-----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, DB7eViAAlxC+zj3w+89xVcE4ciZ/JtW4YZkERlHW+TXenF0umddxthxLf+Q7cKhz z4FduT4VsksaKkJ/JkGXtQ== 0000950135-97-001383.txt : 19970328 0000950135-97-001383.hdr.sgml : 19970328 ACCESSION NUMBER: 0000950135-97-001383 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-21481 FILM NUMBER: 97565830 BUSINESS ADDRESS: STREET 1: 195 ALBANY STREET CITY: CAMBRIDGE STATE: MA ZIP: 02138 BUSINESS PHONE: 6173490200 10-K405 1 REPORT FOR YEAR ENDED 12/31/96 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 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 Number) 195 Albany Street, Cambridge, Massachusetts 02139 (Address of principal executive offices including zip code) Registrant's telephone number, including area code: (617) 349-0200 ------------------ Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of class) 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 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [x]. The approximate aggregate market value of voting stock held by non-affiliates of the Registrant as of March 1, 1997 was $174,655,000 based on the last reported sale price of the Registrant's Common Stock on the Nasdaq National Market as of the close of business on that day. There were 16,649,460 shares of the Registrant's Common Stock outstanding as of March 1, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Definitive Proxy Statement for its 1997 Annual Meeting of Shareholders to be held on June 12, 1997, which Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the Registrant's fiscal year-end of December 31, 1996, are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS SUMMARY Transkaryotic Therapies, Inc. ("TKT" or the "Company") has developed two proprietary technology platforms, Gene Activation and gene therapy. The Company's Gene Activation technology is a proprietary approach to the large scale production of therapeutic proteins which does not require the cloning of genes and their subsequent insertion into non-human cell lines. Consequently, the Company believes its Gene Activation technology avoids using patented approaches to protein production associated with such conventional genetic engineering techniques which have served as effective barriers to competition in the $11 billion therapeutic protein market. As a result, the Company believes it will be able to develop and successfully commercialize a broad range of Gene Activated versions of proteins which have proven medical utility, received marketing approval from regulatory authorities and generated significant revenues in major markets. The Company's most advanced Gene Activation development program is for the production of Gene Activated erythropoietin ("GA- EPO") with clinical trials expected to commence in the first half of 1997. The Company's gene therapy technology ("Transkaryotic Therapy") is a non-viral, ex vivo system based on genetically modifying patients' cells to produce and deliver therapeutic proteins for extended periods of time. In preclinical animal studies, the Company's Transkaryotic Therapy system has produced target proteins at therapeutic levels for the lifetime of the animal without any side effects. GENE ACTIVATION: TECHNOLOGY BACKGROUND Protein Production: Three Technological Waves. The therapeutic value of certain proteins produced by the human body has been known for decades. One of the major advances in 20th-century medicine was the development of systems for the large-scale production of therapeutic proteins outside the body. For example, prior to the development of a manufacturing process for insulin more than seventy years ago, patients with Type I (juvenile onset) diabetes were offered no effective treatment and generally died of starvation at an early age. Following the development of pharmaceutical insulin preparations for injection, Type I diabetics could live long and relatively normal lives. During this first wave of protein production technology, proteins were generally purified from human or animal tissue. Insulin, for example, was isolated from the pancreas of pigs and cattle, and growth hormone, for the treatment of short stature, was isolated from the pituitaries of cadavers. During the second wave of protein production technology, based on the cloning of human genes, proteins were manufactured using conventional genetic engineering techniques. As a result, by the mid-1980's, it became routine to engineer cells to produce therapeutic proteins at levels that were substantially in excess of what could be obtained by purification from tissue. However, since many of the proteins produced by conventional genetic engineering techniques had previously been purified, the patent protection afforded to this second wave of protein production technology tended to focus on the genes encoding therapeutic proteins. Accordingly, many patents have been issued covering isolated and purified DNA sequences encoding such proteins, various vectors used to insert such DNA sequences into production cell lines, and cell lines modified by the insertion of such DNA sequences. TKT believes its proprietary Gene Activation technology represents the third wave in the evolution of protein production technology in that it is based on the activation of genes encoding therapeutic proteins in human cells rather than the cloning and transfer of these genes. TKT's Gene Activation technology avoids using the approach to protein production associated with the second wave, and the Company believes this will allow it to develop and commercialize a large number of therapeutic proteins, including many that are currently marketed. Gene Structure and Regulation of Gene Expression. Recent advances in molecular biology, cell biology, and genomics have led to a much better understanding of the structure and function of human genes than was possible only a few years ago. It is now generally accepted that virtually all genes contain certain DNA sequences - 2 - 3 that provide information necessary for the cell to assemble a specific sequence of amino acids that make up a protein ("coding DNA sequences"). Thus each gene can be viewed as the blueprint for a particular protein, and "gene expression" is the process which leads to the synthesis of the protein it encodes. Gene expression is controlled by certain DNA sequences which function as switches that "turn on" the gene and trigger the synthesis of the protein ("regulatory DNA sequences"). Despite the staggering variety of proteins synthesized by the cells of the body, this process is universal. Essentially every human cell contains the same set of approximately 100,000 genes, but each cell type actually produces only a subset of the 100,000 proteins possible. For example, although essentially all human cells contain the insulin gene, only certain cells of the pancreas actually produce insulin. The regulatory switches that turn on gene expression in the appropriate cell type also turn off gene expression in all other cell types. For this reason, only pancreatic cells express insulin -- the regulatory DNA sequences normally associated with the insulin gene prevent expression elsewhere in the body. TKT's Gene Activation technology is based on activating previously silent genes by bypassing regulatory DNA sequences set in the "off position" with regulatory DNA sequences set in the "on position." Conventional Recombinant Protein Production. By the 1970's, the clinical benefits of several proteins were well-known and the potential benefit of many others was envisioned. Based on a series of basic discoveries in the 1960's and 1970's, scientists learned to clone and manipulate genes of therapeutic interest, leading directly to the birth of the biotechnology industry and the large scale production of therapeutic proteins. To produce large quantities of a therapeutic protein using conventional genetic engineering techniques, scientists first clone the relevant human gene by isolating the coding DNA sequences for the gene from the human cell and transferring them to bacteria, where large quantities of the gene are copied. The cloned gene is then isolated from the bacteria and placed in a test tube. In this test tube, the cloned gene is then fused to appropriate regulatory DNA sequences, and the resulting DNA fragment containing both the regulatory DNA sequences and the coding DNA sequences is inserted into a non-human (mammalian, yeast, or bacterial) cell. This genetically modified cell is then propagated in large bioreactors for commercial-scale production of the protein. TKT'S GENE ACTIVATION TECHNOLOGY Although the conventional approach to recombinant protein production is quite powerful, its use today faces certain commercial barriers and technical limitations. The primary barrier is that biotechnology companies have sought and obtained patent protection covering many of the techniques used to produce commercially-marketed proteins using conventional genetic engineering techniques. These patent rights have served as an effective entry barrier, minimizing competition in the $11 billion (1995 worldwide revenues) protein therapeutics market. In addition, conventional genetic engineering techniques for protein production may face technical limitations arising from the need to first clone the gene of interest. For certain proteins, this step adds to development times, increases costs and is technically challenging. Technical difficulties may also arise from the use of non-human production cell lines, which may result in the production of proteins which may have therapeutically significant differences from those naturally produced by the cells of the human body. Furthermore, production processes based on conventional genetic engineering may not have incorporated recent advances in cell culture systems with significant efficiency and cost advantages as compared to processes originally developed over a decade ago. To overcome these commercial barriers and technical limitations, TKT has developed Gene Activation technology for the production of therapeutic proteins that does not rely on the manipulation of cloned genes. Using its proprietary technology, TKT has succeeded in producing therapeutic proteins in human cells by bypassing regulatory DNA sequences set in the "off position" with regulatory DNA sequences set in the "on position" in order to activate the gene of interest. The Company's Gene Activation technology does not require the manipulation of the protein coding DNA sequences of the gene. The bypass of an "off switch" with an "on - 3 - 4 switch" is accomplished by "gene targeting." Gene targeting is a technology by which DNA fragments can be "cut and pasted" precisely at pre-selected, desirable locations within the cell's genome. Gene targeting can be thought of as molecular surgery, with the surgical tools literally functioning at the molecular level. The technical term for gene targeting, homologous recombination, reflects its underlying mechanism: cells have the capacity to align two homologous DNA sequences (two sequences that are quite similar) and exchange one with the other. In Gene Activation, the new regulatory sequences are flanked with "homing" sequences and structural sequences which allow the cell to exchange the new active regulatory sequences in place of the old inactive ones. The new sequences must be introduced precisely in order to allow the proper initiation of gene expression. In order to manufacture a protein of therapeutic interest using Gene Activation, a human cell line producing the protein must be generated. This cell line will ultimately become the master cell bank for large scale manufacturing and is generated as follows: 1. Determine the sequence of a portion of the regulatory DNA sequences that control the gene of interest; 2. Build a "targeting fragment" by fusing homing sequences to a new regulatory region known to be active in the human cell line chosen for manufacturing; 3. Introduce the targeting fragment into the cell line; 4. Identify and propagate an activated cell line producing the protein of interest; and 5. Optimize protein productivity and prepare the cell line for commercial scale manufacturing. The Company has successfully accomplished all of the steps described above for GA-EPO. The results of TKT's work in this area have led to proof-of-concept that (i) gene targeting can be used to direct the integration of regulatory and structural sequences to a specific, pre-selected position in the genome, (ii) the product of the targeting event is a cell containing an activated gene and (iii) the protein production properties of cells created by Gene Activation are predictable and suitable for, and have been successfully used in, large-scale manufacturing. Accordingly, the Company believes that these methods may be used to express a wide variety of therapeutically valuable proteins at levels suitable for large-scale manufacturing purposes. Because the Gene Activation process avoids many of the technical limitations of conventional recombinant protein production technology, the Company also believes that the Gene Activation process is at least as efficient as, and may be more cost effective than, conventional genetic engineering techniques for protein production. TKT'S GENE ACTIVATION PRODUCTS: GENE ACTIVATED ERYTHROPOIETIN The Company's initial strategy in exploiting its technology is to commercialize Gene Activated proteins that have proven medical utility, have received marketing approval from regulatory authorities and have achieved significant revenues in major markets. These protein products have experienced high rates of acceptance among physicians and health care providers. The Company believes, based primarily on information obtained from annual reports of public companies and other published sources, that the total market for the eight largest marketed proteins in 1995 was approximately $10.8 billion. See Table I on page 5. As the number of new approved protein products increases and as the number of approved indications for such products increases, the Company believes that the market for these protein products will continue to experience substantial growth. The Company also believes that the broad applicability of its Gene Activation technology for protein production and the fact that many additional proteins are currently in clinical development will provide a large number of candidates for commercialization using TKT's Gene Activation technology. - 4 - 5 TABLE I. ESTIMATED 1995 WORLDWIDE PROTEIN PRODUCT REVENUES (IN MILLIONS)
PROTEIN PRIMARY INDICATION REVENUES ------- ------------------ -------- Erythropoietin Anemia $ 2,900 Insulin Diabetes 1,950 G-CSF Neutropenia 1,700 Growth Hormone Short stature 1,500 alpha-Interferon Hepatitis/Cancer 1,000 Factor VIII Hemophilia A 950 tPA Myocardial infarction 450 (beta)-Interferon Multiple sclerosis 350
TKT has focused its initial Gene Activation efforts on the development of its GA-EPO product in collaboration with Hoechst Marion Roussel, Inc. ("HMRI"). Erythropoiesis is the process by which red blood cells (erythrocytes) are produced. When the body requires additional red blood cells, the kidney normally produces erythropoietin, a circulating protein hormone which stimulates the differentiation of certain progenitor cells in the bone marrow. The kidney's critical role in red blood cell production was determined in the 1950's, and erythropoietin was first isolated and purified from the urine of patients with anemia in the 1970's (the first wave). The gene encoding erythropoietin was cloned in the 1980's and used for production of the protein using conventional genetic engineering techniques (the second wave). Erythropoietins have been successfully used to treat anemia associated with a variety of conditions, including the anemia of kidney failure (which causes a reduction in the body's ability to produce the protein) and the anemia of chemotherapy (which causes the destruction of a large number of bone marrow progenitor cells). GA-EPO Development Status. TKT has successfully applied its Gene Activation technology to produce GA-EPO in human cells (the third wave). To illustrate the underlying concept of the Gene Activation process, consider that essentially all human cells contain the erythropoietin gene, yet only certain cells of the kidney actually produce erythropoietin. In all other cells in the human body, the erythropoietin gene is inactive. The erythropoietin gene is not expressed in most human cells because regulatory sequences in those cells prevent the protein from being made; the gene is controlled by a switch ("regulatory DNA sequences") that is permanently in the "off" position. The goal of TKT's GA-EPO program was to remove this "off switch" in a human cell in which the erythropoietin gene is inactive and, in effect, replace it with regulatory sequences comprising an "on switch" to activate erythropoietin expression. TKT has produced a GA-EPO producing cell line sufficient for scale-up to commercial production levels. To accomplish this, TKT first studied the regulatory region that prevents expression of the erythropoietin gene in most human cells and developed an activation strategy. Next, a targeting fragment was constructed by fusing certain homing sequences to a new regulatory region known to be active in the human cell line chosen for manufacturing. The targeting fragment was then introduced into the cell line under conditions appropriate for homologous recombination to occur, and a resulting cell line that produced GA-EPO was identified. The GA-EPO productivity of the cell line was optimized, and the cells were prepared for commercial-scale manufacturing. At present, a production cell line has been scaled up and successfully used to produce GA-EPO. The purified protein has been subjected to an extensive series of analyses and has the properties expected of a human erythropoietin preparation. In particular, the protein has an appropriate molecular weight, amino acid composition, amino acid sequence, secondary structure, and glycosylation profile. GA-EPO has been shown to function in vitro and in vivo in a dose-dependent manner. Finally, preclinical safety tests performed to date have yielded satisfactory results. The Company believes that GA-EPO will be functional in patients because extensive preclinical testing has demonstrated that the protein has the structural and functional characteristics that would be expected of a human - 5 - 6 erythropoietin preparation. The Company anticipates that HMRI will commence clinical trials on GA-EPO in the first half of 1997. The Company believes that GA-EPO is likely to be reviewed within FDA by the Center for Biologics Evaluation and Research ("CBER"). This assumption is based on the fact that erythropoietin products have historically been reviewed by CBER and on the Company's preliminary discussions with CBER officials. CBER currently has no "bioequivalence" pathway for the rapid approval of related biologics, and the Company believes that GA-EPO will require a complete clinical and regulatory program. However, the regulatory and clinical programs have the advantage of focusing on Gene Activated products with conventional counterparts that are well-known to regulatory authorities around the world (in contrast to a typical new biologic, which has no related history concerning its safety and efficacy in humans). Accordingly, TKT believes that clinical development can be accomplished in a focused and timely manner. GENE ACTIVATION COLLABORATIONS AND COMMERCIALIZATION STRATEGY In order to rapidly develop and exploit its Gene Activation technology, TKT has entered into two strategic alliances with HMRI, the first in May 1994 and the second in March 1995. HMRI, with its affiliates, is one of the largest pharmaceutical groups in the world with significant distribution capabilities in all major markets. The alliances are focused on the development of two products, GA-EPO and a second, undisclosed protein. TKT has the potential to receive up to $125 million from HMRI consisting of license fees, equity investments, milestones and research funding in addition to royalties on the sales of the two products, of which $49 million has been received to date. In addition, HMRI is responsible at its own expense for all worldwide development, manufacturing and marketing activities. In May 1994, TKT and HMRI (formerly named Marion Merrell Dow Inc.) entered into an agreement to commercialize TKT's GA-EPO. Under the terms of the agreement, HMRI is obligated to pay TKT a total of $58 million upon completion of all milestones and objectives set forth in the agreement. To date, TKT has received a total of $22 million, which includes up-front fees of $10 million for a license to the Gene Activation technology for GA-EPO, $5 million for the purchase of shares of the Company's Class D Preferred Stock, a $2 million milestone payment in November 1995 at which time HMRI accepted a cell line sufficient for scale-up to commercial production levels of GA-EPO, and $5 million for the purchase of shares of Common Stock upon the closing of the Company's initial public offering. The remaining $36 million in payments are based on HMRI's achievement of certain GA-EPO clinical development milestones. HMRI is responsible for the worldwide development, manufacturing and marketing of GA-EPO, and TKT will receive a royalty based on net sales. In March 1995, TKT entered into a second agreement with HMRI to commercialize a second, undisclosed protein. Pursuant to the agreement, TKT also granted to HMRI an option to commercialize certain aspects of TKT's gene therapy technologies related to this protein. Under the terms of the agreement, HMRI is obligated to pay to TKT a total of $67 million upon completion of all milestones and objectives set forth in the agreement. To date, TKT has received a total of approximately $27 million from HMRI under the second agreement, including up-front fees of $10 million for a license to the Gene Activation technology for the second protein, $10 million for the purchase of shares of the Company's Class E Preferred Stock, and $7 million to fund basic research at the Company. The remaining $40 million to be paid by HMRI to TKT consists primarily of milestone payments based on the development of the product resulting from the licensed technology. TKT is responsible for delivering a cell line suitable for large scale manufacturing. HMRI is responsible for the worldwide development, manufacturing and marketing of the product, and TKT will receive a royalty based on net sales. In addition to the above transactions, in December 1995, HMRI purchased $7.9 million of the Company's Class F Preferred Stock. - 6 - 7 Having completed its responsibilities under its first Gene Activation project by successfully generating a cell line sufficient for scale-up to commercial production levels of GA-EPO that has been accepted by HMRI, TKT is actively pursuing other Gene Activation product candidates. The Company believes that its revenues from the commercialization of Gene Activated proteins will be divided into three stages. In the short term, TKT will attempt to license out additional proteins for development by pharmaceutical partners in return for licensing and milestone payments as well as research funding. In the medium term, the Company anticipates that it will receive royalty payments from HMRI with respect to GA-EPO, as well as from pharmaceutical partners that successfully manufacture and market its Gene Activated proteins. In the long term, the Company will consider developing Gene Activation products independently. Future Gene Activation products may include currently-marketed proteins, proteins currently in late stage clinical development or proteins that are in much earlier stages of development. At present, TKT intends to focus on the currently-marketed products until products from these latter two categories demonstrate clinical and commercial viability before embarking on development programs. TKT believes that its focus on currently-marketed proteins for near-term commercialization and on development-stage proteins for the long-term appropriately utilizes Company resources, maximizes near-term commercial potential and will allow the Company to build a strong Gene Activation product pipeline for the future. GENE THERAPY TECHNOLOGY TKT's Gene Therapy Approach. The first three waves of protein production have a critical feature in common: regardless of methodology, the proteins are manufactured outside the human body. The Company believes that its approach to gene therapy, Transkaryotic Therapy, represents the fourth wave of protein production -- a system that would restore the patient's natural ability to produce a required therapeutic protein. TKT's approach to gene therapy is based on genetically modifying patients' cells to produce and deliver therapeutic proteins for extended periods. The Company believes the approach will be safe, cost-effective and clinically superior to the conventional delivery of proteins by injection. In preclinical animal studies, a single administration of one of the Company's gene therapy products resulted in the lifetime production and delivery of therapeutic proteins. The Company has initiated a Phase I clinical study to determine the safety of its gene therapy system, and preliminary data suggests that the administration of genetically-engineered cells appears to be well-tolerated. TKT believes its gene therapy system is broadly enabling and, accordingly, may be applicable to the treatment of a wide range of human diseases. Because TKT's gene therapy has demonstrated long-term delivery of therapeutic proteins in animal model systems, the Company believes its approach may be well-suited to the treatment of chronic protein deficiency states including hemophilia, diabetes and hypercholesterolemia. The diseases targeted by TKT are characterized by a significant unmet medical need, and the clinical goals that must be achieved by TKT's gene therapy products are well-defined. The potential benefits of TKT's gene therapy products include improved therapeutic outcome, elimination of frequent painful injections and the problem of patient compliance, a minimization of side effects due to over- or under-dosing of conventional proteins and a reduction in costs. There are a large number of technical approaches to gene therapy, but two basic distinctions can be used to characterize the field. The first distinction is viral versus non-viral -- viral gene therapy approaches use genetically modified viruses to introduce genes into human cells by infection, and non-viral approaches use noninfectious (chemical or physical) means to introduce the genes. The second distinction is in vivo vs. ex vivo -- in vivo gene therapies are based on the administration of DNA-based drugs directly to the patient, whereas ex vivo gene therapies are based on removing a small number of cells from a patient, introducing a gene into the cells and implanting the engineered cells into the patient. TKT's enabling gene therapy technology platform is a non-viral, ex vivo system which the Company believes is significantly different from other approaches to gene therapy. The Company believes that these - 7 - 8 differences will allow for physiologic levels of protein expression in patients for extended periods, a goal that historically has represented a major obstacle in alternative gene therapy systems. The major alternative to TKT's system is based on the use of genetically-modified retroviruses and adenoviruses to infect patients' cells. The Company believes that such viral ex vivo approaches present a significant safety risk due to the possibility of causing new viral infections in patients and have not allowed long-term production of the therapeutic protein in animal models or patients. Furthermore, to the best of the Company's knowledge, neither viral nor non-viral in vivo gene therapy technologies have allowed long-term or high level protein expression in the patient and are likely best-suited for non-chronic applications such as immunotherapy. TKT believes Transkaryotic Therapy is well-suited to allow safe and long-term delivery of therapeutic proteins for the treatment of chronic protein deficiency states as demonstrated by the long-term delivery of therapeutic proteins in animal models. In order to develop a safe, effective, non-viral, ex vivo gene therapy system, the Company believes that several major tasks must first be accomplished in basic and preclinical settings. Each of the steps must be carried out to allow the ultimate product to be manufactured efficiently, reproducibly and cost-effectively, to be subjected to rigorous quality control to ensure safety and to direct the long-term production and delivery of the therapeutic protein in the patient. The first step involves the development of techniques for obtaining and propagating the cell types of interest. Next, non-viral methodologies must be developed that allow DNA fragments to be stably introduced into these cells. DNA fragments containing the appropriate DNA regulatory sequences fused to the desired protein encoding sequences, for example, must be constructed and introduced into cells to generate genetically-engineered cells which express the therapeutic protein at clinically relevant levels. After the DNA fragments have been successfully introduced into human cells, methodologies must then be developed which allow the engineered cells to properly process the therapeutic protein. The final step involves the development of methods and formulations for the implantation of the engineered cells. TKT scientists have successfully accomplished all of the above tasks (Table II on page 9) and, in model systems, have successfully delivered therapeutic proteins for the lifetime of the experimental animals. Much of TKT's work has focused on gene therapy using fibroblasts, a cell type present in the skin (and throughout the body) that is readily obtained from patients and propagated in culture. The Company has developed a variety of methodologies for the stable transfection of normal human cells. "Stable transfection" means that the introduced DNA fragment becomes part of a chromosome in the treated cell. One such methodology is electroporation, a technique based on subjecting cells to a brief electrical pulse. The pulse transiently opens small pores in the cell membrane that allow the DNA fragments of interest to enter the cell. The technique is simple, reproducible (it works for a variety of cell types and for cells derived from newborns to the elderly), efficient (one electroporation provides many more transfected cells than required for treatment) and cost-effective (less than one dollar per reaction). - 8 - 9 TABLE II. TKT'S GENE THERAPY SYSTEM: SUMMARY OF SELECTED TECHNICAL ACCOMPLISHMENTS
TASKS Achievement Comments - ----- ----------- -------- Cell types propagated Fibroblasts, myoblasts, mammary Cells retain normal properties epithelial cells Proteins expressed Factor VIII, Factor IX, Growth All expressed at levels of at Hormone, Insulin, Interleukin-2, least 1 ug/million cells/day LDL receptor, alpha-galactosidase Transfection Electroporation, microinjection, All with efficiencies greater methodologies applied polybrene and calcium phosphate than 1 stably transfected cell precipitation per thousand treated cells Proteins characterized Factor VIII, Factor IX, Growth All with natural post- Hormone, alpha-galactosidase translation modifications In vivo expression Factor VIII, Factor IX, Growth All at physiologic levels in observed Hormone, Insulin animal models
The Company believes it has developed the basic technologies required for a safe and effective gene therapy approach which can be refined and optimized for patient use. In patients, TKT envisions that the system would function as follows: 1. The clinician would identify the patient to be treated and perform a small skin biopsy. 2. In TKT's manufacturing facility, patient cells would be harvested from the biopsy specimen. 3. The DNA fragment containing DNA regulatory sequences and protein coding sequences would be introduced into the harvested cells by electroporation. The DNA fragment and the electroporation methodology would be the same for all patients with a given disease. 4. A genetically-engineered cell expressing the therapeutic protein would be identified, propagated, subjected to appropriate characterization and quality control tests and formulated in a syringe. The syringe would then be returned to the physician. 5. The physician would then inject the engineered cells under the patient's skin as an outpatient procedure. The above patient techniques have been successfully carried out in an ongoing Phase I clinical trial. These procedures might vary based on the disease to be treated. For example, different cell types, sites of implantation and genes of interest could be advantageous for a given disease. Clinical Development Status. The Company's approach to initial clinical development of its enabling gene therapy technology is to evaluate product safety in extremely conservative clinical settings. Towards this end, the Company has initiated one Phase I clinical trial for the treatment of cancer cachexia (the gradual wasting of the body) by growth hormone gene therapy and is sponsoring a second Phase I clinical trial for the treatment of renal cancer and malignant melanoma by Interleukin-2 gene therapy. Based on the data generated from these studies, the Company believes it will be well-positioned to perform clinical trials in patients with conditions that are not life-threatening. At present, the Company intends to explore the possibility of further development of these products in conjunction with corporate partners. - 9 - 10 TKT's first Company-initiated trial began in the U.S. in late 1994 following both the validation of TKT's pilot manufacturing facility and FDA review of the Company's IND. The Phase I study is based on the implantation of genetically modified skin fibroblasts to express growth hormone in cancer patients at risk for cachexia. A total of 20 patients will be enrolled with five escalating dosage blocks. Community physicians have injected the modified cells under the skin of subjects; all patient procedures have been performed on an out-patient basis. The major goal of the study is to develop a safety profile of the product in humans. To date, 12 patients have been enrolled in the trial and the therapy appears to be well-tolerated. Due to the extremely conservative inclusion and exclusion criteria for the trial, it is expected to continue well into 1997. The Company has also sponsored a Phase I study at the University of Freiburg based on the delivery of Interleukin-2 by genetically modified skin fibroblasts in order to restore or enhance the ability of the immune system to attack the tumor cells in patients with renal cancer and malignant melanoma. All manufacturing processes have been developed and performed by the University and to date, the product appears to be well-tolerated. Based on the results described above, the Company believes that Transkaryotic Therapy offers several clinical and commercial advantages over conventional treatments and other gene therapies for targeted diseases, including: - - SAFETY. Transkaryotic Therapy does not use infectious agents such as retroviruses to genetically engineer the patient's cells. TKT's non-viral method of producing genetically engineered cells allows for extensive safety testing prior to their implantation in the patient. In studies of TKT's gene therapy system involving over 5,000 animals, no side effects have been observed. - - LONG-TERM EXPRESSION. Transkaryotic Therapy is designed to produce long-term results with a single treatment. In preclinical animal studies, the Company has produced target proteins at therapeutic levels for the lifetime of the animals, suggesting the possibility of long-term effectiveness in humans. - - CONTROLLABILITY. Transkaryotic Therapy is designed to deliver therapeutic proteins at levels which meet a patient's specific needs. The Company believes that its gene therapy system will allow the physiologic and pharmacologic regulation of expression. Further, the Company believes that the treatment afforded by Transkaryotic Therapy will be readily reversible so that therapy can be discontinued if no longer required. - - FLEXIBILITY. The Company has focused on genetically-engineering a wide variety of human cell types because, although certain cell types are useful in the gene therapy of particular diseases, no single cell type is appropriate for the gene therapy of all diseases. - - EASE OF ADMINISTRATION. Transkaryotic Therapy will allow for the administration of its products by a single injection under the patient's skin on an out-patient basis. Furthermore, the potential long-term effectiveness of the treatment could eliminate problems of patient compliance. - - COST-EFFECTIVENESS. Transkaryotic Therapy takes advantage of the patient's natural ability to synthesize therapeutic proteins for extended periods. The potential benefits of Transkaryotic Therapy include improved therapeutic outcome, the elimination of frequent painful injections and patient compliance problems, a reduction of side effects due to overdosing and underdosing of conventional proteins and significant reductions in cost. Accordingly, the Company believes that its therapy may be less costly than therapy using conventional protein pharmaceuticals which require frequent administration. - 10 - 11 TKT'S GENE THERAPY DEVELOPMENT PROGRAMS AND COMMERCIALIZATION STRATEGY The Company is focusing its development efforts on gene therapy products for the treatment of chronic diseases with straightforward and well-characterized etiologies. For certain of these diseases, such as Hemophilia A, effectiveness, dose ranges and safety have been clearly established in the context of currently approved and marketed products. For others, such as Fabry disease, preliminary in vitro and animal model data strongly suggest that the long-term delivery of appropriate therapeutic proteins will effectively treat the disease. The Company believes that this initial focus will provide strategic advantages by allowing evaluation of Transkaryotic Therapy based on well understood clinical parameters, thereby facilitating the regulatory approval process. Furthermore, the Company believes that when administered as part of its proprietary gene therapy system, these proteins may provide therapeutic benefits not achievable using conventional methods of delivery. Hemophilia A. When a blood vessel ruptures, an intricate series of events allows the rapid formation of a clot in normal individuals. One of the best-studied coagulation disorders is Hemophilia A, caused by a deficiency or defect in protein coagulation Factor VIII. Patients with the disease experience acute, debilitating and often life-threatening bleeding episodes. Depending on the severity of the disease, bleeding may occur spontaneously or after minor trauma. Conventional treatment consists of temporarily increasing the patient's Factor VIII levels through infusions of plasma-derived or recombinantly-produced Factor VIII. Factor VIII levels typically rise to therapeutic levels for only two to three days following intravenous administration, then return to the baseline subtherapeutic level, once again placing the patient at risk for a serious bleeding episode. It is estimated that there are about 19,000 Hemophilia A patients in the U.S. and Canada, 25,000 in Europe, and 4,000 in Japan. In the U.S., an adult suffering from the disease receives Factor VIII protein treatment only during bleeding crises at an average annual cost of approximately $65,000. TKT's approach to the treatment of hemophilia is based on the production and delivery of Factor VIII using Transkaryotic Therapy. The Company believes that its Factor VIII gene therapy product has the potential to provide a constant supply of therapeutic levels of the missing protein, effectively eliminating the problem of rapid disappearance of the therapeutic protein. The Company has produced clonal populations of human fibroblasts which have been transfected to express Factor VIII in vitro, demonstrated that the protein is properly processed and achieved protein expression in animals. The Company has initiated preclinical studies for the product and intends to initiate Hemophilia A clinical trials in 1997. In July 1993, the Company entered into a Collaboration and License Agreement with Genetics Institute, Inc. ("GI") relating to a joint development and marketing program for a Hemophilia A gene therapy product based on the Company's non-viral technology. The agreement provides that the parties will collaborate to develop and commercialize a non-viral gene therapy product for the treatment of Hemophilia A using TKT's proprietary technology and GI's patented Factor VIII genes. Under the agreement, GI has granted TKT a nonexclusive worldwide license under GI's patents covering truncated versions of the gene encoding Factor VIII for use in certain non-viral gene therapy applications. GI has agreed to pay a portion of the clinical development costs of the product in the U.S., Canada and the European Community. TKT retained exclusive manufacturing rights throughout the world and exclusive marketing rights to all countries of the world except those in Europe. Subject to certain conditions, GI received exclusive rights to market the product in Europe. The agreement is terminable by GI in the event certain product development and regulatory approval milestones are not reached. Fabry Disease. Fabry disease is an X-linked lysosomal storage disease caused by the deficiency of the enzyme alpha-galactosidase. The disorder is characterized by the accumulation of lipids in lysosomes of vascular endothelial and smooth muscle cells and in a wide variety of other tissues. Patients with classic Fabry disease of early onset, generally in adolescence, show diverse clinical manifestations including severe pain and cardiovascular and renal complications. It is estimated that there are about 2,000 patients in the U.S. and a total of approximately 5,000 patients in the developed world. Current treatment of the disease is limited to the - 11 - 12 reduction of symptoms. Clinical trials of enzyme replacement therapy in the late 1970's have been reported using infusions of alpha-galactosidase purified from placenta, spleen or plasma. The intravenous injection of the enzyme resulted in the transient reduction in the plasma levels of the deleterious lipid but, due to the limited availability of the enzyme obtained from human sources, insufficient quantities were available for further studies. The development of a safe and effective gene therapy product for the direct delivery of alpha-galactosidase using a gene therapy approach could result in an elimination of pain symptoms, the medium- and long-term cardiovascular and renal complications and in an increased life expectancy and improved quality of life. TKT has produced purified alpha-galactosidase from normal human fibroblasts and demonstrated that the enzyme has the desired structural and functional properties. Before proceeding to a gene therapy trial, it is important to determine the safety and pharmacokinetics of the protein in humans. Towards these ends, the Company filed an IND in November 1996 and initiated a small Phase I clinical trial in January 1997 to study the protein. This study is being performed at the National Institute of Health ("NIH") under a collaborative research and development agreement ("CRADA") executed in 1996. Based on the data obtained, it is anticipated that this study will allow the design of a follow-up gene therapy trial in 1997. Long-term Gene Therapy Targets. The Company's long-term gene therapy product development strategy is focused on products for the treatment of commonly occurring diseases including both juvenile- and adult-onset diabetes, hypercholesterolemia and osteoporosis. These are diseases for which either (i) a proven therapeutic protein exists but effective treatment of the disease requires complex patterns of regulation in the patient (for example, insulin is widely used in the treatment of diabetes but delivery of insulin by conventional methods is imprecise and does not prevent the serious complications of the disease) or (ii) no protein has yet been proven effective in treating the disease (for example, many proteins are thought to have potential in the treatment of hypercholesterolemia, but that has yet to be proven conclusively in patients). Manufacturing. One of the critical aspects of any cell-based therapy is the approach to manufacturing. As stated above, the manufacturing process takes up to six weeks and it is essential to optimize the process to allow for a commercially-viable product. The Company believes that this has been accomplished and, for example, the Company believes that the cost for manufacturing its single administration Factor VIII gene therapy product is less than that for manufacture of a one year supply of purified Factor VIII protein required by a typical patient. To produce early clinical materials, TKT has constructed a pilot manufacturing facility that was designed to conform to FDA guidelines for Current Good Manufacturing Practice ("cGMP"). For Phase III clinical trials and commercialization, TKT intends to construct a cGMP-certified facility. The Company intends to manufacture its gene therapy products in central manufacturing facilities. Initially, a single facility would be constructed to serve the U.S. As the Company's product pipeline matures, it is anticipated that demand will increase, possibly requiring the Company to construct an additional central manufacturing facility in the U.S. Other gene therapy companies have adopted a strategy wherein every large city (or potentially large hospital) would have a cell processing facility, but TKT believes that the requirements for strict quality control and the benefits of economy of scale are best achieved using the central manufacturing strategy. OTHER GENE THERAPY COLLABORATIONS In 1994, the Company entered into a three-year collaboration with the University of Freiburg. As part of that collaboration, TKT is sponsoring the first gene therapy trial approved in Germany. The Phase I study is based on the delivery of Interleukin-2 by genetically modified skin fibroblasts in order to restore or enhance the ability of the immune system to attack the tumor cells in patients with renal cancer and malignant melanoma. TKT has no role in the manufacturing process. The trial was initiated in 1994 and 14 patients have been enrolled - 12 - 13 to date. In addition to sponsoring the clinical trial, TKT has certain rights to technologies developed for the non-viral gene therapy of certain cancers. In November 1995, the Company entered into a collaboration with the Institute Pasteur (the "Institute") to study the gene therapy of Hurler disease, a lysosomal storage disorder. The Institute has successfully delivered various proteins in a number of animal models, and the Company and the Institute are working to improve expression of the missing enzyme in human cells. In addition, the Company has certain rights to related technologies developed at the Institute. In July 1996, the Company entered into a collaboration with the Women's and Children's Hospital, Adelaide (the "Hospital") to study gene and protein replacement for the mucopolysaccharidoses, a group of lysosomal storage disorders, including Hunter syndrome. The Company and the Hospital plan to work towards developing a series of therapies for these related diseases, building on the Hospital's twenty years of experience in their molecular biology and clinical features. In connection with the collaboration, TKT will pay the Hospital a royalty on product sales and will reimburse the Hospital for a portion of the patent costs associated with patent prosecution. The Company will also provide the Hospital with funding for research in the field of mucopolysaccharidoses diseases. TKT has secured the worldwide rights to any products and/or patents resulting from the collaboration. PATENTS, PROPRIETARY RIGHTS AND LICENSES Proprietary Issues. For many currently-marketed proteins, the product manufactured using conventional genetic engineering techniques does not represent the first time the protein was isolated and purified. As such, it was generally not possible to obtain a broad composition of matter patent for many of the currently-marketed proteins. In contrast, the isolated and purified DNA sequences encoding these proteins, various vectors used to insert such DNA sequences into production cell lines, cell lines modified by the insertion of such DNA sequences, and corresponding methods (including methods of producing proteins using this approach) led to issued patents in many cases. TKT believes that, by completely avoiding the use of isolated and purified DNA sequences encoding proteins of commercial interest, the Company's technology does not infringe claims based on isolated and purified DNA sequences encoding such proteins. Furthermore, the Company intends to avoid the use of technologies (such as specific protein purification procedures) that are the subject of patents that are not limited to protein products manufactured using conventional genetic engineering techniques. Over the past decade, there has been a dramatic increase in the number of approaches to gene therapy under development in both academic and industrial laboratories. A large number of patent applications have been filed in the U.S. and worldwide relating to this work, and a number of gene therapy patents have issued to date. The Company requested, and the U.S. Patent and Trademark Office (the "PTO") declared, an interference regarding an issued patent with broad claims to ex vivo gene therapy. The participants in the interference are Genetic Therapy, Inc. (a wholly-owned subsidiary of Novartis AG), Somatix Therapy Corporation and TKT. With the possible exception of the patents involved in the interference, the Company believes its Transkaryotic Therapy technology does not infringe on patents issued to date. The PTO proceeding will determine the patentability of the subject matter of the interference and which of the parties first developed this subject matter. The process to resolve the interference can take many years. The outcome of interferences can be quite variable: for example, none of the three parties may receive the desired claims, one party may prevail, or a settlement involving two or more of the parties may be reached. There can be no assurance that TKT will prevail in this interference or that, even if it does prevail, that the Company can meaningfully protect its proprietary position. In the event TKT does not prevail, a January 1997 Federal Trade Commission ("FTC") decision would then be relevant. The FTC accepted a consent order to resolve anticompetitive concerns raised by the merger of Ciba- Geigy Limited and Sandoz Limited into the newly formed Novartis AG. As part of the consent order, the - 13 - 14 constituent entities of Novartis will be required to provide all gene therapy researchers and developers with non-exclusive licenses to the patent upon which Novartis is involved in the interference. The Company has entered into an agreement with Somatix under which the Company's ability to market its non-viral gene therapy products will not be affected should Somatix win the interference. Currently, the Company has one issued patent and 21 pending patent applications in the U.S. to protect its proprietary methods and processes; it has also filed corresponding foreign patent applications for certain of these U.S. patent applications. The U.S. patent applications relate to Gene Activation in general, DNA sequences required for Gene Activation, vectors required for Gene Activation, cells modified by Gene Activation, proteins produced by Gene Activation, corresponding Gene Activation methods, Transkaryotic Therapy in general, methods of propagating and transfecting cells, methods for obtaining expression of therapeutic proteins and homologous recombination in cells, and cells modified by the preceding methods. Where appropriate, the Company intends to file, or cause to be filed on its behalf, additional patent applications relating to future discoveries and improvements. The Company believes that protection of the proprietary nature of its products and technology is important to its business. Accordingly, it has adopted and will maintain a vigorous program to secure and maintain such protection. The Company's practice is to file patent applications with respect to technology, inventions and improvements that are important to its business. The Company also relies upon trade secrets, unpatented know-how, continuing technological innovation and the pursuit of licensing opportunities to develop and maintain its competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary technology or that the Company can meaningfully protect its proprietary position. As a general matter, patent positions in the fields of biotechnology and biopharmacology are highly uncertain and involve complex legal, scientific and factual matters. To date, there has emerged no consistent policy regarding the breadth of claims allowed in biotechnology patents. Consequently, although TKT plans to prosecute aggressively its applications and defend its patents against third parties, there can be no assurance that any of the Company's patent applications relating to the technology used by the Company will result in the issuance of patents or that, if issued, such patents will not be challenged, invalidated or circumvented or will afford the Company protection against competitors with similar technology. Should the Company become involved in any litigation or interference proceedings regarding patent or other proprietary rights, such litigation or interference proceedings may result in substantial cost to the Company, regardless of outcome and, further, may adversely affect TKT's ability to develop, manufacture and market its products and to form strategic alliances. The Company's technologies and potential products may conflict with patents which have been or may be granted to competitors, universities or others. As the biotechnology industry expands and more patents are issued, the risk increases that the Company's technologies and potential products may give rise to claims that they infringe the patents of others. Such other persons could bring legal actions against the Company claiming damages and seeking to enjoin commercialization of a product or use of a technology. If any such actions are successful, in addition to any potential liability for damages, the Company could be required to obtain a license in order to continue to use such technology or to manufacture or market such product or could be required to cease using such product or technology. There can be no assurance that the Company would prevail in any such action or that any license required under any such patent would be made available or would be made available on acceptable terms. The Company believes that there may be significant litigation in the Gene Activation and gene therapy fields regarding patent and other intellectual property rights. In September 1996, the Company received a letter from Amgen Inc. ("Amgen") stating, without further elaboration, that in Amgen's opinion any implication that the Company will be able to commercialize GA-EPO in the United States is "materially false and misleading." The Company has received an opinion of Hamilton, Brook, Smith & Reynolds, P.C., counsel to the Company that the technologies employed by the Company and the method of their use in the Company's products do not infringe U.S. Patent Numbers 4,703,008, 5,441,868 and 5,547,933, the principal Amgen patents, and would not infringe such patents under the doctrine of equivalents. Based upon this opinion as well as its and its - 14 - 15 counsel's review of other relevant patents, the Company believes that it will be able to commercialize GA-EPO in the United States upon successful completion of its clinical trials and receipt of FDA approval. This opinion, however, is not binding on any court, and there can be no assurance that the Company will not in the future become subject, in the United States or any other country, to patent infringement claims, interferences, and other litigation involving patents, including the three referenced Amgen patents, or any patents that may issue on any pending patent applications, including Amgen patent applications. If the Company becomes involved in such litigation, it could consume substantial Company resources. To further protect its trade secrets and other proprietary property, the Company requires all employees, Scientific Advisory Board members, consultants and collaborators having access to such proprietary property to execute confidentiality and invention rights agreements in favor of the Company before beginning their relationship with the Company. While such arrangements are intended to enable the Company to better control the use and disclosure of its proprietary property and provide for the Company's ownership of proprietary technology developed on its behalf, they may not provide meaningful protection for such property and technology in the event of unauthorized use or disclosure. Licensing. The Company has entered into several licensing agreements under which it has acquired certain worldwide rights to use proprietary genes and related technology in its non-viral gene therapy products: The Company has a nonexclusive license for certain non-viral gene therapy applications from GI with respect to GI's patented Factor VIII genes and a nonexclusive sublicense for non-viral gene therapy applications from British Technology Group plc ("BTG") with respect to BTG's patented Factor IX gene. TKT's rights under these gene licenses and sublicenses are for the term of the last to expire patent included in the licensed patent rights, subject to earlier termination in the event of the Company's failure to meet certain specified milestones. Although the Company is not currently in default under any of these agreements, there can be no assurance that such defaults will not occur in the future. Should such a default occur and any of these licenses or sublicenses be terminated in the future, the Company could lose the right to continue to develop one or more of its potential products, which loss could have a material adverse effect upon the Company's business. COMPETITION Gene Activation. At present, the Company considers its primary competition with respect to its Gene Activation technology to be companies involved in the current production of therapeutic proteins. These companies have obtained patent protection covering many of the techniques used to produce commercially-marketed proteins using conventional genetic engineering techniques. These patent rights have served as an effective entry barrier in the $11 billion (1995 worldwide revenues) protein therapeutics market. Several pharmaceutical and biotechnology companies have an established presence in the field of therapeutic protein production. For example, erythropoietin is marketed by Johnson & Johnson ("J&J") and Amgen in the U.S.; by Boehringer Mannheim GmbH and J&J in Europe; and by Sankyo Company Ltd. and Chugai Pharmaceutical Co., Ltd. in Japan. These and other competitors have substantially greater financial and other resources than the Company, including larger research and development staffs and more experience and capabilities in conducting research and development activities, testing products in clinical trials, obtaining regulatory approvals and manufacturing, marketing and distributing products. There can be no assurance that TKT will succeed in developing and marketing technologies and products that are more clinically efficacious and cost-effective than the more established treatments or the new approaches and products developed and marketed by its competitors. The Company believes that the primary competitive factors in the market for therapeutic proteins may include product safety, efficacy, distribution channels and price, and disease management services. In addition, the length of time required for products to be developed and to obtain regulatory and in some cases, reimbursement approval are important competitive factors. The biotechnology industry is characterized by rapid and significant technological change. Accordingly, the Company's success will depend in part on its ability to - 15 - 16 respond quickly to medical and technological changes through the development and introduction of new products. The Company believes it competes favorably with respect to these factors, although there is no assurance that it will be able to continue to do so. Gene Therapy. The Company's gene therapy system will have to compete with other gene therapy systems as well as with conventional methods of treating the diseases and conditions targeted by the Company and new non-gene therapy treatments which may be developed in the future. A number of commercial entities, including major established biotechnology and pharmaceutical companies, as well as development stage entities, currently are involved in the field of human gene therapy. Additional competitors may enter the field in the future as gene therapy becomes better established. Some of these existing competitors have and certain of these potential competitors may have, substantially greater financial, technical, scientific, marketing or other capabilities and resources than are available to the Company. Smaller companies may obtain access to such skills and resources through collaborative arrangements with pharmaceutical companies or academic institutions. Moreover, existing or potential competitors may possess or acquire patents or other rights to genes or technology which are necessary or useful for certain applications of the Company's gene therapies, thereby hampering or preventing the Company from exploiting such applications. The Company is developing gene therapy products to address a variety of diseases and conditions. For certain of the Company's potential products, an important competitive factor may be timing of market entry. The speed with which TKT can enter and complete human clinical trials and approval processes may therefore be a significant competitive factor. The Company believes that product efficacy, safety, reliability and price may also be important competitive factors. The development by others of alternative or superior treatment methods could render the Company's products obsolete or noncompetitive with respect to some or all of these competitive factors. In addition, treatment methods not clearly superior to the Company's could achieve greater market penetration through competitors' superior sales, marketing or distribution capabilities. The Company's competitive position also depends upon its ability to attract and retain qualified personnel, obtain patent protection, secure licenses of necessary genes and technology from third parties, or otherwise develop proprietary products or processes and secure sufficient capital resources for the typically substantial expenditures and period of time prior to commercial sales of each product. GOVERNMENT REGULATION All of the Company's products will require regulatory approval by U.S. and foreign government agencies prior to commercialization in such countries. In particular, protein therapeutics are subject to rigorous pre-clinical and clinical testing, and other pre-market approval procedures administered by the FDA and similar authorities in foreign countries. In addition, gene therapy is a new technology, and regulatory approvals may be obtained more slowly than for products produced using conventional technologies. In the U.S., various federal and in some cases, state and local statutes and regulations also govern or influence the manufacturing, labeling, storage, record keeping and marketing of such products. Obtaining approval from the FDA and other regulatory authorities for a therapeutic product may take several years and involve substantial expenditures. Moreover, ongoing compliance with applicable requirements can entail the expenditure of substantial resources. Difficulties or unanticipated costs may be encountered by the Company in its efforts to secure necessary governmental approvals, which could delay or preclude the Company from marketing its products. The activities required before a new pharmaceutical agent may be marketed in the U.S. begin with pre-clinical testing. Pre-clinical tests include laboratory evaluation and animal studies to assess the potential safety and efficacy of the product. The results of these studies must be submitted to the FDA as part of an Investigational - 16 - 17 New Drug Application ("IND"), which must be reviewed and cleared by the FDA before proposed clinical testing can begin. Clinical trials are conducted in accordance with specific federal regulations (known as Good Clinical Practices). The clinical protocols detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each clinical protocol must be submitted to the FDA as part of an IND. Further, each clinical study must be conducted under the auspices of an independent Institutional Review Board ("IRB") at the institution at which the study will be conducted. Each IRB will consider, among other things, ethical factors, the safety of human subjects, and informed consent. Clinical trials are typically conducted in three sequential phases. In Phase I, clinical trials typically include a small number of subjects (often healthy volunteers) to determine the early safety profile and the pattern of drug distribution and metabolism. In Phase II, clinical trials are conducted with larger groups of patients afflicted with a specific disease in order to further test safety and determine optimal dose amounts, dose schedules, and routes of drug administration. In Phase III, larger-scale, multi-center, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data for a valid statistical test of efficacy and safety required by the FDA and others. In the case of products for life- threatening disease, the initial human testing may be done in patients rather than healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that such studies may provide results traditionally obtained in Phase II trials. These trials are frequently referred to as Phase I/II trials. Although some of the Company's products are being considered for patients with life-threatening diseases, there can be no assurance that the FDA will allow Phase I/II studies, or that if Phase I/II studies are permitted, that this study design would shorten the development time for any of the Company's products. The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification, suspension, or termination of clinical trials if an unwarranted risk is presented to patients, or if the design of the trial is insufficient to meet its stated objectives. After completion of clinical trials of a new product, FDA marketing approval must be obtained. The Company expects that its products will be regulated as biologics. Traditionally, both a Product License Application ("PLA") and an Establishment License Application ("ELA") have been required prior to commercial marketing. The Company expects that both licenses will be required for its gene therapy products. Recently the FDA has announced its intention to simplify the licensing process for well-characterized biologics and put forth a regulatory mechanism to allow for a single license application, a Biologics License Application ("BLA"), for well-characterized biologics. The Company expects that its Gene Activation products will fall into this category and require a BLA. License applications submitted to the FDA have historically taken, typically, two to five years to receive approval. In 1992, at the same time of passage of the Prescription Drug User Fee Act, the FDA committed to reviewing and acting on a complete license application within 12 months of the submission date. Nevertheless, if FDA determines that an application is incomplete, or that important issues are unanswered by the data in the application, approval times could be delayed significantly. Notwithstanding the submission of relevant data, the FDA may ultimately decide that the license application does not satisfy its criteria for approval. Even if FDA clearances are obtained, a marketed product is subject to continual review. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restriction on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. In addition, the manufacturing facility for the Company's products will be subject to FDA inspection for adherence to cGMP prior to marketing clearance and periodically following approval. This will require the Company to observe rigorous manufacturing specifications. The Company believes that many of its Gene Activation products are likely to be reviewed within FDA by CBER. CBER currently has no "bioequivalence" pathway for the rapid approval of closely-related biologics, and the Company believes that its Gene Activated products will be treated as new biologic entities and require a complete regulatory and clinical program. However, these programs will often have the advantage of focusing on Gene Activated products with conventional, previously approved, counterparts that are well-known to regulatory authorities around the world (in contrast to a typical new chemical entity, which has no related history concerning - 17 - 18 its safety and efficacy in humans). In April 1996, the FDA issued a document entitled "FDA Guidance Concerning Demonstration of Comparability of Human Biological Products, Including Therapeutic Biotechnology-derived Products." This document describes situations in which a manufacturer can establish the equivalence of a modified version of their own product using physical, chemical, and/or pharmacological methods, without the need for additional clinical trials. This is a departure from traditional doctrine, in which biologics were deemed too complex to compare using such methods, and reflects the increased purity of many products and technical advances in the analytical methods currently in use. Although an approval pathway for bioequivalent biologics does not exist, the Company believes that increased analytical sophistication and enhanced purity of biologic products will facilitate the development and regulatory review of its Gene Activation products. In addition to regulations enforced by FDA, the Company is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. The Company's research and development involves the controlled use of hazardous materials, chemicals, biological materials and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. For marketing outside the U.S., the Company also is subject to foreign regulatory requirements governing human clinic trials and marketing approval for products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country. ITEM 2. PROPERTIES The Company leases approximately 56,000 square feet of laboratory and office space in a building located in Cambridge, Massachusetts. The Company has no manufacturing facility for protein production and, under the agreements between the Company and HMRI for the commercialization of GA-EPO and the second, undisclosed protein, HMRI is responsible for the manufacture of these products. The Company believes that its existing facilities are adequate to meet its current needs and that there is sufficient additional space at or in close proximity to its present facilities to accomodate its requirements through 1999. The Company also believes that its current facilities comply with all material zoning requirements and that it has all necessary permits and authorizations for such facilities. ITEM 3. LEGAL PROCEEDINGS The Company is currently involved in a patent interference proceeding before the United States Patent and Trademark office. See "Patents, Proprietary Rights and Licenses." The Company is not a party to any other legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. - 18 - 19 EXECUTIVE OFFICERS OF THE REGISTRANT The current executive officers of the Company are as follows:
Name Age Position held with the Company - ---- --- ------------------------------ Richard F Selden, M.D., Ph.D............ 38 President and Chief Executive Officer Douglas A. Treco, Ph.D.................. 39 Senior Vice President, Research and Development Christoph M. Adams, Ph.D................ 40 Vice President, Business Development Daniel E. Geffken....................... 40 Vice President, Finance and Chief Financial Officer Kurt C. Gunter, M.D..................... 42 Vice President, Clinical and Regulatory Affairs
Each officer's term of office extends until the first meeting of the Board of Directors following the next annual meeting of stockholders and until a successor is elected and qualified. Richard F Selden, M.D., Ph.D. is the founder of TKT. He has served as Chief Scientific Officer, Chairman of the Scientific Advisory Board and a Director since the Company's inception in 1988 and as President and Chief Executive Officer since June 1994. Prior to founding TKT, Dr. Selden was an Instructor in pediatrics at Harvard Medical School. He received an A.B. in Biology from Harvard College, an A.M. in Biology from the Harvard University Graduate School of Arts and Sciences, a Ph.D. in genetics from the Division of Medical Sciences at Harvard Medical School and an M.D. from Harvard Medical School. Douglas A. Treco, Ph.D. has directed research at the Company since its inception in 1988. Since February 1997, he has served as the Senior Vice President, Research and Development and from June 1993 to February 1997, he served as Vice President, Director of Research and Development. From December 1990 to June 1993, he served as Director of Research. Prior to joining the Company, Dr. Treco was a Research Fellow in Genetics, Department of Molecular Biology, Massachusetts General Hospital and Department of Genetics, Harvard Medical School. He received a Ph.D. in Biochemistry and Molecular Biology from the State University of New York, Stony Brook. Christoph M. Adams, Ph.D. has served as Vice President, Business Development of the Company since March 1994. From May 1991 to February 1994, Dr. Adams was Business Development Manager at the Pharmaceuticals Division of Ciba-Geigy AG in Basel, Switzerland. Dr. Adams received a Ph.D. in Organic Chemistry from the University of Zurich and an M.B.A. from INSEAD, Fontainebleau, France. Daniel E. Geffken has served as Vice President, Finance and Chief Financial Officer of the Company since February 1997. From June 1993 to February 1997, Mr. Geffken was Chief Financial Officer of CytoTherapeutics, Inc., a biotechnology company, and from December 1995 to February 1997, he served as Vice President. From 1991 until June 1993, Mr. Geffken was Vice President and Chief Financial Officer of Andersen Group, Inc., a diversified holding company. He received a B.S. in Economics from The Wharton School, University of Pennsylvania and an M.B.A. from the Harvard Business School. Kurt C. Gunter, M.D. has served as a consultant to the Company since September 1993 and as Vice President, Clinical and Regulatory Affairs since July 1996. From September 1993 to June 1996, Dr. Gunter worked in the Department of Laboratory Medicine at Children's National Medical Center, most recently as Director of Stem Cell Processing, Hematology - 19 - 20 and Blood Donor Center. From 1988 to 1993, Dr. Gunter worked at the Center for Biologics Evaluation and Research of the U.S. Food and Drug Administration as Acting Deputy Director, Division of Cellular and Gene Therapies and Chief, Cytokine and Cell Biology Branch. He received a B.S. in Biological Sciences from Stanford University and an M.D. from the University of Kansas School of Medicine. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock commenced trading on October 17, 1996 in the Nasdaq National Market System under the symbol "TKTX". As of March 1, 1997, there were 164 holders of record of the Company's common stock. The following table sets forth for the fiscal periods indicated, the range of high and low closing prices for the Company's Common Stock on the Nasdaq National Market System.
HIGH LOW YEAR ENDED DECEMBER 31, 1996 Fourth Quarter (beginning October 17, 1996) $20 1/2 $13 1/2
The Company has never declared or paid any cash dividends on its capital stock. The Company currently anticipates that it will retain all future earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. - 20 - 21 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company for the five years ended December 31, 1996 are derived from the financial statements of the Company. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included as Item 7 and the financial statements and related footnotes included as Item 8 in this Form 10-K.
YEAR ENDED DECEMBER 31, (in thousands, except per share amounts) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA License and contract fee revenues $4,225 $15,400 $10,000 $0 $0 Research and development expenses 14,019 10,529 9,126 6,253 4,604 Net income (loss) (11,972) 2,074 (3,422) (9,083) (6,400) Pro forma net income (loss) per share (0.81) 0.14 Shares used to compute pro forma net income (loss) per share 14,723 14,633
DECEMBER 31, (in thousands) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Cash and marketable securities $86,255 $34,485 $7,579 $6,753 $4,594 Total assets 90,998 39,218 13,472 11,409 7,129 Redeemable preferred stock - 4,440 4,230 4,020 3,810 Total stockholders' equity 89,645 33,541 7,073 5,724 2,776
22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its inception in 1988, TKT has been primarily engaged in the development and commercialization of products based on the Company's proprietary Gene Activation and gene therapy technologies. No revenues have been derived from the sale of any products, and the Company does not expect to receive revenues from product sales for a number of years. The Company expects that its research and development expenditures will increase substantially in future years as research and product development efforts accelerate and clinical trials are broadened or initiated. 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 December 31, 1996, the Company's accumulated deficit was $37,116,000. As a result, the Company is dependent upon existing cash resources, external financing from equity and debt offerings, or collaborative research and development arrangements with corporate sponsors to finance its operations. During 1996, the Company completed an initial public offering of its Common Stock, filed its second Investigational New Drug application and made progress in a number of its research and development programs. As a result, the Company has concluded that it is no longer in its development stage. Results of operations may vary significantly from period to period depending on, among other factors, the progress of the Company's research and development efforts, the receipt, if any, of additional license fees and milestone payments, the timing of certain expenses, and the establishment of additional collaborative research agreements. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the accompanying financial statements and the related footnotes thereto. RESULTS OF OPERATIONS Years Ended December 31, 1996, 1995 and 1994 Revenues from licenses and contract fees totaled $4,225,000, $15,400,000, and $10,000,000 for the years ended December 31, 1996, 1995 and 1994, respectively. All revenues were earned from two collaborative agreements with Hoechst Marion Roussel, Inc. ("HMRI"). Included in revenues in both 1995 and 1994 were one-time up front licensing fee payments of $10,000,000 from HMRI, relating to the signing of agreements for the development of products based on the Company's Gene Activation technology. Research and development expenses totaled $14,019,000 in 1996, as compared to $10,529,000 in 1995 and $9,126,000 in 1994. The increase in 1996 of $3,490,000, or 33.1%, was principally due to an increase in research and development staff to 94 from 75 and increases in laboratory supplies and outside research contracts. The increase in 1995 of $1,403,000, or 15.4%, was principally due to an increase in research and development staff to 75 from 65, increases in laboratory supplies and an expansion of laboratory facilities and expenses related thereto. General and administrative expenses were $4,729,000 for the year ended December 31, 1996, compared with $3,828,000 and $4,690,000 in 1995 and 1994, respectively. The increase in 1996 of $901,000, or 23.5%, was due to an increase of administrative employee costs and outside professional services fees. The decrease in 1995 of $862,000, or 18.4%, primarily reflects one-time personnel related costs of $662,000 incurred in 1994. - 21 - 23 Net interest income was $2,551,000, $1,116,000, and $395,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The average cash and marketable securities balances were $48,673,000, $20,294,000 and $8,808,000 in 1996, 1995 and 1994, respectively. Increased interest income is primarily attributable to higher average balances in the respective year. The Company had a net loss of $11,972,000 in 1996, net income of $2,074,000 in 1995 and a net loss of $3,422,000 in 1994. Net earnings in 1995 and the reduced net loss in 1994 are principally due to the up front licensing fees of $10,000,000 paid by HMRI to the Company in each year. LIQUIDITY AND SOURCES OF CAPITAL Since it inception, the Company has financed its operations through the sale of common and preferred stock, revenues from collaborative agreements and interest income. The Company had unrestricted cash, cash equivalents and marketable securities totaling $86,255,000 at December 31, 1996. Cash equivalents and marketable securities are invested in U.S. Treasury notes, agencies of the U.S. government and money market funds. In August 1996, the Company completed a sale of preferred stock resulting in net proceeds to the Company of $23,521,000. In October 1996, the Company completed its initial public offering of Common Stock, resulting in net proceeds to the Company of $34,110,000, and sold shares of Common Stock to HMRI resulting in net proceeds to the Company of $4,950,000. Concurrent with the completion of the initial public offering, all shares of preferred stock were automatically converted into 8,785,455 shares of Common Stock pursuant to automatic conversion terms contained in the Company's certificate of incorporation. In May 1994, TKT and HMRI (formerly named Marion Merrell Dow Inc.) entered into an agreement to commercialize TKT's GA-EPO. Under the terms of the agreement, HMRI is obligated to pay TKT a total of $58 million upon completion of all milestones and objectives set forth in the agreement. To date, TKT has received a total of $22 million, which includes up-front fees of $10 million for a license to the Gene Activation technology for GA-EPO, $5 million for the purchase of shares of the Company's Class D Preferred Stock, a $2 million milestone payment in November 1995 at which time HMRI accepted a cell line sufficient for scale-up to commercial production levels of GA-EPO, and $5 million for the purchase of shares of Common Stock upon the closing of the Company's initial public offering. The remaining $36 million in payments are based on HMRI's achievement of certain GA-EPO clinical development milestones. HMRI is responsible for the worldwide development, manufacturing and marketing of GA-EPO, and TKT will receive a royalty based on net sales. In March 1995, TKT entered into a second agreement with HMRI to commercialize a second, undisclosed protein. Pursuant to the agreement, TKT also granted to HMRI an option to commercialize certain aspects of TKT's gene therapy technologies related to this protein. Under the terms of the agreement, HMRI is obligated to pay to TKT a total of $67 million upon completion of all milestones and objectives set forth in the agreement. To date, TKT has received a total of approximately $27 million from HMRI under the second agreement, including up-front fees of $10 million for a license to the Gene Activation technology for the second protein, $10 million for the purchase of shares of the Company's Class E Preferred Stock, and $7 million to fund basic research at the Company. The remaining $40 million to be paid by HMRI to TKT consists primarily of milestone payments based on the development of the product resulting from the licensed technology. TKT is responsible for delivering a cell line suitable for large scale manufacturing. HMRI is responsible for the worldwide development, manufacturing and marketing of the product, and TKT will receive a royalty based on net sales. At December 31, 1996, the Company had net operating loss carryforwards of approximately $32 million, which expire through 2011. Since the Company expects to incur substantial losses for at least several years, the - 22 - 24 Company believes that as of December 31, 1996, it is more likely than not that all of the deferred tax assets will not be realized and, therefore, no tax benefit for the prior losses has been provided. The future utilization of net operating loss carryforwards 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 and intellectual property rights, for preclinical and clinical testing of its products, pursuit of regulatory approvals, acquisition of capital equipment, expansion of laboratory and office facilities, establishment of production capabilities and for general and administrative expenses. Until the Company's operations generate significant revenues from product sales, cash reserves and proceeds from equity and debt offerings, and funding from collaborative arrangements will be used to fund operations. The Company expects to pursue opportunities to obtain additional financing in the future through equity and debt financings, lease arrangements related to capital equipment and collaborative research agreements. The source, timing and availability of any future financing will depend principally upon equity market conditions, interest rates and, more specifically, on the Company's continued progress in its exploratory, preclinical and clinical development programs. There can be no assurance that such funds will be available on favorable terms, if at all. The Company expects that its existing capital resources, together with revenues from collaborative agreements and interest income, will be sufficient to fund its operations into 1999. 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. FORWARD LOOKING STATEMENTS Statements that are not historical facts, including statements about the Company's confidence and strategies and the Company's expectations about future products, technologies and opportunities, market demand or acceptance of future products are forward looking statements that involve risks and uncertainties. These uncertainties include commercialization or technology delays or difficulties; timing and satisfactory completion of clinical trials; patent and proprietary rights risks; changes in governmental regulations; lengthy approval processes; impact of competitive products and prices; development of manufacturing, distribution and marketing capabilities; dependence on collaborative partners; product demand and market acceptance risks; legal, economic and other risks detailed in Exhibit 99.1 to this Annual Report on Form 10-K. - 23 - 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary data are included as part of this Annual Report on Form 10-K: Report of Independent Auditors Balance Sheets as of December 31, 1996 and 1995 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Statements of Stockholders' Equity for the period January 1, 1994 through December 31, 1996 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Notes to Financial Statements - 24 - 26 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Transkaryotic Therapies, Inc. We have audited the accompanying balance sheets of Transkaryotic Therapies, Inc. (the Company) as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Transkaryotic Therapies, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Ernst & Young LLP Boston, Massachusetts February 14, 1997 27 Transkaryotic Therapies, Inc. Balance Sheets
December 31, -------------------------------- 1996 1995 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 10,414,412 $ 11,539,531 Marketable securities 75,840,830 22,945,311 Prepaid expenses and other current assets 817,812 97,010 ------------- ------------ Total current assets 87,073,054 34,581,852 Property and equipment, net 3,237,402 3,998,653 Other assets 687,969 637,014 ------------- ------------ $ 90,998,425 $ 39,217,519 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 612,026 $ 515,335 Accrued expenses 651,944 541,352 ------------- ------------ Total current liabilities 1,263,970 1,056,687 Other long term liabilities 89,600 179,200 Redeemable preferred stock, $1.00 par value; no shares authorized, issued and outstanding at December 31, 1996 (3,000 shares authorized, issued and outstanding in 1995) -- 4,440,273 Stockholders' equity: Preferred stock, $1.00 par value, 10,000,000 shares authorized at December 31, 1996 (3,813,386 in 1995); no shares issued and outstanding at December 31, 1996 (2,943,669 in 1995) -- 2,943,669 Common stock, $.01 par value; 30,000,000 shares authorized at December 31, 1996 (15,000,000 in 1995); 16,614,273 shares issued and outstanding at December 31, 1996 (5,197,662 in 1995) 166,143 51,977 Additional paid-in capital 131,795,736 58,330,976 Accumulated deficit (37,115,670) (25,143,705) Deferred compensation (5,217,604) (1,243,897) Unrealized gain on marketable securities 16,250 42,612 Accretion of redeemable preferred stock dividends -- (1,440,273) ------------- ------------ Total stockholders' equity 89,644,855 33,541,359 ------------- ------------ $ 90,998,425 $ 39,217,519 ============= ============
See accompanying Notes to Financial Statements. 28 Transkaryotic Therapies, Inc. Statement of Operations
Year ended December 31, ------------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ License and research revenues from Hoechst Marion Roussel, Inc. $ 4,225,000 $ 15,400,000 $ 10,000,000 Operating expenses: Research and development 14,018,852 10,528,615 9,125,732 General and administrative 4,728,861 3,827,995 4,690,399 ------------ ------------ ------------ 18,747,713 14,356,610 13,816,131 ------------ ------------ ------------ Income (loss) from operations (14,522,713) 1,043,390 (3,816,131) Interest income, net 2,550,748 1,116,081 394,530 ------------ ------------ ------------ Income (loss) before provision for income taxes (11,971,965) 2,159,471 (3,421,601) Provision for income taxes -- 85,000 -- ------------ ------------ ------------ Net income (loss) $(11,971,965) $ 2,074,471 $ (3,421,601) ============ ============ ============ Proforma net income (loss) per share $ (0.81) $ 0.14 ============ ============ Shares used in computing proforma net income (loss) per share 14,723,363 14,632,870 ============ ============
See accompanying Notes to Financial Statements. 29 Transkaryotic Therapies, Inc. Statements of Stockholders' Equity
Preferred Stock Common Stock Additional --------------- ------------ Paid-In Shares Amount Shares Amount Capital ------ ------ ------ ------ ------- BALANCE AT JANUARY 1, 1994 1,068,313 $ 1,068,313 5,294,101 $ 52,941 $ 30,841,863 Issuance of convertible preferred stock 280,367 280,367 -- -- 4,455,053 Repurchase of common stock (122,342) (1,223) (99,008) Deferred compensation related to restricted stock and stock options granted -- -- -- -- 535,667 Compensation expense related to equity issuances -- -- -- -- -- Redeemable preferred stock dividend accretion -- -- -- -- -- Unrealized gain on marketable securities -- -- -- -- -- Net loss -- -- -- -- -- ------------- ------------- ------------- ----------- ------------- BALANCE AT DECEMBER 31, 1994 1,348,680 1,348,680 5,171,759 51,718 35,733,575 Issuance of convertible preferred stock 1,594,989 1,594,989 22,524,334 Issuance of common stock -- -- 30,957 310 (69) Repurchase of common stock -- -- (5,054) (51) 11 Deferred compensation related to restricted stock and stock options granted -- -- -- -- 73,125 Compensation expense related to equity issuances -- -- -- -- -- Redeemable preferred stock dividend accretion -- -- -- -- -- Unrealized gain on marketable securities -- -- -- -- -- Net income -- -- -- -- -- ------------- ------------- ------------- ----------- ------------- BALANCE AT DECEMBER 31, 1995 2,943,669 2,943,669 5,197,662 51,977 58,330,976 Issuance of convertible preferred stock 1,133,589 1,133,589 -- -- 22,387,828 Redeemable preferred stock dividend accretion -- -- -- -- -- Conversion of preferred stock into common stock (4,077,258) (4,077,258) 8,585,455 85,855 6,991,403 Issuance of common stock -- -- 2,833,587 28,335 39,031,822 Repurchase of common stock -- -- (2,431) (24) 5 Deferred compensation related to restricted stock and stock options granted -- -- -- -- 5,053,702 Compensation expense related to equity issuances -- -- -- -- -- Unrealized gain on marketable securities -- -- -- -- -- Net loss -- -- -- -- -- ------------- ------------- ------------- ----------- ------------- BALANCE AT DECEMBER 31, 1996 -- -- 16,614,273 $ 166,143 $ 131,795,736 ============= ============= ============= =========== =============
Unrealized Cumulative Gain (Loss) on Total Accretion of Accumulated Deferred Marketable Stockholders' Preferred Stock Deficit Compensation Securities Equity --------------- ------- ------------ ------------ ------ BALANCE AT JANUARY 1, 1994 $ (1,020,273) $ (23,796,575) $ (1,422,431) $ -- $ 5,723,838 Issuance of convertible preferred stock -- -- -- -- 4,735,420 Repurchase of common stock -- -- -- -- (100,231) Deferred compensation related to restricted stock and stock options granted -- -- (535,667) -- -- Compensation expense related to equity issuances -- -- 365,074 -- 365,074 Redeemable preferred stock dividend accretion (210,000) (210,000) Unrealized gain on marketable securities -- -- -- (19,248) (19,248) Net loss -- (3,421,601) -- -- (3,421,601) ------------- ------------- ------------- ---------- ------------- BALANCE AT DECEMBER 31, 1994 (1,230,273) (27,218,176) (1,593,024) (19,248) 7,073,252 Issuance of convertible preferred stock 24,119,323 Issuance of common stock -- -- -- -- 241 Repurchase of common stock -- -- -- -- (40) Deferred compensation related to restricted stock and stock options granted -- -- (73,125) -- -- Compensation expense related to equity issuances -- -- 422,252 -- 422,252 Redeemable preferred stock dividend accretion (210,000) -- -- -- (210,000) Unrealized gain on marketable securities -- -- -- 61,860 61,860 Net income -- 2,074,471 -- -- 2,074,471 ------------- ------------- ------------- ---------- ------------- BALANCE AT DECEMBER 31, 1995 (1,440,273) (25,143,705) (1,243,897) 42,612 33,541,359 Issuance of convertible preferred stock -- -- -- -- 23,521,417 Redeemable preferred stock dividend accretion (157,500) -- -- -- (157,500) Conversion of preferred stock into common stock 1,597,773 -- -- -- 4,597,773 Issuance of common stock -- -- -- -- 39,060,157 Repurchase of common stock -- -- -- -- (19) Deferred compensation related to restricted stock and stock options granted -- -- (5,053,702) -- -- Compensation expense related to equity issuances -- -- 1,079,995 -- 1,079,995 Unrealized gain on marketable securities -- -- -- (26,362) (26,362) Net loss -- (11,971,965) -- -- (11,971,965) ------------ ------------- ------------- ---------- ------------- BALANCE AT DECEMBER 31, 1996 -- $ (37,115,670) $ (5,217,604) $ 16,250 $ 89,644,855 ============ ============= ============= ========== =============
See accompanying Notes to Financial Statements. 30 Transkaryotic Therapies, Inc. Statements of Cash Flows
Year ended December 31, ----------------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- OPERATING ACTIVITIES: Net income (loss) $ (11,971,965) $ 2,074,471 $ (3,421,601) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 1,574,953 1,488,318 1,252,734 Compensation expense related to equity issuances 1,079,995 422,252 365,074 Changes in operating assets and liabilities: Decrease (increase) in prepaid expenses and other current assets (720,802) 171,138 434,035 Increase (decrease) in accounts payable 96,691 162,650 (820,943) Increase in accrued expenses 20,992 2,521 276,988 ------------- ------------- ------------- Net cash provided by (used for) operating activities (9,920,136) 4,321,350 (1,913,713) ------------- ------------- ------------- INVESTING ACTIVITIES: Proceeds from sales of marketable securities 63,870,842 41,850,807 6,821,432 Purchases of marketable securities (116,792,723) (59,761,766) (9,414,673) Purchase of property and equipment (778,757) (558,243) (2,837,450) Decrease (increase) in other assets (85,900) 59,012 (86,157) ------------- ------------- ------------- Net cash used in investing activities (53,786,538) (18,410,190) (5,516,848) ------------- ------------- ------------- FINANCING ACTIVITIES: Issuance of convertible preferred stock 23,521,417 24,119,323 4,735,420 Issuance (repurchase) of common stock, net 39,060,138 201 (100,231) Repayments of bank debt -- (1,097,945) (399,202) Proceeds from bank debt -- -- 1,447,147 ------------- ------------- ------------- Net cash provided by financing activities 62,581,555 23,021,579 5,683,134 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents (1,125,119) 8,932,739 (1,747,427) Cash and cash equivalents at January 1 11,539,531 2,606,792 4,354,219 ------------- ------------- ------------- Cash and cash equivalents at December 31 $ 10,414,412 $ 11,539,531 $ 2,606,792 ============= ============= =============
See accompanying Notes to Financial Statements. 31 Transkaryotic Therapies, Inc. Notes to Financial Statements 1. NATURE OF BUSINESS Transkaryotic Therapies, Inc. (the "Company") is a biopharmaceutical company engaged in the development and commercialization of therapeutic proteins and gene therapy products for the long-term treatment and cure of a broad range of human diseases. During 1996, the Company completed its initial public offering of common stock, filed its second Investigational New Drug application with the U. S. Food and Drug Administration and made progress in the development of a number of its programs. As a result, the Company has determined that it is no longer in its development stage. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES Cash and cash equivalents include funds held in investments with original maturities of three months or less. Marketable securities consist of investments in agencies of the U.S. government and investment grade corporate notes. The fair values for marketable securities are based on quoted market prices. The Company determines the appropriate classification of cash equivalents and marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company has classified such holdings as available-for-sale securities, which are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. Financial instruments which potentially subject the Company to concentrations of credit risk consist of temporary cash investments. The Company maintains cash and cash equivalents with high-credit-quality financial institutions and limits the amount of credit exposure to any one institution. 32 Transkaryotic Therapies, Inc. Notes to Financial Statements 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated using the straight-line method over estimated useful lives of the respective asset, ranging from three to five years. Leasehold improvements are stated at cost and are amortized using the straight-line method over the term of the lease. STOCK-BASED COMPENSATION The Company accounts for qualified stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and, accordingly, recognizes no compensation expense for the issue thereof. For certain non-qualified stock options granted, the Company recognizes as compensation expense the excess of the deemed fair value of the common stock issuable upon exercise over the aggregate exercise price of such options. The compensation is amortized over the vesting period of each option or the recipient's term of employment, if shorter. The Company has adopted the disclosure provisions only of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS 123), and will continue to account for its stock options plans in accordance with the provisions of APB 25. LICENSE AND RESEARCH REVENUE Revenues from collaborative agreements are recognized as earned upon either the execution of the underlying license agreement, the incurrence of reimbursable expenses or the achievement of certain milestones. 33 Transkaryotic Therapies, Inc. Notes to Financial Statements 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Deferred tax assets are determined based on differences between financial reporting and income tax bases of assets and liabilities, as well as net operating loss carryforwards, and are measured using the enacted tax rates and laws that will be in effect when the differences reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization. PRO FORMA NET INCOME (LOSS) PER SHARE Pro forma net income (loss) per share is computed using the weighted average number of common shares, convertible preferred shares assuming conversion at date of issuance, and dilutive equivalent shares from stock options and warrants using the treasury stock method. Pursuant to the requirements of the Securities and Exchange Commission, shares and equivalent shares issued by the Company during the twelve-month period prior to the initial public offering of the Company's common stock have been included in the calculations as if they were outstanding for all periods prior to the initial public offering in October 1996 whether or not they are anti-dilutive. Historical earnings per share have not been presented since such amounts are not deemed meaningful due to the significant change in the Company's capital structure that occured in connection with the initial public offering. ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes criteria for the recognition and measurement of impairment loss associated with long-lived assets. The Company adopted this standard in the first quarter of 1996. Adoption of this standard did not have a material impact on the Company's financial position or results of operations. FINANCIAL STATEMENT RECLASSIFICATIONS Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. 34 Transkaryotic Therapies, Inc. Notes to Financial Statements 3. MARKETABLE SECURITIES The following is a summary of available-for-sale securities:
Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ====================================================================== December 31, 1996 $ 82,807,773 $ 38,999 $ (22,749) $ 82,824,023 ====================================================================== December 31, 1995 $ 29,750,091 $ 44,886 $ (2,274) $ 29,792,703 ======================================================================
These securities are classified in the accompanying balance sheet as follows:
December 31, ------------------------------------ 1996 1995 ------------------------------------ Cash equivalents $ 6,983,193 $ 6,847,392 Marketable securities 75,840,830 22,945,311 ------------------------------------ $ 82,824,023 $ 29,792,703 ====================================
Maturities of marketable securities held at December 31, 1996 are as follows:
Less than one year $77,716,798 One through three years 5,107,225 ---------------- $82,824,023 ================
35 Transkaryotic Therapies, Inc. Notes to Financial Statements 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, 1996 1995 -------------------------------- Leasehold improvements $5,072,136 $5,015,967 Laboratory equipment 2,844,089 2,386,082 Office furniture and equipment 1,172,154 927,390 -------------------------------- 9,088,379 8,329,439 Less accumulated depreciation and amortization 5,850,977 4,330,786 -------------------------------- $3,237,402 $3,998,653 ================================
Depreciation and amortization expense on property and equipment was $1,540,000, $1,463,000 and $1,233,000 in 1996, 1995 and 1994, respectively. 5. ACCRUED EXPENSES Accrued expenses consist of the following:
December 31, 1996 1995 ------------------------------ Salaries and benefits $ 341,546 $ 177,937 Professional fees 182,298 157,815 Deferred rent 89,600 89,600 Income taxes payable - 85,000 Other 38,500 31,000 ------------------------------ $ 651,944 $ 541,352 ==============================
6. BANK DEBT In February 1995, the Company repaid all outstanding bank debt. 36 Transkaryotic Therapies, Inc. Notes to Financial Statements 7. REDEEMABLE PREFERRED STOCK Upon the closing of the initial public offering of the Company's common stock in October 1996, redeemable preferred stock and all rights to accrued dividends thereon, totaling $4,598,000, were automatically converted into 200,000 shares of common stock of the Company. 8. STOCKHOLDERS' EQUITY PREFERRED STOCK All shares of preferred stock outstanding prior to the initial public offering of the Company's common stock were automatically converted into 8,785,455 shares of common stock as of the date of the offering. In July 1996, the Board of Directors authorized 10,000,000 shares of undesignated preferred stock, par value of $.01 per share, none of which were issued or outstanding at December 31, 1996. COMMON STOCK In July 1996, the Board of Directors authorized an increase in the number of authorized shares of common stock to 30,000,000. In October 1996, the Company completed an initial public offering of its common stock by selling 2,500,000 shares at $15 per share, resulting in net proceeds to the Company of approximately $34,100,000. On the same date, the Company sold 333,333 shares of its common stock to Hoechst Marion Roussel, Inc. ("HMRI") for total proceeds of $5,000,000. 37 Transkaryotic Therapies, Inc. Notes to Financial Statements 8. STOCKHOLDERS' EQUITY (CONTINUED) STOCK COMPENSATION PLANS The Company has adopted several stock compensation plans which provide for the issuance of incentive and nonqualified stock options, stock appreciation rights, restricted stock, long-term performance awards and stock grants to employees, Directors and consultants of the Company at prices determined by the Board of Directors. At December 31, 1996, approximately 2,500,000 shares of common stock have been reserved for issuance under the plans. Options vest ratably over periods ranging from three to six years and are exercisable for ten years from the date of grant. Stock option activity under the plans is as follows:
1996 1995 1994 -------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------------------------------------------------------------------------------- Outstanding at January 1 136,344 $0.01 163,344 $0.01 60,120 $0.01 Granted 792,968 0.42 13,339 0.01 105,222 0.01 Exercised (288) 0.01 (7,660) 0.01 - 0.01 Canceled (22,713) 0.01 (32,679) 0.01 1,998 0.01 -------------------------------------------------------------------------------- Outstanding at December 31 906,311 $0.36 136,344 $0.01 163,344 $0.01 ================================================================================ Options exercisable at December 31 50,578 $0.01 27,519 $0.01 5,414 $0.01 ================================================================================ Weighted average fair value per share of options granted during the year $6.59 $6.22 $4.15 ========= ========== =========
38 Transkaryotic Therapies, Inc. Notes to Financial Statements 8. STOCKHOLDERS' EQUITY (CONTINUED) The exercise price and life information in regard to significant option groups outstanding at December 31, 1996 is as follows:
Weighted Average Remaining Number Contractual Exercise Number Outstanding Life (Yrs.) Price Exercisable ------------------------------------------------------------- 886,911 8.66 $ 0.01 50,578 15,000 9.84 15.00 - 4,400 9.93 21.94 - ============== ========= 906,311 50,578 ============== =========
Pursuant to the requirements of FAS 123, the following are the pro forma net income (loss) and net income (loss) per share for 1996 and 1995, as if the compensation cost for the options had been determined based on the fair value at the grant date for grants in 1996 and 1995, consistent with the provisions of FAS 123:
1996 1995 ---- ---- As Reported Pro Forma As Reported Pro Forma ------------------------------------------------------------------------ Net income (loss) $(11,972,000) $(12,783,000) $2,074,000 $2,080,000 Net income (loss) per share $ (0.81) $ (0.87) $ 0.14 $ 0.14
39 Transkaryotic Therapies, Inc. Notes to Financial Statements 8. STOCKHOLDERS' EQUITY (CONTINUED) The fair value of options issued pursuant to the plans at the date of grant were estimated using the Minimum Value method for options granted prior to the initial public offering and the Black-Scholes model for options granted subsequent to the initial public offering. The estimation of the fair value of these options at the date of grant used the following assumptions:
1996 1995 --------------- ----------------- Expected life (years) 2.5 - 7.5 2.5 - 7.5 Interest rate 5.79% - 6.30% 5.90% - 7.85% Volatility 0.65 N/A Forfeiture rate 10.0% 10.0%
The Company's volatility for the period prior to the initial public offering was not used in the calculation of the fair value of the options. The Company has never declared or paid dividends on any of its capital stock and does not expect to in the foreseeable future. The effects on 1995 and 1996 pro forma net income (loss) and net income (loss) per share of expensing the estimated fair value of stock options issued are not necessarily representative of the effects on reporting the results of operations for future years as the period presented include only one year and two years, respectively, of option grants. STOCK WARRANTS In conjunction with various debt and equity financings, the Company issued warrants to purchase 817,000 shares of common stock at prices ranging from $6.22 to $7.78 per share. The warrants expire at various times through November 1998. The Company has reserved shares of common stock for issuance upon the exercise of these stock warrants. 40 Transkaryotic Therapies, Inc. Notes to Financial Statements 9. LICENSE AND RESEARCH AGREEMENTS In May 1994 and March 1995, the Company entered into license and stock purchase agreements with HMRI, whereby HMRI was granted exclusive rights to make, use and sell worldwide two therapeutic products produced under patent rights and technologies owned by the Company. Under the terms of the agreements, the Company received $10,000,000 in each of 1995 and 1994 as non-refundable licensing fees. In 1995, the Company also received a milestone payment of $2,000,000 for successful completion of certain research. In each of 1996 and 1995, the Company received $3,400,000 for contract research funding under these agreements. As part of these agreements, HMRI may make additional payments of up to $76,000,000 upon achievement of certain development milestones. The Company has entered into licensing agreements with various universities and research organizations. Under the terms of these agreements, the Company is required to make payments of nonrefundable license fees and royalties on future sales of products employing the technology. 10. EMPLOYEE RETIREMENT PLAN AND OTHER BENEFITS The Company maintains a qualified defined contribution plan covering substantially all employees who have completed at least six months of service to the Company. The Company matches 50% of employee contributions, up to 5% of compensation. Employer contributions vest ratably over five years after the first year of service by the employee. The related expense was $91,000, $83,000 and $57,000 in 1996, 1995 and 1994, respectively. In 1994, a former officer and director's association with the Company terminated. As part of the separation agreement, the Company repurchased 16,071 shares of its common stock, forgave loans and related interest and made other payments, which resulted in a charge against results of operations of $544,000. 41 Transkaryotic Therapies, Inc. Notes to Financial Statements 11. INCOME TAXES Except for 1995, the Company has incurred operating losses. Since the Company expects that it will continue to incur substantial losses for at least several years, no tax benefit for the prior operating losses or other deferred tax assets has been provided given the uncertainty regarding their utilization. At December 31, 1996, the Company had net operating loss carryforwards of approximately $32,000,000 and research and development tax credits of $2,635,000, which expire through 2011. During 1995, the Company utilized approximately $1,600,000 of tax benefits from net operating loss carryforwards to offset all but $85,000 of the current year tax provision. The future utilization of these carryforwards is subject to an annual limitation when a cumulative change in stock ownership of more than 50% occurs over a three year period. The Company believes that such ownership changes has occurred and 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. Significant components of the Company's deferred tax assets are as follows:
December 31 ---------------------------------- 1996 1995 ---------------------------------- Deferred tax assets: Net operating loss carryforwards $ 13,800,000 $ 9,397,000 Research and development tax credits 2,635,000 2,479,000 Depreciation 1,068,000 752,000 Other 186,000 40,000 ---------------------------------- Total deferred tax assets 17,689,000 12,668,000 Valuation allowance (17,689,000) (12,668,000) ---------------------------------- Net deferred tax assets $ - $ - ==================================
42 Transkaryotic Therapies, Inc. Notes to Financial Statements 12. COMMITMENTS AND CONTINGENCIES The Company leases its facilities under operating leases which expire through 2001, subject to renewal provisions. Future annual minimum payments under all noncancelable operating leases are as follows:
Year ended: 1997 $ 1,156,000 1998 1,148,000 1999 117,000 2000 117,000 2001 117,000 Thereafter 19,000 -------------- $ 2,674,000 ==============
Rent expense was $1,068,000, $992,000 and $1,087,000 in 1996, 1995 and 1994, respectively. 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The response to this item is contained in part under the caption "Executive Officers of the Registrant" in Part I hereof and the remainder is incorporated herein by reference from the discussion responsive thereto under the caption "Election of Directors" in the Company's Proxy Statement relating to its Annual Meeting of Stockholders scheduled for June 12, 1997 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The response to this item is incorporated herein by reference from the discussion responsive thereto under the caption "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is incorporated herein by reference from the discussion responsive thereto under the caption "Stock Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item is incorporated herein by reference from the discussion responsive thereto under the caption "Certain Transactions" in the Proxy Statement. - 25 - 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following financial statements and supplementary data are included in Part II Item 8 filed as part of this Form 10-K: Report of Independent Auditors Balance Sheets as of December 31, 1996 and 1995 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Statements of Stockholders' Equity for the period January 1, 1994 through December 31, 1996 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Notes to Financial Statements 2. FINANCIAL STATEMENT SCHEDULES None. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1996. (c) EXHIBITS The Exhibits filed as part of this Form 10-K are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference. - 26 - 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. March 27, 1997 By: /s/ Richard F Selden --------------------- Richard F Selden President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Richard F Selden President and Chief March 27, 1997 - ---------------------------- Executive Officer Richard F Selden (Principal Executive Officer) /s/ Daniel E. Geffken Vice President, Finance March 27, 1997 - ---------------------------- and Chief Financial Daniel E. Geffken Officer (Principal Financial and Accounting Officer) /s/ William R. Miller Director March 27, 1997 - ---------------------------- William R. Miller /s/ Rodman W. Moorhead, III Director March 27, 1997 - ---------------------------- Rodman W. Moorhead, III /s/ James E. Thomas Director March 27, 1997 - ---------------------------- James E. Thomas /s/ Peter Wirth Director March 27, 1997 - ---------------------------- Peter Wirth
- 27 - 46 EXHIBIT INDEX
Sequentially Exhibit Numbered No. Description Page --- ----------- ---- 3.1 Amended and Restated Certificate of Incorporation of the Registrant (1) ............................................................. 3.2 Amended and Restated By-Laws of the Registrant (1).......................... 10.1 Stock Purchase Agreement, dated July 1988, by and between Warburg, Pincus Capital Company, L.P. ("Warburg") and the Registrant (2).............................................................. 10.2 Amended and Restated Registration Rights Agreement, dated November 3, 1993 and amended on May 13, 1994, March 1, 1995, October 26, 1995, July 10, 1996 and August 7, 1996, by and among the Registrant and certain holders of the Registrant's Preferred Stock named therein (2)........................................... 10.3 Lease Agreement, dated January 1, 1994, by and between the Trust under the Will of Harry F. Stimpson for office space at 195 Albany Street, Cambridge, Massachusetts (2)............................. 10.4 Sublease Agreement, dated April 7, 1992, by and between the Massachusetts Institute of Technology and the Registrant, for office space located at 185 Albany Street, Cambridge, Massachusetts (2)........................................................... 10.5 1993 Non-Employee Directors' Stock Option Plan (2) (3)...................... 10.6 1993 Long-Term Incentive Plan (2) (3)....................................... 10.7 Form of Letter Agreement re: Confidentiality, Inventions and Non-Disclosure (2).......................................................... 10.8 Form of Letter Agreement re: Restricted Stock (2)........................... 10.9 Form of Scientific Advisor Agreement (2).................................... 10.10 Amended and Restated Promissory Note, dated June 16, 1993, issued by the Registrant to Dr. Richard F Selden, in the original principal amount of $125,000 (2)............................................ 10.11 Amended and Restated Promissory Note, dated June 16, 1993, issued by the Registrant to Dr. Douglas A. Treco, in the original principal amount of $60,000 (2)............................................. 10.12 Amended and Restated Promissory Note, dated April 21, 1995, issued by the Registrant to Dr. Christoph M. Adams, in the original principal amount of $15,000 (2).................................... 10.13 Amended and Restated Promissory Note, dated May 5, 1995, issued by the Registrant to Dr. Christoph M. Adams, in the original principal amount of $20,000 (2)....................................
47
Sequentially Exhibit Numbered No. Description Page --- ----------- ---- 10.14 Employment Agreement, dated July 19, 1991, by and between Dr. Richard F Selden and the Registrant (2) (3)............................. 10.15 Pledge Agreement, dated May 14, 1991, by and between Dr. Richard F Selden and the Registrant (2)..................................... 10.16 Employment Agreement, dated July 26, 1991, by and between Dr. Douglas A. Treco and the Registrant (2) (3)............................. 10.17 Pledge Agreement, dated August 15, 1991, by and between Dr. Douglas A. Treco and the Registrant (2)..................................... 10.18 Employment Agreement, dated November 20, 1993, by and between Dr. Christoph M. Adams and the Registrant (2) (3).................. 10.19 Pledge Agreement, dated April 21, 1995, by and between Dr. Christoph M. Adams and the Registrant (2).................................. 10.20 Agreement, dated September 1, 1991, by and between Mr. William R. Miller and the Registrant (2).................................... 10.21 Agreement, dated July 30, 1993, by and between Warburg and the Registrant (2).......................................................... 10.22 Common Stock Purchase Warrant, dated September 12, 1991 (2)................. 10.23 Collaboration and License Agreement, dated July 22, 1993 and amended on May 30, 1996, by and between Genetics Institute, Inc. and the Registrant (2) (4)............................................. 10.24 Amended and Restated License Agreement, dated March 1, 1995, by and between Hoechst Marion Roussel, Inc. ("HMRI") and the Registrant (2) (4).................................................. 10.25 License Agreement, dated March 1, 1995, by and between HMRI and the Registrant (2) (4)............................................. 10.26 Agreement to Nominate, dated September 23, 1996, by and between Warburg and the Registrant (2)...................................... 10.27 Fifth Amendment to Registration Rights Agreement dated October 1, 1996 by and among the Registrant and certain holders of the Registrant's Preferred Stock named therein (2)............... 10.28 Employment Agreement dated July 1, 1996 by and between the Registrant and Kurt C. Gunter (3) (5)....................................... 10.29 Consulting Agreement dated November 1, 1996 by and between Registrant and Peter Wirth (3) (5).......................................... 11.1 Statement re: computation of earnings (loss) per share (5) 23.1 Consent of Ernst & Young LLP (5)........................................... 27.1 Financial Data Schedule (5).................................................
48
Sequentially Exhibit Numbered No. Description Page --- ----------- ---- 99.1 Important Factors Regarding Forward Looking Statements (5)..................
- ----------------------------------- (1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 0-21481) on November 26, 1996 and incorporated herein by reference. (2) Filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 333-10845) declared effective on October 16, 1996 and incorporated herein by reference. (3) Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (4) Confidential treatment granted to certain portions. (5) Filed as an exhibit to this Annual Report on Form 10-K. EX-10.28 2 EMPLOYMENT AGREEMENT W/ KURT C. GUNTER 1 =============================================================================== TRANSKARYOTIC THERAPIES INC. [LOGO: TKT] EMPLOYMENT AGREEMENT -------------------- AGREEMENT, dated as of July 1, 1996, between Transkaryotic Therapies, Inc., a Delaware corporation (the "Company"), and Kurt Christian Gunter, M.D. (the "Executive"). 1. EMPLOYMENT. The Company hereby employs the Executive and the Executive hereby accepts employment with the Company upon the terms and conditions herein set forth. 2. DUTIES. The Executive shall be engaged as a full-time employee to act as the Company's Vice President, Clinical and Regulatory Affairs, and shall report to the Company's Founder and Chief Executive Officer. The Executive shall perform the duties consistent with such position as the Founder and Chief Executive Officer shall from time to time designate. The Executive shall devote his entire time, attention and energies to the business of the Company and shall not engage in any other business activity or activities, whether or not such business activity is pursued for gain, profit or other pecuniary advantage, that, in the judgment of the Company, may conflict with the proper performance of the Executive's duties under this Agreement. Notwithstanding the foregoing, (a) with respect to businesses which do not compete with the Company, the Executive may invest his personal or family assets in such form or manner as will not require any services on the part of the Executive in the operation of the affairs of the companies in which such investments are made and in which his participation is solely that of an investor, and (b) the Executive may purchase securities in any corporation whose securities are regularly traded in recognized securities markets, provided that such investments shall not result in his collectively owning beneficially at any time one per cent (1%) or more of the equity securities of any corporation engaged in a business competitive to that of the Company. 3. COMPENSATION. (a) BASE SALARY. For services rendered under this Agreement, the Company shall pay the Executive an annual salary of $150,000 (the "Base Salary"), payable (after deduction of applicable withholding for federal and state income and payroll taxes) in equal semi-monthly installments. For the period of time that the Executive performs his duties from the Maryland address (July 1, 1996 to August 26, 1996) the Company shall pay the Executive at the rate of one-half of the Base Salary after deduction of applicable withholding for taxes. The Company may review the Executive's compensation annually and make such increases to the Base Salary as the Company determines are merited, based upon the Executive's performance and consistent with the Company's compensation policies as established by 195 ALBANY STREET, CAMBRIDGE, MA 02139 617 349-0200 FAX 617 491-7903 2 the Compensation Committee of the Company's Board of Directors. Any such increase in annual Base Salary shall be communicated to the Executive shortly after the January meeting of the Board of Directors and shall be made effective on the first day of January each year. (b) SIGN-ON BONUS. Upon commencement of duties the Company shall promptly pay to the Executive a sign-on bonus of $10,000, payable after deduction of applicable withholding for federal and state income and payroll taxes. (c) BONUS. The Executive shall receive a guaranteed bonus of $25,000, without reference to achievement of any established performance goals, for the remainder of the calendar year of 1996. This bonus shall be payable (after deduction of applicable withholdings for taxes) at the same date as performance bonuses are paid to other executives of the Company. At least thirty (30) days prior to each subsequent calendar year under this Agreement, the Company shall establish objective performance goals for the Executive for such calendar year. Upon the attainment of such performance goals, but subject to the overall performance of the Company during such year, the Executive may be entitled to a bonus, as determined by the Compensation Committee of the Company's Board of Directors. Within thirty (30) days after the close of each such calendar year, the Company shall evaluate the attainment of the performance goals for such calendar year and determine the amount of any performance bonus payable hereunder. Any such performance bonus shall be payable within ninety (90) days after the calendar year to which it relates. (d) FRINGE BENEFITS. In addition to Base Salary and Bonus payments under Sections 3(a), (b) and (c) above, the Executive shall be eligible for and participate in such fringe benefits, in accordance with the terms of each such benefit, as shall be generally provided to executives of the Company, including incentive compensation, the Company's 401(k) Plan, health and dental insurance, and any retirement programs, stock options plans or employee stock purchase plans which may be adopted from time to time during the term hereof by the Company. Nothing herein contained shall be deemed to preclude the Company from granting such additional compensation or benefits to the Executive as it shall in its sole discretion determine. (e) STOCK OPTIONS. Upon authorization by the Company's Board of Directors or Compensation Committee, the Company will promptly grant the Executive under the Company's 1993 Long-Term Incentive Plan (the "Plan") a nonstatutory stock option to purchase an aggregate of fifty thousand (50,000) shares of the Common Stock of the Company, par value $.01 per share, at a purchase price of one cent ($0.01) per share. Such option will vest annually for a period of six (6) years in installments of 8,333 shares 2 3 each, with any remaining shares vesting on the sixth anniversary hereof. Such option shall be exercisable during the ten (10) year period following its date of vesting and shall be subject to all the terms and conditions of the Plan and the Company's standard form of Stock Option Agreement, copies of which have been delivered to the Executive separately. 4. SICK LEAVE AND VACATION. During the term of this Agreement, the Executive shall be entitled to sick leave and annual vacation consistent with the Company's customary sick leave and vacation policies; the latter providing for vacation of ten (10) days in the first twelve (12) months of employment, and fifteen (15) days in subsequent annual periods from July 1. 5. EXPENSES. (a) GENERAL. During the term of this Agreement, the Company shall reimburse the Executive in accordance with the Company's customary policies for all reasonable out-of-pocket expenses incurred by the Executive in connection with the business of the Company and in performance of his duties under this Agreement upon the Executive's presentation to the Company of an itemized accounting of such expenses with reasonable supporting data. (b) RELOCATION EXPENSES. The Company shall pay to the Executive a $50,000 lump sum amount (net after applicable withholding and payroll taxes) which may be applied to the costs of purchasing a home in the greater Boston area. In addition, the Company will reimburse the Executive, or pay directly, the costs of (1) two house-hunting trips to the greater Boston area; (2) the Executive's reasonable, out-of-pocket moving expenses relating to his relocation from Maryland to the greater Boston area, and (3) the reasonable, out-of-pocket expense of staying up to two weeks at a hotel in the greater Boston area. Reimbursement of expenses by the Company hereunder will be made upon the Executive's presentation of an itemized accounting of such expenses with reasonable supporting data. (c) EXISTING MORTGAGE EXPENSES AND CLOSING EXPENSES. The Company shall reimburse the Executive for payment on his current mortgage for six (6) months or for the period until sale of his existing home in Maryland, whichever is earlier. In addition, the Company will reimburse the Executive for closing costs (including broker's commission) associated with the sale of that house. Reimbursements or payments of costs for the Executive for items 5(b) and (c), to the extent they are reported on the Executive's W-2 forms as taxable income in accordance with Internal Revenue Service code, shall be paid "net" to the Executive (after applicable withholding for income and payroll taxes). 3 4 6. TERM. (a) The Executive's employment under this Agreement shall commence on July 1, 1996 (the "Commencement Date") and shall continue until terminated by the Company as provided in this Section 6(a) or by the Executive as provided in Section 6(c) below. The Company may, at its election, terminate the obligations of the Company under this Agreement as follows: (i) Upon at least sixty (60) days prior written notice if the Executive becomes physically or mentally incapacitated or is injured so that he is unable to perform the services required of him hereunder and such inability to perform continues for a period in excess of six (6) months and is continuing at the time of such notice; or (ii) For "Cause" upon prior written notice of such termination to the Executive. For purposes of this Agreement, the Company shall have "Cause" to terminate its obligations hereunder upon (a) the Company's determination that the Executive has ceased or failed to substantially perform his duties hereunder (other than as a result of his incapacity due to physical or mental illness or injury), and at least thirty (30) days prior written notice to the Executive, (b) the Executive's death, (c) the Company's determination that the Executive has engaged or is about to engage in conduct materially injurious to the Company, (d) the Executive's having been convicted of a felony, or (e) the Executive's participation in activities proscribed by the provisions of Sections 2, 8 or 10 hereof or material breach of any of the other covenants herein; or (iii) Without Cause upon at least sixty (60) days prior written notice of such termination to the Executive. (b) If, within six (6) months of the date the Executive's employment hereunder commences, this Agreement is terminated for any reason (including, without limitation, termination by the Company without Cause or voluntary termination by the Executive, the Executive shall receive no severance pay. If, subsequent to such six (6) month period, this Agreement is terminated pursuant to Section 6(a)(i) above, subject to Section 10(d) below, the Executive shall receive severance pay until the fourth anniversary of the date hereof at the rate of one hundred per cent (100%) of Base Salary, reduced by applicable payroll taxes and further reduced by the amount received by the Executive during such period under any Company maintained disability insurance policy or plan or under Social Security or similar laws. Such severance payments shall be paid periodically to the Executive as provided in Section 3(a) for the payment of Base Salary. If this Agreement is terminated 4 5 at any time pursuant to Section 6(a)(ii) above, the Executive shall receive no severance pay. If this Agreement is terminated pursuant to Section 6(a)(iii) above more than six (6) months but within one (1) year after the date the Executive's employment hereunder commences, the Executive shall receive severance pay, for a period of six (6) months from and after such termination, equal to the Base Salary less the amount, if any, earned by the Executive during such six (6) month period, whether as salary, consulting fees, deferred payments or other direct or indirect compensation. If this Agreement is terminated pursuant to Section 6(a)(iii) above more than one (1) year after the date the Executive's employment hereunder commences, the Executive shall receive severance pay, for a period of twelve (12) months from and after such termination, equal to the Base Salary less the amount, if any, earned by the Executive during such twelve (12) month period, whether as salary, consulting fees, deferred payments or other direct or indirect compensation. During any such six (6) month or twelve (12) month period the Executive shall inform the Company from time to time, but no less often than every three (3) months, of the Executive's employment and the amount of the Executive's compensation and earnings during such period. Such severance payments (less applicable withholding and payroll taxes) shall be paid periodically to the Executive as provided in Section 3(a) for the payment of Base Salary. (c) The Executive may terminate this Agreement for any reason upon at least sixty (60) days prior written notice. In the event of any such termination, the Executive shall not be entitled to any severance payments. 7. REPRESENTATIONS. The Executive hereby represents to the Company that (a) he is legally entitled to enter into this Agreement and to perform the services and other obligations contemplated herein; (b) he has, and throughout the term of this Agreement will continue to have, the full right, power and authority, subject to no rights of third parties, to grant to the Company the rights contemplated by Section 9 hereof; and (c) he is not subject to any agreement, rule, regulation or policy of any university, research institution or other third party inconsistent with the foregoing representations. 8. DISCLOSURE OF INFORMATION. (a) The Executive recognizes and acknowledges that the Company's trade secrets, know-how and proprietary processes as they may exist from time to time (including, without limitation, information regarding methods, cultures, vectors, plasmids, synthesis techniques, nucleic acid sequences, purification techniques and assay procedures) as well as the Company's confidential business plans and financial data are valuable, special and unique assets of the Company's business, access to and knowledge of which are essential to the performance of the Executive's duties hereunder. The Executive shall not, during or after the term of his employment by the 5 6 Company, in whole or in part, disclose such secrets, know-how, processes, business plans or financial data to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall the Executive make use of any such property for his own purposes or for the benefit of any person, firm, corporation or other entity (except the Company) under any circumstances during or after the term of his employment, provided that after the term of his employment, these restrictions shall not apply to such secrets, know-how and processes which the Executive can establish by competent proof: (i) were known, other than under binder of secrecy, to the Executive prior to his employment by the Company; (ii) were passed into the public domain prior to or after their development by or for the Company, other than through acts or omissions attributable to the Executive; or (iii) were subsequently obtained, other than under binder of secrecy, from a third party not acquiring the information under an obligation of confidentiality from the disclosing party. (b) Upon termination of his employment hereunder, the Executive shall promptly turn over to the Company all originals and copies which he may have of any of the Company's confidential information described in this Section 8. 9. INTELLECTUAL PROPERTY. The Executive hereby sells, transfers and assigns to the Company, or to any person or entity designated by the Company, the entire right, title and interest of the Executive in and to all inventions, ideas, discoveries and improvements (including, without limitation, all microorganisms, strains or cultures) whether patented or unpatented, and copyrightable material made or conceived by the Executive, solely or jointly, during the term hereof, which arise out of research or other activities conducted by, for or under the direction of the Company, whether or not conducted at the Company's facilities, or which relate to methods, apparatus, designs, products, processes or devices, sold, leased, used or under consideration or development by the Company. The Executive acknowledges that all copyrightable materials developed or produced by the Executive within the scope of his employment constitute works made for hire. The Executive shall communicate promptly and disclose to the Company, in such form as the Company may reasonably request, all information, details and data pertaining to any such inventions, ideas, discoveries and improvements; and the Executive shall execute and deliver to the Company such formal transfers and assignments and such other papers and documents and shall give such testimony as may be necessary or required of the Executive to permit the Company or any person or entity designated by the Company to file and prosecute patent applications and, as to copyrightable material, to obtain copyrights thereof. Any 6 7 such invention, idea, discovery or improvement disclosed by the Executive within one (1) year following the termination of this Agreement shall be deemed to fall within the provisions of this Section 9 unless proved to have been first conceived and made following such termination. 10. COVENANTS NOT TO COMPETE OR INTERFERE. (a) Subject to Section 10(b) below, during the term of this Agreement and the period ending twenty-four (24) months from and after the termination of the Executive's employment hereunder, the Executive shall not engage in any business (whether as an officer, director, owner, employee, partner, consultant, advisor or other direct or indirect participant) engaged in the development of gene therapy and/or gene targeting and/or gene isolation methods and/or the sale of products or rendering of services related to gene therapy and/or gene targeting and/or gene isolation and/or to any other activities which directly compete with the Company's business activities. This Agreement shall not be construed to restrict the Executive's right to be employed as a faculty member of any university or employee of any nonprofit agency or foundation after any termination of this Agreement where this covenant not to compete shall continue to be in effect. During the period in which this covenant not to compete is in effect the Executive also shall not interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Company and any customer, supplier, lessor, lessee, employee, consultant, research partner or investor of the Company. (b) If this Agreement is terminated by the Company pursuant to Section 6(a)(iii) above, the provisions of the first sentence of Section 10(a) shall apply until twelve (12) months from and after such termination. (c) It is the desire and intent of the parties that the provisions of this Section 10 shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular Subsection or portion of this Section 10 shall be adjudicated to be invalid or unenforceable, this Section 10 shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of this Section in the particular jurisdiction in which such adjudication is made. (d) In the event of any breach of the provisions of this Section 10 by the Executive, any and all rights of the Executive to receive severance payments under Section 6(b) above shall automatically terminate. 7 8 11. INJUNCTIVE RELIEF. If there is a breach or threatened breach of the provisions of Section 8, 9 or 10 of this Agreement, the Company shall be entitled to an injunction, without bond, restraining the Executive from such breach. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies for such breach or threatened breach. 12. INSURANCE. The Company may, at its election and for its benefit, insure the Executive against accidental loss or death, and the Executive shall submit to such physical examinations and supply such information as may be required in connection therewith. 13. NOTICES. Any notice required or permitted to be given under this Agreement to the Executive shall be sufficient if in writing and if sent by certified or registered mail to his residence, or in the case of the Company, to Transkaryotic Therapies, Inc., 195 Albany Street, Cambridge, MA 02139, Attention: Chief Executive Officer, or to such other offices or addresses as the Company shall designate from time to time in writing to the Executive. Any such notice shall be effective on the earlier of (a) the date on which it is personally delivered or (b) three (3) days after it is deposited in the United States mails, postage prepaid. 14. WAIVER OF BREACH. A waiver by the Company or the Executive of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the other party. 15. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the Commonwealth of Massachusetts. 16. ASSIGNMENT. This Agreement may be assigned, without the consent of the Executive, by the Company to any person, partnership, corporation or other entity which succeeds to the business of the Company or which has purchased substantially all the assets of the Company, provided such assignee assumes all the liabilities of the Company hereunder. 17. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties and supersedes any prior understandings or agreements between the Executive and the Company. This agreement may be changed only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 8 9 IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the date first above written. TRANSKARYOTIC THERAPIES, INC. By: /s/ Richard F Selden, M.D., Ph.D. ----------------------------------- Richard F Selden, M.D., Ph.D. Founder and Chief Executive Officer /s/ Kurt C. Gunter, M.D. --------------------------------- Kurt Christian Gunter, M.D. 9 EX-10.29 3 CONSULTING AGREEMENT W/ PETER WIRTH 1 ================================================================================ TRANSKARYOTIC THERAPIES INC. [TRANSKARYOTIC LOGO] November 1, 1996 Mr. Peter Wirth 37 Hancock Street Boston, MA 02114 Dear Peter: This letter is being written for the purpose of setting forth the basic terms of the understandings between Transkaryotic Therapies, Inc., a Delaware corporation (the "Company"), and you (the "Consultant"). If you are in agreement with these terms, please sign and date the last page of one copy of this letter and return it to us, whereupon this letter shall represent a legally binding agreement between us. Please keep the other copy of this letter for your files. The Company hereby engages you, and you accept engagement, as a consultant to the Company upon the following terms and conditions. 1. DUTIES. As a Consultant to the Company, your duties during the term of this Agreement will consist of rendering consulting services from time to time to the Company on such matters as the Company requests, including: (a) advising the Company regarding business affairs of the Company; and (b) giving strategic advice to the Company in connection with the projects and developments in which the Company may be involved or considering. Your duties will not involve the practice of law. You will render such services at such specific times as may be mutually agreed upon by you and the Company. The Company hereby acknowledges that you are presently employed in a full time capacity as Executive Vice President and General Counsel by Genzyme Corporation (the Primary Employer) and, as such, that the time you may be permitted to devote to rendering consulting services to the Company and other consulting obligations hereunder is limited by the terms of your employment with the Primary Employer. 2. CONFIDENTIALITY. You recognize and acknowledge that the Company's trade secrets, know-how and proprietary processes as they exist from time to time (including, but not limited to, information regarding scientific methods, animal cell lines, plasmids, gene therapy techniques, gene targeting and delivery techniques, gene mapping and isolation techniques, experimental animals, regulatory filings and regulatory strategies), as well as the Company's confidential business plans and 195 ALBANY STREET, CAMBRIDGE, MA 02139 617 349-0200 FAX 617 491-7903 2 financial data are valuable, special and unique assets of the Company's business, access to and knowledge of which are essential to the performance of your duties as a consultant to the Company. In addition, you acknowledge that as a consultant to the Company, you may be given access to confidential information regarding the research of certain other consultants or advisors to the Company and other scientists who may enter into discussions with the Company ("Third Party Research"). You shall not, during or after the term of your consultancy to the Company, in whole or in part, disclose such secrets, know-how, processes, business plans, financial data or Third Party Research to any person, firm, ' corporation, association or other entity (except the Company) for any reason or purposes whatsoever, nor shall you make use of any property owned by the Company or of any Third Party Research for your own purposes or for the benefit of any third party (except the Company) under any circumstances during or after the term of your consultancy. These restrictions shall not apply to such secrets, know-how and processes which you can establish by competent proof: i) were known to you, other than under binder of secrecy, prior to your consulting to the Company; ii) have passed into the public domain prior to or after their development by or for the Company, or their disclosure to the Company, other than through acts or omissions attributable to you; or iii) were subsequently obtained, other than under binder of secrecy, from a third party not acquiring the information under an obligation of confidentiality from the disclosing party. Upon termination of your consultancy to the Company, you shall promptly turn over to the Company all originals and copies which you may have of any of the Company's confidential information described in this Agreement or any Third Party Research. You will not disclose to the Company any confidential information, proprietary material or trade secrets belonging to any current or former employer or other third party. Nothing contained in this Agreement, however, shall be construed to preclude a publication by you, in journals, conferences, symposia or by other means, of any of the results of your own research. 3. EXISTING AND FUTURE COMMITMENTS. You represent and warrant to the Company that: (a) You are permitted under the terms of your employment by the Primary Employer to enter into this Agreement; and you have furnished such Employer with such notice, and obtained such approvals, regarding your accepting a position as a consultant to the Company as are required under the terms of your employment; and 2 3 (b) You are not presently a party to any agreement under which you advise or render services to any commercial enterprise other than as set forth in Schedule A to this agreement, nor do you have any equity participation of developments in gene therapy, molecular biology as it relates to gene therapy, or homologous recombination (other than investments in securities in the Primary Employer or any corporation or other entity whose securities are publicly traded and in which your beneficial ownership does not exceed one percent (1%) of the equity securities of such corporation or other entity). You are free to consult with any company that is not pursuing gene therapy, molecular biology as it relates to gene therapy, or homologous recombination as it relates to gene therapy or protein production, provided you do not disclose secrets, know-how, processes, business plans, financial data or Third Party Research as described in paragraph 2 of this agreement. The Consultant will notify the Company in writing of such consulting relationships as they arise. 4. COMPENSATION. As compensation for your services as a Consultant, the Company will pay you a consulting fee at the rate of $50,000 per annum payable quarterly in arrears on the fifteenth day of each January, April, July, and October that falls within the term of this agreement. In addition, you will receive a total of 15,000 options to purchase TKT stock. Such options will (i) have an exercise price of $15.00 per share, (ii) become exercisable in blocks of 5000 on the first, second, and third anniversary of the date of this Agreement, and (iii) have a term of 10 years. Options which have not become exercisable at the time this Agreement terminates shall expire on the date of termination; exercisable options shall remain exercisable and outstanding for their full unexpired term. The payments provided for in this paragraph will constitute your sole compensation for all services rendered to the Company hereunder and all benefits conferred upon the Company hereunder. If the Company terminates this agreement, you will be paid for the quarter in which such termination takes effect. 5. TERM. This Agreement shall be for a term of three (3) years beginning on the date hereof unless terminated by you or the Company with not less than sixty (60) days prior written notice. Notwithstanding the foregoing, the Company may terminate this Agreement at any time for cause or upon death or disability. The provisions of Paragraphs 2, 6, 7, and 8 of this Agreement will survive any termination of this Agreement. 6. NONCOMPETITION. So long as you serve as a consultant to the Company and for a period of two (2) years thereafter, you shall not engage in any business (whether as an officer, director, owner, employee, partner, consultant, advisor or other direct or indirect participant) engaged in the commercial exploitation of research in gene therapy, molecular biology as it relates to gene therapy, or 3 4 homologous recombination as it relates to gene therapy or protein production, or any other business which competes with the business of the Company, PROVIDED that during any period in which this covenant may be in effect, you may be employed by the Primary Employer or any commercial enterprise set forth in Schedule A (as amended from time to time with the Company's consent). So long as you serve as a consultant to the Company and for a period of two (2) years thereafter you shall not interfere with, disrupt or attempt to disrupt, the relationship (contractual or otherwise) between the Company and any of its customers, suppliers, lessors, lessees, employees, consultants, research partners, creditors or investors. It is the intent of the Company and you that the provisions of this Paragraph 6 be enforced to the fullest extent permissible under the laws and public policies of each jurisdiction in which enforcement is sought. Accordingly, if any portion of this Paragraph 6 shall be deemed amended to delete therefrom the portion so adjudicated to be invalid or unenforceable, such deletion shall apply only with respect to the operation of this Paragraph 6 in the particular jurisdiction in which such adjudication is made. Nothing contained herein shall prevent you from being employed by or acting as a consultant to any person or entity which does not compete with the business of the Company. 7. INTELLECTUAL PROPERTY. You hereby sell, transfer and assign to the Company, or to any person or entity designated by the Company, your entire right, title, and interest in and to all inventions, ideas, discoveries and improvements (including, but not limited to, information regarding methods, yeast and bacterial strains, animal cell lines, plasmids, mutants, synthesis techniques, gene therapy techniques, gene targeting and delivery techniques, gene mapping and isolation techniques, experimental animals, regulatory filings and regulatory strategies) whether patented or unpatented, and material subject to copyright, made or conceived by you, solely or jointly, during the course of your consultancy to the Company, whether or not conducted at the Company's facilities, which relate to methods, apparatus, designs, products, processes or devices, sold, leased, used or under consideration or development by the Company. You acknowledge that all copyrightable materials developed or produced by you within the scope of your consultancy constitute works made for hire. You shall communicate promptly and disclose to the Company, in such form as the Company may reasonably request, all information, details and data pertaining to any such inventions, ideas, discoveries, and improvements; and you shall execute and deliver to the Company such formal transfers and assignments and such other papers and documents and shall give such testimony as may be necessary or required of you to permit the Company to file and prosecute patent applications and, as to material subject to copyright, to obtain copyrights thereof. The Company hereby acknowledges that the provisions of this Paragraph 7 shall not apply to inventions, ideas, discoveries and improvements made by you within the scope of your employment by the Primary Employer or any commercial enterprise set forth in Schedule A (as amended from time to time with the Company's consent). 4 5 8. TECHNICAL RECORDS. Immediately upon the Company's request and promptly upon termination of this Agreement, you shall deliver to the Company all memorandums, notes, records, reports, photographs, drawings, plans, papers or other documents made or compiled by you or made available to you during the course of your consultancy under this Agreement, and any copies or abstracts thereof, whether or not of a secret or confidential nature, and all of such memorandums or other documents shall, during and after the termination of this Agreement, be the exclusive property of the Company. 9. INDEMNIFICATION. The Company shall indemnify you against all losses incurred in connection with any civil or criminal lawsuit to which you may be made a party arising out of consulting services rendered hereunder by you at the request of the Company, except to the extent such losses result from your negligence, willful misconduct or bad faith. 10. ASSIGNMENT. The rights and obligations of you and the Company hereunder shall inure to the benefit of, and shall be binding upon, our respective successors and assigns; PROVIDED, HOWEVER, that neither you nor the Company may assign this Agreement without the previous written consent of the other, and, PROVIDED, FURTHER, that nothing contained in this Agreement shall restrict or limit the Company, in any manner whatsoever, from assigning any or all of its rights, benefits or obligations under this Agreement to any Affiliate of the Company without the necessity of obtaining your consent. "Affiliates," as used throughout this Agreement, means any person or entity which, directly or indirectly, controls or is controlled by or is under common control with the Company. 11. SPECIFIC PERFORMANCE. The Company is hereby authorized to demand specific performance of any covenant contained in Paragraphs 2, 6, 7, and 8 of this Agreement, and you hereby irrevocably waive any defense based on the adequacy of a remedy at law which might be asserted as a bar to the remedy of specific performance in any action brought by the Company. 12. AMENDMENT AND WAIVER. Neither this Agreement nor any term, covenant, condition or other provisions hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 13. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. 14. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between you and the Company and supersedes any prior or contemporaneous understandings between us. 15. INDEPENDENT CONTRACTOR. Nothing contained in this Agreement shall be deemed to constitute you an employee of the Company, it being the intent of both 5 6 you and the Company to establish an independent contractor relationship, nor shall you have authority to bind the Company in any manner whatsoever by reason of this Agreement. 16. NOTICES. Any notice given under this Agreement shall be deemed delivered when delivered by hand or given by registered or certified mail addressed to the parties at their respective addresses set forth on the first page of this Agreement or at such other address as you or the Company may provide to the other in writing from time to time. Please indicate your acceptance and approval of the foregoing in the space provided below. /s/ Peter Wirth 12/20/96 - ---------------------------------------------- Peter Wirth (Date) /s/ Richard F Selden 12 20 96 - ---------------------------------------------- Richard F Selden (Date) Transkaryotic Therapies Inc. 6 EX-11.1 4 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF EARNINGS (LOSS) PER SHARE - PRO FORMA
Year Ended Year Ended December 31, 1996 December 31, 1995 ----------------- ----------------- Weighted average common shares outstanding........... 7,555,213 5,195,472 Effect of Preferred Stock - assumed converted at date of issuance........................................ 4,707,042 5,666,165 Weighted average common equivalent shares resulting from stock options and warrants.................... -- 489,723 Effect of Common and Common equivalent shares issued by the Company during the twelve month period immediately preceeding the Company's filing of the registration statement for its initial public offering (using the treasury stock method).. 2,461,108 3,281,510 ----------------- ----------------- Shares used in computing pro forma net income (loss) per share ......................................... 14,723,363 14,632,870 ================= ================= Net income (loss) .................................. $(11,971,965) $ 2,074,471 Pro forma net income (loss) per share .............. $ (0.81) $ 0.14
EX-23.1 5 CONSENT OF ERNST & YOUNG, LLP 1 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-19915 and 333-19917) of Transkaryotic Therapies, Inc. of our report dated February 14, 1997, with respect to the financial statements of Transkaryotic Therapies, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Boston, Massachusetts March 25, 1997 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 10,414,412 75,840,830 308,838 0 0 87,073,504 9,088,379 5,850,977 90,998,425 1,263,970 0 0 0 166,143 89,478,712 90,998,425 0 4,225,000 0 18,747,713 0 0 0 (11,971,965) 0 (11,971,965) 0 0 0 (11,971,965) (.81) (.81)
EX-99.1 7 IMPORTANT FACTORS RE: FORWARD LOOKING STATEMENTS 1 EXHIBIT 99.1 ------------ IMPORTANT FACTORS REGARDING FORWARD LOOKING STATEMENTS EARLY STAGE OF DEVELOPMENT; COMMERCIAL UNCERTAINTY TKT is at an early stage of development. All of the Company's potential Gene Activation products are in research or preclinical development. No revenues have been generated from product sales and no such revenues are expected for at least several years. The Gene Activation products currently under development by the Company will require significant additional development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercial use. There can be no assurance that any Gene Activation products will ultimately be developed by the Company and its corporate partners, or that, even if developed, these products will receive regulatory approval. If approved, these products will compete with established products of proven safety and efficacy, the manufacturers of which can be expected to employ intellectual property challenges to commercialization of these products. There can be no assurance that the Company's Gene Activation products, if any, will be able to be commercialized or, if commercialized, that they will be accepted by medical centers, hospitals, physicians or patients in lieu of existing treatments. Accordingly, there can be no assurance that these products can be successfully manufactured and marketed at prices that would permit the Company and its corporate partners to operate profitably. The Company's potential gene therapy products may be even further from commercial introduction. Due to the early stage of development of the Company's potential gene therapy products and the extensive research, development, preclinical and clinical testing, and regulatory review process required before marketing approval can be obtained, the Company cannot predict with certainty when it will be able to commercialize any of its potential gene therapy products, if at all. TECHNOLOGICAL UNCERTAINTY Gene Activation and gene therapy are new and rapidly evolving technologies. Existing preclinical data on the safety and efficacy of proteins produced by the Company's Gene Activation technology are limited, and the Company's Gene Activation products have not yet been tested in humans. The Company's potential gene therapy products are even further from commercial introduction. While many approaches to gene therapy are being pursued by pharmaceutical and biotechnology companies and academic institutions, there are currently no marketed gene therapy products, and existing clinical data on the safety and efficacy of potential gene therapy products are limited. The potential gene therapy products currently under development by the Company will require substantial additional development efforts, including extensive preclinical and clinical testing and the receipt of regulatory approvals prior to commercial introduction. For any given disease, gene therapy generally, as well as the Company's specific approach to gene therapy, may not be efficacious or may prove to have undesirable and unintended side effects, toxicities or other characteristics that may prevent or limit commercial use. There can be no assurance that the Company's products will obtain approval from the U.S. Food and Drug Administration (the "FDA") or equivalent foreign regulatory authorities for any indication. UNCERTAINTY ASSOCIATED WITH CLINICAL TRIALS Subject to compliance with FDA regulations, TKT and its corporate partners plan to undertake extensive clinical testing in humans to evaluate the safety and efficacy of its Gene 2 Activation and gene therapy products in development. None of the Company's Gene Activation products has entered clinical trials. The rate of completion of clinical trials is dependent upon, among other factors, the enrollment of patients. Patient accrual is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the existence of competitive clinical trials. Delays in planned patient enrollment in the anticipated Gene Activation clinical trials may result in program delays, which could have a material adverse effect on TKT. Even if clinical trials are completed, there can be no assurance that the Company or its partners will be able to submit a Product License Application ("PLA") to the FDA or comparable regulatory agencies in foreign countries on the schedule anticipated or that such applications will be reviewed and approved by such regulatory agencies in a timely manner. Of the gene therapy products under development at the Company, only one is in Phase I human clinical trials. The Company currently intends to seek a collaborative partner prior to proceeding with further clinical development of this product. There can be no assurance that the Company will be able to obtain authorization from the FDA for additional human clinical testing of any of its gene therapy products currently in research or preclinical development. There can be no assurance that any authorized clinical testing will be completed successfully within any specified time period, if at all, with respect to any potential product. There also can be no assurance that such testing will show any potential product to be safe or efficacious or that any such product will be approved by the FDA for any indication. Furthermore, the Company or the FDA may suspend clinical trials at any time if the subjects or patients participating in such trials are being exposed to unacceptable health risks. There can be no assurance that the Company will not encounter problems in clinical trials which will cause the Company or the FDA to delay or suspend clinical trials. PATENTS AND PROPRIETARY RIGHTS The Company's success may depend in large part on its ability to obtain patent protection for its Gene Activation and gene therapy processes and potential products in the U.S. and other countries and to obtain the right to use in its potential products genes or other technology that have been or may be patented by others. Currently, the Company has 19 pending patent applications in the U.S. to protect its proprietary methods and processes; it has also filed foreign patent applications corresponding to certain of these U.S. patent applications. In addition, the Company has entered into several agreements to license proprietary rights from other parties. However, the patent situation in the field of biotechnology generally is highly uncertain and involves complex legal, scientific and factual questions. To date there has emerged no consistent policy regarding the breadth of claims allowed in biotechnology patents. Accordingly, there can be no assurance that patent applications relating to the technology used by the Company will result in patents being issued or that, if issued, the patents will not be challenged, invalidated or circumvented or will afford protection against competitors with similar technology. Many biotechnology and pharmaceutical companies, universities and research institutions, including competitors with substantial resources, have filed patent applications and have been issued patents potentially relating to the Company's Gene Activation and gene therapy technologies. In addition, certain competitors have filed patent applications and have been issued patents relating to certain methods of producing therapeutic proteins that the Company anticipates producing using its Gene Activation technology. The Company's Gene Activation and gene therapy technologies and potential products may be found to conflict or be alleged to conflict with patents which have been or may be granted to competitors, universities or others. There are a substantial number of biotechnology patent applications under review at the U.S. Patent and Trademark Office (the "PTO"). Because patent applications in the U.S. are maintained in secrecy until patents issue, the Company cannot be certain that others have not filed or maintained patent applications for technology used by -2- 3 the Company or covered by the Company's pending patent applications or that the Company was the first to file patent applications for such technology. Competitors may have filed applications for, or may have received patents and may obtain additional patents and proprietary rights relating to, compositions of matter or processes that block or compete with those of the Company. Furthermore, as is the case with any pending patent application, competitors may attempt to amend existing applications to claim rights to compositions of matter or processes that may block the Company. No assurance can be given that the Company's products or processes may not infringe patents that may issue under pending patent applications. With respect to gene therapy technology, the Company has been involved in one interference proceeding declared by the PTO in order to determine the patentability of the technology and the priority of invention and, thus, the right such technology in the U.S. Should any of its competitors have filed additional patent applications in the U.S. that claim technology also invented by the Company, the Company may have to participate in additional interference proceedings declared by the PTO, all of which could result in substantial cost to the Company to determine its rights or potential loss of rights. The biotechnology industry has been characterized by significant litigation and interference proceedings regarding patents, patent applications and other intellectual property rights, and many companies in the biotechnology industry have attempted to employ intellectual property litigation to gain or preserve a competitive advantage. For example, there has been substantial intellectual property litigation between suppliers of erythropoietin throughout the world. In September 1996, the Company received a letter from Amgen, Inc. stating, without further elaboration, that in Amgen's opinion any implication that the Company will be able to commercialize GA-EPO in the United States is "materially false and misleading." The Company has received an opinion of Hamilton, Brook, Smith & Reynolds, P.C., counsel to the Company, that the technologies employed by the Company and the method of their use in the Company's products do not infringe U.S. Patent Numbers 4,703,008, 5,441,868 and 5,547,933, the principal Amgen patents, and would not infringe such patents under the doctrine of equivalents. Based upon this opinion as well as its and its counsel's review of other relevant patents, the Company believes that it will be able to commercialize GA-EPO in the United States upon successful completion of its clinical trials and receipt of FDA approval. This opinion, however, is not binding on any court, and there can be no assurance that the Company will not in the future become subject, in the United States or any other country, to patent infringement claims, interferences and other litigation involving patents, including the three referenced Amgen patents, or any patents that may issue on any pending patent applications, including Amgen patent applications. The defense and prosecution of intellectual property suits and related legal and administrative proceedings can be both costly and time consuming. Litigation and interference proceedings could result in substantial expense to the Company or its corporate partner and significant diversion of effort by the Company's technical and management personnel. An adverse determination in litigation to which the Company may become a party could subject the Company to significant liabilities to third parties or require the Company to seek licenses from third parties. Although a number of patent and intellectual property disputes in the biotechnology area have been settled through licensing or similar arrangements, costs associated with any such arrangement may be substantial and could include ongoing royalties. Furthermore, there can be no assurance that necessary licenses would be available to the Company or its corporate partner or would be available on acceptable terms. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company or its corporate partner from manufacturing and selling some or all of its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company has licensed proprietary rights to certain genes (for example, for Factor VIII and Factor IX) to be used in its gene therapy products, the Company presently has no -3- 4 proprietary rights to certain other genes that it may later seek to use in its products and which may be the subject of issued third party patents or pending patent applications. As a result, the Company may be required to obtain licenses under third party patents in order to market certain of its products. If such licenses are not made available to the Company on acceptable terms, the Company will not be able to market such products. In addition, under the Company's license and sublicense agreements, the licensors and sublicensors may terminate these agreements upon the Company's failure to meet certain specified milestones. Any such termination of an existing license or sublicense by any such licensor or sublicensor, or any inability by the Company to obtain any required license, could have a material adverse effect on the Company's business. The Company also relies upon unpatented proprietary technology, processes and know-how, which the Company protects in part by confidentiality agreements with its employees, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS; LENGTHY APPROVAL PROCESS The Company's research and development, preclinical testing, clinical trials, facilities and manufacturing and marketing of its products will be subject to extensive regulation by numerous governmental authorities in the U.S. and other countries. The regulatory process for new therapeutic products, which includes preclinical and clinical testing of each product to establish its safety and efficacy, can take many years and require the expenditure of substantial resources. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent FDA regulatory approval. In addition, delays or rejections may be encountered based upon changes in FDA policy during the period of product development and FDA regulatory review of each submitted License Application. Similar delays may also be encountered and substantial resources expended in foreign countries. There can be no assurance that even after such time and expenditures, regulatory approval will be obtained for any Gene Activation or gene therapy products developed by the Company. Moreover, if regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which it may be marketed and contain requirements for post-marketing follow-up studies. Because gene therapy is a relatively new technology and products for gene therapy have not been extensively tested in humans, the regulatory requirements governing gene therapy products may be subject to substantial additional review by various regulatory authorities in the U.S. and abroad. These requirements may result in extensive delays in initiating clinical trials of gene therapy products and in the regulatory approval process in general. Any of the foregoing effects of government regulation, as well as of comparable foreign regulation, could delay the marketing of the Company's Gene Activation and gene therapy products for a considerable or indefinite period of time, materially increase the cost involved in developing, manufacturing and marketing the Company's products, diminish or eliminate any competitive advantage the Company may enjoy, or otherwise adversely affect the Company's ability to conduct its business. Compliance with applicable government regulations governing each of the Company's potential Gene Activation and gene therapy products will require a significant commitment of time, money and effort by the Company and its corporate partners with no assurances that any approval will ultimately be granted on a timely basis, if at all. -4- 5 HISTORY OF OPERATING LOSSES; FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING The Company has experienced significant operating losses since its inception in 1988. As of December 31, 1996, the Company had an accumulated deficit of $37.1 million. The Company expects that it will continue to incur substantial losses for at least several years and expects cumulative losses to increase as the Company's research and development efforts expand. The Company expects that such losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. There can be no assurance that the Company will ever achieve sales or profitability. The Company will require substantial funds to conduct research and development (including preclinical and clinical testing) of its potential products and to manufacture and market any products that are approved for commercial sale. Based on its current operating plan, the Company belives that its available cash will be adequate to satisfy its capital needs through 1999. The Company's future capital requirements will depend on many factors, including continued progress in its research and development programs, the magnitude of these programs, the scope and results of clinical trials, the timing and receipt of milestone payments, the time and costs involved in obtaining regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, competing technological and market developments, the ability of the Company to establish and maintain collaborative arrangements, and the cost of manufacturing and commercialization activities. To date, the Company has not received any revenues from product sales. The Company intends to seek additional funding through collaborative arrangements or through public or private financings. There can be no assurance that additional financing will be available on acceptable terms, if at all. COMPETITION The field of biotechnology is new and evolving, and it is expected to continue to undergo significant and rapid technological change. Technological developments could result in the Company's potential products becoming obsolete. The Company's products and technologies will be subject to substantial competition, both from other companies in the field of Gene Activation and gene therapy and from companies which have other forms of treatment of the diseases targeted by the Company. The Company is initially focusing its Gene Activation efforts on established products with proven safety and efficacy. The Company anticipates that companies selling such products will compete vigorously. There can be no assurance that the Company's Gene Activation products will be accepted by medical centers, hospitals, physicians or patients in lieu of existing products, or as to the effect of such competition on the market prices of the Company's products. Although the Company has a major corporate partner, many of the Company's existing or potential competitors have substantially greater product development capabilities and financial, scientific, marketing or human resources than the Company. Similarly, other competitors of the Company may enter into collaborative relationships with other companies having such greater resources. In addition, certain of these competitors have significantly greater experience than the Company in undertaking human clinical trials of new therapeutic products. Accordingly, other companies may succeed in developing products earlier than the Company, obtaining FDA approvals for such products more rapidly than the Company, or developing products that are more effective or less costly than those proposed to be developed by the Company. Furthermore, if the Company is permitted to commence commercial sales of products, it may also be competing with respect to commercial manufacturing and marketing capabilities, areas in which it has no experience. -5- 6 NO MANUFACTURING, DISTRIBUTION OR MARKETING CAPABILITY Although the Company has a pilot gene therapy manufacturing facility and believes it will be able to manufacture its potential products on a large scale, the feasibility of large-scale manufacturing of such products has not been demonstrated. If the Company is unable to develop or contract for manufacturing capabilities on acceptable terms, the Company's ability to commercialize its potential products would be materially adversely affected. If the Company is delayed in establishing suitable manufacturing capabilities, the Company's ability to conduct human clinical testing may be adversely affected, resulting in the delay of submission of potential products for regulatory approval and initiation of new development programs, which in turn could impair materially the Company's competitive position and the possibility of the Company achieving profitability. In addition, although the Company believes that its potential products will be cost-effective, there can be no assurance that the Company will be able to manufacture and distribute such products at a reasonable cost, that the Company will be able to price such products competitively or, if priced competitively, that the Company will be able to achieve margins sufficient to allow it to achieve profitability. The Company plans to provide its gene therapy products through central manufacturing facilities. The establishment of these facilities will require substantial additional funds and personnel and will require compliance with extensive regulations applicable to such facilities. There can be no assurance that such funds and personnel will be available on acceptable terms, if at all, or that the Company will be able to comply with such regulations at acceptable cost, if at all. In addition, in managing this expansion the Company may encounter unforeseen regulatory, logistical or management problems or incur unexpected operating costs. Failure or delays in establishing these facilities, or the incurrence of unexpected operating costs, could adversely affect the ability of the Company to manufacture and market its gene therapy products. Furthermore, the Company has no experience in sales, marketing or distribution. In order to market any of its gene therapy products, the Company must develop a marketing and sales capability, either on its own or in conjunction with others. There can be no assurance that the Company will be able to enter into any arrangements for the marketing of its products, that such arrangements will be successful, or that the Company will be able to obtain additional capital and expertise to conduct such activities independently. The Company has no manufacturing, sales, marketing or distribution capabilities for its Gene Activation products. The Company's collaborative partner, HMRI, is responsible for the manufacture, sales, marketing and distribution of GA-EPO and the undisclosed second protein. With respect to future Gene Activation products, the Company may seek collaborative partners or may manufacture and commercialize the products on its own. There can be no assurance that the Company will be successful in establishing such future collaborative relationships or that the Company will be able to conduct such activities independently. DEPENDENCE ON KEY PERSONNEL The Company's success is highly dependent on the retention of principal members of its scientific and management staff. Furthermore, the Company's future growth will require the hiring of significant numbers of qualified scientific and management personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to the Company's success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of the Company's activities, and there can be no assurance that the Company will be able to continue to attract and retain on acceptable terms the qualified personnel necessary for the development of its business. -6- 7 DEPENDENCE ON HMRI AND OTHER COLLABORATIVE PARTNERS The Company has entered into arrangements with HMRI on two of its Gene Activation development programs and with another corporate partner on a gene therapy development program. Each agreement with HMRI is subject to termination without cause on short notice under certain circumstances and there is no assurance that in the future either partner will not exercise its termination rights. The Company is relying on HMRI to develop, conduct clinical trials, obtain regulatory approval for the sale of, manufacture and market GA-EPO and the undisclosed second protein worldwide. There can be no assurance that HMRI will devote the resources necessary to complete development of and commercialize these two potential products. Should HMRI fail to develop and commercialize these two potential products, the Company's business would be materially adversely affected. The Company's strategy for the research, development and commercialization of certain of its potential products includes the possibility that it will enter into various additional arrangements with corporate partners, licensors, licensees and others. There can be no assurance that any further arrangements will be effected in the future. Although the Company believes parties to any existing and future arrangements, if entered into, would have economic and other motivations to perform their contractual responsibilities in full, the amount and timing of resources which they would devote to these activities would not be within the control of the Company. There can be no assurance that such parties would perform their obligations as expected or that any revenue would be derived by the Company from such arrangements. PRODUCT LIABILITY AND INSURANCE The Company's business will in the future expose it to potential product liability risks which are inherent in the testing, manufacturing and marketing of human therapeutic products. Although the Company has clinical trial liability insurance for trials conducted in the U.S., the Company does not currently have any product liability insurance, and there can be no assurance that it will be able to obtain or maintain such insurance on acceptable terms, if at all, or that any insurance obtained will provide adequate protection against potential liabilities. An inability to obtain insurance at acceptable cost or otherwise protect against potential product liability claims, in addition to exposing the Company to significant liabilities, could prevent or inhibit the commercialization of products developed by the Company. UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT The business and financial condition of pharmaceutical and biotechnology companies will continue to be affected by the efforts of government and third-party payors to contain or reduce the cost of health care through various means. For example, in certain foreign markets, pricing and profitability of prescription pharmaceuticals is subject to government control. In particular, individual pricing negotiations are often required in each country of the European Community, even if approval to market the drug is obtained. In the U.S. there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement similar government control. In addition, an increasing emphasis on managed care in the U.S. has and will continue to increase the pressure on pharmaceutical pricing. While the Company cannot predict whether any such legislative or regulatory proposals will be adopted or the effect such proposals or managed care efforts may have on its business, the announcement of such proposals or efforts could have a material adverse effect on the Company's ability to raise capital, and the adoption of such proposals or efforts could have a material adverse effect on the Company's business, financial condition and results of operations. -7- 8 Further, to the extent that such proposals or efforts have a material adverse effect on other pharmaceutical companies that are prospective corporate partners for the Company, the Company's ability to establish corporate collaborations may be adversely affected. In addition, in both domestic and foreign markets, sales of the Company's products, if any, will be dependent in part on the availability of reimbursement from third party payors, such as government and private insurance plans. Third party payors are increasingly challenging the prices charged for medical products and services. If the Company succeeds in commercializing products, there can be no assurance that these products will be considered cost effective, that reimbursement will be available, or if available, that the payor's reimbursement policies will be adequate to permit the Company to realize a reasonable return. -8- -----END PRIVACY-ENHANCED MESSAGE-----