-----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, JenHwoWbS2vPwh8aH5fNIMo3JwPBCSLab/x7XMu4wQuTIi734fLl5vzRaDruLkpt NaeQVK62fBALLTLJmOYHnw== 0001047469-98-019992.txt : 19980515 0001047469-98-019992.hdr.sgml : 19980515 ACCESSION NUMBER: 0001047469-98-019992 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 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-Q SEC ACT: SEC FILE NUMBER: 000-21481 FILM NUMBER: 98619479 BUSINESS ADDRESS: STREET 1: 195 ALBANY ST CITY: CAMBRIDGE STATE: MA ZIP: 02138 BUSINESS PHONE: 6173490200 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 1998 Commission File Number 0-21481 TRANSKARYOTIC THERAPIES, INC. (Exact name of registrant as specified in its charter) ---------------------- Delaware 04-3027191 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 195 Albany Street Cambridge, Massachusetts 02139 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 349-0200 ---------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | At April 30, 1998, there were 19,058,674 shares of Common Stock, $.01 par value, issued and outstanding. There were no issued and outstanding shares of Preferred Stock. Transkaryotic Therapies, Inc. INDEX
Page Number PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 3 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 EXHIBIT INDEX 16
Part 1- Item 1- Condensed Consolidated Financial Statements Transkaryotic Therapies, Inc. Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except par values) March 31, December 31, 1998 1997 --------- --------- Assets Current assets: Cash and cash equivalents $ 25,114 $ 23,922 Marketable securities 99,801 105,632 Prepaid expenses and other current assets 987 551 --------- --------- Total current assets 125,902 130,105 Property and equipment, net 4,193 4,505 Other assets 355 338 --------- --------- $ 130,450 $ 134,948 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 513 $ 1,656 Accrued expenses 1,794 1,543 --------- --------- Total current liabilities 2,307 3,199 Stockholders' equity: Preferred stock, $1.00 par value, 10,000 shares authorized: no shares issued and outstanding Common stock, $.01 par value; 30,000 shares authorized; 19,026 and 18,929 shares issued and outstanding at March 31, 1998 and December 31, 1997, respectively 190 189 Additional paid-in capital 185,968 185,451 Accumulated deficit (54,490) (49,987) Deferred compensation (3,613) (3,940) Accumulated other comprehensive income 88 36 --------- --------- Total stockholders' equity 128,143 131,749 --------- --------- $ 130,450 $ 134,948 ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements. 3 Part 1- Item 1- Condensed Consolidated Financial Statements Transkaryotic Therapies, Inc. Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts) Three Months Ended March 31, March 31, 1998 1997 -------- -------- License and research revenues $ 575 $ 300 Operating expenses: Research and development 5,393 3,832 General and administrative 1,502 1,402 -------- -------- 6,895 5,234 -------- -------- Loss from operations (6,320) (4,934) Interest income 1,817 1,141 -------- -------- Net loss ($ 4,503) ($ 3,793) ======== ======== Basic and diluted net loss per share ($ 0.24) ($ 0.23) ======== ======== Shares used to compute basic and diluted net loss per share 18,962 16,641 ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements. 4 Part 1- Item 1- Condensed Consolidated Financial Statements Transkaryotic Therapies, Inc. Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands) Three Months Ended March 31, March 31, 1998 1997 --------- --------- Operating activities: Net loss $ (4,503) $ (3,793) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 557 398 Compensation expense relating to equity issuances 291 280 Changes in operating assets and liabilities (1,328) 301 -------- -------- Net cash used for operating activities (4,983) (2,814) -------- -------- Investing activities: Proceeds from sales of marketable securities 37,683 11,985 Purchases of marketable securities (31,800) (13,039) Purchase of property and equipment (209) (331) Changes in other assets and liabilities (53) (48) -------- -------- Net cash provided by (used for) investing activities 5,621 (1,433) -------- -------- Financing Activities: Proceeds from exercise of options and warrants 554 -- -------- -------- Net increase (decrease) in cash and cash equivalents 1,192 (4,247) Cash and cash equivalents at January 1 23,922 10,414 -------- -------- Cash and cash equivalents at March 31 $ 25,114 $ 6,167 ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements. 5 PART I - Item 1 - Condensed Consolidated Financial Statements Transkaryotic Therapies, Inc. Notes to Condensed Consolidated Financial Statements (unaudited) March 31, 1998 and 1997 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-TM-. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial condition, results of operations and cash flows for the periods presented. The results of operations for the interim period ended March 31, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 1997 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. 2. BASIC AND DILUTED NET LOSS PER SHARE Basic and diluted net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded as their effect is antidilutive. In December 1997, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share". Under SFAS No. 128, primary earnings per share computed in accordance with Opinion 15 has been replaced with a simpler calculation called basic earnings per share. Basic earnings per share is calculated by dividing income available to common stockholders by the weighted average common shares outstanding. Fully dilutive earnings per share did not change significantly but has been renamed diluted earnings per share. The adoption of SFAS No. 128 had no effect on the financial statements presented for the three months ended March 31, 1998 and 1997 since common equivalent shares from stock options and warrants have been excluded as their effect is antidilutive. 6 3. COMPREHENSIVE INCOME As of January 1, 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components, including the requirement that unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholders' equity, be included in other comprehensive income. The adoption of SFAS No. 130 had no impact on the Company's net loss or stockholders' equity. During the first quarter of 1998 and 1997, total comprehensive loss amounted to $4,451,000 and 3,936,000. 4. LEGAL PROCEEDINGS In April 1997, Amgen Inc. filed a civil action in the U.S. District Court in Massachusetts against the Company and Hoechst Marion Roussel, Inc. ("Hoechst Marion Roussel"), its collaborative partner. The complaint in the action alleged that Gene Activated-TM- erythropoietin ("GA-EPO-TM-"), and processes for producing GA-EPO infringe Amgen's U.S. Patent Numbers 5,547,933, 5,618,698, and 5,621,080 and requested that TKT and Hoechst Marion Roussel be enjoined from making, using, or selling GA-EPO and that the court award Amgen monetary damages. In November 1997, TKT and Hoechst Marion Roussel filed a Motion for Summary Judgment. On the same date, Amgen filed a Motion for Summary Judgment of Infringement. TKT and Hoechst Marion Roussel opposed that motion, stating that there had been no infringement. In April 1998, the U.S. District Court granted TKT and Hoechst Marion Roussel's Motion for Summary Judgment and denied Amgen's Motion for Summary Judgment on the ground that all of TKT and Hoechst Marion Roussel's GA-EPO related activities to date had been solely for uses reasonably related to the production of information for submission to the U.S. Food and Drug Administration (the " FDA") for regulatory approval and, under the Waxman-Hatch Act, do not constitute acts of patent infringement. The Court ordered Amgen's remaining claim for declaratory judgment of future infringement administratively closed, to be reopened upon motion of either party for good cause shown. The Court also stated that issuance by the FDA of a product license presumably would show good cause to reopen that claim. Finally, the Court stated that, should the case be reopened and should Amgen seek preliminary equitable relief, the Court will combine the hearing on a preliminary injunction with trial on the merits. The Company expects that the case will be reopened. Should the case be reopened, the Company can provide no assurance as to the outcome of the 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 7 Hoechst Marion Roussel in the United States, or any other conclusion of such litigation in a manner adverse to the Company and Hoechst Marion Roussel, would have a material adverse effect on the Company's business, financial condition, and results of operations. Pursuant to the Amended and Restated License Agreement, dated March 1995, by and between Hoechst Marion Roussel and the Company, Hoechst Marion Roussel assumed the cost of defense of the suit by Amgen. The Company will reimburse Hoechst Marion Roussel for its share of litigation expenses, as defined, from future royalties, if any, received from the sale of GA-EPO. 8 PART I - Financial Information Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Since its inception in 1988, Transkaryotic Therapies, Inc. ( "TKT" or the "Company") has been primarily engaged in the development and commercialization of products based on the Company's three 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 March 31, 1998, the Company's accumulated deficit was $54,490,000. 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 operation of the Company should be read in conjunction with the accompanying condensed consolidated financial statements and the related footnotes thereto. RESULTS OF OPERATIONS For the Three Months Ended March 31, 1998 and 1997 License and research revenues totaled $575,000 and $300,000 for the three months ended March 31, 1998 and 1997, respectively. All revenues were earned from collaborative agreements with Hoechst Marion Roussel, Inc. Research and development expenses totaled $5,393,000 in the first quarter of 1998, as compared to $3,832,000 during the same period in 1997. The increase in 1998 of $1,561,000, or 41%, was principally due to an increase in research and development staff, manufacturing costs, clinical trial expenses and outside services, as well as an increase in facilities costs for additional leased space. 9 General and administrative expenses were $1,502,000 in the quarter ended March 31, 1998, compared with $1,402,000 during the same period in 1997. The increase in 1998 of $100,000, or 7%, is principally due to increases in administrative employee costs. Interest income was $1,817,000 and $1,141,000 for the three months ended March 31, 1998 and 1997, respectively. The average cash and marketable securities balances were $126,965,000 and $84,654,000 in 1998 and 1997, respectively. The increase in interest income of $676,000 is primarily attributable to higher average balances in 1998 as a result of the Company's follow-on offering in July 1997. The Company had a net loss of $4,503,000 and $3,793,000 in the quarter ended March 31, 1998 and 1997, respectively. Net loss per share was $0.24 for the three months ended March 31, 1998 compared to a net loss per share of $0.23 for the same period in 1997. 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 $124,915,000 at March 31, 1998. Cash equivalents and marketable securities are invested in U.S. Treasury notes, agencies of the U.S. government and money market funds. 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. 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 and proceeds from equity and debt offerings and funding from collaborative arrangements will be used to fund operations. The Company expects to pursue opportunities to obtain additional financing in the future through equity and debt financings, lease arrangements related to 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. 10 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 Inc. with respect to the development of GA-EPO. See Note 4 to Notes to Condensed Financial Statements, which is incorporated by reference herein. FORWARD LOOKING STATEMENTS Statements that are not historical facts, including statements about the Company's confidence and strategies and its expectations about future products, technologies and opportunities, market demand or acceptance of future products are forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "intends" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, whether any of the Company's Gene 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 in the Company's Annual Report on Form 10-K under the caption "Certain Factors That May Affect Future Results" which are incorporated herein by reference and filed herewith as Exhibit 99, with the exception of the factor titled "Patent Litigation" which is superseded by the following: 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, Inc. "Amgen" filed a civil action in the U.S. District Court in Massachusetts against the Company and Hoechst Marion Roussel, Inc. ("Hoechst Marion Roussel"), the Company's collaborative partner. The complaint in the action alleged 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 requested that TKT and Hoechst Marion Roussel be enjoined from making, using, or selling GA-EPO and that the court award Amgen monetary damages. 11 In November 1997, TKT and Hoechst Marion Roussel filed a Motion for Summary Judgment. On the same date, Amgen filed a Motion for Summary Judgment of Infringement. TKT and Hoechst Marion Roussel opposed that motion, stating that there had been no infringement. In April 1998, the U.S. District Court granted TKT and Hoechst Marion Roussel's Motion for Summary Judgment and denied Amgen's Motion for Summary Judgment on the ground that all of TKT and Hoechst Marion Roussel's GA-EPO related activities to date had been solely for uses reasonably related to the production of information for submission to the FDA for regulatory approval and, under the Waxman-Hatch Act, do not constitute acts of patent infringement. The Court ordered Amgen's remaining claim for declaratory judgment of future infringement administratively closed, to be reopened upon motion of either party for good cause shown. The Court also stated that the issuance by the FDA of a product license presumably would show good cause to reopen that claim. Finally, the Court stated that, should the case be reopened and should Amgen seek preliminary equitable relief, the Court will combine the hearing on a preliminary injunction with trial on the merits. The Company expects that the case will be reopened. Should the case be reopened, the Company can provide no assurance as to the outcome of the 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 Hoechst Marion Roussel in the United States, or any other conclusion of such litigation in a manner adverse to the Company and Hoechst Marion Roussel, 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, 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 12 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 U.S. Patent and Trademark Office (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 Federal Trade Commission (the "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. 13 PART II - Other Information Item 1. Legal Proceedings The Company is engaged in litigation with Amgen, Inc. with respect to the development of GA-EPO. See Note 4 to Notes to Condensed Consolidated Financial Statements, which is incorporated by reference herein. Since 1996, the Company has been involved in a patent interference proceeding before the United States Patent and Trademark Office involving a patent and several patent applications in the gene therapy field. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The Exhibits filed as part of this Form 10-Q are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference. (b) Reports on Form 8-K No reports were filed on Form 8-K during the quarter ended March 31, 1998. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRANSKARYOTIC THERAPIES, INC. Date: May 13, 1998 By: /s/ Daniel E. Geffken ----------------------------------- Daniel E. Geffken Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 15 Transkaryotic Therapies, Inc. EXHIBIT INDEX Exhibit No. Description ----------- ----------- 10.1 1993 Long-Term Incentive Plan as amended to date 27 Financial Data Schedule (for EDGAR filing purposes only) 99 Certain Factors That May Affect Future Results (as filed with the Company's Annual Report on Form 10-K, except for the factor titled "Patent Litigation" which is superseded by the section of the same title, appearing under the caption "Forward Looking Statements" in this Quarterly Report on Form 10-Q). 16 EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 TRANSKARYOTIC THERAPIES, INC. 1993 LONG-TERM INCENTIVE PLAN TABLE OF CONTENTS
1. PURPOSE 1 2. DEFINITIONS 1 2.1. Affiliate 1 2.2. Award 1 2.3. Board 1 2.4. Code 1 2.5. Committee 1 2.6. Company 1 2.7. Employment Agreement 1 2.8. Fair Market Value 2 2.9. Incentive Option 2 2.10. Long-Term Performance Award or Long-Term Award 2 2.11. Nonstatutory Option 2 2.12. Participant 2 2.13. Plan 2 2.14. Restricted Stock 2 2.15. Stock 2 2.16. Shareholders Agreement 2 2.17. Stock Appreciation Right 2 2.18. Stock Grant 2 2.19. Stock Option or Option 2 2.20. Ten Percent Owner 3 3. TERM OF THE PLAN 3 4. STOCK SUBJECT TO THE PLAN 3 5. ADMINISTRATION 4 6. ELIGIBILITY 5 7. STOCK OPTIONS 5 7.1. Provision for Grant 5 7.2. Terms and Conditions 5 8. STOCK APPRECIATION RIGHTS 8 8.1. Provision for Grant 8
8.2. Termination 8 8.3. Manner and Effect of Exercise 8 8.4. Other Terms and Conditions 9 9. RESTRICTED STOCK 9 9.1. Provision for Grant 9 9.2. Awards and Certificates 9 9.3 Additional Terms and Conditions 9 10. LONG-TERM PERFORMANCE AWARDS 11 10.1. Provision for Grant 11 10.2. Periodic Determination of Performance 11 10.3. Adjustment of Awards 11 10.4. Effect of Termination of Employment or Association 12 10.5. Form of Payment 12 11. STOCK GRANTS 12 12. RESTRICTIONS ON ISSUANCE OF SHARES 12 12.1. Securities Laws 12 12.2. Investment Representation 13 12.3. Placement of Legends; Stop Orders; etc 13 12.4. Registration 13 12.5. Applicability of Shareholders Agreement 14 13. EFFECT OF CERTAIN TRANSACTIONS 14 13.1. Liquidation or Dissolution of the Company 14 13.2. Sale of Assets, Merger or Consolidation 14 14. TERMINATION AND AMENDMENT OF THE PLAN AND AWARDS 14 15. MISCELLANEOUS PROVISIONS 15 15.1 Unfunded Status of Plan 15 15.2. Adoption of Other Plans 15 15.3. Payments on Death 15 15.4. Tax Withholding 15 15.5. Limitation of Rights in Stock 16 15.6. No Special Employment or Other Rights 16 15.7. Notices and Other Communications 16 15.8. Governing Law. 16
TRANSKARYOTIC THERAPIES, INC. 1993 LONG-TERM INCENTIVE PLAN 1. PURPOSE The purpose of this Plan is to enable key employees of and consultants to Transkaryotic Therapies, Inc. (the "Company") to (i) own shares of stock in the Company, (ii) participate in the shareholder value which has been created, (iii) have a mutuality of interest with other shareholders and (iv) enable the Company to attract, retain and motivate key employees and consultants of particular merit. 2. DEFINITIONS For the purposes of the Plan, the following terms shall have the meanings set forth below: 2.1. Affiliate means a parent or subsidiary corporation of the Company, as defined in Sections 424(e) and (f), respectively, of the Code. 2.2. Award means the grant or sale pursuant to the Plan of any of Stock Options, Restricted Stock, Stock Appreciation Rights, Stock Grants, and Long Term Awards. 2.3. Board means the Board of Directors of the Company. 2.4. Code means the federal Internal Revenue Code of 1986, as amended from time to time, or any statute successor thereto, and any regulations issued from time to time thereunder. 2.5. Committee means a committee appointed by the Board, responsible for the administration of the Plan, as provided in Section 5 of the Plan. No member of the Committee shall be eligible to receive an Award under the Plan, and no individual shall be eligible for membership on the Committee within one year of having received an Award under the Plan. For any period during which no such committee is in existence all authority and responsibility assigned the Committee under the Plan shall be exercised, if at all, by the Board. 2.6. Company means Transkaryotic Therapies, Inc., a corporation organized under the laws of the State of Delaware. 2.7. Employment Agreement means an agreement, if any, between the Company and a Participant, setting forth, inter alia, conditions and restrictions upon the transfer of shares of Stock. -2- 2.8. Fair Market Value means, as of any given date, the last reported sales price of the Stock as reported in The Wall Street Journal for such date or, if either no such sale is reported or the Stock is not publicly traded on or as of such date, the fair market value of the Stock as determined by the Committee in good faith based on the available facts and circumstances at the time. 2.9. Incentive Option means an Option which by its terms is to be treated as an "incentive stock option" within the meaning of Section 422 of the Code. 2.10. Long-Term Performance Award or Long-Term Award means an award made pursuant to Section 10 below that is payable in cash and/or Stock (including Restricted Stock) in accordance with the terms of the grant, based on Company, business unit and/or individual performance. 2.11. Nonstatutory Option means any Option that is not an Incentive Option. 2.12. Participant means an employee or consultant to whom an Award, as provided in Section 6, shall have been granted under the Plan. 2.13. Plan means this 1993 Long-Term Incentive Plan of the Company, as amended from time to time. 2.14. Restricted Stock means an Award pursuant to Section 9 below of shares of Stock subject to restrictions or other forfeiture conditions. 2.15. Stock means Common Stock, par value $.01 per share of the Company. 2.16. Shareholders Agreement means the agreement, if any, between the Company and certain shareholders, setting forth, inter alia, certain restrictions upon the transfer of shares of Stock. 2.17. Stock Appreciation Right means the right, pursuant to an Award granted under Section 8 below, to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Option (or such portion thereof) is surrendered, of the shares of Stock covered by such Stock Option (or such portion thereof), and (ii) the aggregate exercise price of such Stock Option (or such portion thereof). 2.18. Stock Grant means an Award pursuant to Section 11 below of shares of Stock not subject to restrictions or other forfeiture conditions. 2.19. Stock Option or Option means any option to purchase shares of Stock (including Restricted Stock) granted pursuant to Section 7 below. -3- 2.20. Ten Percent Owner means a person who owns, or is deemed within the meaning of Section 422(b)(6) of the Code to own, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or any Affiliate). Whether a person is a Ten Percent Owner shall be determined with respect to an Incentive Option based on the facts existing immediately prior to the grant date of such Option. 3. TERM OF THE PLAN Unless the Plan shall have been earlier terminated by the Board, Awards may be granted hereunder at any time in the period commencing on the approval of the Plan by the Board and ending on the tenth anniversary of the earlier of the adoption of the Plan by the Board or approval of the Plan by the Company's shareholders. Awards granted pursuant to the Plan within such period shall not expire solely by reason of the termination of the Plan. 4. STOCK SUBJECT TO THE PLAN (a) Aggregate Limit On Awards. At no time shall the number of shares of Stock issued pursuant to Awards granted under the Plan exceed 1,250,000 shares, subject, however, to the provisions of subsection (c) below. Such shares may be either authorized but unissued shares or shares held by the Company in its treasury. The Company shall at all times reserve and make available in sufficient number of shares to meet the requirements of the Plan, provided that following termination of the Plan the number of shares reserved need not exceed the number of Shares issuable under Awards outstanding from time to time thereafter. (b) Computation of Available Shares. For the purpose of computing the total number of shares of Stock available for Plan purposes at any time during which the Plan is in effect, there shall be debited against the total number of shares determined to be available pursuant to paragraphs (a) and (c) of this Section 4(i) any outstanding Restricted Stock and Stock Grants, (ii) the maximum number of shares of Stock subject to issuance upon exercise of Options or upon settlement of other Awards theretofore made under the Plan, (iii) the shares related to the unexercised or undistributed portion of any terminated, expired or forfeited Award for which a material benefit was received by a Participant (e.g. dividends, but not including voting rights), and the equivalent number of shares (determined as of the date of settlement) of any portion of any Award settled in cash. (c) Other Adjustment. In the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, or other change in corporate structure affecting the Stock, such substitution or adjustment shall be made in the character and aggregate number of shares reserved for issuance under the Plan, and in the number and option price of shares subject to outstanding Options and other stock based Awards granted under the Plan, as may be determined to be appropriate by the Committee, provided that the number of shares subject to any Award shall -4- always be a whole number. Any such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. 5. ADMINISTRATION The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have complete authority, in its sole discretion, to make or to select the manner of making any and all determinations required for the operation of the Plan, and without limiting the generality of the foregoing, shall have the authority to (a) grant to eligible individuals, pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, (iv) Long-Term Performance Awards, and (v) Stock Grants; (b) select from time to time the officers, other employees and consultants of the Company and its Affiliates to whom Awards shall be granted hereunder; (c) determine whether and to what extent Incentive Options, Nonstatutory Options, Stock Appreciation rights, Restricted Stock, Long-Term Performance Awards and Stock Grants or any combination thereof, are to be granted hereunder; (d) determine the number of shares of Stock to be covered by each Award granted hereunder; (e) determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award (which need not be identical in every case), including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or forfeiture waiver regarding any Stock Option or other Award and the shares of Stock relating thereto, based on such factors as the Committee shall determine; (f) determine whether and under what circumstances a Stock Option may be settled in cash or Stock, including Restricted Stock, as provided in Section 7.2; (g) determine whether and under what circumstances a Stock Option may be exercised without a payment of cash as provided in Section 7.2; and (h) determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the Participant. In making such determinations, the Committee may take into account the nature of the services rendered by the respective employees and consultants, their -5- present and potential contributions to the success of the Company and its Affiliates, and such other factors as the Committee in its discretion shall deem relevant. Subject to the provisions of the Plan, the Committee shall also have complete authority, in its sole discretion, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of any Award issued under the Plan (and any agreements relating thereto), to resolve all disputes arising under the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee's determinations shall be conclusive, final and binding upon all persons having or claiming any interest in the Plan or in any Award pursuant to the Plan. 6. ELIGIBILITY Awards shall be granted under the Plan only to employees of or consultants to one or more of the Company or an Affiliate (but excluding members of the Committee) who are responsible for or contribute to, as determined by the Committee, the management, growth and profitability of the business of the Company and its Affiliates. A director of one or more of the Company or any Affiliate who is not also an employee or consultant of one or more of the Company or an Affiliate shall not be eligible to receive an Award under the Plan. 7. STOCK OPTIONS 7.1. Provision for Grant. Stock Options may be granted alone, in addition to or in tandem with other Awards under the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant any optionee who is an employee of the Company, or an Affiliate, Incentive Options, Nonstatutory Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). To the extent that any Stock Option does not qualify as an Incentive Option, it shall constitute a separate Nonstatutory Option. In the case of any other person eligible for an Award under the Plan, any Stock Option granted under the Plan shall be a Nonstatutory Option (with or without Stock Appreciation Rights). Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Option under such Section 422. 7.2. Terms and Conditions. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem appropriate: (a) Option Price. The option price per share of Stock purchasable -6- under a Stock Option shall be determined by the Committee at the time of grant but in the case of any Incentive Option shall be not less than 100% of the Fair Market Value of the Stock at the time of grant (110% of Fair Market Value, in the case of any grant of an Incentive Option to a Ten Percent Owner). (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but not Incentive Option shall be exercisable more than ten years after the date the Option is granted (or, more than five years after the date the Option is granted, in the case of any grant of an Incentive Option to a Ten Percent Owner). No Stock Option may be exercised by any person after expiration of the term of the Option. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant, provided, however, that, except as provided in this Section 7 and Section 13, at or after grant no Stock Option shall be exercisable during the six months following the date of the granting of the Option. If the Committee provides, in its discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine. (d) Method of Exercise. Subject to whatever installment exercise provisions may apply, Stock Options may be exercised in whole or in part at any time and from time to time during the option period, by giving written notice of exercise to the Company, in the manner set out in Section 15.7, specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or such other instrument as the Committee may accept. As determined by the Committee, at or after grant, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or, in the case of the exercise of a Nonstatutory Option, Restricted Stock subject to an Award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee); provided, however, that, in the case of an Incentive Option, the right to make a payment in the form of already owned shares may be authorized only at the time the option is granted. If payment of the option exercise price of a Nonstatutory Option is made in whole or in part in the form of Restricted Stock, such Restricted Stock (and any replacement shares relating thereto) shall remain (or be) restricted in accordance with the original terms of the Restricted Stock Award in question, and any additional Stock received upon the exercise shall be subject to the same forfeiture restrictions, unless otherwise determined by the Committee, at or after grant. If payment of the Option exercise price of a Stock Option is made in whole or in part in the form of unrestricted Stock already owned by the Participant, the -7- Company may require that the Stock has been owned by the Participant for a specified minimum period of time, for the purpose of avoiding any charge to the Company's earnings, limiting the pyramiding of Stock Option exercises, or such other purposes as the Company deems appropriate. (e) Replacement Options. If a Nonstatutory Option granted pursuant to the Plan may be exercised by an optionee by means of the delivery of previously acquired Stock, then the Committee may, at the time of the original option grant, authorize the Participant to automatically receive a replacement Nonstatutory Option to the extent shares are available under Section 4 at the time such replacement Option would be issued. Any such replacement Option shall cover such number of shares as may be determined by the Committee, but in no event more than the number of shares equal to the difference, if any, between the number of shares for which the original Option is exercised and the net shares received by the Participant from such exercise. Any such replacement Option shall have an exercise price equal to the then Fair Market Value of Stock, and a term extending to the expiration date of the original Option. The Committee shall have the right at any time to discontinue the automatic grant of replacement Options. (f) Transferability. No Stock Option shall be transferable by the optionee other than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (g) Effect of Termination of Employment Or Association. If an optionee's employment by or association with the Company and its Affiliates terminates for any reason whatsoever, unless the Committee shall have provided otherwise, any Stock Option held by such optionee shall thereupon terminate; provided, however, that military or sick leave shall not be deemed a termination of employment or other association, if it does not exceed the longer of 90 days or the period during which the absent optionee's reemployment rights, if any, are guaranteed by statute or by contract. (h) Incentive Option Limitations. To the extent required for "Incentive Option" status under Section 422 of the Code, the aggregate Fair Market Value (determined as of the date of grant) of the Stock with respect to which Incentive Options become exercisable for the first time by the optionee during any calendar year under the Plan and any other stock option plan of the Company and any Affiliate shall not exceed $100,000. In the event shares of Stock in excess of the preceding limitation become exercisable for the first time in a calendar year under any such Options or options, such shares shall be considered to have become exercisable under separate Nonstatutory Options (with the Options or options granted earliest in time considered to constitute to the maximum extent possible the Incentive Options). (i) Cash-out of Option; Settlement of Spread Value in Restricted Stock. On receipt of written notice to exercise, the Committee may elect to cash out -8- all or part of the portion of the Option(s) to be exercised by paying the optionee an amount, in cash or Stock, equal to the excess of the Fair Market Value of the Stock over the option price (the "Spread Value") on the effective date of such exercise. In addition, if the Option agreement so provides at grant or is amended after grant and prior to exercise to so provide (with the optionee's consent), the Committee may require that all or part of the shares to be issued with respect to the Spread Value of an exercised Option take the form of Restricted Stock, which shall be valued on the date of exercise on the basis of the Fair Market Value of such Restricted Stock determined without regard to the forfeiture restrictions involved. (j) Cashless Exercise. To the extent permitted under the applicable laws and regulations and the terms of a Participant's Option agreement, at the request of the Participant and with the consent of the Committee, the Company agrees to cooperate in a "cashless exercise" of an Option. The cashless exercise shall be effected by the Participant delivering to a registered securities broker acceptable to the Company instructions to sell a sufficient number of shares of Stock from which such Option is then exercisable to cover the costs and expenses associated with such exercise and sale. (k) Grant Date. The granting of an Option shall take place at the time specified in the agreement set forth the terms of such Option. Only if expressly so provided in the Option agreement, shall the grant date be the date on which an Option agreement shall have been duly executed and delivered by the Company and the Participant. 8. STOCK APPRECIATION RIGHTS 8.1. Provision for Grant. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Nonstatutory Option, such rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Option, such rights may be granted only at the time of the grant of such Stock Option. 8.2. Termination. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that, unless otherwise determined by the Committee at the time of grant, a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Stock Option shall not be reduced until the number of shares covered by an exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. 8.3. Manner and Effect of Exercise. A Stock Appreciation Right may be exercised by an optionee, in accordance with Section 8.4, by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner -9- prescribed in Section 8.4. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Stock Appreciation Right has been exercised. 8.4. Other Terms and Conditions. Stock Appreciation Rights granted under the Plan shall be subject to the following terms and conditions, and shall contain such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem appropriate: (a) Exercisability. Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate, if any, shall be exercisable in accordance with the provisions of Section 7 and this Section 8.4 of the Plan; provided, however, that any Stock Appreciation Right granted subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of its term; and provided, further, however, that a Stock Appreciation Right granted in connection with an Incentive Option may be exercised only if and when the market price of the Stock subject to the Incentive Option exceeds the exercise price of such Stock Option. (b) Amount Payable. Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive up to, but not more than, an amount in cash or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option, multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised. The Committee shall determine the form of payment. (c) Transferability. Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 7.2 of the Plan. 9. RESTRICTED STOCK 9.1. Provision for Grant. Shares of Stock may be issued either alone or in addition to other Awards granted under the Plan at such price, if any, as the Committee may determine. The Committee may condition the grant of Restricted Stock upon the completion of additional service, attainment of specified performance goals or such other factors as the Committee may determine. 9.2. Awards and Certificates. The prospective recipient of a Restricted Stock Award shall not have any rights with respect to such Award, unless and until such recipient has executed an agreement evidencing the Award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such Award. 9.3. Additional Terms and Conditions. Grants of Restricted Stock may be -10- made under the following additional terms and conditions: (a) Purchase Price. The purchase price for shares of Restricted Stock shall be equal to or less than their Fair Market Value and may be zero, as determined by the Committee. (b) Acceptance of Awards. Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify at grant) after the Award date, by executing a Restricted Stock Award agreement and paying whatever price (if any) is required pursuant to the terms of the Award. (c) Issuance of Certificates. Each Participant receiving a Restricted Stock Award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such Participant and, if applicable, shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, in addition to legends authorized pursuant to Section 12, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Transkaryotic Therapies, Inc. 1993 Long-Term Incentive Plan and an Agreement entered into between the registered owner and Transkaryotic Therapies, Inc. Copies of such Plan and Agreement are on file in the offices of Transkaryotic Therapies, Inc. at 195 Albany Street, Cambridge, MA 02139." (d) Escrow of Shares. The Committee may require that the stock certificates evidencing shares of Restricted Stock be held in custody by the Company until the restrictions thereon shall have lapsed, and that the Participant deliver a stock power, endorsed in blank, relating to the Stock covered by such Award. (e) Transferability. Subject to the provisions of this Plan and the Award agreement, during the period set by the Committee commencing with the date of such Award (the "Restriction Period"), the Participant shall not be permitted to sell, transfer, pledge, assign or otherwise encumber shares of Restricted Stock awarded under the Plan. Within these limits, the Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, based on service, performance and/or such other factors or criteria as the Committee may determine. (f) Rights Pending Lapse of Restrictions or Forfeiture of Award. Except as provided in this subsection (f) and subsection (e) above, the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares, and the right to receive any cash dividends. The Committee, as determined at the time of Award, -11- may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional Restricted Stock to the extent shares are available under Section 4. (g) Effect of Termination of Employment or Association. Unless otherwise determined by the Committee and subject to the applicable provisions of the Award agreement and this Section 9, upon termination of a Participant's employment or other association with the Company and its Affiliates for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the Participant; provided, however, that military or sick leave shall not be deemed a termination of employment or other association, if it does not exceed the longer of 90 days or the period during which the absent optionee's reemployment rights, if any, are guaranteed by statute or by contract. (h) Lapse of Restrictions. If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, the certificates for such shares shall be delivered to the Participant promptly if not theretofore so delivered. 10. LONG-TERM PERFORMANCE AWARDS 10.1. Provision for Grant. Long-Term Performance Awards may be awarded either alone or in addition to other Awards granted under the Plan. The Committee shall determine the nature, length and starting date of the performance period (the "Performance Period") for each Long-Term Performance Award, which subject to Section 13 below shall be a period of at least two years, and shall determine the performance objectives to be used in valuing Long-Term Performance Awards and determining the extent to which such Long-Term Performance Awards have been earned. Performance objectives may vary from Participant to Participant and between groups of Participants and shall be based upon such Company, business unit and/or individual performance factors and criteria as the Committee may deem appropriate, including, but not limited to, earnings per share or return on equity. Performance Periods may overlap and Participants may participate simultaneously with respect to Long-Term Performance Awards that are subject to different Performance Periods and/or different performance factors and criteria. 10.2. Periodic Determination of Performance. At the beginning of each Performance Period, the Committee shall determine for each Long-Term Performance Award subject to such Performance period the range of dollar values or number of shares of Stock to be awarded to the Participant at the end of the Performance period if and to the extent that the relevant measure(s) of performance for such Long Term Performance is (are) met. Such dollar values or number of shares of Stock may be fixed or may vary in accordance with such performance or other criteria as may be specified by the Committee. 10.3. Adjustment of Awards. In the event of special or unusual events or -12- circumstances affecting the application of one or more performance objectives to a Long-Term Performance Award, the Committee may revise the performance objectives or underlying factors and criteria applicable to the Long-Term Performance Awards affected, to the extent deemed appropriate by the Committee, to avoid unintended windfalls or hardship. 10.4. Effect of Termination of Employment or Association. Unless otherwise determined by the Committee, upon termination of a Participant's employment or other association with the Company and its Affiliates for any reason during a Performance period, the Participant shall not be entitled to any payment with respect to the Long-Term Performance Awards subject to such Performance period; provided, however, that military or sick leave shall not be deemed a termination of employment or other association, if it does not exceed the longer of 90 days or the period during which the absent Participant's reemployment rights, if any, are guaranteed by statute or by contract. 10.5. Form of Payment. The earned portion of a Long-Term Performance Award may be paid currently or on a deferred basis with such interest or earnings equivalent as may be determined by the Committee. Payment shall be made in the form of cash or whole shares of Stock, including Restricted Stock, either in a lump sum payment or in annual installments commencing as soon as practicable after the end of the relevant Performance Period, all as the Committee shall determine at or after grant. 11. STOCK GRANTS In recognition of significant contributions to the success of the Company or its Affiliates, and in such other circumstances as the Committee deems appropriate shares of Stock may be issued either alone or in addition to other stock or cash-based Awards granted under the Plan at such price, if any, as the Committee may determine. Subject to adjustment pursuant to Section 4(c) above, the number of shares awarded as Stock Grants shall not exceed 125,000 of the 1,250,000 shares of Stock subject to this Plan. Stock Grant Awards shall be made without forfeiture conditions of any kind and otherwise pursuant to such terms and conditions as the Committee may determine. 12. RESTRICTIONS ON ISSUANCE OF SHARES 12.1. Securities Laws. Notwithstanding any other provision of the Plan, if, at any time, in the reasonable opinion of the Company the issuance of shares of Stock covered by any Award granted under the Plan may constitute a violation of law, then the Company may delay such issuance and the delivery of a certificate for such shares until (i) approval shall have been obtained from such governmental agencies, other than the Securities and Exchange Commission, as may be required under any applicable law, rule, or regulation; and (ii) in the case where such issuance would constitute a violation of a law administered by or a regulation of the -13- Securities and Exchange Commission, one of the following conditions shall have been satisfied: (a) the shares with respect to which such Option has been exercised are at the time of the issue of such shares effectively registered under the Securities Act of 1933, as amended (the "Securities Act"); or (b) a no-action letter in form and substance reasonably satisfactory to the Company with respect to the issuance of such shares shall have been obtained by the Company from the Securities and Exchange Commission. The Company shall make all reasonable efforts to bring about the occurrence of said events. 12.2. Investment Representation. Unless the shares to be issued in connection with any Award granted under the Plan have been effectively registered under the Securities Act, the Company shall be under no obligation to issue any shares covered by such Award unless the person to acquire such shares shall give a written representation to the Company which is satisfactory in form and substance to its counsel and upon which the Company may reasonably rely, that he or she is acquiring the shares issued pursuant to such Award as an investment and not with a view to, or for sale in connection with, the distribution of any such shares. 12.3. Placement of Legends; Stop Orders; etc. Each share of Stock issued pursuant to an Award granted under this Plan may bear a reference to the investment representation made in accordance with Section 12.2 in addition to any other applicable restriction under the Plan, the terms of the Award, and any applicable Shareholders Agreement and Employment Agreement, and to the fact that no registration statement has been filed with the Securities and Exchange Commission in respect to said Stock. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 12.4. Registration. If the Company shall deem it necessary or desirable to register under the Securities Act or other applicable statutes any shares with respect to which an Option shall have been granted or to qualify any such shares for exemption from the Securities Act or other applicable statutes, then the Company shall take such action at its own expense. The Company may require from each Participant, and each holder of shares of Stock acquired pursuant to an Award granted under the Plan such information in writing for use in any registration statement, prospectus, preliminary prospectus or offering circular as is reasonably necessary for such purpose and may require reasonable indemnity to the Company and its officers and directors from such holder against all losses, claims, damage and liabilities arising from such use of the information so furnished and caused by any -14- untrue statement of any material fact therein or caused by the omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. 12.5. Applicability of Shareholders Agreement. Whenever shares are to be issued pursuant to an Award granted hereunder, the Company shall have the right to require the Participant to execute and deliver and otherwise become a party to the Shareholders Agreement in respect of such shares. 13. EFFECT OF CERTAIN TRANSACTIONS 13.1. Liquidation or Dissolution of the Company. In the event of a proposed dissolution or liquidation of the Company, each outstanding Award granted hereunder shall terminate (i.e., Options and Stock Appreciation Rights shall lapse, Restricted Stock shall be forfeited and any Performance Awards cancelled) immediately prior to the consummation of such action, without any payment therefore, unless otherwise provided by the Committee. As to outstanding Options, the Committee may, in the exercise of its sole discretion in such instances, declare that any such Option shall terminate as of a date fixed by the Committee and give each Optionee the right to exercise his option as to all or any part of the shares of Stock covered by an Option for a period of twenty (20) days following such date, including shares of Stock as to which the Option would not otherwise be exercisable. 13.2. Sale of Assets, Merger or Consolidation. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger or consolidation of the Company with or into another corporation in a transaction in which the Company does not survive, the Committee may, in the exercise of its sole discretion in such instances, give each Participant the right to exercise his Option as to all or any part of the shares of Stock covered by an Option, including shares of Stock as to which the Option would not otherwise be exercisable, waive any remaining restrictions applicable to Restricted Stock and provide for the pro rata payment of Performance Awards based on performance through the date of such transaction. In the event the Committee elects to authorize the exercise of outstanding and otherwise unexercisable Options, the Committee shall notify the Participant that the Option shall be fully exercisable for a period of not less than twenty (20) nor more than sixty (60) days from the date of such notice, and if such Option shall not be exercised, the Committee may, in the exercise of its sole discretion in such instances, determine that the Option shall terminate upon the expiration of such period and be of no further force or effect. 14. TERMINATION AND AMENDMENT OF THE PLAN AND AWARDS The Board may at any time terminate the Plan or make such modifications of the Plan as it shall deem advisable. No termination or amendment of the Plan may, without the consent of the Participant to whom any Award shall theretofore have -15- been granted, adversely affect the rights of such Participant under such Award. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without the Participant's consent. 15. MISCELLANEOUS PROVISIONS 15.1. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of any other general creditor of the Company. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to Awards hereunder, provided, however, unless the Committee otherwise determines with the consent of the affected participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. 15.2. Adoption of Other Plans. Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. 15.3. Payments on Death. The Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant's death are to be paid. 15.4. Tax Withholding. (a) In General. No later than the date as of which an amount first becomes includable in the gross income of the Participant for federal income tax purposes with respect to any Award, the Participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state, or local taxes of any kind required by law to be withheld (whether so required to secure an otherwise available tax deduction or otherwise) with respect to such amount. If authorized by the Committee at the grant of an Award (or, other than in the case of Incentive Option, at any time thereafter) and so elected by the Participant, the minimum required withholding obligations may be settled with Stock, including Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant. (b) Disqualifying Dispositions. The Company may require as a -16- condition to the issuance of shares covered by any Incentive Option that the party exercising such Option give a written representation to the Company which is satisfactory in form and substance to its counsel and upon which the Company may reasonably rely, that he or she will report to the Company any disposition of such shares prior to the expiration of the holding periods specified by Section 422(a)(1) of the Code. If and to the extent that the realization of income in such a disposition imposes upon the Company federal, state, local or other withholding tax requirements, or any such withholding is required to secure for the Company an otherwise available tax deduction, the Company shall have the right to require that the recipient remit to the Company an amount sufficient to satisfy those requirements. 15.5. Limitation of Rights in Stock. No Participant shall not be deemed for any purpose to be a stockholder of the Company with respect to any of the shares of Stock covered by an Award, except to the extent any payment required therefor shall have been received by the Company and a certificate shall have been issued therefor and delivered to the Participant or his or her agent (or, in the case of Restricted Stock, the Company as escrow agent). Any Stock issued pursuant to an Award shall be subject to all restrictions upon the transfer thereof which may be now or hereafter imposed by the Certificate of Incorporation, the By-laws of the Company, the Shareholders Agreement and the Employment Agreement. 15.6. No Special Employment or Other Rights. Nothing contained in the Plan or in any Award shall confer upon any Participant any right with respect to the continuation of his or her employment or other association with the Company (or any Affiliate), or interfere in any way with the right of the Company (or any Affiliate), subject to the terms of any separate employment or consulting agreement or provision of law or corporate articles or by-laws to the contrary, at any time to terminate such employment or consulting agreement or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an Award under the Plan. 15.7. Notices and Other Communications. All notices and other communications required or permitted under the Plan shall be effective if in writing and if delivered or sent by certified or registered mail, return receipt requested (a) if to the Participant, at his or her residence address last filed with the Company, and (b) if to the Company, at 195 Albany Street, Cambridge, MA 02139 Attention: Treasurer or to such other persons or addresses as the Participant or the Company may specify by a written notice to the other from time to time. 15.8. Governing Law. The Plan and all Awards and actions taken thereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without regard to the conflict of laws principles thereof. -17- Date of Board Approval: June 16, 1993 Date of Shareholder Approval: June 24, 1993 TRANSKARYOTIC THERAPIES, INC. Amendment No. 1 to 1993 Long Term Incentive Plan Section 7.2(c) of the Plan is amended and restated in its entirety to read as follows: "(c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant. If the Committee provides, in its discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee may determine." Adopted by the Board of Directors on January 22, 1998 EX-27 3 EX-27
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 25,114 99,801 0 0 0 125,902 12,226 8,033 130,450 2,307 0 0 0 190 127,953 130,450 0 575 0 6,895 0 0 0 (6,320) 0 (6,320) 0 0 0 (6,320) (0.24) (0.24)
EX-99 4 EX-99 Exhibit 99 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, 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 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 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 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 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. 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. 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 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. -----END PRIVACY-ENHANCED MESSAGE-----