-----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, TPlJFkuKw0wweOfrAkdVaWdpGmd5z2sNuLxjrkj5GzCVzYiRthJ4ANRrL9TH6geo 5K7tVtaxlXmtntScepsARw== 0000912057-99-005909.txt : 19991117 0000912057-99-005909.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005909 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99753669 BUSINESS ADDRESS: STREET 1: 195 ALBANY ST CITY: CAMBRIDGE STATE: MA ZIP: 02138 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 SEPTEMBER 30, 1999 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 November 5, 1999, there were 22,584,202 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 September 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 EXHIBIT INDEX 17
2 Part 1- Item 1- Condensed Consolidated Financial Statements Transkaryotic Therapies, Inc. Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except par values) September 30, December 31, 1999 1998 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 21,851 $ 31,760 Marketable securities 59,012 78,395 Prepaid expenses and other current assets 1,609 2,334 ------------- ------------- Total current assets 82,472 112,489 Property and equipment, net 18,886 5,140 Other assets 371 333 ------------- ------------- $101,729 $117,962 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,244 $ 1,456 Accrued expenses 6,022 2,860 Current maturities of long-term debt 1,761 - ------------- ------------- Total current liabilities 11,027 4,316 Long-term debt, less current maturities 10,570 - ------------- ------------- Total liabilities 21,597 4,316 ------------- ------------- Stockholders' equity: Preferred stock, $1.00 par value, 10,000 shares authorized: no shares issued and outstanding - - Common stock, $.01 par value; 30,000 shares authorized; 19,280 and 19,126 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 193 191 Additional paid-in capital 187,072 186,067 Accumulated deficit (104,797) (69,952) Deferred compensation (1,957) (2,632) Accumulated other comprehensive loss (379) (28) ------------- ------------- Total stockholders' equity 80,132 113,646 ------------- ------------- $101,729 $117,962 ============= =============
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 Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ License and research revenues $ 649 $ 4,750 $ 1,370 $ 5,325 Operating expenses: Research and development 11,753 6,394 32,787 17,422 General and administrative 2,836 1,801 7,034 4,987 ------------ ------------ ------------ ------------ 14,589 8,195 39,821 22,409 ------------ ------------ ------------ ------------ Loss from operations (13,940) (3,445) (38,451) (17,084) Interest income 1,070 1,663 3,606 5,199 ------------ ------------ ------------ ------------ Net loss $(12,870) $(1,782) $(34,845) $(11,885) ============ ============ ============ ============ Basic and diluted net loss per share $(0.67) $(0.09) $(1.82) $(0.62) ============ ============ ============ ============ Shares used to compute basic and diluted net loss per share 19,241 19,074 19,198 19,032 ============ ============ ============ ============
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) Nine Months Ended September 30, 1999 1998 ----------- ----------- OPERATING ACTIVITIES: Net loss $(34,845) $(11,885) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,468 1,629 Compensation expense related to equity issuances 747 847 Changes in operating assets and liabilities 5,675 (959) ----------- ----------- Net cash used for operating activities (26,955) (10,368) ----------- ----------- INVESTING ACTIVITIES: Proceeds from sales of marketable securities 82,383 91,080 Purchases of marketable securities (63,351) (70,911) Purchases of property and equipment (15,214) (1,849) Changes in other assets and liabilities (38) (34) ----------- ----------- Net cash provided by investing activities 3,780 18,286 ----------- ----------- FINANCING ACTIVITIES: Proceeds from long-term debt financing 12,331 - Proceeds from exercise of options and warrants 935 623 ----------- ----------- Net cash provided by financing activities 13,266 623 Net increase (decrease) in cash and cash (9,909) 8,541 equivalents Cash and cash equivalents at January 1 31,760 23,922 ----------- ----------- Cash and cash equivalents at September 30 $ 21,851 $ 32,463 =========== ===========
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) September 30, 1999 and 1998 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION Transkaryotic Therapies, Inc. ("TKT" or the "Company") is a biopharmaceutical company building a broad and renewable product pipeline based on three proprietary development platforms: Gene Activated-TM- proteins, Niche Protein-TM- 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 September 30, 1999 are not necessarily indicative of the results to be expected for the year ending December 31, 1999. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. 2. BASIC AND DILUTED NET LOSS PER SHARE 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 net loss per share was the same as diluted net loss per share during each of the three and nine months ended September 30, 1999 and 1998 since common equivalent shares from stock options and warrants have been excluded as their effect is antidilutive. 6 3. COMPREHENSIVE INCOME As of January 1, 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components, including the requirement that unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholders' equity, be included in other comprehensive income. The adoption of SFAS No. 130 had no impact on the Company's net loss or stockholders' equity. The Company had total comprehensive loss of $12,968,000 and $1,606,000 for the three months ended September 30, 1999 and 1998, respectively. For the nine months ended September 30, 1999 and 1998, total comprehensive loss was $35,196,000 and $11,713,000, 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 Hoechst Marion Roussel, Inc. ("HMRI"), the Company's collaborative partner. The complaint in the action alleged that Gene Activated erythropoietin ("GA-EPO-TM-") and processes for producing GA-EPO infringe certain of Amgen's U.S. patents and requests that TKT and HMRI be enjoined from making, using, or selling GA-EPO and that the Court award Amgen monetary damages. In April 1998, the District Court granted TKT and HMRI's Motion for Summary Judgment of Non-Infringement and denied Amgen's Motion for Summary Judgment of Infringement on the ground that all of TKT and HMRI's GA-EPO related activities through that date had been conducted solely for uses reasonably related to the production of information for submission to the U.S. Food and Drug Administration (the "FDA") as part of seeking regulatory approval to market GA-EPO. According to the District Court, under the Waxman-Hatch Act, such activities are not acts of patent infringement. The Court did not address the issue of whether TKT and HMRI's 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, to be reopened upon motion of either party for good cause shown. The court also stated that issuance by the FDA of a product license presumably would constitute good cause to reopen the claim. In June 1999, the Company and HMRI filed a motion to reopen the case, which the Court granted. The District Court scheduled the trial to commence in April 2000. In addition, in July 1999, the Company commenced legal proceedings against Kirin-Amgen, Inc., a joint venture of Amgen and Kirin Brewery Co., Ltd., in the U.K. 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 7 claims of Kirin-Amgen's U.K. patent are invalid. The trial is scheduled to commence in November 2000. In September 1999, the Court in the Massachusetts proceeding granted Amgen's motion to amend its complaint to include two additional patents that issued in May 1998 and September 1999, respectively. In November 1999, Amgen filed a motion for Summary Judgement of Infringement in the District Court. The motion asserts that GA-EPO and the process for producing GA-EPO infringe a total of six claims in Amgen's U.S. patents. It requests that the District Court grant a summary judgement of infringement with respect to those claims. 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 HMRI in the U.S. or U.K., or any other conclusion of either litigation in a manner adverse to the Company and HMRI, would have a material adverse effect on the Company's business, financial condition, and results of operations. Pursuant to the Amended and Restated License Agreement, dated March 1995, by and between HMRI and the Company, HMRI assumed the cost of defense of the Amgen and Kirin-Amgen litigations. The Company is required to reimburse HMRI for its share of litigation expenses, as defined, from future royalties, if any, otherwise payable by HMRI as to the sale of GA-EPO and in certain other circumstances. 4. SUBSEQUENT EVENT On November 2, 1999 the Company issued 3,300,000 shares of its common stock to qualified institutional buyers and other accredited investors for $40.00 per share, representing aggregate proceed to the Company of $132,000,000 before deducting offering expenses. Net proceeds amounted to approximately $125,000,000. The Company intends to use the net proceeds of this offering for the establishment of sales and marketing capabilities for its Niche Protein products, the funding of preclinical testing, clinical trials and other research and development programs, and for working capital and other general corporate purposes. 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 of products based on the Company's three proprietary development platforms: Gene-Activated-TM- proteins, Niche Protein-TM- products, and Gene Therapy. The Company has not derived revenues from the sale of products, and the Company does not expect to receive revenues from product sales until 2000, at the earliest. The Company expects that its research and development expenditures will increase substantially in future years as product development efforts accelerate. The Company also expects that its sales and marketing expenditures will increase substantially in connection with the establishment of sales and marketing capabilities related to the Company's Niche Protein products. Finally, the Company's facility costs will increase as its scale of operations increases. 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 September 30, 1999, the Company's accumulated deficit was $104,797,000. As a result, the Company is dependent upon existing cash resources, interest income, and external financing from equity offerings, debt financings, and 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 outcome of patent litigation and other patent proceedings, the receipt, if any, of additional license fees and milestone payments, the timing of certain expenses, and the establishment of additional collaborative 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 SEPTEMBER 30, 1999 AND 1998 License and research revenues totaled $649,000 and $4,750,000 for the three months ended September 30, 1999 and 1998, respectively. Revenues in the third quarter of 1999 were earned from collaborative agreements with Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo") and HMRI. Revenues in the same period in 1998 included a $2,500,000 milestone payment 9 relating to the initiation of the Phase III clinical program for GA-EPO and a $2,000,000 non-refundable up front payment from Sumitomo relating to the development and commercialization of the Company's alpha-galactosidase A (alpha-gal) product for Fabry disease in Japan and other Asian countries. Research and development expenses totaled $11,753,000 in the third quarter of 1999, as compared to $6,394,000 during the same period in 1998. The increase in 1999 of $5,359,000, or 84%, was principally due to an increase in research and development staff, clinical trial expenses, and external development costs for the Company's programs. The Company expects research and development expenses to continue to increase during the remainder of 1999. General and administrative expenses were $2,836,000 in the quarter ended September 30, 1999, compared with $1,801,000 during the same period in 1998. The increase in 1999 of $1,035,000, or 57%, represents principally personnel and costs expended in connection with the establishment of sales and marketing capabilities related to the Company's Niche Protein products. During the remainder of 1999, the Company expects that its general and administrative costs will continue to increase over the prior year as it continues to build such capabilities. Interest income was $1,070,000 and $1,663,000 for the three months ended September 30, 1999 and 1998, respectively. The average cash and marketable securities balances were $84,966,000 and $119,135,000 in the three months ended September 30, 1999 and 1998, respectively. The decrease in interest income of $593,000 was primarily attributable to lower average cash and marketable securities balances, as well as lower interest rates in 1999. The Company had a net loss of $12,870,000 and $1,782,000 for the three months ended September 30, 1999 and 1998, respectively. Basic and diluted net loss per share was $0.67 for the three months ended September 30, 1999, as compared to a basic and diluted net loss per share of $0.09 for the corresponding period in 1998. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 License and research revenues totaled $1,370,000 and $5,325,000 for the nine months ended September 30, 1999 and 1998, respectively. Revenues in the first nine months of 1999 were earned from collaborative agreements with Sumitomo and HMRI. Revenues in the first nine months of 1998 included a $2,500,000 milestone payment relating to the initiation of the Phase III clinical program for GA-EPO and a $2,000,000 non-refundable up front payment from Sumitomo relating to the development and commercialization of the Company's alpha-gal product for Fabry disease in Japan and other Asian countries. Research and development expenses totaled $32,787,000 in the first nine months of 1999, as compared $17,422,000 during the same period in 1998. The increase in 1999 of $15,365,000, or 88%, was principally due to an increase in research and development staff, clinical trial expenses and external development costs. The Company expects research and development expenses will continue to increase for the remainder of 1999. 10 General and administrative expenses were $7,034,000 in the nine months ended September 30, 1999, compared with $4,987,000 during the same period in 1998. The increase in 1999 of $2,047,000, or 41%, principally represents costs expended in connection with the establishment of sales and marketing capabilities related to the Company's Niche Protein products. During the remainder of 1999, the Company expects that its general and administrative costs will continue to increase over the prior year as it continues to build such sales and marketing capabilities. Interest income was $3,606,000 and $5,199,000 for the nine months ended September 30, 1999 and 1998, respectively. The average cash and marketable securities balances were $95,404,000 and $122,844,000 in the nine months ended September 30, 1999 and 1998, respectively. The decrease in interest income of $1,593,000 was primarily attributable to lower average balances and lower interest rates in the respective nine month periods. The Company had a net loss of $34,845,000 and $11,885,000 for the nine months ended September 30, 1999 and 1998, respectively. Basic and diluted net loss per share was $1.82 for the nine months ended September 30, 1999, as compared to a basic and diluted net loss per share of $0.62 for the corresponding period in 1998. LIQUIDITY AND SOURCES OF CAPITAL Since its inception, the Company has financed its operations primarily through the sale of common and preferred stock, revenues from collaborative agreements, and interest income. The Company had unrestricted cash, cash equivalents, and marketable securities totaling $80,863,000 at September 30, 1999. Cash equivalents and marketable securities are invested in U.S. Treasury notes, agencies of the U.S. government, and money market funds. On November 2, 1999 the Company issued 3,300,000 shares of its common stock to qualified institutional buyers and other accredited investors resulting in aggregate proceeds to the Company of $132,000,000. Net proceeds amounted to approximately $125,000,000. The Company leased additional facilities in 1998. Equipment and improvements to the space are estimated to cost approximately $14,000,000. In December 1998, the Company obtained an unsecured term loan facility for up to $14,000,000 to finance the capital costs related to 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. An election is made at the time of each drawdown. The weighted average interest rate of the loan was 7.4% as of September 30, 1999. The note contains certain restrictive covenants, including, among other things, minimum cash and tangible net asset requirements and a prohibition on the payment of dividends. At September 30, 1999, $12,331,000 was outstanding under the term loan. 11 The Company may require space in addition to that referenced in the prior paragraph to meet its needs beginning in 2001. 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. 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 manufacturing capabilities, establishment of sales and marketing capabilities, and for general and administrative expenses. The Company has no material committed external sources of capital and, as discussed above, does not anticipate product revenues until 2000, at the earliest. As a result, the Company will need to fund its operations with its existing cash resources, interest income, and proceeds from equity offerings, debt financings, and funding from collaborative arrangements. 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. The Company is engaged in litigation with Amgen Inc. with respect to the development of GA-EPO. See Note 4 to Notes to Condensed Consolidated Financial Statements. Pursuant to TKT's agreements with HMRI, HMRI has assumed the cost of the litigation. The Company is required to reimburse HMRI for the Company's share of litigation expenses from future royalties, if any, otherwise payable by HMRI as to the sale of GA-EPO and in certain other circumstances. At December 31, 1998, the Company had net operating loss carryforwards of approximately $62,700,000, which expire at various times through 2013. 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 12 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. YEAR 2000 The Year 2000 issue results from computer programs and systems that were created to accept only two digit dates. As a result, computer programs are unable to differentiate between the year 1900 and the year 2000. This could result in miscalculations and system failures. The Company has established a multidisciplinary Year 2000 project committee. The committee has assessed the Company's software, hardware, communications systems, applications, and networks, as well as other date sensitive equipment. Mission critical systems such as the accounting system have been found compliant or have been upgraded. The remaining systems are currently being tested to identify those systems which would be affected by Year 2000 non-compliance. In most cases, vendors have offered free upgrades or the systems were already scheduled for upgrade. Therefore, the cost for obtaining Year 2000 compliance is expected to be minimal for internal systems. The Company believes its internal systems will not pose significant operating issues for the Company as a result of the Year 2000. In addition to the Company's internal risks, the Company is dependent upon a number of third parties that provide information, goods and services to the Company. These include financial institutions, suppliers, service providers, and research partners. If these third parties experience failures in their computer systems or equipment due to Year 2000 non-compliance, it could seriously affect the Company's business operations. The Company has contacted its significant external business partners to determine the extent to which the Company is vulnerable to their failure. The Company is reviewing the responses and expects that all necessary contingency plans will be completed in the fourth quarter. If third party providers are not able to supply the Company, the Company could experience delays in its research and development including delays in clinical trial development or the submission of products for regulatory approval. As a contingency plan, the Company expects to identify, if available, a secondary source for critical third party providers. The Company has not yet incurred significant cost to address the Year 2000 issue. While the total cost of obtaining Year 2000 compliance is not known at this time, the Company believes the cost will not be material. FORWARD-LOOKING STATEMENTS This document contains forward-looking statements that involve a number of risks and uncertainties. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "intends," and similar expressions are 13 intended to identify forward-looking statements. Important factors that could cause actual results to differ materially from the expectations described in these forward-looking statements are set forth in Exhibit 99.1 to this Quarterly Report on Form 10-Q and incorporated herein by reference. These important factors include risks as to whether TKT's products will advance in the clinical trials process, the timing of such clinical trials, whether the clinical trial results will warrant continued product development, and whether the Company's products will receive approval from the U.S. Food and Drug Administration or equivalent regulatory agencies, and, if such products receive approval, whether they will be successfully marketed. 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. 14 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 2. Changes in Securities and Use of Proceeds On November 2, 1999, TKT issued 3,300,000 shares of its common stock to qualified institutional buyers and other accredited investors for $40.00 per share, representing aggregate proceeds to the Company of $132,000,000 before deducting offering expenses. Net proceeds amounted to approximately $125,000,000. The shares of common stock were issued without registration under the Securities Act of 1933, as amended (the "Securities Act") pursuant to an exemption from registration under Section 4 (2) of the Securities Act and Rule 506 of Regulation D thereunder. The Company filed a registration statement with the Securities and Exchange Commission and the shares are now available for resale. 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 November 2, 1999. 15 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: November 15, 1999 By: /s/ DANIEL E. GEFFKEN --------------------------------- Daniel E. Geffken Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 16 Transkaryotic Therapies, Inc. EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 27 Financial Data Schedule (for EDGAR filing purposes only) 99.1 Certain Factors That May Affect Future Results
17 EX-27 2 EX 27
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 21,851 59,012 0 0 0 82,472 29,871 10,985 101,729 11,027 10,570 0 0 193 79,939 101,729 0 1,370 0 39,821 0 0 0 (34,845) 0 (34,845) 0 0 0 (34,845) (1.82) (1.82)
EX-99.1 3 EX 99-1 EXHIBIT 99.1 CERTAIN CHANGES THAT MAY AFFECT FUTURE OPERATING RESULTS WE ARE A PARTY TO LITIGATION WITH AMGEN AND KIRIN-AMGEN INVOLVING GA-EPO-TM- We and HMRI, our collaborator, are defendants in a civil patent infringement lawsuit brought by Amgen 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 HMRI 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 HMRI's Motion for Summary Judgment of Non-Infringement in this case. The District Court based this decision on the fact that all of our and HMRI's 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. According to the District Court, these activities are not acts of patent infringement under the Waxman-Hatch Act. The District Court did not address the issue of whether our and HMRI's 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 HMRI filed a motion to reopen the case with the District Court. The District Court granted this motion. In addition, in July 1999, we 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 sale of GA-EPO and that numerous claims of the U.K. patent are invalid. 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 HMRI in the U.S. or the U.K., or any other conclusion of either litigation in a manner adverse to us and HMRI, 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 HMRI, HMRI has assumed the cost of the Amgen and Kirin-Amgen litigations. We are required to reimburse HMRI for our share of litigation expenses from future royalties, if any, payable by HMRI 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 recently been held by Congress with respect to the Waxmam-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 FOR 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 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. WE MAY NOT OBTAIN GOVERNMENT APPROVALS; THE APPROVAL 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 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 Biologics License Application 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 Biologics License Application 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 activation 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 Johnson and Johnson (Janssen-Cilag) in Europe; and Sankyo Company Ltd., Chugai Pharmaceutical Co., Ltd., and Kirin Brewery Co. in Japan. Many of the protein products against which our Gene-Activated protein products 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 protein products 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 U.S. ORPHAN DRUG EXCLUSIVITY FOR OUR NICHE PROTEIN-TM- 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 HMRI 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 HMRI to develop, conduct clinical trials, obtain regulatory approvals for, and manufacture, market, and sell GA-EPO and GA-II; Sumitomo to develop and commercialize alpha-gal for Fabry disease in Japan and other Asian countries; and Genetics Institute 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 pending merger between HMRI and Rhone-Poulenc SA, which is expected to occur by the end of 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 RELATING 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 NovartisAG. 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 follow-up 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 September 30, 1999, we had an accumulated deficit of approximately $104.8 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. OUR OFFICERS AND DIRECTORS EXERCISE SIGNIFICANT CONTROL OVER TKT Our executive officers, directors, and entities affiliated with them, in the aggregate, beneficially own approximately 24% of our outstanding common stock. These stockholders may be able to exercise substantial influence over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of our company. WE HAVE ANTITAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION AND COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK Provisions of our Certificate of Incorporation, our Bylaws, and Delaware law may have the effect of deterring hostile takeovers or delaying or preventing changes in control or our management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interest. OUR STOCK PRICE COULD BE VOLATILE, WHICH COULD CAUSE YOU TO LOSE PART OR ALL OF YOUR INVESTMENT The market price of our common stock, like that of the common stock of many other development stage biotechnology companies, may be highly volatile. Factors such as announcements of technological innovations or new commercial products by us or our competitors, disclosure of results of clinical testing or regulatory proceedings, governmental regulation and approvals, developments in patent or other proprietary rights, public concern as to the safety of products developed by us, our financial results, and general market conditions may have a significant effect on the market price of our common stock. In addition, the stock market has experienced extreme price and volume fluctuations. This volatility has significantly affected the market prices of securities of many biotechnology and pharmaceutical companies for reasons frequently unrelated to or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. -----END PRIVACY-ENHANCED MESSAGE-----