Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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
Preferred Stock Purchase Rights
(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 1, 2001, the approximate aggregate market value of the voting
stock held by non-affiliates of the registrant was $165,227,749 based on the
last reported sale price of the registrant's Common Stock on The Nasdaq Stock
Market as of the close of business on March 1, 2001. There were 22,717,379
shares of Common Stock outstanding as of March 1, 2001.
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 14, 2001 III
PART I
ITEM 1. BUSINESS
Summary
Transkaryotic Therapies, Inc. ("TKT" or the "Company") is a
biopharmaceutical company developing protein- and cell-based therapeutics for
the treatment of a wide range of human diseases. Based on three proprietary
development platforms: Gene-Activated(R) proteins, Niche Protein(TM) products,
and Gene Therapy, the Company is building a broad and renewable product
pipeline. Five products emerging from TKT's pipeline have been approved for
human clinical testing, including two late-stage products, Dynepo(TM) for the
treatment of anemia, and Replagal(TM) for the treatment of Fabry disease.
During 2000, Aventis Pharma ("Aventis"), the Company's collaborative
partner on the development of Dynepo, filed a Biologics License Application
("BLA") and a Marketing Authorization Application ("MAA") seeking marketing
authorization of Dynepo in both the United States and Europe, respectively.
In 2000, the U.S. Food and Drug Administration ("FDA") requested that
additional data be provided regarding manufacturing information and that a
new BLA be submitted when the data are compiled. Aventis and the Company are
currently accumulating this information. The European review of the Dynepo
MAA is ongoing.
In 2000, the Company submitted a BLA seeking marketing authorization for
Replagal(TM). In January 2001, the FDA issued a complete review letter regarding
the BLA, which requested further explanation in several areas and additional
data.
In July 2000, the Company submitted a MAA to the European Agency for
the Evaluation of Medicinal Products (the "EMEA") seeking marketing approval
of Replagal. The Company announced in March 2001 that the Committee for
Proprietary Medicinal Products (the "CPMP") of the EMEA issued a positive
opinion recommending approval of Replagal(TM) in the European Union. The
CPMP's recommendation for approval will be forwarded to the European
Commission (the "EC"), which will determine whether to grant marketing
authorization of Replagal. The Company expects the EC to make a final
decision regarding the approval of Replagal in mid-2001.
TKT has a balanced commercialization strategy, designed to leverage the
size and expertise of corporate partners for certain products, while building a
small efficient commercial infrastructure for others. Accordingly, TKT is
collaborating with Aventis with respect to the worldwide development and
commercialization of Dynepo, with Sumitomo Pharmaceuticals Co., Ltd.
("Sumitomo") for Replagal in Japan, and with Genetics Institute, Inc. ("GI") for
Factor VIII gene therapy for the treatment of hemophilia A in Europe. TKT
intends to independently market its Niche Protein products and gene therapy
products, as well as a number of its Gene-Activated proteins.
In January 2001, the U.S. District Court for the District of Massachusetts
concluded in a patent infringement action brought by Amgen Inc. against the
Company and Aventis that Dynepo and the cells and processes used to make Dynepo
infringed eight claims of patents asserted by Amgen. TKT and Aventis have filed
an appeal of the decision with the U.S. Court of Appeals for the Federal
Circuit. The Company believes it has strong grounds for appeal. The Company and
Aventis are also engaged in litigation involving Dynepo with Kirin-Amgen, Inc.
("Kirin-Amgen") in the U.K.
The Company is also involved in patent litigation in the United States
with Genzyme Corporation ("Genzyme") and Mount Sinai School of Medicine of New
York University ("Mt. Sinai") regarding whether Replagal infringes a patent held
by Genzyme and Mt. Sinai. (See Item 3. Legal Proceedings).
2
Technology Platforms
Gene-Activated(R) Protein Products
TKT's gene activation technology is a proprietary approach to the
development and large scale production of therapeutic protein products. It is
based on the activation of genes encoding therapeutic proteins in human cells,
rather than the cloning and transfer of these genes associated with conventional
protein production techniques. The Company believes this technology will allow
it to develop and commercialize a large number of therapeutic proteins,
including potentially improved versions of currently-marketed proteins and
proteins that have no currently-marketed counterparts.
Essentially every human cell contains the same set of approximately 35,000
genes, but each cell type actually produces only a subset of the 35,000 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."
During the 1970's proteins were generally purified from human or animal
tissue. By the mid-1980's, proteins were manufactured using conventional genetic
engineering techniques, which were based on the cloning of human genes to
produce therapeutic proteins at levels that were substantially in excess of what
could be obtained by purification from tissue.
Although conventional genetic engineering techniques for recombinant
protein production are quite powerful, their use today faces certain commercial
barriers and technical limitations. The primary barrier is that biotechnology
companies have sought and obtained patent protection covering many of the
techniques used to produce commercially-marketed proteins using conventional
genetic engineering techniques. These patent rights have served as effective
barriers to entry, minimizing competition in the therapeutic proteins market. In
addition, conventional genetic engineering techniques for protein production may
face technical limitations arising from the need to first clone the gene of
interest.
TKT has developed gene activation technology, a new approach to the
production of therapeutic proteins. This proprietary technology does not rely on
the manipulation of cloned genes. 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" or homologous recombination.
Accordingly, the Company believes that gene activation technology may be
used to express a wide variety of therapeutically valuable proteins at levels
suitable for large-scale manufacturing purposes. Since gene activation
technology avoids many of the technical limitations of conventional recombinant
protein production technology, the Company also believes that the gene
activation technology is at least as efficient as, and may be more
cost-effective than, conventional genetic engineering techniques for protein
production.
3
Niche Protein(TM) Products
Certain genetic diseases are known to be caused by the deficiency of a
single, well-defined protein. The patient's inability to produce sufficient
amounts of the specified protein results in symptoms which can be debilitating
and, ultimately, life threatening. These diseases include lysosomal storage
disorders such as Fabry disease, Gaucher disease, Hunter syndrome, Hurler
syndrome, Pompe disease, and Tay-Sachs disease. Lysosomal storage disorders
result from an inherited deficiency of an enzyme responsible for the breakdown
of biomolecules such as fats and sugars. The build-up becomes toxic, resulting
in lysosomes that crowd out other parts of the cell, ultimately killing it from
within.
The most direct approach to treat these diseases is to manufacture the
missing or deficient protein and deliver it to the patient. No effective
treatment currently exists for most of these rare diseases. TKT's Niche Protein
product platform is focused on developing enzyme replacement products to treat
patients suffering from certain of these diseases.
The Company's product development strategy for its Niche Protein product
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 product
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, with the goal of reducing symptoms and
potentially reversing progression of the disease. TKT views its Niche Protein
product platform as a near-term opportunity to develop and commercialize
products on a relatively cost-effective, lower risk basis.
During 1999, the Company initiated the development of a commercial
infrastructure for the future worldwide marketing and sale of its Niche Protein
products. In the U.S., the Company has assembled a group of seasoned executives
with broad experience in marketing, sales and reimbursement of specialty
products. The Company expects that it will expand its infrastructure following
marketing approval of Replagal in the U.S.
In 2000, the Company formed TKT Europe-5S AB, a majority owned subsidiary,
to market its Niche Protein products in the European Union. The company,
headquartered in Sweden, is led by five veteran marketers of specialty
biopharmaceutical products in Europe. The Company has established a presence in
all major European markets.
Gene Therapy
TKT's approach to gene therapy, called Transkaryotic Therapy(TM), 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.
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
4
characterized by a significant unmet medical need, and the clinical goals that
must be achieved by TKT's gene therapy products are well-defined. The potential
benefits of TKT's gene therapy products include improved therapeutic outcome,
elimination of frequent painful injections and the problem of patient
compliance, a minimization of side effects due to over- or under-dosing of
conventional proteins, and a reduction in costs.
There are a large number of technical approaches to gene therapy, but two
basic distinctions can be used to characterize the field. The first distinction
is viral versus non-viral. Viral gene therapy approaches use genetically
modified viruses to introduce genes into human cells by infection. 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 viruses to infect patients' cells. The
Company believes that such viral approaches present a significant safety risk
due to the possibility of causing new viral infections in 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.
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; and
5
5. The physician would then inject the engineered cells under the
patient's skin as an outpatient procedure.
The Company believes that Transkaryotic Therapy offers several clinical and
commercial advantages over conventional treatments and other gene therapies for
targeted diseases, including safety, long-term expression, controllability,
flexibility, ease of administration, and cost effectiveness.
Transkaryotic Therapy does not use infectious agents such as retroviruses,
adenoviruses, or adeno-associated viruses 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.
The system is designed to produce long-term results with a single treatment.
In preclinical 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. 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.
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.
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.
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.
Products in Development
Investigational Products in Clinical Trials
Product/Protein Indication Status Partner
- -------------------------------------------------------------------------------------------------------------
Dynepo(TM)/erythropoietin anemia from kidney disease MAA submitted Aventis
Dynepo(TM)/erythropoietin anemia from cancer Phase III Aventis
Replagal(TM)/alpha-galactosidase A Fabry disease BLA/MAA submitted Sumitomo (Japan)
Iduronate-2-sulfatase Hunter syndrome IND submitted --
Factor VIII gene therapy hemophilia A Phase I GI (Europe)
Dynepo(TM) for anemia
TKT's lead Gene-Activated protein program is Dynepo(TM), a fully human
erythropoietin, developed in collaboration with Aventis. Erythropoietin, a
circulating protein hormone that stimulates
6
the differentiation of certain progenitor cells in the bone morrow, is normally
produced in the kidney when the body requires additional red blood cells.
In December 1999, Aventis completed Phase III testing of Dynepo of its
initial indication, anemia related to chronic renal failure. More than 1,300
patients participated in clinical studies, which supported submissions for
marketing approval in the United States and Europe.
In August 2000, Aventis submitted a BLA to the FDA and a MAA to the EMEA.
Aventis is seeking authorization for subcutaneous and intravenous routes of
administration for the treatment of anemia in patients with chronic renal
failure, including both dialysis and non-dialysis patients, to elevate and
maintain red blood cell production.
In November 2000, the FDA requested that Aventis provide data on
additional manufacturing data for Dynepo, based on a change in the Dynepo
manufacturing process that increases the scale from 2000 liter to 5000 liter
bioreactors. The Company is assisting Aventis in collecting these data and
expects that Aventis will submit a new BLA for Dynepo when the data are
compiled, which is currently in progress and is expected to take at least six
months. The review of Aventis' MAA for Dynepo is ongoing in Europe.
A Phase III clinical trial assessing Dynepo as a treatment for anemia
associated with cancer chemotherapy is ongoing. Upon completion of this study,
Aventis will collect the data and, if positive, TKT expects Aventis will file a
new BLA in the U.S. .
In January 2001, the U.S. District Court for the District of Massachusetts
concluded in a patent infringement action brought by Amgen against the Company
and Aventis that Dynepo and the cells and processes used to make Dynepo
infringed eight claims of patents asserted by Amgen. TKT and Aventis have filed
an appeal of the decision with the U.S. Court of Appeals for the Federal
Circuit. The Company and Aventis are also involved in judicial proceedings
involving Dynepo with Kirin-Amgen in the U.K. The trial concluded in March 2001,
and a decision is expected in mid-2001. (See Item 3. Legal Proceedings).
Other Gene-Activated Proteins
TKT believes that numerous development opportunities exist for
Gene-Activated proteins. In addition to erythropoietin, TKT is developing six
other Gene-Activated proteins. These programs are in various stages of
development.
In November 2000, TKT reacquired rights to develop and market a second
Gene-Activated protein (GA-II) from Aventis. Prior to November 2000, Aventis
successfully completed Phase I clinical testing of GA-II. A third Gene-Activated
protein (GA-III) is in late preclinical development.
Replagal(TM) for Fabry disease
TKT's first target in the Niche Protein product program is Fabry disease.
Fabry disease is an inherited lysosomal storage disorder caused by the
deficiency of the enzyme alpha-galactosidase A. Patients with Fabry disease show
diverse clinical manifestations beginning as early as adolescence. These
manifestations include severe pain and cardiovascular and renal complications.
The Company believes that there are approximately 5,000 Fabry disease patients
worldwide. Current treatment of the disease is limited to the reduction of
symptoms. The Company believes that enzyme replacement therapy could result in
an improvement in the clinical manifestations of the disease.
7
TKT, in collaboration with the National Institutes of Health ("NIH"),
completed a 26 patient pivotal Phase II study in patients with Fabry disease in
December 1999. The goal of the study was to assess safety and clinical activity
of Replagal, TKT's enzyme replacement therapy, particularly its effect on pain
and kidney function.
A second pivotal Phase II study involving 15 patients was conducted at the
Royal Free Hospital in London. The goal of the study was to assess safety and
clinical activity, particularly to improve cardiac function in patients with
Fabry disease.
In October 2000, TKT reported pivotal Phase II clinical results of
Replagal from the NIH study, indicating that the enzyme replacement therapy had
broad clinical effects in treating Fabry disease. Patients receiving Replagal
had comprehensive clinical and biochemical improvement including a reduction in
pain and stabilization or improvement in renal function. Data from the Royal
Free Hospital study will be presented at a medical meeting during 2001.
Data from these two pivotal studies, as well as data from an additional
six months of treatment from an open-label maintenance study at the NIH,
supported submissions for marketing approval in the United States and Europe.
In June 2000, the Company filed a BLA seeking marketing authorization of
Replagal in the U.S. During 2000, Replagal underwent a priority review at the
FDA. In January 2001, the FDA issued a complete review letter which requested
additional data and asked for further explanation in several areas.
In July 2000, the Company submitted a MAA to the EMEA seeking marketing
approval of Replagal. The Company announced in March 2001 that the CPMP
issued a positive opinion recommending approval of Replagal(TM) in the
European Union. The CPMP's recommendation for approval will be forwarded to
the EC, which will determine whether to grant marketing authorization of
Replagal. The Company expects the EC to make a final decision regarding the
approval of Replagal in mid-2001.
TKT has received orphan drug designation for Replagal in the U.S. As a
result, if Replagal is the first product to receive FDA marketing approval for
the indication for which it has designation as an orphan drug, the FDA may not
approve any other applications to market the same product for the same
indication, except in limited circumstances, for a period of seven years.
The Company also received orphan drug designation in Europe. As a result,
if Repalgal is the first product to receive marketing approval for Fabry
disease, the European Commission may not approve any other applications to
market the same product for the same indication, except in limited
circumstances, for a period of ten years.
The Company believes that Genzyme is seeking marketing authorization in
both the U.S. and Europe. Genzyme has also received orphan drug status for
its Fabry disease treatment in both the U.S. and Europe. Moreover, the CPMP
also issued a positive opinion recommending approval of Genzyme's Fabry
disease product to the EC. If Genzyme's Fabry disease product receives
marketing approval in either the U.S. or Europe before TKT, TKT may be
excluded from marketing Replagel in the U.S. or Europe, as the case may be,
except in limited circumstances.
8
The Company is also involved in patent litigation with Genzyme and Mt.
Sinai in the U.S. District Court for the District of Delaware regarding
whether the manufacture, use, intended sale, and/or intended offer for sale
of Replagal infringes a Genzyme and Mt. Sinai patent. The court has scheduled
trial in this action to begin in March 2002. (See Item 3. Legal Proceedings.)
Iduronate-2-Sulfatase for Hunter Syndrome
TKT's second target in the Niche Protein product platform is Hunter
syndrome. Hunter syndrome is an inherited lysosomal storage disorder caused by a
deficiency of the enzyme iduronate-2-sulfatase ("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. The Company
believes that there are approximately 5,000 Hunter syndrome patients worldwide.
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. In December 2000,
TKT filed an Investigational New Drug Application ("IND") to commence a Phase
I/II clinical trial of I2S in twelve patients with Hunter syndrome. The
randomized, placebo-controlled study will assess the safety, pharmacokinetic
profile and clinical activity of the enzyme in patients.
Other Niche Protein Products
TKT is developing five additional Niche Protein products including
treatments for Gaucher disease and Hurler syndrome.
Factor VIII Gene Therapy for Hemophilia A
TKT's lead gene therapy program is for the treatment of hemophilia A.
Hemophilia A, is 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 approximately 50,000 hemophilia A patients worldwide.
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 its non-viral, ex vivo gene therapy approach
called Transkaryotic Therapy(TM). 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.
9
In November 1998, the Company began the first ever clinical trial
evaluating a gene therapy treatment for hemophilia A. The Phase I safety study
includes 12 patients and is being conducted at the Beth Israel Deaconess Medical
Center in Boston, Massachusetts. The trial is expected to take up to three years
to complete, which includes a two year follow up period following the treatment
phase.
In December 2000, Phase I results were presented at the 42nd Annual
Meeting of the American Society of Hematology. Data from the first six of twelve
patients participating in the study demonstrated that non-viral delivery of
Factor VIII using patients' genetically modified cells is safe and
well-tolerated. Furthermore, four of the first six patients showed clinical
benefit, with two patients having no spontaneous bleeds for approximately one
year following treatment.
Research and Development Expenses
For the years ending December 31, 2000, 1999, and 1998, the Company spent
approximately $56.4 million, $44.0 million, and $25.6 million, respectively on
research and development activities .
Collaborative Partners
Aventis Pharma
TKT entered into a strategic alliance with Aventis in May 1994,
focused on the development of Dynepo. TKT has the potential to receive up to $58
million, consisting of license fees, equity investments, milestone payments, and
research funding, of which $30 million had been received at December 31, 2000.
The remaining payments are contingent upon the achievement of milestones in
connection with the commercialization of Dynepo by Aventis. TKT also is entitled
to a low double-digit royalty on net sales of Dynepo worldwide.
Under the original license agreement, Aventis was granted worldwide
exclusive rights to make, use, and sell Dynepo, except that TKT has reacquired
marketing rights from Aventis for Japan. Aventis is responsible, at its own
expense, for development, manufacturing, and marketing activities for the
product. The license agreement expires, on a country by country basis, on the
later of (i) 10 years after the first commercial sale of the covered product in
such country or (ii) the last to expire of the patents licensed under such
agreement with respect to such country, subject to earlier termination by either
party under specified circumstances, including a material breach of the
agreement by the other party.
In addition, Aventis has assumed the cost of defense of its patent
litigation with Amgen Inc. and Kirin-Amgen, Inc. The Company is required to
reimburse Aventis for its share of litigation expenses, as defined, from
future royalties, if any, otherwise payable by Aventis as to the sale of
Dynepo and in certain other circumstances.
In March 1995, TKT entered into a second agreement with Aventis focused
on the development of GA-II. Under the collaborative agreement, TKT had
received $34 million as of December 2000, in the form of license fees, equity
investments, milestone payments, and research funding. In November 2000, TKT
reacquired rights to develop and market GA-II from Aventis. Prior to November
2000, Aventis completed Phase I clinical testing of GA-II.
Sumitomo Pharmaceutical Co., Ltd.
10
In July 1998, the Company entered into a distribution agreement with
Sumitomo to commercialize Replagal in Japan and certain other Asian countries.
As of December 31, 2000, TKT has received $3.0 million from Sumitomo for
Replagal. Sumitomo will make additional payments to TKT, subject to the
achievement of milestones, as the product moves through development and
commercialization. Sumitomo is responsible for development and commercialization
of Replagal in its territories.
The distribution agreement expires on a country-by-country basis under
specified circumstances, including a material breach of the agreement by the
other party.
Genetics Institute
In July 1993, TKT entered into a Collaboration and License Agreement with
GI relating to a joint development and marketing program for a hemophilia A gene
therapy product based on TKT's proprietary non-viral gene therapy technology and
GI's patented Factor VIII genes.
Under the agreement, GI has granted TKT a non-exclusive 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 GI agreement terminates upon the expiration date of the last to
expire licenses granted pursuant to the agreement.
Patents, Proprietary Rights, and Licenses
Patents and Proprietary Issues
The Company believes that protection of the proprietary nature of its
products and technology is important to its business. Accordingly, it has
adopted and plans to 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.
At December 31, 2000, the Company owned or licensed 25 issued U.S. patents
and had 50 pending patent applications in the U.S. to protect its proprietary
methods and processes. It also has 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, cells modified by gene
activation to produce Gene-Activated proteins, corresponding gene activation
methods, the Transkaryotic Therapy platform in general, the Niche Protein
product 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 U.S.
patents owned or licensed by TKT expire at various dates ranging from 2010 to
2017.
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.
11
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 that 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.
Gene Activation Technology Patents
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 continues to believe that,
notwithstanding the Amgen cases, 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.
Dynepo(TM) Patent Litigation
In January 2001, the U.S. District Court for the District of Massachusetts
concluded in a patent infringement action brought by Amgen against the Company
and Aventis that Dynepo and the cells and processes used to make Dynepo
infringed eight claims of patents held by Amgen. TKT and Aventis have filed an
appeal of the decision with the U.S. Court of Appeals for the Federal Circuit.
The Company and Aventis are also involved in judicial proceedings with
Kirin-Amgen in the U.K. involving Dynepo. The trial concluded in March 2001 and
a decision is expected in mid-2001. (See Item 3. Legal Proceedings).
Replagal(TM) Patent Litigation
12
The Company is involved in patent litigation with Genzyme and Mt. Sinai
in the U.S. District Court for the District of Delaware regarding whether the
manufacture, use, intended sale, and/or intended offer for sale of Replagal
infringes a Genzyme and Mt. Sinai patent. The Court has scheduled trial in
this action to begin in March 2002. (See Item 3. Legal Proceedings).
Gene Therapy Patent Interference
In January 1996, the U.S. Patent and Trademark Office ("PTO") declared an
interference regarding an issued patent with broad claims to ex vivo gene
therapy involving TKT, Genetic Therapy, Inc., a wholly owned subsidiary of
Novartis AG, Syntex, a wholly-owned subsidiary of Roche Holdings, Inc., and Cell
Genesys, Inc. (See Item 3. Legal Proceedings).
Trade Secrets
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 royalty-bearing 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 non-exclusive license for certain
non-viral gene therapy applications from GI with respect to GI's patented
Factor VIII genes and a non-exclusive 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.
Competition
The Company believes that the primary competitive factors relating to the
products that it is developing include safety, efficacy, reliability,
distribution channels, 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 the competitive factors affecting its business,
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,
13
obtaining regulatory approvals, and manufacturing, marketing, and distributing
products. Smaller companies may obtain access to such skills and resources
through collaborative arrangements with pharmaceutical companies or academic
institutions.
There can be no assurance that TKT will succeed in developing and
marketing technologies and products that are more clinically efficacious and
cost-effective than existing established treatments or new approaches and
products developed and marketed by competitors. The development by others of
alternative or superior treatment methods could render the Company's products
obsolete or noncompetitive with respect to some or all of the competitive
factors described above. In addition, treatment methods not clearly superior to
the Company's could achieve greater market penetration through competitors'
superior sales, marketing, or distribution capabilities.
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection, secure
licenses of necessary genes and technology from third parties, or otherwise
develop proprietary products, or processes, and secure sufficient capital
resources for the typically substantial expenditures and period of time prior to
commercial sales of each product.
Gene-Activated(TM) Proteins
In its Gene-Activated protein program, TKT is developing potentially
improved versions of proteins that are currently-marketed and proteins that have
no currently-marketed counterparts. For instance, in the case of Dynepo,
erythropoietin is marketed by Amgen and Johnson & Johnson ("J&J") in the U.S.;
F. Hoffmann-La Roche Ltd. (Boehringer Mannheim GmbH) and J&J (Janssen-Cilag) in
Europe; and by Sankyo Company Ltd., Chugai Pharmaceutical Co., Ltd., and Kirin
in Japan.
Many of the protein products against which the Company's Gene-Activated
proteins would compete have well-known brand names, have been promoted
extensively and have achieved market acceptance by third party payors,
hospitals, physicians, and patients. In addition, many of the companies that
produce these protein products have patents covering techniques used to produce
these products, which have served as effective barriers to entry in the
therapeutic proteins market. As with Amgen and its erythropoietin product, these
companies may seek to block TKT's entry into the market by asserting that the
Company's Gene-Activated proteins infringe their patents. Many of these
companies are also seeking to develop and commercialize new or potentially
improved versions of their proteins.
Niche Protein(TM) Products
For many of the disease targets of the Company's Niche Protein product
program, there is currently no cure or effective treatment. Treatments generally
are 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 is Genzyme. Genzyme owns or controls issued patents related to
the production of protein products to treat Fabry disease and Gaucher disease.
Some jurisdictions, including the United States, may designate drugs for
relatively small patient populations as orphan drugs. Orphan drug status
generally provides incentives to manufacturers to undertake development and
marketing of products to treat relatively rare diseases . The Company believes
that many of the potential products in its Niche Protein product platform will
14
qualify as orphan drugs and intends to pursue orphan drug designations, where
appropriate. If a product that has an orphan drug designation subsequently
receives the first marketing approval for the indication for which it has such
designation, the same product for the same indication may not generally be
approved for marketing, except in limited circumstances, for a period of seven
to ten years.
The Company believes that Genzyme is seeking marketing authorization in
the U.S. and Europe. Genzyme has also received orphan drug status for its
Fabry disease treatment in both the U.S. and Europe. In December 2000,
Genzyme announced that the FDA had requested clarification of several points
and identified additional data it needs concerning Genzyme's BLA.
Concurrently with the issuance of its positive opinion on Replagal to the EC,
the CPMP issued a positive opinion recommending approval of Genzyme's Fabry
disease product to the EC. If Genzyme receives regulatory approval to market
its drug before TKT, TKT may be excluded from marketing Replagal in the U.S.
and/or Europe, except in limited circumstances.
There can be no assurance that other companies will not seek an orphan
drug designation and obtain 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, the Company would not be permitted to market the same product for
the same indication during the exclusivity period, except in limited
circumstances.
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. In addition, new non-viral gene therapy treatments may
be developed in the future. A number of companies, including major biotechnology
and pharmaceutical companies, as well as development stage companies, are
actively involved in this field.
Manufacturing
TKT is currently using, and plans in the future to use, a combination of
internal manufacturing and contract manufacturing by third parties to meet its
requirements for preclinical testing, clinical trials, and commercialization of
its products.
Under TKT's collaboration with Aventis, Aventis is required to manufacture
Dynepo required for clinical trials and commercial sale. TKT expects that in the
future it may employ third party contract manufacturers for the production of
Gene-Activated proteins for clinical development and commercial sale.
TKT has entered into contract manufacturing arrangements with third
parties for the production of Replagal. TKT expects that it will also rely on
contract manufacturers to produce Replagal for commercial sale.
Government Regulation
The testing, manufacturing, labeling, advertising, promotion, export, and
marketing, among other things, of the Company's products are subject to
extensive regulation by governmental authorities in the U.S. and other
countries. In the U.S., pharmaceutical products are regulated by the FDA under
the Federal Food, Drug, and Cosmetic Act and other laws, including, in the case
of biologics, the Public Health Service Act. The Company believes that most of
its products will be
15
regulated by the FDA as biologics. Biologics require the submission of a BLA and
approval by the FDA prior to being marketed in the U.S. Manufacturers of
biologics may also be subject to state regulation.
The steps required before a product may be approved for marketing in the
U.S. generally include (i) preclinical laboratory tests and animal tests, (ii)
the submission to the FDA of an IND for human clinical testing, which must be
approved before human clinical trials may commence, (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the product, (iv) the submission to the FDA of a BLA, (v) FDA review of the
BLA, and (vi) satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the product is made to assess compliance with
cGMP. The Company or the FDA may suspend the approval process at any time on
various grounds including a finding that subjects or patients are exposed to an
unacceptable health risk. There can be no assurance that the completion of any
stage of the approval process will result in FDA authorization to market the
Company's products.
Both before and after approval is obtained, violations of regulatory
requirements may result in various adverse consequences, including the FDA's
delay in approving or refusal to approve a product, withdrawal of an approved
product from the market, and/or the imposition of criminal penalties against the
manufacturer and/or BLA holder. For example, BLA holders are required to report
certain adverse reactions to the FDA, and to comply with certain requirements
concerning advertising and promotional labeling for their products. Also,
quality control and manufacturing procedures must continue to conform to cGMP
regulations after approval, and the FDA periodically inspects manufacturing
facilities to assess compliance with cGMP. Accordingly, manufacturers must
continue to expend time, monies, and effort in the area of production and
quality control to maintain cGMP compliance. In addition, discovery of problems
may result in restrictions on a product, manufacturer, or BLA holder, including
withdrawal of the product from the market. Also, new federal, state or local
government requirements may be established that could delay or prevent
regulatory approval of the Company's products under development.
The Company also will be subject to a variety of foreign regulations
governing clinical trials and sales of its products. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The approval process varies from
country to country and the time may be longer or shorter than that required for
FDA approval.
In addition to regulations enforced by the FDA, the Company also is
subject to regulation under the Occupational Safety and Health 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 activities involve 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 clinical 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.
16
Employees
As of December 31, 2000, the Company had 322 full-time employees,
including 254 in research and development and 55 in general and administrative
functions. Thirteen of these employees are based in Europe as part of a European
subsidiary.
Trademarks
Gene-Activated(R) and the TKT(R) logo are registered trademarks of
Transkaryotic Therapies, Inc. GA-EPO(TM), Niche Protein(TM), Replagal(TM), and
Transkaryotic Therapy(TM), are trademarks of Transkaryotic Therapies, Inc.
Dynepo(TM) is a trademark of Aventis Pharma.
ITEM 2. PROPERTIES
As of December 31, 2000, the Company leased a total of approximately
124,000 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.
In August 2000, TKT signed a lease to rent approximately 180,000 square
feet of new laboratory and office space in Cambridge, Massachusetts, which will
serve as the Company's new corporate headquarters. TKT is expected to take
occupancy of its new headquarters in 2002.
In January 2001, the Company purchased a 45,000 square foot facility and
leased 44,000 square feet of adjacent space in Randolph, Massachusetts. This
facility will serve as laboratory and product development space.
The Company believes that its current facilities together with the new
building will be adequate to accommodate its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company can provide no assurance as to the outcome of any legal
proceedings. A decision by a court in the United States or in any other
jurisdiction in a manner adverse to the Company could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
Dynepo(TM) Patent Litigation
In April 1997, Amgen commenced a patent infringement action against the
Company and Aventis in the U.S. District Court for the District of
Massachusetts. Amgen's Complaint, as subsequently amended, sought a
declaratory judgment that the Company's Dynepo(TM) product, and the cells and
processes used to make Dynepo, infringe and will infringe, Amgen's U.S.
Patent Nos. 5,547,933, 5,618,698, 5,621,080, 5,756,349 and 5,955,422. A
non-jury trial commenced in May 2000 and concluded in September 2000.
In January 2001, the Court ruled that the Company infringed eight
claims of three patents. In particular, the Court ruled that the asserted
claims of U.S. Patent No. 5,547,933 are not infringed (and, if this finding
is in error, that the asserted claims are invalid), that the asserted claims
of U.S. Patent 5,618,698 are not infringed, that Claims 2, 3 and 4 of U.S.
Patent No. 5,621,080 are valid, enforceable and infringed under the doctrine
of equivalents; that Claims 1,
17
3, 4 and 6 of U.S. Patent No. 5,756,349 are valid, enforceable and literally
infringed, but that Claim 7 of the '349 patent is not infringed, and that Claim
1 of U.S. Patent No. 5,955,422 is valid, enforceable and literally infringed.
Amgen did not seek and was not awarded monetary damages.
In January 2001, TKT and Aventis filed a Notice of Appeal from the
Judgment of the District Court with the U.S. Court of Appeals for the Federal
Circuit in this case. The Company believes it has strong grounds for appeal.
Amgen filed a Notice of Cross-Appeal in February 2001 with the U.S. Court of
Appeals for the Federal Circuit.
In addition, in July 1999, Aventis and the Company commenced legal
proceedings in the U.K. against Kirin-Amgen, seeking a declaration that a U.K.
patent held by Kirin-Amgen will not be infringed by the Company's activities
related to Dynepo and that certain claims of Kirin-Amgen's U.K. patent are
invalid. The trial commenced in January 2001 and concluded in March 2001. The
Company expects a decision in mid-2001.
Pursuant to an Amended and Restated License Agreement, dated March
1995, by and between Aventis and the Company, Aventis has assumed the legal
costs of the Amgen and Kirin-Amgen litigation. The Company will reimburse
Aventis for the Company's share of the litigation expenses, as defined, from
future royalties, if any, received from the sale of Dynepo and in certain
other circumstances.
Replagal(TM) Patent Litigation
In July 2000, Genzyme and Mount Sinai filed a patent infringement suit
against the Company in the U.S. District Court for the District of Delaware,
alleging that the manufacture, use, intended sale, and/or intended offer for
sale of the Company's Replagal(TM) product infringes U.S. Patent No.
5,356,804. Genzyme and Mt. Sinai seek injunctive relief and an accounting for
damages. Discovery proceedings commenced in February 2001, and the Court has
scheduled trial in this action to begin in March 2002.
In September 2000, the Company filed suit against Genzyme and Mount Sinai
in the U.S. District Court for the District of Massachusetts seeking a
declaratory judgment that Genzyme's U.S. Patent No. 5,356,804 is invalid and not
infringed TKT. TKT expects the case to be transferred to the U.S. District Court
for the District of Delaware as part of the Delaware action.
Gene Therapy Patent Interference
TKT requested, and the U.S. Patent and Trademark Office ("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., which is a wholly-owned subsidiary of Novartis AG, Syntex
(U.S.A.), which is a wholly-owned subsidiary of Roche Holdings, Inc., and Cell
Genesys, Inc.
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
18
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.
If TKT does not prevail, a March 1997 Federal Trade Commission (the "FTC")
consent order may be relevant to TKT. The FTC entered this consent order to
resolve anti-competitive 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 are required to provide all gene therapy researchers and
developers with nonexclusive, royalty-bearing licenses to the Novartis patent
that is involved in the interference. In addition, the Company has entered into
an agreement with Cell Genesys under which the Company would be permitted to
market its non-viral gene therapy products pursuant to a license agreement if
Cell Genesys wins the interference. Thus, the Company believes that it will only
be materially adversely affected if Syntex prevails in this proceeding.
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 Officers
The executive officers of the Company are as follows:
Name Age Position held with the Company
- ---- --- ------------------------------
Richard F Selden, M.D., Ph.D. 42 President and Chief Executive Officer
Michael J. Astrue 44 Senior Vice President, Administration and
General Counsel
Daniel E. Geffken 44 Senior Vice President, Finance and Chief
Financial Officer
William H. Pursley 47 Senior Vice President, Commercial
Operations
Douglas A. Treco, Ph.D. 43 Senior Vice President, Research and
Development
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. 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.
Michael J. Astrue has served as Senior Vice President, Administration and
General Counsel since May 2000. From 1993 to 1999, he served as Vice President,
Secretary and General Counsel of Biogen, Inc., a biotechnology company. Mr.
Astrue holds a B.A. in Philosophy and English from Yale University and a J.D.
from Harvard Law School.
Daniel E. Geffken has served as Senior Vice President, Finance and Chief
Financial Officer of the Company since December 2000 and, from February 1997 to
December 2000, he served as Vice President, Finance and Chief Financial Officer.
From June 1993 to February 1997, Mr. Geffken was
19
Vice President and Chief Financial Officer of CytoTherapeutics, Inc., a
biotechnology company. He received a B.S. in Economics from The Wharton School,
University of Pennsylvania and a M.B.A. from the Harvard Business School.
William H. Pursley has served as Senior Vice President, Commercial
Operations since April 1999. From April 1995 to April 1999, Mr. Pursley was
Senior Vice President, Commercial Development at BioTechnology General
Corporation, a BioTechnology company. He received a B.A. in Biology from the
University of Louisville.
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. 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.
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 Stock Market under the symbol "TKTX." As of March 1, 2001, there were 155
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
Stock Market.
High Low
2000
Quarter Ended:
December 31....................................... $ 46 5/8 $ 30 7/8
September 30...................................... 48 25 3/16
June 30........................................... 52 24 7/16
March 31.......................................... 85 3/8 32 9/16
1999
Quarter Ended:
December 31....................................... $ 53 3/8 $ 34 1/4
September 30...................................... 51 3/8 31 3/8
June 30........................................... 34 3/8 25 15/16
March 31.......................................... 37 7/8 23 3/8
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain all future
earnings, if any, to fund the development and growth of its business and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Company is currently prohibited from paying cash dividends under its
term loan facility with Fleet National Bank.
20
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company for the
five years ended December 31, 2000 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.
- ------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2000 1999 1998 1997 1996
License and research revenues $7,247 $3,870 $5,325 $5,788 $4,225
Research and development expenses 56,440 43,946 25,617 18,111 14,019
Net income (loss) (51,021) (44,456) (19,965) (12,871) (11,972)
Basic net income (loss) per share (pro forma in 1996) $(2.25) $(2.25) $(1.05) $(0.74) $(0.98)
Shares used to compute basic net income (loss) per
share (pro forma in 1996) 22,675 19,763 19,052 17,394 12,262
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA December 31,
- ------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998 1997 1996
Cash and marketable securities $245,456 $192,495 $110,155 $129,554 $86,255
Total assets 272,393 215,291 117,962 134,948 90,998
Total stockholders' equity 247,857 195,782 113,646 131,749 89,644
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since its inception in 1988, the Company has been primarily engaged in the
development and commercialization of products based on the Company's three
proprietary development platforms: Gene-Activated(R) proteins, Niche Protein(TM)
products and gene therapy. As of December 31, 2000, no revenue has been derived
from the sale of any products. 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, 2000, the
Company's accumulated deficit was $165,429,000. 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.
21
Results of Operations
Years Ended December 31, 2000, 1999 and 1998
License and research revenues totaled $7,247,000, $3,870,000 and
$5,325,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
All revenues were earned from collaborative agreements with Aventis Pharma
("Aventis"), Genetics Institute, Inc. and Sumitomo Pharmaceuticals Co., Ltd.
Research and development expenses totaled $56,440,000 in 2000, as compared
to $43,946,000 in 1999 and $25,617,000 in 1998. The increase in 2000 of
$12,494,000, or 28%, and in 1999 of $18,329,000, or 72%, was principally due to
increases in external development services and research and development staffing
in each of the Company's product development platforms. In particular,
preclinical and clinical costs for the Company's Fabry disease, Hunter syndrome
and hemophilia A programs, as well as manufacturing costs associated with the
Fabry disease program, were significant components of the increase in 2000.
During 2001, the costs related to both preclinical and clinical programs are
expected to increase significantly as product development activities are
initiated or expanded.
General and administrative expenses were $15,755,000 for the year ended
December 31, 2000, compared with $10,035,000 and $6,409,000 in 1999 and 1998,
respectively. The increases in 2000 of $5,720,000, or 57%, and in 1999 of
$3,626,000, or 57%, were principally due to costs in building a business
development and commercialization infrastructure, particularly sales and
marketing capabilities related to the commercialization of products in the
Company's Niche Protein product platform in both the U.S. and Europe. During
2001, these costs are expected to increase as pre-launch activities related to
its Niche Protein product platform accelerate.
Interest income was $13,927,000, $5,655,000 and $6,736,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. The average cash and
marketable securities balances were $222,712,000, $108,673,000 and $120,779,000
in 2000, 1999 and 1998, respectively. The increase in interest income in 2000 is
due to both higher average investment balances for 2000 as compared to 1999 and
higher rates of return earned in 2000. The decrease in interest income in 1999
is due to both lower average investment balances and generally lower rates of
return earned in 1999.
The Company had a net loss of $51,021,000, $44,456,000 and $19,965,000 in
2000, 1999 and 1998, 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 $245,456,000 at December 31, 2000. Cash equivalents and
marketable securities are invested in U.S. government and agency obligations and
money market funds.
22
In June 2000, the Company completed a private placement of 10,000 shares
of Series A Convertible Preferred Stock, resulting in net proceeds to the
Company of approximately $99,797,000.
In November 1999, the Company completed a private placement of 3,300,000
shares of Common Stock, resulting in net proceeds to the Company of
approximately $124,576,000.
The Company leased additional facilities in the fourth quarter of 1998
which are used for research and development. 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 became payable in
December 1999 on the basis of a seven year amortization schedule over a five
year period, with a final payment for any remaining amount in September 2004.
The loan bears interest at either the prime rate or LIBOR plus 1.5%, at the
Company's election. The weighted average interest rate of the loan at
December 31, 2000 was 8%. The note contains certain restrictive covenants,
including, among other things, minimum cash and tangible net asset
requirements and prohibitions on the payment of dividends. At December 31,
2000, $12,000,000 was outstanding under this facility.
In August 2000, the Company entered into a ten year lease for a new
corporate headquarters and research and development facility in Cambridge,
Massachusetts. The lease requires a security deposit of $7,680,000, of which
$680,000 was paid in cash and the balance provided in the form of a letter of
credit. An investment with a value of $7,819,000 collateralizes the letter of
credit. The Company expects to spend up to an additional $25,000,000 for
leasehold improvements for this facility.
In January 2001, the Company purchased a 45,000 square foot development
facility for $8,800,000. In addition, it leased an adjoining 44,000 square foot
facility under the terms of a ten year lease. The Company expects to spend up to
an additional $10,000,000 for leasehold improvements for these facilities.
The Company may seek financing for all or a significant portion of the
cost of the leasehold improvements described above. There can be no guarantee
that financing will be available on favorable terms, if at all.
At December 31, 2000, the Company had committed to pay approximately
$28,560,000 to third parties for certain product development activities through
2004.
In May 1994, the Company and Aventis entered into an agreement to
commercialize Dynepo(TM), a Gene-Activated erythropoeitin product. Under the
terms of the agreement, Aventis 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, 2000, the Company had received $30,000,000. The
remaining $28,000,000 in payments are contingent upon Aventis' achievement of
certain Dynepo clinical development milestones. Aventis is responsible for the
worldwide development, manufacturing and marketing of Dynepo, and the Company is
entitled to receive a royalty based on net sales.
In March 1995, the Company entered into a second agreement with Aventis to
commercialize a second Gene-Activated protein, GA-II. In December 2000, TKT
reacquired worldwide commercial rights to GA-II. The GA-II development program
has concluded Phase
23
I studies, and the Company may fund the remaining development cost itself. This
cost could be significant.
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $144,264,000, which expire at various times through 2020. 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 and
marketing 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 2002. The Company's cash requirements may vary,
however, depending on numerous factors. Lack of necessary funds may require the
Company to delay, scale back or eliminate some or all of its research and
product development programs or to license its potential products or
technologies to third parties.
The Company has been engaged in litigation with Amgen Inc. and
Kirin-Amgen, Inc. with respect to the development of Dynepo and with Genzyme
Corporation with respect to the development of Replagal. Pursuant to the
Amended and Restated License Agreement, dated March 1995, by and between
Aventis and the Company, Aventis has assumed the legal cost of the Amgen and
Kirin-Amgen litigations. The Company is required to reimburse Aventis for the
Company's share of litigation expenses, as defined, from future royalties, if
any, received from the sale of Dynepo and in certain other circumstances.
Forward-Looking Statements
24
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,"
"estimates," "intends," "should," "could," "will," "may," 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.
These include, without limitation, the following: (1) whether any of the
Company's Gene-Activated protein, Niche Protein or gene therapy product
candidates will advance in the clinical trial process, (2) whether such
clinical trials will proceed in a timely manner, (3) whether the clinical
trial results will warrant continued product development, (4) whether the
required regulatory filings, such as Investigational New Drug applications
and Biologics License Applications, are made in a timely manner, (5) whether
the Company's products will receive approval from the U.S. Food and Drug
Administration or equivalent foreign regulatory agencies, (6) if such
products receive approval, whether they will be successfully distributed and
marketed, (7) whether patent litigation in which the Company is involved or
may become involved are resolved in a manner adverse to the Company; (8) the
effects of competitive products on the Company's proposed products, (9) the
Company's dependence on third parties, including collaborators, manufacturers
and distributors, and (10) the other risks set forth below the caption,
"Certain Factors That May Affect Future Results." In addition, any
forward-looking statements represent the Company's estimates only as of the
date this Annual Report was first filed with the Securities and Exchange
Commission and should not be relied upon as representing the Company's
estimates as of any subsequent date. While the Company may elect to update
forward-looking statements at some point in the future, the Company
specifically disclaims any obligation to do so, even if its estimates change.
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, 2000 and presented elsewhere
by management from time to time.
WE ARE A PARTY TO LITIGATION WITH AMGEN AND KIRIN-AMGEN INVOLVING
DYNEPO(TM)
In April 1997, Amgen commenced a patent infringement action against the
Company and Hoechst Marion Roussel, Inc. (now Aventis Pharma) in the United
States District Court for the District of Massachusetts. Amgen's complaint, as
subsequently amended, sought a declaratory judgment that our Dynepo(TM) product,
and the cells and processes used to make Dynepo, infringe, and will infringe,
Amgen's U.S. Patent Nos. 5,547,933, 5,618,698, 5,621,080, 5,756,349 and
5,955,422.
A non-jury trial commenced in May 2000 and concluded in September 2000. In
January 2001, the Court ruled that we do not infringe the asserted claims of
U.S. Patent No. 5,547,933 (and, if this finding is in error, that the asserted
claims are invalid), that we do not infringe the asserted claims of U.S. Patent
5,618,698, that Claims 2, 3 and 4 of United States Patent No. 5,621,080 are
valid, enforceable and are infringed by us under the doctrine of equivalents;
that Claims 1, 3, 4 and 6 of United States Patent No. 5,756,349 are valid,
enforceable and literally infringed by us, but that we do not infringe Claim 7
of the '349 patent, and that Claim 1 of U.S. Patent No. 5,955,422 is valid,
enforceable and literally infringed by us. Amgen did not seek and was not
awarded monetary damages.
In January 2001, we filed a Notice of Appeal with the U.S. Court of
Appeals for the Federal Circuit from the Judgment of the District Court in this
case. We believe that we have strong grounds for appeal. Amgen filed a Notice of
Cross-Appeal in February 2001.
25
In addition, in July 1999, together with Aventis, we commenced legal
proceedings in the United Kingdom against Kirin-Amgen, Inc., seeking a
declaration that a U.K. patent held by Kirin-Amgen will not be infringed by our
activities related to Dynepo and that certain claims of Kirin-Amgen's U.K.
patent are invalid. The trial commenced in January 2001 and concluded in March
2001. We expect a decision from the Court in mid-2001.
Pursuant to an Amended and Restated License Agreement, dated March 1995,
by and between Aventis and the Company, Aventis has assumed the legal costs of
the Amgen and Kirin-Amgen litigation. We will reimburse Aventis for the
Company's share of the litigation expenses, as defined, from future royalties,
if any, received from the sale of Dynepo and in certain other circumstances.
We can provide no assurance as to the outcome of either of these
proceedings. Court decisions adverse to us could have a material adverse effect
on our business, financial condition, and results of operations. In particular,
with respect to the Amgen litigation, if the District Court decision is not
reversed on appeal, it is likely that we and Aventis would be enjoined from
making, using, or selling Dynepo in the U.S. Additionally, Dynepo may be the
subject of additional litigation in the future.
WE ARE A PARTY TO LITIGATION WITH GENZYME AND MOUNT SINAI INVOLVING
REPLAGAL(TM)
We are a defendant in a civil patent infringement lawsuit brought by
Genzyme and Mt. Sinai in the U.S. District Court for the District of Delaware.
Genzyme's complaint, which was filed in July 2000, alleges that the manufacture,
use, intended sale, and/or intended offer for sale of our Replagal(TM) product
infringes U.S. Patent No. 5,356,804. Genzyme and Mt. Sinai seek injunctive
relief and an accounting for damages. Discovery proceedings commenced in
February 2001 and the Court has scheduled trial in this action to begin in March
2002.
In September 2000, we filed suit against Genzyme and Mt. Sinai in the U.S.
District Court for the District of Massachusetts seeking a declaratory judgment
that Genzyme's U.S. Patent No. 5,356,804 is invalid and not infringed us. We
expect the case to be transferred to the U.S. District Court for the District of
Delaware.
We can provide no assurance as to the outcome of this litigation. A court
decision adverse to us could have a material adverse effect on our business,
financial condition, and results of operations.
WE MAY NOT OBTAIN GOVERNMENT APPROVALS; THE APPROVALS PROCESS IS COSTLY
AND LENGTHY
The testing, manufacturing, labeling, advertising, promotion, export, and
marketing, among other things, of our products are subject to extensive
regulation by governmental authorities in the U.S. and other countries. The
regulatory approval process to obtain market approval for a new drug or biologic
takes many years and requires the expenditure of substantial resources. We have
had only limited experience in preparing applications and obtaining regulatory
approvals.
There can be no assurance that submission of an Investigational New Drug
Application will result in FDA authorization to commence clinical trials, or
that once clinical trials have begun, testing will be completed successfully
within any specific time period, if at all, with respect to any of our products.
Furthermore, we or the FDA may suspend clinical trials at any time on various
grounds, including a finding that the subjects or patients are being exposed to
unacceptable health
26
risks. Once trials are complete and an application has been submitted, the
FDAmay deny a BLA if applicable regulatory criteria are not satisfied, may
require additional testing or information, or may require postmarketing testing
and surveillance to monitor the safety or efficacy of a product. The testing and
approval process requires substantial time, effort, and financial resources. We
can provide no assurance that any approval will be granted on a timely basis, if
at all.
In 2000, the FDA requested that additional data be provided regarding
manufacturing information and that a new BLA for Dynepo be submitted when the
data is compiled. In 2001, the FDA issued a complete review letter regarding the
Replagal BLA, which requested further explanation in several areas and
additional data.
Because gene therapy is a relatively new technology and products for gene
therapy have not been extensively tested in humans, the regulatory requirements
governing gene therapy products may be more uncertain than for other types of
products. This uncertainty may cause delays in the regulatory process relating
to our gene therapy products, including delays in our initiating clinical trials
of these products. This uncertainty may also increase the cost of obtaining
regulatory approvals of our gene therapy products.
Both before and after approval is obtained, violations of regulatory
requirements may result in various adverse consequences, including the FDA's
delay in approving or refusal to approve a product, withdrawal of an approved
product from the market, /or the imposition of criminal penalties against the
manufacturer or the BLA holder.
We will also be subject to a variety of foreign regulations governing
clinical trials and the sale of its products. Whether or not we have obtained
FDA approval, the comparable regulatory authorities of foreign countries must
also approve a product prior to the commencement of marketing of the product in
those countries. The approval process varies from country to country, and the
time may be longer or shorter than that required for FDA approval.
We announced in March 2001 that the CPMP issued a positive opinion
recommending approval of Replagal(TM). The CPMP's recommendation for approval
will be forwarded to the EC, which will determine whether to grant marketing
authorization of Replagal in the European Union. The CPMP also issued a
positive opinion recommending approval of Genzyme's Fabry disease product to
the EC. There can be no assurance that the EC will approve the marketing
authorization for Replagal.
COMPETITORS' PRODUCTS MAY RECEIVE ORPHAN DRUG EXCLUSIVITY AND THEREBY
PRECLUDE US FROM MARKETING OUR NICHE PROTEIN-TM- PRODUCTS AND WE MAY NOT BE ABLE
TO OBTAIN ORPHAN DRUG EXCLUSIVITY FOR OUR NICHE PROTEIN PRODUCTS
Some jurisdictions, including the United States, may designate drugs for
relatively small patient populations as `orphan drugs'. Generally, if a product
which has an orphan drug designation subsequently receives the first marketing
approval for the indication for which it has such designation, the product is
entitled to orphan drug exclusivity, i.e., other applications to market the same
product for the same indication may not be approved, except in limited
circumstances, for a period of seven to ten years. Obtaining orphan drug
designations and orphan drug exclusivity for our Niche Protein products may be
critical to our success in this area. We may not be able to obtain orphan drug
designation or exclusivity for any of our potential products or be able to
maintain such designation or exclusivity for any of these products. For example,
if a competitive product is shown to be clinically superior to our product, any
orphan drug exclusivity we have obtained will not apply to our product.
27
Our competitors may also seek orphan drug designations and obtain
orphan drug exclusivity for products competitive with our products before we
obtain marketing approval. We believe that Genzyme is seeking marketing
authorization in both the U.S. and Europe for a protein product for the
treatment of Fabry disease for which it has orphan drug designation. In
December 2000, Genzyme announced that the FDA requested clarification of
several points and identified additional data it needs concerning Genzyme's
BLA. Concurrently with the issuance of its positive opinion on Replagal to
the EC, the CPMP issued a positive opinion recommending approval of Genzyme's
Fabry disease product to the EC. We cannot predict whether Genzyme may in the
future be able to prevent the marketing of Replagal through an orphan drug
statute.
WE FACE SIGNIFICANT COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING,
DEVELOPING, OR COMMERCIALIZING PRODUCTS BEFORE OR MORE SUCCESSFULLY THAN WE DO
The biotechnology industry is highly competitive and characterized by
rapid and significant technological change. Our competitors include
pharmaceutical companies, biotechnology firms, universities, and other research
institutions. Many of these competitors have substantially greater financial and
other resources than we do and are conducting extensive research and development
activities on technologies and products similar to or competitive with ours.
We may be unable to develop technologies and products that are more
clinically efficacious or cost-effective than products developed by our
competitors. Even if we obtain marketing approval for our product candidates,
many of our competitors have more extensive and established sales, marketing,
and distribution capabilities than we do. Litigation with third parties,
including our litigation with both Amgen and Genzyme, could delay our time to
market for certain products and enable our competitors to more quickly and
effectively penetrate certain markets.
Under our Gene-Activated protein program, we are developing fully human
versions of proteins that are currently-marketed. For instance, in the case of
Dynepo, erythropoietin is marketed by Amgen and Johnson & Johnson in the U.S.;
F. Hoffmann-La Roche Ltd. (Boehringer Mannheim GmbH) and Johnson & Johnson
(Janssen-Cilag) in Europe; and Sankyo Company Ltd., Chugai Pharmaceutical Co.,
Ltd., and Kirin in Japan.
Many of the protein products against which our Gene-Activated proteins
would compete have well-known brand names, have been promoted extensively, and
have achieved market acceptance by third party payors, hospitals, physicians,
and patients. Many of the companies that produce these protein products have
patents covering the techniques used to produce these products, which have
served as effective barriers to entry in the protein therapeutics market. As
with Amgen and its erythropoietin product, these companies may seek to block our
entry into the market by asserting that our Gene-Activated proteins infringe
their patents. Many of these companies are also seeking to develop and
commercialize new or potentially improved versions of their proteins.
We believe that the primary competition with respect to our Niche
Protein product program is from biotechnology and smaller pharmaceutical
companies. In particular, we believe that our major competition with respect
to Fabry disease and Gaucher disease is Genzyme. We believe that Genzyme is
seeking marketing authorization in both the U.S. and Europe. Genzyme has
received orphan drug status for its Fabry disease treatment in both the U.S.
and Europe. Moreover, concurrently with the issuance of its positive opinion
on Replagal to the EC, the CPMP issued a positive opinion recommending
approval of Genzyme's Fabry disease product to the EC. In addition, Genzyme
has marketed a product for the treatment of Gaucher disease since 1991.
Genzyme owns or controls issued patents related to the production of protein
products to treat Fabry disease and Gaucher disease. The markets for some of
our potential Niche Protein
28
products are quite small. As a result, if competitive products exist, we may not
be able successfully to commercialize our products.
Our gene therapy system will have to compete with other gene therapy
systems, as well as with conventional methods of treating targeted diseases and
conditions. In addition, new non-gene therapy treatments may be developed in the
future. A number of companies, including major biotechnology and pharmaceutical
companies, as well as development stage companies, are actively involved in this
field.
WE ARE DEPENDENT ON AVENTIS AND OTHER CORPORATE COLLABORATORS TO DEVELOP,
CONDUCT CLINICAL TRIALS, OBTAIN REGULATORY APPROVALS FOR, AND, MANUFACTURE,
MARKET, AND SELL OUR PRINCIPAL PRODUCTS
We are parties to collaborative agreements with third parties relating to
certain of our principal products. We are relying on Aventis to develop, conduct
clinical trials, obtain regulatory approvals for, and manufacture, market, and
sell Dynepo; Sumitomo to develop and commercialize Replagal for Fabry disease in
Japan and other Asian countries; and GI to develop and commercialize Factor VIII
gene therapy for hemophilia A in Europe. Our collaborators may not devote the
resources necessary or may otherwise be unable to complete development and
commercialization of these potential products. Our existing collaborations are
subject to termination without cause on short notice under certain
circumstances.
Our existing collaborations and any future collaborative arrangements with
third parties may not be scientifically or commercially successful. Factors that
may affect the success of our collaborations include the following:
- our collaborators may be pursuing alternative technologies or developing
alternative products, either on their own or in collaboration with others,
that may be competitive with the product as to which they are
collaborating with us, which could affect our collaborative partners'
commitment to the collaboration with us;
- reductions in marketing or sales efforts or a discontinuation of marketing
or sales of our products by our collaborators would reduce our revenues,
which will be based on a percentage of net sales by the collaborator;
- our collaborators may terminate their collaborations with us, which could
make it difficult for us to attract new collaborators or adversely affect
the perception of us in the business and financial communities; and
- our collaborators may pursue higher priority programs or change the focus
of their development programs, which could affect the collaborator's
commitment to us.
WE HAVE NOT GENERATED REVENUES FROM THE SALE OF PRODUCTS
We are at an early stage of development. We have not generated revenues
from the sale of products. Each of our three product platforms involves new and
rapidly evolving technologies. All of our potential products are in research,
preclinical testing, or clinical development. We will need to conduct additional
development efforts for all of these products prior to seeking regulatory
approval. Preclinical and clinical data on the safety and efficacy of our
potential products are limited. Our potential products may not be efficacious or
may prove to have undesirable or unintended side effects, toxicities, or other
characteristics that may prevent or limit commercial use.
WE HAVE NOT BEEN PROFITABLE AND MAY REQUIRE ADDITIONAL FUNDING
29
We have experienced significant operating losses since our inception in
1988. At, December 31, 2000, we had an accumulated deficit of approximately
$165.4 million. We expect that we will continue to incur substantial losses and
that our cumulative losses will increase until then as our research and
development, sales and marketing, and manufacturing efforts expand. We expect
that the losses that we incur will fluctuate from quarter to quarter and that
these fluctuations may be substantial. To date, we have not received revenues
from the sale of products.
We will require substantial funds to conduct research and development,
including preclinical testing and clinical trials of our potential products, and
to manufacture and market any products that are approved for commercial sale.
Our future capital requirements will depend on many factors, including the
following:
- continued progress in our research and development programs, as well as
the magnitude of these programs;
- the scope and results of our clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the cost of manufacturing activities;
- the cost of commercialization activities;
- the cost of our additional facilities requirements;
- our ability to establish and maintain collaborative arrangements;
- the timing, receipt, and amount of milestone and other payments from
collaborators;
- the timing, receipt, and amount of sales and royalties from our potential
products in the market;
- the costs involved in preparing, filing, prosecuting, maintaining, and
enforcing patent claims and other patent-related costs, including
litigation costs and the costs of obtaining any required licenses to
technologies;
- the results of such litigation; and
- the cost of obtaining and maintaining licenses to use patented
technologies.
We may seek additional funding through collaborative arrangements and
public or private financings. Additional financing may not be available to us on
acceptable terms or at all.
If we raise additional funds by issuing equity securities, further
dilution to our then existing stockholders will result. In addition, the terms
of the financing may adversely affect the holdings or the rights of such
stockholders. If we are unable to obtain funding on a timely basis, we may be
required to significantly curtail one or more of our research or development
programs. We also could be required to seek funds through arrangements with
collaborators or others that may require us to relinquish rights to certain of
our technologies, product candidates, or products which we would otherwise
pursue on our own.
WE HAVE LIMITED MANUFACTURING CAPABILITIES AND MAY DEPEND ON THIRD PARTY
MANUFACTURERS
We have limited manufacturing experience and in order to continue to
develop products, apply for regulatory approvals, and, ultimately, commercialize
any products, we will need to develop, contract for, or otherwise arrange for
the necessary manufacturing capabilities.
30
We expect to manufacture certain of our products in our own manufacturing
facilities. We will require substantial additional funds and need to recruit
qualified personnel in order to build or lease and operate any manufacturing
facilities.
We currently rely upon third parties to produce material for preclinical
testing and clinical trial purposes. We expect to continue to do so in the
future. We also expect to rely upon third parties for the commercial production
of certain of our products if we succeed in obtaining necessary regulatory
approvals. There are a limited number of such third party manufacturers capable
of manufacturing for us. As a result, we may experience difficulty in obtaining
adequate capacity for our future needs. If we are unable to obtain or maintain
contract manufacturing of these products, or to do so on commercially reasonable
terms, we may not be able to complete development of these products or market
them. To the extent that we enter into manufacturing arrangements with third
parties, we are dependent upon these third parties to perform their obligations
in a timely manner and in accordance with applicable government regulations.
IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL, WE MAY NOT BE ABLE TO DEVELOP
AND COMMERCIALIZE ANY RELATED PRODUCTS
In order to obtain regulatory approvals for the commercial sale of our
potential products, we and our collaborators will be required to complete
extensive clinical trials in humans to demonstrate the safety and efficacy of
the products. We may not be able to obtain authority from the FDA or other
regulatory agencies to commence or complete these clinical trials.
The results from preclinical testing of a product that is under
development may not be predictive of results that will be obtained in human
clinical trials. In addition, the results of early human clinical trials may not
be predictive of results that will be obtained in larger scale, advanced stage
clinical trials. Furthermore, we, one of our collaborators, or the FDA may
suspend clinical trials at any time if the subjects or patients participating in
such trials are being exposed to unacceptable health risks, or for other
reasons.
The rate of completion of clinical trials is dependent in part upon the
rate of enrollment of patients. Patient accrual is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study, and the existence of
competitive clinical trials. In particular, the patient population for some of
our Niche Protein products is small. Delays in planned patient enrollment may
result in increased costs and program delays.
We and our collaborators may not be able to successfully complete any
clinical trial of a potential product within any specified time period. In some
cases, we may not be able to complete the trial at all. Moreover, clinical
trials may not show any potential product to be safe or efficacious. Thus, the
FDA and other regulatory authorities may not approve any of our potential
products for any indication.
Our business, financial condition, or results of operations could be
materially adversely affected if:
- we or our collaborators are unable to complete a clinical trial of one of
our potential products;
- the results of any clinical trial are unfavorable; or
- the time or cost of completing the trial exceeds our expectations.
31
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE AND CAPABILITIES
We have limited sales and marketing experience and capabilities. In order
to market our products, we will need to develop this experience and these
capabilities or rely upon third parties, such as our collaborators, to perform
these functions. If we rely on third parties to sell, market, or distribute our
products, our success will be dependent upon the efforts of these third parties
in performing these functions. In many instances, we may have little or no
control over the activities of these third parties in selling, marketing, and
distributing our products. If we choose to conduct these activities directly, as
we plan to do with respect to some of our potential products, we may not be able
to recruit and maintain an effective sales force.
OUR SUCCESS IS DEPENDENT UPON THE RETENTION AND HIRING OF KEY PERSONNEL
Our success is highly dependent on the retention of principal members of
our scientific and administrative staff. Furthermore, our future growth will
require hiring a significant number of qualified scientific and administrative
personnel. Accordingly, recruiting and retaining such personnel in the future
will be critical to our success. There is intense competition from other
companies and research and academic institutions for qualified personnel in the
areas of our activities, and there can be no assurance that we will be able to
continue to attract and retain, on acceptable terms, the qualified personnel
necessary for the continued development of our business.
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT BY THIRD PARTY
PAYORS FOR OUR FUTURE PRODUCTS, WE MAY NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE
OUR PRODUCTS IN CERTAIN MARKETS
The availability of reimbursement by governmental and other third party
payors affects the market for any pharmaceutical product. These third party
payors continually attempt to contain or reduce the costs of health care by
challenging the prices charged for medical products and services. In certain
foreign countries, particularly the countries of the European Union, the pricing
of prescription pharmaceuticals is subject to governmental control.
Proposals have been considered periodically by the Health Care Financing
Administration of the United States Department of Health and Human Services to
reduce the reimbursement rate with respect to erythropoietin. Adoption by the
Health Care Financing Administration of any such proposal might have an adverse
effect on the pricing of Dynepo.
In both the U.S. and certain foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the health care system.
We believe that further proposals are likely. The potential for adoption of
these proposals may affect our ability to raise capital, obtain additional
collaborative partners, and market our products.
If we or our collaborators obtain marketing approvals for our products, we
expect to experience pricing pressure due to the trend toward managed health
care, the increasing influence of health maintenance organizations, and
additional legislative proposals. We may not be able to sell our products
profitably if reimbursement is unavailable or limited in scope or amount.
WE MAY BE SUBJECT TO ADDITIONAL LITIGATION RELATING TO OUR INTELLECTUAL
PROPERTY RIGHTS
32
The biotechnology industry has been characterized by significant
litigation and interference and other proceedings regarding patents, patent
applications, and other intellectual property rights. We may become a party to
additional patent litigation and other proceedings in the future beyond the
patent issues described under "--We are a party to litigation with Amgen and
Kirin-Amgen involving Dynepo(TM)", "We are a party to litigation with Genzyme
involving Replagal" and "--We are involved and may become involved in patent
litigation or other intellectual property proceedings relating to our
Transkaryotic Therapy(TM) technology which could result in liability for damages
or stop our development and commercialization efforts."
Certain of our competitors have filed patent applications and have been
issued patents relating to certain methods of producing therapeutic proteins. We
believe that the risk of our becoming involved in patent litigation is
significant with respect to the therapeutic proteins that we anticipate
producing.
An adverse outcome in any patent litigation or other proceeding involving
patents could subject us to significant liabilities to third parties and require
us to cease using the technology that is at issue or to license the technology
from third parties. We may not be able to obtain any required licenses on
commercially acceptable terms or at all.
The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our competitors may be able
to sustain these costs more effectively than we can because of their
substantially greater financial resources. Uncertainties resulting from the
initiation and continuation of patent litigation or other proceedings could have
a material adverse effect on our ability to compete in the marketplace.
In addition, hearings have been held by Congress with respect to the
Waxman-Hatch Act. Under the safe harbor provisions of the Waxman-Hatch Act,
activities conducted solely for uses reasonably related to the production of
information for submission to the FDA as part of seeking regulatory approval to
market a product are not acts of patent infringement. If legislation changing
the safe harbor provisions of the Waxman-Hatch Act were introduced in Congress
and enacted, competitors of ours that desire to bring U.S. patent infringement
actions against us might be able to do so at an earlier time than under the
existing law.
WE MAY NOT BE ABLE TO OBTAIN PATENT PROTECTION FOR OUR DISCOVERIES
Our success will depend in large part on our ability to obtain patent
protection for our processes and products in the U.S. and other countries. The
patent situation in the field of biotechnology generally is highly uncertain and
involves complex legal and scientific questions. We may not be issued patents
relating to our technology. Even if issued, patents may be challenged,
invalidated, or circumvented. Our patents also may not afford us protection
against competitors with similar technology. Because patent applications in the
U.S. are maintained in secrecy until patents issue, third parties may have filed
or maintained patent applications for technology used by us or covered by our
pending patent applications without our being aware of these applications.
We may not hold proprietary rights to certain product patents, process
patents, and use patents related to our products or their methods of
manufacture. In some cases, these patents may be owned or controlled by third
parties. As a result, we may be required to obtain licenses under third party
patents to market certain of our potential products. If licenses are not
available to us on acceptable terms, we may not be able to market these
products.
33
We also rely upon unpatented proprietary technology, processes, and
know-how. We seek to protect this information in part by confidentiality
agreements with our employees, consultants, and other third party contractors.
These agreements may be breached, and we may not have adequate remedies for any
such breach. In addition, our trade secrets may otherwise become known or be
independently developed by competitors.
WE MAY LOSE IMPORTANT LICENSE RIGHTS IN SOME CIRCUMSTANCES
We are a party to a number of patent licenses that are important to our
business and expect to enter into additional patent licenses in the future.
These licenses impose various commercialization, sublicensing, royalty,
insurance, and other obligations on us. If we fail to comply with these
obligations, the licensor may have the right to terminate the license.
WE ARE INVOLVED AND MAY BECOME INVOLVED IN PATENT LITIGATION OR OTHER
INTELLECTUAL PROPERTY PROCEEDINGS RELATED TO OUR TRANSKARYOTIC THERAPY -TM-
TECHNOLOGY WHICH COULD RESULT IN LIABILITY FOR DAMAGES OR STOP OUR DEVELOPMENT
AND COMMERCIALIZATION EFFORTS
We are a party to a proceeding before the U.S. Patent and Trademark Office
to determine the patentability of our Gene Therapy technology. The participants
in the interference are TKT, Genetic Therapy, Inc., which is a wholly-owned
subsidiary of Novartis AG, Syntex (U.S.A.), which is a wholly-owned subsidiary
of Roche Holdings, Inc., and Cell Genesys, Inc. This proceeding will determine
which of the parties first developed this technology. If the technology is
patentable, the party that first developed the technology will be awarded the
U.S. patent rights.
The process to resolve an interference can take many years. We may not
prevail in this interference. Even if we do prevail, the decision in this
proceeding may not enable us meaningfully to protect our proprietary position in
the field of ex vivo gene therapy.
If we do not prevail in this proceeding, a consent order issued by the
Federal Trade Commission in March 1997 may be relevant to us. The Federal Trade
Commission entered this consent order to resolve anti-competitive concerns
raised by the merger of Ciba-Geigy Limited and Sandoz Limited into Novartis AG.
As part of the consent order, the constituent entities of Novartis are required
to provide all gene therapy researchers and developers with nonexclusive,
royalty-bearing licenses to the Novartis patent which is involved in the
interference proceeding described above. In addition, we have entered into an
agreement with Cell Genesys under which we would be permitted to market our
non-viral gene therapy products pursuant to a royalty-free license agreement if
Cell Genesys wins the interference.
SOME GENE THERAPY CLINICAL TRIALS HAVE BEEN SUSPENDED AND REGULATORY
AUTHORITIES ARE REVIEWING THE NEED FOR INCREASED REGULATION OF GENE THERAPY
CLINICAL TRIALS
Due to recent adverse events that have occurred during gene therapy
clinical trials, conducted by other biotechnology and pharmaceutical companies
and institutions, the Federal government, the FDA, industry organizations, and
institutions conducting gene therapy clinical trials have grown increasingly
concerned about the safety of gene therapy clinical trials. As a result, a
number of gene therapy clinical trials have been terminated or suspended. In
February 2000, Beth Israel placed a temporary moratorium on all gene therapy
clinical trials being conducted at its facility, including our clinical trial
for hemophilia A, due to national public policy concerns relating to gene
therapy trials.
34
There had been no adverse events associated with our trial. Upon review of our
hemophilia A clinical trial safety data, Beth Israel resumed our gene therapy
clinical trial to treat hemophilia A two weeks after its initial suspension.
There can be no assurance that increased concern over gene therapy trials
generally will not lead the FDA or other regulatory agencies to impose further
regulation on gene therapy clinical trials. If greater regulations are imposed
on gene therapy research generally, the delays and costs involved in complying
with such greater regulation may impair our ability to complete clinical trials
already in progress and to conduct gene therapy clinical trials in the future.
EVEN IF WE OBTAIN MARKETING APPROVAL, OUR PRODUCTS WILL BE SUBJECT TO
ONGOING REGULATORY REVIEW
If regulatory approval of a product is granted, such approval may be
subject to limitations on the indicated uses for which the product may be
marketed or contain requirements for costly post-marketing studies. As to
products for which we obtain marketing approval, we, the manufacturer of the
product if other than us, and the manufacturing facilities will be subject to
continual review and periodic inspections by the FDA and other regulatory
authorities. The subsequent discovery of previously unknown problems with the
product, manufacturer, or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.
We announced in March 2001 that the CPMP issued a positive opinion
recommending approval of Replagal(TM). The CPMP's recommendation for approval
will be forwarded to the EC, which will determine whether to grant marketing
authorization of Replagal. If the EC approves the marketing authorization for
Replagal, we and our subsidiaries will be subject to on-going regulatory
requirements. There can be no assurance that we or our subsidiaries will be
able to comply with all applicable requirements.
If we fail to comply with applicable regulatory requirements with respect
to any of our products, we may be subject to fines, suspension or withdrawal of
regulatory approvals, product recalls, seizure of products, operating
restrictions, and criminal prosecution.
THE MARKET MAY NOT BE RECEPTIVE TO OUR PRODUCTS UPON THEIR INTRODUCTION
The commercial success of our products that are approved for marketing by
the FDA and other regulatory authorities will depend upon their acceptance by
the medical community and third party payors as clinically useful,
cost-effective, and safe. Each of our technology programs is new. As a result,
it may be difficult for us to achieve market acceptance of our products,
particularly for the first products for which we obtain marketing approval.
Other factors that we believe will materially affect market acceptance of
our products include:
- the timing of the receipt of marketing approvals and the countries in
which such approvals are obtained;
- the safety and efficacy of the product as compared to competitive
products; and
- the cost-effectiveness of the product and the ability to receive third
party reimbursement.
We may be exposed to product liability claims and may not bE able to
obtain adequate product liability insurance
Our business exposes us to the risk of product liability claims that is
inherent in the testing, manufacturing, and marketing of human therapeutic
products. Although we have
35
clinical trial liability insurance, we do not currently have any product
liability insurance. We may not be able to obtain or maintain such insurance on
acceptable terms or at all. Moreover, any insurance that we do obtain may not
provide adequate protection against potential liabilities. If we are unable to
obtain insurance at acceptable cost or otherwise protect against potential
product liability claims, we will be exposed to significant liabilities, which
may materially and adversely affect our business and financial condition. These
liabilities could prevent or interfere with our product commercialization
efforts.
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, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
36
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, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 6, 2001
37
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values) DECEMBER 31,
----------------------
2000 1999
----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 49,445 $ 151,202
Marketable securities 196,011 41,293
Prepaid expenses and other current assets 1,842 2,054
--------- ---------
Total current assets 247,298 194,549
Property and equipment, net 23,597 20,384
Other assets 1,498 358
--------- ---------
Total assets $ 272,393 $ 215,291
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,986 $ 2,000
Accrued expenses 8,550 4,009
Current maturities of long-term debt 2,500 2,000
--------- ---------
Total current liabilities 15,036 8,009
Long-term debt, less current maturities 9,500 11,500
Stockholders' equity:
Series A convertible preferred stock, $.01 par
value, 10 shares authorized; 10 shares
issued and outstanding at December 31, 2000
and no shares issued and outstanding at
December 31, 1999 1 --
Series B preferred stock, $.01 par
value, 1,000 shares authorized;
no shares issued and outstanding at
December 31, 2000 and 1999 -- --
Common stock, $.01 par value; 100,000 shares
authorized, 22,700 and 22,592 shares issued
and outstanding at December 31, 2000 and 1999,
respectively 227 226
Additional paid-in capital 413,242 311,817
Accumulated deficit (165,429) (114,408)
Deferred compensation (860) (1,645)
Accumulated other comprehensive income (loss) 676 (208)
--------- ---------
Total stockholders' equity 247,857 195,782
--------- ---------
Total liabilities and stockholders' equity $ 272,393 $ 215,291
========= =========
See accompanying Notes to Consolidated Financial Statements.
38
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
------------------------------------
License and research
revenues $ 7,247 $ 3,870 $ 5,325
Operating expenses:
Research and development 56,440 43,946 25,617
General and administrative 15,755 10,035 6,409
-------- -------- --------
72,195 53,981 32,026
-------- -------- --------
Loss from operations (64,948) (50,111) (26,701)
Interest income 13,927 5,655 6,736
-------- -------- --------
Net loss $(51,021) $(44,456) $(19,965)
======== ======== ========
Basic and diluted net loss
per share $ (2.25) $ (2.25) $ (1.05)
======== ======== ========
Shares used in computing basic
and diluted net loss per share 22,675 19,763 19,052
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
39
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE
(in thousands) PREFERRED STOCK COMMON STOCK
--------------------- ----------------------
SHARES AMOUNTS SHARES AMOUNT
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1997 -- -- 18,929 $189
Issuances of common stock -- -- 201 2
Compensation expense related to equity issuances -- -- -- --
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted -- -- (4) --
Unrealized loss on marketable securities -- -- -- --
Net loss -- -- -- --
Comprehensive loss -- -- -- --
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1998 -- -- 19,126 191
Issuances of common stock, net -- -- 3,466 35
Deferred compensation related to stock options
granted -- -- -- --
Compensation expense related to equity issuances -- -- -- --
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted -- -- -- --
Unrealized loss on marketable securities -- -- -- --
Net loss -- -- -- --
Comprehensive loss -- -- -- --
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1999 -- -- 22,592 226
Issuance of convertible preferred stock, net 10 $1 -- --
Issuances of common stock -- -- 108 1
Compensation expense related to equity issuances -- -- -- --
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted -- -- -- --
Unrealized gain on marketable securities -- -- -- --
Foreign currency translation adjustment -- -- -- --
Net loss -- -- -- --
Comprehensive loss -- -- -- --
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2000 10 $1 22,700 $227
========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
40
ADDITIONAL
(in thousands) PAID-IN ACCUMULATED
CAPITAL DEFICIT
---------- -----------
BALANCE AT DECEMBER 31, 1997 $185,451 $(49,987)
Issuances of common stock 808 --
Compensation expense related to equity issuances -- --
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted (192) --
Unrealized loss on marketable securities -- --
Net loss -- (19,965)
Comprehensive loss -- --
--------- ---------
BALANCE AT DECEMBER 31, 1998 186,067 (69,952)
Issuances of common stock, net 125,715 --
Deferred compensation related to stock options
granted 208 --
Compensation expense related to equity issuances 67 --
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted (240) --
Unrealized loss on marketable securities -- --
Net loss -- (44,456)
Comprehensive loss -- --
--------- ---------
BALANCE AT DECEMBER 31, 1999 311,817 (114,408)
Issuance of convertible preferred stock, net 99,796 --
Issuances of common stock 1,672 --
Compensation expense related to equity issuances -- --
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted (43) --
Unrealized gain on marketable securities -- --
Foreign currency translation adjustment -- --
Net loss -- (51,021)
Comprehensive loss -- --
--------- ---------
BALANCE AT DECEMBER 31, 2000 $413,242 $(165,429)
========= =========
See accompanying Notes to Consolidated Financial Statements.
41
ACCUMULATED
OTHER TOTAL
(in thousands) DEFERRED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION INCOME (LOSS) EQUITY
------------ ------------- -------------
BALANCE AT DECEMBER 31, 1997 $ (3,940) $ 36 $ 131,749
Issuances of common stock -- -- 810
Compensation expense related to equity issuances 1,116 -- 1,116
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted 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
Issuances of common stock, net -- -- 125,750
Deferred compensation related to stock options
granted (208) -- --
Compensation expense related to equity issuances 955 -- 1,022
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted 240 -- --
Unrealized loss on marketable securities -- (180) (180)
Net loss -- -- (44,456)
---------
Comprehensive loss -- -- (44,636)
--------- --------- ---------
BALANCE AT DECEMBER 31, 1999 (1,645) (208) 195,782
Issuance of convertible preferred stock, net -- -- 99,797
Issuance of common stock -- -- 1,673
Compensation expense related to equity issuances 742 -- 742
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted 43 -- --
Unrealized gain on marketable securities -- 776 776
Foreign currency translation adjustment -- 108 108
Net loss -- -- (51,021)
---------
Comprehensive loss -- -- (50,137)
--------- --------- ---------
BALANCE AT DECEMBER 31, 2000 $ (860) $ 676 $ 247,857
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
42
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
OPERATING ACTIVITIES:
Net loss $ (51,021) $ (44,456) $ (19,965)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 2,411 1,983 2,056
Compensation expense related to equity
issuances 742 1,022 1,116
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses and
other current assets 212 280 (1,783)
Increase (decrease) in accounts payable 1,986 544 (200)
Increase in accrued expenses 4,592 1,149 1,317
--------- --------- ---------
Net cash used for operating activities (41,078) (39,478) (17,459)
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sales and maturities of marketable securities 127,656 110,640 134,491
Purchases of marketable securities (281,598) (73,718) (107,318)
Purchases of property and equipment (5,624) (17,227) (2,660)
Increase in other assets (1,140) (25) (26)
--------- --------- ---------
Net cash provided by (used for) investing activities (160,706) 19,670 24,487
--------- --------- ---------
FINANCING ACTIVITIES:
Issuance of convertible preferred stock, net 99,797 -- --
Issuances of common stock 1,673 125,750 810
Proceeds from long-term debt financing -- 14,000 --
Principal payments of long-term debt (1,500) (500) --
--------- --------- ---------
Net cash provided by financing activities 99,970 139,250 810
Effect of exchange rate changes on cash and cash equivalents 57 -- --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (101,757) 119,442 7,838
Cash and cash equivalents at January 1 151,202 31,760 23,922
--------- --------- ---------
Cash and cash equivalents at December 31 $ 49,445 $ 151,202 $ 31,760
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
43
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(R) 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 subsidiaries. All significant intercompany transactions have been
eliminated.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are measured
using the local currency as the functional currency. Assets and liabilities are
translated at exchange rates in effect at the balance sheet date. Income and
expense accounts are translated at the average monthly exchange rates during the
year. Resulting translation adjustments are recorded as a separate component of
accumulated other comprehensive income (loss). The foreign currency translation
component of accumulated other comprehensive income amounted to $108,000 at
December 31, 2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
FINANCIAL INSTRUMENTS
Cash equivalents include funds held in investments with original maturities of
three months or less at the time of purchase. Marketable securities consist of
U.S. government and agency obligations. The fair values of marketable securities
are based on quoted market prices.
The Company determines the classification of cash equivalents and marketable
securities at the time of purchase and re-evaluates 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 accumulated other
comprehensive income (loss). Unrealized gains of $568,000 were included in
accumulated other comprehensive income at December 31, 2000.
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 or the
estimated useful life of the asset, whichever is shorter.
44
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 related interpretations, 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 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."
In April 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB No. 25." The Interpretation has been
applied prospectively to new awards, modifications to outstanding awards, and
changes in employee status on or after July 1, 2000, except in certain
circumstances. This interpretation has not had a material impact on the
Company's financial position and results of operations.
LICENSE AND RESEARCH REVENUES
The Company adopted the Securities and Exchange Commission's Staff Accounting
Bulletin 101 (SAB 101) in the fourth quarter of 2000.
The Company derives its license and research revenue primarily from license fees
and the achievement of certain milestones under collaborative agreements.
Revenue from license fees is recorded once all significant obligations under the
collaborative agreements have been fulfilled by the Company. Milestones are
recorded when the Company has successfully completed the substantive performance
objectives and obligations related to the milestone.
There was no effect on the financial statements as a result of implementing SAB
101.
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.
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
The Company calculates net loss per share in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share is computed using the weighted
average shares outstanding.
Basic net loss per share was equivalent to diluted net loss per share for the
years ended December 31, 2000, 1999 and 1998 since common equivalent shares from
convertible preferred stock, stock options and warrants have been excluded as
their effect is antidilutive.
45
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." These statements establish
accounting and reporting standards for derivative instruments and for hedging
activities.
Currently, the Company does not hold derivative instruments and has not entered
into any hedging arrangements. The Company does not hedge its foreign currency
exposures. Thus, the Company anticipates that the adoption of FAS 133 will not
have a material impact on the Company's financial position or results of
operations.
3. FINANCIAL INSTRUMENTS
The following is a summary of available-for-sale securities:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
----- ---------- ----------- -----------
December 31, 2000 $211,352 $ 574 $ (6) $211,920
======== ======= ======= ========
December 31, 1999 $170,456 $ 83 $ (291) $170,248
======== ======= ======= ========
These securities are classified in the accompanying balance sheets as follows:
December 31,
(in thousands) ---------------------------
2000 1999
-------- --------
Cash equivalents $ 15,909 $128,955
Marketable securities 196,011 41,293
-------- --------
$211,920 $170,248
======== ========
Maturities of marketable securities held at December 31, 2000 are as follows:
Less than one year $185,839
One through two years 10,172
--------
$196,011
========
46
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
(in thousands) DECEMBER 31,
-------------------------
2000 1999
------- -------
Leasehold improvements $ 8,017 $ 7,823
Laboratory equipment 7,533 6,009
Office furniture and equipment 4,883 3,816
Construction in process 17,075 14,236
------- -------
37,508 31,884
Less accumulated depreciation and amortization 13,911 11,500
------- -------
$23,597 $20,384
======= =======
Depreciation and amortization expense on property and equipment was $2,411,000,
$1,983,000 and $2,025,000 in 2000, 1999 and 1998, respectively.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
(in thousands) DECEMBER 31,
-----------------
2000 1999
------ ------
External development services $4,106 $1,491
Salaries and benefits 2,337 1,140
Professional fees 801 538
Other 1,306 840
------ ------
$8,550 $4,009
====== ======
6. LONG-TERM DEBT
At December 31, 2000, the Company had $12,000,000 outstanding under an unsecured
term loan facility that was used to finance capital equipment and leasehold
improvements. Loan repayments began 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
weighted average interest rate of the loan was 8.0% as of December 31, 2000. The
note contains certain restrictive covenants including, among other things,
minimum cash and tangible net asset requirements and a prohibition on the
payment of dividends.
For the years ended December 31, 2000 and 1999, capitalized interest, in
connection with construction in process, was $1,042,000 and $410,000, of which
$836,000 and $352,000 was paid, respectively.
Maturities of long-term debt for the years ending December 31 are as follows:
(in thousands)
2001 $ 2,500
2002 2,000
2003 2,000
2004 5,500
-------
$12,000
=======
47
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LETTERS OF CREDIT
As of December 31, 2000, the Company had outstanding letters of credit primarily
related to lease obligations, totaling $7,450,000. Marketable securities
totaling $8,516,000 are restricted and serve as collateral for the letters of
credit.
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
There are 10,000,000 shares of Preferred Stock authorized, of which 10,000
shares have been designated for Series A Convertible Preferred Stock and
1,000,000 shares have been designated for Series B Junior Participating
Preferred Stock.
SERIES A CONVERTIBLE PREFERRED STOCK
In June 2000, the Company completed a private placement of 10,000 shares of
Series A Convertible Preferred Stock ("Series A Preferred Stock"), resulting
in net proceeds of $99,797,000. The Series A Preferred Stock converts, at the
option of the holder, into approximately 3,571,000 shares of the Company's
Common Stock based on a conversion price of $28.00 per share, subject to
adjustment under specified terms and conditions. Such common shares have been
reserved for conversion. The Company, at its option, may redeem all, but not
less than all, of the shares of the Series A Preferred Stock, at any time
after December 15, 2000, at a price of $10,000 per share, plus dividends
thereon declared but unpaid, provided certain specified criteria are met. The
holders are entitled to dividends when and as declared by the Board of
Directors on the shares of Common Stock. In the event of any liquidation,
dissolution or winding-up of the Company, the holders of the Series A
Preferred Stock are entitled to receive, prior to and in preference to the
holders of Common Stock, $10,000 per share, subject to adjustments, plus any
dividends thereon declared but unpaid. Each issued and outstanding share of
Series A Preferred Stock is entitled to the number of votes equal to the
number of shares of Common Stock into which each share of Series A Preferred
Stock is then convertible.
SHAREHOLDER RIGHTS PLAN
In December 2000, the Company adopted a shareholder rights plan. The plan is
intended to ensure that TKT shareholders realize the full value of their
investment and to provide fair and equal treatment for all shareholders in the
event that an unsolicited attempt is made to acquire TKT.
Under the plan, a dividend of one Preferred Stock purchase right was declared
for each share of Common Stock held of record as of the close of business on
December 26, 2000. One million shares of Preferred Stock have been designated as
Series B Junior Participating Preferred Stock ("the Series B Preferred Stock")
and are reserved for issuance in connection with the shareholder rights plan.
Each right entitles the holder to purchase from the Company one one-thousandth
of a share of Series B Preferred Stock. Initially the rights are not exercisable
and will automatically trade with the underlying shares of Common Stock. The
rights will not become exercisable unless a person acquires, or commences a
tender offer to acquire, beneficial ownership of 20% or more of the Company's
outstanding Common Stock, subject to certain limited exceptions. If the rights
become exercisable, each right would initially entitle shareholders of TKT,
other than the acquiring person, to purchase 1/1,000th of a share of Series B
Preferred Stock at an initial exercise price of $289. If a person acquires
beneficial ownership of 20% or more of the Company's outstanding Common Stock,
subject to certain limited exceptions, each right, other than those owned by the
acquiring person, would entitle its holder to purchase shares of the Company's
Common Stock having a market value of two times the exercise price of the right.
The rights may be redeemed by the Board in certain circumstances and will expire
in December 2010 unless extended.
STOCK COMPENSATION PLANS
The Company has adopted several stock compensation plans, which provide for the
issuance of incentive and non-qualified 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, 2000, approximately 4,079,000 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.
48
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity under the plans is as follows:
(in thousands, except share prices)
2000 1999 1998
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------------------------
Outstanding at January 1 2,214 $23.57 1,370 $12.99 976 $ 5.76
Granted 1,285 35.65 1,179 33.56 507 25.91
Exercised (108) 15.57 (167) 7.04 (51) 1.28
Cancelled (142) 32.78 (168) 23.10 (62) 11.98
----- ----- -----
Outstanding at December 31 3,249 28.21 2,214 23.57 1,370 12.99
===== ===== =====
Options exercisable at December 31 905 $21.51 515 $16.96 395 $13.95
===== ===== =====
Weighted average fair value per share of
options granted during the year $27.10 $20.72 $15.63
The exercise price and life information for significant option groups
outstanding at December 31, 2000 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
- --------- ----------- ------------ --------- -------- --------------
$.01 466 4.95 $0.01 279 $0.01
$16.75-25.12 452 7.69 $21.60 120 $20.97
$26.19-37.56 1,494 8.56 $31.32 382 $31.34
$37.75-55.19 817 9.39 $41.19 123 $40.20
$67.88-84.25 20 9.20 $72.91 1 $68.96
----- ---
3,249 905
===== ===
Pursuant to the requirements of SFAS No. 123, the following are the pro forma
net loss and net loss per share amounts for 2000, 1999 and 1998, as if
stock-based compensation had been determined based on the fair value at the
grant date for grants in 2000, 1999 and 1998, consistent with the provisions of
SFAS No. 123:
(in thousands, except per share amounts)
2000 1999 1998
-------------------------- -------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
Net loss $(51,021) $(68,399) $(44,456) $(52,193) $(19,965) $(23,774)
Basic and diluted
Net loss per
share $ (2.25) $ (3.02) $ (2.25) $ (2.64) $ (1.05) $ (1.25)
49
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of options issued pursuant to the plans at the date of grant were
estimated using the Minimum Value method for options granted prior to the
initial public offering and the Black-Scholes model for options granted
subsequent to the initial public offering. The estimation of the fair value of
these options at the date of grant used the following assumptions:
2000 1999 1998
------- ------- --------
Expected life (years) 2.5-7.5 1.5-7.5 2.5-7.5
Interest rate 4.8-5.2% 5.2%-6.7% 4.5-4.8%
Expected volatility 0.95 0.70 0.70
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 2000, 1999 and 1998 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 four years, three years and two
years, respectively, of option grants.
9. LICENSE AND RESEARCH AGREEMENTS
The Company entered into license agreements with Aventis Pharma ("Aventis"),
formerly Hoechst Marion Roussel, Inc., whereby Aventis was granted exclusive
worldwide rights to make, use and sell two therapeutic products produced under
patent rights and technologies owned by the Company. In December 2000, the
Company re-acquired worldwide commercial rights to the second product, GA-II. As
of December 31, 2000, the Company has received $64,000,000 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 Aventis. As part of the remaining
agreement, Aventis will make additional payments of up to $28,000,000 upon
achievement of certain development milestones and pay royalties based on net
sales of the product.
For the years ended December 31, 2000, 1999 and 1998, license and research
revenues earned from Aventis totaled $3,500,000, $3,531,000 and $3,325,000,
respectively. At December 31, 2000, Aventis owned 2,187,000 shares of the
Company's Common Stock.
For the years ended December 31, 2000 and 1999, license and research revenues
from Sumitomo Pharmaceutical Co., Ltd. totaled $1,051,000 and $339,000,
respectively. In 2000, the Company also received license and research revenue
from Genetics Institute, Inc. in the amount of $2,696,000.
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.
10. EMPLOYEE RETIREMENT PLANS
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. Employer contributions vest ratably
over five years; the related expense was $471,000, $310,000 and $231,000 in
2000, 1999 and 1998, respectively.
In 2000, the Company established a non-qualified deferred compensation plan,
which permits certain management employees to annually elect to defer a portion
of their compensation, on a pre-tax basis. The amount of compensation deferred,
the Company match, and earnings on deferrals included in accrued expenses at
December 31, 2000, the benefit is $347,000.
50
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
At December 31, 2000, the Company had unused net operating loss carryforwards of
$144,264,000 and research and development tax credits of $27,109,000, which
expire through 2020. 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
---------------------
2000 1999
------ -------
Deferred tax assets:
Net operating loss carryforwards $57,705 $ 40,115
Research and development tax credits 27,109 15,575
Depreciation and amortization 1,789 1,625
Other 386 225
------- -------
Total deferred tax assets 86,989 57,540
Valuation allowance (86,989) (57,540)
------- -------
Net deferred tax assets $ -- $ --
======= =======
The valuation allowance increased by $29,449,000 during 2000 primarily due 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.
12. COMMITMENTS AND CONTINGENCIES
In April 1997, Amgen Inc. commenced a patent infringement action against the
Company and Aventis in the U.S. District Court of Massachusetts. Amgen's
Complaint, as subsequently amended, sought a declaratory judgment that the
Company's Dynepo product, and the cells and processes used to make Dynepo,
infringe or will infringe five of Amgen's U.S. patents. In January 2001, the
District Court ruled that eight claims of three of the patents were valid,
enforceable and infringed. Amgen did not request and was not awarded monetary
damages.
In February 2001, the Company and Aventis filed a Notice of Appeal with the U.S.
Court of Appeals for the Federal Circuit from the judgment of the District
Court. The Company and Aventis believe that they have substantial grounds for
appeal. Amgen filed a Notice of Cross Appeal in February 2001 with the U.S.
Court of Appeals for the Federal Circuit.
In addition, in July 1999, the Company commenced legal proceedings in the U.K.
against Kirin-Amgen, Inc., seeking a declaration that a U.K. patent held by
Kirin-Amgen will not be infringed by TKT's activities related to Dynepo and that
numerous claims of Kirin-Amgen's U.K. patent are invalid. The trial concluded in
February 2001, and a decision is expected in 2001.
Pursuant to the Amended and Restated License Agreement, dated March 1995, by and
between Aventis and the Company, Aventis has assumed the cost of defense of the
Amgen and Kirin-Amgen litigation. The Company will reimburse Aventis for the
Company's share of litigation expenses, as defined, from future royalties, if
any, received from the sale of Dynepo and in certain other circumstances.
51
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 2000, Genzyme Corporation ("Genzyme") and Mt. Sinai School of Medicine
of New York University ("Mt. Sinai") brought suit against TKT in the U.S.
District Court of Delaware alleging that certain of TKT's activities relating to
the Company's ReplagalTM product infringe or will infringe one or more claims of
a U.S. patent held by them. Genzyme and Mt. Sinai's complaint requested that the
District Court award Genzyme and Mt. Sinai monetary damages and injunctive
relief. The trial is scheduled to begin in March 2002.
The Company can provide no assurance as to the outcome of these proceedings. A
decision by a court in the United States or in any other jurisdiction in a
manner adverse to the Company 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 that expire through
2011, subject to renewal provisions. Future annual minimum payments under such
commitments are as follows:
YEAR ENDED
(in thousands)
2001 $ 4,145
2002 9,781
2003 9,415
2004 7,646
2005 7,638
Thereafter 47,750
-------
$86,375
=======
Rent expense was $2,537,000, $1,962,000 and $1,316,000, in 2000, 1999 and 1998,
respectively.
At December 31, 2000, the Company had committed to pay approximately $28,560,000
to third parties for certain product development activities through 2004. The
Company has the right to terminate this agreement upon six months written
notice.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
2000 -------- -------- -------- -------- --------
License and research revenues $ -- $ 1,514 $ 5,357 $ 376 $ 7,247
Total expenses 15,721 16,655 17,096 22,723 72,195
Net loss $(13,099) $(12,220) $ (7,506) $(18,196) $(51,021)
Basic and Diluted net loss per share $ (0.58) $ (0.54) $ (0.33) $ (0.80) $ (2.25)
1999
License and research revenues $ 721 $ -- $ 649 $ 2,500 $ 3,870
Total expenses 11,522 13,710 14,589 14,160 53,981
Net loss $ (9,458) $(12,517) $(12,870) $ (9,611) $(44,456)
Basic and Diluted net loss per share $ (0.49) $ (0.65) $ (0.67) $ (0.45) $ (2.25)
52
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 in the
Company's Proxy Statement for the Company's Annual Meeting of Stockholders to be
held on June 14, 2001 (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, 2000 and 1999
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statement of Stockholders' Equity for years ended
December 31, 2000, 1999 and 1998
53
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
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:
Report on Form 8-K filed November 22, 2000, announcing that the
United States Food and Drug Administration requested additional data
regarding Dynepo.
Report on Form 8-K filed December 12, 2000, announcing that the
Company had reacquired GA-II from Aventis Pharma.
Report on Form 8-K filed December 14, 2000, announcing the filing of
a Registration Statement on Form S-3 and the adoption of a
shareholders rights plan.
54
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: April 2, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Richard F Selden President, Chief Executive Officer April 2, 2001
- ---------------------------- and Director (Principal Executive
Richard F Selden Officer)
/s/ Daniel E. Geffken Senior Vice President, Finance and April 2, 2001
- ---------------------------- Chief Financial Officer
Daniel E. Geffken (Principal Accounting and
Financial Officer)
/s/ Rodman W. Moorhead, III Chairman of the Board of Directors April 2, 2001
- ----------------------------
Rodman W. Moorhead, III
/s/ Jonathan S. Leff Director April 2, 2001
- ----------------------------
Jonathan S. Leff
/s/ William R. Miller Director April 2, 2001
- ----------------------------
William R. Miller
/s/ Walter Gilbert Director April 2, 2001
- ----------------------------
Walter Gilbert
/s/ James E. Thomas Director April 2, 2001
- ----------------------------
James E. Thomas
/s/ Wayne P. Yetter Director April 2, 2001
- ----------------------------
Wayne P. Yetter
55
Exhibit Index
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
the Registrant. (1)
3.2 Certificate of Amendment of Amended and Restated
Certificate of Incorporation of the Registrant, dated
June 15, 2000. (2)
3.3 Certificate of Designation, Number, Voting Powers,
Preferences and Rights of Series A Convertible
Preferred Stock of the Registrant, dated June 9,
2000. (2)
3.4 Certificate of Designation of Series B Junior
Participating Preferred Stock of the Registrant,
dated December 13, 2000. (3)
3.5 Amended and Restated By-Laws of the Registrant. (4)
3.6 Amendment No. 1 to Amended and Restated By-Laws. (2)
3.7 Amendment No. 2 to Amended and Restated By-Laws. (3)
4.1 Rights Agreement dated December 13, 2000, between
Registrant and Equiserve Trust Company, N.A. (5)
10.1 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 certain holders of the Registrant's Preferred
Stock named therein and the Registrant. (6)
10.2 Lease Agreement, dated January 1, 1994, for office
space at 195 Albany Street, Cambridge, Massachusetts,
by and between the Trust under the Will of Harry F.
Stimpson and the Registrant. (6)
10.3 Sublease Agreement, dated April 7, 1992, for office
space located at 185 Albany Street, Cambridge,
Massachusetts, by and between the Massachusetts
Institute of Technology and the Registrant. (6)
10.4 1993 Non-Employee Directors' Stock Option Plan. (6) (7)
10.5 1993 Long-Term Incentive Plan. (7) (8)
10.6 Form of Letter Agreement re: Confidentiality,
Inventions and Non-Disclosure. (6)
10.7 Form of Letter Agreement re: Restricted Stock. (6)
10.8 Form of Scientific Advisor Agreement. (6)
56
10.9 Employment Agreement, dated June 19, 1991, by and
between Dr. Richard F Selden and the Registrant. (6) (7)
10.10 Employment Agreement, dated July 26, 1991, by and
between Dr. Douglas A. Treco and the Registrant. (6) (7)
10.11 Agreement, dated September 1, 1991, by and between
Mr. William R. Miller and the Registrant. (6) (7)
10.12 Agreement, dated July 30, 1993, by and between E.M.
Warburg, Pincus & Co. and the Registrant. (6) (7)
10.13 Collaboration and License Agreement, dated July 22,
1993 and amended on May 30, 1996, by and between
Genetics Institute, Inc. and the Registrant. (5) (9)
10.14 Amended and Restated License Agreement, dated March 1,
1995, by and between Aventis S.A. and the Registrant.
(6) (9)
10.15 Fifth Amendment to Registration Rights Agreement,
dated October 1, 1996, by and among certain holders
of the Registrant's Preferred Stock named therein and
the Registrant. (6)
10.16 Employment Agreement, dated February 20, 1997, by and
between Mr. Daniel E. Geffken and the Registrant.
(7) (10)
10.17 Form of Common Stock Purchase Agreement by and
between each Purchaser of shares in the Registrant's
directed public offering of common stock in 1997 and
the Registrant. (11)
10.18 Employment Agreement, dated April 12, 1999, by and
between Mr. William H. Pursley and the Registrant.
(7) (12)
10.19 Common Stock Purchase Agreement by and between each
Purchaser of shares in the Registrant's private
placement of common stock in November 1999 and the
Registrant. (13)
10.20 Agreement, dated November 15, 1999, by and between
Mr. Wayne P. Yetter and the Registrant. (7) (13)
10.21 Employment agreement, dated February 4, 2000, by and
between Dr. Joseph G. Habarta and the Registrant.
(7) (14)
10.22 Registration Rights Agreement, dated June 9, 2000, by
and between certain holders of Series A Convertible
Preferred Stock and the Registrant. (15)
10.23 Agreement, dated April 20, 2000, by and between Dr.
Walter Gilbert and the Registrant. (7) (15)
10.24 Agreement, dated June 16, 2000, by and between Mr.
James E. Thomas and the Registrant. (7) (15)
57
10.25 Employment Agreement, dated May 18, 2000, by and
between Mr. Michael J. Astrue and the Registrant. (7)
(15)
10.26 Lease Agreement, dated August 4, 2000, for new
corporate headquarters and research and
development space at 28 Osborn Street, Cambridge,
Massachusetts, by and between the Massachusetts
Institute of Technology and the Registrant. (16)
10.27 Purchase and Sale and Assignment Agreement, dated
November 28, 2000, by and between Serono, Inc. and
the Registrant. (3)
10.28 First Amendment to Purchase and Sale and Assignment
Agreement, dated February 8, 2001, by and between
Serono, Inc. and the Registrant. (3)
10.29 Lease Agreement, dated February 2001, by and between
Trinet Property Partners, L.P and the Registrant. (3)
10.30 Reimbursement Agreement, dated May 18, 2000, by and
between Mr. William H. Pursley and the Registrant. (3)
10.31 2001 Non-Officer Employee Stock Incentive Plan. (3)
10.32 2000 Nonqualified Deferred Compensation Plan. (3)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
25.1 Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939, as amended, of the Trustee under
the Senior Indenture will be incorporated herein by
reference from a subsequent filing in accordance with
Section 305(b)(2) of the Trust Indenture Act of 1939. (17)
25.2 State of Eligibility on Form T-1 under the Trust Indenture
Act of 1939, as amended, of the Trustee under the
Subordinated Indenture will be incorporated herein by
reference from a subsequent filing in accordance with
Section 305 (b)(2) of the Trust Indenture Act of 1939.
(17)
FOOTNOTES
1. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
2. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000 and incorporated herein by reference.
3. Filed as an exhibit to this Annual Report on Form 10-K for the year ended
December 31, 2000.
58
4. 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.
5. Filed as an exhibit to the Company's Report on Form 8-K filed with the SEC
on December 14, 2000 and incorporated herein by reference
6. Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-10845) and incorporated herein by reference.
7. Management contract or compensation plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
8. 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.
9. Confidential treatment granted as to certain portions.
10. 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.
11. Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-31957) and incorporated herein by reference.
12. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by reference.
13. Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference.
14. Filed as an exhibit to the Company's Quarterly Report on From 10-Q for the
quarter ended March 31, 2000 and incorporated herein by reference.
15. Filed as an exhibit to the Company's Quarterly Report on From 10-Q for the
quarter ended June 30, 2000 and incorporated herein by reference.
16. Filed as an exhibit to the Company's Quarterly Report on From 10-Q for the
quarter ended September 30, 2000 and incorporated herein by reference.
17. Filed as an exhibit to the Company's Registration Statement on Form S-3
filed with the SEC on December 13, 2000 (File No. 333-51772) and
incorporated herein by reference.
59