-----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, OBX6TUwFwzQnGI+5wuFpsFGWZXUYP/pRdsiM3vQelCP+/K5xpdnMC3+inWIC408/ VsOAskqw1KmV53SnVRvecw== 0001047469-99-012664.txt : 19990402 0001047469-99-012664.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012664 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K SEC ACT: SEC FILE NUMBER: 000-21481 FILM NUMBER: 99580213 BUSINESS ADDRESS: STREET 1: 195 ALBANY ST CITY: CAMBRIDGE STATE: MA ZIP: 02138 BUSINESS PHONE: 6173490200 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 0-21481 TRANSKARYOTIC THERAPIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ----------------- DELAWARE 04-3027191 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 195 ALBANY STREET CAMBRIDGE, MASSACHUSETTS 02139 (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 349-0200 ----------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 5, 1999, the approximate aggregate market value of the voting stock held by non-affiliates of the registrant was $214,000,000, based on the last reported sale price of the registrant's Common Stock on the Nasdaq National Market as of the close of business on March 5, 1999. There were 19,166,209 shares of Common Stock outstanding as of March 5, 1999. DOCUMENTS INCORPORATED BY REFERENCE Document 10-K Part - -------- --------- Specifically Identified Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 10, 1999 III - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS SUMMARY Transkaryotic Therapies, Inc. ("TKT" or "the Company") is a biopharmaceutical company dedicated to the development and commercialization of products based on its three proprietary development platforms--Gene Activated(TM) proteins, Niche Protein(TM) products and gene therapy. The Company's Gene Activation(TM) technology is a proprietary approach to the large scale production of therapeutic proteins which does not require the cloning of genes and their subsequent insertion into non-human cell lines. Consequently, the Company believes its Gene Activation technology avoids using patented approaches to protein production associated with such conventional genetic engineering techniques which have served as effective barriers to competition in the protein therapeutics market, which the Company estimates is a $15 billion market (1998 worldwide revenues). As a result, the Company believes it will be able to develop and successfully commercialize a broad range of Gene Activated versions of proteins which have proven medical utility, received marketing approval from regulatory authorities and generated significant revenues in major markets. The Company's most advanced Gene Activation development program is Gene Activated erythropoietin ("GA-EPO(TM)"), which Hoechst Marion Roussel, Inc. ("HMRI"), the Company's collaborative partner, advanced into Phase III trials in September 1998. See "Item 3 -- Legal Proceedings." TKT's Niche Protein platform is based on protein replacement for the treatment of rare genetic diseases which are characterized by the absence of certain metabolic enzymes. Since the defect in many of these disorders is understood in depth, product development pathways have the potential to be straightforward. The Company believes that manufacturing and marketing of these products will require a relatively modest investment in infrastructure and plans to commercialize these products itself. In December 1998, the Company, in collaboration with the National Institutes of Health, initiated a Phase II clinical trial of the alpha-galactosidase A protein ("alpha-gal") in patients with Fabry disease. The Company's gene therapy technology ("Transkaryotic Therapy(TM)") is a non-viral, ex vivo system based on genetically modifying patients' cells to produce and deliver therapeutic proteins for extended periods of time. In preclinical animal studies, the Company's Transkaryotic Therapy system has produced target proteins at therapeutic levels for the lifetime of the experimental animals. In November 1998, the Company commenced a Phase I clinical trial of TKT's gene therapy system for the long-term delivery of Factor VIII for the treatment of hemophilia A. GENE ACTIVATION: TECHNOLOGY BACKGROUND PROTEIN PRODUCTION: THREE TECHNOLOGICAL WAVES. The therapeutic value of certain proteins produced by the human body has been known for decades. One of the major advances in 20th-century medicine was the development of systems for the large-scale production of therapeutic proteins outside the body. For example, prior to the development of a manufacturing process for insulin more than seventy years ago, patients with Type I (juvenile onset) diabetes were offered no effective treatment and generally died of starvation at an early age. Following the development of pharmaceutical insulin preparations for injection, Type I diabetics could live long and relatively normal lives. During this first wave of protein production technology, proteins were generally purified from human or animal tissue. Insulin, for example, was isolated from the pancreas of pigs and cattle, and growth hormone, for the treatment of short stature, was isolated from the pituitaries of cadavers. During the second wave of protein production technology, based on the cloning of human genes, proteins were manufactured using conventional genetic engineering techniques. As a result, by the mid-1980's, it became routine to engineer cells to produce therapeutic proteins at levels that were substantially in excess of what could be obtained by purification from tissue. However, since many of the proteins produced by conventional genetic engineering techniques had previously been purified, the patent protection afforded to this second wave of protein production technology tended to focus on the genes encoding therapeutic proteins. Accordingly, many patents have been issued covering isolated and purified DNA sequences encoding such proteins, various vectors used to insert such DNA sequences into production cell lines, and cell lines modified by the insertion of such DNA sequences. TKT believes its proprietary Gene Activation technology represents the third wave in the evolution of protein production technology in that it is based on the activation of genes encoding therapeutic proteins in human cells rather than the cloning and transfer of these genes. TKT's Gene Activation technology avoids using the approach to protein production associated with the second wave. The Company believes this will allow it to develop and commercialize a large number of therapeutic proteins, including potentially improved versions of many that are currently marketed. GENE STRUCTURE AND REGULATION OF GENE EXPRESSION. Recent advances in molecular biology, cell biology, and genomics have led to a much better understanding of the structure and function of human genes than was possible only a few years ago. It is now generally accepted that virtually all genes contain certain DNA sequences that provide information necessary for the cell to assemble a specific sequence of amino acids that make up a protein ("coding DNA sequences"). Thus each gene can be viewed as the blueprint for a particular protein, and "gene expression" is the process which leads to the synthesis of the protein it encodes. Gene expression is controlled by certain DNA sequences which function as switches that "turn on" the gene and trigger the synthesis of the protein ("regulatory DNA sequences"). Despite the staggering variety of proteins synthesized by the cells of the body, this process is universal. Essentially every human cell contains the same set of approximately 100,000 genes, but each cell type actually produces only a subset of the 100,000 proteins possible. For example, although essentially all human cells contain the insulin gene, only certain cells of the pancreas actually produce insulin. The regulatory switches that turn on gene expression in the appropriate cell type also turn off gene expression in all other cell types. For this reason, only pancreatic cells express insulin--the regulatory DNA sequences normally associated with the insulin gene prevent expression elsewhere in the body. TKT's Gene Activation technology is based on activating previously silent genes by bypassing regulatory DNA sequences set in the "off position" with regulatory DNA sequences set in the "on position." CONVENTIONAL RECOMBINANT PROTEIN PRODUCTION. By the 1970's, the clinical benefits of several proteins were well-known and the potential benefit of many others was envisioned. Based on a series of basic discoveries in the 1960's and 1970's, scientists learned to clone and manipulate genes of therapeutic interest, leading directly to the birth of the biotechnology industry and the large scale production of therapeutic proteins. To produce large quantities of a therapeutic protein using conventional genetic engineering techniques, scientists first clone the relevant human gene by isolating the coding DNA sequences for the gene from the human cell and transferring them to bacteria, where large quantities of the gene are copied. The cloned gene is then isolated from the bacteria and placed in a test tube. In this test tube, the cloned gene is then fused to appropriate regulatory DNA sequences, and the resulting DNA fragment containing both the regulatory DNA sequences and the coding DNA sequences is inserted into a non-human (mammalian, yeast, or bacterial) cell. This genetically modified cell is then propagated in large bioreactors for commercial-scale production of the protein. TKT'S GENE ACTIVATION TECHNOLOGY Although the conventional approach to recombinant protein production is quite powerful, its use today faces certain commercial barriers and technical limitations. The primary barrier is that biotechnology companies have sought and obtained patent protection covering many of the techniques used to produce commercially-marketed proteins using conventional genetic engineering techniques. -2- These patent rights have served as an effective entry barrier, minimizing competition in the $15 billion protein therapeutics market (1998 worldwide revenues). In addition, conventional genetic engineering techniques for protein production may face technical limitations arising from the need to first clone the gene of interest. For certain proteins, this step adds to development times, increases costs and is technically challenging. Technical difficulties may also arise from the use of non-human production cell lines, which may result in the production of proteins which may have therapeutically significant differences from those naturally produced by the cells of the human body. Furthermore, production processes based on conventional genetic engineering may not have incorporated recent advances in cell culture systems with significant efficiency and cost advantages as compared to processes originally developed over a decade ago. To overcome these commercial barriers and technical limitations, TKT has developed Gene Activation technology for the production of therapeutic proteins that does not rely on the manipulation of cloned genes. Using its proprietary technology, TKT has succeeded in producing therapeutic proteins in human cells by bypassing regulatory DNA sequences set in the "off position" with regulatory DNA sequences set in the "on position" in order to activate the gene of interest. The Company's Gene Activation technology does not require the manipulation of the protein coding DNA sequences of the gene. The bypass of an "off switch" with an "on switch" is accomplished by "gene targeting." Gene targeting is a technology by which DNA fragments can be "cut and pasted" precisely at pre-selected, desirable locations within the cell's genome. Gene targeting can be thought of as molecular surgery, with the surgical tools literally functioning at the molecular level. The technical term for gene targeting, homologous recombination, reflects its underlying mechanism: cells have the capacity to align two homologous DNA sequences (two sequences that are quite similar) and exchange one with the other. In Gene Activation, the new regulatory sequences are flanked with "homing" sequences and structural sequences which allow the cell to exchange the new active regulatory sequences in place of the old inactive ones. The new sequences must be introduced precisely in order to allow the proper initiation of gene expression. In order to manufacture a protein of therapeutic interest using Gene Activation, a human cell line producing the protein must be generated. This cell line will ultimately become the master cell bank for large scale manufacturing and is generated as follows: 1. Determine the sequence of a portion of the regulatory DNA sequences that control the gene of interest; 2. Build a "targeting fragment" by fusing homing sequences to a new regulatory region known to be active in the human cell line chosen for manufacturing; 3. Introduce the targeting fragment into the cell line; 4. Identify and propagate an activated cell line producing the protein of interest; and 5. Optimize protein productivity and prepare the cell line for commercial scale manufacturing. The Company has successfully accomplished all of the steps described above for GA-EPO and its second, undisclosed Gene Activated product ("GA-II"). The results of TKT's work in this area have led to proof-of-concept that (i) gene targeting can be used to direct the integration of regulatory and structural sequences to a specific, pre-selected position in the genome, (ii) the product of the targeting event is a cell containing an activated gene and (iii) the protein production properties of cells created by Gene Activation are predictable and suitable for, and have been successfully used in, large-scale manufacturing. Accordingly, -3- the Company believes that these methods may be used to express a wide variety of therapeutically valuable proteins at levels suitable for large-scale manufacturing purposes. Because the Gene Activation process avoids many of the technical limitations of conventional recombinant protein production technology, the Company also believes that the Gene Activation process is at least as efficient as, and may be more cost effective than, conventional genetic engineering techniques for protein production. TKT'S GENE ACTIVATION PRODUCTS The Company's initial strategy in exploiting its technology is to commercialize Gene Activated proteins that have proven medical utility, have received marketing approval from regulatory authorities and have achieved significant revenues in major markets. These protein products have experienced high rates of acceptance among physicians and health care providers. The Company believes, based primarily on information obtained from annual reports of public companies and other published sources, that the total sales of the ten largest marketed proteins in 1998 was approximately $15 billion. See Table I. As the number of new approved protein products increases and as the number of approved indications for such products increases, the Company believes that the market for these protein products will continue to experience substantial growth. The Company also believes that the broad applicability of its Gene Activation technology for protein production and the fact that many additional proteins are currently in clinical development will provide a large number of candidates for commercialization using TKT's Gene Activation technology. TABLE I. COMPANY ESTIMATE OF 1998 WORLDWIDE PROTEIN PRODUCT REVENUES (IN MILLIONS)
PROTEIN PRIMARY INDICATION REVENUES ------- ------------------ -------- Erythropoietin Anemia $3,900 Insulin Diabetes 2,800 G-CSF Neutropenia 1,900 Growth Hormone Short stature 1,500 alpha Interferon Hepatitis/Cancer 1,300 Factor VIII Hemophilia A 1,300 beta Interferon Multiple sclerosis 800 FSH Infertility 800 tPA Myocardial infarction 400 Glucocerebrosidase Gaucher disease 400
TKT has focused its initial Gene Activation efforts on the development of its GA-EPO product in collaboration with HMRI. Erythropoiesis is the process by which red blood cells (erythrocytes) are produced. When the body requires additional red blood cells, the kidney normally produces erythropoietin, a circulating protein hormone which stimulates the differentiation of certain progenitor cells in the bone marrow. The kidney's critical role in red blood cell production was determined in the 1950's, and erythropoietin was first isolated and purified from the urine of patients with anemia in the 1970's (the first wave). The gene encoding erythropoietin was cloned in the 1980's and used for production of the protein using conventional genetic engineering techniques (the second wave). Erythropoietins have been successfully used to treat anemia associated with a variety of conditions, including the anemia of kidney failure (which causes a reduction in the body's ability to produce the protein) and the anemia of chemotherapy (which causes the destruction of a large number of bone marrow progenitor cells). -4- GA-EPO DEVELOPMENT STATUS. TKT has successfully applied its Gene Activation technology to produce GA-EPO in human cells (the third wave). To illustrate the underlying concept of the Gene Activation process, consider that essentially all human cells contain the erythropoietin gene, yet only certain cells of the kidney actually produce erythropoietin. In all other cells in the human body, the erythropoietin gene is inactive. The erythropoietin gene is not expressed in most human cells because regulatory sequences in those cells prevent the protein from being made; the gene is controlled by a switch ("regulatory DNA sequences") that is permanently in the "off" position. The goal of TKT's GA-EPO program was to remove this "off switch" in a human cell in which the erythropoietin gene is inactive and, in effect, replace it with regulatory sequences comprising an "on switch" to activate erythropoietin expression. TKT has generated a GA-EPO producing cell line that has been scaled up to commercial production levels. To accomplish this, TKT first studied the regulatory region that prevents expression of the erythropoietin gene in most human cells and developed an activation strategy. Next, a targeting fragment was constructed by fusing certain homing sequences to a new regulatory region known to be active in the human cell line chosen for manufacturing. The targeting fragment was then introduced into the cell line under conditions appropriate for homologous recombination to occur, and a resulting cell line that produced GA-EPO was identified. The GA-EPO productivity of the cell line was optimized, and the cells were prepared for commercial-scale manufacturing. The production process is at commercial scale and has been successfully used to produce GA-EPO for clinical trials. The purified protein has been subjected to an extensive series of analyses and has the properties expected of a human erythropoietin preparation. In particular, the protein has an appropriate molecular weight, amino acid composition, amino acid sequence, secondary structure, and glycosylation profile. GA-EPO has been shown to function in vitro and in vivo in a dose-dependent manner. Finally, preclinical safety tests performed to date have yielded satisfactory results. In a Phase I study completed in 1997 by HMRI, twelve healthy volunteers were administered GA-EPO. The goal of the study was to assess safety of GA-EPO administration. The study demonstrated that GA-EPO exhibited a satisfactory safety profile and resulted in a dose-dependent increase in hematocrit. In 1998, HMRI completed a Phase II study of GA-EPO. Thirty-two patients with end stage renal disease were treated in two dosage groups. The Phase II trial resulted in no adverse events related to GA-EPO and demonstrated a dose-dependent increase in hematocrit. In September 1998, HMRI commenced Phase III trials of GA-EPO, the goal of which is to support a Biologics License Application ("BLA") for U.S. FDA approval for the indications of renal failure in patients who are receiving dialysis and in patients who are not yet undergoing dialysis. Furthermore, the clinical program has been designed to obtain FDA approval for intravenous and subcutaneous administration of GA-EPO. The program is expected to be completed by the end of 1999. During 1999, HMRI is expected to commence a Phase III trial of GA-EPO for oncology related anemia. GA-EPO is being reviewed within the FDA by the Center for Biologics Evaluation and Research ("CBER"). DEVELOPMENT STATUS OF OTHER GENE ACTIVATION PRODUCTS. In collaboration with HMRI, TKT is developing GA-II. HMRI accepted for development the Gene Activated cell line for GA-II in June 1997 and manufacturing is at commercial scale. Pre-clinical testing is in progress, with satisfactory results achieved to date. The Company expects HMRI to file an Investigational New Drug application ("IND") for this product in 1999. -5- TKT's third Gene Activated protein ("GA-III") is in pre-clinical testing. Manufacturing scale-up is in process, and the Company expects to file an IND for this product in late 1999 or early 2000. TKT is currently developing GA-III independently. TKT believes that numerous development opportunities exist for Gene Activated proteins. In addition to the proteins discussed above, the Company is currently developing four other Gene Activated proteins. These programs are in the research or pre-clinical stage. GENE ACTIVATION COLLABORATIONS AND COMMERCIALIZATION STRATEGY In order to rapidly develop and exploit its Gene Activation technology, TKT has entered into two strategic alliances with HMRI, the first in May 1994 and the second in March 1995. HMRI, with its affiliates, is one of the largest pharmaceutical groups in the world, with significant distribution capabilities in all major markets. The alliances are focused on the development of two products, GA-EPO and GA-II. Under two licenses agreements, HMRI was granted worldwide exclusive rights to make, use and sell the two products. HMRI is responsible, at its own expense, for all worldwide development, manufacturing and marketing activities for both products. Pursuant to the agreement pertaining to GA-II, TKT also granted HMRI an option to commercialize certain aspects of TKT's gene therapy technologies. As to both products, TKT has successfully generated cell lines sufficient for scale-up to commercial production levels that have been accepted and scaled up by HMRI. TKT has the potential to receive up to $125,000,000 ($58,000,000 for GA-EPO and $67,000,000 for GA-II) from HMRI from the two alliances, consisting of license fees, equity investments, milestones and research funding. As of December 31, 1998, TKT had received approximately $57,000,000 of such amount (approximately $26,500,000 for GA-EPO and approximately $30,500,000 for GA-II). The remaining payments are contingent upon the achievement of milestones in connection with the continued development of these products. TKT also is entitled to royalties on sales of these two products. In December 1998, HMRI announced its intention to merge with Rhone-Poulenc SA. The merger is expected to be completed in 1999, subject to regulatory approval, and will create the second largest global pharmaceutical company. Future Gene Activation products may include currently-marketed proteins, proteins currently in late stage clinical development or proteins that are in much earlier stages of development. At present, TKT intends to focus on the currently-marketed products until products from these latter two categories demonstrate clinical and commercial viability. TKT believes that its focus on currently-marketed proteins for near-term commercialization and on development-stage proteins for the long-term appropriately utilizes Company resources, maximizes near-term commercial potential and will allow the Company to build a strong Gene Activation product pipeline for the future. NICHE PROTEIN(TM) PRODUCT DEVELOPMENT PLATFORM It is well established that certain genetic diseases are caused by the deficiency of a single, well-defined protein. Therefore, the most direct approach to treatment is to manufacture the missing protein and administer it to the patient. TKT's Niche Protein development is focused on developing protein replacement products to treat patients suffering from rare genetic diseases characterized by protein deficiencies such as Fabry disease, Gaucher disease, Hurler syndrome, Hunter syndrome, Pompe disease, and Tay-Sachs disease. Due to mutations in certain genes, individuals with these rare genetic diseases are born lacking the ability to produce sufficient amounts of a specific protein, resulting in symptoms which can be -6- debilitating and, ultimately, life threatening. Unfortunately, no effective treatment currently exists for most of these rare diseases. The Company plans to develop and commercialize products for a number of these diseases, with the goal of reducing symptoms and potentially reversing progression of the disease. TKT'S NICHE PROTEIN(TM) DEVELOPMENT PROGRAMS AND COMMERCIALIZATION STRATEGY The Company's product development strategy for its Niche Protein platform is to leverage the Company's core competencies in gene expression, cell culture, and protein characterization to create protein replacement products to treat rare genetic diseases which are characterized by the absence of certain metabolic enzymes. Since the defects in many of the diseases which the Company intends to address with its Niche Protein platform are understood in depth, product development pathways have the potential to be straightforward. The Company is currently developing seven niche protein products, including treatments for Fabry disease, Hunter syndrome, and Gaucher disease. The Company believes that it will be able to arrange for manufacturing of its Niche Protein products under the terms of contract manufacturing agreements. In addition, the Company believes that it will be able effectively to serve Niche Protein markets with a small, focused sales force, thereby limiting the Company's investment in sales and marketing infrastructure. Thus, TKT views its Niche Protein program as a nearer term opportunity to move into a series of markets with a cost-effective, lower-risk approach and thereby build a commercialization capability. TKT expects to develop and commercialize these products in the U.S. and Europe and obtain collaborative partners for Japan. FABRY DISEASE. TKT's first target in the Niche Protein program is Fabry disease. Fabry disease is an X-linked lysosomal storage disease caused by the deficiency of alpha-gal. The disorder is characterized by the accumulation of lipids in lysosomes of vascular endothelial and smooth muscle cells and in a variety of other tissues. Patients with classic Fabry disease of early onset, generally in adolescence, show diverse clinical manifestations including severe pain and cardiovascular and renal complications. It is estimated that there are several thousand Fabry disease patients in the developed world. Current treatment of the disease is limited to the reduction of symptoms. Clinical trials of enzyme replacement therapy in the late 1970's have been reported using infusions of alpha-gal purified from placenta, spleen or plasma. The intravenous injection of the enzyme resulted in the transient reduction in the plasma levels of the deleterious lipid. The Company believes that enzyme replacement therapy could result in an elimination of the medium- and long-term complications of the disease and in an increased life expectancy and improved quality of life. In 1997, the Company, in collaboration with the National Institutes of Health under a collaborative research and development agreement ("CRADA"), conducted a Phase I clinical trial designed to characterize the safety and pharmacokinetic profile of alpha-gal. Ten patients with Fabry disease were treated with a single dose of highly purified alpha-gal manufactured at TKT, with two patients treated at each of five escalating dose levels. Plasma half-life and alpha-gal enzyme activity were examined before and after treatment, along with a series of clinical and laboratory safety assessments. Nine out of ten patients showed a reduction of the toxic lipid that causes the symptoms of Fabry disease, with the reduction observed in both liver and kidney. The treatment was well-tolerated, and no clinically significant side-effects were observed. The half-life of the enzyme appears to support dosing at intervals of one week or longer. The Company initiated Phase II trials of its alpha-gal product in December 1998 with patients with Fabry disease. The 24 patient, placebo-controlled trial is being conducted at the National Institutes of Health and is expected to be completed by the end of 1999. The goal of the study is to assess safety and efficacy of the alpha-gal protein as a treatment for the disorder. -7- The Company has received Fast Track designation for alpha-gal from the FDA; accordingly, the FDA is expected to review the Company's BLA within six months of submission. TKT has also received Orphan Drug status for alpha-gal, potentially giving the Company a seven year market exclusivity in the U.S. following FDA approval. The Company has entered into a contract manufacturing agreement to produce alpha-gal. Development of a cell line for commercial manufacturing has been completed. In December 1998, the Company announced that it had entered into a distribution agreement with Sumitomo Pharmaceuticals Co., Ltd. to commercialize TKT's alpha-gal in Japan and other Asian territories. Under the terms of the agreement, Sumitomo paid TKT an upfront fee of $2,000,000 and is obligated to make additional payments to TKT as the product moves through development and commercialization. HUNTER SYNDROME. TKT's second target in the Niche Protein platform is Hunter syndrome. Hunter syndrome is a X-linked lysosomal storage disorder caused by a deficiency of the enzyme iduronate-2-sulphatase (I2S). As a result of this deficiency, complex carbohydrates accumulate in cells of the body, causing debilitating symptoms in the patient. Physical manifestations include skeletal deformities, obstructive airway disease, cardiac failure and, in severe cases, central nervous system involvement. Cardiac and respiratory illness are often the cause of death at an early age in patients with the disorder. It is estimated that there are several thousand Hunter syndrome patients in the developed world. The Company believes that I2S enzyme replacement therapy could result in an elimination of many of the clinical manifestations associated with Hunter syndrome and an increased life expectancy and quality of life. The Company plans to file an IND covering its I2S product in late 1999 or early 2000. The Company has entered into a contract manufacturing agreement to produce I2S. A commercial quality cell line has been developed, and commercial scale up is nearing completion. GENE THERAPY TECHNOLOGY TKT'S GENE THERAPY APPROACH. The first three waves of protein production have a critical feature in common: regardless of methodology, the proteins are manufactured outside the human body. The Company believes that its approach to gene therapy, Transkaryotic Therapy, represents the fourth wave of protein production--a system that would restore the patient's natural ability to produce a required therapeutic protein. TKT's approach to gene therapy is based on genetically modifying patients' cells to produce and deliver therapeutic proteins for extended periods. The Company believes the approach will be safe, cost-effective and clinically superior to the conventional delivery of proteins by injection. In preclinical animal studies, a single administration of one of the Company's gene therapy products resulted in the lifetime production and delivery of therapeutic proteins. TKT believes its gene therapy system is broadly enabling and, accordingly, may be applicable to the treatment of a wide range of human diseases. Because TKT's gene therapy has demonstrated long-term delivery of therapeutic proteins in animal model systems, the Company believes its approach may be well-suited to the treatment of chronic protein deficiency states including hemophilia, diabetes and hypercholesterolemia. The diseases targeted by TKT are characterized by a significant unmet medical need, and the clinical goals that must be achieved by TKT's gene therapy products are well-defined. The potential benefits of TKT's gene therapy products include improved therapeutic outcome, elimination of frequent painful injections and the problem of patient compliance, a minimization of side effects due to over- or under-dosing of conventional proteins and a reduction in costs. There are a large number of technical approaches to gene therapy, but two basic distinctions can be used to characterize the field. The first distinction is viral versus non-viral. Viral gene therapy -8- approaches use genetically modified viruses to introduce genes into human cells by infection. Non-viral approaches use noninfectious (chemical or physical) means to introduce the genes. The second distinction is in vivo versus ex vivo. in vivo gene therapies are based on the administration of DNA-based drugs directly to the patient. ex vivo gene therapies are based on removing a small number of cells from a patient, introducing a gene into the cells and implanting the engineered cells into the patient. TKT's enabling gene therapy technology platform is a non-viral, ex vivo system which the Company believes is significantly different from other approaches to gene therapy. The Company believes that these differences will allow for physiologic levels of protein expression in patients for extended periods, a goal that historically has represented a major obstacle in alternative gene therapy systems. The major alternative to TKT's system is based on the use of genetically-modified retroviruses and adenoviruses to infect patients' cells. The Company believes that such viral ex vivo approaches present a significant safety risk due to the possibility of causing new viral infections in patients. In addition, such approaches have not allowed long-term production of the therapeutic protein in animal models or patients. To the best of the Company's knowledge, neither viral nor non-viral in vivo gene therapy technologies have allowed long-term or high level protein expression in the patient. Accordingly, these technologies may be best-suited for non-chronic applications, such as immunotherapy. TKT believes Transkaryotic Therapy is well-suited to allow safe and long-term delivery of therapeutic proteins for the treatment of chronic protein deficiency states as demonstrated by the long-term delivery of therapeutic proteins in animal models. In order to develop a safe, effective, non-viral, ex vivo gene therapy system, the Company believes that several major tasks must first be accomplished in basic and preclinical settings. Each of the steps must be carried out to allow the ultimate product to be manufactured efficiently, reproducibly and cost-effectively, to be subjected to rigorous quality control to ensure safety and to direct the long-term production and delivery of the therapeutic protein in the patient. The first step involves the development of techniques for obtaining and propagating the cell types of interest. Next, non-viral methodologies must be developed that allow DNA fragments to be stably introduced into these cells. DNA fragments containing the appropriate DNA regulatory sequences fused to the desired protein encoding sequences, for example, must be constructed and introduced into cells to generate genetically-engineered cells which express the therapeutic protein at clinically relevant levels. After the DNA fragments have been successfully introduced into human cells, methodologies must then be developed which allow the engineered cells to properly process the therapeutic protein. The final step involves the development of methods and formulations for the implantation of the engineered cells. TKT scientists have successfully accomplished all of the tasks set forth in Table II and, in model systems, have successfully delivered therapeutic proteins for the lifetime of the experimental animals. Much of TKT's work has focused on gene therapy using fibroblasts, a cell type present in the skin (and throughout the body) that is readily obtained from patients and propagated in culture. The Company has developed a variety of methodologies for the stable transfection of normal human cells. "Stable transfection" means that the introduced DNA fragment becomes part of a chromosome in the treated cell. One such methodology is electroporation, a technique based on subjecting cells to a brief electrical pulse. The pulse transiently opens small pores in the cell membrane that allow the DNA fragments of interest to enter the cell. The technique is simple, reproducible (it works for a variety of cell types and for cells derived from newborns to the elderly), efficient (one electroporation provides many more transfected cells than required for treatment) and cost-effective (less than one dollar per reaction). -9- TABLE II. TKT'S GENE THERAPY SYSTEM: SUMMARY OF SELECTED TECHNICAL ACCOMPLISHMENTS
TASKS ACHIEVEMENT COMMENTS ----- ----------- -------- Cell types propagated Fibroblasts, myoblasts, mammary epithelial Cells retain normal properties cells Proteins expressed Factor VIII, Factor IX, Growth Hormone, All expressed at levels of at least 1 Insulin, Interleukin-2, LDL receptor, alpha-gal ug/million cells/day Transfection methodologies applied Electroporation, microinjection, polybrene All with efficiencies greater than 1 and calcium phosphate precipitation stably transfected cell per thousand treated cells Proteins characterized Factor VIII, Factor IX, Growth Hormone, All with natural post-translational alpha-gal modifications In vivo expression observed Factor VIII, Factor IX, Growth Hormone, All at physiologic levels in animal Insulin models
The Company believes it has developed the basic technologies required for a safe and effective gene therapy approach which can be refined and optimized for patient use. In patients, TKT envisions that, in general, the system would function as follows: 1. The clinician would identify the patient to be treated and perform a small skin biopsy. 2. In TKT's manufacturing facility, patient cells would be harvested from the biopsy specimen. 3. The DNA fragment containing DNA regulatory sequences and protein coding sequences would be introduced into the harvested cells by electroporation. The DNA fragment and the electroporation methodology would be the same for all patients with a given disease. 4. A genetically-engineered cell expressing the therapeutic protein would be identified, propagated, subjected to appropriate characterization and quality control tests and formulated in a syringe. The syringe would then be returned to the physician. 5. The physician would then inject the engineered cells under the patient's skin as an outpatient procedure. These patient techniques have been successfully carried out in an ongoing Phase I clinical trial of growth hormone as a treatment for cachexia (described below). The procedures might vary based on the disease to be treated. For example, different cell types, sites of implantation and genes of interest could be advantageous for a given disease. CLINICAL DEVELOPMENT STATUS. The Company's first gene therapy clinical trial is a Phase I study based on the implantation of genetically modified skin fibroblasts to express growth hormone in cancer patients at risk for cachexia. The principal purpose of this study is to determine the safety of the Company's gene -10- therapy in humans. At December 31, 1998, a total of 20 patients had been enrolled in five escalating dosage blocks, with four patients per block. Community physicians have injected the modified cells under the skin of subjects; all patient procedures have been performed on an out-patient basis. Preliminary data from this study suggests that the administration of the genetically-engineered cells appears to be well-tolerated. Prior to proceeding with further clinical development (beyond Phase I) of this product, the Company intends to seek a collaborative partner. In December 1998, the Company began the first clinical trial evaluating a gene therapy treatment for hemophilia. Twelve patients will be enrolled in the Phase I safety study, which will be conducted at the Beth Israel Deaconess Medical Center in Boston, Massachusetts. The trial is expected to take up to three years to complete, including a two year follow up period following the treatment phase. The Company believes that Transkaryotic Therapy offers several clinical and commercial advantages over conventional treatments and other gene therapies for targeted diseases, including: - - SAFETY. Transkaryotic Therapy does not use infectious agents such as retroviruses to genetically engineer the patient's cells. TKT's non-viral method of producing genetically engineered cells allows for extensive safety testing prior to implantation of such cells in the patient. In studies of TKT's gene therapy system involving over 5,000 animals, no side effects have been observed. - - LONG-TERM EXPRESSION. Transkaryotic Therapy is designed to produce long-term results with a single treatment. In preclinical animal studies, the Company has produced target proteins at therapeutic levels for the lifetime of the animals, suggesting the possibility of long-term effectiveness in humans. - - CONTROLLABILITY. Transkaryotic Therapy is designed to deliver therapeutic proteins at levels which meet a patient's specific needs. The Company believes that its gene therapy system will allow the physiologic and pharmacologic regulation of expression. Further, the Company believes that the treatment afforded by Transkaryotic Therapy will be readily reversible so that therapy can be discontinued if no longer required. - - FLEXIBILITY. The Company has focused on genetically-engineering a wide variety of human cell types because, although certain cell types are useful in the gene therapy of particular diseases, no single cell type is appropriate for the gene therapy of all diseases. - - EASE OF ADMINISTRATION. Transkaryotic Therapy will allow for the administration of its products by a single injection under the patient's skin on an out-patient basis. Furthermore, the potential long-term effectiveness of the treatment could eliminate problems of patient compliance. - - COST-EFFECTIVENESS. Transkaryotic Therapy takes advantage of the patient's natural ability to synthesize therapeutic proteins for extended periods. The potential benefits of Transkaryotic Therapy include improved therapeutic outcome, the elimination of frequent painful injections and patient compliance problems, a reduction of side effects due to overdosing and underdosing of conventional proteins and significant reductions in cost. Accordingly, the Company believes that its therapy may be less costly than therapy using conventional protein pharmaceuticals which require frequent administration. TKT'S GENE THERAPY DEVELOPMENT PROGRAMS AND COMMERCIALIZATION STRATEGY The Company is focusing its development efforts on gene therapy products for the treatment of chronic diseases with straightforward and well-characterized etiologies. For certain of these diseases, such as hemophilia A, effectiveness, dose ranges and safety have been clearly established in the context of -11- currently approved and marketed products. For other diseases, preliminary in vitro and animal model data strongly suggest that the long-term delivery of appropriate therapeutic proteins will effectively treat the disease. The Company believes that this initial focus will provide strategic advantages by allowing evaluation of Transkaryotic Therapy based on well understood clinical parameters, thereby facilitating the regulatory approval process. Furthermore, the Company believes that when administered as part of its proprietary gene therapy system, these proteins may provide therapeutic benefits not achievable using conventional methods of delivery. HEMOPHILIA A. When a blood vessel ruptures, an intricate series of events allows the rapid formation of a clot in normal individuals. One of the best-studied coagulation disorders is hemophilia A, caused by a deficiency or defect in protein coagulation Factor VIII. Patients with the disease experience acute, debilitating and often life-threatening bleeding episodes. Depending on the severity of the disease, bleeding may occur spontaneously or after minor trauma. Conventional treatment consists of temporarily increasing the patient's Factor VIII levels through infusions of plasma-derived or recombinantly-produced Factor VIII. Factor VIII levels typically rise to therapeutic levels for only two to three days following intravenous administration, then return to the baseline subtherapeutic level, once again placing the patient at risk for a serious bleeding episode. It is estimated that there are about 19,000 hemophilia A patients in the U.S. and Canada, 25,000 in Europe, and 4,000 in Japan. In the U.S., an adult suffering from the disease receives Factor VIII protein treatment only during bleeding crises at an average annual cost of approximately $65,000. TKT's approach to the treatment of hemophilia A is based on the production and delivery of Factor VIII using Transkaryotic Therapy. The Company believes that its Factor VIII gene therapy product has the potential to provide a constant supply of therapeutic levels of the missing protein, effectively eliminating the problem of rapid disappearance of the therapeutic protein. The Company has produced clonal populations of human fibroblasts which have been transfected to express Factor VIII in vitro, demonstrated that the protein is properly processed and achieved protein expression in animals. As described above, the Company commenced Phase I clinical trials of its gene therapy approach for the long-term delivery of Factor VIII in November 1998. In July 1993, the Company entered into a Collaboration and License Agreement with Genetics Institute, Inc. ("GI") relating to a joint development and marketing program for a hemophilia A gene therapy product based on the Company's non-viral technology. The agreement provides that the parties will collaborate to develop and commercialize a non-viral gene therapy product for the treatment of hemophilia A using TKT's proprietary technology and GI's patented Factor VIII genes. Under the agreement, GI has granted TKT a nonexclusive worldwide license under GI's patents covering truncated versions of the gene encoding Factor VIII for use in certain non-viral gene therapy applications. GI has agreed to pay a portion of the clinical development costs of the product in the U.S., Canada and the European Community. TKT retained exclusive manufacturing rights throughout the world and exclusive marketing rights to all countries of the world except those in Europe. Subject to certain conditions, GI received exclusive rights to market the product in Europe. The agreement is terminable by GI in the event certain product development and regulatory approval milestones are not reached. LONG-TERM GENE THERAPY TARGETS. The Company's long-term gene therapy product development strategy is focused on products for the treatment of commonly occurring diseases, including both juvenile- and adult-onset diabetes, hypercholesterolemia and osteoporosis. These are diseases for which either (i) a proven therapeutic protein exists but effective treatment of the disease requires complex patterns of regulation in the patient (for example, insulin is widely used in the treatment of diabetes but delivery of insulin by conventional methods is imprecise and does not prevent the serious complications of the disease) or (ii) no protein has yet been proven effective in treating the disease (for example, many proteins are thought to have potential in the treatment of hypercholesterolemia, but that has yet to be proven conclusively in patients). -12- MANUFACTURING. One of the critical aspects of any cell-based therapy is the approach to manufacturing. The manufacturing process takes up to six weeks. It is essential to optimize the process to allow for a commercially-viable product, and the Company believes it has accomplished such optimization. To produce early clinical materials, TKT has constructed a pilot manufacturing facility designed to conform to FDA guidelines for Current Good Manufacturing Practice ("cGMP"). For Phase III clinical trials and commercialization, TKT intends to construct a cGMP-certified facility. The Company intends to manufacture its gene therapy products in central manufacturing facilities. Initially, the Company plans to construct a central facility to serve the U.S. As the Company's product pipeline matures, the Company believes that demand will increase, possibly requiring the Company to construct an additional manufacturing facility in the U.S. Other gene therapy companies have adopted a strategy based on locating a cell processing facility in every large city (or potentially large hospital). TKT believes that the requirements for strict quality control and the benefits of economy of scale are better achieved using the central manufacturing strategy. PATENTS, PROPRIETARY RIGHTS AND LICENSES PROPRIETARY ISSUES. For many currently marketed proteins, the product manufactured using conventional genetic engineering techniques does not represent the first time the protein was isolated and purified. As such, it was generally not possible to obtain a broad composition of matter patent for many of the currently marketed proteins. In contrast, the isolated and purified DNA sequences encoding these proteins, various vectors used to insert such DNA sequences into production cell lines, cell lines modified by the insertion of such DNA sequences, and corresponding methods (including methods of producing proteins using this approach) led to issued patents in many cases. TKT believes that, by completely avoiding the use of isolated and purified DNA sequences encoding proteins of commercial interest, the Company's technology does not infringe claims based on isolated and purified DNA sequences encoding such proteins. Furthermore, the Company intends to avoid the use of technologies (such as specific protein purification procedures) that are the subject of patents that are not limited to protein products manufactured using conventional genetic engineering techniques. Over the past decade, there has been a dramatic increase in the number of approaches to gene therapy under development in both academic and industrial laboratories. A large number of patent applications have been filed in the U.S. and worldwide relating to this work, and a number of gene therapy patents have issued to date. The Company requested, and the U.S. Patent and Trademark Office (the "PTO") declared in January 1996, an interference regarding an issued patent with broad claims to ex vivo gene therapy. The participants in the interference are TKT, Genetic Therapy, Inc. (a wholly-owned subsidiary of Novartis AG), Syntex (U.S.A.) (a wholly-owned subsidiary of Roche Holdings, Inc.), and Somatix Therapy Corporation ("Somatix"). Somatix subsequently merged into Cell Genesys, Inc. With the possible exception of the patent involved in the interference, the Company believes its Transkaryotic Therapy technology does not infringe on patents issued to date. The PTO proceeding will determine the patentability of the subject matter of the interference and which of the parties first developed this subject matter. The process to resolve the interference can take many years. The outcome of interferences can be quite variable: for example, none of the four parties may receive the desired claims, one party may prevail, or a settlement involving two or more of the parties may be reached. There can be no assurance that TKT will prevail in this interference or that, even if it does prevail, the Company can meaningfully protect its proprietary position. In the event TKT does not prevail, a January 1997 Federal Trade Commission ("FTC") decision may then be relevant. The FTC entered a consent order to resolve anticompetitive concerns raised by the merger of Ciba-Geigy Limited and Sandoz Limited into Novartis AG. As part of the consent order, the constituent entities of Novartis will be required to provide all gene therapy researchers and developers -13- with non-exclusive licenses to the patent upon which Novartis is involved in the interference. The Company has entered into an agreement with Somatix under which the Company's ability to market its non-viral gene therapy products will not be affected should Somatix win the interference. At December 31, 1998, the Company had six issued U.S. patents and 28 pending patent applications in the U.S. to protect its proprietary methods and processes. It has also filed corresponding foreign patent applications for certain of these U.S. patent applications. The issued U.S. patents and patent applications relate to the Gene Activation platform in general, DNA sequences required for Gene Activation, vectors required for Gene Activation, cells modified by Gene Activation, proteins produced by Gene Activation, corresponding Gene Activation methods, the Transkaryotic Therapy platform in general, the Niche Protein Platform in general, methods of propagating and transfecting cells, methods for obtaining expression of therapeutic proteins and homologous recombination in cells, and cells modified by the preceding methods. The Company believes that protection of the proprietary nature of its products and technology is important to its business. Accordingly, it has adopted and will maintain a vigorous program to secure and maintain such protection. The Company's practice is to file patent applications with respect to technology, inventions and improvements that are important to its business. The Company also relies upon trade secrets, unpatented know-how, continuing technological innovation and the pursuit of licensing opportunities to develop and maintain its competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary technology or that the Company can meaningfully protect its proprietary position. As a general matter, patent positions in the fields of biotechnology and biopharmacology are highly uncertain and involve complex legal, scientific and factual matters. To date, there has emerged no consistent policy regarding the breadth of claims allowed in biotechnology patents. Consequently, although TKT plans to prosecute aggressively its applications and defend its patents against third parties, there can be no assurance that any of the Company's patent applications relating to the technology used by the Company will result in the issuance of patents or that, if issued, such patents or the Company's existing patents will not be challenged, invalidated or circumvented or will afford the Company protection against competitors with similar technology. Any litigation or interference proceedings regarding patent or other proprietary rights may result in substantial cost to the Company, regardless of outcome, and, further, may adversely affect TKT's ability to develop, manufacture and market its products and to form strategic alliances. The Company's technologies and potential products may conflict with patents which have been or may be granted to competitors, universities or others. As the biotechnology industry expands and more patents are issued, the risk increases that the Company's technologies and potential products may give rise to claims that they infringe the patents of others. Such other persons could bring legal actions against the Company claiming damages and seeking to enjoin commercialization of a product or use of a technology. If any such actions are successful, in addition to any potential liability for damages, the Company could be required to obtain a license in order to continue to use such technology or to manufacture or market such product or could be required to cease using such product or technology. There can be no assurance that the Company would prevail in any such action or that any license required under any such patent would be made available or would be made available on acceptable terms. The Company believes that there may be significant litigation regarding patent and other intellectual property rights in the fields of all three of its product platforms. In April 1997, Amgen Inc. ("Amgen") filed a civil action in the U.S. District Court in Massachusetts against the Company and HMRI relating to GA-EPO and the processes for producing GA-EPO. See "Item 3 - Legal Proceedings." -14- To further protect its trade secrets and other proprietary property, the Company requires all employees, Scientific Advisory Board members, consultants and collaborators having access to such proprietary property to execute confidentiality and invention rights agreements in favor of the Company before beginning their relationship with the Company. While such arrangements are intended to enable the Company to better control the use and disclosure of its proprietary property and provide for the Company's ownership of proprietary technology developed on its behalf, they may not provide meaningful protection for such property and technology in the event of unauthorized use or disclosure. LICENSING. The Company has entered into several licensing agreements under which it has acquired certain worldwide rights to use proprietary genes and related technology in its non-viral gene therapy products. In particular, the Company has a nonexclusive license for certain non-viral gene therapy applications from GI with respect to GI's patented Factor VIII genes and a nonexclusive sublicense for non-viral gene therapy applications from British Technology Group plc ("BTG") with respect to BTG's patented Factor IX gene. In addition, the Company has an exclusive license to certain pending and issued patents from Women's and Children's Hospital, North Adelaide, Australia related to certain mucopolysaccharidoses (MPS), including Hurler and Scheie syndrome (MPS I), Hunter syndrome (MPS II) and Sanfilippo syndrome (MPS III). TKT's rights under these gene licenses and sublicenses are for the term of the last to expire patent included in the licensed patent rights. Although the Company is not currently in default under any of these agreements, there can be no assurance that such defaults will not occur in the future. Should such a default occur and any of these licenses or sublicenses be terminated in the future, the Company could lose the right to continue to develop one or more of its potential products, which loss could have a material adverse effect upon the Company's business. COMPETITION The Company believes that the primary competitive factors relating to the products that it is developing include safety, efficacy, reliability, distribution channels and price, and disease management services. In addition, the length of time required for products to be developed and to obtain regulatory and, in some cases, reimbursement approval are important competitive factors. The biotechnology industry is characterized by rapid and significant technological change. Accordingly, the Company's success will depend in part on its ability to respond quickly to medical and technological changes through the development and introduction of new products. The Company believes it competes favorably with respect to these factors, although there can be no assurance that it will be able to continue to do so. Many of the Company's competitors have substantially greater financial and other resources than the Company, including larger research and development staffs and more experience and capabilities in conducting research and development activities, testing products in clinical trials, obtaining regulatory approvals and manufacturing, marketing and distributing products. Smaller companies may obtain access to such skills and resources through collaborative arrangements with pharmaceutical companies or academic institutions. There can be no assurance that TKT will succeed in developing and marketing technologies and products that are more clinically efficacious and cost-effective than existing established treatments or new approaches and products developed and marketed by competitors. The development by others of alternative or superior treatment methods could render the Company's products obsolete or noncompetitive with respect to some or all of the competitive factors described above. In addition, treatment methods not clearly superior to the Company's could achieve greater market penetration through competitors' superior sales, marketing or distribution capabilities. The Company's competitive position also depends upon its ability to attract and retain qualified personnel, obtain patent protection, secure licenses of necessary genes and technology from third parties, -15- or otherwise develop proprietary products or processes and secure sufficient capital resources for the typically substantial expenditures and period of time prior to commercial sales of each product. GENE ACTIVATION. At present, the Company considers its primary competition with respect to its Gene Activation technology to be companies involved in the current production of therapeutic proteins. These companies have obtained patent protection covering many of the techniques used to produce commercially-marketed proteins using conventional genetic engineering techniques. These patent rights have served as an effective entry barrier in the $15 billion protein therapeutics market (1998 worldwide revenues). Several pharmaceutical and biotechnology companies have an established presence in the field of therapeutic protein production. For example, erythropoietin is marketed by Johnson & Johnson ("J&J") and Amgen in the U.S.; by Boehringer Mannheim GmbH and J&J in Europe; and by Sankyo Company Ltd. and Chugai Pharmaceutical Co., Ltd. in Japan. NICHE PROTEINS. For many of the disease targets of the Company's Niche Protein program, there is currently no cure or effective treatment. Treatments are generally focused on the management of the disease's clinical symptoms, particularly pain. In general, the Company believes that these diseases may represent markets too small to attract the resources of larger pharmaceutical companies, but provide attractive commercial opportunities to smaller companies, such as TKT. The Company believes its major competition with respect to Fabry disease and Gaucher disease to be Genzyme Corporation. The Orphan Drug Act of 1983 generally provides incentives to manufacturers to undertake development and marketing of products to treat relatively rare diseases or diseases where fewer than 200,000 persons in the United States at the time of application for Orphan Drug designation would be likely to receive the treatment. The Company believes that many of the potential products in its Niche Protein program will qualify as Orphan Drugs and intends to pursue Orphan Drug designations, where appropriate. A drug that receives Orphan Drug designation by the FDA and is the first product to receive FDA marketing approval for its stated product claim is entitled to a seven-year exclusive marketing period in the United States for that product claim. There can be no assurance, however, that other companies will not seek an Orphan Drug designation and obtain FDA marketing approval for a product competitive with a Niche Protein product before the Company obtains such approval. If another company obtains Orphan Drug marketing approval and receives seven-year marketing exclusivity, it is possible that the Company would not be permitted by the FDA to market a similar product in the United States during the exclusivity period. GENE THERAPY. The Company's gene therapy system will have to compete with other gene therapy systems as well as with conventional methods of treating the diseases and conditions targeted by the Company and new non-gene therapy treatments which may be developed in the future. A number of commercial entities, including major established biotechnology and pharmaceutical companies, as well as development stage entities, currently are involved in the field of human gene therapy. GOVERNMENT REGULATION All of the Company's products will require regulatory approval by U.S. and foreign government agencies prior to commercialization in such countries. In particular, protein therapeutics are subject to rigorous preclinical and clinical testing, and other pre-market approval procedures administered by the FDA and similar authorities in foreign countries. In addition, gene therapy is a new technology, and regulatory approvals may be obtained more slowly than for products produced using conventional technologies. In the U.S., various federal and in some cases, state and local statutes and regulations also govern or influence the manufacturing, labeling, storage, record keeping and marketing of such products. -16- Obtaining approval from the FDA and other regulatory authorities for a therapeutic product may take several years and involve substantial expenditures. Moreover, ongoing compliance with applicable requirements can entail the expenditure of substantial resources. Difficulties or unanticipated costs may be encountered by the Company in its efforts to secure necessary governmental approvals, which could delay or preclude the Company from marketing its products. The activities required before a new pharmaceutical agent may be marketed in the U.S. begin with preclinical testing. Preclinical tests include laboratory evaluation and animal studies to assess the potential safety and efficacy of the product. The results of these studies must be submitted to the FDA as part of an IND, which must be reviewed and cleared by the FDA before proposed clinical testing can begin. Clinical trials are conducted in accordance with specific federal regulations (known as Good Clinical Practices). The clinical protocols detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each clinical protocol must be submitted to the FDA as part of an IND. Further, each clinical study must be conducted under the auspices of an independent IRB at the institution at which the study will be conducted. Each IRB will consider, among other things, ethical factors, the safety of human subjects, and informed consent. Clinical trials are typically conducted in three sequential phases. In Phase I, clinical trials typically include a small number of subjects (often healthy volunteers) to determine the early safety profile and the pattern of drug distribution and metabolism. In Phase II, clinical trials are conducted with larger groups of patients afflicted with a specific disease in order to further test safety and determine optimal dose amounts, dose schedules, and routes of drug administration. In Phase III, larger-scale, multi-center, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data for a valid statistical test of efficacy and safety required by the FDA and others. In the case of products for life-threatening disease, the initial human testing may be done in patients rather than healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that such studies may provide results traditionally obtained in Phase II trials. These trials are frequently referred to as Phase I/II trials. Although some of the Company's products are being considered for patients with life-threatening diseases, there can be no assurance that the FDA will allow Phase I/II studies, or that if Phase I/II studies are permitted, that this study design would shorten the development time for any of the Company's products. The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification, suspension, or termination of clinical trials if, among other things, an unreasonable risk is presented to patients, or if the design of the trial is insufficient to meet its stated objective. After completion of clinical trials of a new product, FDA marketing approval must be obtained. License applications submitted to the FDA have historically taken two to five years to receive approval. The Company expects that its products will be regulated as biologics. Traditionally, both a Product License Application and an Establishment License Application have been required prior to commercial marketing. The FDA will be proposing regulations to implement the new BLA provision in the Food and Drug Administration Modernization Act of 1997 (the "Act"), which allows for a single license application. The Act sets as a goal for the FDA, but does not require the review and action on a complete license application within 12 months. In addition, if the FDA determines that a product would be a significant improvement in the safety or effectiveness of the treatment, diagnosis or prevention of a serious or life threatening disease, the FDA may designate the product for priority review, in which case the FDA's goal is to review and act on the complete license application within six months of the submission date. To the extent one of the Company's products might fall within the existing or future BLA regulations for certain enumerated biotechnology products, these regulations may provide guidance regarding FDA expectations. If the FDA determines that an application is incomplete, or that important issues are unanswered by the data in the application, approval times could be delayed significantly. Notwithstanding the submission of relevant data, the FDA may ultimately decide that the license application does not satisfy its criteria for approval. -17- Even if FDA clearances are obtained, a marketed product is subject to continual review. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restriction on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. In addition, the manufacturing facility for the Company's products will be subject to FDA inspection for adherence to cGMP prior to marketing clearance and periodically following approval. This will require the Company to observe rigorous manufacturing specifications. The Company believes that many of its Gene Activation products are likely to be reviewed within the FDA by CBER. CBER currently has no "bioequivalence" pathway for the rapid approval of closely-related biologics. The Company believes that its Gene Activated products will be treated as new biologic entities and require a complete regulatory and clinical program. However, these programs may have the advantage of focusing on Gene Activated products with conventional, previously approved, counterparts that are well-known to regulatory authorities around the world (in contrast to a typical new biologic, which has no related history concerning its safety and efficacy in humans). In April 1996, the FDA issued a document entitled "FDA Guidance Concerning Demonstration of Comparability of Human Biological Products, Including Therapeutic Biotechnology-derived Products." This document describes situations in which a manufacturer can make manufacturing changes and establish the comparability of the product using physical, chemical, bioassay, preclinical animal and/or pharmacological methods, without the need for additional clinical trials. In addition to regulations enforced by FDA, the Company is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. The Company's research and development involves the controlled use of hazardous materials, chemicals, biological materials and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. For marketing outside the U.S., the Company also is subject to foreign regulatory requirements governing human clinic trials and marketing approval for products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country. EMPLOYEES As of December 31, 1998, the Company had 178 full-time employees, including 155 in research and development. The Company's employees are not covered by any collective bargaining agreement. TKT considers relations with its employees to be good. TRADEMARKS TRANSKARYOTIC THERAPIES(TM), TKT(TM), TRANSKARYOTIC THERAPY(TM), NICHE PROTEIN(TM), GA-EPO(TM), GENE ACTIVATED(TM), and GA(TM) are trademarks of the Company. -18- ITEM 2. PROPERTIES The Company leases a total of approximately 108,000 square feet of laboratory and office space in buildings located in Cambridge, Massachusetts. These facilities include pilot facilities for gene therapy and protein product manufacturing. The Company's current facilities may not be adequate to accommodate the Company's needs beyond 2000. The Company currently expects to meet its facilities requirements through development of a new facility or conversion of an existing building. The Company expects to seek financing for all or a significant portion of the cost of any new facility. ITEM 3. LEGAL PROCEEDINGS In April 1997, Amgen filed a civil action in the U.S. District Court in Massachusetts against the Company and HMRI, the Company's collaborative partner. The complaint in the action alleges that the Company's Gene Activated erythropoietin product ("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 same date, Amgen filed a Motion for Summary Judgment of Infringement. TKT and HMRI opposed that motion, stating that there has been no infringement. In April 1998, the U.S. District Court granted TKT and HMRI's Motion for Summary Judgment and denied Amgen's Motion for Summary Judgment on the ground that all of TKT and HMRI's GA-EPO related activities to that date had been solely for uses reasonably related to the production of information for submission to the FDA for regulatory approval and, under the Hatch-Waxman 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 constitute 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 any 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 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. Pursuant to the Amended and Restated License Agreement, dated March 1995, by and between HMRI and the Company, HMRI assumed the cost of defense of the suit by Amgen. The Company will reimburse HMRI for the Company's share of litigation expenses, as defined, from future royalties, if any, received from the sale of GA-EPO and in certain other circumstances. 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. -19- The Company is currently involved in a patent interference proceeding before the PTO involving a patent and several patent applications in the gene therapy field. See "Item 1 - Business--Patents- Proprietary Rights and Licenses." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICES OF THE REGISTRANT The executive officers of the Company are as follows: Name Age Position held with the Company ---- --- ------------------------------ Richard F Selden, M.D., Ph.D. 40 President, Chief Executive Officer Douglas A. Treco, Ph.D. 41 Senior Vice President, Research and Development Christoph M. Adams, Ph.D. 42 Vice President, Business Development Daniel E. Geffken 42 Vice President, Finance, Chief Financial Officer and Secretary Kurt C. Gunter, M.D. 44 Vice President, Clinical and Regulatory Affairs Each officer's term of office extends until the first meeting of the Board of Directors following the next annual meeting of stockholders and until a successor is elected and qualified. Richard F Selden, M.D., Ph.D. is the founder of TKT. He has served as Chief Scientific Officer, Chairman of the Scientific Advisory Board and a Director since the Company's inception in 1988 and as President and Chief Executive Officer since June 1994. Prior to founding TKT, Dr. Selden was an Instructor in pediatrics at Harvard Medical School. He received an A.B. in Biology from Harvard College, an A.M. in Biology from the Harvard University Graduate School of Arts and Sciences, a Ph.D. in genetics from the Division of Medical Sciences at Harvard Medical School and an M.D. from Harvard Medical School. Douglas A. Treco, Ph.D. has directed research at the Company since its inception in 1988. Since February 1997, he has served as the Senior Vice President, Research and Development and from June 1993 to February 1997, he served as Vice President, Director of Research and Development. Prior to joining the Company, Dr. Treco was a Research Fellow in Genetics, Department of Molecular Biology, Massachusetts General Hospital and Department of Genetics, Harvard Medical School. He received a B.S. in Biology and Chemistry from the University of Delaware and a Ph.D. in Biochemistry and Molecular Biology from the State University of New York, Stony Brook. Christoph M. Adams, Ph.D. has served as Vice President, Business Development of the Company since March 1994. From May 1991 to February 1994, Dr. Adams was Business Development Manager at the Pharmaceuticals Division of Ciba-Geigy AG in Basel, Switzerland. Dr. Adams received a Ph.D. in Organic Chemistry from the University of Zurich and a M.B.A. from INSEAD, Fontainebleau, France. -20- Daniel E. Geffken has served as Vice President, Finance and Chief Financial Officer of the Company since February 1997. From June 1993 to February 1997, Mr. Geffken was Chief Financial Officer of CytoTherapeutics, Inc., a biotechnology company, and from December 1995 to February 1997, he served as Vice President. He received a B.S. in Economics from The Wharton School, University of Pennsylvania and a M.B.A. from the Harvard Business School. Kurt C. Gunter, M.D. has served as a consultant to the Company since September 1993 and as Vice President, Clinical and Regulatory Affairs since July 1996. From September 1993 to June 1996, Dr. Gunter worked in the Department of Laboratory Medicine at Children's National Medical Center, most recently as Director of Stem Cell Processing, Hematology and Blood Donor Center. He received a B.S. in Biological Sciences from Stanford University and an M.D. from the University of Kansas School of Medicine. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock commenced trading on October 17, 1996 on the Nasdaq National Market under the symbol "TKTX." As of March 5, 1999, there were 165 holders of record of the Company's Common Stock. The following table sets forth for the fiscal periods indicated the range of high and low closing prices for the Company's Common Stock on the Nasdaq National Market.
HIGH LOW ---------- -------- 1998 QUARTER ENDED: December 31 . . . . . . . . . . . . . . . . . . . . . $ 25 15/16 $ 15 1/8 September 30 . . . . . . . . . . . . . . . . . . . . 30 19 1/8 June 30 . . . . . . . . . . . . . . . . . . . . . . . 36 25 3/4 March 31 . . . . . . . . . . . . . . . . . . . . . . 39 1/8 29 1997 QUARTER ENDED: December 31 . . . . . . . . . . . . . . . . . . . . . $ 43 1/4 $ 27 September 30 . . . . . . . . . . . . . . . . . . . . 44 3/4 27 3/4 June 30 . . . . . . . . . . . . . . . . . . . . . . . 32 1/4 12 3/4 March 31 . . . . . . . . . . . . . . . . . . . . . . 25 3/4 17
The Company has never declared or paid any cash dividends on its capital stock. The Company currently anticipates that it will retain all future earnings, if any, to fund the development and growth of its business and does not anticipated paying any cash dividends on its Common Stock in the foreseeable future. -21- ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data of the Company for the five years ended December 31, 1998 are derived from the consolidated financial statements of the Company. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included as Item 7 and the consolidated financial statements and related footnotes included as Item 8 in this Form 10-K.
YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994 STATEMENT OF OPERATIONS DATA License and research revenues $ 5,325 $ 5,788 $ 4,225 $ 15,400 $ 10,000 Research and development expenses 25,617 18,111 14,019 10,529 9,126 Net income (loss) (19,965) (12,871) (11,972) 2,074 (3,422) Basic net income (loss) per share (pro forma in (1.05) (0.74) (0.98) 0.19 1996 and 1995) Shares used to compute basic net income (loss) per 19,052 17,394 12,262 10,862 share (pro forma in 1996 and 1995)
December 31, (IN THOUSANDS) 1998 1997 1996 1995 1994 BALANCE SHEET DATA Cash and marketable securities $110,155 $129,554 $ 86,255 $ 34,485 $ 7,579 Total assets 117,962 134,948 90,998 39,218 13,472 Redeemable preferred stock -- -- -- 4,440 4,230 Total stockholders' equity 113,646 131,749 89,644 33,541 7,073
The Company has implemented Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which requires the presentation of both basic and diluted earnings per share in the Consolidated Statements of Operations. The per share amounts presented above and in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", are based on the basic weighted average shares outstanding unless specifically identified as diluted. -22- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its inception in 1988, Transkaryotic Therapies, Inc. (the "Company") has been primarily engaged in the development and commercialization of products based on the Company's three proprietary development platforms: Gene Activated proteins, Niche Protein products and gene therapy. 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 2000. The Company expects that its research and development expenditures will increase substantially in future years as product development efforts accelerate. With the exception of 1995, the Company has incurred substantial annual operating losses since inception and expects to incur substantial operating losses in the future. At December 31, 1998, the Company's accumulated deficit was $69,952,000. As a result, the Company is dependent upon existing cash resources, interest income, external financing from equity offerings, debt financings or collaborative research and development arrangements with corporate sponsors to finance its operations. Results of operations may vary significantly from period to period depending on, among other factors, the progress of the Company's research and development efforts, the receipt, if any, of additional license fees and milestone payments, the timing of certain expenses, and the establishment of additional collaborative research agreements. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the accompanying consolidated financial statements and the related footnotes thereto. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 License and research revenues totaled $5,325,000, $5,788,000 and $4,225,000 for the years ended December 31, 1998, 1997 and 1996, respectively. With the exception of a $2,000,000 non-refundable upfront payment from Sumitomo Pharmaceuticals Co., Ltd. relating to the development and commercialization of the Company's Fabry disease product in Japan and other Asian countries in 1998, all other revenues in each fiscal year were earned from two collaborative agreements with Hoechst Marion Roussel, Inc. ("HMRI"). Research and development expenses totaled $25,617,000 in 1998, as compared to $18,111,000 in 1997 and $14,019,000 in 1996. The increase in 1998 of $7,506,000, or 41%, was principally due to increases in external development services, research and development staffing and laboratory supplies in each of the Company's product development platforms. In particular, preclinical and clinical costs for the Company's Fabry disease and hemophilia A programs, as well as manufacturing costs associated with the Fabry disease program, were significant components of the increase. During 1999, the costs related to both preclinical and clinical programs are expected to increase significantly as product development activities are initiated or expanded. The increase in 1997 of $4,092,000, or 29%, was principally due to an increase in external development costs, research and development staffing and laboratory supplies and expenses related thereto in each of the Company's product development platforms. General and administrative expenses were $6,409,000 for the year ended December 31, 1998, compared with $6,279,000 and $4,729,000 in 1997 and 1996, respectively. The increase in 1998 of -23- $130,000, or 2%, was principally due to increases in the number of administrative staff. The increase in 1997 of $1,550,000, or 33%, was principally due to increases in administrative employee costs and expenses associated with being a publicly-held company. During 1999, general and administrative costs are expected to increase significantly as the Company begins to build sales, marketing and distribution capabilities related to the commercialization of products in its Niche Protein product platform. Interest income was $6,736,000, $5,731,000 and $2,551,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The average cash and marketable securities balances were $120,779,000, $102,161,000 and $48,673,000 in 1998, 1997 and 1996, respectively. The increases in interest income in 1998 and 1997 resulted generally from higher average balances in each of the years. Higher average balances in the respective years resulted from the Company's initial public offering in October 1996 and a follow-on offering in July 1997. In 1998, the effect of the increase in average balances on interest income was offset by a decline in yield. In the current interest rate environment, the Company anticipates yields from cash and marketable securities will decline significantly from amounts earned in 1998 and 1997. The Company had a net loss of $19,965,000, $12,871,000 and $11,972,000 in 1998, 1997 and 1996, respectively. LIQUIDITY AND SOURCES OF CAPITAL Since its inception, the Company has financed its operations through the sale of Common and Preferred Stock, borrowings under debt agreements, revenues from collaborative agreements and interest income. The Company had unrestricted cash, cash equivalents and marketable securities totaling $110,155,000 at December 31, 1998. Cash equivalents and marketable securities are invested in U.S. Treasury notes, agencies of the U.S. government and money market funds. In July 1997, the Company completed a direct placement of 1,700,000 shares of common stock, resulting in net proceeds to the Company of $52,900,000. The Company leased additional facilities in the fourth quarter of 1998 which will be used for research and development. Equipment and improvements to the space are estimated to cost approximately $14,000,000. In December 1998, the Company obtained an unsecured term loan facility for up to $14,000,000 to finance the capital costs related to the leased space. The loan is payable beginning in December 1999 on the basis of a seven year amortization schedule over a five year period, with a final payment for any remaining amount in September 2004. The note contains certain restrictive covenants, including, among other things, minimum cash and tangible net asset requirements and limitations on the payment of dividends. At December 31, 1998, no amounts were outstanding under this facility. Even after lease of the new space referred to in the prior paragraph, the Company's facilities may not be adequate to accommodate the Company's needs beyond 2000. The Company currently expects to meet any additional facilities requirements through development of a new facility or conversion of an existing building. The Company intends to seek financing for all or a significant portion of the cost of any additional facilities. There can be no guarantee that financing will be available on favorable terms, if at all. -24- At December 31 1998, the Company had commitments totaling $6,911,000 for certain product development activities with third parties for 1999. In May 1994, the Company and HMRI entered into an agreement to commercialize the Company's GA-EPO product. Under the terms of the agreement, HMRI is obligated to pay the Company a total of $58,000,000 upon completion of all milestones and objectives set forth in the agreement. As of December 31, 1998, the Company had received $26,500,000. The remaining $31,500,000 in payments are contingent upon HMRI's achievement of certain GA-EPO clinical development milestones. In March 1995, the Company entered into a second agreement with HMRI to commercialize GA-II. Pursuant to the agreement, the Company also granted HMRI an option to commercialize certain aspects of the Company's gene therapy technologies applicable to this protein. Under the terms of the agreement, HMRI is obligated to pay the Company a total of $67,000,000 upon completion of all milestones and objectives set forth in the agreement. At December 31, 1998, the Company had received $30,500,000. The remaining $36,500,000 to be paid to the Company by HMRI consists primarily of milestone payments contingent upon the development of the product resulting from the licensed technology. HMRI is responsible for the worldwide development, manufacturing and marketing of GA-EPO, and the Company is entitled to receive a royalty based on net sales. At December 31, 1998, the Company had net operating loss carryforwards of approximately $62,700,000, which expire at various times through 2013. Due to the degree of uncertainty related to the ultimate use of loss carryforwards and tax credits, the Company has fully reserved against any potential tax benefit. The future utilization of net operating loss carryforwards and tax credits may be subject to limitation under the changes in stock ownership rules of the Internal Revenue Code. Because of this limitation, it is possible that taxable income in future years, which would otherwise be offset by net operating losses, will not be offset and, therefore, will be subject to tax. Substantial additional funds will be required to support the Company's research and development programs, for acquisition of technologies, for preclinical and clinical testing of its products, pursuit of regulatory approvals, acquisition of capital equipment, expansion of laboratory and office facilities, establishment of production capabilities, establishment of sales, marketing and distribution capabilities and for general and administrative expenses. Until such time, if any, as the Company's operations generate significant revenues from product sales, cash resources, interest income and proceeds from equity offerings, debt financings and funding from collaborative arrangements will be required to fund operations. The Company expects to pursue opportunities to obtain additional financing in the future through equity financings, debt financings, lease arrangements related to facilities and capital equipment and collaborative research agreements. The source, timing and availability of any future financing will depend principally upon equity and debt market conditions, interest rates and, more specifically, on the Company's continued progress in its exploratory, preclinical and clinical development programs. There can be no assurance that such funds will be available on favorable terms, if at all. The Company expects that its existing capital resources, together with revenues from collaborative agreements and interest income, will be sufficient to fund its operations into 2001. The Company's cash requirements may vary, however, depending on numerous factors. Lack of necessary funds may require the Company to delay, scale back or eliminate some or all of its research and product development programs or to license its potential products or technologies to third parties. -25- The Company has been engaged in litigation with Amgen Inc. with respect to the development of GA-EPO. See Note 11 to Notes to Consolidated Financial Statements, which is incorporated by reference herein. YEAR 2000 The Year 2000 issue results from computer programs and systems that were created to accept only two digit dates. As a result, some computer programs are unable to differentiate between the year 1900 and the year 2000. This could result in miscalculations and system failures. The Company has established a multidisciplinary Year 2000 project committee. The committee has assessed the Company's software, hardware, communications systems, applications and networks, as well as other date sensitive equipment. Mission critical systems such as the accounting system have been found compliant or will be upgraded prior to June 1999. The remaining systems are currently being tested to identify those systems which would be affected by Year 2000 non-compliance. In most cases, vendors have offered free upgrades or the systems were already scheduled for upgrade. Therefore, the cost for obtaining Year 2000 compliance will be minimal for internal systems. The Company believes its internal systems will not pose significant operating issues for the Company as a result of the Year 2000. In addition to the Company's internal risks, the Company is dependent upon a number of third parties that provide information, goods and services to the Company. These include financial institutions, suppliers, service providers, public utilities and research partners. If these third parties experience failures in their computer systems or equipment due to Year 2000 non-compliance, it could seriously affect the Company's business operations. The Company is in the process of contacting its significant external business partners to determine the extent to which the Company is vulnerable to their failure. The Company expects this process to be complete by September 1999. If third party providers are not able to supply the Company, the Company could experience delays in its research and development including delays in clinical trial development or the submission of products for regulatory approval. As a contingency plan, the Company expects to identify, if available, a secondary source for critical third party providers. The Company has not yet incurred significant cost to address the Year 2000 issue. While the total cost of obtaining Year 2000 compliance is not known at this time, the Company believes the cost will not be material. FORWARD LOOKING STATEMENTS 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 Activated, gene therapy, or Niche Protein product candidates will advance in the clinical trial process, the timing of such clinical trials, whether the clinical trial results will warrant continued product development, the timing of making required regulatory filings such as Investigational New Drug applications, and other risks set forth below, under the caption "Certain Factors That May Affect Future Results." -26- 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, 1998 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 Inc. filed a civil action in the U.S. District Court in Massachusetts against the Company and Hoechst Marion Roussel, Inc. ("HMRI"), the Company's collaborative partner. The complaint in the action alleged that the Company's Gene Activated product 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 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 same date, Amgen filed a Motion for Summary Judgment of Infringement. TKT and HMRI opposed that motion, stating that there had been no infringement. In April 1998, the U.S. District Court granted TKT and HMRI's Motion for Summary Judgment and denied Amgen's Motion for Summary Judgment on the ground that all of TKT and HMRI's GA-EPO related activities to that date had been solely for uses reasonably related to the production of information for submission to the FDA for regulatory approval and, under the Hatch-Waxman 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 constitute 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 HMRI in the United States, or any other conclusion of such litigation in a manner adverse to the Company and HMRI, would have a material adverse effect on the Company's business, financial condition, and results of operations. Pursuant to the Company's license agreement with HMRI, HMRI assumed the cost of defense of the suit by Amgen. The Company will reimburse HMRI for the Company's share of litigation expenses, as defined, from future royalties, if any, received from the sale of GA-EPO and in certain other circumstances. 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. -27- 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 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. 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, 1998, the Company had six issued U.S. patents and 28 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 -28- 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 and to certain patents (for example, for certain pending and issued patents related to mucopolysaccharidoses), 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 2000 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 -29- 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 2000. 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 Activated 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 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. -30- Of the gene therapy products under development at the Company, one, for the treatment of cachexia, and a second, for the treatment of hemophilia A, are in Phase I clinical trials. 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 Activated 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, 1998, the Company had an accumulated deficit of $69,952,000. The Company expects that it will continue to incur substantial losses until at least 2000 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 -31- 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 into 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 Activated product efforts on established products with proven safety and efficacy. The Company anticipates that companies selling such products will compete vigorously against any Gene Activated products offered by the Company or its collaborators. There can be no assurance that the Company's Gene Activated 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 -32- 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 protein 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 -33- 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 COLLABORATIVE PARTNERS. The Company has entered into arrangements with HMRI on two of its Gene Activation development programs, with Sumitomo on one of its Niche Protein products, and with GI 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 worldwide GA-EPO and GA-II. There can be no assurance that these collaborative partners will devote the resources necessary to complete development of and commercialize these potential products. Should these collaborative partners 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 -34- 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary data are included as part of this Annual Report on Form 10-K: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 Consolidated Statement of Stockholders' Equity for the period January 1, 1996 through December 31, 1998 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 -35- REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Transkaryotic Therapies, Inc. We have audited the accompanying consolidated balance sheets of Transkaryotic Therapies, Inc. (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transkaryotic Therapies, Inc. at December 31, 1998 and 1997, and the results of its consolidated operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts February 5, 1999 -36- TRANSKARYOTIC THERAPIES, INC. CONSOLIDATED BALANCE SHEETS
(in thousands, except par values) DECEMBER 31, ----------------------- 1998 1997 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 31,760 $ 23,922 Marketable securities 78,395 105,632 Prepaid expenses and other current assets 2,334 551 ---------- ---------- Total current assets 112,489 130,105 Property and equipment, net 5,140 4,505 Other assets 333 338 ---------- ---------- $ 117,962 $ 134,948 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,456 $ 1,656 Accrued expenses 2,860 1,543 ---------- ---------- Total current liabilities 4,316 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, 19,126 and 18,929 shares issued and outstanding at December 31, 1998 and 1997, respectively 191 189 Additional paid-in capital 186,067 185,451 Accumulated deficit (69,952) (49,987) Deferred compensation (2,632) (3,940) Accumulated other comprehensive income (loss) (28) 36 ---------- ---------- Total stockholders' equity 113,646 131,749 ---------- ---------- $ 117,962 $ 134,948 ---------- ---------- ---------- ----------
See accompanying Notes to Consolidated Financial Statements. -37- TRANSKARYOTIC THERAPIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts) YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 -------- -------- -------- License and research revenues $ 5,325 $ 5,788 $ 4,225 Operating expenses: Research and development 25,617 18,111 14,019 General and administrative 6,409 6,279 4,729 -------- -------- -------- 32,026 24,390 18,748 -------- -------- -------- Loss from operations (26,701) (18,602) (14,523) Interest income 6,736 5,731 2,551 -------- -------- -------- Net loss $(19,965) $(12,871) $(11,972) -------- -------- -------- -------- -------- -------- Basic and diluted net loss per share (pro forma in 1996) $ (1.05) $ (0.74) $ (0.98) -------- -------- -------- -------- -------- -------- Shares used in computing basic and diluted net loss per share (pro forma in 1996) 19,052 17,394 12,262 -------- -------- -------- -------- -------- --------
See accompanying Notes to Consolidated Financial Statements. -38- TRANSKARYOTIC THERAPIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands) PREFERRED STOCK COMMON STOCK ------------------------------ ------------------------------- SHARES AMOUNT SHARES AMOUNT ------------- ------------- ------------- ------------- BALANCE AT JANUARY 1, 1996 2,944 $ 2,944 5,198 $ 52 Issuance of convertible preferred stock 1,133 1,133 -- -- Issuance of common stock, net -- -- 2,831 28 Deferred compensation related to restricted stock and stock options granted -- -- -- -- Compensation expense related to equity issuances -- -- -- -- Redeemable preferred stock dividend accretion -- -- -- -- Conversion of preferred stock into common stock (4,077) (4,077) 8,585 86 Unrealized loss on marketable securities -- -- -- -- Net loss -- -- -- -- Comprehensive loss -- -- -- -- ------------- ------------- ------------- ------------- BALANCE AT DECEMBER 31, 1996 -- -- 16,614 166 Issuance of common stock, net -- -- 2,315 23 Deferred compensation related to stock options granted -- -- -- -- Reversal of deferred compensation related to forfeited restricted stock and stock options granted, net -- -- -- -- Compensation expense related to equity issuances -- -- -- -- Unrealized gain on marketable securities -- -- -- -- Net loss -- -- -- -- Comprehensive loss -- -- -- -- ------------- ------------- ------------- ------------- BALANCE AT DECEMBER 31, 1997 -- -- 18,929 189 Issuance of common stock, net -- -- 201 2 Compensation expense related to equity issuances -- -- -- -- Reversal of deferred compensation related to forfeited restricted stock and stock options granted, net -- -- (4) -- Unrealized loss on marketable securities -- -- -- -- Net loss -- -- -- -- Comprehensive loss -- -- -- -- ------------- ------------- ------------- ------------- BALANCE AT DECEMBER 31, 1998 -- -- 19,126 $ 191 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
See accompanying Notes to Consolidated Financial Statements -39-
CUMULATIVE ADDITIONAL ACCRETION OF (in thousands) PAID-IN PREFERRED ACCUMULATED CAPITAL STOCK DEFICIT ------------- ------------- ------------- BALANCE AT JANUARY 1, 1996 $ 58,331 $ (1,440) $ (25,144) Issuance of convertible preferred stock 22,388 -- -- Issuance of common stock, net 39,032 -- -- Deferred compensation related to restricted stock and stock options granted 5,054 -- -- Compensation expense related to equity issuances -- -- -- Redeemable preferred stock dividend accretion -- (158) -- Conversion of preferred stock into common stock 6,991 1,598 -- Unrealized loss on marketable securities -- -- -- Net loss -- -- (11,972) Comprehensive loss -- -- -- ------------- ------------- ------------- BALANCE AT DECEMBER 31, 1996 131,796 -- (37,116) Issuance of common stock, net 53,754 -- -- Deferred compensation related to stock options granted 526 -- -- Reversal of deferred compensation related to forfeited restricted stock and stock options granted, net (625) -- -- Compensation expense related to equity issuances -- -- -- Unrealized gain on marketable securities -- -- -- Net loss -- -- (12,871) Comprehensive loss -- -- -- ------------- ------------- ------------- BALANCE AT DECEMBER 31, 1997 185,451 -- (49,987) Issuance of common stock, net 808 -- -- Compensation expense related to equity issuances -- -- -- Reversal of deferred compensation related to forfeited restricted stock and stock options granted, net (192) -- -- Unrealized loss on marketable securities -- -- -- Net loss -- -- (19,965) Comprehensive loss -- -- -- ------------- ------------- ------------- BALANCE AT DECEMBER 31, 1998 $ 186,067 -- $ (69,952) ------------- ------------- ------------- ------------- ------------- -------------
See accompanying Notes to Consolidated Financial Statements -40-
ACCUMULATED OTHER TOTAL (in thousands) DEFERRED COMPREHENSIVE STOCKHOLDERS' COMPENSATION INCOME (Loss) EQUITY ------------- ------------- ------------- BALANCE AT JANUARY 1, 1996 $(1,244) $42 $ 33,541 Issuance of convertible preferred stock -- -- 23,521 Issuance of common stock, net -- -- 39,060 Deferred compensation related to restricted stock and stock options granted (5,054) -- -- Compensation expense related to equity issuances 1,080 -- 1,080 Redeemable preferred stock dividend accretion -- -- (158) Conversion of preferred stock into common stock -- -- 4,598 Unrealized loss on marketable securities -- (26) (26) Net loss -- -- (11,972) ------------- Comprehensive loss -- -- (11,998) ------------- ------------- ------------- BALANCE AT DECEMBER 31, 1996 (5,218) 16 89,644 Issuance of common stock, net -- -- 53,777 Deferred compensation related to stock options granted (526) -- -- Reversal of deferred compensation related to forfeited restricted stock and stock options granted, net 625 -- -- Compensation expense related to equity issuances 1,179 -- 1,179 Unrealized gain on marketable securities -- 20 20 Net loss -- -- (12,871) ------------- Comprehensive loss -- -- (12,851) ------------- ------------- ------------- BALANCE AT DECEMBER 31, 1997 (3,940) 36 131,749 Issuance of common stock, net -- -- 810 Compensation expense related to equity issuances 1,116 -- 1,116 Reversal of deferred compensation related to forfeited restricted stock and stock options granted, net 192 -- -- Unrealized loss on marketable securities -- (64) (64) Net loss -- -- (19,965) ------------- Comprehensive loss -- -- (20,029) ------------- ------------- ------------- BALANCE AT DECEMBER 31, 1998 $(2,632) $(28) $113,646 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying Notes to Consolidated Financial Statements. -41- TRANSKARYOTIC THERAPIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- OPERATING ACTIVITIES: Net loss $ (19,965) $ (12,871) $ (11,972) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 2,056 2,092 1,575 Compensation expense related to equity issuances 1,116 1,179 1,080 Changes in operating assets and liabilities: Decrease (increase) in prepaid expenses and other current assets (1,783) 267 (721) Increase (decrease) in accounts payable (200) 1,044 97 Increase in accrued expenses 1,317 801 21 ------------- ------------- ------------- Net cash used for operating activities (17,459) (7,488) (9,920) ------------- ------------- ------------- INVESTING ACTIVITIES: Proceeds from sales of marketable securities 134,491 117,669 63,871 Purchases of marketable securities (107,318) (147,440) (116,793) Purchases of property and equipment (2,660) (2,936) (779) Increase in other assets (26) (74) (86) ------------- ------------- ------------- Net cash provided by (used for) investing activities 24,487 (32,781) (53,787) ------------- ------------- ------------- FINANCING ACTIVITIES: Issuance of common stock, net 810 53,777 39,060 Issuance of convertible preferred stock -- -- 23,521 ------------- ------------- ------------- Net cash provided by financing activities 810 53,777 62,581 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 7,838 13,508 (1,126) Cash and cash equivalents at January 1 23,922 10,414 11,540 ------------- ------------- ------------- Cash and cash equivalents at December 31 $ 31,760 $ 23,922 $ 10,414 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying Notes to Consolidated Financial Statements. -42- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION Transkaryotic Therapies, Inc. ("TKT" or "the Company") is a biopharmaceutical company engaged in the development and commercialization of products based on its three proprietary development platforms: Gene Activated(TM) proteins, Niche Protein(TM) products and gene therapy. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany activity has been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES Cash equivalents include funds held in investments with original maturities of three months or less. Marketable securities consist of U.S. government and agency obligations. The fair values for marketable securities are based on quoted market prices. The Company determines the appropriate classification of cash equivalents and marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company has classified such holdings as available-for-sale securities, which are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. Financial instruments that potentially subject the Company to concentrations of credit risk consist of temporary cash investments and marketable securities. The Company maintains cash and cash equivalents with high credit-quality financial institutions and limits the amount of credit exposure to any one institution. The Company's credit exposure on its marketable securities is limited by its diversification among U.S. government and agency obligations. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated using the straight-line method over estimated useful lives of the respective asset, ranging from three to five years. Leasehold improvements are stated at cost and are amortized using the straight-line method over the term of the lease. -43- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK-BASED COMPENSATION The Company accounts for qualified stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and, accordingly, recognizes no compensation expense for the issue thereof. For certain non-qualified stock options granted, the Company recognizes as compensation expense the excess of the deemed fair value of the common stock issuable upon exercise over the aggregate exercise price of such options. The compensation is amortized over the vesting period of each option or the recipient's term of employment, if shorter. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation," and will continue to account for its stock options plans in accordance with the provisions of APB 25. LICENSE AND RESEARCH REVENUE Revenues from collaborative agreements are recognized as earned upon either the execution of the underlying license agreement, the incurrence of reimbursable expenses or the achievement of certain milestones. INCOME TAXES Deferred tax assets are determined based on differences between financial reporting and income tax bases of assets and liabilities, as well as net operating loss carryforwards, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization. NET LOSS PER SHARE In 1997, the Financial Accounting Standards Board ("the FASB") issued and the Company adopted SFAS No. 128, "Earnings per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. All loss per share amounts for all periods have been presented and, where appropriate, restated to conform to SFAS No. 128 and Securities and Exchange Commission ("SEC") requirements. Net loss per share for 1998 and 1997 is computed using the weighted average number of common shares outstanding. Pro forma net loss per share for 1996 is computed using the weighted average number of common shares and convertible preferred shares outstanding assuming conversion at date of issuance. Historical loss per share for 1996 has not been presented since such amounts are not deemed meaningful due to the significant change in the Company's capital structure that occurred in connection with the Company's initial public offering in that year. -44- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes 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. Prior year financial statements have been modified to conform to the requirements of SFAS No. 130. SEGMENT REPORTING Effective January 1, 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. All of the Company's efforts are devoted to product development platforms that are managed and reported in one segment: therapeutic products. The Company is located in the U.S. and derives substantially all of its license and research revenues from services provided in the U.S. Current licensing agreements provide for the sale of products in both the U.S. and abroad. To date, the Company has not recorded revenues from the sale of any product. 3. MARKETABLE SECURITIES The following is a summary of available-for-sale securities:
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR (in thousands) COST GAINS LOSSES VALUE - ----------------- -------- ---------- ---------- ---------- December 31, 1998 $100,768 $100 $(128) $100,740 -------- ---------- ---------- ---------- -------- ---------- ---------- ---------- December 31, 1997 $124,795 $ 64 $ (28) $124,831 -------- ---------- ---------- ---------- -------- ---------- ---------- ----------
These securities are classified in the accompanying balance sheet as follows:
(in thousands) December 31, ---------------------- 1998 1997 -------- -------- Cash equivalents $ 22,345 $ 19,199 Marketable securities 78,395 105,632 -------- -------- $100,740 $124,831 -------- -------- -------- --------
-45- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Maturities of marketable securities held at December 31, 1998 are as follows: (in thousands) Less than one year $ 58,562 One through three years 19,833 -------- $ 78,395 -------- --------
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
(in thousands) DECEMBER 31, -------------------- 1997 1998 ------- ------- Leasehold improvements $ 6,935 $ 6,083 Laboratory equipment 4,967 4,056 Office furniture and equipment 2,320 1,877 Construction in process 435 - ------- ------- 14,657 12,016 Less accumulated depreciation and amortization 9,517 7,511 ------- ------- $ 5,140 $ 4,505 ------- ------- ------- -------
Depreciation and amortization expense on property and equipment was $2,025,000, $1,668,000 and $1,540,000 in 1998, 1997 and 1996, respectively. 5. ACCRUED EXPENSES Accrued expenses consist of the following:
(in thousands) DECEMBER 31, --------------------- 1998 1997 ------ ------- External development services $1,245 $ 157 Salaries and benefits 530 556 Professional fees 384 555 Other 701 275 ------ ------- $2,860 $1,543 ------ ------- ------ -------
6. BANK LOAN In December 1998, the Company obtained an unsecured term loan facility for up to $14,000,000 to finance capital equipment and leasehold improvements. The loan is repayable beginning in December 1999 on the basis of a seven year amortization schedule over a five year period, with a final payment for any remaining outstanding amount in September 2004. The loan bears interest at either the prime rate or LIBOR plus 1.50%, at the Company's election. The note contains certain restrictive covenants including, among other things, minimum cash and tangible net asset requirements. As of December 31, 1998, no amounts were outstanding on the loan. -46- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. STOCKHOLDERS' EQUITY COMMON STOCK In July 1997, the Company completed a directed public offering of 1,700,000 shares of its common stock, resulting in net proceeds to the Company of approximately $52,900,000. STOCK COMPENSATION PLANS The Company has adopted several stock compensation plans, which provide for the issuance of incentive and nonqualified stock options, stock appreciation rights, restricted stock, long-term performance awards and stock grants to employees, Directors and consultants of the Company at prices determined by the Board of Directors. At December 31, 1998, approximately 2,372,000 shares of common stock have been reserved for issuance under the plans. Options generally vest ratably over periods ranging from two to six years and are exercisable for ten years from the date of grant. Stock option activity under the plans is as follows:
(in thousands, except share prices) 1998 1997 1996 ----------------------- ----------------------- ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- --------- --------- --------- --------- --------- Outstanding at January 1 976 $ 5.76 906 $ 0.36 136 $ 0.01 Granted 507 25.91 247 21.51 793 0.42 Exercised (51) 1.28 (77) 2.35 - 0.01 Canceled (62) 11.98 (100) 0.56 (23) 0.01 --------- --------- --------- Outstanding at December 31 1,370 12.99 976 5.76 906 0.36 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Options exercisable at December 31 395 $ 13.95 137 $ 0.67 51 $ 0.01 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average fair value per share of options granted during the year $ 25.91 $ 24.24 $ 6.59 --------- --------- --------- --------- --------- ---------
-47- The exercise price and life information in regard to significant option groups outstanding at December 31, 1998 is as follows:
(in thousands, except share prices) EXERCISABLE ---------------------------- WEIGHTED AVERAGE WEIGHTED RANGE OF NUMBER OF REMAINING AVERAGE WEIGHTED EXERCISE OPTIONS CONTRACTUAL EXERCISE NUMBER OF AVERAGE PRICES OUTSTANDING LIFE (Yrs.) PRICE OPTIONS EXERCISE PRICE - ------------ ----------- ---------- -------- ---------- -------------- $.01 662 6.90 $0.01 207 $0.01 $15.00-22.50 377 9.25 $20.03 34 $17.51 $23.13-29.75 101 9.34 $26.73 2 $23.92 $30.50-36.69 198 9.05 $31.89 147 $31.77 $38.50-39.00 32 8.90 $38.57 5 $38.57 ----- --- 1,370 395 ----- --- ----- ---
-48- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pursuant to the requirements of SFAS No. 123, the following are the pro forma net loss and net loss per share for 1998, 1997 and 1996, as if stock-based compensation had been determined based on the fair value at the grant date for grants in 1998, 1997 and 1996, consistent with the provisions of SFAS No. 123: (in thousands, except per share amounts)
1998 1997 1996 --------------------------- -------------------------- --------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- ----------- --------- Net loss $(19,965) $(23,774) $(12,871) $(13,729) $(11,972) $(12,783) Basic and diluted net loss per share $ (1.05) $ (1.25) $ (0.74) $ (0.79) $ (0.98) $ (1.04)
The fair value of options issued pursuant to the plans at the date of grant were estimated using the Minimum Value method for options granted prior to the initial public offering and the Black-Scholes model for options granted subsequent to the initial public offering. The estimation of the fair value of these options at the date of grant used the following assumptions:
1998 1997 1996 --------- ------- ---------- Expected life (years) 2.5-7.5 2.5-7.5 2.5-7.5 Interest rate 4.48-4.79% 6.5% 5.79-6.30% Volatility 0.70 0.65 0.65 Forfeiture rate 10.0% 10.0% 10.0%
The Company's volatility for the period prior to the initial public offering was not used in the calculation of the fair value of the options. The Company has never declared or paid dividends on any of its capital stock and does not expect to do so in the foreseeable future. The pro forma effects on 1998, 1997 and 1996 net loss and net loss per share of expensing the estimated fair value of stock options issued are not necessarily representative of the effects on reporting the results of operations for future years as the periods presented include only three years, two years and one year, respectively, of option grants. 8. LICENSE AND RESEARCH AGREEMENTS The Company has license agreements with Hoechst Marion Roussel, Inc. ("HMRI"), whereby HMRI was granted exclusive rights to make, use and sell worldwide two therapeutic products produced under patent rights and technologies owned by the Company. As of December 31, 1998, the Company has received $57,000,000 from the sale of stock, nonrefundable licensing fees, milestone payments related to the successful completion of certain development milestones, and contract research fundings, pursuant to the agreements with HMRI. As part of these agreements, HMRI will make additional payments of up to $68,000,000 upon achievement of certain development milestones and pay royalties based on net sales of the two products. For the years ended December 31, 1998, 1997 and 1996, license and research revenues earned from HMRI totaled $3,325,000, $5,788,000 and $4,225,000, respectively. At December 31, 1998, HMRI owned 2,187,000 shares of the Company's common stock. For the year ended December 31, 1998, license and research revenues from another collaborator totaled $2,000,000. -49- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company licenses certain technology from various universities and research organizations. Under the terms of these agreements, the Company is required to make payments of nonrefundable license fees and royalties on future sales of products employing the technology. 9. EMPLOYEE RETIREMENT PLAN The Company maintains a qualified defined contribution plan covering substantially all employees of the Company. The Company matches 50% of employee contributions, up to 7% of compensation (5% prior to July 1997). Employer contributions vest ratably over five years. The related expense was $231,000 , $159,000 and $91,000 in 1998, 1997 and 1996, respectively. 10. INCOME TAXES At December 31, 1998, the Company had unused net operating loss carryforwards of $62,700,000 and research and development tax credits of $3,816,000, both of which expire through 2013. Due to the degree of uncertainty related to the ultimate use of the loss carryforwards and tax credits, the Company has fully reserved this tax benefit. Additionally, the future utilization of the net operating loss carryforwards and tax credits may be subject to limitations under the change in stock ownership rules of the Internal Revenue Service. Significant components of the Company's deferred tax assets are as follows:
(in thousands) December 31 ----------------------- 1998 1997 -------- ------- Deferred tax assets: Net operating loss carryforwards $ 23,842 $18,370 Research and development tax credits 3,816 3,050 Depreciation 1,525 1,350 Other 57 186 -------- ------- Total deferred tax assets 29,240 22,956 Valuation allowance (29,240) (22,956) -------- ------- Net deferred tax assets $ -- $ -- -------- ------- -------- -------
The valuation allowance increased by $6,284,000 and $5,267,000 during 1998 and 1997, respectively, due primarily to the increase in net operating loss carryforwards and tax credits. The difference between the Company's "expected" tax benefit, as computed by applying the U.S. federal corporate tax rate of 34% to the loss before provision for income taxes and the actual tax is attributable to tax losses and credits for which the Company has not recognized any tax benefit. 11. COMMITMENTS AND CONTINGENCIES In April 1997, Amgen Inc. filed a civil action in the U.S. District Court in Massachusetts against the Company and HMRI. The complaint in the action alleged that the Company's Gene Activated erythropoietin product ("GA-EPO") and processes for producing GA-EPO infringe Amgen's U.S. Patent Numbers 5,547,933, 5,618,698, and 5,621,080 and requested that the Company and HMRI be enjoined from making, using, or selling GA-EPO and that the court award Amgen monetary damages. In November 1997, the Company and HMRI filed a Motion for Summary Judgment. On the same date, Amgen filed a Motion for Summary Judgment of Infringement. The Company and HMRI opposed that motion, stating that there had been no infringement. In April 1998, the U.S. District Court granted the Company and HMRI's Motion for Summary Judgment and denied Amgen's Motion for Summary Judgment on the ground that all of the Company and HMRI's GA-EPO -50- TRANSKARYOTIC THERAPIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) related activities to that 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 Hatch-Waxman 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 constitute 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. Pursuant to the Amended and Restated License Agreement, dated March 1995, by and between HMRI and the Company, HMRI has assumed the cost of defense of the suit by Amgen. The Company will reimburse HMRI for the Company's share of litigation expenses, as defined, from future royalties, if any, received from the sale of GA-EPO and in certain other circumstances. The Company and HMRI believe that they have substantial defenses to the allegations in the complaint and expect that their position will be thoroughly vindicated in court. The Company can provide no assurance as to the outcome of this litigation. A decision by the court in Amgen's favor, including the issuance of an injunction against the making, use or sale of GA-EPO by the Company and HMRI in the United States, or any other conclusion of the litigation in a manner adverse to the Company and HMRI, would have a material adverse effect on the Company's business, financial condition, and results of operations. The Company leases its facilities under operating leases which expire through 2008, subject to renewal provisions. In addition, the Company has commitments for certain product development activities with third parties for 1999. Future annual minimum payments under such commitments are as follows: YEAR ENDED (in thousands) 1999 $ 8,758 2000 1,595 2001 1,605 2002 1,504 2003 1,484 Thereafter 1,747 ------- $16,693 ------- -------
Rent expense was $1,316,000, $1,233,000, $1,068,000 in 1998, 1997 and 1996, respectively. -51- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is contained in part under the caption "Executive Officers of the Company" in PART I hereof, and the remainder is contained in the Company's Proxy Statement for the Company's Annual Meeting of Stockholders to be held on June 10, 1999 (the "Proxy Statement") under the caption "Proposal 1 - Election of Directors" and is incorporated herein by this reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is contained under the caption "Executive Compensation" in the Company's Proxy Statement and is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained in the Company's Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained in the Company's Proxy Statement under the caption "Certain Transactions" and is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS A PART OF THIS FORM 10-K: 1. FINANCIAL STATEMENTS. The following documents are filed as part of this Annual Report on Form 10-K: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 Consolidated Statement of Stockholders' Equity for the period January 1, 1996 through December 31, 1998 -52- Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES. The Company is not filing any financial statement schedules as part of this Annual Report on Form 10-K because they are not applicable or the required information is included in the financial statements or notes thereto. 3. EXHIBITS. The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of this Annual Report on Form 10-K, and such Exhibit Index is incorporated herein by reference. (b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed during the quarter ended December 31, 1998. -53- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRANSKARYOTIC THERAPIES, INC. By: /s/ Richard F Selden ------------------------------- Richard F Selden President and Chief Executive Officer Date: March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, in the capacities and on the dates indicated. Signature Title Date /s/ Richard F Selden President, Chief Executive March 31, 1999 - --------------------------- Officer and Director Richard F Selden (Principal Executive Officer) /s/ Daniel E. Geffken Vice President, Finance and March 31, 1999 - --------------------------- Chief Financial Officer Daniel E. Geffken (Principal Accounting and Financial Officer) /s/ Rodman W. Moorhead, III Chairman of the Board of March 31, 1999 - --------------------------- Directors Rodman W. Moorhead, III /s/ William R. Miller Director March 31, 1999 - --------------------------- William R. Miller /s/ James E. Thomas Director March 31, 1999 - --------------------------- James E. Thomas /s/ Peter Wirth Director March 31, 1999 - --------------------------- Peter Wirth -54- Exhibit Index EXHIBIT NO. DESCRIPTION 3.1 Amended and Restated Certificate of Incorporation of the Registrant (1) 3.2 Amended and Restated By-Laws of the Registrant, as amended(2) 10.1 Stock Purchase Agreement, dated July 1988, by and between Warburg, Pincus Capital Company, L.P. ("Warburg") and the Registrant (3) 10.2 Amended and Restated Registration Rights Agreement, dated November 3, 1993 and amended on May 13, 1994, March 1, 1995, October 26, 1995, July 10, 1996 and August 7, 1996, by and among the Registrant and certain holders of the Registrant's Preferred Stock named therein (3) 10.3 Lease Agreement, dated January 1, 1994, by and between the Trust under the Will of Harry F. Stimpson for office space at 195 Albany Street, Cambridge, Massachusetts (3) 10.4 Sublease Agreement, dated April 7, 1992, by and between the Massachusetts Institute of Technology and the Registrant, for office space located at 185 Albany Street, Cambridge, Massachusetts (3) 10.5 1993 Non-Employee Directors' Stock Option Plan (3) (4) 10.6 1993 Long-Term Incentive Plan (5) 10.7 Form of Letter Agreement re: Confidentiality, Inventions and Non-Disclosure (3) 10.8 Form of Letter Agreement re: Restricted Stock (3) 10.9 Form of Scientific Advisor Agreement (3) 10.10 Amended and Restated Promissory Note, dated June 16, 1993, issued by the Registrant to Dr. Richard F Selden, in the original principal amount of $125,000 (3) 10.11 Amended and Restated Promissory Note, dated April 21, 1995, issued by the Registrant to Dr. Christoph M. Adams, in the original principal amount of $15,000 (3) 10.12 Amended and Restated Promissory Note, dated May 5, 1995, issued by the Registrant to Dr. Christoph M. Adams, in the original principal amount of $20,000 (3) 10.13 Employment Agreement, dated June 19, 1991, by and between Dr. Richard F Selden and the Registrant (3) (4) 10.14 Pledge Agreement, dated May 14, 1991, by and between Dr. Richard F Selden and the Registrant (3) 10.15 Employment Agreement, dated July 26, 1991, by and between Dr. Douglas A. Treco and the Registrant (3) (4) -55- 10.16 Employment Agreement, dated November 20, 1993, by and between Dr. Christoph M. Adams and the Registrant (3) (4) 10.17 Pledge Agreement, dated April 21, 1995, by and between Dr. Christoph M. Adams and the Registrant (3) 10.18 Agreement, dated September 1, 1991, by and between Mr. William R. Miller and the Registrant (3) 10.19 Agreement, dated July 30, 1993, by and between Warburg and the Registrant (3) 10.20 Common Stock Purchase Warrant (3) 10.21 Collaboration and License Agreement, dated July 22, 1993 and amended on May 30, 1996 (3) (6) 10.22 Amended and Restated License Agreement, dated March 1, 1995, by and between Hoechst Marion Roussel, Inc. ("HMRI") and the Registrant (3) (6) 10.23 License Agreement, dated March 1, 1995, by and between HMRI and the Registrant (3) (6) 10.24 Agreement to Nominate, dated September 23, 1996, by and between Warburg and the Registrant (3) (6) 10.25 Fifth Amendment to Registration Rights Agreement dated October 1, 1996 by and among the Registrant and certain holders of the Registrant's Preferred Stock named therein (3) 10.26 Employment Agreement dated July 1, 1996 by and between Kurt C. Gunter and the Registrant (4) (7) 10.27 Consulting Agreement dated November 1, 1996 by and between Peter Wirth and the Registrant (4) (7) 10.28 Employment Agreement dated February 20, 1997 by and between Daniel E. Geffken and the Registrant (8) 10.29 Form of Common Stock Purchase Agreement by and between each Purchaser of shares in the Registrant's directed public offering in August 1997 and the Registrant (8) 10.30 Lease dated November 10, 1998 between 205 Alewife Limited Partnership and the Registrant 21.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 27.1 Financial Data Schedule - ------------------------------------- (1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference. -56- (2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. (3) Filed as an exhibit to the Company's Registration Statement on Form S-1 (File No. 333-10845) and incorporated herein by reference. (4) Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (5) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. (6) Confidential treatment granted as to certain portions. (7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. (8) Filed as an exhibit to the Company's Registration Statement on Form S-1 (File No. 333-31957) and incorporated herein by reference. -57- EX-10.30 2 EXHIBIT 10.30 Exhibit 10.30 11.2.98 LEASE AGREEMENT THIS LEASE made and entered into as of this 10 day of November, 1998, by and between 205 ALEWIFE LIMITED PARTNERSHIP, a Massachusetts limited partnership ("Landlord"), and TRANSKARYOTIC THERAPIES, INC., a Massachusetts corporation ("Tenant"). WITNESSETH WHEREAS, Landlord is the owner of certain land and a building located at 205 Alewife Brook Parkway, Cambridge, Massachusetts more particularly described in Exhibit A (the "Premises" or the "Leased Premises"); and WHEREAS, Landlord and a related additional party ("Additional Party") are the owners of certain parking facilities more particularly described in Exhibit B attached hereto, which parking facilities are included in the Premises demised hereunder; and WHEREAS, Tenant desires to lease from Landlord such land, building and improvements located thereon, and to lease from Landlord and the Additional Party the parking facilities more particularly described in Exhibit B, subject to the terms and conditions hereinafter stated. NOW, THEREFORE, in consideration of the mutual covenants herein set forth, Landlord and Tenant do hereby agree to the terms and conditions set forth in this Lease. ARTICLE I. REFERENCE DATA 1.1 Definitions. Each reference in this Lease to any of the following subjects shall be construed to incorporate the date stated for that subject in this Article. ANNUAL FIXED RENT: From and after the Rent Commencement Date, (a) during the first through the sixth month thereafter, $20,000.00 per month; (b) from and after the seven (7) month following the Rent Commencement Date and through out the Term, $30,115.00 monthly (from and after the second year of the Term, $361,380.00 annually). COMMENCEMENT DATE: The date of execution of this Lease. RENT COMMENCEMENT DATE: Annual Fixed Rent shall commence on the earlier of (a) the nineth month following the Commencement Date or (b) the date on which Tenant occupies the Premises for the Permitted Uses hereunder and its tenant improvements are completed (provided that such occupancy shall not be deemed to have occurred during the period in which Tenant is installing its improvements, equipment and furnishings in the Premises). LAND: A parcel of land known as 205 Alewife Brook Parkway, Cambridge, Massachusetts, as more particularly described in Exhibit A. LANDLORD'S ORIGINAL ADDRESS: 185 Alewife Brook Parkway, Suite 400 Cambridge, MA LEASE YEAR: Any period of one year during the Term commencing on the Commencement Date or on any anniversary thereof. PERMITTED USES: Any office, laboratory, manufacturing, biotechnology or accessory use permitted under the Cambridge Zoning By-Law. PREMISES: The Land with the building and parking facilities thereon described in Exhibit A, together with the parking facilities described in Exhibit B TENANT'S ADDRESS: 195 Albany Street Cambridge, MA 02139 TERM: The term of this Lease shall be ten (10) years, commencing on the Commencement Date. Tenant has three (3) additional renewal periods of five (5) years each at Fair Market Rent (see Exhibit C). -2- 1.2 Exhibits: There are incorporated as part of this Lease the following Exhibits: Exhibit A - Legal Description of the Land Exhibit B - Parking Facilities Exhibit C - Options to Extend Exhibit D - Tenant Improvements Exhibit D-1 Improvements Removable by Tenant ARTICLE II. PREMISES, TERM AND RENT 2.1 Demising. Landlord hereby demises and leases to Tenant, and Tenant hereby hires from Landlord, for the Term, the Premises, as is. 2.2 Term. Tenant shall have and hold the Premises for a period commencing on the date of execution of this Lease and continuing for the Term unless sooner terminated as provided in this Lease. 2.3 Annual Fixed Rent. Tenant shall pay, without notice or demand, monthly installments of the Annual Fixed Rent in advance for each full calendar month of the Term and shall pay in advance the corresponding fraction of said monthly installment at the beginning or end of the Term in the amounts set forth in Section 1.1. 2.4 Immediate Access. From and after the date of execution of this Lease, Tenant shall be permitted access to the Premises to install the tenant improvements described in Exhibit D, and its equipment, fixtures, and furnishings, but such entry by Tenant prior to the Rent Commencement Date shall be subject to and upon all of the terms, conditions and agreements contained in this Lease except that Tenant shall not be obligated to pay Annual Fixed Rent. ARTICLE III. ADDITIONAL RENT 3.1 Tax Expenses. During the Term, Tenant shall pay directly to the City of Cambridge, as Additional Rent, the Tax Expenses (as such term is hereinafter defined) in accordance with this Section 3.1. The terms used in this Section 3.1. are defined as follows: -3- (a) "Tax Year" means the 12-month period beginning July 1 of each year, or if the appropriate governmental tax fiscal period shall begin on any date other than July 1, such other date. (b) "Tax Expenses" with respect to any Tax Year means the aggregate Real Estate Taxes on the Property with respect to that Tax Year, reduced by any abatement receipts with respect to that Tax Year. (c) "Real Estate Taxes" means all taxes and special assessments of every kind and nature assessed by any governmental authority on the Premises which Landlord shall be obligated to pay in connection with the ownership, leasing or operation of the Premises, and reasonable expenses of any proceedings for abatement of such taxes including appeals thereof. The amount of special assessments to be included shall be limited to the amount of the installment paid in any Tax Year (plus any interest thereon) of such special assessment which shall be payable over the longest period permitted by law. There shall be excluded from such taxes all income, estate, succession, inheritance, excess profit, franchise and transfer taxes. Payments by Tenant on account of Tax Expenses shall be made prior to the date when due. Tenant shall furnish a copy of evidence of such payment to Landlord upon request therefor. For any tax bill covering a period only partially occurring during the Term, Tenant shall pay a pro rata portion of the taxes shown on that bill, which portion shall be based on the number of days in the tax period for which the bill applies that occur during the term. Landlord hereby represents and warrants to Tenant that all Tax Expenses in respect of the Premises have been paid in full through the first and second quarters of fiscal year 1999, and that the Premises constitute a separate parcel for real estate tax assessment purposes. If the first and second quarters of fiscal year 1999 have not been paid, or if Landlord fails to timely pay all Tax Expenses for the Premises through the Commencement Date, Tenant may make payment of the same and deduct such payments from the Rent payable under this Lease. If Landlord elects not to initiate proceedings to contest the amount of Real Estate Taxes for any Tax Year, Tenant may, at Tenant's expense, bring appropriate proceedings to contest the amount of the Real Estate Taxes. Landlord shall cooperate with Tenant in any such proceedings so far as reasonably necessary. If, as the result of any such contest or review, the Real Estate Taxes shall be reduced for any Tax Year, the Tax Expenses for that Tax Year shall be reduced by an amount equal to the reduction in Real Estate Taxes for such Tax Year less Landlord's reasonable expenses, if any, incurred in connection with obtaining that reduction. If at the time the Real Estate Taxes are reduced Tenant has made payments for Tax Expenses in excess of the actual Tax Expenses due for that Tax Year, the Landlord shall refund such -4- overpayment to Tenant. In the event Tenant initiates abatement proceedings, Tenant shall make such payments on account of Tax Expenses as may be required by law. 3.2 Utilities and Other Services. During the Term, Tenant shall pay directly to the provider of the service all charges for steam, heat, air-conditioning, gas, electricity, telephone, janitorial service, fuel, and trash removal and all other services and utilities furnished directly to the Premises. Landlord hereby represents and warrants to Tenant that all water, sewer and other municipal charges in respect of the Premises have been paid in full through the date of execution of this Lease. If said charges have not been paid, Tenant may make payment of the same and deduct such payments from the Rent payable under this Lease. Tenant hereby covenants and agrees that Tenant shall maintain the exterior of the Premises in good order and condition consistent with a quality commercial property, including landscaping, exterior cleaning and snow removal. 3.3 Net Lease. It is the intent of the parties that the Annual Fixed Rent be net to the Landlord. Accordingly, Tenant shall pay directly the expenses of the Leased Premises as defined pursuant to the term of this Lease Agreement (e.g., taxes, insurance, maintenance and operating expenses) during the term of this Lease. ARTICLE IV. TENANT'S ALTERATIONS 4.1 Except as permitted hereunder, Tenant shall not make alterations and additions to the Premises except in accordance with plans and specifications therefor first approved by Landlord, which approval shall not be unreasonably withheld or delayed and which shall be requested in writing. Landlord shall not be deemed unreasonable for withholding approval of any alterations or additions which (a) involve or might adversely affect any structural or exterior element of the Building, or any area or element outside of the Premises, or (b) will require unusual expense to re-adapt the Premises to the current use of any portion of the Premises upon the Lease termination or expiration unless Tenant first gives assurance acceptable to Landlord that such re-adaptation will be made prior to such termination or expiration without expense to Landlord. Notwithstanding the foregoing, the consent of Landlord shall not be required for (a) the tenant improvements described in Exhibit D, (b) non-structural alterations, and (c) painting, carpet, and other cosmetic improvements. Except as set forth in Exhibit D-1 and as may otherwise be agreed by Landlord and Tenant, all alterations and additions shall become part of the Building and shall become the property of Landlord upon termination. Tenant shall have no obligation to remove the tenant improvements described in Exhibit D upon the expiration of the Term. -5- 4.2 Construction Standard. All construction work permitted or required by this Lease shall be done in a good and workmanlike manner and in compliance with all applicable laws and all lawful ordinances, regulations and orders of Governmental authority and insurers of the Building. 4.3 Alteration Requirements. Landlord may (but without any implied obligation to do so) inspect any construction work of Tenant under this Lease at reasonable times and upon reasonable prior notice to Tenant. Any such entry shall be subject to Tenant's security precautions for personal safety and the confidentiality of its business activities. All of Tenant's work shall be performed by appropriately licensed contractors. Tenant, before its work is started, shall secure all permits necessary therefor; deliver to Landlord a statement of the names of all its contractors; and shall cause each contractor to carry workman's compensation insurance and comprehensive general public liability insurance in commercially reasonable amounts insuring Landlord and Tenant as well as the contractors, and deliver to Landlord certificates of all such insurance. Tenant agrees to pay promptly when due the entire cost of any work done by Tenant, its agents, employees or independent contractors, and not to cause or permit any liens for labor or materials performed or furnished in connection therewith to attach to the Premises and promptly to discharge any such liens which may so attach. ARTICLE V. CONDITION OF THE PREMISES SURRENDER: HOLDING OVER 5.1 Maintenance and Repair. Tenant will be responsible to provide that the Leased Premises shall have adequate electrical, plumbing, heating, ventilation and air conditioning systems and related fixtures of such systems as herein provided, which shall be in good order and condition. Tenant will be responsible for the repairs required to the electrical, plumbing, heating, ventilation, air conditioning systems and related fixtures of such systems, and for all necessary maintenance, repairs, alterations and replacements to such systems and related fixtures, irrespective of the cost thereof. Tenant will also be responsible for cleaning and maintaining the Leased Premises, including the redecorating of any interior surfaces and the installation of any replacement floor coverings which Tenant desires. The structural repairs for which Tenant is responsible include repairs to the roof of the Building, the slab floor foundation, and utility systems. Tenant is responsible for the exterior of the building. If maintenance or repairs are required to be done or made by Tenant pursuant to the terms hereof, Landlord may demand that Tenant do or make the same forthwith, and, if Tenant refuses or neglects or commence such repairs and complete the same with reasonable dispatch after such demand, Landlord may (but shall not be required to do so) make or cause such repairs to be made and shall not be -6- responsible to Tenant for any loss or damage that may accrue to Tenant's property or business by reason thereof. If Landlord makes or causes such repairs to be made, Tenant agrees that Tenant will forthwith on demand pay to Landlord the cost thereof as Additional Rent. In the event that any capital repairs or replacements to the roof, slab, structure or major base building systems performed by Tenant hereunder (except for Tenant's initial improvements, as described in Exhibit D, and except for any capital items unique to Tenant's research and manufacturing activities, which shall be Tenant's sole responsibility) have a useful life (determined in accordance with generally accepted accounting principles on a straight-line basis) which would extend beyond the Term hereof, Tenant shall be obligated to perform such work only upon the payment by Landlord to Tenant of the cost of that portion of the work so allocated to the period beyond the expiration of the Term hereof. For the purposes of the foregoing sentence only, the Term shall be deemed to include the initial ten-year term and the three (3) five-year option periods thereafter, whether or not exercised by Tenant. If Landlord fails to make such payment within thirty (30) days of written request therefor, Tenant may undertake such repair or replacement and deduct Landlord's share of the cost thereof from the payment of Annual Fixed Rent hereunder. Landlord shall have the right to approve any repair or replacement as to which Landlord is obligated to contribute hereunder, which approval shall not be unreasonably withheld or delayed. 5.2 Entry by Landlord. Landlord may enter the Premises for the purpose of inspecting the same upon reasonable prior notice to Tenant, provided that any such entry shall be subject to Tenant's security precautions for personal safety and the confidentiality of its business activities. Landlord shall use reasonable efforts to minimize interference with Tenant's activities in the Premises. In no event shall Landlord enter the Premises for the purpose of marketing the same, nor shall Landlord install any signs for such purpose, until the last six (6) months of the Term. In case Landlord is prevented or delayed from performing any covenant, obligation or duty to be performed on Landlord's part by reason of any external cause, Landlord shall not be liable to Tenant therefor. If Tenant fails to surrender the Premises to Landlord upon the expiration of the Term as provided hereunder, Tenant shall be liable to Landlord for rent at the rate of 150% of the fixed rent payable hereunder until Tenant vacates the Premises. 5.3 Surrender. Tenant shall surrender the Premises and all alterations and additions thereto as hereinabove provided, at the end or earlier termination of the Term, in the condition described in Section 5.1, first removing all goods and effects of Tenant and repairing any damage caused by such removal and restoring the Premises and leaving them clean and neat. Without limiting the generality of the foregoing, and except as set forth in Exhibit D-1 or as may be otherwise agreed by Landlord and Tenant, Tenant shall not remove from the Premises any laboratory fixture, including, without limitation, fixed laboratory fixtures, laboratory benches, fume hoods, benches and alterations made to bring the Premises into compliance with the -7- Massachusetts Building Code. Tenant waives all claims against Landlord for any damage to Tenant resulting from Landlord's retention or disposition of any alterations or additions or Tenant's personal property remaining on the Premises on expiration or earlier termination of the Term. Tenant shall be liable to Landlord for Landlord's cost for storing, removing, and disposing of any alterations or Tenant's personal property. 5.4 Holding Over. If Tenant, with Landlord's consent, remains in possession of the Premises after expiration or earlier termination of the Term, such possession by the Tenant shall be deemed to be a month-to-month tenancy terminable on thirty days' notice given at any time by either party. During any such month-to-month tenancy, Tenant shall pay all rent and other sums required by this Lease, and all provisions of this Lease except those pertaining to Term shall apply to the month-to-month tenancy. ARTICLE VI. TENANT COVENANTS Tenant covenants during the Term and for such further time as Tenant occupies any part of the Premises: 6.1 Payment of Rent. To pay when due all Annual Fixed Rent and Additional Rent, all charges for utility services rendered to the Premises, and all other monies required to be paid by Tenant pursuant to this Lease. 6.2 Use. Continuously from the Commencement Date to the end of the Term, to use and occupy the Premises for the Permitted Uses only, and not to use or devote the Premises or any part thereof for any purpose which is contrary to law or ordinance or liable to invalidate any insurance on the Building or its contents. Tenant shall comply with all applicable laws, statutes and regulations, including all environmental laws, Federal and State, including M.G.L. 21E, applicable to the conduct by Tenant of the Permitted Uses in the Premises, and shall indemnify and hold harmless Landlord from all claims, loss or damage arising from any violation thereof by Tenant. Landlord hereby agrees to indemnify and hold Tenant harmless from any liability arising under all environmental laws, Federal and State, including M.G.L. 21E, occasioned by the existing environmental condition of the Premises, except to the extent disclosed by the environmental report prepared by MacPhail Associates dated November 2, 1998, a copy of which has been provided by Tenant to Landlord (Tenant hereby acknowledging its acceptance of the matters set forth in said report). -8- 6.3 Compliance with Law. To comply with all federal, state and local laws, regulations, ordinances, executive orders and similar requirements in effect from time to time during the Term, including, without limitations, at Tenant's cost to alter, maintain or restore the Premises to comply with the same, and to keep the Premises equipped with all safety appliances required by law or ordinance or any other regulations of any public authority and to procure all licenses and permits required for the Premises or Tenant's use thereof, it being understood that any foregoing provisions shall not be construed to broaden in any way the Permitted Uses. In the event that any capital repairs or replacements to the Premises required in order to bring the Premises into such legal compliance (except for Tenant's initial improvements, as described in Exhibit D, and except for any capital items unique to Tenant's research and manufacturing activities, which shall be Tenant's sole responsibility) have a useful life (determined in accordance with generally accepted accounting principles on a straight-line basis) which would extend beyond the Term hereof, Tenant shall be obligated to perform such work only upon the payment by Landlord to Tenant of the cost of that portion of the work so allocated to the period beyond the expiration of the Term hereof. For the purposes of the foregoing sentence only, the Term shall be deemed to include the initial ten-year term and all three (3) five-year option periods thereafter, whether or not exercised by Tenant. If Landlord fails to make such payment within thirty (30) days of written request therefor, Tenant may undertake such repair or replacement, and deduct Landlord's share of the cost thereof from the payment of Annual Fixed Rent hereunder. Landlord shall have the right to approve any repair or replacement as to which Landlord is obligated to contribute hereunder, which approval shall not be unreasonably withheld or delayed. 6.4 Permitted Entry. To permit Landlord and its agents, after reasonable notice except in the case of emergencies, to enter the Premises at all reasonable hours for the purpose of inspecting, testing, or of making repairs to the same, to show the Premises to prospective purchasers and mortgagees at all reasonable times, and to show the Premises to prospective tenants during the last six (6) months of the Term. Any such entry shall be subject to Tenant's security precautions for personal safety and the confidentiality of its business activities. Landlord shall use reasonable efforts to minimize interference with Tenant's activities in the Premises. 6.5 Overloading. Not to place a load upon any floor in the Premises exceeding the floor load per square foot of area which such floor was designed to carry and which is allowed by law. 6.6 Personal Property Taxes. To pay promptly when due all taxes which may be imposed upon personal property (including, without limitation, fixtures and equipment) in the Premises. -9- 6.7 Attorneys' Fees. As Additional Rent, to pay all reasonable costs, counsel and other fees incurred by Landlord in connection with the successful enforcement by Landlord of any obligations of Tenant under this Lease. 6.8 Assignment and Subletting. Except as otherwise provided in this Section 6.8, not to assign, mortgage, pledge, hypothecate or otherwise transfer this Lease, or sublet (which term, without limitation, shall include granting of concessions, licensees and the like) the whole or any part of the Premises without, in each instance, having first received the consent of Landlord, which consent shall not be unreasonably withheld, delayed or conditioned. Any assignment or sublease made without such consent shall be void, and in any case where Landlord consents to such assignment or subletting, Tenant shall remain fully and primarily liable for the obligations of the tenant hereunder, including, without limitation, the obligation to pay Annual Fixed Rent and Additional Rent as provided under this Lease. In the event that Landlord fails to respond to Tenant's written request for consent to assign or sublet hereunder within twenty (20) days, such request shall be deemed given by Landlord and Tenant may rely thereon. Landlord's prior consent shall not be required for an assignment or sublease to any entity controlling, controlled by, or under common control with Tenant, or, provided the net worth of the surviving entity is equal to or greater than the net worth of Tenant on the date of assignment, in connection with any merger, consolidation or reorganization of Tenant, or sale of all or substantially all of the assets thereof. Tenant shall give Landlord prior notice of any proposed sublease or assignment as to which consent is required hereunder, specifying the provisions of the proposed subletting or assignment, including (i) the name and address of the proposed subtenant or assignee, (ii) a copy of the proposed subtenant's or assignee's most recent annual financial statement, and (iii) all of the terms and provisions upon which the proposed subletting or assignment is to be made. Except in the case of a sublease or an assignment pursuant to the second paragraph of this Section 6.8, Tenant shall pay to Landlord as Additional Rent fifty percent (50%) of any amount Tenant received from any subtenant or assignee as rent, additional rent or other form of compensation or reimbursement in excess of the Annual Fixed Rent, Additional Rent and other monies otherwise due to Landlord pursuant to this Lease (allocable in the case of a sublease to that portion of the Premises being subleased), following the recovery by Tenant of (a) any reasonable expenses incurred and paid by Tenant in connection with such sublease or assignment such as brokerage commissions, fees for legal services, and expenses of preparing the Premises for occupancy by such subtenant or assignee, and (b) the unamortized cost of the improvements installed by Tenant in the Premises for its Permitted Uses. -10- If this Lease is assigned, or if the Premises or any part thereof is sublet or occupied by anyone other than Tenant, Landlord may, upon the occurrence of an event of default thereunder, collect rent and other charges from the assignee, sublessee or occupant and shall apply the amount collected to the rent and other charges herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of the prohibitions contained in this Section 6.8, or the acceptance of the assignee, sublessee or occupant as a tenant, or a release of Tenant from the further performance by Tenant of covenants herein contained to be performed by Tenant. The consent by Landlord to an assignment or subletting shall not be construed to relieve Tenant from obtaining the express consent in writing of Landlord to any further assignment or subletting to the extent required hereunder. No assignment, subletting or use of the Premises by a subsidiary or controlling entity of Tenant or by any other third party shall affect the Permitted Uses as set forth in Section 1.1 hereof. ARTICLE VII. INDEMNITY AND INSURANCE 7.1 Indemnity. To the maximum extent this agreement may be made effective according to law, each party agrees to defend, save harmless, and indemnify the other party from any liability or injury, loss, accident or damage to any person or property, and from any claims actions, proceedings, and expenses and costs in connection therewith (including without limitation reasonable counsel fees), (i) arising from the omission, fault, willful act, negligence or other misconduct of such party, its contractors, agents, employees or invitee, or from any use made or thing done or occurring on the Premises during the term or during Tenant's possession of any part of the Premises not due to the omission, fault, willful act, negligence or other misconduct of the other party, its contractors, agents, employees or invitees, or failure to perform its obligations hereunder, or (ii) resulting from the failure of such party to perform and discharge its covenants and obligations under this Lease, including, without limitation, the violation of any environmental law or other governmental requirement. This indemnity and hold harmless agreement shall include indemnity against all costs, expenses and liabilities incurred in connection with any such claim or proceedings brought thereon, and the defense thereof. 7.2 Tenant's Insurance. Tenant agrees to maintain in full force from the date upon which a Tenant first enters the Premises for any reason, throughout the Term, and thereafter, so long as Tenant is in occupancy of any part of the Premises, a policy of comprehensive general liability insurance under which Landlord and Tenant are named as insureds, and under which the insurer provides a contractual liability endorsement insuring against all cost, expense and liability arising out of or based upon any and all claims, accidents, injuries and damages described in Section 7.1, in -11- the broadest form of such coverage from time to time available. Each such policy shall be non-cancellable and non-amendable (to the extent that any proposed amendment reduces the limits or the scope of the insurance required in this Lease) with respect to Landlord without thirty (30) days prior notice to Landlord, and a duplicate original thereof shall be delivered to Landlord. As of the Commencement Date hereof, the minimum limits of liability of such insurance for each year shall be Three Million Dollars ($3,000,000.00) for combined bodily injury (or death) and damage to property (per occurrence), and from time to time during the Term for such higher limits, if any, as are carried customarily in the Boston/Route 128 area with respect to similar properties. At any time when Tenant is performing construction work in or on the Premises, Tenant shall carry builder's risk insurance satisfactory to Landlord. Tenant shall provide Landlord with a certificate evidencing such coverage, which shall state that the coverage cannot be cancelled or amended without thirty days' prior notice to Landlord. Tenant at its cost shall maintain on all its personal property, tenant improvements and alterations in on or about the Premises a policy of standard fire and extended coverage insurance, with vandalism and malicious mischief endorsements, to the extent of their full replacement value. The proceeds for any such policy shall be used by Tenant for the replacement of personal property or the restoration of tenant improvements or alterations. Tenant shall deliver a certificate evidencing such coverage to Landlord, which shall state that the coverage may not be amended or cancelled without at least thirty days' prior written notice to Landlord. 7.3 Tenant's Risk. Tenant agrees that all of the furnishing, fixtures, equipments, effects, and property of every kind, nature and description of Tenant, and of all persons claiming by, through or under Tenant which during the continuance of this Lease or any occupancy of the Premises by Tenant or anyone claiming under Tenant may be on the Premises, shall be at the sole risk and hazard of Tenant, and if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of pipes or by theft or from any other cause, no part of said loss or damage is to be charged to or be borne by Landlord, except that Landlord shall in no event be exonerated from any liability to Tenant or to any person for any injury, loss, damage, or liability to the extent such exoneration is prohibited by law and to the extent otherwise set forth herein. 7.4 Landlord's Insurance. Landlord shall carry such insurance with respect to the Premises as may from time to time be deemed reasonably prudent by Landlord or required by any mortgagee holding a mortgage thereon or any ground lessor of the Land, which may only include loss of rents coverage if required by a mortgagee, and in any event shall include all-risk property insurance against loss by fire and the risks now covered by extended coverage endorsement in an amount at -12- least equal to 100% of the replacement value of the Building and the improvements, alterations and additions installed by Tenant therein, exclusive of foundation, site preparation and other construction costs which would not need to be duplicated in the event of total destruction of the Building, and shall supply certificates of all such insurance to Tenant issued by or on behalf of the insurers named therein by a duly authorized agent. Tenant shall pay Landlord as Additional Rent the premiums for such insurance within ten (10) days after Landlord sends Tenant a copy of the invoice for the premium of such insurance. In the event that Landlord fails to maintain such insurance and to provide Tenant with evidence of the same within ten (10) days of request therefor, Tenant may obtain such insurance, and deduct the cost of the same from the Annual Fixed Rent due hereunder. 7.5 Subrogation. Any insurance carried by either party with respect to the Property, or any property therein or occurrences thereon shall, without further request by either party, if it can be so written without additional premium, or with an additional premium which the other party elects to pay, include a clause or endorsement denying to the insurer rights of subrogation against the other party to the extent rights have been waived by the insured prior to occurrence of injury or loss. Each party, notwithstanding any provisions of this Lease to the contrary, hereby waives any rights of recovery against the other for injury or loss, including, without limitation, injury or loss caused by negligence of such other party due to hazards covered by insurance containing such clause or endorsement to the extent of the indemnification received thereunder. ARTICLE VIII. CASUALTY AND EMINENT DOMAIN 8.1 Casualty During Term. If, during the Term, the Building shall be partially damaged (as distinguished from "substantially damaged," as that term is hereinafter defined) by fire or casualty, Landlord shall proceed promptly to restore the Building (consistent, however, with governmental laws and codes then in existence), to substantially the condition thereof at the time of such damage, but Landlord shall not be responsible for delay in such restoration which may result from any cause beyond the reasonable control of Landlord. If during the Term the Building shall be substantially damaged (as that term is hereinafter defined) by fire or casualty, the risk of which is covered by Landlord's insurance, Landlord shall, promptly after such damage and the determination of the net amount of insurance proceeds available to Landlord, expend so much as may be necessary of such net amount to restore (consistent, however, with governmental laws and codes then in existence) the Building to substantially the condition thereof at the time of such damage. If the Building shall be substantially damaged by fire or -13- casualty (a) as the result of a risk not covered by the forms of casualty insurance maintained by Landlord, or (b) the net amount of insurance proceeds available to Landlord are insufficient to cover the cost of restoring the Building in the reasonable estimate of Landlord, then in any such case Landlord may, but shall have no obligation to, restore the Building. If Landlord elects not to restore the Building, Landlord shall terminate this Lease by giving notice to Tenant within a reasonable time after Landlord has determined the net amount of insurance proceeds available to Landlord and the estimated cost of such restoration. If Landlord shall notify Tenant that Landlord does not intend to restore the Building and intends to terminate the Lease by reason of the unavailability or insufficiency of insurance proceeds, Tenant shall have the right to contribute to Landlord the amount of such insufficiency, and if Tenant shall promptly notify Landlord of Tenant's desire to contribute such insufficiency and provide Landlord with security for Tenant's undertaking in this respect satisfactory to Landlord, this Lease shall not terminate and Landlord shall restore the Building unless otherwise excused and permitted to terminate by some other provision of this Article VIII. Unless Landlord within forty-five (45) days after the casualty advises Tenant of the status of Landlord's obligations with respect to reconstruction, Tenant shall have the right to terminate this Lease, such termination to take effect as of the date of such Tenant's notice. In addition, Tenant shall have the right to terminate this Lease by written notice to Landlord in the event of a casualty as to which the restoration period will exceed one hundred fifty (150) days from the date of the casualty, or in the event that Landlord commences restoration but fails to complete the same within one hundred fifty (150) days from the date of the casualty. 8.2 Casualty at End of Term. If the Premises shall be substantially damaged by fire or casualty within the last twelve (12) months of the Term (as the same may have been extended hereunder), either party shall have the right, by giving notice to the other not later than thirty (30) days after such damage, to terminate this Lease, whereupon this Lease shall terminate as of the date of such notice. 8.3 "Substantially Damaged". The term, "substantially damaged," as used in this Article VIII, shall refer to damage of such a character that the same cannot, in ordinary course, reasonably be expected to be repaired within one hundred twenty (120) days from the time that repair work would commence. 8.4 Condemnation. Except as hereinafter provided, if the Premises, or such portion thereof as to render the balance (if reconstructed to the maximum extent practicable in the circumstances) unsuitable for Tenant's purposes, shall be taken by eminent domain, Landlord or Tenant shall have the right to terminate this Lease by notice to the other of its desire to do so, provided that such notice is given not later than thirty (30) days after the effective date of such taking. Should any part of the -14- Premises be so taken, and should this Lease be not terminated in accordance with the foregoing provisions, Landlord agrees to Use due diligence to put what may remain of the Premises (consistent, however, with governmental laws and codes then in existence) into proper condition for use and occupation as nearly like the condition of the Premises prior to such taking as shall be practicable, but Landlord shall not be required to expend funds in excess of the damages recovered by Landlord as a result of taking. 8.5 Abatement of Rent. If the Premises shall be damaged by fire or other casualty, the Annual Fixed Rent and Additional Rent shall be justly and equitably abated and reduced according to the nature and extent of the loss of use thereof suffered by Tenant; and in case of a taking which permanently reduces the area of the Premises, a just proportion of the Annual Fixed Rent shall be abated for the remainder of the Term. 8.6 Condemnation Award. Landlord shall have and hereby reserves and excepts, and Tenant hereby grants and assigns to Landlord, all rights to recover for damages to the Premises, and the leasehold interest hereby created, and to compensation accrued or hereafter to accrue by reason of such taking, damage or destruction, as aforesaid, and by way of confirming the foregoing, Tenant hereby grants and assigns to Landlord all rights to such damages or compensation. Nothing contained herein shall be construed to prevent Tenant from prosecuting in any condemnation proceedings a claim for recovery of the cost of improvements installed by Tenant in the Premises, as well as Tenant's fixtures, equipment, personal property, and relocation expenses. ARTICLE IX. DEFAULT 9.1 Tenant's Default. In the event that: (a) Tenant shall fail to pay the Annual Fixed Rent, Additional Rent or other charges for which provision is made herein on or before the date on which the same become due and payable, and such condition continues for seven (7) days after written notice from Landlord to Tenant that the same are due (but Tenant shall not be entitled to such notice more than twice in any twelve-month period), or (b) Tenant shall fail to perform or observe any other term or condition contained in this Lease and Tenant shall not cure such failure within thirty (30) days after written notice from Landlord -15- to Tenant thereof or, if such failure cannot be cured within such thirty (30) days, if Tenant shall fail to commence to cure such failure within such thirty (30) days and promptly and diligently complete the curing of the same, or (c) The estate hereby created shall be taken on execution or by other process of law, or if Tenant shall be judicially declared bankrupt or insolvent according to law, or if any assignment or trust mortgage arrangement, so-called, shall be made of the property of Tenant for the benefit of creditors, or if a receiver, guardian, conservator, trustee in involuntary bankruptcy, or other similar officer shall be appointed to take charge of all or any substantial part of Tenant's property by a court of competent jurisdiction, or if a petition shall be filed for the reorganization of Tenant under any provisions of the Bankruptcy Code now or hereafter enacted and the same is not dismissed within ninety (90) days, or if Tenant shall file a petition for such reorganization, or for arrangements under any provisions of the Bankruptcy Code now or hereafter enacted and providing a plan for a debtor to settle, satisfy or extend the time for payment of debts. Then, in any such case, whether or not the Term shall have begun, Landlord lawfully may, immediately or at any time thereafter, give notice to Tenant specifying the default and this Lease shall come to an end on the date specified therein as fully and completely as if such date were the date herein originally fixed for the expiration of the Term (Tenant hereby waiving any rights of redemption), and Tenant will then quit and surrender the Premises to Landlord, but Tenant shall remain liable as hereinafter provided. 9.2 Damages. In the event that this Lease is terminated under any of the provisions contained in Section 9.1 or shall be otherwise terminated for breach of any obligation of Tenant, Tenant covenants to pay to Landlord forthwith on Landlord's demand, as compensation, an amount equal to the excess, if any, of the discounted present value of the total rent reserved for the residue of the Term over the then discounted present fair rental value of the Premises for the residue of the Term. In calculating the discounted present value, the parties agree to use a discount rate of two percent (2%) above the prime rate published by the Wall Street Journal during the twelve (12) months following any such termination. In calculating the rent reserved, there shall be included, in addition to the Annual Fixed Rent and all Additional Rent, the value of all other considerations agreed to be paid or performed by Tenant for said residue during the twelve months following any such termination. Tenant further covenants as an additional and cumulative obligation after any such termination to pay punctually to Landlord during the twelve months following any such termination all the sums and perform all the obligations which Tenant -16- covenants in this Lease to pay and to perform in the same manner and to the same extent and at the time as if this Lease had not been terminated. In calculating the amounts to be paid by Tenant under the next foregoing covenant, Tenant shall be credited with any amount paid to Landlord pursuant to the first sentence of this Section 9.2 with the net proceeds of any rent obtained by reletting the Premises, after deducting all Landlord's expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commission, fees for legal services and expenses of preparing the Premises for such reletting, it being agreed that Landlord may (i) relet the Premises, or any part or parts thereof, for a term or terms which may, at Landlord's option, be equal to or less than or exceed the period which would otherwise have constituted the balance of the Term, and may grant such concessions and free rent as Landlord in its reasonable commercial judgment considers advisable or necessary to relet the same and (ii) make such alterations, repairs and decorations in the Premises as Landlord in its reasonable commercial judgment considers advisable or necessary to relet the same, and no action of Landlord is accordance with the foregoing or failure to relet or to collect rent under reletting shall operate or be construed to release or reduce Tenant's liability as aforesaid. Landlord agrees to use reasonable efforts to attempt to relet the Premises, but shall be entitled to seek to rent other properties of Landlord prior to reletting the Premises. 9.3 Remedies Cumulative. The specific remedies to which Landlord may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which it may be lawfully entitled in case of any breach or threatened breach by Tenant of any provisions of this Lease. In addition to the other remedies provide in this Lease, Landlord shall be entitled to the restraint by injunction of the violation or attempted or threatened violation of any of the covenants, conditions, or provisions of this Lease or to a decree completing specific performance of any such covenants, conditions, or provisions. Nothing contained in this Lease shall limit or prejudice the right of Landlord to prove for and obtain in proceedings for bankruptcy, insolvency or like proceedings by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal to, or less than the amount of the loss or damages referred to above. 9.4 Landlord's Election. If Tenant shall at any time default in the performance of any obligation under this Lease, Landlord shall have the right, but not the obligation, upon fifteen (15) days' notice to tenant (except in case of emergency in which case no notice need be given), to perform such obligation notwithstanding the fact that no specific provisions for such substituted performance is made in this lease with respect to such default. In performing such obligation, Landlord may reasonably make any payment of money or perform any other -17- reasonable act and all sums so paid by Landlord and all necessary incidental costs and connection with enforcement of its rights under this Section incurred by Landlord (together with interest at two percent (2%) above the prime rate from time to time published by the Wall Street Journal) shall be deemed to be Additional Rent under this Lease and shall be payable to Landlord immediately on demand. Landlord may exercise its rights under this Section without waiving any other of its rights or releasing Tenant from any of its obligations under this Lease. 9.5 Late Charges. In the event that any payment of Annual Fixed Rent or Additional Rent shall remain unpaid for a period of seven (7) days after written notice from Landlord to Tenant, there shall become due to Landlord from Tenant, as Additional Rent and as compensation for Landlord's extra administrative costs in investigating the circumstances of late rent, a late charge of three percent (3%) of the amount overdue. ARTICLE X. MORTGAGEES' AND GROUND LESSORS' RIGHTS ESTOPPEL CERTIFICATE 10.1 Subordination. Tenant shall, at the request of Landlord, subordinate this Leave to any and all mortgages or ground leases on the Property, so that the lien of any such mortgage or ground lease shall be superior to all rights hereby or hereafter vested in Tenant, on the condition that each such subordination shall provide by its terms that in the event of foreclosure of such mortgage or termination of such ground lease, Tenant shall remain undisturbed in its occupancy of the Premises under the terms and conditions of this lease, so long as Tenant complies with such terms and conditions. In addition, and as a condition to the obligations of Tenant hereunder, Landlord shall deliver to Tenant a Nondisturbance and Attornment Agreement on the foregoing terms from any existing mortgagee or ground lessee of the Premises, including any existing mortgagee or ground lessee of the parking facilities described in Exhibit B. Landlord hereby represents to Tenant that there is no mortgage presently encumbering the Premises. 10.2 No Prepaid Rent. No Annual Fixed Rent, Additional Rent, or any other charge payable to Landlord shall be paid more than thirty (30) days prior to the due date thereof under the terms of this Lease and payments made in violation of this provision shall (except to the extent that such payments are actually received by a mortgagee or ground lessor) be a nullity as against such mortgagee or ground lessor and Tenant shall be liable for the amount of such payments to such mortgagee or ground lessor. 10.3 Opportunity to Cure. No act or failure to act on the part of Landlord which would entitle Tenant under the terms of this Lease, or by law, to be relieved of -18- Tenant's obligations to pay Annual Fixed Rent or Additional Rent hereunder or to terminate this Lease, shall result in a release or termination of such tenant's obligations or a termination of this Lease unless (a) Tenant shall have first given written notice of Landlord's act or failure to act to Landlord's mortgagees of record, if any, of whose identity and address Tenant shall have been given notice, specifying the act or failure to act on the part of Landlord which would give basis to Tenant's rights; and (b) such mortgagees, after receipt of such notice, have failed to or refused to correct or cure the condition complained of within a reasonable time thereafter, which shall include a reasonable time for such mortgagee to obtain possession of the Property if possession is necessary for the mortgagee to correct or cure the condition and if the mortgagee notifies Tenant of its intention to take possession of the Property and correct or cure such condition. 10.4 Estoppel Certificate. Tenant shall from time to time within fifteen (15) days of a written request by Landlord execute, acknowledge and deliver to Landlord a statement in writing certifying to Landlord or an independent third party: that this Lease is unmodified and in full force and effect (or, if there have been any modifications, that the same is in full force and effect as modified and stating the modifications); that Tenant has no knowledge of any defenses, offsets, or counterclaims against its obligations to pay the Annual Fixed Rent and Additional Rent and to perform its other covenants under this Lease (or if there are any defenses, offsets, or counterclaims, setting them forth in reasonable detail); that there are no known uncured defaults of Landlord or Tenant under this Lease (or if there are known defaults, setting them forth in reasonable detail); the dates to which the Annual Fixed Rent, Additional Rent and other charges have been paid; and such other matters as Landlord may reasonably request. Any such statement delivered pursuant to this Section may be relied upon by any mortgagee or purchaser of this Premises and shall be binding on Tenant. Landlord hereby covenants and agrees to furnish estoppel certificates to Tenant on the same terms and conditions as Tenant is obligated to furnish the same to Landlord hereunder. ARTICLE XI. MISCELLANEOUS 11.1 No Recordation. Tenant agreed not to record this Lease, but simultaneous with the execution of this Lease, both parties shall execute and deliver a memorandum of this Lease in form appropriate for recording or registration, an instrument acknowledging the Commencement Date of the Term, and if this Lease is terminated before the Term expires, an instrument in such form acknowledging the date of termination. -19- 11.2 Notices: Checks. Whenever any notice, approval, consent, request, election, offer or acceptance is given or made pursuant to this Lease, it shall be in writing. Communications and payments shall be addressed, if to Landlord, at Landlord's Original Address or at such other address as may have been specified by prior notice to Tenant; and if to Tenant, at Tenant's Original Address, with a copy to Katharine E. Bachman, Esq., Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, or at such other place as may have been specified by prior notice to Landlord. Any communication so addressed shall be deemed duly served on the day delivered, if personally delivered, on the third business day following the date of mailing if mailed by registered or certified mail, return receipt requested, or on the day following delivery with a recognized overnight courier service. If Landlord by notice to Tenant at any time designates some other person or receive payments or notices, all payments or notices thereafter by Tenant shall be paid or given to the agent designated until notice to the contrary is received by Tenant from Landlord. Annual Fixed Rent and Additional Rent payments required under this Lease shall be deemed sufficiently paid if made by check collected on first presentation. 11.3 Successors and Assigns. Subject to Section 6.8 regarding Tenant's right to assign and sublet, this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the original Landlord named herein and each successive landlord shall be liable only for obligations accruing during the period of its ownership. 11.4 Waiver. The failure of Landlord to Tenant to seek redress for violation of, or to insist upon strict performance of, any covenant or condition of this Lease, shall not be deemed a waiver of such violation nor prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of Annual Fixed Rent or Additional Rent with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. No provision of this Lease shall be deemed to have been waived by Landlord or Tenant unless such waiver is in writing and signed by the waiving party. No consent of waiver, express or implied, by Landlord or by Tenant to or of any breach of any agreement or duty shall be construed as a waiver or consent to or of any other breach of the same or any other agreement or duty. 11.5 Partial Payment. No acceptance by Landlord of a lesser sum than the Annual Fixed Rent and Additional Rent then due shall be deemed to be other than a partial installment of such rent due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or pursue any other remedy in this Lease provided the delivery of keys to any employee of Landlord or -20- to Landlord's agent or any employee thereof shall not operate as a termination of this Lease or a surrender of the Premises. 11.6 Severability. If any term of this Lease, or the application thereof to any person or circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such term to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term of this Lease shall be valid and enforceable to the fullest extent permitted by law. The titles of the Articles are for convenience only and not to be considered in construing this Lease. 11.7 Quiet Enjoyment. So long as Tenant pays Annual Fixed Rent and Additional Rent, performs all other Tenant covenants of this Lease and observes all conditions hereof, Tenant shall peaceably and quietly have, hold and enjoy the Premises for the Term in accordance with the terms of this Lease. 11.8 Entire Agreement; Captions. This Lease contains all of the agreements of the parties with respect to the subject matter thereof and supersedes all prior dealings between them with respect to such subject matter. The captions of this Lease shall have no effect on its interpretation. 11.9 Signs. Tenant at its cost shall have the right to place, construct, and maintain on the Premises one or more signs advertising its business at the Premises, and no other signs. Any sign that Tenant has the right to place, construct, and maintain shall comply with all laws and ordinances, and Tenant shall obtain any approval required by any such laws and ordinances. Landlord makes no representation with respect to Tenant's ability to place, construct or maintain any signs. 11.10 Parking Lot Use and Maintenance; Cambridge Electric Easement. Landlord will at all times during the term of this Lease permit free parking by Tenant, its customers, employees, invitees, agents and caretakers in the parking areas described in Exhibit B. Landlord covenants and agrees to make all payments and perform all obligations required of Landlord under the Parking Easement from Cambridge Electric Company referenced in Exhibit B (the "Parking Easement") so that the same shall remain in full force and effect during the term of this Lease and any extensions thereof. If Landlord breaches said covenant, Tenant may make payment or perform such obligations as are required of Landlord under the Parking Easement and and deduct the cost thereof from the Rent payable under this Lease. Landlord hereby represents and warrants to Tenant that the Parking Easement is in full force and effect; that Landlord has made all payments and performed all obligations of Landlord thereunder through the date hereof; that the rent payable thereunder for -21- calendar year 1998 was $2,795.00 with respect to Cambridge Electric Company, which amount has been paid in full; and that Landlord has the right under the Parking Easement to grant to Tenant the rights with respect thereto granted by this Lease. Landlord agrees to use best efforts to prevent Cambridge Electric Company from exercising the right of termination set forth in its Parking Easement. In the event of termination of the Parking Easement, or in the event that Tenant is deprived of any of the parking rights referenced in Exhibit B, Landlord shall use best efforts to provide to Tenant replacement spaces therefor in a location reasonably convenient to the Premises, including the Fresh Pond Shopping Center. If Landlord fails to provide replacement spaces upon such termination, or if such replacement spaces do not conform with the zoning requirements of the City of Cambridge, then, at Tenant's election, Tenant may either terminate this Lease upon thirty (30) days prior written notice to Landlord, or Tenant may make its own arrangements for replacement parking spaces and deduct the cost thereof from monthly payments of Fixed Rent hereunder. 11.11 Time of Essence. Time is of the essence of each provisions of this Lease. 11.12 Authorization. If either party is a corporation, that party shall deliver to the other party on execution of this Lease a certified copy of a resolution of its Board of Directors authorizing the execution of this Lease and naming the officers that are authorized to execute this Lease on behalf of the corporation. Each individual executing this Lease warrants and represents that he or she is duly authorized to execute this Lease on behalf of the party that he or she represents, and that no further act is required to make this Lease the binding obligation of such party. 11.13 Brokerage. Each party represents and warrants to the other party that the only parties with whom they have dealt who would be entitled to a brokerage commission in connection with this Lease are Fallon Hines & O'Connor and Trammel Crow, as to whom Landlord shall be responsible for the payment of all amounts due. Each party agrees to defend, indemnify, and hold the other party harmless from any liability arising from a breach of the foregoing representation and warranty. -22- Executed as a sealed instrument in two or more counterparts on the day and year first above written. LANDLORD: 205 Alewife Limited Partnership, a Massachusetts limited partnership By: 205 Alewife Corporation, a Massachusetts corporation, its general partner By: /s/ Nishan Atinizian ----------------------- Nishan Atinizian, President TENANT: Transkaryotic Therapies, Inc. By: /s/ Daniel E. Geffken ----------------------- Its: VP, CFO --------------------- THE UNDERSIGNED ADDITIONAL PARTY JOINS IN THIS LEASE FOR THE PURPOSES OF GRANTING TO TENANT THE RIGHT TO PARK IN ITS PARKING FACILITIES LISTED IN EXHIBIT B DURING THE TERM OF THIS LEASE WITHOUT THE REQUIREMENT OF PAYMENT OF ANY SUMS IN ADDITION TO THE RENT PAYABLE BY TENANT HEREUNDER, AND WITHOUT THE UNDERSIGNED INCURRING ANY OTHER LIABILITY OR OBLIGATION UNDER THIS LEASE: /s/ Rusen Atiniz -------------------------- Rusen Atiniz, as Trustee of Fresh Pond Shopping Center Trust Hereunto duly authorized -23- EXHIBIT A DESCRIPTION OF PREMISES The land with the building and improvements thereon and appurtenances thereto located at 205 Alewife Brook Parkway, Cambridge, Massachusetts, more particularly described in Transfer Certificate of Title No. 205120, filed for registration with the Middlesex South Registry District of the Land Court in Registration Book 1155, Page 170. -25- EXHIBIT B PARKING Tenant shall have the exclusive right to the following parking spaces, which spaces shall be specifically designated by signage prepared by Tenant: 1. Fourteen (14) parking spaces on the Premises at 205 Alewife Brook Parkway. Owner: Landlord No Mortgagee 2. Twelve (12) parking spaces within the parking easement granted by Cambridge Electric Company dated October 16, 1987, filed for registration with the Middlesex South Registry District of the Land Court as Document No. 760840. (the "Parking Easement"). Owner: Cambridge Electric Company; Landlord, holder of the Parking Easement 3. Seventeen (17) parking spaces at the rear of the building on premises at 185 Alewife Brook Parkway, in the location closest to the leased premises Owner: Rusen Atiniz, as Trustee of the Fresh Pond Shopping Center Trust under declaration of trust dated June 29, 1977, recorded with the Middlesex South Registry of Deeds in Book 13301, Page 110, filed with said Registry District as Document No. 561975, as amended of record No Mortgagee Title Reference: Middlesex South Registry of Deeds, Book 28895, Page 398 All of said parking facilities shall be without additional charge under this Lease. The foregoing location of all of the foregoing parking spaces are shown on the attached Exhibit B-1. -26- EXHIBIT B-1 [GRAPHIC OMITTED] [PLOT PLAN FOR PREMISES; SHOWS PARKING LOCATIONS] EXHIBIT C OPTIONS TO EXTEND If this Lease is in full force and effect, the Tenant shall have the right to extend the term of this Lease for three (3) separate five (5) year options of extension provided written notice of the election of such option shall be delivered by Tenant to Landlord at least six (6) months prior to the expiration of the initial term of this Lease, in the case of the first option, and similar notice prior to the expiration of the first extension for exercise of the second extension option if applicable and a similar notice prior to the expiration of the second extension option, if applicable for exercise of the third extension option. It shall be a condition of the validity of the exercise of such options that Tenant, at the time required herein for the exercise of said options, and upon the commencement of the option period, shall not be in default under this Lease beyond the expiration of any applicable grace period and if at either such time, the applicable grace period shall not have expired, the condition shall be determined upon the expiration of the grace period. If said options are duly exercised, the term of this Lease shall be automatically extended without the requirement of any further instrument, upon all of the same terms, provisions and conditions set forth in the Lease, except that the fixed rent for and with respect to each option term shall be Market Rent determined for each such period. Whenever the term "Market Rent" is required to be determined under this Lease, the term shall mean the market rate rent chargeable for comparable office space in the Cambridge, Massachusetts area, assuming the condition of the Premises as of the date of commencement of the extended term, and shall be determined as follows: (a) By no later than one hundred fifty (150) days preceding the last day set forth for the Tenant to give notice of its election to extend the term of this Lease, the Tenant shall send a written request to Landlord requesting Landlord's determination of the "Market Rent" for the Premises for and with respect to the five (5) year extension period. Within thirty (30) days after such request Landlord shall notify Tenant ("Landlord's Notice") of Landlord's determination of the "Market Rent" for such purpose (the "Determined Market Rent"). The Tenant's written request to Landlord for a determination of Market Rent, as set forth above, shall not be deemed to be the Tenant's exercise of its right to extend the term of this Lease. Tenant shall not be required to exercise such right to extend until Tenant has received notice of the "Market Rent" as determined pursuant to this Exhibit C. The same procedures shall govern the second five (5) year option if duly exercised prior to the expiration of the first extended option term and also the third five (5) year option if duly exercised prior to the expiration of the second extended option term. -27- (b) If the Tenant disagrees with the Determined Market Rent as being the "Market Rent" for the Premises for the extension period, the Tenant shall have the right to initiate a proceeding hereunder for the determination of such "Market Rent" by, within ten (10) days after Landlord's Notice, giving written notice thereof to Landlord which notice shall also appoint a real estate appraiser who is a designed member in good standing of either the Society of Real Estate Appraisers or the Appraisal Institute with at least ten (10) years, full-time commercial appraisal experience for the purpose of establishing such "Market Rent" by a market survey in the Cambridge, Massachusetts area. Within ten (10) days after receipt by the Landlord of such notice, the Landlord shall, by notice to the Tenant, appoint a real estate appraiser, with the same minimum qualifications set forth in the preceding sentence, to determine jointly with the Tenant's appraiser such "Market Rent". If within thirty (30) days after the second appraiser has been appointed, the two designated appraisers are unable to agree upon such "Market Rent", they shall elect a third appraiser meeting the qualifications stated in this paragraph within ten (10) days after expiration of the aforesaid thirty (30) day period. If the two appraisers are not able to agree upon such third appraiser with the aforesaid ten (10) day period, either appraiser may request the office of the American Arbitration Association located nearest to Boston, Massachusetts to designate a third appraiser willing so to act and an appraiser so appointed shall, for all purposes have the same standing and powers as though he had been seasonably appointed by the appraisers first appointed. In the case of the inability or refusal to serve of any person designated as an appraiser, or in case any appraiser for any reason, ceases to be such, an appraiser to fill such vacancy, meeting the minimum qualifications stated above, shall be promptly appointed by Landlord, the Tenant, the appraiser first appointed by the Tenant, or the said office of the American Arbitration Association, as the case may be, whichever made the original appointment, or, if the person who continues to act, or the Landlord or the Tenant may apply to said office of the American Arbitration Association to fill such vacancy with an appraiser meeting the minimum qualifications stated above, and any appraiser so appointed to fill such vacancy shall have the same standing and powers as though originally appointed. The resulting board of appraisers shall, forthwith upon their appointment, (i) hear the Parties to this Lease and their witnesses, (ii) examine the records relating to the Premises, the market surveys and such other documents and records as may, in their judgment, be necessary, (iii) determine the "Market Rent" of the Premises for such purposes. The costs, other than counsel fees, of such appraisal shall be borne equally by the Parties. Any determination by a majority of the members of the board of appraisers shall be final and binding upon the parties, but if a majority of the members of the board of appraisers are unable to agree upon a determination, the determination of such third appraiser shall be binding upon the Parties. Upon determining such Market Rent and after computing the rent as set forth above, the board of appraisers shall promptly notify the Parties in writing of such -28- determination. If any party shall fail to appear at the hearings appointed by the appraisers, the appraisers may act in the absence of such party. The determination of the board of appraisers or the third appraiser, as appropriate, made in accordance with the foregoing provisions shall be final and binding upon the Parties, such determination may be entered as an award in arbitration in a court of competent jurisdiction, and judgment thereon may be entered. (c) Upon the determination of such "Market Rent" the Landlord shall use such in the calculation of the Fixed Rent as set forth in this Lease. If, for any reason, the decision of the appraiser or the appraisers shall not be determined before the commencement of the extension period, then the Tenant shall continue to pay Fixed Rent in monthly installments at the rate in effect immediately prior to the commencement of such extension period until such decision of the appraiser(s) shall be made, and upon the decision by the appraiser(s) an appropriate adjustment shall be made, retroactive to the first day of such extension, except that Tenant shall not be required to exercise its right to extend until Tenant has received notice of the "Market Rent" as determined pursuant to this Exhibit C. -29- EXHIBIT D TENANT IMPROVEMENTS Tenant improvements are illustrated in drawings prepared by Clifford Hoffman Associates dated 8/31/98. Tenant improvements shall consist of the complete interior tenant fitup of 205 Alewife Brook Parkway (29,100 square feet ) will include the following disciplines, structural, architectural, mechanical and electrical: Structural o Remove damaged concrete floor at the rear, right side, first floor o Install a series of mini-piles to support new steel columns which will extend through the roof at this section. (this steel will be used to support new mechanical equipment.) o Reinstall concrete floor at the same elevation as the left side floor o Selective demolition of existing non-bearing drywall Architectural o Erect new walls, ceilings and flooring in accordance with architectural floorplans per the following distribution:
Use SF % --- -- - Laboratory 9,600 32 Office 4,600 15 Storage/warehouse 2,600 10 Mechanical 2,600 10 Protein Production Suite 9,700 33
- Production suite will be built to clean room standards which meet or exceed Class 10,000. - Laboratories shall be typical wet chemistry labs with permanently affixed metal casework and epoxy countertops. - An interior elevator will be installed to satisfy ADA requirements. Mechanical - Purchase and install new HVAC equipment including (2) air handlers, (2) air-cooled chillers, a gas-fired steam boiler and associated ductwork - New high purity utility systems (Clean Steam, RODI, WFI and process gases) will be installed. Electrical - The electrical service will be upgraded at the tenants sole cost either through the direct purchase and installation of primary switchgear or amortized over a two year period with ComElectric. -30- All new secondary switchgear gear and power distribution will be installed along with a natural gas powered standby generator. -31- EXHIBIT D-1 TENANT IMPROVEMENTS REMOVABLE BY TENANT At Tenant's option, the following permanently affixed equipment may be removed from the Premises upon lease termination: - Clean steam generator - Reverse osmosis de-ionized (RODI) water generation skid - WFI still - Automated manufacturing equipment - Dedicated process equipment and tanks - Autoclaves - Glasswashers - Biosafety cabinets - Incubators -32- EX-21.1 3 EXHIBIT 21.1 Exhibit 21.1 Subsidiaries of the Registrant NAME JURISDICTION OF INCORPORATION TKT Securities Corp. Massachusetts EX-23.1 4 EXHIBIT 23.1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-19915 and 333-19917) pertaining to the 1993 Long-Term Incentive Plan and 1993 Non-Employee Director Stock Option Plan of our report dated February 5, 1999, with respect to the consolidated financial statements of Transkaryotic Therapies, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ Ernst & Young LLP Boston, Massachusetts March 26, 1999 EX-27 5 EX-27
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 31,760 78,395 0 0 0 112,489 14,657 9,517 117,962 4,316 0 0 0 191 113,455 117,962 0 5,325 0 32,026 0 0 0 (19,965) 0 (19,965) 0 0 0 (19,965) (1.05) (1.05)
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