-----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, ASMAmAr6DEcSS14F41SQWOvD6ktP1Vi5WHXBJSa5TqZSWCc+7VadSu+b7AxF7bIG qg9aHAvbJKr4L81abaoKJw== 0001047469-98-012601.txt : 19980331 0001047469-98-012601.hdr.sgml : 19980331 ACCESSION NUMBER: 0001047469-98-012601 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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: SEC FILE NUMBER: 000-21481 FILM NUMBER: 98579734 BUSINESS ADDRESS: STREET 1: 195 ALBANY ST CITY: CAMBRIDGE STATE: MA ZIP: 02138 BUSINESS PHONE: 6173490200 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-21481 TRANSKARYOTIC THERAPIES, INC. (Exact name of registrant as specified in its charter) ---------------------- Delaware 04-3027191 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 195 Albany Street Cambridge, Massachusetts (Address of principal 02139 executive offices) (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 Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No 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 ] As of March 6, 1998, the approximate aggregate market value of the voting stock held by non-affiliates of the registrant was $238,585,000, 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 March 6, 1998. There were 18,944,864 shares of Common Stock outstanding as of March 6, 1998. DOCUMENTS INCORPORATED BY REFERENCE Document 10-K Part - -------- --------- Specifically Identified Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 19, 1998 III - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS Summary Transkaryotic Therapies, Inc. ("TKT(TM)" or "the Company") is a biopharmaceutical company dedicated to the development and commercialization of treatments for a wide range of human diseases. The Company has three product development platforms -- Gene Activation, gene therapy, and Niche Proteins(TM). 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 $13 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(TM) 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 Gene Activated erythropoietin ("GA-EPO"), which Hoechst Marion Roussel, Inc. ("HMRI"), the Company's collaborative partner, advanced from Investigational New Drug application ("IND") submission to initiation of Phase II trials in 1997. See "Item 3 -- Legal Proceedings." The Company's gene therapy technology ("Transkaryotic Therapy(TM)") 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. In December 1997, the Company submitted an IND seeking permission to start Phase I clinical trials of TKT's gene therapy approach to the long-term delivery of Factor VIII for the treatment of Hemophilia A. The IND became effective in January 1998, and the Company expects to commence Phase I clinical trials in mid-1998. TKT's Niche Protein platform is based on protein replacement for the treatment of rare genetic diseases which are characterized by the absence of certain metabolic enzymes. Since the defect in many of these disorders is understood in depth, product development pathways have the potential to be straightforward. The Company believes that manufacturing and marketing of these products will require minimal investment in infrastructure and plans to commercialize these products itself. During 1997, the Company, in collaboration with the National Institutes of Health, conducted a Phase I clinical trial of the [alpha]-galactosidase A protein ("[alpha]-gal") produced by the Company in patients with Fabry disease. 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 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. -2- 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 $13 billion (1996 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 switch" is accomplished by "gene targeting." Gene targeting is a technology by which DNA fragments can be "cut and pasted" precisely at preselected, desirable locations within the cGene 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. -3- 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(TM) 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 ten largest marketed proteins in 1996 was approximately $13 billion. See Table I. 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. Table I. Estimated 1996 Worldwide Protein Product Revenues (in millions)
Protein Primary Indication Revenues - ------- ------------------ -------- Erythropoietin Anemia $3,200 Insulin Diabetes 2,200 G-CSF Neutropenia 1,800 Growth Hormone Short stature 1,700 [alpha]-Interferon Hepatitis/Cancer 1,100 Factor VIII Hemophilia A 1,100 (beta)-Interferon Multiple sclerosis 1,100 FSH Infertility 500 tPA Myocardial infarction 450 Glucocerebrosidase Gaucher disease 250
TKT has focused its initial Gene Activation efforts on the development of its GA-EPO(TM) product in collaboration with 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 -4- 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(TM) 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 erythropoietin preparation. In a Phase I study conducted by HMRI in 1997, GA-EPO administration exhibited a satisfactory safety profile and resulted in a dose-dependent increase in hemocrit. In 1997, HMRI commenced a Phase II clinical trial of GA-EPO. Subject to successful completion of this Phase II trial, the Company expects that HMRI will initiate Phase III trials of GA-EPO in the second half of 1998. The Company believes that GA-EPO will be reviewed within the FDA by the Center for Biologics Evaluation and Research ("CBER"). 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. Development Status of Other Gene Activation Products. In collaboration with HMRI, TKT is developing a second, undisclosed protein. HMRI accepted for development the Gene Activated cell line for the second protein in June 1997. The Company expects HMRI to file an IND for this product in 1998. -5- TKT believes that numerous development opportunities exist for Gene Activated proteins. In addition to the two proteins that are the subjects of the collaborations with HMRI, the Company is currently developing four other Gene Activated proteins. These programs are in the research stage. 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. Under two licenses agreements, HMRI was granted exclusive rights to make, use and sell, worldwide, the two products. HMRI is responsible, at its own expense, for all worldwide development, manufacturing and marketing activities for both products. Pursuant to the agreement pertaining to the second protein, TKT also granted HMRI an option to commercialize certain aspects of TKT's gene therapy technologies related to this protein. TKT has successfully generated cell lines sufficient for scale-up to commercial production levels that have been accepted by HMRI. TKT has the potential to receive up to $125,000,000 ($58,000,000 for GA-EPO and $67,000,000 for the second protein) from HMRI from the two alliances, consisting of license fees, equity investments, milestones and research funding. As of December 31, 1997, TKT had received approximately $54,000,000 of such amount (approximately $24,000,000 for GA-EPO and approximately $30,000,000 for the second protein). The remaining payments are contingent upon the achievement of milestones in connection with the continued development of these products. TKT also is entitled to royalties on sales of these two products. TKT is actively pursuing a number of 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 and the second protein, as well as from other pharmaceutical partners that successfully develop, manufacture, and market other Gene Activated proteins. In the longer term, the Company is also considering the development of 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. 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(TM), represents the fourth wave of protein production -- a system that would restore the patient's natural ability to produce a required therapeutic protein. -6- 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. 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 vs. non-viral -- viral gene therapy approaches use genetically modified viruses to introduce genes into human cells by infection. 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. 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 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. In addition, such approaches have not allowed long-term production of the therapeutic protein in animal models or patients. 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. Accordingly, these technologies may be 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 -7- 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 tasks set forth below (Table II) 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). Table II. TKT's Gene Therapy System: Summary of Selected Technical Accomplishments
Tasks Achievement Comments ----- ----------- -------- Cell types propagated Fibroblasts, myoblasts, mammary Cells retain normal epithelial cells properties Proteins expressed Factor VIII, Factor IX, Growth All expressed at levels of Hormone, Insulin, Interleukin-2, LDL at least 1 ug/million receptor, [alpha]-gal cells/day Transfection methodologies Electroporation, microinjection, All with efficiencies applied polybrene and calcium phosphate greater than 1 stably precipitation transfected cell per thousand treated cells Proteins characterized Factor VIII, Factor IX, Growth All with natural post- Hormone, [alpha]-gal translational modifications In vivo expression observed Factor VIII, Factor IX, Growth All at physiologic levels Hormone, Insulin in 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 -8- 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. These patient techniques have been successfully carried out in an ongoing Phase I clinical trial of growth hormone as a treatment for cachexia (described below). The 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 first gene therapy clinical trial is a Phase I study based on the implantation of genetically modified skin fibroblasts to express growth hormone in cancer patients at risk for cachexia. The principal purpose of this study is to determine the safety of the Company's gene therapy in humans. A total of 20 patients will be enrolled in five escalating dosage blocks, with four patients per block. At December 31, 1997, 17 patients had been enrolled in the trial. Community physicians have injected the modified cells under the skin of subjects; all patient procedures have been performed on an out-patient basis. Preliminary data from this study suggests that the administration of the genetically-engineered cells appears to be well-tolerated. Prior to proceeding with further clinical development (beyond Phase I) of this product, the Company intends to seek a collaborative partner. In December 1997, the Company submitted an IND seeking permission to start Phase I clinical trials of its gene therapy approach for the long-term delivery of Factor VIII for the treatment of Hemophilia A. The IND became effective in January 1998. The Company expects to commence Phase I clinical trials of this product in 1998. The Company believes that Transkaryotic Therapy offers several clinical and commercial advantages over conventional treatments and other gene therapies for targeted diseases, including: o 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 implantation of such cells in the patient. In studies of TKT's gene therapy system involving over 5,000 animals, no side effects have been observed. o 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. o 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. o 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. o 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. -9- o 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. 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 other diseases, 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 A 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. As described above, the Company expects to commence Phase I clinical trials of its gene therapy approach for the long-term delivery of Factor VIII in 1998. 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 -10- 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. 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. The manufacturing process takes up to six weeks. It is essential to optimize the process to allow for a commercially-viable product, and the Company believes it has accomplished such optimization. To produce early clinical materials, TKT has constructed a pilot manufacturing facility 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, the Company plans to construct a central facility to serve the U.S. As the Company's product pipeline matures, the Company believes that demand will increase, possibly requiring the Company to construct an additional manufacturing facility in the U.S. Other gene therapy companies have adopted a strategy based on locating a cell processing facility in every large city (or potentially large hospital). TKT believes that the requirements for strict quality control and the benefits of economy of scale are better achieved using the central manufacturing strategy. Niche Protein(TM) Product Development Platform It is well established that certain genetic diseases are caused by the deficiency of a single, well-defined protein. Therefore, the most direct approach to treatment is to manufacture the missing protein and administer it to the patient. TKT's Niche Protein development is focused on developing protein replacement products to treat patients suffering from rare genetic diseases characterized by protein deficiencies such as Fabry disease, Gaucher disease, Hurler disease, phenylketonuria, Pompe disease, and Tay-Sachs disease. Due to mutations in certain genes, individuals with these rare genetic diseases are born lacking the ability to produce sufficient amounts of a specific protein, resulting in symptoms which can be debilitating and, ultimately, life threatening. Unfortunately, no effective treatment currently exists for most of these rare diseases. The Company plans to develop and commercialize products for a number of these diseases, with the goal of reducing symptoms and potentially reversing progression of the disease. TKT's Niche Protein(TM) Development Programs and Commercialization Strategy The Company's product development strategy for its Niche Protein platform is to leverage the Company's core competencies in gene expression, cell culture, and protein characterization to create protein replacement products to treat rare genetic diseases which are characterized by the absence of certain metabolic enzymes. Since the defects in many of the diseases which the Company intends to -11- address with its Niche Protein platform are understood in depth, product development pathways have the potential to be straightforward. The Company believes that it will be able to arrange for proteins for its Niche Protein program to be manufactured by pharmaceutical companies under the terms of contract manufacturing agreements, thereby limiting the Company's fixed cost investment in a commercial scale manufacturing facility. In addition, the Company believes that it will be able effectively to serve Niche Protein markets with a small, focused sales force, thereby limiting the Company's investment in sales and marketing infrastructure. Thus, TKT views its Niche Protein program as a near term opportunity to move into a series of markets with a cost-effective, low-risk approach and thereby build a commercialization capability. TKT expects to develop and commercialize these products in the U.S. and Europe and obtain collaborative partners for Japan. Fabry disease. TKT's first target in the Niche Protein program is Fabry disease. Fabry disease is an X-linked lysosomal storage disease caused by the deficiency of [alpha]-gal. The disorder is characterized by the accumulation of lipids in lysosomes of vascular endothelial and smooth muscle cells and in a 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 several thousand Fabry disease patients in the developed world. Current treatment of the disease is limited to the reduction of symptoms. Clinical trials of enzyme replacement therapy in the late 1970's have been reported using infusions of [alpha]-gal 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. The Company believes that enzyme replacement therapy 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. In 1997, the Company, in collaboration with the National Institutes of Health under a collaborative research and development agreement ("CRADA"), conducted a Phase I clinical trial designed to characterize the safety and pharmacokinetic profile of [alpha]-gal. Ten patients with Fabry disease were treated with a single dose of highly purified [alpha]-gal manufactured at TKT, with two patients treated at each of five escalating dose levels. Plasma half-life and [alpha]-gal enzyme activity were examined before and after treatment, along with a series of clinical and laboratory safety assessments. Nine out of ten patients showed a reduction of the toxic lipid that causes Fabry disease, with the reduction observed in both liver and kidney. The treatment was well-tolerated, and no clinically significant side-effects were observed. The half-life of the enzyme appears to support dosing at intervals of one week or longer. The Company has entered into a contract manufacturing agreement with a major pharmaceutical company to produce [alpha]-gal. The Company plans to initiate Phase II trials of its [alpha]-gal product in mid-1998. 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 -12- 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 in January 1996, an interference regarding an issued patent with broad claims to ex vivo gene therapy. The participants in the interference are TKT, Genetic Therapy, Inc. (a wholly-owned subsidiary of Novartis AG), Syntex (U.S.A.) (a wholly-owned subsidiary of Roche Holdings, Inc.), and Somatix Therapy Corporation ("Somatix"). Somatix subsequently merged into Cell Genesys, Inc. With the possible exception of the patent 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 four 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, the Company can meaningfully protect its proprietary position. In the event TKT does not prevail, a January 1997 Federal Trade Commission ("FTC") decision may then be relevant. The FTC entered a consent order to resolve anticompetitive concerns raised by the merger of Ciba-Geigy Limited and Sandoz Limited into Novartis AG. As part of the consent order, the constituent entities of Novartis 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. At December 31, 1997, the Company had two issued U.S. patents and 27 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 issued U.S. patents and patent applications relate to the Gene Activation platform 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, the Transkaryotic Therapy platform in general, the Niche Protein Platform 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. 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, -13- 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 or the Company's existing patents will not be challenged, invalidated or circumvented or will afford the Company protection against competitors with similar technology. Any litigation or interference proceedings regarding patent or other proprietary rights 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 regarding patent and other intellectual property rights in the fields of all three of its product platforms. In April 1997, Amgen Inc. ("Amgen") filed a civil action in the U.S. District Court in Massachusetts against the Company and HMRI relating to GA-EPO and the processes for producing GA-EPO. See "Item 3 - Legal Proceedings." 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. In particular, 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 The Company believes that the primary competitive factors relating to the products that it is developing include safety, efficacy, reliability, distribution channels and price, and disease management services. In addition, the length of time required for products to be developed and to obtain regulatory -14- 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 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 can be no assurance that it will be able to continue to do so. Many of the Company's 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. Smaller companies may obtain access to such skills and resources through collaborative arrangements with pharmaceutical companies or academic institutions. 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 existing established treatments or new approaches and products developed and marketed by competitors. 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 the competitive factors described above. 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. 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 $13 billion (1996 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. 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. Niche Proteins(TM). For many of the disease targets of the Company's Niche Protein program, there is currently no cure or effective treatment. Treatments are generally focused on the management of the disease's clinical symptoms, particularly pain. In general, the Company believes that these diseases may represent markets too small to attract the resources of larger pharmaceutical companies, but provide attractive commercial opportunities to smaller companies, such as TKT. The Company believes its major competition with respect to Fabry disease to be Genzyme Corporation. The Orphan Drug Act of 1983 generally provides incentives to manufacturers to undertake development and marketing of products to treat relatively rare diseases or diseases where fewer than -15- 200,000 persons in the United States at the time of application for Orphan Drug designation would be likely to receive the treatment. The Company believes that many of the potential products in its Niche Protein program will qualify as Orphan Drugs and intends to pursue Orphan Drug designations, where appropriate. A drug that receives Orphan Drug designation by the FDA and is the first product to receive FDA marketing approval for its stated product claim is entitled to a seven-year exclusive marketing period in the United States for that product claim. There can be no assurance, however, that other companies will not seek an Orphan Drug designation and obtain FDA marketing approval for a product competitive with a Niche Protein product before the Company obtains such approval. If another company obtains Orphan Drug marketing approval and receives seven-year marketing exclusivity, it is possible that the Company would not be permitted by the FDA to market a similar product in the United States during the exclusivity period. 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 preclinical 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 preclinical testing. Preclinical 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 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 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 -16- 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, among other things, an unreasonable risk is presented to patients, or if the design of the trial is insufficient to meet its stated objective. After completion of clinical trials of a new product, FDA marketing approval must be obtained. License applications submitted to the FDA have historically taken two to five years to receive approval. The Company expects that its products will be regulated as biologics. Traditionally, both a Product License Application and an Establishment License Application have been required prior to commercial marketing. The FDA will be proposing regulations to implement the new Biologics License Application ("BLA") provision in the Food and Drug Administration Modernization Act of 1997 (the "Act"), which allows for a single license application. The Act sets as a goal for the FDA, but does not require the review and action on a complete license application within 12 months. In addition, if the FDA determines that a product would be a significant improvement in the safety or effectiveness of the treatment, diagnosis or prevention of a serious or life threatening disease, the FDA may designate the product for priority review, in which case the FDA's goal is to review and act on the complete license application within six months of the submission date. To the extent one of the Company's products might fall within the existing or future BLA regulations for certain enumerated biotechnology products, these regulations may provide guidance regarding FDA expectations. If the 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 the FDA by CBER. CBER currently has no "bioequivalence" pathway for the rapid approval of closely- related biologics. 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 may 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 biologic, which has no related history concerning 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 make manufacturing changes and establish the comparability of the product using physical, chemical, bioassay, preclinical animal and/or pharmacological methods, without the need for additional clinical trials. 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 -17- 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. Employees As of December 31, 1997, the Company had 149 full-time employees, including 124 in research and development. The Company's employees are not covered by any collective bargaining agreement. TKT considers relations with its employees to be good. Trademarks TRANSKARYOTIC THERAPIES(TM), TKT(TM), TRANSKARYOTIC THERAPY(TM), NICHE PROTEIN(TM), GA-EPO(TM), GENE ACTIVATED(TM), and GA-(TM) are trademarks of the Company. ITEM 2. PROPERTIES The Company leases a total of approximately 66,000 square feet of laboratory and office space in buildings located in Cambridge, Massachusetts. These facilities include pilot facilities for gene therapy and protein product manufacturing. The Company's current facilities may not be adequate to accommodate the Company's needs beyond 2000. The Company currently expects to meet its facilities requirements through development of a new facility or conversion of an existing building. The Company expects to seek financing for all or a significant portion of the cost of any new facility. ITEM 3. LEGAL PROCEEDINGS In April 1997, Amgen filed a civil action in the U.S. District Court in Massachusetts against the Company and HMRI, the Company's collaborative partner. The complaint in the action alleges that the Company's Gene Activation development program for the production of GA-EPO and processes for producing GA-EPO infringe on Amgen's U.S. Patent Numbers 5,547,933, 5,618,698, and 5,621,080 and requests that TKT and HMRI be enjoined from making, using, or selling GA-EPO and that the court award Amgen monetary damages. In November 1997, TKT and HMRI filed a Motion for Summary Judgment on the ground that all of TKT's and HMRI's activities to date have been reasonably related to the development and submission of data to the FDA, and, under the Waxman-Hatch Act, cannot constitute acts of patent infringement. On the same date, Amgen filed a Motion for Summary Judgment of Infringement. TKT and HMRI have opposed that motion, stating that there has been no infringement. Oral arguments were heard in January 1998. The Company can provide no assurance as to the outcome of this litigation. A decision by the court in Amgen's favor, including the issuance of an injunction against the making, use or sale of GA-EPO by the Company and HMRI in the United States, or any other conclusion of the litigation in a manner -18- adverse to the Company and HMRI, would have a material adverse effect on the Company's business, financial condition, and results of operations. There can be no assurance that the Company will not in the future become subject, in the United States or any other country, to additional patent infringement claims, interferences and other litigation involving patents, or any patents that may issue on any pending patent applications, including Amgen patent applications. The Company is currently involved in a patent interference proceeding before the PTO involving a patent and several patent applications in the gene therapy field. See "Item 1 - Business -- Patents, Proprietary Rights and Licenses." 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. EXECUTIVE OFFICES 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. 39 President, Chief Executive Officer Douglas A. Treco, Ph.D. 40 Senior Vice President, Research and Development Christoph M. Adams, Ph.D. 41 Vice President, Business Development Daniel E. Geffken 41 Vice President, Finance, Chief Financial Officer and Secretary Kurt C. Gunter, M.D. 43 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 -19- 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 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 (a) The Company's Common Stock commenced trading on October 17, 1996 on the Nasdaq National Market under the symbol "TKTX." As of March 6, 1998, there were 183 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.
High Low ----------- ---------- 1997 Quarter Ended: December 31....................................... $ 43 1/4 $ 27 September 30...................................... 44 3/4 27 3/4 June 30........................................... 32 1/4 12 3/4 March 31.......................................... 25 3/4 17 1996 Quarter Ended: December 31 (beginning October 17, 1996).......... 20 1/2 13 1/2
-20- 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 anticipated paying any cash dividends on its Common Stock in the foreseeable future. (b) The following information is provided pursuant to Rule 463 under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Company's first registration statement filed pursuant to the Securities Act, and updates the information previously reported in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997: Effective date of the Registration Statement: October 16, 1996 Securities and Exchange Commission file number: 333-10845 Use of Proceeds: Working Capital $34,110,581 Note: The information reported in this Item 5(b) assumes that the proceeds of the offering have been applied to the Company's working capital requirements since the date of the offering, before the use of any other source of cash. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company for the five years ended December 31, 1997 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) 1997 1996 1995 1994 1993 STATEMENT OF OPERATIONS DATA License and research revenues $ 5,788 $ 4,225 $ 15,400 $ 10,000 $ -- Research and development expenses 18,111 14,019 10,529 9,126 6,253 Net income (loss) (12,871) (11,972) 2,074 (3,422) (9,083) Basic net income (loss) per share (pro forma in 1996 and 1995) (0.74) (0.98) 0.19 Shares used to compute basic net income (loss) per share (pro forma in 1996 and 1995) 17,394 12,262 10,862
-21-
December 31, (in thousands) 1997 1996 1995 1994 1993 BALANCE SHEET DATA Cash and marketable securities $129,554 $ 86,255 $ 34,485 $ 7,579 $ 6,753 Total assets 134,948 90,998 39,218 13,472 11,409 Redeemable preferred stock -- -- 4,440 4,230 4,020 Total stockholders' equity 131,749 89,644 33,541 7,073 5,724
The Company has implemented Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which requires the presentation of both basic and diluted earnings per share in the Consolidated Statements of Operations. The per share amounts presented above and in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", are based on the basic weighted average shares outstanding unless specifically identified as diluted. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Since its inception in 1988, Transkaryotic Therapies, Inc. (the "Company") has been primarily engaged in the development and commercialization of products based on the Company's three product development platforms: Gene Activation, gene therapy and Niche Proteins. No revenues have been derived from the sale of any products, and the Company does not expect to receive revenues from product sales until at least 1999. The Company expects that its research and development expenditures will increase substantially in future years as product development efforts accelerate. With the exception of 1995, the Company has incurred substantial annual operating losses since inception and expects to incur substantial operating losses in the future. At December 31, 1997, the Company's accumulated deficit was $49,987,000. As a result, the Company is dependent upon existing cash resources, interest income, external financing from equity and debt offerings and/or collaborative research and development arrangements with corporate sponsors to finance its operations. Results of operations may vary significantly from period to period depending on, among other factors, the progress of the Company's research and development efforts, the receipt, if any, of additional license fees and milestone payments, the timing of certain expenses, and the establishment of additional collaborative research agreements. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto. Results of Operations Years Ended December 31, 1997, 1996 and 1995 -22- License and research revenues totaled $5,788,000, $4,225,000 and $15,400,000 for the years ended December 31, 1997, 1996 and 1995, respectively. All revenues were earned from two collaborative agreements with HMRI. Included in revenues in 1995 was an up front licensing fee payment of $10,000,000, relating to the signing of an agreement for the development of a product based on the Company's Gene Activation technology. Research and development expenses totaled $18,111,000 in 1997, as compared to $14,019,000 in 1996 and $10,529,000 in 1995. The increase in 1997 of $4,092,000, or 29%, was principally due to increases in outside contracts and collaborations, research and development staffing and laboratory supplies in each of the Company's product development platforms. During 1998, these programs are expected to increase significantly as product development activities are initiated or expanded. The increase in 1996 of $3,490,000, or 33%, was principally due to an increase in research and development staffing, increases in laboratory supplies and an expansion of laboratory facilities and expenses related thereto in each of the Company's product development platforms. General and administrative expenses were $6,279,000 for the year ended December 31, 1997, compared with $4,729,000 and $3,828,000 in 1996 and 1995, respectively. The increases in 1997 and 1996 of $1,550,000, or 33%, and $901,000, or 24%, respectively, were principally due to increases in administrative employee costs and expenses associated with being a publicly-held company. Net interest income was $5,731,000, $2,551,000 and $1,116,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The average cash and marketable securities balances were $102,161,000, $48,673,000 and $20,294,000 in 1997, 1996 and 1995, respectively. Increased interest income was primarily attributable to higher average balances in the respective years as a result of the Company's initial public offering in October 1996 and follow-on offering in July 1997. The Company had a net loss of $12,871,000 and $11,972,000 in 1997 and 1996, respectively, and net income of $2,074,000 in 1995. Net income in 1995 was principally due to the initial licensing fee of $10,000,000 paid by HMRI to the Company. Liquidity and Sources of Capital Since its 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 $129,554,000 at December 31, 1997. Cash equivalents and marketable securities are invested in U.S. Treasury notes, agencies of the U.S. government and money market funds. In July 1997, the Company completed a direct placement of 1,700,000 shares of common stock, resulting in net proceeds to the Company of $52,900,000. The Company's current facilities may not be adequate to accommodate the Company's needs beyond 2000. The Company currently expects to meet its facilities requirements through development of a new facility or conversion of an existing building. The Company expects to seek financing for all or a significant portion of the cost of any new facility. In May 1994, the Company and HMRI entered into an agreement to commercialize the Company's GA-EPO product. Under the terms of the agreement, HMRI is obligated to pay the Company a total of $58,000,000 upon completion of all milestones and objectives set forth in the agreement. As of December 31, 1997, the Company had received $24,000,000. The remaining $34,000,000 in payments are contingent upon HMRI's achievement of certain GA-EPO clinical development milestones. HMRI is responsible for -23- the worldwide development, manufacturing and marketing of GA-EPO, and the Company is entitled to receive a royalty based on net sales. In March 1995, the Company entered into a second agreement with HMRI to commercialize a second, undisclosed Gene Activation product. Pursuant to the agreement, the Company also granted HMRI an option to commercialize certain aspects of the Company's gene therapy technologies applicable to this protein. Under the terms of the agreement, HMRI is obligated to pay the Company a total of $67,000,000 upon completion of all milestones and objectives set forth in the agreement. At December 31, 1997, the Company had received $29,900,000. The remaining $37,100,000 to be paid to the Company by HMRI consists primarily of milestone payments contingent upon the development of the product resulting from the licensed technology. HMRI is responsible for the worldwide development, manufacturing and marketing of this product, and the Company is entitled to receive a royalty based on net sales. At December 31, 1997, the Company had net operating loss carryforwards of approximately $43,000,000, which expire at various times through 2012. The Company believes that as of December 31, 1997, 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, 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 such time, if any, as the Company's operations generate significant revenues from product sales, cash resources, interest income and proceeds from equity and debt offerings and funding from collaborative arrangements will be required to fund operations. The Company expects to pursue opportunities to obtain additional financing in the future through equity and debt financings, lease arrangements related to facilities and capital equipment and collaborative research agreements. The source, timing and availability of any future financing will depend principally upon equity 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 2001. The Company's cash requirements may vary, however, depending on numerous factors. Lack of necessary funds may require the Company to delay, scale back or eliminate some or all of its research and product development programs or to license its potential products or technologies to third parties. The Company is engaged in litigation with Amgen with respect to the development of GA-EPO. See Note 10 to Notes to Consolidated Financial Statements, which is incorporated by reference herein. The Company has conducted an assessment of its software and related systems and believes that it is year 2000 compliant. Forward Looking Statements Statements that are not historical facts, including statements about the Company's confidence and strategies and its expectations about future products, technologies and opportunities, market demand or -24- acceptance of future products are forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "intends" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, whether any of the Company's Gene Activation, gene therapy, or Niche Protein product candidates will advance in the clinical trial process, the timing of such clinical trials, whether the clinical trial results will warrant continued product development, the timing of making required regulatory filings such as Investigational New Drug applications, and other risks set forth below, under the caption "Certain Factors That May Affect Future Results." Certain Factors That May Affect Future Results The following important factors, among others, could cause actual results to differ from those indicated by forward-looking statements made in this Annual Report on Form 10-K for the year ended December 31, 1997 and presented elsewhere by management from time to time. Patent Litigation. 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 April 1997, Amgen filed a civil action in the U.S. District Court in Massachusetts against the Company and HMRI, the Company's collaborative partner. The complaint in the action alleges that the Company's Gene Activation development program for the production of GA-EPO and processes for producing GA-EPO infringe on Amgen's U.S. Patent Numbers 5,547,933, 5,618,698, and 5,621,080 and requests that TKT and HMRI be enjoined from making, using, or selling GA-EPO and that the court award Amgen monetary damages. In November 1997, TKT and HMRI filed a Motion for Summary Judgment on the ground that all of TKT and HMRI's activities to date have been reasonably related to the development and submission of data to the FDA, and, under the Waxman-Hatch Act, cannot constitute acts of patent infringement. On the same date, Amgen filed a Motion for Summary Judgment of Infringement. TKT and HMRI have opposed that motion, stating that there has been no infringement. Oral arguments were heard in January 1998. The Company can provide no assurance as to the outcome of this litigation. A decision by the court in Amgen's favor, including the issuance of an injunction against the making, use or sale of GA-EPO by the Company and HMRI in the United States, or any other conclusion of the litigation in a manner adverse to the Company and HMRI, would have a material adverse effect on the Company's business, financial condition, and results of operations. There can be no assurance that the Company will not in the future become subject, in the United States or any other country, to additional patent infringement claims, interferences and other litigation involving 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, -25- 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. With respect to gene therapy technology, the Company requested, and the PTO declared in January 1996, an interference regarding a third party's issued patent with broad claims to ex vivo gene therapy. The participants in the interference are TKT, Genetic Therapy, Inc. (a wholly-owned subsidiary of Novartis AG), Syntex (U.S.A.) (a wholly-owned subsidiary of Roche Holdings, Inc.), and Somatix. Somatix subsequently merged into Cell Genesys, Inc. With the possible exception of the patent 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 four 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 in the interference, a January 1997 FTC decision may then be relevant. The FTC entered 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 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. 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. Patents and Proprietary Rights. The Company's success may depend in large part on its ability to obtain patent protection for its 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. At December 31, 1997, the Company had two issued U.S. patents and 27 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 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 technologies and potential products may be found to conflict or be alleged to conflict with patents which -26- have been or may be granted to competitors, universities or others. There are a substantial number of biotechnology patent applications under review at 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 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 do not infringe patents that may issue under pending patent applications. 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 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. Early Stage of Development; Commercial Uncertainty. TKT is at an early stage of development. All of the Company's potential products are in research, preclinical development or clinical development. No revenues have been generated from product sales, and no such revenues are expected until 1999 at the earliest. 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 may 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 -27- 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. All of TKT's potential Niche Protein products are in research, preclinical development or clinical development. No revenues have been generated from product sales, and the Company believes no such revenues will be realized until at least 1999. Extensive research, development, preclinical and clinical testing and the regulatory review process will be required before marketing approval can be obtained. The Company cannot predict with certainty when it will be able to commercialize any of its potential Niche Protein products, if at all. Technological Uncertainty. Each of the Company's three product platforms involves new and rapidly evolving technologies. All of the Company's potential products are in pre-clinical or clinical stages of development and will require substantial additional development efforts and regulatory approvals prior to market introduction. The Company's Gene Activation and Niche Protein products are either in clinical development or have not yet been tested in humans. While certain of the Company's potential gene therapy products are in or about to enter clinical development, the Company believes that its product candidates in this area are even further from commercial introduction. Existing preclinical and clinical data on the safety and efficacy of the Company's potential products are limited. For any given indication, the Company's potential products 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 any of the Company's products will obtain approval from the FDA or equivalent foreign regulatory authorities for any indication. Uncertainty Associated with Clinical Trials. The Company's potential products are in various stages of research or preclinical or clinical development. 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 products in development. 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 license application 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, one (for the treatment of cachexia) is in Phase I clinical trials and a second (for the treatment of Hemophilia A) is the subject of an effective IND, but has not yet entered a Phase I clinical trial. There can be no assurance that the Company will be able to obtain authorization from the FDA for additional human clinical testing for any of its other 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 -28- 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. 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 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 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. 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, 1997, the Company had an accumulated deficit of $49,987,000. The Company expects that it will continue to incur substantial losses until at least 1999 and expects cumulative losses to increase until then 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. To date, the Company has not received any revenues from product sales. 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 believes that its available cash will be adequate to satisfy its capital needs through 2001. 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. The Company -29- also will require capital to fund the costs of its additional facilities requirements. The Company intends to seek additional funding through collaborative arrangements and/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 biotechnology industry is characterized by rapid and significant technological change. 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 existing established treatments or new approaches and products developed and marketed by its competitors. The development by others of alternative or superior treatment methods could render the Company's products obsolete or noncompetitive. 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 products and technologies will be subject to substantial competition from companies engaged in the commercialization of therapeutic proteins and gene therapy as well as from companies which have other forms of treatment for the diseases targeted by the Company. Many of these 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. Smaller companies may obtain access to such skills and resources through collaborative arrangements with pharmaceutical companies or academic institutions. 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 against any Gene Activation products offered by the Company or its collaborators. 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. The Company's Niche Protein products are targeted at patients suffering from rare genetic diseases. The Company anticipates that the market for such products in some instances may be quite small, and that competition in the form of competitive products could place significant pressure on TKT's ability to successfully commercialize its products. The Company's competitive position also depends on 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. There can be no assurance that the Company will be successful in achieving these goals. No Manufacturing or Distribution or Marketing Capabilities; Dependence on Third Party Manufacturers. Although the Company has pilot gene therapy and Gene Activation manufacturing facilities, it has only limited manufacturing experience and no commercial scale manufacturing capabilities. The Company will need to develop, contract for or otherwise arrange for such capabilities, for example, through collaborative partners, to commercialize any of its products. 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. In addition, there can be no assurance that the Company will be able to manufacture products at a reasonable cost, that the Company will be able to price products competitively or, if priced competitively, that the Company will be able to achieve margins sufficient to allow it to achieve profitability. -30- 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. To the extent that the Company contracts with third parties for the manufacture of its products, the Company will be dependent on such third parties to comply with the terms of the contracts and to manufacture for the Company on a timely basis and in accordance with applicable regulations. Any failures by third parties to person their contract obligations satisfactorily may delay clinical trial development or the submission of products for regulatory approval, impair the Company's ability to commercialize its products as planned and deliver products on a timely basis or otherwise adversely affect the Company's competitive position. The Company has no product sales, marketing or distribution capabilities or experience. In order to market any of its products, the Company must develop sales, marketing and distribution capabilities, 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 sale, marketing and distribution 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. In addition, if the Company chooses to conduct such activities directly, there can be no assurance that the Company will be able to recruit and maintain a sales force or that a sales force will be able to successfully access the markets for the Company's products. Possibility of Orphan Drug Status. The Company believes that many of the potential products in its Niche Protein platform may qualify as Orphan Drugs. TKT intends to pursue this designation aggressively, where appropriate, with respect to its Niche Protein products intended for patient populations in the United States of less than 200,000. A drug that receives Orphan Drug designation by the FDA and is the first product to receive FDA marketing approval for its stated product claim is entitled to a seven-year exclusive marketing period in the United States for that product claim. A drug that is considered by the FDA to be different than a particular Orphan Drug is not barred from sale in the United States during such seven-year exclusive marketing period. Furthermore, Orphan Drug exclusivity can be terminated for a variety of reasons, including that the manufacturer of an Orphan Drug cannot provide an adequate supply of the product. There can be no assurance that Orphan Drug status will be afforded to any of the Company's potential products, or, if afforded, that such designations will be maintained. In addition, the Company could incur substantial costs in asserting any rights to prevent such uses it may have under the Orphan Drug Act. Legislation has in the past been introduced to limit the marketing exclusivity provided for certain Orphan Drugs. Although the outcome of that legislation, if reintroduced, is uncertain, there remains a possibility that future legislation will limit the incentives currently afforded to the developers of Orphan Drugs. There can be no assurance that other companies will not seek such designation and obtain FDA marketing approval before the Company obtains such approval. If another company obtains Orphan Drug marketing approval and receives seven-year marketing exclusivity, it is possible that the Company would not be permitted by the FDA to market a similar product in the United States during the exclusivity period. -31- 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. 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 an 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 -32- 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. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 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 on Independent Auditors Balance Sheets as of December 31, 1997 and 1996 Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Statements of Stockholders' Equity for the period January 1, 1995 through December 31, 1997 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Financial Statements -33- REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Transkaryotic Therapies, Inc. We have audited the accompanying consolidated balance sheets of Transkaryotic Therapies, Inc. (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial position of Transkaryotic Therapies, Inc. at December 31, 1997 and 1996, and the results of its consolidated operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Ernst & Young LLP Boston, Massachusetts February 9, 1998 -34- TRANSKARYOTIC THERAPIES, INC. CONSOLIDATED BALANCE SHEETS
(In thousands, except par values) December 31, ---------------------- 1997 1996 --------- --------- Assets Current assets: Cash and cash equivalents $ 23,922 $ 10,414 Marketable securities 105,632 75,841 Prepaid expenses and other current assets 551 818 --------- --------- Total current assets 130,105 87,073 Property and equipment, net 4,505 3,237 Other assets 338 688 --------- --------- $ 134,948 $ 90,998 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,656 $ 612 Accrued expenses 1,543 652 --------- --------- Total current liabilities 3,199 1,264 Other long-term liabilities -- 90 Stockholders' equity: Preferred stock, $1.00 par value, 10,000 shares authorized; no shares issued and outstanding -- -- Common stock, $.01 par value; 30,000 shares authorized, 18,929 and 16,614 shares issued and outstanding at December 31, 1997 and 1996, respectively 189 166 Additional paid-in capital 185,451 131,796 Accumulated deficit (49,987) (37,116) Deferred compensation (3,940) (5,218) Unrealized gain on marketable securities 36 16 --------- --------- Total stockholders' equity 131,749 89,644 --------- --------- $ 134,948 $ 90,998 ========= =========
See accompanying Notes to Consolidated Financial Statements. -35- TRANSKARYOTIC THERAPIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) Year Ended December 31, ---------------------------------- 1997 1996 1995 -------- -------- -------- License and research revenues from Hoechst Marion Roussel, Inc. $ 5,788 $ 4,225 $ 15,400 Operating expenses: Research and development 18,111 14,019 10,529 General and administrative 6,279 4,729 3,828 -------- -------- -------- 24,390 18,748 14,357 -------- -------- -------- Income (loss) from operations (18,602) (14,523) 1,043 Interest income 5,731 2,551 1,116 -------- -------- -------- Income (loss) before provision for income taxes (12,871) (11,972) 2,159 Provision for income taxes -- -- 85 -------- -------- -------- Net income (loss) $(12,871) $(11,972) $ 2,074 ======== ======== ======== Net income (loss) per share (pro forma in 1996 and 1995): Basic $ (0.74) $ (0.98) $ 0.19 ======== ======== ======== Diluted $ (0.74) $ (0.98) $ 0.18 ======== ======== ======== Shares used in computing net income (loss) per share (pro forma in 1996 and 1995): Basic 17,394 12,262 10,862 ======== ======== ======== Diluted 17,394 12,262 11,351 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. -36- TRANSKARYOTIC THERAPIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Cumulative (in thousands) ----------------------- --------------------- Additional Accretion of Paid-in Preferred Shares Amount Shares Amount Capital Stock --------- --------- --------- --------- --------- ------------ Balance at January 1, 1995 1,349 $ 1,349 5,172 $ 52 $ 35,734 $ (1,230) Issuance of convertible preferred stock 1,595 1,595 -- -- 22,524 -- Issuance of common stock, net -- -- 26 -- -- -- Deferred compensation related to restricted stock and stock options granted -- -- -- -- 73 -- Compensation expense related to equity issuances -- -- -- -- -- -- Redeemable preferred stock dividend accretion -- -- -- -- -- (210) Unrealized gain on marketable securities -- -- -- -- -- -- Net income -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- Balance at December 31, 1995 2,944 2,944 5,198 52 58,331 (1,440) Issuance of convertible preferred stock 1,133 1,133 -- -- 22,388 -- Issuance of common stock, net -- -- 2,831 28 39,032 -- Deferred compensation related to restricted stock and stock options granted -- -- -- -- 5,054 -- Compensation expense related to equity issuances -- -- -- -- -- -- Redeemable preferred stock dividend accretion -- -- -- -- -- (158) Conversion of preferred stock into common stock (4,077) (4,077) 8,585 86 6,991 1,598 Unrealized loss on marketable securities -- -- -- -- -- -- Net loss -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- Balance at December 31, 1996 -- -- 16,614 166 131,796 -- Issuance of common stock, net -- -- 2,315 23 53,754 -- Deferred compensation related to stock options granted -- -- -- -- 526 -- Reversal of deferred compensation related to forfeited restricted stock and stock options granted, net -- -- -- -- (625) -- Compensation expense related to equity issuances -- -- -- -- -- -- Unrealized gain on marketable securities -- -- -- -- -- -- Net loss -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- Balance at December 31, 1997 -- $ -- 18,929 $ 189 $ 185,451 $ -- ========= ========= ========= ========= ========= ========= Unrealized Gain (Loss) (in thousands) on Total Accumulated Deferred Marketable Stockholders' Deficit Compensation Securities Equity --------- ------------- --------- --------- Balance at January 1, 1995 $ (27,218) $ (1,593) $ (20) $ 7,074 Issuance of convertible preferred stock -- -- -- 24,119 Issuance of common stock, net -- -- -- -- Deferred compensation related to restricted stock and stock options granted -- (73) -- -- Compensation expense related to equity issuances -- 422 -- 422 Redeemable preferred stock dividend accretion -- -- -- (210) Unrealized gain on marketable securities -- -- 62 62 Net income 2,074 -- -- 2,074 --------- --------- --------- --------- Balance at December 31, 1995 (25,144) (1,244) 42 33,541 Issuance of convertible preferred stock -- -- -- 23,521 Issuance of common stock, net -- -- -- 39,060 Deferred compensation related to restricted stock and stock options granted -- (5,054) -- -- Compensation expense related to equity issuances -- 1,080 -- 1,080 Redeemable preferred stock dividend accretion -- -- -- (158) Conversion of preferred stock into common stock -- -- -- 4,598 Unrealized loss on marketable securities -- -- (26) (26) Net loss (11,972) -- -- (11,972) --------- --------- --------- --------- Balance at December 31, 1996 (37,116) (5,218) 16 89,644 Issuance of common stock, net -- -- -- 53,777 Deferred compensation related to stock options granted -- (526) -- -- Reversal of deferred compensation related to forfeited restricted stock and stock options granted, net -- 625 -- -- Compensation expense related to equity issuances -- 1,179 -- 1,179 Unrealized gain on marketable securities -- -- 20 20 Net loss (12,871) -- -- (12,871) --------- --------- --------- --------- Balance at December 31, 1997 $ (49,987) $ (3,940) $ 36 $ 131,749 ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. -37- TRANSKARYOTIC THERAPIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year Ended December 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- Operating activities: Net income (loss) $ (12,871) $ (11,972) $ 2,074 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 2,092 1,575 1,488 Compensation expense related to equity issuances 1,179 1,080 422 Changes in operating assets and liabilities: Decrease (increase) in prepaid expenses and other current assets 267 (721) 171 Increase in accounts payable 1,044 97 163 Increase in accrued expenses 801 21 3 --------- --------- --------- Net cash provided by (used for) operating activities (7,488) (9,920) 4,321 --------- --------- --------- Investing activities: Proceeds from sales of marketable securities 117,669 63,871 41,851 Purchases of marketable securities (147,440) (116,793) (59,762) Purchase of property and equipment (2,936) (779) (558) Decrease (increase) in other assets (74) (86) 59 --------- --------- --------- Net cash used in investing activities (32,781) (53,787) (18,410) --------- --------- --------- Financing activities: Issuance of common stock, net of expenses 53,777 39,060 -- Issuance of convertible preferred stock -- 23,521 24,119 Repayments of bank debt -- -- (1,097) --------- --------- --------- Net cash provided by financing activities 53,777 62,581 23,022 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 13,508 (1,126) 8,933 Cash and cash equivalents at January 1 10,414 11,540 2,607 --------- --------- --------- Cash and cash equivalents at December 31 $ 23,922 $ 10,414 $ 11,540 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. -38- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Basis of Presentation Transkaryotic Therapies, Inc. ("TKT" or "the Company") is a biopharmaceutical company engaged in the development and commercialization of products based on its three proprietary product development platforms: Gene Activation, gene therapy and Niche Proteins. 2. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany activity has been eliminated. 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 U.S. government and agency obligations. 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. 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 ("SFAS") No. 123, "Accounting for Stock-Based Compensation", and will continue to account for its stock options plans in accordance with the provisions of APB 25. -39- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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. 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. Net Income (Loss) Per Share In 1997, the Financial Accounting Standards Board ("the FASB") issued SFAS No. 128, "Earnings per Share". SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Pursuant to the previous requirements of the Securities and Exchange Commission ("SEC"), common and common equivalent shares issued by the Company during the twelve month period prior to its initial public offering of common stock in October 1996 had been included in the calculations as if they were outstanding for all periods prior to the offering whether or not they were anti-dilutive. In February 1998, the SEC issued Staff Accounting Bulletin 98 which, among other things, conformed prior SEC requirements to SFAS No. 128 and eliminated inclusion of such shares in the computation of earnings (loss) per share. All earnings (loss) per share amounts for all periods have been presented and, where appropriate, restated to conform to SFAS No. 128 and SEC requirements. Net loss per share for 1997 is computed using the weighted average number of common shares outstanding. Pro forma net income (loss) per share for 1996 and 1995 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. At December 31, 1995, the difference between basic and fully diluted shares used in the computation of earnings per share is the approximately 490,000 weighted average common equivalent shares resulting from outstanding common stock options and warrants. Historical earnings (loss) per share for 1996 and 1995 have not been presented since such amounts are not deemed meaningful due to the significant change in the Company's capital structure that occurred in connection with the initial public offering. Accounting Pronouncements In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which is effective for all financial statements beginning after December 15, 1997. At that time, the Company will be required to report and display comprehensive income and its components in a full set of general purpose financial statements and to reclassify earlier periods provided for comparative purposes. Also in 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is required to be adopted on December 31, 1998. At that time, the Company will be required to change the way it reports and discloses certain information about products and services, geographic areas and major customers. Adoption of these standards are not expected to have a material impact on the Company's financial position or results of operations. -40- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 3. Marketable Securities The following is a summary of available-for-sale securities:
(in thousands) Gross Gross Unrealized Unrealized Estimated Fair Cost Gains Losses Value -------- -------- -------- -------- December 31, 1997 $124,795 $ 64 $ (28) $124,831 ======== ======== ======== ======== December 31, 1996 $ 82,808 $ 39 $ (23) $ 82,824 ======== ======== ======== ========
These securities are classified in the accompanying balance sheet as follows:
(in thousands) December 31, --------------------------- 1997 1996 -------- -------- Cash equivalents $ 19,199 $ 6,983 Marketable securities 105,632 75,841 -------- -------- $124,831 $ 82,824 ======== ========
Maturities of marketable securities held at December 31, 1997 are as follows: (in thousands) Less than one year $ 58,730 One through three years 66,101 ---------- $ 124,831 ==========
4. Property and Equipment Property and equipment consists of the following:
(in thousands) December 31, ------------------- 1997 1996 ------- ------- Leasehold improvements $ 6,083 $ 5,072 Laboratory equipment 4,056 2,844 Office furniture and equipment 1,877 1,172 ------- ------- 12,016 9,088 Less accumulated depreciation and amortization 7,511 5,851 ------- ------- $ 4,505 $ 3,237 ======= =======
Depreciation and amortization expense on property and equipment was $1,668,000, $1,540,000 and $1,463,000 in 1997, 1996 and 1995, respectively. -41- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. Accrued Expenses Accrued expenses consist of the following:
(in thousands) December 31, ------------------- 1997 1996 ------ ------ Salaries and benefits $ 556 $ 342 Professional fees 712 182 Other 275 128 ------ ------ $1,543 $ 652 ====== ======
6. Stockholders' Equity Common Stock In July 1997, the Company completed a directed public offering of 1,700,000 shares of its common stock resulting in net proceeds to the Company of approximately $52,900,000. 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, 1997, approximately 2,423,000 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:
(in thousands, except share prices) 1997 1996 1995 -------------------- --------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- -------- -------- -------- -------- -------- Outstanding at January 1 906 $ 0.36 136 $ 0.01 163 $ 0.01 Granted 247 21.51 793 0.42 14 0.01 Exercised (77) 2.35 -- 0.01 (8) 0.01 Canceled (100) 0.56 (23) 0.01 (33) 0.01 -------- -------- -------- Outstanding at December 31 976 5.76 906 0.36 136 0.01 ======== ======== ======== ======== ======== ======== Options exercisable at December 31 137 $ 0.67 51 $ 0.01 28 $ 0.01 ======== ======== ======== ======== ======== ======== Weighted average fair value per share of options granted during the year $ 24.24 $ 6.59 $ 6.22 ======== ======== ========
-42- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) The exercise price and life information in regard to significant option groups outstanding at December 31, 1997 is as follows:
(in thousands, except share Exercisable prices) ---------------------------- Weighted Average Number of Options Remaining Weighted Average Number of Weighted Average Range of Exercise Prices Outstanding Contractual Life (Yrs.) Exercise Price Options Exercise Price - ------------------------ -------------------- ----------------------- ----------------- --------- ---------------- $0.01 745 7.93 $ .01 131 $ 0.01 15.00 15 8.84 15.00 5 15.00 16.75 - 24.25 162 9.26 20.78 1 21.00 27.13 - 35.00 21 9.69 32.70 -- -- 38.50 - 42.50 33 9.90 38.72 -- -- -------------------- --------- 976 137 ==================== =========
Pursuant to the requirements of SFAS 123, the following are the pro forma net income (loss) and net income (loss) per share for 1997, 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 1997, 1996 and 1995, consistent with the provisions of SFAS 123:
(in thousands, except per share 1997 1996 1995 amounts) ----------------------------- -------------------------- --------------------------- As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma ------------ ----------- ----------- ----------- ------------ ---------- Net income (loss) $ (12,871) $ (13,729) $ (11,972) $ (12,783) $ 2,074 $ 2,080 Basic net income (loss) per share $ (.74) $ (.79) $ (0.98) $ (1.04) $ 0.19 $ 0.19
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: 1997 1996 1995 ------------- ------------- ------------- Expected life (years) 2.5-7.5 2.5-7.5 2.5-7.5 Interest rate 6.5% 5.79-6.30% 5.90-7.85% Volatility .65 0.65 N/A Forfeiture rate 10% 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 1997, 1996 and 1995 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 periods presented include only three years, two years and one year, respectively, of option grants. -43- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Stock Warrants In conjunction with various debt and equity financings, the Company issued warrants to purchase shares of common stock at prices ranging from $6.22 to $7.78 per share. The warrants expire at various times through November 1998. At December 31, 1997 and 1996, there were 168,000 and 817,000 warrants outstanding, respectively. The Company has reserved shares of common stock for issuance upon the exercise of these stock warrants. 7. 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. As of December 31, 1997, the Company has received $53,900,000 from the sale of stock, nonrefundable licensing fees, milestone payments related to the successful completion of certain development milestones and contract research fundings. As part of these agreements, HMRI may make additional payments of up to $71,100,000 upon achievement of certain development milestones and pay royalties based on net sales of the two products. 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. 8. Employee Retirement Plan and Other Benefits The Company maintains a qualified defined contribution plan covering substantially all employees of the Company. The Company matches 50% of employee contributions, up to 7% of compensation (5% prior to July 1997). Employer contributions vest ratably over five years. The related expense was $159,000, $91,000 and $83,000 in 1997, 1996 and 1995, respectively. 9. Income Taxes Except for 1995, the Company has incurred operating losses. Since the Company expects that it will continue to incur operating losses, 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, 1997, the Company had net operating loss carryforwards of approximately $43,000,000 and research and development tax credits of $3,007,000, which expire through 2012. During 1995, the Company utilized approximately $1,600,000 of tax benefits from net operating loss carryforwards to offset all but $85,000 of the current year tax provision. The future utilization of these carryforwards is subject to an annual limitation when a cumulative change in stock ownership of more than 50% occurs over a three year period. Because of this limitation, it is possible that taxable income in future years, which would otherwise be offset by net operating losses, will not be offset and, therefore, will be subject to tax. -44- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Significant components of the Company's deferred tax assets are as follows:
(in thousands) December 31, ----------------------- 1997 1996 -------- -------- Deferred tax assets: Net operating loss carryforwards$ $ 18,370 13,800 Research and development tax credits 3,050 2,635 Depreciation 1,350 1,068 Other 186 186 -------- -------- Total deferred tax assets 22,956 17,689 Valuation allowance (22,956) (17,689) -------- -------- Net deferred tax assets $ -- $ -- ======== ========
10. Commitments and Contingencies In April 1997, Amgen Inc. filed a civil action in the U.S. District Court in Massachusetts against the Company and HMRI. The complaint in the action alleges that GA-EPO and processes for producing GA-EPO infringe Amgen's U.S. Patent Numbers 5,547,933, 5,618,698, and 5,621,080 and requests that TKT and HMRI be enjoined from making, using, or selling GA-EPO and that the court award Amgen monetary damages. In November 1997, TKT and HMRI filed a Motion for Summary Judgment on the ground that all of TKT and HMRI's activities to date have been reasonably related to the development and submission of data to the FDA, and, under the Waxman-Hatch Act, cannot constitute acts of patent infringement. On the same date, Amgen filed a Motion for Summary Judgment of Infringement. TKT and HMRI have opposed that motion, stating that there has been no infringement. Pursuant to the Amended and Restated License Agreement, dated March 1995, by and between HMRI and the Company, HMRI has assumed the cost of defense of the suit by Amgen. The Company will reimburse HMRI for its share of litigation expenses, as defined, from future royalties, if any, received from the sale of GA-EPO. The Company and HMRI believe that they have substantial defenses to the allegations in the complaint and expect that their position will be thoroughly vindicated in court. The Company can provide no assurance as to the outcome of this litigation. A decision by the court in Amgen's favor, including the issuance of an injunction against the making, use or sale of GA-EPO by the Company and HMRI in the United States, or any other conclusion of the litigation in a manner adverse to the Company and HMRI, would have a material adverse effect on the Company's business, financial condition, and results of operations. -45- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) The Company leases its facilities under operating leases which expire through 2002, subject to renewal provisions. Future annual minimum payments under all noncancelable operating leases are as follows:
Year ended -------------- (in thousands) 1998 $ 1,386 1999 355 2000 133 2001 122 2002 20 -------- $ 2,016 ========
Rent expense was $1,233,000, $1,068,000 and $992,000 in 1997, 1996 and 1995, respectively. -46- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is contained in part under the caption "Executive Officers of the Company" in PART I hereof, and the remainder is contained in the Company's Proxy Statement for the Company's Annual Meeting of Stockholders to be held on May 19, 1998 (the "Proxy Statement") under the caption "Proposal 1 - Election of Directors" and is incorporated herein by this reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is contained under the caption "Executive Compensation" in the Company's Proxy Statement and is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained in the Company's Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained in the Company's Proxy Statement under the caption "Certain Transactions" and is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as a part of this Form 10-K: 1. Financial Statements. The following documents are filed as part of this Annual Report on Form 10-K: Report on Independent Auditors Balance Sheets as of December 31, 1997 and 1996 Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Statements of Stockholders' Equity for the period January 1, 1995 through December 31, 1997 -47- Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Financial Statements 2. Financial Statement Schedules. The Company is not filing any financial statement schedules as part of this Annual Report on Form 10-K because they are not applicable or the required information is included in the financial statements or notes thereto. 3. Exhibits. The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of this Annual Report on Form 10-K, and such Exhibit Index is incorporated herein by reference. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended December 31, 1997. -48- 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. By: /s/ Richard F Selden --------------------------------- Richard F Selden President and Chief Executive Officer Date: March 30, 1998 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, in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Richard F Selden President, Chief Executive Officer and March 30, 1998 - ------------------------------- Director (Principal Executive Officer) Richard F Selden /s/ Daniel E. Geffken Vice President, Finance and Chief March 30, 1998 - ------------------------------- Financial Officer (Principal Accounting Daniel E. Geffken and Financial Officer) /s/ Rodman W. Moorhead, III Director March 30, 1998 - ------------------------------- Rodman W. Moorhead, III /s/ William R. Miller Director March 30, 1998 - ------------------------------- William R. Miller /s/ James E. Thomas Director March 30, 1998 - ------------------------------- James E. Thomas /s/ Peter Wirth Director March 30, 1998 - ------------------------------- Peter Wirth
-49- Exhibit Index Exhibit No. Description - ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Registrant (1) 3.2 Amended and Restated By-Laws of the Registrant, as amended 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) 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 $125,000 (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) 10.14 Employment Agreement, dated June 19, 1991, by and between Dr. Richard F Selden and the Registrant (2) (3) -50- 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 (2) 10.23 Collaboration and License Agreement, dated July 22, 1993 and amended on May 30, 1996 (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) (4) 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 Kurt C. Gunter and the Registrant (3) (5) 10.29 Consulting Agreement dated November 1, 1996 by and between Peter Wirth and the Registrant (3) (5) 10.30 Employment Agreement dated February 20, 1997 by and between Daniel E. Geffken and the Registrant (6) 10.31 Form of Common Stock Purchase Agreement by and between each Purchaser of shares in the Registrant's directed public offering in August 1997 and the Registrant (6) 21.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP -51- 27.1 Financial Data Schedule for the year ended December 31, 1997. 27.2 Restated Financial Data Schedules for the year ended December, 31, 1996, the nine months ended September 30, 1996, the six months ended June 30, 1996 and the year ended December 31, 1995. - ------------------------------------- (1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference. (2) Filed as an exhibit to the Company's Registration Statement on Form S-1 (File No. 333-10845) 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 as to certain portions. (5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. (6) Filed as an exhibit to the Company's Registration Statement on Form S-1 (File No. 333-31957) and incorporated herein by reference. -52- EX-3.2 2 EX-3.2 Exhibit 3.2 TRANSKARYOTIC THERAPIES, INC. AMENDED AND RESTATED BY-LAWS ARTICLE I OFFICERS Transkaryotic Therapies, Inc. (the "Corporation") shall maintain a registered office in the State of Delaware. The Corporation may also have other offices at such other places either within or without the State of Delaware, as the Board of Directors may from time to time designate or the business of the Corporation may require. ARTICLE II STOCKHOLDERS Section 1. Annual Meeting: The annual meeting of Stockholders for the election of Directors and the transaction of any other business as may properly come before such meeting shall be held on the first Monday in June of each year, or as soon after such date as may be practicable, in such City and State and at such time and place as may be designated by the Board of Directors, and set forth in the notice of such meeting. If said day be a legal holiday, said meeting shall be held on the next succeeding business day. At the annual meeting any business may be transacted and any corporate action may be taken, whether stated in the notice of meeting or not, except as otherwise expressly provided by statute or the Certificate of Incorporation. Section 2. Special Meetings: Special meetings of the Stockholders for any purpose may be called at any time by the Board of Directors, the Chairman of the Board, or if no Chairman has been elected, by the President and Chief Executive Officer, and shall be called by the Chairman of the Board or, if none, by the President and Chief Executive Officer at the request of the holders of a majority of the outstanding shares of capital stock entitled to vote. Special meetings shall be held at such place or places within or without the State of Delaware as shall from time to time be designated by the Board of Directors and stated in the notice of such meeting. At a special meeting no business shall be transacted and no corporate action shall be taken other than that stated in the notice of the meeting. Section 3. Notice of Meetings: Written notice of the date, time and place of any Stockholders' meeting, whether annual or special, shall be given to each Stockholder entitled to vote thereat, by mailing the same to him at his address as the same appears upon the records or the Corporation not less than ten (10) nor more than sixty (60) days prior to the date of such meeting. Notice of any adjourned meeting need not be given other than by announcement at the meeting so adjourned, unless otherwise ordered in connection with such adjournment. Such further notice, if any, shall be given as may be required by law. Section 4. Waiver of Notice: Notice of meeting need not be given to any Stockholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any Stockholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him. Section 5. Quorum: Any number of Stockholders, together holding at least a majority of the capital stock of the Corporation issued and outstanding and entitled to vote, who shall be present in person or by proxy at any meeting duly called, shall constitute a quorum for all purposes except as may otherwise be provided by law. Section 6. Adjournment of Meetings: If less than a quorum shall attend at the time for which a meeting shall have been called, the meeting may be adjourned from time to time by a majority vote of the Stockholders present or by proxy and entitled to vote thereat, without notice other than by announcement at the meeting until a quorum shall attend. Any meeting at which a quorum is present may also be adjourned in like manner and for such time or upon such call as may be determined by a majority vote of the Stockholders present in person or by proxy and entitled to vote thereat. At any adjourned meeting at which a quorum shall be present, any business may be transacted and any corporate action may be taken which might have been transacted at the meeting as originally called. Section 7. Voting: Each Stockholder entitled to vote at any meeting may vote either in person or by proxy, duly appointed by instrument in writing subscribed by such Stockholder and bearing a date not more than eleven months prior to said meeting, unless said proxy provides for a longer period. The holders of Common Stock shall be entitled to one vote in respect of each share held on all matters submitted to a vote of shareholders. When a quorum is present at any meeting, the holders of a majority of the stock present or represented and voting on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of a majority of the stock of that class present or represented and voting on a matter) shall decide any matter to be voted upon by the Stockholders at such meeting, except when a different vote is required by express provision of law, the Certificate of Incorporation or these By-laws. Any election by Stockholders shall be determined by a plurality of the votes cast by the Stockholders entitled to vote at the election. Section 8. Nomination of Directors: Only persons who are nominated in accordance with the following procedures shall be eligible for election as Directors. Nomination for election to the Board of Directors of the Corporation at a meeting of Stockholders may be made by the Board of Directors or by any Stockholder of the Corporation entitled to vote for the election of Directors at such meeting who complies with the notice procedures set forth in this Section 8. Such nominations, other than those made by or on behalf of the Board of Directors, shall be made by notice in writing delivered to mailed by first class United States mail, postage prepaid, to the Secretary, and received not less than 60 days nor more than 90 days prior to such meeting; provided, however, that if less than 70 days' notice or prior public disclosure of the date of the meeting is given to Stockholders, such nomination shall have been mailed or delivered to the Secretary not later than the close of business of the 10th day following the date on which the notice of the meeting was mailed or such public disclosure was made, whichever occurs first. Such notice shall set forth (a) as to each proposed nominee (i) the name, age, business address and, if known, residence address of each such nominee, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee, and (iv) any other information concerning the nominee that must be disclosed as to nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to be named as a nominee and to serve as a Director if elected); and (b) as to the Stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such Stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such Stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably -2- be required by the Corporation to determine the eligibility of such proposed nominee to serve as a Director of the Corporation. The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 9. Notice of Business at Annual Meetings: At an annual meeting of the Stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before an annual meeting by a Stockholder. For business to be properly brought before an annual meeting by a Stockholder, if such business relates to the election of Directors of the Corporation, the procedures in Section 8 must be complied with. If such business relates to any other matter, the Stockholder must have given timely notice thereof in writing to the Secretary. To be timely, a Stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to Stockholders, notice by the Stockholder to be timely must be so received not later than the close of business on the 10th day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever occurs first. A Stockholder's notice to the Secretary shall set forth as to each matter the Stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the Stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the Stockholder, and (d) any material interest of the Stockholder in such business. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 9 and except that any Stockholder proposal which complies with Rule 14a-8 of the proxy rules (or any successor provision) promulgated under the Securities Exchange Act of 1934, as amended, and is to be included in the Corporation's proxy statement for an annual meeting of Stockholders shall be deemed to comply with the requirements of this Section 9. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 9, and if he should so determine, the chairman shall so declare to the meeting that any such business not properly brought before the meeting shall not be transacted. Section 10. Action Without Meeting: Unless otherwise provided in the Certificate of Incorporation, any action required or permitted to be taken by Stockholders for or in connection with any corporate action may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware by hand or certified or registered mail, return receipt requested, to its principal place of business or to an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Each such written consent shall bear the date of signature of each Stockholder who signs the consent. No written consent shall be effective to take the corporate action referred to therein unless written consents signed by a number of Stockholders sufficient to take such -3- action are delivered to the Corporation in the manner specified in this paragraph within sixty days of the earliest dated consent so delivered. If action is taken by consent of Stockholders and in accordance with the foregoing, there shall be filed with the records of the meetings of stockholders the writing or writings comprising such consent. If action is taken by less than unanimous consent of Stockholders, prompt notice of the taking of such action without a meeting shall be given to those who have not consented in writing and a certificate signed and attested to by the Secretary of the Corporation that such notice was given shall be filed with the records of the meetings of stockholders. In the event that the action which is consented to is such as would have required the filing of a certificate under any provision of the General Corporation Law of the State of Delaware, if such action had been voted upon by the Stockholders at a meeting thereof, the certificate filed under such provision shall state, in lieu of any statement required by such provision concerning a vote of Stockholders, that written consent has been given under Section 228 of said General Corporation Law and that written notice has been given as provided in such Section 228. Notwithstanding the foregoing, if at any time the Corporation shall have a class of stock registered pursuant to the provisions of the Securities Exchange Act of 1934, as amended, for so long as such class is registered, any action by the Stockholders of such class must be taken at an annual or special meeting of Stockholders and may not be taken by written consent. Section 11. Organization. The Chairman of the Board, or in his absence the Vice Chairman of the Board designated by the Chairman of the Board, or the President, in the order named, shall call meetings of the Stockholder to order, and shall act as chairman of such meeting; provided, however, that the Board of Directors may appoint any Stockholder to act as chairman of any meeting in the absence of the Chairman of the Board. The Secretary of the Corporation shall act as secretary at all meetings of the Stockholders; but in the absence of the Secretary at any meeting of the Stockholders, the presiding officer may appoint any person to act as secretary of the meeting. ARTICLE III DIRECTORS Section 1. Number and Qualifications: The Board of Directors shall consist of not less than three (3) nor more than seven (7) Directors. The Directors need not be Stockholders. Section 2. Responsibilities: The general management of the affairs of the Corporation shall be vested in the Board of Directors, which may delegate to Officers, employees and to committees of Directors such powers and duties as it may from time to time see fit, subject to the limitations hereinafter set forth, and except as may otherwise be provided by law. Section 3. Election and Term of Office: The Directors shall be elected by the Stockholders at the annual meeting of Stockholders. If the election of Directors shall not be held on the day designated by the By-laws, the Directors shall cause the same to be held as soon thereafter as may be convenient. The Directors chosen at any annual meeting shall hold office except as hereinafter provided, until the next annual election and until the election and qualification of their successors. Section 4. Removal and Resignation of Directors: Any Director may be removed from the Board of Directors, only for cause, by the holders of two-thirds of the shares of outstanding stock -4- entitled to vote at any special meeting of the Stockholders called for that purpose, and the office of such Director shall forthwith become vacant. Any Director may resign at any time. Such resignation shall take effect at the time specified therein, and if no time be specified at the time of its receipt by the Chairman of the Board or if no Chairman has been elected, by the President and Chief Executive Officer, or by the Secretary. The acceptance of a resignation shall not be necessary to make it effective, unless so specified therein. Section 5. Filling of Vacancies: Any vacancy among the Directors, occurring from any cause whatsoever, may be filled by a majority of the remaining Directors, though less than a quorum, provided, however, that the Stockholders removing any Director may at the same meeting fill the vacancy caused by such removal, and provided further, that if the Directors fail to fill any such vacancy, the Stockholders may at any special meeting called for that purpose fill such vacancy. In case of any increase in the number of Directors, the additional Directors may be elected by the Directors in office prior to such increase. Any person elected to fill a vacancy shall hold office, subject to the right of removal as hereinbefore provided, until the next annual election and until the election and qualification of his successor. Section 6. Regular Meetings: The Board of Directors shall hold an annual meeting for the purpose of organization and the transaction of any business immediately after the annual meeting of the Stockholders, provided a quorum is present. Other regular meetings may be held at such times as may be determined from time to time by resolution of the Board of Directors. Section 7. Special Meetings: Special meetings of the Board of Directors may be called at any time by the Chairman of the Board of Directors, if any, or by the President and Chief Executive Officer. Section 8. Notice and Place of Meetings: Regular meetings of the Board of Directors may be held without notice at such time and place as shall be designated by resolution of the Board of Directors. Notice shall be required, however, for special meetings. Notice of any special meeting shall be sufficiently given if mailed to each Director at his residence or usual place of business at least two (2) days before the day on which the meeting is to be held, or if sent to him at such place by telegraph or cable, or delivered personally or by telephone not later than 24 hours prior to the time at which the meeting is to be held. No notice of the annual meeting shall be required if held immediately after the annual meeting or the Stockholders and if a quorum is present. Notice of a meeting need not be given to any Director who submits a signed waiver of notice before or after the meeting, nor to any Director who attends the meeting without protesting the lack of notice prior thereto or at its commencement. Section 9. Business Transacted at Meetings: Any business may be transacted and any corporate action may be taken at any regular or special meeting of the Board of Directors at which a quorum shall be present, whether such business or proposed action be stated in the notice of such meeting or not, unless special notice of such business or proposed action shall be required by law. Section 10. Quorum: A majority of the entire Board of Directors shall be necessary to constitute a quorum for the transaction of business, and the acts of a majority of the Directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors, unless otherwise provided by law, the Certificate of Incorporation or these By-laws. If a quorum is not present at a meeting of the Board of Directors, a majority of the Directors present may adjourn the meeting to such time and place as they may determine without notice other than announcement at the meeting until enough Directors to constitute a quorum shall attend. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any Directors. -5- Section 11. Action Without a Meeting: Any action required or permitted to be taken by the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board or committee shall be filed with the minutes of the proceedings of the Board or committee. Section 12. Participation by Telephone: Any one or more members of the Board or any committee thereof may participate in a meeting of the Board or such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 13. Compensation: The Board of Directors may establish by resolution reasonable compensation of all Directors for services to the Corporation as Directors, including a fixed fee, if any, incurred in attending each meeting. Nothing herein contained shall preclude any Director from serving the Corporation in any other capacity, as an Officer, agent or otherwise, and receiving compensation therefor. ARTICLE IV COMMITTEES Section 1. Executive Committee: The Board of Directors, by resolution passed by a majority of the entire Board, may designate three (3) or more Directors to constitute an Executive Committee to hold office at the pleasure of the Board, which Committee shall, during the intervals between meetings of the Board of Directors, have and exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, subject only to such restrictions or limitations as the Board of Directors may from time to time specify, or as limited by the Delaware General Corporation Law, and shall have power to authorize the seal of the Corporation to be affixed to all instruments which may require it. Any member of the Executive Committee may be removed at any time, with or without cause, by a resolution of a majority of the entire Board of Directors. Any person ceasing to be a Director shall ipso facto cease to be a member of the Executive Committee. Any vacancy in the Executive Committee occurring from any cause whatsoever may be filled from among the Directors by a resolution of a majority of the entire Board of Directors. Section 2. Other Committees: Other committees whose members are to be Directors, may be appointed by the Board of Directors, which committees shall hold office for such time and have such powers and perform such duties as may from time to time be assigned to them by the Board of Directors or the committee appointing them. Any member of such a committee may be removed at any time, with or without cause, by the Board of Directors or the committee appointing such committee. Any vacancy in a committee occurring from any cause whatsoever may be filled by the Board of Directors or the committee appointing such committee. Section 3. Resignation: Any member of a committee may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or, if no time be specified, at the time of its receipt by the Chairman of the Board, if any, the President and Chief Executive Officer or the Secretary. The acceptance of a resignation shall not be necessary to make it effective unless so specified therein. Section 4. Quorum: A majority of the members of a committee shall constitute a quorum. The act of a majority of the members of a committee present at any meeting at which a quorum is present -6- shall be the act of such committee. The members of a committee shall act only as a committee, and the individual members thereof shall have no powers as such. Section 5. Record of Proceedings: Each committee shall keep a record of its acts and proceedings, and shall report the same to the Board of Directors when and as required by the Board of Directors. Section 6. Organization, Meetings, Notices: A committee may hold its meetings at the principal office of the Corporation, or at any other place upon which a majority of the committee may at any time agree. Each committee may make such rules as it may deem expedient for the regulation and carrying on of its meetings and proceedings, unless otherwise ordered by the Executive Committees any notice of a meeting of such committee may be given by the Secretary or by the chairman of the committee and shall be sufficiently given if mailed to each member at his residence or usual place of business at least five (5) days before the day on which the meeting is to be held, or if sent to him at such place by telecopy, telegraph or cable, or delivered personally or by telephone not later than 24 hours prior to the time at which the meeting is to be held. Section 7. Compensation: The members of any committee shall be entitled to such compensation as may be established by resolution of the Board of Directors. ARTICLE V OFFICERS Section l. Number: The Officers of the Corporation shall be a President and Chief Executive Officer, a Secretary and a Treasurer, and such Vice Presidents and other Officers as may be appointed in accordance with the provisions of Section 3 of this Article V. The Board of Directors, in its discretion, may also elect a Chairman of the Board of Directors. Section 2. Election, Term of Office and Qualifications: The Officers, except as provided in Section 3 of this Article V, shall be chosen annually by the Board of Directors. Each such Officer shall, except as herein otherwise provided, hold office until the selection and qualification of his successor. Any two or more offices may be held by the same person, except the offices of President and Chief Executive Officer and Secretary. Section 3. Other Officers: Other Officers, including, without limitation, one or more Vice Presidents, Assistant Secretaries and Assistant Treasurers, may from time to time be appointed by the Board of Directors, which other Officers shall have such powers and perform such duties as may be assigned to them by the Board of Directors or the Officer or committee appointing them. All such Officers shall be corporate officers of the Corporation with the power to hind the Corporation by acts within the scope or their authority. Section 4. Removal of Officers: Any Officer of the Corporation may be removed from office, with or without cause, by a vote of a majority of the Board of Directors. Section 5. Resignation: Any Officer of the Corporation may resign at any time. Such resignation shall be in writing and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the Chairman of the Board, if any, the President and Chief Executive Officer or the Secretary. The acceptance of a resignation shall not be necessary in order to make it effective, unless so specified therein. Section 6. Filling of Vacancies: A vacancy in any office shall be filled by the Board of Directors. -7- Section 7. Compensation: The compensation of the Officers shall be fixed by the Board of Directors, or by any committee upon whom such power may be conferred by the Board of Directors. Section 8. Chairman of the Board of Directors: The Chairman of the Board of Directors, if one is elected, shall be a Director and shall preside at all meetings of the Board of Directors and of the Stockholders at which he shall be present. He shall have power to call special meetings of the Stockholders or of the Board of Directors or of the Executive Committee at any time and shall have such power and perform such other duties as may from time to time be assigned to him by the Board of Directors. Section 9. President and Chief Executive Officer: The President and Chief Executive Officer shall have responsibility for the general direction of the business affairs and property of the Corporation, and of its several Officers, and shall have and exercise all such powers and discharge such duties as usually pertain to the office of President and Chief Executive Officer. He shall have responsibility for the day-to-day affairs of the Corporation, subject to the control of the Board of Directors. He shall perform such duties as may be assigned to him from time to time by the Board of Directors and shall, in the absence of the Chairman of the Board, perform and carry out the functions of the Chairman of the Board. Section 10. Secretary: The Secretary shall attend all meetings of the Board of Directors and of the Stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose, and shall perform like duties for any Committee appointed by the Board. He shall give or cause to be given notice of all meetings of Stockholders and special meetings of the Board of Directors and shall perform such other duties as may be prescribed by the Board of Directors. He shall keep in safe custody the seal of the Corporation and affix it to any instrument when so authorized by the Board of Directors. Section 11. Treasurer: The Treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may he ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and Chief Executive Officer and Directors at the regular meetings of the Board, or whenever they may require, an account of all his transactions as Treasurer and of the financial condition of the Corporation. He may be required to give bond for the faithful discharge of his duties. ARTICLE VI CAPITAL STOCK Section 1. Issue of Certificates of Stock: Certificates of capital stock shall be in such form as shall be approved by the Board of Directors. They shall be numbered in the order of their issue, and shall be signed by the Chairman of the Board of Directors, the President and Chief Executive Officer or any Vice President, and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary, and the seal of the Corporation or a facsimile thereof shall be impressed, affixed or reproduced thereon. In case any Officer or Officers who shall have signed any such certificate or certificates shall cease to be such Officer or Officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates have not ceased to be such Officer or Officers of the Corporation. -8- Section 2. Registration and Transfer of Shares: The name of each person owning a share of the capital stock or the Corporation shall be entered on the books of the Corporation together with the number of shares held by him, the numbers of the certificates covering such shares and the dates of issue of such certificates. The shares of stock of the Corporation shall be transferable on the books of the Corporation by the holders thereof in person, or by their duly authorized attorneys or legal representatives, on surrender and cancellation of certificates for a like number of shares, accompanied by an assignment of power of transfer endorsed thereon or attached thereto, duly executed, and with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. A record shall be made of each transfer. The Board of Directors may make other and further rules and regulations concerning the transfer and registration of certificates for stock. Section 3. Lost, Destroyed and Mutilated Certificates: The holder of any stock of the Corporation shall immediately notify the Corporation of any loss, theft, destruction or mutilation of the Certificates therefor. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it and alleged to have been lost, stolen or destroyed. The Board of Directors may, in its discretion, require the owner of the lost, stolen or destroyed certificate, or his legal representatives, to give the Corporation a bond, in such sum not exceeding trouble the value of the stock and with such surety or sureties as they may require, to indemnify it against any claim that may be made against it by reason of the issue of such new certificate and against all other liability in the premises, or may remit such owner to such remedy or remedies as he may have under the laws of the State of Delaware. ARTICLE VII DIVIDENDS AND SURPLUS Section 1. General Discretion of Directors: The Board of Directors shall have power to fix and vary the amount to be set aside or reserved as working capital of the Corporation, or as reserves, or for other proper purposes of the Corporation, and, subject to the requirements of the Certificate of Incorporation, to determine whether any part of the surplus or net profits of the Corporation shall be declared in dividends and paid to the Stockholders, and to fix the date or dates for the payment of dividends. ARTICLE VIII MISCELLANEOUS PROVISIONS Section l. Fiscal Year: The fiscal year of the Corporation shall commence on the first day of January and end on the last day of December. Section 2. Corporate Seal: The corporate seal shall be in such form as approved by the Board of Directors and may be altered at its pleasure. The corporate seal may be used by causing it or a facsimile thereof to be impressed, affixed or reproduced by the Secretary or Assistant Secretary of the Corporation. Section 3. Notices: Except as otherwise expressly provided, any notice required by these By-laws to be given shall be sufficient if given by depositing the same in a post office or letter box in a sealed wrapper with first class postage prepaid thereon and addresses to the person entitled thereto at his address, as the same appears upon the books of the Corporation, or by telecopying, telegraphing or cabling the same to such person at such address; and such notice shall be deemed to be given at the time it was mailed, telecopied, telegraphed or cabled. -9- Section 4. Waiver it Notice: Any Stockholder or Director may at any time, by writing or by telecopy, telegraph or cable, waive any notice required to be given under these By-laws, and if any Stockholder or Director shall be present at any meeting his presence shall constitute a waiver of such notice. Section 5. Contracts, Checks, Drafts: The Board of Directors, except as may otherwise be required by law, may authorize any Officer or Officers, agent or agents, in the name of and on behalf of the Corporation to enter into any contract or execute or deliver any instrument. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such Officer or Officers, agent or agents of the Corporation, and in such manner, as shall be designated from time to time by resolution of the Board of Directors. Section 6. Deposits: All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such bank or banks, trust companies or other depositaries as the Board of Directors may select, and, for the purpose of such deposit, checks, drafts, warrants and other orders for the payment of money which are payable to the order of the Corporation, may be endorsed for deposit, assigned and delivered by any Officer of the Corporation, or by such agents of the Corporation as the Board of Directors, the Chairman of the Board, if any, or the President and a Chief Executive Officer may authorize for that purpose. Section 7. Voting Stock of Other Corporations: Except as otherwise ordered by the Board of Directors or the Executive Committee, the Chairman of the Board, if any, or the President and Chief Executive Officer shall have full power and authority on behalf of the Corporation to attend and to act and to vote at any meeting of the stockholders of any corporation of which the Corporation is a stockholder and to execute a proxy to any other person to represent the Corporation at any such meeting, and at any such meeting the Chairman of the Board, if any, or the President and Chief Executive Officer or the holder of any such proxy, as the case may be, shall possess and may exercise any and all rights and powers incident to ownership of such stock and which, as owner thereof, the Corporation might have possessed and exercised if present. The Board of Directors or the Executive Committee may from time to time confer like powers upon any other person or persons. Section 8. Indemnification of Officers and Directors: The Corporation shall indemnify any and all of its Directors or Officers, who shall serve as an Officer or Director of this Corporation or of any other corporation at the request of this Corporation, to the fullest extent permitted under and in accordance with the laws of the State of Delaware. ARTICLE IX AMENDMENTS Section 1. By the Board of Directors: These By-laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of a majority of the Directors present at any regular or special meeting of the Board of Directors at which a quorum is present. Section 2. By the Stockholders: Except as otherwise provided in Section 3, these By-laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of the holders of a majority of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote at any regular or special meeting of Stockholders, provided notice of such alteration, amendment, repeal or adoption of new by-laws shall have been stated in the notice of such regular or special meeting. -10- Section 3. Certain Provisions: Notwithstanding any other provision of law, the Certificate of Incorporation or these By-laws, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote shall be required to amend or repeal, or to adopt any provision inconsistent with Sections 2, 7, 8, 9, 10 and 11 of Article II, Article III or Article IX of these By-laws. Dated: September 25, 1996. -11- TRANSKARYOTIC THERAPIES, INC. Amendment No. 1 to the Amended and Restated By-Laws Pursuant to Section 109 of the Delaware Corporate Law, Article II, Section 1 of the Corporation's Amended and Restated By-Laws is hereby amended and restated in its entirety as follows: Section 1: Annual Meeting: The annual meeting of Stockholders for the election of Directors and the transaction of any other business as may properly come before the such meeting shall be held within six months after the end of each fiscal year of the corporation on a date to be fixed by the Board of Directors or the President (which date shall not be a legal holiday in the place where the meeting is to be held) at the time and place to be fixed by the Board of Directors or the President and stated in the notice of the meeting. At the annual meeting any business may be transacted and any Corporate action may be taken, whether stated in the notice of meeting or not, except as otherwise expressly provided by statute or the Certificate of Incorporation. Approved by Board of Directors on January 22, 1998. EX-21.1 3 EX-21.1 Exhibit 21.1 Subsidiaries of the Registrant Name Jurisdiction of Incorporation - ---- ----------------------------- TKT Securities Corp. Massachusetts EX-23.1 4 EX-23.1 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 9, 1998, with respect to the financial statements of Transkaryotic Therapies, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP ERNST & YOUNG LLP Boston, Massachusetts March 27, 1998 EX-27.1 5 EX-27.1
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 23,922 105,632 0 0 0 130,105 12,016 7,511 134,948 3,199 0 0 0 189 131,560 134,948 0 5,788 0 24,390 0 0 0 (12,871) 0 (12,871) 0 0 0 (12,871) (0.74) (0.74)
EX-27.2 6 EX-27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996, THE NINE MONTHS ENDED SEPTEMBER 30, 1996, THE SIX MONTHS ENDED JUNE 30, 1996, AND THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 YEAR 9-MOS 6-MOS YEAR DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1995 DEC-31-1996 SEP-30-1996 JUN-30-1996 DEC-31-1995 10,414 11,401 17,798 11,540 75,840 39,159 10,975 22,945 309 31 0 0 0 0 0 0 0 0 0 0 87,074 50,921 29,017 34,582 9,088 8,985 8,837 8,329 5,851 5,466 5,082 4,331 90,998 55,615 33,626 39,218 1,264 1,645 1,059 1,057 0 0 0 0 0 4,598 4,545 4,440 0 4,077 2,944 2,944 166 52 52 52 89,478 45,132 (24,891) (30,546) 90,998 55,615 33,626 39,218 0 0 0 0 4,225 3,950 1,975 15,400 0 0 0 0 18,748 13,788 8,750 14,357 0 0 0 0 0 0 0 0 0 0 0 13 (11,972) (8,404) (5,987) 2,159 0 0 0 85 (11,972) (8,404) (5,987) 2,074 0 0 0 0 0 0 0 0 0 0 0 0 (11,972) (8,404) (5,987) 2,074 (0.98) (0.77) (0.55) .19 (0.98) (0.77) (0.55) .18
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