, the progress of the Company's research and development efforts, the receipt, if any, and timing of additional license fees and milestone payments, the timing of certain expenses, and the establishment of additional collaborative research agreements. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the accompanying condensed consolidated financial statements and the related footnotes thereto. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 License and research revenues totaled $1,218,000 for the three months ended March 31, 2001. Revenues in the first quarter of 2001 were earned from collaborative agreements with Sumitomo Pharmaceutical Co. Ltd. ("Sumitomo") and Genetics Institute, Inc. There were no revenues for the corresponding period in 2000. Research and development expenses totaled $16,506,000 in the first quarter of 2001, as compared to $12,684,000 during the same period in 2000. The increase in 2001 of $3,822,000, or 30%, was principally due to increases in research and development staffing and external development services in each of the Company's product development platforms. During the remainder of 2001, the costs related to both preclinical and clinical programs for the Company's Fabry disease, Hunter syndrome, hemophilia A and other Niche Protein programs are expected to 9 increase significantly as product development activities are initiated or expanded. Selling, general and administrative expenses were $4,959,000 in the quarter ended March 31, 2001, compared with $3,037,000 during the same period in 2000. The increase in 2001 of $1,922,000, or 63%, was principally due to costs incurred in preparation for worldwide launch of the Company's Replagal product. During 2001, selling, general and administrative costs are expected to increase significantly as product launch activities related to the Company's Replagal product accelerate. During the first quarter of 2001, TKT sold substantially all of its investment in a European biotechnology company resulting in a gain of $2,785,000. In 1996, TKT made a strategic investment of $300,000 in such company. Interest income was $3,654,000 and $2,622,000 for the three months ended March 31, 2001 and 2000, respectively. The average cash and marketable securities balances were $233,311,000 and $186,425,000 in 2001 and 2000, respectively. The increase in interest income of $1,032,000 resulted from higher average cash and marketable securities balances, as well as higher rates of return in the first quarter of 2001. Interest expense was $224,000 for the three months ended March 31, 2001. For 2000, no interest expense was recognized, as interest expense of $257,000 was capitalized in connection with construction in process. The Company had a net loss of $14,032,000 and $13,099,000 for the three months ended March 31, 2001 and 2000, respectively. Basic and diluted net loss per share was $0.62 for the three months ended March 31, 2001, as compared to a basic and diluted net loss per share of $0.58 for the corresponding period in 2000. 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 cash, cash equivalents and marketable securities totaling $220,708,000 at March 31, 2001, including marketable securities collateralizing letters of credit totaling $8,475,000. Cash equivalents and marketable securities are invested in U.S. government and agency obligations and money market funds. In June 2000, the Company sold 10,000 shares of Series A Convertible Preferred Stock to investment funds affiliated with E. M. Warburg, Pincus & Co., L.L.C., resulting in net proceeds to the Company of $99,797,000. In December 1998, the Company obtained an unsecured term loan facility for up to $14,000,000 to finance the capital costs related to leased space. The loan became payable 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 10 prime rate or LIBOR plus 1.50% at the Company's election. The interest rate of the loan was 6.4% as of March 31, 2001. The note contains certain restrictive covenants, including, among other things, minimum cash and tangible net asset requirements and limitations on the payment of dividends. At March 31, 2001, $11,000,000 was outstanding under the loan. In August 2000, the Company entered into a ten year lease for a new corporate headquarters and research and development facility in Cambridge, Massachusetts. The lease requires a security deposit of $7,680,000, of which $680,000 was paid in cash and the balance provided in the form of a letter of credit. An investment with a value of $7,883,000 collateralizes the letter of credit. The Company expects to spend up to an additional $30,000,000 for leasehold improvements. In January 2001, the Company purchased a 45,000 square foot development facility for $8,800,000. In addition, it leased an adjoining 44,000 square foot facility under the terms of a ten year lease. The Company expects to spend up to an additional $10,000,000 for leasehold improvements for these facilities. The Company may seek financing for all or a significant portion of the cost of the leasehold improvements described above. There can be no guarantee that financing will be available on favorable terms, if at all. At March 31, 2001, the Company had committed to pay approximately $25,000,000 to third parties for certain product development activities through 2004. At December 31, 2000, the Company had net operating loss carryforwards of approximately $144,264,000, which expire at various times through 2020. 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, interest income 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 financings, 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 11 clinical development programs, and the extent of its commercial success. 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 2003. The Company's cash requirements may vary, however, depending on numerous factors. Lack of necessary funds may require the Company to delay, scale back or eliminate some or all of its research and product development programs or to license its potential products or technologies to third parties. The Company has been engaged in litigation with Amgen and Kirin-Amgen with respect to the development of Dynepo and with Genzyme and Mt. Sinai with respect to the development of Replagal. Pursuant to the Amended and Restated License Agreement, dated March 1995, between Aventis and the Company, Aventis has assumed the legal cost of the Amgen and Kirin-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 Dynepo 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," "estimates," "intends," "should," "could," "will," "may," 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. These include, without limitation, the following: (1) whether any of the Company's Gene-Activated protein, Niche Protein product or gene therapy product candidates will advance in the clinical trial process, (2) whether such clinical trials will proceed in a timely manner, (3) whether the clinical trial results will warrant continued product development, (4) whether the required regulatory filings, such as Investigational New Drug applications and Biologics License Applications, are made in a timely manner, (5) whether the Company's products will receive approval from the U.S. Food and Drug Administration (the "FDA"), European Agency for the Evaluation of Medicinal Products (the "EMEA") or equivalent foreign regulatory agencies, (6) if such products receive approval, whether they will be successfully manufactured, distributed and marketed, (7) whether patent litigation or orphan drug issues in which the Company is involved or may become involved are resolved in a manner adverse to the Company, (8) the effects of competitive products on the Company's proposed products, (9) the Company's dependence on third parties, including collaborators, manufacturers and distributors, and (10) the other risks set forth under the caption "Certain Factors That May Affect Future Results" set forth below. In addition, any forward-looking statements represent the Company's estimates only as of the date this Quarterly Report was first filed with the Securities and Exchange Commission and should not be relied upon as representing the Company's estimates as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so, even if its estimates change. 12 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 by the Company from time to time. WE MAY NOT OBTAIN GOVERNMENT APPROVALS FOR OUR PRODUCTS; 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. We announced in March 2001 that the Committee for Proprietary Medicinal Products (the "CPMP") of the European Agency for the Evaluation of Medicinal Products (the "EMEA") issued a positive opinion recommending approval of Replagal(TM). The CPMP's recommendation for approval will be forwarded to the European Commission (the "EC"), which will determine whether to grant marketing authorization of Replagal in Europe. While the EC generally follows the opinion of the CPMP, there can be no assurance that the EC will approve the marketing authorization for Replagal. In 2001, the U.S. Food and Drug Administration (the "FDA") issued a complete review letter regarding our Biologics License Application ("BLA") for Replagal, which requested further explanation in several areas and additional data. We can provide no assurance that any approval will be granted on a timely basis, if at all. In 2000, the FDA requested that additional data be provided regarding manufacturing information and that a new BLA for Dynepo(TM) be submitted when the data is compiled. While we and Aventis are working with the FDA to satisfy all of their requests, we can provide no assurance that any approval will be granted on a timely basis, if at all. In general, there can be no assurance that submission of materials requesting permission to conduct clinical trials will result in authorization by the FDA, the EMEA or equivalent foreign regulatory agency 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 a regulatory agency such as the FDA or EMEA 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 or the EMEA may deny a BLA or Marketing Authorization Application ("MAA"), respectively, if applicable regulatory criteria are not satisfied, may require additional testing or information, or may require post-marketing 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. 13 In addition, we are developing gene therapy products. 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 or EMEA's delay in approving or refusal to approve a product, withdrawal of an approved product from the market, or the imposition of criminal penalties against the manufacturer or the BLA or MAA holder. We will also be subject to a variety of regulations outside the United States and Europe governing clinical trials and the sale of its products. Whether or not we have obtained FDA or EMEA approval, the comparable regulatory authorities of such 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 or EMEA approval. 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 Some jurisdictions, including the U.S. and Europe, may designate drugs for relatively small patient populations as `orphan drugs'. Generally, if a product which has an orphan drug designation 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., other applications to market the same product for the same indication may not be approved, except in limited circumstances, for a period of seven to ten 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 such competitive 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. Genzyme is seeking marketing authorization in both the U.S. and Europe for a protein product for the treatment of Fabry disease for which it has an orphan drug designation. Concurrently with the issuance of its positive opinion on Replagal to the EC, the CPMP issued a positive opinion recommending approval of Genzyme's Fabry disease product to the EC. We cannot predict whether Genzyme may in the future be able to prevent the marketing of Replagal through an orphan drug statute in the U.S., Europe or elsewhere. IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT BY THIRD 14 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 U.S. 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 Dynepo. 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. We believe that 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 may 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. WE HAVE LIMITED SALES AND MARKETING EXPERIENCE AND CAPABILITIES We have limited sales and marketing experience and capabilities. In order to market our products, including Replagal, if approved in Europe, we will need to develop this experience and these capabilities or rely upon third parties, such as our 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. 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, the EMEA and other regulatory authorities will depend upon their acceptance by the medical community and third party payors as clinically useful, cost-effective, and safe. It may be difficult for us to achieve market acceptance of our products. 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; and the safety, efficacy, convenience, and cost-effectiveness of the product as compared to competitive products. 15 WE HAVE LIMITED MANUFACTURING CAPABILITIES AND DEPEND ON THIRD PARTY MANUFACTURERS We have limited manufacturing experience and in order to continue to develop products, apply for regulatory approvals, and commercialize our 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 for the production of certain of our products and we expect to continue to do so in the future. There are a limited number of such third party manufacturers capable of manufacturing our protein products. As a result, we may experience difficulty in obtaining adequate capacity for our future needs. 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. 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 technical, commercial and administrative staff. Furthermore, our future growth will require hiring a significant number of qualified technical, commercial 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 ARE A PARTY TO LITIGATION WITH AMGEN AND KIRIN-AMGEN INVOLVING DYNEPO(TM) We and Aventis are involved in a patent infringement action with Amgen, Inc. ("Amgen"). In January 2001, the U.S. District Court for the District of Massachusetts ruled that we and Aventis infringed eight of eighteen claims asserted by Amgen. In particular, the District Court ruled that the asserted claims of U.S. Patent No. 5,547,933 are not infringed (and, if this finding is in error, that the asserted claims are invalid); that the asserted claims of U.S. Patent 5,618,698 are not infringed; that Claims 2, 3 and 4 of U.S. Patent No. 5,621,080 are valid, enforceable and infringed under the doctrine of equivalents; that Claims 1, 3, 4 and 6 of U.S. Patent No. 5,756,349 are valid, enforceable and literally infringed, but that Claim 7 of the `349 patent is not infringed; and that Claim 1 of U.S. Patent No. 5,955,422 is valid, enforceable and 16 literally infringed. Amgen did not seek and was not awarded monetary damages. In January 2001, we and Aventis filed a Notice of Appeal from the Judgment of the District Court with the U.S. Court of Appeals for the Federal Circuit in this case. We believe that we have strong grounds for appeal. Amgen filed a Notice of Cross-Appeal in February 2001 with the U.S. Court of Appeals for the Federal Circuit. In addition, in July 1999, we and Aventis commenced legal proceedings in the U.K. against Kirin-Amgen, Inc. ("Kirin-Amgen"), seeking a declaration that a U.K. patent held by Kirin-Amgen will not be infringed by our activities related to Dynepo and that certain claims of Kirin-Amgen's U.K. patent are invalid. The English High Court of Justice ruled that one of four claims of the patent asserted by Amgen was infringed by us and Aventis. We believe that we have strong grounds for appeal and filed a Notice of Appeal in April 2001. Pursuant to an Amended and Restated License Agreement, dated March 1995, between Aventis and us, Aventis has assumed the legal costs of the Amgen and Kirin-Amgen litigation. We will reimburse Aventis for our share of the litigation expenses, as defined, from future royalties, if any, received from the sale of Dynepo and in certain other circumstances. We can provide no assurance as to the outcome of this litigation. A court decision adverse to us could have a material adverse effect on our business, financial position, and results of operations. WE ARE A PARTY TO LITIGATION WITH GENZYME AND MT. SINAI INVOLVING REPLAGAL(TM) In July 2000, Genzyme Corporation ("Genzyme") and Mount Sinai School of Medicine of New York University ("Mt. Sinai") filed a patent infringement suit against us in the U.S. District Court for the District of Delaware, alleging that the manufacture, use, intended sale, and/or intended offer for sale of our Replagal product infringes one or more claims of U.S. Patent No. 5,356,804. Genzyme and Mt. Sinai seek injunctive relief and an accounting for damages. Discovery proceedings commenced in February 2001, and the District Court has scheduled trial in this action to begin in March 2002. We can provide no assurance as to the outcome of this litigation. A court decision adverse to us could have a material adverse effect on our business, financial position, and results of operations. 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 17 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 litigation with both Amgen and Genzyme, could delay our time to market for certain products and enable our competitors to more quickly and effectively penetrate certain markets. 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 the treatment of Fabry disease and Gaucher disease is Genzyme. Genzyme is seeking marketing authorization in both the U.S. and Europe for its Fabry disease product, and Genzyme has received orphan drug designation for its Fabry disease treatment in both the U.S. and Europe. Concurrently with the issuance of its positive opinion on Replagal in the EC, the CPMP issued a positive opinion recommending approval of Genzyme's Fabry disease product to the EC. In addition, Genzyme 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. Other competitors with respect to our Niche Protein product program include BioMarin Pharmaceutical Inc., Novazyme Pharmaceuticals, Inc., Orphan Medical, Inc., Oxford GlycoSciences Plc, Pharming Group, N.V., and Synpac Pharmaceuticals, Ltd. 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. Under our Gene-Activated protein program, some of the products we are developing are fully human versions of proteins that are currently-marketed. For instance, in the case of Dynepo, erythropoietin is marketed by Amgen and Johnson & Johnson in the U.S.; F. Hoffmann-La Roche Ltd. (Boehringer Mannheim GmbH) and Johnson & Johnson (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. 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. 18 WE ARE DEPENDENT ON 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 Dynepo; Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo") to develop and commercialize Replagal for Fabry disease in Japan and other Asian countries; and Genetics Institute, Inc. ("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. WE HAVE NOT BEEN PROFITABLE AND MAY REQUIRE ADDITIONAL FUNDING We have experienced significant operating losses since our inception in 1988. We expect that we will continue to incur substantial losses and that our cumulative losses will increase 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 recorded 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 19 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; the results of such litigation; 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. IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL, WE MAY 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, the EMEA 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 or EMEA 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 to successfully 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, the EMEA and other regulatory authorities may not approve any of our potential products for any indication. Our business, financial position, 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 20 trial exceeds our expectations. 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. We may become a party to additional patent litigation and other proceedings in the future beyond the patent issues described under "--We are a party to litigation with Amgen and Kirin-Amgen involving Dynepo(TM)", "We are a party to litigation with Genzyme and Mt. Sinai involving Replagal(TM)" and "--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." 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 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 21 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 may 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 may 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 Cell Genesys, Inc. This proceeding will 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. 22 SOME 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, the EMEA, 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, the EMEA 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. 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, the EMEA 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. We announced in March 2001 that the CPMP issued a positive opinion recommending approval of Replagal. The CPMP's recommendation for approval will be forwarded to the EC, which will determine whether to grant marketing authorization of Replagal. If the EC approves the marketing authorization for Replagal, we and our subsidiaries will be subject to ongoing regulatory requirements. There can be no assurance that we or our subsidiaries will be able to comply with all applicable requirements. If we fail to comply with applicable regulatory requirements with respect to any of our products, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, and criminal prosecution. 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 23 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 position. These liabilities could prevent or interfere with our product commercialization efforts. 24 PART II - Other Information Item 1. Legal Proceedings The Company can provide no assurance as to the outcome of any legal proceedings. A decision by a court in the U.S. or in any other jurisdiction in a manner adverse to the Company could have a material adverse effect on the Company's business, financial position, and results of operations. DYNEPO(TM) PATENT LITIGATION As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, the Company and Aventis are involved in a patent infringement action with Amgen. In January 2001, the U.S. District Court for the District of Massachusetts ruled that the Company infringed eight of eighteen claims asserted by Amgen. In particular, the District Court ruled that the asserted claims of U.S. Patent No. 5,547,933 are not infringed (and, if this finding is in error, that the asserted claims are invalid); that the asserted claims of U.S. Patent 5,618,698 are not infringed; that Claims 2, 3 and 4 of U.S. Patent No. 5,621,080 are valid, enforceable and infringed under the doctrine of equivalents; that Claims 1, 3, 4 and 6 of U.S. Patent No. 5,756,349 are valid, enforceable and literally infringed, but that Claim 7 of the `349 patent is not infringed; and that Claim 1 of U.S. Patent No. 5,955,422 is valid, enforceable and literally infringed. Amgen did not seek and was not awarded monetary damages. In January 2001, TKT and Aventis filed a Notice of Appeal from the Judgment of the District Court with the U.S. Court of Appeals for the Federal Circuit in this case. The Company believes it has strong grounds for appeal. Amgen filed a Notice of Cross-Appeal in February 2001 with the U.S. Court of Appeals for the Federal Circuit. In addition, in July 1999, Aventis and the Company commenced legal proceedings in the U.K. against Kirin-Amgen, seeking a declaration that a U.K. patent held by Kirin-Amgen will not be infringed by the Company's activities related to Dynepo and that certain claims of Kirin-Amgen's U.K. patent are invalid. The English High Court of Justice ruled that one of four claims of the patent asserted by Amgen was infringed by the Company and Aventis. The Company believes it has strong grounds for appeal and filed a Notice of Appeal in April 2001. Pursuant to an Amended and Restated License Agreement, dated March 1995, between Aventis and the Company, Aventis has assumed the legal costs of the Amgen and Kirin-Amgen litigation. The Company will reimburse Aventis for the Company's share of the litigation expenses, as defined, from future royalties, if any, received from the sale of Dynepo and in certain other circumstances. REPLAGAL(TM) PATENT LITIGATION In July 2000, Genzyme and Mt. Sinai filed a patent infringement suit against the 25 Company in the U.S. District Court for the District of Delaware, alleging that the manufacture, use, intended sale, and/or intended offer for sale of the Company's Replagal(TM)product infringes one or more claims of U.S. Patent No. 5,356,804. Genzyme and Mt. Sinai seek injunctive relief and an accounting for damages. Discovery proceedings commenced in February 2001, and the District Court has scheduled trial in this action to begin in March 2002. 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 January 22, 2001 regarding the TKT's announcement that Judge William G. Young of the U.S. District Court of Massachusetts has issued an opinion in a patent infringement suit Amgen brought against Aventis Pharma and TKT involving Dynepo(TM), the companies' Gene-Activated(R) erythropoietin being developed in the United States and Europe for the treatment of anemia. Current Report on Form 8-K dated January 4, 2001 regarding the TKT's announcement that it has received a complete review letter from the U.S. Food and Drug Administration concerning its Biologics License Application for Replagal(TM) (agalsidase alfa), an investigational enzyme replacement therapy for the treatment of Fabry disease. 26 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 14, 2001 By: /S/ DANIEL E. GEFFKEN --------------------------- Daniel E. Geffken Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 27 -----END PRIVACY-ENHANCED MESSAGE-----