UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarter Ended September 30, 2004

For the Period from                    to                   

Commission File Number 0-21481

TRANSKARYOTIC THERAPIES, INC.

Registrant’s telephone number, including area code: (617) 349-0200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended).

Yes þ    No o

At October 31, 2004, there were 34,772,809 shares of Common Stock, $.01 par value, outstanding.

Transkaryotic Therapies, Inc.

INDEX

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PART I FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Transkaryotic Therapies, Inc.

See accompanying Notes to Condensed Consolidated Financial Statements.

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Transkaryotic Therapies, Inc.

See accompanying Notes to Condensed Consolidated Financial Statements.

4

Transkaryotic Therapies, Inc.

See accompanying Notes to Condensed Consolidated Financial Statements.

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Transkaryotic Therapies, Inc.

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for the interim period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004 or for any other period.

These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

Gene-Activated®, and TKT® are registered trademarks and Replagal™ is a trademark of the Company. Dynepo™ is a trademark of Aventis Pharmaceuticals, Inc., which is a subsidiary of Sanofi-Aventis SA, the successor to Aventis SA (“Sanofi-Aventis”). Fabrazyme™ is a trademark of Genzyme Corporation (“Genzyme”). All other trademarks, service marks or trade names referenced in this quarterly report are the property of their respective owners.

2. NET LOSS PER SHARE

The Company calculates net loss per share in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 128, Earnings Per Share, and related interpretations. 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 three and nine months ended September 30, 2004 and 2003 because common equivalent shares from the Company’s 1.25% Senior Convertible Notes due 2011 (the “Notes”) as described in note 8 and stock options have been excluded, as their effect is antidilutive.

3. COMPREHENSIVE LOSS

Comprehensive loss comprises net loss, unrealized gains and losses on marketable securities designated as available-for-sale, and cumulative foreign currency translation adjustments. The Company had a total comprehensive loss of $15,374,000 and $13,216,000 for the three months ended September 30, 2004 and 2003, respectively. For the nine months ended September 30, 2004 and 2003, the Company had a total comprehensive loss of $53,561,000 and $57,003,000, respectively.

4. REVENUE RECOGNITION

The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition, when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured. The Company determines that the fee is fixed and determinable, and that collection is reasonably assured in Europe and in some other countries outside of the United States once reimbursement agreements and pricing arrangements are established and formalized, as these agreements establish the relevant payors’ intent to pay, or once there are legally binding purchase agreements between a hospital or other customer and the Company, or once

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approval has been granted by the payor for the reimbursement of cost for individual patients. The Company only records revenues in those countries for which one of the conditions set forth in the previous sentence has been met.

During the first quarter of 2004, the Company recorded a $481,000 reversal of a price rebate accrual to product sales that it recorded in 2003 because the Company determined it was no longer probable that it would be required to pay this amount to customers.

In the European pharmaceutical industry, it is common practice that customers, principally hospitals, have a general right of return on purchases of product. To date, the Company has not had any sales returns. The Company generally ships small quantities of Replagal to customers on the basis of firm purchase orders. The customers generally order Replagal for specific patients, and the drug is typically utilized within one month of receipt. In part due to the expensive price of the drug, customers typically maintain small inventories of Replagal. Because of these circumstances, the Company expects that it will have no or minimal returns in the future and, accordingly, has not recorded a reserve for sales returns and allowances in accordance with SFAS No. 48, Revenue Recognition When Right-of-Return Exists.

For multiple-deliverable arrangements entered into after July 1, 2003, the Company applies Emerging Issues Task Force (“EITF”) Issue 00-21, Revenue Arrangements with Multiple Deliverables. The Company evaluates such arrangements to determine if the deliverables are separable into units of accounting and then applies applicable revenue recognition criteria to each unit of accounting. The Company applied EITF 00-21 in accounting for the payments made to the Company under the distribution agreement and legal settlement that the Company entered into with Genzyme in October 2003.

The Company records contract revenue for research and development as it is earned based on the performance requirements of the contract. Non-refundable contract fees for which there are neither further performance obligations nor continuing involvement by the Company are recognized on the earlier of when the fees are received or when collection is reasonably assured. The Company recognizes revenue from non-refundable up-front license fees and milestone payments where TKT has continuing involvement through development collaboration or an obligation to supply product, as the obligation is fulfilled or ratably over the development period or the period of the manufacturing obligation, as appropriate. The Company recognizes revenue associated with substantive performance milestones upon the achievement of the milestones, as defined in the respective agreements. Advance payments received in excess of amounts earned are classified as deferred revenue.

In June 2004, the Company entered into an agreement to distribute Replagal in Australia. Due to an unpredictable rebate process mandated by the Australian government reimbursement agency, the sales price is not fixed or determinable. Therefore, the Company is deferring revenues related to shipments to the Australian distributor until the rebate amounts are finalized by the Australian government. The Company expects the rebate amounts to be finalized in the third or fourth quarter of 2005. As of September 30, 2004, the Company has recorded approximately $781,000 as deferred revenue for shipments to Australia.

5. INVENTORIES

Inventories consist of the following:

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Inventories are stated at the lower of cost or market with cost determined under a first-in, first-out method. Inventories are reviewed periodically for slow-moving or obsolete status based on sales activity, both projected and historical.

6. RESTRUCTURING CHARGES

In February 2003, TKT announced a major reorganization in an effort to reduce costs and narrow the scope of the Company’s research initiatives. Under this reorganization, TKT refocused its research, development, and commercialization efforts primarily on therapeutics for the treatment of rare genetic diseases caused by protein deficiencies. The Company is seeking collaborative partners for programs outside of its core focus, including some of its Gene-Activated protein products, which are versions of proteins that would compete with proteins currently being marketed by third parties, and for its gene therapy programs. During 2003, TKT reduced its United States headcount by approximately 100 positions and further reduced headcount through attrition. As of September 30, 2004, TKT had 350 full-time United States employees. TKT also vacated four facilities as part of the restructuring. The Company’s employee-related and facility consolidation restructuring actions were substantially completed as of December 31, 2003.

As a result of the restructuring, the Company recorded charges of $12,461,000 in 2003, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities which consisted of costs related to employee severance and outplacement services costs for 74 employees, primarily in research and development, remaining lease obligations for the four facilities that the Company vacated, and a write-down of leasehold improvements for some of the facilities which were vacated. Since the first quarter of 2003, the Company has recorded $1,319,000 related to employee severance and outplacement services costs, $13,574,000 related to lease obligations and $598,000 for write-off of fixed assets. The Company recorded restructuring charges of $3,030,000 for the nine months ended September 30, 2004 related to ongoing lease obligations for the vacated facilities that have not yet been sublet. The Company expects to continue to record restructuring charges related to vacated facility expenses during the remainder of the lease terms until such facilities are sublet. The last to expire lease term expires in 2011. The remaining lease obligation costs are included in restructuring charges in the statements of operations and in accrued expenses on the balance sheet at September 30, 2004. The following table sets forth the restructuring activity and liability balance included in accrued expenses:

7. STOCK BASED COMPENSATION

The Company accounts for qualified stock option grants under the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees and Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25, and related interpretation, 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

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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 SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure.

The table below presents the net loss and basic and diluted net loss per common share if compensation cost for the Company’s stock option plans had been determined based on the estimated fair value of awards under those plans on the grant or purchase date:

Fair value of awards granted under the stock option plans were estimated at grant or purchase dates using a Black-Scholes option pricing model. The Company uses the multiple option approach and the following assumptions:

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 of expensing the estimated fair value of stock options on net loss and net loss per share for the three and nine months ended September 30, 2004 and 2003, respectively, are not necessarily representative of the effects on reporting the results of operations for future years as options vest over several years and the Company expects to grant options in future years.

8. CONVERTIBLE NOTES

During the second quarter of 2004, the Company sold $94,000,000 of 1.25% senior convertible notes which mature on May 15, 2011. The Company received net proceeds of $90,859,000 from the sale and recorded issuance costs of $2,959,000 as deferred issuance costs in other assets on its balance sheet at September 30, 2004. The Company records amortization of the deferred issuance costs over the term of the Notes and

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records the amortization as interest expense. Holders of the Notes may convert the Notes at any time prior to the maturity date into shares of the Company’s common stock at an initial conversion rate of 54.0972 shares of common stock per $1,000 of notes, which is equivalent to a conversion price of approximately $18.49 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of specified events. The Company may redeem all or part of the Notes for cash at any time on or after May 20, 2007 and before May 20, 2009 at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if the closing price of the Company’s common stock exceeds 145% of the conversion price for 20 trading days within a period of 30 consecutive trading days ending on the trading day prior to the date the Company mails notice of redemption. On or after May 20, 2009, the Company may redeem for cash all or part of the Notes for cash at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest. Holders of the Notes may also require the Company to repurchase all or a portion of their Notes, subject to specified exceptions, upon the occurrence of a fundamental change of the Company, as defined, for a price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. The Company intends to use the net proceeds from the sale of the Notes for general corporate purposes.

9. LITIGATION EXPENSES

The Company is a party to a number of legal proceedings. The costs related to these proceedings have been significant and the Company expects that these costs will continue to be significant. The Company can provide no assurance as to the timing and the outcome of any of these 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. The Company has not established any reserves or provisions for these legal proceedings.

     Replagal Patent Litigation

In July 2000, Genzyme and Mount Sinai School of Medicine (“Mount Sinai”) filed a patent infringement action against the Company in the United States District Court of Delaware. The complaint alleged that the Company’s activities relating to Replagal infringe a patent licensed by Genzyme from Mount Sinai. In January 2002, the United States District Court of Delaware dismissed this patent litigation granting the Company’s motion for summary judgment of non-infringement and denying Genzyme and Mount Sinai’s motion for summary judgment of infringement. Genzyme and Mount Sinai sought monetary damages and injunctive relief.

In March 2002, Genzyme and Mount Sinai appealed the United States District Court of Delaware’s ruling to the United States Court of Appeals for the Federal Circuit. In October 2003, pursuant to a global legal settlement, Genzyme agreed to withdraw from this suit and paid the Company $1,555,000. Mount Sinai is not a party to the settlement. In October 2003, the United States Court of Appeals for the Federal Circuit affirmed a finding of non-infringement by the Company. In January 2004, the Federal Circuit denied Mount Sinai’s petition for a rehearing en banc. The deadlines associated with further appeal have expired.

     Dynepo Patent Litigation

In July 1999, the Company and Sanofi-Aventis commenced legal proceedings in the United Kingdom against Kirin-Amgen, Inc. (“Kirin-Amgen”), which sought a declaration that a U.K. patent held by Kirin-Amgen will not be infringed by the Company’s activities relating to Dynepo and that certain claims of Kirin-Amgen’s U.K. patent are invalid. In April 2001, the High Court of Justice in the United Kingdom ruled that Dynepo infringed one of four claims of the patent asserted by Kirin-Amgen. In July 2002, the Court of Appeals in the United Kingdom reversed the High Court of Justice and ruled that Dynepo did not infringe Kirin-Amgen’s patent. Kirin-Amgen petitioned the House of Lords to hear an appeal from the decision of the Court of Appeals. The House of Lords heard this appeal during July 2004, and in October 2004, upheld the decision by the Court of Appeals that Dynepo did not infringe Kirin-Amgen’s patent and also held that Kirin-Amgen's patent is invalid.

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In addition, in April 1997, Amgen Inc. (“Amgen”) commenced a patent infringement action against the Company and Sanofi-Aventis in the United States District Court of Massachusetts. In January 2001, the United States District Court of Massachusetts concluded that Dynepo infringed eight of the 18 claims of five patents that Amgen had asserted. Amgen did not seek and was not awarded monetary damages. This decision was subsequently appealed to the United States Court of Appeals for the Federal Circuit.

In January 2003, the United States Court of Appeals for the Federal Circuit issued a decision affirming in part and reversing in part the decision of the United States District Court of Massachusetts and remanded the action to the United States District Court of Massachusetts for further proceedings. In particular, the United States Court of Appeals for the Federal Circuit:

•		upheld the United States District Court of Massachusetts’ determination of invalidity of one of Amgen’s patents;
•		upheld the United States District Court of Massachusetts’ determination that some claims of two other Amgen patents were infringed, but vacated the United States District Court of Massachusetts’ determination that those patents were not invalid; and
•		vacated the United States District Court of Massachusetts’ determination that Dynepo infringed some claims of the two remaining Amgen patents, and vacated the United States District Court of Massachusetts’ determination that one of these patents was not invalid.

As part of the United States Court of Appeals for the Federal Circuit’s ruling, it remanded the case to the United States District Court of Massachusetts and instructed it to reconsider the validity of Amgen’s patents in light of potentially invalidating prior art. The United States District Court of Massachusetts concluded the remand proceedings in July 2003. The United States District Court of Massachusetts also issued a decision upholding its January 2001 findings that Amgen successfully rebutted the presumption of prosecution history estoppel with respect to certain of its patents, and therefore, that the Company and Sanofi-Aventis infringe such patents in light of recent Supreme Court precedents. On remand, the Company and Sanofi-Aventis presented affirmative defenses with respect to such patents. In October 2004, the United States District Court of Massachusetts issued a decision on the remanded issues, finding that certain claims related to four patents held by Amgen are valid and infringed by the Company. The Company intends to appeal the decision of the United States District Court of Massachusetts to the United States Court of Appeals for the Federal Circuit.

In March 2004, the Company and Sanofi-Aventis amended the license agreement between the Company and Sanofi-Aventis relating to Dynepo. Under the amended license agreement, Sanofi-Aventis retained the right to control the Amgen litigation in the United States and assumed responsibility for 100% of the litigation costs incurred with respect to both the United States litigation and the Kirin-Amgen litigation in the United Kingdom prior to March 26, 2004. Sanofi-Aventis is required to pay all U.S. litigation expenses incurred from and after March 26, 2004, but the Company is required to reimburse Sanofi-Aventis for 50% of these litigation costs. Sanofi-Aventis is entitled to deduct up to 50% of any royalties that Sanofi-Aventis may otherwise owe the Company with respect to the sale of Dynepo until Sanofi-Aventis has recouped the full amount of the Company’s share of the U.S. litigation costs. The Company has the right to control the U.K. litigation and is responsible for all litigation costs incurred with respect to such litigation and any other litigation that might arise outside of the United States from and after March 26, 2004. Subsequent to the amendment of the license agreement and as of September 30, 2004, the Company had incurred approximately $1,300,000 related to the U.K. litigation. Based on the House of Lords’ favorable ruling in October 2004, the Company does not expect to incur further significant costs related to the U.K. litigation, and expects that, pursuant to U.K. fee-shifting rules, Kirin-Amgen will have to pay the Company a substantial percentage of the legal fees it has incurred since March 26, 2004. The Company expects that

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there will be ongoing costs related to the U.S. litigation, specifically the appeal of the decision of the United Stated District Court of Massachusetts.

     Gene Activation Patent Litigation

In August 2004, Applied Research Systems ARS Holding N.V., a wholly-owned subsidiary of Serono SA (“Serono”), served the Company with an amended complaint that was filed in the U.S. District Court of Massachusetts alleging that the Company infringes Serono’s U.S. Patent No. 5,272,071 (“the ‘071 patent”) which purportedly covers certain methods of gene activation. In the original complaint, Serono appealed an adverse decision by the Board of Patent Appeals and Interferences of the U.S. Patent and Trademark Office (“PTO”) in an interference proceeding between Cell Genesys, Inc. (“Cell Genesys”) and Serono regarding the ‘071 patent declared in 1996. In June 2004, the PTO held that both Serono and Cell Genesys were entitled to certain claims in their respective patent and patent application, and both parties appealed the decision on the interference. The Company was not a party to this interference. In October, 2004, the Company filed a motion to dismiss the amended complaint. The European counterpart to the ‘071 patent, EP No. 0 505 500 (“the ‘500 patent”), was revoked by the European Patent Office in January 2002 on grounds of invalidity due to insufficiency of disclosure. When the revocation of the patent was still on appeal, Serono prematurely sued the Company in the Netherlands in January 2003 and claimed that Replagal infringed the ‘500 patent. Serono withdrew the suit in November 2003 after the earlier revocation of its patent was affirmed by a unanimous Technical Board of Appeals.

     Purported Class Action Shareholder Suit

In January and February 2003, various parties filed purported class action lawsuits against the Company and Richard Selden, the Company’s former Chief Executive Officer, in the United States District Court for the District of Massachusetts. The complaints generally allege securities fraud during the period from January 2001 through January 2003. Each of the complaints asserts claims under Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, and alleges that the Company and its officers made false and misleading statements and failed to disclose material information concerning the status and progress for obtaining United States marketing approval of the Company’s Replagal product to treat Fabry disease during that period.

In March 2003, various plaintiffs filed motions to consolidate, to appoint lead plaintiff, and to approve plaintiff’s selections of lead plaintiffs’ counsel. In April 2003, various plaintiffs filed a Joint Stipulation and Proposed Order of Lead Plaintiff Applicants to Consolidate Actions, To Appoint Lead Plaintiffs and to Approve Lead Plaintiffs’ Selection of Lead Counsel, Executive Committee and Liaison Counsel. In April 2003, the Court endorsed the Proposed Order, thereby consolidating the various matters under one matter: In re Transkaryotic Therapies, Inc., Securities Litigation, C.A. No. 03-10165-RWZ.

In July 2003, the plaintiffs filed a Consolidated and Amended Class Action Complaint, which the Company refers to as the Amended Complaint, against the Company; Dr. Selden; Daniel Geffken, the Company’s former Chief Financial Officer; Walter Gilbert, Jonathan S. Leff, Rodman W. Moorhead, III, and Wayne P. Yetter, members of the Company’s board of directors; William R. Miller and James E. Thomas, former members of the Company’s board of directors; and SG Cowen Securities Corporation, Deutsche Bank Securities Inc., Pacific Growth Equities, Inc. and Leerink Swann & Company, underwriters of the Company’s common stock in prior public offerings.

The Amended Complaint alleges securities fraud during the period from January 4, 2001 through January 10, 2003. The Amended Complaint alleges that the defendants made false and misleading statements and failed to disclose material information concerning the status and progress for obtaining United States marketing approval of Replagal during that period. The Amended Complaint asserts claims against Dr. Selden and the Company under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and against Dr. Selden under Section 20(a) of the Exchange Act. The Amended Complaint also asserts claims based on the Company’s public offerings of June 29, 2001, December 18, 2001 and December 26,

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2001 against each of the defendants under Section 11 of the Securities Act of 1933 and against Dr. Selden under Section 15 of the Securities Act; against SG Cowen Securities Corporation, Deutsche Bank Securities, Pacific Growth Equities, Inc., and Leerink Swann & Company under Section 12(a)(2) of the Securities Act. The plaintiffs seek equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs.

In September 2003, the Company filed a motion to dismiss the Amended Complaint. A hearing of the motion occurred in December 2003. In May 2004, the United States District Court for the District of Massachusetts issued a Memorandum of Decision and Order denying in part and granting in part the Company’s motion to dismiss the purported class action lawsuit. In the Memorandum, the Court found several allegations against the Company arose out of forward-looking statements protected by the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The Court dismissed those statements as falling within the PSLRA’s safe harbor provisions. The Court also dismissed claims based on the public offerings of June 29, 2001 and December 18, 2001 because no plaintiff had standing to bring such claims. The Court allowed all other allegations to remain.

In June 2004, TKT submitted an unopposed motion seeking clarification from the Court that the Memorandum dismissed claims based on the first two offerings as to all defendants. The Court granted the motion.

In July 2004, the plaintiffs voluntarily dismissed all claims based on the third offering because no plaintiff had standing to bring such claims.

The plaintiffs subsequently filed a motion seeking permission to notify certain TKT investors of the dismissal of the claims based on the offerings, and to inform those investors of their opportunity to intervene in the lawsuit. TKT filed an opposition to this motion in July 2004. The Court has not yet ruled on this motion. The Company filed an answer to the Amended Complaint in July 2004. The plaintiffs then filed a motion for class certification in July 2004. Any opposition to this motion is due in December 2004. A hearing on class certification is scheduled to be held in January 2005.

As of September 30, 2004, the Company had spent approximately $1,400,000 related to this lawsuit and the shareholder derivative suit described below. The Company expects that future costs related to these suits will be significant.

     Shareholder Derivative Suit

In April 2003, South Shore Gastrointerology UA 6/6/1980 FBO Harold Jacob, and Nancy R. Jacob Ttee filed a Shareholder Derivative Complaint against Dr. Selden; against the following members of the Company’s board of directors: Jonathan S. Leff, Walter Gilbert, Wayne P. Yetter, Rodman W. Moorhead III; against the following former members of the Company’s board of directors: James E. Thomas, and William Miller; and against the Company as nominal defendant, in Middlesex Superior Court in the Commonwealth of Massachusetts, Civil Action No. 03-1669. On May 29, 2003, the parties moved to transfer venue to the Business Litigation Session in Suffolk Superior Court in the Commonwealth of Massachusetts. The parties’ motion was allowed, and in June 2003 the matter was accepted into the Business Litigation Session as Civil Action No. 03-02630-BLS.

The complaint alleges that the individual defendants breached fiduciary duties owed to the Company and its shareholders by disseminating materially false and misleading statements to the market and causing or allowing the Company to conduct its business in an unsafe, imprudent and unlawful manner. The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary duty, and to assert a claim for contribution and indemnification on behalf of the Company for any liability the Company incurs as a result of the individual defendants’ alleged misconduct. The complaint seeks declaratory, equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs.

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In August 2003, the plaintiff filed its Verified Amended Derivative Complaint, which the Company refers to as the Amended Derivative Complaint. The Amended Derivative Complaint alleges that the individual defendants breached fiduciary duties owed to the Company and its stockholders by causing the Company to issue materially false and misleading statements to the public, by signing the Company’s Form 10-Ks for the years 2000 and 2001 and by signing a registration statement. The Amended Derivative Complaint also alleges that defendant Dr. Selden sold the Company’s stock while in possession of material non-public information. The plaintiffs seek declaratory, equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs.

In September 2003, the Company filed a motion to dismiss the Amended Derivative Complaint. A hearing of the motion was held in January 2004. In May 2004, the Court granted the Company’s motion to dismiss. In June 2004, the plaintiff filed a Notice of Appeal appealing the dismissal of the Amended Derivative Complaint to the Massachusetts Court of Appeals.

As of September 30, 2004, the Company had spent approximately $1,400,000 related to this lawsuit and the purported class action shareholder suit described above. The Company expects that future costs related to these suits will be significant.

     SEC Investigation

In May 2003, the Company received a copy of a formal order of investigation by the Securities and Exchange Commission. The order of investigation relates to the Company’s disclosures and public filings with regard to Replagal and the status of the approval process of the United States Food and Drug Administration (the “FDA”) for Replagal, as well as transactions in the Company’s securities.

In July 2004, the Company and Dr. Selden, its former Chief Executive Officer, received “Wells” notices from the staff of the SEC, in connection with the SEC investigation. The Wells notices state that the SEC staff has preliminarily determined to recommend that the Commission bring a civil action for possible violations of the federal securities laws in which it may seek an injunction and civil penalties against TKT, and an injunction, disgorgement, and an officer and director bar as to Dr. Selden. The Company intends to continue to cooperate fully with the SEC in the investigation. As of September 30, 2004, the Company had spent approximately $1,600,000 related to this matter.

10. CONTRACTUAL COMMITMENTS

In July 2004, the Company entered into a manufacturing agreement with Lonza Biologics plc (“Lonza”) under which Lonza agreed to manufacture Dynepo bulk drug substance at Lonza’s cGMP production facility in Slough, UK. The Company has committed to pay Lonza approximately $13,000,000 related to initial start-up and manufacturing costs of Dynepo bulk drug substance through 2006. The Company may terminate the agreement upon at least 30 days’ notice to Lonza. However, in the event that the Company terminates the agreement upon less than twelve months’ notice to Lonza, the Company will be required to pay Lonza for any binding orders for the manufacture of Dynepo bulk drug substance placed by the Company prior to the date of notice of termination.

11. SUBSEQUENT EVENT

On October 22, 2004, the Company completed the purchase of the 20% equity interest in TKT Europe AB, formerly known as TKT Europe-5S AB (“TKT Europe”), the Company’s sales and marketing subsidiary in Europe, held by the founding European executives of TKT Europe. With this purchase, the Company now owns 100% of TKT Europe. The purchase price, based on a predefined formula included in the stockholders’ agreement between the Company and the founding European executives, was $61,130,000 and was funded by the Company’s existing cash balances.

The purchase price will be allocated to the assets acquired and to the liabilities assumed based on 20 percent of their estimated fair value of the date of acquisition. The acquisition will be accounted for as a step acquisition in the fourth quarter of 2004. The Company expects that the majority of the purchase price will

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be allocated to tangible and intangible assets.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Transkaryotic Therapies, Inc. (the “Company” or “TKT”) is a biopharmaceutical company researching, developing and commercializing therapeutics, primarily for the treatment of rare genetic diseases caused by protein deficiencies. TKT has approval to market and sell Replagal (agalsidase alfa) (“Replagal”), its enzyme replacement therapy for the long-term treatment of patients with Fabry disease, in 34 countries outside of the United States. The Company recorded $19,479,000 and $54,920,000 of product sales of Replagal in the three months and nine months periods ended September 30, 2004, respectively. The Company’s most advanced active clinical programs include iduronate-2-sulfatase (“I2S”), its enzyme replacement therapy for the treatment of Hunter syndrome, and Gene-Activated glucocerebrosidase (“GA-GCB”), its enzyme replacement therapy for the treatment of Gaucher disease. The Company is currently conducting a pivotal Phase III clinical trial of I2S and a Phase I/II clinical trial of GA-GCB. TKT is currently evaluating out-licensing opportunities for a number of other of its Gene-Activated and gene therapy products. In addition to its focus on rare diseases, TKT intends to commercialize Dynepo (epoeitin delta) (“Dynepo”), its Gene-Activated erythropoietin product for anemia related to kidney disease, in the European Union by entering into arrangements with third parties to distribute, sell and market Dynepo.

With the exception of 1995, the Company has incurred substantial annual operating losses since inception. The Company expects to incur significant operating losses until it generates substantially greater product sales than it is currently generating. Until such time, the Company is dependent upon product sales, collections of accounts receivable, existing cash resources, interest income, external financing from equity offerings, debt financings, and collaborative research and development alliances to finance its operations. At September 30, 2004, the Company’s accumulated deficit was $493,839,000. The Company expects, based on its current operating plan, that its existing capital resources and anticipated proceeds from collections on existing accounts receivable and on future accounts receivable from future product sales, anticipated cash payments under collaborative agreements, and interest income, will be sufficient to fund its operations into 2006.

The Company’s results of operations may vary significantly from period to period depending on, among other factors:

•		the timing and amount of Replagal product sales, as well as the collections of receivables;
•		continued progress in TKT’s research and development programs, particularly with respect to I2S and GA-GCB;
•		the Company’s ability to manufacture Dynepo product on a timely and cost-effective basis, including the ability to obtain approval from the European Commission of a site change amendment to its existing marketing approval application (“MAA”) for Dynepo and to enter into successful third party arrangements for the marketing of Dynepo in the European Union and elsewhere;
•		the scope and results of the Company’s clinical trials;
•		the timing of, and the costs involved in, obtaining regulatory approvals and the scope of such regulatory approvals, if any;
•		the cost of expansion of the Company’s internal manufacturing facilities;
•		the inherent variability of product yields in biological manufacturing activities;
•		fluctuations in foreign exchange rates for sales denominated in currencies other than the United States dollar;

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•		the quality and timeliness of the performance of third party suppliers;
•		the cost of commercialization activities, including product marketing, sales and distribution;
•		the costs involved in preparing, filing, prosecuting, maintaining, and enforcing patent claims and other patent-related costs, including litigation costs and the results of such litigation;
•		the outcome of pending purported class action and other related, or potentially related, actions and the litigation costs with respect to such actions;
•		the integration of TKT Europe’s infrastructure into the Company’s existing infrastructure and the retention of key employees of TKT Europe;
•		the outcome of the Securities and Exchange Commission (the “SEC”) investigation referred to in the notes to the condensed, consolidated financial statements in this report; and
•		the Company’s ability to establish and maintain collaborative arrangements.

Recent Product Development and Business Activities

     TKT Europe

On October 22, 2004, the Company completed the purchase of the 20% equity interest in TKT Europe held by the founding European executives of TKT Europe. The purchase price, based on a predefined formula included in the stockholders’ agreement between the Company and the founding European executives, was $61,130,000 and was funded by existing cash balances. The purchase price will be allocated to the assets acquired and to the liabilities assumed based on 20 percent of their estimated fair value at the date of acquisition. The acquisition will be accounted for as a step acquisition in the fourth quarter of 2004. The Company expects that the majority of the purchase price will be allocated to tangible and intangible assets.

     Dynepo

In September 2004, Sanofi-Aventis granted the Company a license to clinical trial results from a controlled Phase III clinical trial conducted by Sanofi-Aventis evaluating Dynepo for the treatment of anemia in cancer patients treated with chemotherapy. The Company expects that top-line results of the clinical trial will be available in the first half of 2005. If the data are positive, the Company intends to file an amendment to the European Dynepo product license and seek to expand the label to include anemia associated with chemotherapy.

In July 2004, the Company entered into a manufacturing agreement with Lonza under which Lonza agreed to manufacture Dynepo bulk drug substance at Lonza’s cGMP production facility in Slough, UK. In the future, the Company plans to enter into arrangements with contract manufacturers for the preparation and packaging of Dynepo bulk drug substance into finished product, work with its contract manufacturers to set up and validate manufacturing processes, and obtain the approval by the European Commission of an amendment to the approved MAA for Dynepo reflecting the new manufacturing sites. The Company intends to commercialize Dynepo by entering into arrangements with third parties for the sales and marketing of Dynepo.

Application of Critical Accounting Policies and Estimates

The discussion and analysis of TKT’s financial condition and results of operations is based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires

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TKT to make estimates and judgments that affect its reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from these estimates under different assumptions and conditions.

The Company regards an accounting estimate underlying its financial statements as a “critical accounting estimate” if the accounting estimate requires the Company to make assumptions about matters that are highly uncertain at the time of estimation and if different estimates that reasonably could have been used in the current period, or changes in the estimate that are reasonably likely to occur from period to period, would have had a material effect on the presentation of financial condition, changes in financial condition, or results of operations.

The Company regards its policies with respect to revenue recognition, accounts receivable, inventories, asset impairment and restructuring charges as “critical accounting estimates.” There have been no changes to such policies or significant changes in assumptions or estimates that would affect such policies for the nine months ended September 30, 2004. These policies are described under the caption “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, which is on file with the SEC.

Results of Operations

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the accompanying condensed, consolidated financial statements and the related notes thereto.

Revenues

Revenues for the three and nine months ended September 30, 2004 and 2003 were:

     Product Sales

The majority of Replagal product sales were in Europe. The increase in sales in the three months and nine months periods of 2004 over the comparative periods in 2003 reflects an overall increase in unit sales and the favorable effects of foreign currency fluctuations as described below. For both comparative periods, unit sales increased due in part to additional patients commencing therapy. In addition, a reversal of a 2003 price rebate accrual during the first quarter of 2004 contributed approximately $481,000 to product sales in the nine months ended September 30, 2004 as the Company determined it was no longer probable that it would be required to pay this amount to customers.

The Company prices Replagal in the functional currency of the country into which it is sold. While overall price levels in local currencies are generally consistent period over period, foreign exchange fluctuations caused an increase in the United States dollar denominated average selling prices. In the third quarter of 2004, foreign currency fluctuations increased sales and gross margins by approximately $1,490,000, or 10%, as compared to the third quarter of 2003. For the nine months ended September 30, 2004, foreign currency fluctuations increased sales and gross margins by approximately $4,870,000, or 12%, as compared to the corresponding period in 2003.

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Substantially all of the Company’s manufacturing costs are in United States dollars. Therefore, any fluctuation in the value of the payment currencies relative to the United States dollar is likely to impact gross margins in the future since the Company’s manufacturing costs would remain approximately the same while its revenue in terms of United States dollars would change. Product sales and gross margins will be negatively affected if the United States dollar strengthens against currencies in which the Company sells Replagal. The Company currently does not engage in foreign currency hedging activities.

     License and Research Revenues

The decrease in license and research revenues in the three and nine month periods in 2004 from the corresponding periods in 2003 reflects non-recurring amounts earned under the Company’s collaborative agreements during the third quarter of 2003. License and research revenues in the three and nine months ended September 30, 2004 reflects amounts received under the global legal settlement and distribution agreement that the Company executed with Genzyme Corporation (“Genzyme”) in the fourth quarter of 2003. Revenues related to these agreements are being recognized ratably over a thirteen year period, representing the term over which the Company has agreed to supply bulk drug substance to Genzyme under the distribution agreement. During the fourth quarter of 2003, the Company received a total of $3,055,000 under these agreements with Genzyme which the Company recorded as deferred revenue. During the third quarter of 2003, the Company earned $1,018,000 under a collaborative agreement for Replagal in Japan with Sumitomo Pharmaceutical Co. Ltd. (“Sumitomo”). The Company also received $500,000 in the third quarter of 2003 from Wyeth, which succeeded Genetics Institute, Inc. (“Wyeth”), in connection with the termination of its Factor VIII gene therapy collaboration with Wyeth.

Cost of Goods Sold

Components of cost of goods sold are as follows:

Cost of goods sold consists of expenses incurred in connection with the manufacture of Replagal. The increase in cost of goods sold for the three and nine months ended September 30, 2004 primarily reflects increased unit sales. The decrease in cost of goods sold as a percentage of sales for the three and nine months ended September 30, 2004 reflects continuing improvements in manufacturing and production efficiencies as well as the contribution of foreign currency fluctuations on product sales. This decrease also reflects the fact that the Company incurred non-recurring charges amounting to $2,590,000, or 6% of product sales, during the nine month period ended in 2003 related to excess capacity at the terminated contract manufacturer of bulk drug substance of Replagal.

The Company has historically relied on contract manufacturing arrangements with third parties for the production of Replagal bulk drug substance for commercial sale, as well as contract packaging and labeling services. In January 2003, the Company terminated its agreement with a third-party manufacturer of the bulk drug substance of Replagal, effective in July 2003. In July 2003, the European Commission approved the Company’s manufacturing facility at Cambridge, Massachusetts (the “Alewife Facility”) for the commercial manufacture of bulk drug substance for Replagal. In October 2003, the Company began significant renovations to its manufacturing facility in the Alewife Facility in order to expand its manufacturing capacity and configure the facility for the production on a commercial scale of products other than Replagal.

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In anticipation of these renovations, in the third quarter of 2003, the Company ceased all manufacturing operations at the Alewife Facility. In June 2004, the Company completed renovations to the Alewife Facility and recommenced manufacturing operations. At the present time, the Company anticipates that existing inventory will be sufficient to fill customer orders for Replagal into 2005. The Company intends to continue to rely on third-party manufacturers for fill/finish and packaging services.

The Company expects that it will sell Replagal inventory produced both at the terminated contract manufacturer and at the Company’s Alewife Facility in the remainder of 2004. Cost of goods sold will reflect a mix of full production costs with respect to inventory produced at the former contract manufacturer, and partial production costs with respect to inventory manufactured at the Alewife Facility as the majority of such costs were previously expensed.

Research and Development Expenses

Research and development expenses increased by $5,632,000, or 31%, to $23,527,000 in the third quarter of 2004, as compared to $17,895,000 during the same period in 2003. For the nine month period ended September 30, 2004, research and development expenses totaled $65,674,000 versus $55,730,000 for the same period in 2003, an increase of $9,944,000, or 18%. The increase for both periods reflects increased clinical trial and manufacturing costs in 2004 related to the Company’s I2S and GA-GCB clinical programs. The Company expects its research and development costs will continue to increase relative to the nine month period of 2004, primarily as expenditures increase for the ongoing I2S and GA-GCB clinical trials, for the manufacture of I2S and GA-GCB for use in these studies, and in connection with the continuation of contract manufacturing activities related to Dynepo.

The Company’s four largest research and development programs, Replagal, I2S, GA-GCB and Dynepo, represent the majority of the Company’s research and development spending. Expenses associated with the Company’s preclinical and clinical programs related to the Company’s products for the treatment of other rare genetic diseases, and Gene-Activated protein products, accounted for the balance of the Company’s research and development expenses for the three months ended September 30, 2004. The following table details the Company’s significant research and development programs:

     Replagal

The decrease in research and development expenses for Replagal in both periods of 2004 is primarily due to the Company’s decision in January 2004 to cease efforts to seek the approval of Replagal in the United States. The Company expects the amount of future Replagal-related research and development expenses will decrease. The Company expects that substantially all of future Replagal research and development expenses will relate to the conditions associated with the Company’s European and Canadian approvals of Replagal, including the Company’s obligations to conduct additional clinical trials and to submit an annual assessment of Replagal for review by the European regulatory agency and additional studies required in Canada.

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     I2S

The increases in research and development expenses for I2S in both periods of 2004 were due to increased expenditures related to the Company’s ongoing I2S pivotal trial and costs to manufacture I2S for this study.

In September 2003, the Company began enrolling patients in its pivotal trial, referred to as the AIM (Assessment of I2S in MPS II) study, which is a randomized, double-blind, placebo-controlled, clinical trial to evaluate the effect of I2S over 12 months in patients with Hunter syndrome. The pivotal clinical trial includes 96 patients with Hunter syndrome at nine sites around the world. The Company completed enrollment in the study in March 2004. The Company expects preliminary results from the study in the second quarter of 2005 and, if positive, the Company expects to submit applications for marketing approval of I2S in both the United States and Europe in the second half of 2005.

Future research and development costs for the I2S program are not reasonably certain because such costs are dependent on a number of variables, including the cost and design of any additional clinical trials, uncertainties in the timing of the regulatory process, and the costs associated with large-scale manufacture of I2S. The Company estimates that the total cost of its pivotal clinical trial of I2S may aggregate approximately $10,000,000 to $15,000,000 in 2004. The Company expects that expenses related to the pivotal I2S trial will continue to be significant.

     GA-GCB

The increases in research and development expenses for GA-GCB in both periods of 2004 were due to increased expenditures related to the Company’s ongoing GA-GCB phase I/II trial and costs to manufacture GA-GCB for this study.

In December 2003, the Company submitted an investigational new drug application, or IND, to the FDA to commence human clinical trials of GA-GCB. This IND became effective in January 2004. In April 2004, the Company initiated a phase I/II clinical trial to evaluate the safety and clinical activity of GA-GCB. In this clinical trial, the Company plans to evaluate GA-GCB in 12 patients with Gaucher disease who will receive treatment for nine months. The Company expects to complete this phase I/II trial in 2005.

Future research and development costs for the GA-GCB program are not reasonably certain because such costs are dependent on a number of variables, including the cost and design of any additional clinical trials, uncertainties in the timing of the regulatory process, and the costs associated with large-scale manufacture of GA-GCB. The Company expects that expenses related to the phase I/II and subsequent pivotal trials will continue to be significant.

     Dynepo

The significant majority of expenses relating to Dynepo are in connection with a manufacturing agreement that the Company entered into with Lonza in July 2004 under which Lonza agreed to manufacture Dynepo bulk drug substance at Lonza’s cGMP production facility in Slough, UK. The Company incurred $1,733,000 and $1,990,000 for the three and nine month periods ended September 30, 2004, respectively, for initial start up and development work under the manufacturing agreement. Expenses related to development and manufacturing of the Dynepo product will result in increases in future research and development expenses. The Company has committed to pay Lonza approximately $13,000,000 related to initial start-up and manufacturing costs of Dynepo bulk drug substance through 2006. Research and development costs for Dynepo are not reasonably certain because such costs are dependent on a number of variables, including costs related to technology transfer, costs associated with the startup of Dynepo manufacturing, and uncertainties in the timing and approval of the manufacturing facility and processes by the appropriate regulatory authorities.

In September 2004, Sanofi-Aventis granted the Company a license to clinical trial results from a controlled Phase III clinical trial conducted by Sanofi-Aventis evaluating Dynepo for the treatment of anemia in cancer patients treated with chemotherapy. The Company expects that top-line results of the clinical trial will be available in the first half of 2005. If the data are positive, the Company intends to file an amendment to the European Dynepo product license and seek to expand the label to include anemia associated with chemotherapy.

Intellectual Property License Fee Expense

In June 2002, the Company obtained an exclusive license to certain patents and patent applications from Cell Genesys related to Cell Genesys’ approach to gene activation. In consideration for the license, the Company initially paid Cell Genesys $11,000,000 in cash and issued to Cell Genesys shares of the Company’s common stock worth $15,000,000 as of the date of the agreement.

On January 15, 2003, the Company and Cell Genesys renegotiated the consideration paid for the license, and the Company repurchased the shares of stock issued to Cell Genesys for $15,000,000 in cash. The Company incurred a license expense in the first quarter of 2003 of $1,350,000, which represents the decline in the market value of the Company’s common stock from December 31, 2002 to January 15, 2003. The repurchased shares have been recorded as treasury stock.

Under the license agreement, Cell Genesys also has the potential to receive certain milestone payments from the Company contingent upon the outcome of related patent matters under the license agreement. If all of the milestones are achieved, the Company will be obligated to pay Cell Genesys an aggregate of $17,000,000 payable in part in cash and in part in stock. The Company cannot predict when those milestones will become due, if ever. The Company is not required to make royalty payments to Cell Genesys.

Selling, General and Administrative Expenses

The Company’s selling, general and administrative expenses were as follows:

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The increase in selling, general and administrative costs for the three months ended September 30, 2004 as compared to the same period in 2003 reflects primarily increased sales and marketing costs, including incentive compensation, at TKT Europe. For the nine months ended September 30, 2004, selling, general and administrative costs increased primarily due to incentive compensation at TKT Europe, as well as costs incurred in connection with the UK Dynepo litigation which totaled $1,300,000. The increase was partially offset by non-recurring executive severance charges incurred in 2003.

The Company expects selling, general and administrative expenses related to selling and marketing expenses to continue to increase in 2004 as the Company establishes infrastructure and distribution capabilities to support commencement of Replagal product sales in additional countries outside of the European Union. In addition, the Company is incurring transition costs related to the buyout of the minority interest in TKT Europe that it completed in October 2004.

The Company is currently evaluating potential commercialization strategies for Dynepo in Europe, which could contribute to increases in future selling, general and administrative expenses. Future selling, general and administrative costs for Dynepo are not reasonably certain because such costs are dependent on a number of variables, including costs related to entering into and supporting potential sales and marketing licensing agreements with third parties.

The Company expects selling, general and administrative costs, primarily related to Dynepo litigation, to total approximately $2,000,000 in 2004.

Restructuring Charges

In February 2003, the Company announced a major reorganization in an effort to reduce costs and narrow the scope of the Company’s research initiatives. As part of this restructuring, during the first quarter of 2003, the Company reduced its United States headcount by approximately 100 positions and vacated four of its facilities throughout 2003. The Company’s restructuring actions were substantially completed as of December 31, 2003.

For the three months ended September 30, 2004 and 2003, restructuring charges amounted to $1,257,000 and $2,765,000, respectively. Restructuring charges were $3,030,000 and $11,324,000 for the nine months ended September 30, 2004 and 2003, respectively. Restructuring charges recorded in the three and nine month periods ended September 30, 2004 were primarily related to ongoing facility and lease expenses related to the four vacated facilities. Also included in the nine months ended September 30, 2003 was $1,354,000 of employee severance and outplacement services costs for 74 employees, primarily in research and development, $9,396,000 representing the remaining lease obligation for three of the four facilities that the Company no longer occupied, and a write-down of $574,000 for leasehold improvements for facilities which were vacated. The Company will continue to record restructuring charges primarily related to vacated facility expenses during the remainder of the lease terms until such facilities are sublet. The last to expire lease expires in 2011.

Minority Interest

The Company recorded minority interest charges in the net loss of TKT Europe of $23,000 and $55,000 for the three and nine months ended September 30, 2004, respectively. To date, the Company has recorded

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minority interest charges amounting to $358,000 related to the 20% minority interest in the cumulative net income of TKT Europe.

Interest Income, Net

Interest income increased in the three month period ended September 30, 2004 primarily due to higher cash and marketable securities balances, primarily as a result of the Notes offering, and a higher rate of return relative to the same period in 2003. During the third quarter of 2004, average cash and marketable securities balances were $228,431,000 as compared to $191,753,000 for the same period in 2003. Interest income decreased for the nine month period ended September 30, 2004 primarily due to lower cash and marketable securities balances, and a lower rate of return relative to the same period in 2003. For the nine months ended September 30, 2004 and 2003, the average cash and marketable securities balances were $199,128,000 and $210,300,000, respectively. As a result of the Notes offering, the Company recorded $405,000 and $656,000 for interest expense and amortization of deferred issuance costs for the three and nine month periods ended September 30, 2004, respectively. The Company expects a decrease in interest income as a result of lower cash and marketable securities balances due to ongoing operating activities.

Loss on Disposal of Fixed Assets

The Company recorded losses on disposals of fixed assets amounting to $402,000 and $433,000 for the three and nine month periods ended September 30, 2004, respectively. Fixed asset disposals primarily relate to the write-off of manufacturing equipment and computer equipment that is no longer in use, off-set from the sale of related equipment.

Net Loss

The Company had a net loss of $18,810,000 and $13,553,000 for the three months ended September 30, 2004 and 2003, respectively. Basic and diluted net loss per share was $0.54 and $0.39 for the three months ended September 30, 2004 and 2003, respectively. Restructuring charges contributed $(0.04) to the net loss per share in the third quarter 2004 compared with $(0.08) in the third quarter of 2003.

The Company’s net loss was $53,171,000 and $60,518,000 for the nine months ended September 30, 2004 and 2003, respectively. Basic and diluted net loss per share was $1.53 for the nine months ended September 30, 2004, as compared to a basic and diluted net loss per share of $1.75 for the corresponding period in 2003. Restructuring charges contributed $(0.09) and $(0.33) for the nine month periods ended September 30, 2004 and 2003, respectively.

Liquidity and Sources of Capital

Since its inception, TKT has financed its operations through:

•		the sale of common stock, preferred stock, and the Company’s 1.25% Senior Convertible Notes (the “Notes”);
•		revenues from collaborative agreements;
•		interest income;

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•		more recently, with product sales and collections from accounts receivable; and
•		borrowings under debt agreements.

     Cash Flows

The Company had cash, cash equivalents and marketable securities totaling $222,833,000 at September 30, 2004, including restricted marketable securities collateralizing letters of credit totaling $7,820,000. Included in the Company’s cash, cash equivalents and marketable securities as of September 30, 2004 was $100,511,000 held by TKT Europe, which were denominated in Swedish Krona, British Pound, and Euros. Cash equivalents and marketable securities are invested in United States government and agency obligations and money market funds.

The Company used net cash of $38,856,000 for operating activities in the nine months ended September 30, 2004. Significant cash flow changes consisted of a net loss of $53,171,000, and depreciation expense of $9,931,000. Working capital at September 30, 2004, was $241,826,000 compared to $204,190,000 at December 31, 2003. Accounts receivable increased by $5,595,000 for the nine months ended September 30, 2004 due to increased Replagal sales. Inventory decreased by $4,399,000 for the nine months ended September 30, 2004, primarily due to product sales and minimal Replagal manufacturing activity at the Company’s Alewife Facility during the nine month period ended September 30, 2004 as a result of the renovation of the Alewife Facility.

In certain European countries, such as Italy and Belgium, customary payment terms on accounts receivable are significantly longer than in the United States, particularly for products treating orphan drug indications. In these countries, the Company historically has received, and expects to continue to receive, payments approximately one year from the invoice date. Aggregate accounts receivable balances for Italy and Belgium were 55% and 56% of total accounts receivable at September 30, 2004 and December 31, 2003, respectively. The Company monitors its days’ sales outstanding and collections in these countries. To date, these customers have been paying within the customary payment terms. If collections and days’ sales outstanding in these countries deteriorate in the future, the Company’s liquidity will be adversely affected.

Net cash used for investing activities was $10,991,000 for the nine months ended September 30, 2004. The Company used $11,386,000 during the nine month period ended September 30, 2004 for property and equipment purchases primarily related to leasehold improvements and equipment for the Company’s Alewife Facility. The Company expects to spend a total of approximately $3,600,000 for purchases of property and equipment during the balance of 2004, principally for expanding its internal manufacturing and information technologies capabilities.

On October 22, 2004, the Company completed the purchase of the 20% equity interest in TKT Europe, the Company’s sales and marketing subsidiary in Europe, held by the founding European executives of TKT Europe. With this purchase, the Company now owns 100% of TKT Europe. The purchase price, based on a predefined formula included in the stockholders’ agreement between the Company and the founding European executives, was $61,130,000 and was funded by the Company’s existing cash balances. The purchase price will be allocated to the assets acquired and to the liabilities assumed based on 20 percent of their estimated fair value of the date of acquisition. The acquisition will be accounted for as a step acquisition in the fourth quarter of 2004. The Company expects that the majority of the purchase price will be allocated to tangible and intangible assets.

The effect of exchange rate changes decreased cash and cash equivalents by $221,000 during the nine months ended September 30, 2004 and is primarily due to the strengthening of the United States dollar relative to the Swedish Krona and the translation of our foreign subsidiaries’ cash and accounts receivable balances, which are primarily denominated in Euros.

The Company’s cash requirements for operating activities and investment activities have significantly exceeded its internally generated funds. The Company expects that its cash requirements for such activities will continue to exceed its internally generated funds until it is able to generate substantially greater product sales.

The Company expects that it will require substantial additional funds to support its research and development programs, obligations under license agreements, long-term debt interest and principal payment obligations, acquisition of technologies, preclinical and clinical testing of its products, pursuit of regulatory approvals, acquisition of capital equipment, expansion of internal manufacturing capabilities, and selling, general and administrative expenses.

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During the second quarter of 2004, the Company sold $94,000,000 of Notes for net proceeds of $90,859,000. The Company has used these proceeds to fund its purchase of the minority interest in TKT Europe and plans to use the balance of such proceeds to fund its operations. Interest on the Notes is payable at a rate of 1.25% per annum and is payable semi-annually on May 15 and November 15 of each year commencing November 15, 2004.

In the near term, TKT expects to finance its operations principally from existing cash and cash equivalents, and collections of accounts receivable related to sales of Replagal. The Company expects, based on its current operating plan, that its existing capital resources and anticipated proceeds from collections on existing accounts receivable and on future accounts receivable from future product sales, anticipated cash payments under collaborative agreements, and interest income, will be sufficient to fund its operations into 2006.

The Company also plans to meet its long-term cash requirements through anticipated proceeds from collections on existing accounts receivable and on future accounts receivable from future product sales, anticipated cash payments under collaborative agreements, and interest income.

Because the Company expects to incur substantial operating losses in the future, the Company may need to seek additional funding for its operations. The Company may do so through collaborative arrangements and public or private debt or equity financings or lease arrangements related to facilities and capital equipment.

In December 2000, the Company filed a shelf registration statement on Form S-3 with the SEC, which became effective in December 2000. This shelf registration statement permits the Company to offer, from time to time, any combination of common stock, preferred stock, debt securities and warrants of up to an aggregate of $500,000,000. Following the sale of the Notes, the Company had approximately $138,000,000 worth of securities available for issuance under a shelf registration statement.

If the Company is unable to obtain additional future financing, the Company may be required to significantly curtail one or more of its research or development programs or some of its commercial activities, which could harm the Company’s business, financial condition and operating results. 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 preclinical and clinical development programs, and the extent of its commercial success. There can be no assurance that external funds will be available on favorable terms, if at all.

     Contractual Obligations

The following table summarizes the Company’s significant contractual obligations as of September 30, 2004:

In October 2004, the Company completed the purchase of the 20% equity interest in TKT Europe. The purchase price was $61,130,000 and was funded by existing cash balances.

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As of September 30, 2004, the Company had committed to pay approximately $9,029,000 to various contract vendors for administering and executing clinical trials. The timing of payments is not reasonably certain as payments are dependent upon actual services performed by such vendors. However, the Company expects to pay for these commitments throughout 2004 and into 2005 as ongoing trials are completed.

In July 2004, the Company entered into a manufacturing agreement with Lonza under which Lonza agreed to manufacture Dynepo bulk drug substance at Lonza’s cGMP production facility in Slough, UK. The Company has committed to pay Lonza approximately $13,000,000 related to initial start-up and manufacturing costs of Dynepo bulk drug substance through 2006. To date, the Company has paid Lonza $3,370,000. The Company may terminate the agreement upon at least 30 days’ notice to Lonza. However, in the event that the Company terminates the agreement upon less than twelve months’ notice to Lonza, the Company is required to pay Lonza for any binding orders for the manufacture of Dynepo bulk drug substance placed by the Company prior to the date of notice of termination.

The Company also is subject to the potential commitment discussed in the following paragraph that are not included in the above table:

In June 2002, the Company obtained an exclusive license to certain patent and patent applications from Cell Genesys related to Cell Genesys’ approach to gene activation. In consideration for the license, the Company paid $11,000,000 cash in June 2002 and an additional $15,000,000 in January 2003. If Cell Genesys achieves all the milestones related to patent matters under the license agreement, the Company will be obligated to pay Cell Genesys an aggregate of $17,000,000 payable in part in cash and in part in stock. The Company cannot predict when these milestones will become due, if ever. The Company is not required to make royalty payments to Cell Genesys.

     Net Operating Loss Carryforwards

At December 31, 2003, the Company had net operating loss carryforwards of approximately $298,410,000, which expire at various times through 2023. 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.

     Litigation Expenses

The Company is a party to the legal proceedings listed below which are described in greater detail under note 9 to the Condensed Consolidated Financial Statements. The costs related to these proceedings have been significant and the Company expects that these costs will continue to be significant. The Company can provide no assurance as to the outcome of any of these 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.

     • The Company has been engaged in patent litigation with Genzyme and Mount Sinai with respect to Replagal. In October 2003, pursuant to a global legal settlement, Genzyme agreed to withdraw from this patent litigation and paid the Company $1,555,000. Mount Sinai is not a party to the settlement. In October 2003, the United States Court of Appeals for the Federal Circuit affirmed a finding of non-infringement by the Company. In January 2004, the Federal Circuit denied Mount Sinai’s petition for a rehearing en banc. The deadlines associated with further appeal have expired. The Company did not incur any litigation expenses in the three months ended September 30, 2004 and does not expect to incur any additional expenses relating to this litigation.

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     • The Company and Sanofi-Aventis have been involved in patent infringement actions with Kirin-Amgen and Amgen with respect to Dynepo. The litigation is costly and the Company is required to reimburse Sanofi-Aventis, which is paying the United States litigation expenses, for 50% of the expenses incurred in the United States after March 26, 2004. Sanofi-Aventis is entitled to deduct up to 50% of any royalties due to the Company from the sale of Dynepo until Sanofi-Aventis has recouped the full amount of TKT’s share of litigation expenses. The Company is responsible for all litigation expenses outside of the United States incurred after March 26, 2004. As of September 30, 2004, the Company had incurred approximately $1,300,000 in litigation expenses associated with litigation in the U.K. In October 2004, the House of Lords upheld the 2002 decision by the Court of Appeals that Dynepo did not infringe Kirin-Amgen’s patent and also held that Kirin-Amgen’s patent is invalid. Based on the House of Lords’ favorable ruling, the Company does not expect that there will be further significant costs related to the U.K. litigation, and expects that, pursuant to U.K. fee-shifting rules, Kirin-Amgen may have to pay the Company a substantial percentage of the legal fees the Company has incurred since March 26, 2004. With respect to the U.S. litigation, in October 2004, the United States District Court of Massachusetts on remand found certain claims related to four patents held by Amgen are valid and infringed by the Company. The Company intends to appeal the decision of the United Stated District Court of Massachusetts to the United States Court of Appeals for the Federal Circuit. The Company expects that there will be ongoing expenses associated with the appeal in the U.S.

     • In August 2004, Applied Research Systems ARS Holding N.V., a wholly-owned subsidiary of Serono, served the Company with an amended complaint that was filed in the U.S. District Court of Massachusetts alleging that the Company infringes the ‘071 patent which purportedly covers certain methods of gene activation. In the original complaint, Serono appealed an adverse decision by the Board of Patent Appeals and Interferences of the U.S. Patent and Trademark Office (“PTO”) in an interference proceeding between Cell Genesys and Serono regarding the ‘071 patent declared in 1996. In June 2004, the PTO held that both Serono and Cell Genesys were entitled to certain claims in their respective patent and patent application, and both parties appealed the decision on the interference. The Company was not a party to this interference. In October, 2004, the Company filed a motion to dismiss the amended complaint. The European counterpart to the ‘071 patent, EP No. 0 505 500 (“the ‘500 patent”), was revoked by the European Patent Office in January 2002 on grounds of invalidity due to insufficiency of disclosure. When the revocation of the patent was still on appeal, Serono prematurely sued the Company in the Netherlands in January 2003 and claimed that Replagal infringed the ‘500 patent. Serono withdrew the suit in November 2003 after the earlier revocation of its patent was affirmed by a unanimous Technical Board of Appeals. The Company expects that there will be ongoing expenses associated with the Serono litigation.

     • In 2003, various parties filed purported class action lawsuits against the Company, its former Chief Executive Officer, former Chief Financial Officer, the members of the Company’s Board of Directors and other parties. In April 2003 a derivative law suit was filed against the Company’s former Chief Executive Officer, the members of the Company’s Board of Directors and the Company as a nominal defendant, alleging that the individual defendants breached fiduciary duties owed to the Company and its shareholders. In May 2004, the Court granted the Company’s motion to dismiss the derivative law suit. In June 2004, the plaintiffs appealed this ruling. As of September 30, 2004, the Company had incurred approximately $1,400,000 related to the shareholders law suit and derivative law suit.

     • In May 2003, the Company received a copy of a formal order of investigation by the SEC. In July 2004, the Company and its former Chief Executive Officer received “Wells” notices from the staff of the SEC, in connection with its investigation. The Wells notices state that the SEC staff has preliminarily determined to recommend that the Commission bring a civil action for possible violations of the federal securities laws in which it may seek an injunction and civil penalties against TKT, and an injunction, disgorgement, and an officer and director bar as to Dr. Selden. The Company intends to continue to cooperate fully in the investigation. As of September 30, 2004, the Company had incurred approximately $1,600,000 related to this matter.

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FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act that involve risks and uncertainties. The Company may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “will,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those set forth below under “Certain Factors That May Affect Future Results.” These factors and the other cautionary statements made in this quarterly report should be read as being applicable to all related forward-looking statements wherever they appear in this quarterly report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, the Company’s actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. In addition, any forward-looking statements represent the Company’s estimates only as of the date this quarterly report was 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 could cause actual results to differ from those indicated by forward-looking statements made by the Company in this quarterly report and elsewhere from time to time.

Financing risks

We have not been profitable and expect to continue to incur substantial losses.

     We have experienced significant operating losses since our inception in 1988. As of September 30, 2004, our accumulated deficit was $493.8 million. We had net losses of $18.8 million, $13.6 million, $20.9 million and $15.9 million in the three months ended September 30, 2004, 2003, 2002 and 2001. We had net losses of $53.2 million in the nine months ended September 30, 2004, $60.5 million in 2003, $82.3 million in 2002 and $51.0 million in 2001.

     We expect that, until we have substantially greater product sales, we will continue to incur substantial losses and that our cumulative losses will continue to increase. We recorded $19.5 million and $54.9 million in product sales in the three and nine months ended September 30, 2004, respectively, $57.2 million in product sales in 2003, and $34.7 million in product sales in 2002. We expect that the losses that we incur will fluctuate from quarter to quarter and that these fluctuations may be substantial.

We may need additional financing, which may be difficult to obtain. If we do not obtain additional financing, our business, results of operations and financial condition may be adversely affected.

Our cash requirements for operating activities, financing activities and investment activities have historically exceeded our internally generated funds. We expect that our cash requirements for such activities will continue to exceed our internally generated funds until we are able to generate substantially greater product sales.

We expect, based on our current operating plan, that our existing capital resources and anticipated proceeds from collections on existing accounts receivable and on future accounts receivable from product sales, anticipated cash payments under collaborative agreements, and interest income, will be sufficient to fund our operations into 2006. However, our existing capital resources and our other anticipated sources of capital may not provide adequate funds to

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satisfy our capital requirements. Our future capital requirements will depend on many factors, including the following:

•		the timing and amount of Replagal product sales, as well as the cash collections on receivables;
•		continued progress in our research and development programs, particularly with respect to I2S and GA-GCB;
•		our ability to manufacture Dynepo product on a timely and cost-effective basis, including the ability to obtain approval from the European Commission of a site change amendment to our existing MAA for Dynepo, and to enter into successful third party arrangements for the marketing of Dynepo in the European Union;
•		the scope and results of our clinical trials;
•		the timing of, and the costs involved in, obtaining regulatory approvals and the scope of such regulatory approvals, if any;
•		the cost of expansion of our internal manufacturing facilities;
•		the inherent variability of product yields in biological manufacturing activities;
•		fluctuations in foreign exchange rates for sales denominated in currencies other than the United States dollar;
•		the quality and timeliness of the performance of third party suppliers;
•		the cost of commercialization activities, including product marketing, sales, and distribution;
•		the costs involved in preparing, filing, prosecuting, maintaining, and enforcing patent claims and other patent-related costs, including litigation costs and the results of such litigation;
•		the outcome of pending purported class action and other related, or potentially related, actions and the litigation costs with respect to such actions;
•		the integration of TKT Europe’s infrastructure into our existing infrastructure and the retention of key employees of TKT Europe;
•		the outcome of the SEC investigation referred to in the condensed, consolidated financial statements; and
•		our ability to establish and maintain collaborative arrangements.

Because we expect to incur substantial operating losses in the future, we may need to seek additional funding for our operations. We may do so through collaborative arrangements and public or private debt or equity financings or lease arrangements related to facilities and capital equipment. Additional financing may not be available to us on acceptable terms, if at all. If we do not obtain additional financing, our financial condition may be adversely affected.

If we raise additional funds by issuing equity securities, further dilution to our then existing stockholders will result. If we raise additional funds by issuing debt securities, our total indebtedness will increase and we may subject ourselves to covenants that limit or restrict our ability to take specified actions, such as incurring additional debt or making capital expenditures. In addition, the terms of the financing may adversely affect the holdings or the rights of our 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 or some of our commercialization activities. We also could be required to seek funds through arrangements

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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 significant indebtedness and we may incur additional indebtedness in the future. Our current indebtedness and any future indebtedness we incur exposes us to risks that could adversely affect our business, operating results and financial condition.

We incurred $94 million of indebtedness when we sold the Notes. We may also incur additional long-term indebtedness or obtain working capital lines of credit to meet future financing needs. This indebtedness could have significant negative consequences for our business, operating results and financial condition, including:

•		increasing our vulnerability to adverse economic and industry conditions;
•		limiting our ability to obtain additional financing;
•		requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes;
•		limiting our flexibility in planning for, or reacting to, changes in our business; and
•		placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.

If we experience a decline in revenues, we could have difficulty making required payments on the Notes and any indebtedness which we may incur in the future. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of the Notes or any indebtedness which we may incur in the future, we would be in default, which would permit the holders of the notes and any such indebtedness to accelerate the maturity of the notes and any such indebtedness and could cause defaults under the Notes or any such indebtedness we may incur in the future. Any default under the Notes or any indebtedness which we may incur in the future could have a material adverse effect on our business, operating results and financial condition.

Our stock price has been and may in the future be volatile. This volatility may make it difficult for you to sell common stock when you want or at attractive prices.

Our common stock has been and in the future may be subject to substantial price volatility. The value of your investment could decline due to the effect of any of the following factors upon the market price of our common stock:

•		announcements of technological innovations or new commercial products by our competitors;
•		disclosure of results of clinical testing or regulatory proceedings by us or our competitors;
•		results of litigation;
•		the timing, amount and receipt of revenue from sales of our products and margins on sales of our products;
•		the integration of TKT Europe’s infrastructure into our existing infrastructure and the retention of key employees of TKT Europe;
•		governmental regulation and approvals;

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• developments in patent or other proprietary rights;

• public concerns as to the safety of products developed by us or the fields of study in which we work; and

• general market conditions.

In addition, the stock market has experienced significant price and volume fluctuations, and the market prices of biotechnology companies have been highly volatile. Moreover, broad market and industry fluctuations that are not within our control may adversely affect the trading price of our common stock. During the period from January 1, 2002 to September 30, 2004, the closing sale price of our common stock on the Nasdaq National Market ranged from a low of $3.74 per share to a high of $46.50 per share. You must be willing to bear the risk of fluctuations in the price of our common stock and the risk that the value of your investment in our securities could decline.

Our corporate governance structure, including provisions in our certificate of incorporation and by-laws, our stockholder rights plan, our employee stock option plans, and Delaware law, may prevent a change in control or management that securityholders may consider desirable.

Section 203 of the Delaware General Corporation Law and our certificate of incorporation, by-laws and stockholder rights plan contain provisions that might enable our management to resist a takeover of our company or discourage a third party from attempting to take over our company. These provisions include the inability of stockholders to act by written consent or to call special meetings, and the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval. In addition, our employee stock option plans contain provisions which accelerate the vesting of employee stock options under specified circumstances following a change in control of us.

These provisions could have the effect of delaying, deferring, or preventing a change in control of us or a change in our management that securityholders may consider favorable or beneficial. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock or our other securities.

Development, clinical and regulatory risks

If our clinical trials are not successful, we may not be able to develop and commercialize our 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 our products. However, we may not be able to commence or complete these clinical trials in any specified time period, or at all, either because the FDA or other regulatory agencies object, because we are unable to attract or retain clinical trial participants, or for other reasons. We currently are conducting a pivotal clinical trial of I2S and a phase I/II clinical trial of GA-GCB.

Even if we complete a clinical trial of one of our potential products, the data collected from the clinical trial may not indicate that our product is safe or effective to the extent required by the FDA, the European Commission, or other regulatory agencies to approve the potential product. For example, in November 2002, the FDA indicated to us that the data for Replagal that we submitted in connection with our biologics license application, or BLA, was not adequate for approval, and in January 2003, the FDA’s Endocrinologic & Metabolic Drugs Advisory Committee concluded that our clinical data did not provide substantial evidence of efficacy. In January 2004, we withdrew our BLA for Replagal.

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

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predictive of results that will be obtained in larger scale, advanced-stage clinical trials. Furthermore, we, one of our collaborators, or a regulatory agency with jurisdiction over the trials may suspend clinical trials at any time if the patients participating in such trials are being exposed to unacceptable health risks, or for other reasons.

The timing 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, the existence of competitive clinical trials, and the availability of alternative treatments. Delays in planned patient enrollment may result in increased costs and prolonged clinical development. In addition, patients may withdraw from a clinical trial for a variety of reasons. If we fail to accrue and maintain the number of patients into one of our clinical trials for which the clinical trial was designed, the statistical power of that clinical trial may be reduced which would make it harder to demonstrate that the products being tested in such clinical trial are safe and effective.

Regulatory authorities, clinical investigators, institutional review boards, data safety monitoring boards and the hospitals at which our clinical trials are conducted all have the power to stop our clinical trials prior to completion. If our studies are not completed, we would be unable to show the safety and efficacy required to obtain marketing authorization for our products.

We may not be able to obtain marketing approvals for our products, which would materially impair our ability to generate revenue.

We are not able to market any of our products in the United States, Europe or in any other jurisdiction without marketing approval from the FDA, the European Commission, or any equivalent foreign regulatory agency. The regulatory process to obtain marketing approval for a new drug or biologic takes many years and requires the expenditure of substantial resources. This process can vary substantially based on the type, complexity, novelty and indication of the product candidate involved.

In August 2001, the European Commission granted marketing authorization of Replagal in the European Union, approximately one year after we submitted our MAA to the European Agency for the Evaluation of Medicinal Products, or EMEA, and approximately five years after we filed our investigational new drug application, or IND, with the FDA. The FDA never approved Replagal in the United States and, in January 2004, we withdrew our BLA for Replagal. We are continuing to seek marketing approval for Replagal in a number of other countries in the world. We may not obtain approvals in one or more of these countries when we anticipate receiving such approval, if at all. Approval in Japan has been delayed and we do not know when, or if, we will receive such approval.

We are currently conducting a pivotal clinical trial of I2S in 96 patients with Hunter syndrome at nine sites around the world. If the results are positive, we expect to submit applications for marketing approval in the United States and in the European Union in the second half of 2005. However, even if we submit such applications, the FDA, the European Commission and other regulatory agencies to which we submit applications may not agree that our product is safe and effective and may not approve our product.

Although the European Commission has granted marketing approval of Dynepo in the European Union, Dynepo has not been approved in the United States. In 2000, Aventis Pharmaceuticals, Inc., a subsidiary of Sanofi-Aventis, submitted a BLA to the FDA seeking marketing authorization for Dynepo in the United States. The FDA did not accept the BLA for filing, and requested that Sanofi-Aventis provide additional manufacturing data. Sanofi-Aventis has not yet submitted the requested additional data to the FDA, and we cannot predict whether or when Sanofi-Aventis will do so.

There can be no assurance as to whether or when any of our applications for marketing authorization relating to any of our products, including Replagal, I2S, and Dynepo, or additional applications for marketing authorization that we may make in the future as to these or other products, will be approved by the relevant regulatory authorities. Among other things, we have had only limited experience in preparing applications and obtaining regulatory approvals. If approval is granted, it may be subject to limitations on the indicated

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uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor safety or efficacy of the product. For example, there are conditions associated with our European Union approval of Replagal, including an obligation to conduct additional clinical trials and an obligation to submit an annual assessment of Replagal for review by the Committee for Medicinal Products for Human Use, or CHMP. If we do not complete these clinical trials on a timely basis or the results of these trials are not satisfactory to the CHMP, the European Commission may withdraw or suspend our Replagal approval. If approval of an application to market a product is not granted on a timely basis or at all, or we are unable to maintain our approval, our business may be materially harmed.

We may not be able to obtain orphan drug exclusivity for our products for the treatment of rare genetic diseases. If our competitors are able to obtain orphan drug exclusivity for their products, we may not be able to have our competitive products approved by the applicable regulatory authority for a significant period of time.

Some jurisdictions, including the European Union and the United States, may designate drugs for relatively small patient populations as “orphan drugs.” Orphan drug designation must be requested before submitting an application for marketing authorization. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process, but does make the product eligible for orphan drug exclusivity and, in the United States, certain tax credits. Generally, if a product with 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. Orphan drug exclusivity means that another application to market the same drug for the same indication may not be approved for a period of up to 10 years in the European Union, and for a period of seven years in the United States, except in limited circumstances set forth in the U.S. Food, Drug and Cosmetic Act and its implementing regulations, which we refer to as the FDA law. Obtaining orphan drug designations and orphan drug exclusivity for our products for the treatment of rare genetic diseases may be critical to the success of these products. Our competitors may obtain orphan drug exclusivity for products competitive with our products before we do as Genzyme did with its Fabrazyme product in the United States, as discussed below. Even if we obtain orphan drug exclusivity for any of our potential products, we may not be able to maintain it. For example, if a competitive product is shown to be clinically superior to our product, any orphan drug exclusivity we have obtained will not block the approval of such competitive product.

In August 2001, the European Commission granted marketing authorization of Replagal in the European Union. The European Commission also granted marketing authorization of Genzyme Corporation’s Fabrazyme product in the European Union in August 2001. In connection with these approvals, the European Commission granted Replagal and Fabrazyme co-exclusive orphan drug status in the European Union for up to 10 years.

In April 2003, Genzyme received marketing authorization in the United States for Fabrazyme. Because Fabrazyme had received orphan drug designation in the United States, upon its marketing approval, Fabrazyme received orphan drug exclusivity. Because Fabrazyme received marketing approval in the United States before Replagal and received orphan drug exclusivity, the FDA may not approve Replagal and Replagal will be excluded from the United States market for seven years, until April 2010, unless we receive approval to market and sell Replagal in the United States and we can demonstrate that Replagal satisfies the limited criteria for exceptions set forth in the FDA law. In January 2004, we withdrew our BLA for Replagal. We will not be able to market Replagal in the United States unless we resubmit, and obtain the FDA’s approval of, our BLA for Replagal.

In November 2001, our I2S product for the treatment of Hunter syndrome was designated an orphan drug in the European Union and in the United States. If our I2S product is the first such product to receive marketing approval for Hunter syndrome, then our I2S product will be entitled to orphan drug exclusivity and no other application to market the same drug for the same indication may be approved, except in limited circumstances, for a period of up to 10 years in the European Union and for a period of seven years in the

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United States. If we are not able to maintain this orphan drug exclusivity, our business may be adversely affected.

If we fail to comply with the extensive regulatory requirements to which we and our products are subject, our products could be subject to restrictions or withdrawal from the market and we could be subject to penalties.

The testing, manufacturing, labeling, advertising, promotion, export, and marketing, among other things, of our products, both before and after approval, are subject to extensive regulation by governmental authorities in the United States, Europe and elsewhere throughout the world. Failure to comply with the law administered by the FDA, the EMEA, or other governmental authorities could result in any of the following:

•		delay in approving or refusal to approve a product;
•		product recall or seizure;
•		interruption of production;
•		operating restrictions;
•		warning letters;
•		injunctions;
•		criminal prosecutions; and
•		unanticipated expenditures.

For example, the European Commission approved Replagal under “exceptional circumstances.” Approval under exceptional circumstances means that the European Commission accepted less-than-complete clinical data because it determined that it would be impractical or unethical for the drug sponsor to carry out full-scale pivotal clinical trials. The European Commission imposes specific obligations on the drug sponsor when granting such approvals. These obligations form part of the formal marketing authorization issued by the European Commission and are reviewed by the CHMP at the intervals specified, minimally on an annual basis. The annual review includes a reassessment of the overall benefit/risk ratio of the product. If the drug sponsor does not fulfill the specific obligations imposed in connection with approval, the European Commission may vary, suspend or withdraw the marketing authorization for the product. The European Commission required us as part of its post-approval requirements for Replagal to conduct additional clinical trials of Replagal. If we do not complete these clinical trials on a timely basis, the results of these studies are not satisfactory to the CHMP or we otherwise fail to comply with the conditions imposed on us pursuant to the approval under exceptional circumstances, the European Commission could withdraw or suspend its approval of Replagal. Because Replagal is currently our only commercial product, the withdrawal or suspension of the European Commission’s approval of Replagal could materially adversely affect our business, results of operations and financial condition.

We are required to maintain pharmacovigilance systems for collecting and reporting information concerning suspected adverse reactions to our products. In response to pharmacovigilance reports, regulatory authorities may initiate proceedings to revise the prescribing information for our products or to suspend or revoke our marketing authorizations. Procedural safeguards are often limited, and marketing authorizations can be suspended with little or no advance notice.

Both before and after approval of a product, quality control and manufacturing procedures must conform to current good manufacturing practice regulations, or cGMP. Regulatory authorities, including the EMEA and the FDA, periodically inspect manufacturing facilities to assess compliance with cGMP. Accordingly, we

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and our contract manufacturers will need to continue to expend time, monies, and effort in the area of production and quality control to maintain cGMP compliance.

In addition to regulations adopted by the EMEA, the FDA, and other foreign regulatory authorities, we are also subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and other federal, state, and local regulations.

If we fail to obtain marketing authorizations in a timely manner, our costs associated with clinical trials will increase.

After completion of a clinical trial designed to show safety or effectiveness, we often enroll patients taking our products in maintenance clinical trials in which these patients continue to receive treatment with our products pending approval for marketing authorization in the relevant jurisdiction. We receive no payments for such treatment. The costs associated with maintaining open-ended maintenance clinical trials can be significant. If we fail to obtain marketing authorizations in a timely manner for the product being tested in such trials, our costs associated with these maintenance clinical trials will increase and we may continue to supply the product for use in clinical trials without remuneration to us.

Our research and development efforts may not result in products appropriate for testing in human clinical trials.

We expend significant resources on research and development and preclinical studies of product candidates. However, these efforts may not result in the development of products appropriate for testing in human clinical trials. For example, our research may result in product candidates that are not expected to be effective in treating diseases or may reveal safety concerns with respect to product candidates. We may postpone or terminate research and development of a product candidate or a program at any time for any reason such as the safety or effectiveness of the potential product, allocation of resources or unavailability of qualified research and development personnel.

Adverse events in the field of gene therapy may impair our ability to enter into collaborative arrangements for our gene therapy programs.

In connection with our restructuring in the first quarter of 2003, we terminated internal development of our gene therapy programs and now are seeking collaborators with which to continue to develop these programs. Adverse events in the field of gene therapy, although not occurring in our clinical trials, may impair our ability to generate value from our gene therapy programs or to enter into collaborations for our programs. In particular, in November 1999, a patient with a rare metabolic disorder died in a gene therapy trial conducted at the University of Pennsylvania. In addition, in October 2002, a French boy developed a leukemia-like disease nearly three years after participating in a gene therapy study as a baby. As a result of these and other events, a number of gene therapy clinical trials have been terminated or suspended in the United States and in other countries, and regulatory authorities have grown increasingly concerned about the safety of gene therapy.

Litigation and intellectual property risks

We are a party to litigation with Amgen Inc. involving Dynepo which could preclude us from manufacturing or selling Dynepo in the United States.

In April 1997, Amgen commenced a patent infringement action against us and Sanofi-Aventis in the United States District Court of Massachusetts. In January 2001, the United States District Court of Massachusetts concluded that Dynepo infringed eight of the 18 claims of five patents that Amgen had asserted. Amgen did not seek and was not awarded monetary damages. This decision was subsequently appealed to the United States Court of Appeals for the Federal Circuit.

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In January 2003, the United States Court of Appeals for the Federal Circuit issued a decision affirming in part and reversing in part the decision of the United States District Court of Massachusetts and remanded the action to the United States District Court of Massachusetts for further proceedings. In particular, the United States Court of Appeals for the Federal Circuit:

•		upheld the United States District Court of Massachusetts’ determination of invalidity of one of Amgen’s patents;
•		upheld the United States District Court of Massachusetts’ determination that some claims of two other Amgen patents were infringed, but vacated the United States District Court of Massachusetts’ determination that those patents were not invalid; and
•		vacated the United States District Court of Massachusetts’ determination that Dynepo infringed some claims of the two remaining Amgen patents, and vacated the United States District Court of Massachusetts’ determination that one of these patents was not invalid.

As part of the United States Court of Appeals for the Federal Circuit’s ruling, it remanded the case to the United States District Court of Massachusetts and instructed it to reconsider the validity of Amgen’s patents in light of potentially invalidating prior art. The United States District Court of Massachusetts concluded the remand proceedings in July 2003. The United States District Court of Massachusetts also issued a decision upholding its January 2001 findings that Amgen successfully rebutted the presumption of prosecution history estoppel with respect to certain of its patents, and therefore, that we and Sanofi-Aventis infringe such patents in light of recent Supreme Court precedents. On remand, we and Sanofi-Aventis presented affirmative defenses with respect to such patents. In October 2004, the United States District Court of Massachusetts issued a decision on the remanded issues, finding that certain claims related to four patents held by Amgen are valid and infringed by us. We intend to appeal the decision of the United States District Court of Massachusetts to the United States Court of Appeals for the Federal Circuit.

We can provide no assurance as to the outcome of the appeal. If we and Sanofi-Aventis are not successful in the Dynepo litigation at the appellate level, we and Sanofi-Aventis would be precluded from making, using and selling Dynepo in the United States. We are required to reimburse Sanofi-Aventis, which controls the litigation and is paying the litigation expenses, for 50% of the expenses incurred in connection with the litigation from and after March 26, 2004. Sanofi-Aventis is entitled to deduct up to 50% of any royalties that Sanofi-Aventis may otherwise owe us with respect to the sale of Dynepo until Sanofi-Aventis has recouped the full amount of our share of the litigation expenses. We have the right to control any other litigation that might arise outside of the United States and are responsible for all litigation expenses incurred in connection with such litigation from and after March 26, 2004.

We are a party to litigation with Serono involving gene activation which could preclude us from using certain gene activation methods in the production of our products.

In August 2004, Applied Research Systems ARS Holding N.V., a wholly-owned subsidiary of Serono, served the Company with an amended complaint that was filed in the U.S. District Court of Massachusetts alleging that the Company infringes Serono’s ‘071 patent which purportedly covers certain methods of gene activation. In the original complaint, Serono appealed an adverse decision by the Board of Patent Appeals and Interferences of the U.S. PTO in an interference proceeding between Cell Genesys and Serono regarding the ‘071 patent declared in 1996. In June 2004, the PTO held that both Serono and Cell Genesys were entitled to certain claims in their respective patent and patent application, and both parties appealed the decision on the interference. The Company was not a party to this interference. In October, 2004, the Company filed a motion to dismiss the amended complaint.

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We can provide no assurance as to the outcome of the Serono litigation. If we are not successful in the gene activation litigation, we would be precluded from using certain methods of gene activation currently used in the development of our products. This could have a materially adverse effect on our business.

We are a party to a shareholder lawsuit and a derivative action regarding the adequacy of our public disclosure which could have a material adverse affect on our business, results of operations and financial condition.

In January and February 2003, various parties filed purported class action lawsuits against us and Richard Selden, our former Chief Executive Officer, in the United States District Court for the District of Massachusetts. The complaints generally allege securities fraud during the period from January 2001 through January 2003. Each of the complaints asserts claims under Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, and alleges that we and our officers made false and misleading statements and failed to disclose material information concerning the status and progress for obtaining United States marketing approval of our Replagal product to treat Fabry disease during that period.

In March 2003, various plaintiffs filed motions to consolidate, to appoint lead plaintiff, and to approve plaintiff’s selections of lead plaintiffs’ counsel. In April 2003, various plaintiffs filed a Joint Stipulation and Proposed Order of Lead Plaintiff Applicants to Consolidate Actions, To Appoint Lead Plaintiffs and to Approve Lead Plaintiffs’ Selection of Lead Counsel, Executive Committee and Liaison Counsel. In April 2003, the Court endorsed the Proposed Order, thereby consolidating the various matters under one matter: In re Transkaryotic Therapies, Inc., Securities Litigation, C.A. No. 03-10165-RWZ.

In July 2003, the plaintiffs filed a Consolidated and Amended Class Action Complaint, which we refer to as the Amended Complaint, against us; Dr. Selden; Daniel Geffken, our former Chief Financial Officer; Walter Gilbert, Jonathan S. Leff, Rodman W. Moorhead, III, and Wayne P. Yetter, members of our board of directors; William R. Miller and James E. Thomas, former members of our board of directors; and SG Cowen Securities Corporation, Deutsche Bank Securities Inc., Pacific Growth Equities, Inc. and Leerink Swann & Company, underwriters of our common stock in prior public offerings.

The Amended Complaint alleges securities fraud during the period from January 4, 2001 through January 10, 2003. The Amended Complaint alleges that the defendants made false and misleading statements and failed to disclose material information concerning the status and progress for obtaining United States marketing approval of Replagal during that period. The Amended Complaint asserts claims against Dr. Selden and us under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and against Dr. Selden under Section 20(a) of the Exchange Act. The Amended Complaint also asserts claims based on our public offerings of June 29, 2001, December 18, 2001 and December 26, 2001 against each of the defendants under Section 11 of the Securities Act of 1933 and against Dr. Selden under Section 15 of the Securities Act; against SG Cowen Securities Corporation, Deutsche Bank Securities, Pacific Growth Equities, Inc., and Leerink Swann & Company under Section 12(a)(2) of the Securities Act. The plaintiffs seek equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs.

In September 2003, we filed a motion to dismiss the Amended Complaint. A hearing of the motion occurred in December 2003. In May 2004, the United States District Court for the District of Massachusetts issued a Memorandum of Decision and Order denying in part and granting in part our motion to dismiss the purported class action lawsuit. In the Memorandum, the Court found several allegations against us arose out of forward-looking statements protected by the “safe harbor” provisions of the PSLRA. The Court dismissed those statements as falling within the PSLRA’s safe harbor provisions. The Court also dismissed claims based on the public offerings of June 29, 2001 and December 18, 2001 because no plaintiff

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had standing to bring such claims. The Court allowed all other allegations to remain.

In June 2004, we submitted an unopposed motion seeking clarification from the Court that the Memorandum dismissed claims based on the first two offerings as to all defendants. The Court granted the motion.

In July 2004, the plaintiffs voluntarily dismissed all claims based on the third offering because no plaintiff had standing to bring such claims.

The plaintiffs subsequently filed a motion seeking permission to notify certain of our investors of the dismissal of the claims based on the offerings, and to inform those investors of their opportunity to intervene in the lawsuit. We filed an opposition to this motion in July 2004. The Court has not yet ruled on this motion. We filed an answer to the Amended Complaint on July 16, 2004. The plaintiffs then filed a motion for class certification in July 2004. Any opposition to this motion is due in December 2004. A hearing on class certification is scheduled to be held in January 2005.

In April 2003, South Shore Gastrointerology UA 6/6/1980 FBO Harold Jacob, and Nancy R. Jacob Ttee filed a Shareholder Derivative Complaint against Dr. Selden; against the following members of our board of directors: Jonathan S. Leff, Walter Gilbert, Wayne P. Yetter, Rodman W. Moorhead III; against the following former members of our board of directors: James E. Thomas, and William Miller; and against us as nominal defendant, in Middlesex Superior Court in the Commonwealth of Massachusetts, Civil Action No. 03-1669. On May 29, 2003, the parties moved to transfer venue to the Business Litigation Session in Suffolk Superior Court in the Commonwealth of Massachusetts. The parties’ motion was allowed, and in June 2003 the matter was accepted into the Business Litigation Session as Civil Action No. 03-02630-BLS.

The complaint alleges that the individual defendants breached fiduciary duties owed to us and our shareholders by disseminating materially false and misleading statements to the market and causing or allowing us to conduct our business in an unsafe, imprudent and unlawful manner. The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary duty, and to assert a claim for contribution and indemnification on behalf of us for any liability we incur as a result of the individual defendants’ alleged misconduct. The complaint seeks declaratory, equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs. In August 2003, the plaintiff filed its Verified Amended Derivative Complaint, which we refer to as the Amended Derivative Complaint. The Amended Derivative Complaint alleges that the individual defendants breached fiduciary duties owed to us and our stockholders by causing us to issue materially false and misleading statements to the public, by signing our Form 10-Ks for the years 2000 and 2001 and by signing a registration statement. The Amended Derivative Complaint also alleges that defendant Dr. Selden sold our stock while in possession of material non-public information. The plaintiffs seek declaratory, equitable and monetary relief, an unspecified amount of damages, with interest, and attorney’s fees and costs.

In September 2003, we filed a motion to dismiss the Amended Derivative Complaint. A hearing of the motion was held in January 2004. In May 2004, the Court granted our motion to dismiss. In June 2004, the plaintiff filed a Notice of Appeal appealing the dismissal of the Amended Derivative Complaint to the Massachusetts Court of Appeals.

As of September 30, 2004, we had spent approximately $1.4 million related to these lawsuits. We expect that the costs related to these suits will be significant. We can provide no assurance as to the outcome of any of these suits. If we are not successful in defending these actions, our business, results of operations and financial condition could be materially adversely affected. In addition, even if we are successful, the defense of these actions may divert the attention of our management and other resources that would otherwise be engaged in running our business.

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The SEC is investigating us regarding our public disclosures and filings, as well as transactions in our securities, which could have a material adverse effect on our business, results of operations and financial condition.

In May 2003, we received a copy of a formal order of investigation by the SEC. The order of investigation relates to our disclosures and public filings with regard to Replagal and the status of the FDA’s approval process for Replagal, as well as transactions in our securities.

In July 2004, we and Dr. Richard F Selden, our former Chief Executive Officer, received “Wells” notices from the staff of the SEC, in connection with its investigation. The Wells notices state that the SEC staff has preliminarily determined to recommend that the Commission bring a civil action for possible violations of the federal securities laws in which it may seek an injunction and civil penalties against us, and an injunction, disgorgement, and an officer and director bar as to Dr. Selden. We are cooperating fully and will continue to cooperate fully with the SEC in the investigation. As of September 30, 2004, we had spent approximately $1.6 million related to this matter.

If this investigation results in a determination that we have failed to properly disclose information relating to Replagal and the status of the FDA’s approval process for Replagal or that there were improper transactions in our securities, we could be subject to substantial fines or penalties and other sanctions. An adverse determination could have a material adverse effect on our business, results of operations and financial condition. However, at this time, we cannot accurately predict the outcome of this proceeding. In addition, even if we are successful, this investigation may divert the attention of our management and other resources that would otherwise be engaged in running our business.

We may become involved in additional and expensive patent litigation or other proceedings, which could result in our incurring substantial costs and expenses or substantial liability for damages or require us to stop our development and commercialization efforts.

The biotechnology industry has been characterized by significant litigation, and other proceedings regarding patents, patent applications, and other intellectual property rights. We may become a party to additional patent litigation beyond the Amgen and Serono litigation described above and to other proceedings with respect to our products and technologies.

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 or product that is at issue or to license the technology or product 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. In addition, any such litigation or proceeding will divert management’s attention and resources. 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 develop, manufacture, and market products, form collaborations, and compete in the marketplace.

If we are unable to obtain and maintain patent protection for our discoveries, the value of our technology and products may be adversely affected.

Our success will depend in large part on our ability to obtain and maintain patent protection for our processes and products in the United States and other countries. The patent situation in the field of biotechnology generally is highly uncertain and involves complex legal, scientific and factual questions. We may not be issued patents relating to our technology or products. Even if issued, patents may be challenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in patent

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laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

Our patents also may not afford us protection against competitors with similar technology. Because some patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing or are maintained in secrecy until patents issue from those patent applications, 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. For this reason, we cannot be certain that we were the first to make the inventions claimed in issued patents or pending patent applications, or that we were the first to file for protection of the inventions set forth in these patent applications. As a result, third parties could assert claims against us concerning our gene activation or other technology.

Our overall patent strategy with respect to our gene activation technology and our protein products made using our gene activation technology is to attempt to obtain patent coverage for gene activation of the gene that encodes the product, the composition of matter of the product, the method of making the product, cells or cell lines capable of expressing the product, and the genetic constructs used to obtain the product. We have been unable to obtain patent claims in all categories with respect to all of our Gene-Activated protein products. Nonetheless, while our patent portfolio may afford us protection against competitors with similar technology and competitors which attempt to make products in human cell or cell lines, it may not afford us protection against all competitors, such as those who make the same products in mouse, rodent, bacterial or yeast cells.

The expiration dates for the patents and patent applications covering our principal products are as follows:

•		Replagal—The principal issued patents and patents that may issue from pending patent applications covering Replagal expire or will expire in the United States at various dates from 2011 to 2023, and in Europe at various dates from 2012 to 2023.
•		I2S—The principal issued patents and patents that may issue from pending patent applications covering I2S expire or will expire in the United States at various dates from 2015 to 2024, and in Europe in 2024.
•		GA-GCB—The principal issued patents and patents that may issue from pending patent applications covering GA-GCB expire or will expire in the United States at various dates from 2011 to 2020 and in Europe at various dates from 2012 to 2021.
•		Dynepo—The principal issued patents and patents that may issue from pending patent applications covering Dynepo expire or will expire in the United States at various dates from 2011 to 2015, and in Europe in 2012.

Third parties may own or control patents or patent applications and require us to seek licenses, which would increase our development and commercialization costs, or prevent us from developing or marketing our products or technologies.

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. Therefore, in some cases, in order to develop, manufacture, sell or import some of our existing and proposed products or processes, we may choose to seek, or be required to seek, licenses under third party patents or those patents that might issue from patent applications. In such event, we would be required to pay license fees or royalties or both to the licensor. If licenses are not available to us on acceptable terms, we or our collaborators may not be able to develop, manufacture, sell, use or import the affected products or processes.

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For example, we are aware of third party patents and patent applications that relate to gene activation. We believe that our gene activation technology does not infringe any third party patents that we believe to be valid. We use our gene activation technology to manufacture Replagal, Dynepo, GA-GCB and other products. If the use of our gene activation technology were found to infringe a valid third party patent, we could be precluded from manufacturing and selling such products and our business, results of operations and financial condition would be materially adversely affected.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products will be adversely affected.

We 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.

If we fail to comply with our obligations under the agreements under which we license commercialization rights to products or technology from third parties, we could lose license rights.

We are a party to over 20 patent licenses under which we have acquired rights to proprietary technology of third parties, including licenses to patents related to I2S and Dynepo, 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 and we could lose our license to use the acquired rights. If these rights are lost, we may not be able to market products that were covered by the license.

Business risks

Our revenue from product sales is dependent on the commercial success of Replagal.

Replagal is our only commercial product. We expect that Replagal will account for all of our product sales until at least the fourth quarter of 2005. The commercial success of Replagal will depend on its acceptance by physicians, patients and other key decision-makers for the treatment of Fabry disease. The commercial success of Replagal will also depend in part upon Replagal receiving marketing approval in Japan and other countries. We have ceased our efforts to seek the approval of Replagal in the United States. If Replagal is not commercially successful, our business, results of operations and financial condition will be materially adversely affected.

Our revenue from sales of Replagal and our cash held by TKT Europe are subject to foreign currency fluctuations.

We have exposure to currency risk for Replagal sales in Europe. Country-by-country pricing of Replagal was initially established as the local currency equivalent of between approximately $165,000 and $175,000 per patient per year for an average patient weighing 70 kilograms. The price generally remains fixed in the local currencies and varies in United States dollars with exchange rate fluctuations. Since the approval of Replagal in August 2001, the United States dollar has generally weakened versus most European currencies, including the Euro, which has resulted in increased revenues for us from sales of Replagal. If the United States dollar were to strengthen versus these currencies, this currency fluctuation would adversely impact our Replagal product sales. Foreign currency fluctuations favorably contributed $4.9 million to product sales for the nine months ended September 30, 2004 as compared to the same period of 2003, and $9.4 million to product sales for the year ended December 31, 2003 as compared to the same period of 2002.

We also have exposure to currency risk for cash and cash equivalents held by TKT Europe, which are primarily denominated in Swedish Krona, British Pound and Euro. Any change in the value of the United

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States dollar as compared to these foreign currencies may have an adverse effect on our liquidity. For example, a hypothetical 10 percent strengthening of the United States dollar relative to these foreign currencies would result in an approximate $7.3 million decrease in our cash and marketable securities held by TKT Europe as of September 30, 2004.

The continuity of our sales of Replagal in Europe and our ability to comply with SEC regulations may be affected by our ability to integrate the operations of TKT Europe.

In April 2000, we established an 80%-owned subsidiary, TKT Europe, for the purpose of marketing, selling and distributing Replagal in Europe. Under the stockholders’ agreement for TKT Europe, we agreed that the holders of the remaining 20% interest in TKT Europe would, with specified exceptions, manage the day-to-day operations of TKT Europe. As a result, our ability to successfully market and sell Replagal in Europe has been dependent on the efforts of the minority stockholders of TKT Europe.

In October 2004, we exercised our right under the stockholders’ agreement for TKT Europe to purchase the minority stockholders’ 20% ownership interest in TKT Europe in the fourth quarter of 2004 for a price determined in accordance with a formula based on sales of Replagal in Europe as set forth in the stockholders’ agreement. The purchase price for the transaction was $61.1 million.

As a result of this purchase, our ability to successfully market and sell Replagal in Europe now will depend in part on our ability to integrate the functions of TKT Europe into our infrastructure. In addition, if we cannot retain the founding executives of TKT Europe and the existing marketing and sales personnel of TKT Europe for a sufficient period, it is likely that the current relationships that TKT Europe maintains with patients, physicians and other key decision-makers for the treatment of Fabry disease in Europe will be affected, which could adversely affect our business and results of operations in Europe, including our sales of Replagal, and could result in the loss of sales and market share for Replagal in Europe.

Substantially all of the sales of Replagal are transacted through and recorded by TKT Europe. As a result of the purchase, we will require the cooperation of the existing managers of TKT Europe to provide us with critical accounting and related financial information in order to enable us to report to investors, complete SEC filings, and complete Sarbanes-Oxley Section 404 compliance work, which involves documenting the operational design of TKT Europe’s internal controls and testing operating effectiveness of such controls, on a timely basis. In the event that we do not receive a timely flow of information from TKT Europe, our ability to comply with the regulatory requirements imposed on us by the SEC may be adversely affected, which could have a material adverse effect on our business.

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, such as our litigation with Amgen, could delay our time to market or preclude us from reaching the market for certain products and enable our competitors to more quickly and effectively penetrate certain markets.

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Therapeutics for the treatment of rare genetic diseases

We believe that the primary competition with respect to our products for the treatment of rare genetic diseases is from biotechnology and smaller pharmaceutical companies. Competitors include Actelion Ltd., BioMarin Pharmaceutical Inc., and Genzyme. The markets for some of the potential therapeutics for rare genetic diseases caused by protein deficiencies are quite small. As a result, if competitive products exist, we may not be able to successfully commercialize our products.

Our primary competition with respect to Replagal is Genzyme’s Fabrazyme. Replagal and Fabrazyme were each granted marketing authorization in the European Union and were also granted co-exclusive orphan drug status in the European Union for up to 10 years. Fabrazyme has received marketing authorization and orphan drug exclusivity in the United States.

We believe that our primary competition with respect to our GA-GCB product for the treatment of Gaucher disease will be Genzyme’s product for the treatment of Gaucher disease, Cerezyme.

Gene-Activated versions of proteins that would compete with currently-marketed proteins

We have developed several Gene-Activated protein products that would compete with proteins that are currently being marketed by third parties. For instance, in the case of Dynepo, competing products are marketed by Amgen, Johnson & Johnson, F. Hoffmann-La Roche Ltd. (Boehringer Mannheim GmbH), Sankyo Company Ltd., Chugai Pharmaceutical Co., Ltd., and the pharmaceutical division of Kirin Brewery Co., Ltd. in Japan. Additional competitors to Dynepo may emerge following the expiration of Amgen’s European patents in December 2004.

Many of the products against which our Gene-Activated protein products, such as Dynepo and GA-GCB, 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 often served as effective barriers to entry in the therapeutic proteins 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 protein products infringe their patents. Many of these companies are also seeking to develop and commercialize new or potentially improved versions of their proteins.

Gene therapy

Although we made a substantial investment in our gene therapy programs through March 2003, we have discontinued work in this area and believe, due to technical disappointments across the industry, that it is unlikely that we will be able to generate substantial revenue from its past investments in gene therapy.

The commercial success of our products will depend on the degree that the market is receptive to our products upon introduction.

The commercial success of any of our products for which we obtain marketing approval from the European Commission, the FDA, and other regulatory authorities will depend upon their acceptance by patients, the medical community and third-party payors as clinically effective, safe and cost-effective. It may be difficult for us to achieve market acceptance of our products.

Other factors that we believe will materially affect market acceptance of our products include:

•		the timing of the receipt of marketing approvals;
•		the scope of marketing approval as reflected in a product’s label;
•		the countries in which such approvals are obtained; and

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•

the safety, efficacy, convenience, and cost-effectiveness of the product as compared to competitive products.

If we cannot achieve market acceptance for our products, our business, results of operations and financial condition will be adversely affected.

We have limited manufacturing experience and may not be able to develop the experience and capabilities needed to manufacture our products in compliance with regulatory requirements. If we cannot develop this experience or capabilities, we may not be able to manufacture our products, the manufacture of our products may be subject to significant delays or we may incur significant costs.

The manufacture of proteins is complicated and technical. We have limited manufacturing experience. In order to continue to develop products, apply for regulatory approvals, and commercialize our products, we will need to develop, contract for, or otherwise arrange for the necessary manufacturing capabilities. We have manufactured, and plan to continue in the future to manufacture, the bulk drug substance for Replagal, I2S and GA-GCB for preclinical testing, clinical trials, and commercial sale. We have engaged Lonza to manufacture Dynepo bulk drug substance and intend to engage additional third-party contract manufacturers for the preparation and packaging of Dynepo bulk drug substance into finished product for us.

Any manufacturing of our products must comply with cGMP as required by the countries in which we intend to sell our products. Before approving an application for marketing authorization for a product, the FDA, the European Commission, or any other equivalent foreign regulatory agency will inspect the facilities at which the product is manufactured. If we or our third-party manufacturers do not comply with applicable cGMP, such regulatory agency may refuse to approve our application for marketing authorization. Once the regulatory agency approves a product, we or our third-party manufacturers must continue to comply with cGMP. If we or our third-party manufacturers fail to maintain compliance with cGMP, adverse consequences can result, including suspension or withdrawal of an approved product from the market, operating restrictions, and the imposition of civil and criminal penalties.

We have modified our manufacturing facility to increase the scale of the process used to produce bulk drug substance for Replagal. In the European Union, we need to obtain regulatory approval of an amendment to our MAA describing these modifications and associated scale changes for Replagal before we can sell Replagal manufactured using this modified scale process. If we cannot obtain this regulatory approval, we will not be able to sell Replagal manufactured using these processes.

In some of our manufacturing processes, we use bovine-derived serum sourced from Canada and the United States. The discovery of cattle in both Canada and the United States with bovine spongiform encephalopathy, or mad cow disease, could cause the regulatory agencies in some countries to impose restrictions on our products, or prohibit us from using our products at all in such countries.

We are incurring significant costs to expand and renovate our manufacturing facility. Any delays in completing the expansion and renovation of our facility and bringing the facility into compliance with cGMP could adversely affect our ability to supply the bulk drug substance needed to manufacture our products other than Dynepo.

We are investing substantial funds to expand the capacity of our manufacturing facility in Cambridge, Massachusetts and to configure the facility for the production at a commercial scale of additional products. In anticipation of this expansion and renovation, in the third quarter of 2003, we ceased all manufacturing operations at our manufacturing facility, including the manufacture of Replagal. We recommenced manufacturing operations at our manufacturing facility in June 2004. We need to comply with cGMP before we can ship bulk drug substance made at our manufacturing facility for commercial sale and clinical trials. If we are unable to successfully bring the facility into compliance with cGMP, our ability to supply our products for

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commercial sale and clinical use, including Replagal, I2S and GA-GCB, could be interrupted and our sales of Replagal and the timing of our I2S or GA-GCB clinical trials could be adversely affected.

We depend on third party contract manufacturers for various aspects of the manufacture of Replagal, I2S and GA-GCB, including the preparation and packaging of TKT-manufactured bulk drug substance into finished product, and plan to depend entirely on third party contract manufacturers for the manufacture of Dynepo. If these manufacturers fail to meet our requirements or applicable regulatory requirements, our product development and commercialization efforts may be materially harmed.

To the extent that we are a party to 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. For instance, other than with respect to the manufacturing of the bulk drug substance for Replagal, I2S, and GA-GCB, we rely on contract manufacturing arrangements with third parties for all aspects of the manufacture of our products, including the preparation and packaging of TKT-manufactured bulk drug substance into finished product. Each of these manufacturing arrangements relates to only some aspects of the manufacturing process. In the event that any one of these manufacturers fails to or is unable to comply with its obligations under its manufacturing, agreement with us, and if the manufacturer’s failure materially delays the ultimate production of Replagal, I2S, or GA-GCB or adversely affects our inventory levels, our sales of Replagal or the timing of our I2S or GA-GCB clinical trials could be adversely affected.

In July 2004, we entered into a manufacturing agreement with Lonza under which Lonza agreed to manufacture Dynepo bulk drug substance at Lonza’s cGMP production facility in Slough, UK. In the future, we plan to enter into arrangements with contract manufacturers for the preparation and packaging of Dynepo bulk drug substance into finished product, work with our contract manufacturers to set up and validate manufacturing processes, and obtain the approval of an amendment to the approved MAA for Dynepo reflecting the new manufacturing sites by the European Commission. We intend to commercialize Dynepo by entering into arrangements with third parties for the sales and marketing of Dynepo. If we cannot establish contract manufacturing arrangements on favorable terms or at all, successfully set up and validate manufacturing processes or obtain the approval of the European Commission, we will not be able to sell Dynepo in the European Union when planned, which could result in Dynepo being subject to additional competition and which would adversely affect our cash resources.

The value of the inventory under the control of our third party contract manufacturers far exceeds the amount of liability such third parties are willing to assume for their negligence. In the event that inventory in the possession of one of our third-party manufacturers is damaged, we could face significant financial losses and we could also experience an interruption in supply which could have a significant adverse affect on our sales.

There are a limited number of third-party manufacturers capable of manufacturing our protein products with a limited amount of production capacity. As a result, we may experience difficulty in obtaining adequate manufacturing capacity for our needs. If we are unable to obtain or maintain contract manufacturing of our products, or to do so on commercially reasonable terms, we may not be able to complete development of our products or market them.

If we fail to manage our inventory correctly, or our inventory is destroyed, damaged or expires, we could experience supply shortages and significant costs to build inventory or a significant build-up of high-cost products and raw materials, which could cause us to experience cash flow difficulties as well as financial losses.

Manufacture of proteins, including our products and potential products, is expensive and requires lengthy production cycle times. We build inventory of both bulk drug substance and of finished product in order to ensure the adequate supply to patients of our products and potential products, including Replagal and I2S. Accordingly, we have significant capital invested in inventory because of the high cost of manufacturing

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protein products, including Replagal and I2S. In the event that any of our facilities containing inventory are damaged, the inventory at the facility could be destroyed or damaged. We may not be able to produce or have produced replacement inventory on a timely basis or at all. We also have limited experience in managing our supply for Replagal and our other potential products. If we fail to keep an adequate inventory of our products, it is possible that patients could miss treatments, which could have an adverse effect on our ability to sell our products and on our clinical trials. Conversely, if we are unable to sell our high-cost inventory in a timely manner, or if our high-cost inventory were to be destroyed or expire, we could experience cash flow difficulties as well as financial losses.

Some of the raw materials used to manufacture our products are expensive and are available from a small number of suppliers. If we fail to keep an adequate inventory of our raw materials, it is possible that we would be unable to manufacture our products in a timely manner. Conversely, if we are unable to use our high-cost raw materials, or if our high-cost raw materials were to be destroyed or expire, we could experience cash flow difficulties as well as financial losses.

If we fail to obtain reimbursement, or an adequate level of reimbursement, by third-party payors in a timely manner for our products, or if we are unable to collect payment in a timely manner, we may not have commercially viable markets for our products.

In certain countries, including the countries of the European Union, Australia, and Canada, the pricing of prescription pharmaceuticals and the level of reimbursement are subject to governmental control. In some countries, it can take an extended period of time to establish and obtain reimbursement, and reimbursement approval may be required at the individual patient level, which can lead to further delays. In addition, in some countries such as Italy, Spain and Belgium, it normally takes an extended period of time to collect payment even after reimbursement has been established.

In the United States and elsewhere, 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. For example, in Germany, the reimbursement authority unilaterally reduced the price that it would reimburse for all pharmaceutical products, including Replagal, by six percent in 2003 and an additional 10 percent in 2004. In addition, in Australia, the reimbursement authorities have limited their overall budget for purchase of enzyme replacement therapy for Fabry disease to $10,000,000 Australian dollars, and in Canada, federal reimbursement authorities have a recommendation that is pending regarding reimbursement of Replagal by provincial authorities. Governmental and reimbursement authorities or third-party payors in other countries may attempt to control costs by limiting access to pharmaceutical products such as Replagal and the other products we are developing or by narrowing the class of patients for which a pharmaceutical product such as Replagal or the other products we are developing may be prescribed. If we are not able to obtain pricing and reimbursement at satisfactory levels for our products that receive marketing approval, our revenues and results of operations will be adversely affected, possibly materially.

We expect that the prices for many of our products, when commercialized, including in particular our products for the treatment of rare genetic diseases, may be high compared to other pharmaceutical products. For example, we have established pricing and reimbursement for substantially all patients receiving Replagal in the European Union. Country-by-country pricing was initially established as the local currency equivalent of between approximately $200,000 and $215,000 per patient per year for an average patient weighing 70 kilograms. The price generally remains fixed in the local currencies and varies in United States dollars with exchange rate fluctuations. We may encounter particular difficulty in obtaining satisfactory pricing and reimbursement for products for which we seek a high price.

We also may experience pricing pressure with respect to Replagal and other products for which we may obtain marketing approval in the United States due to the trend toward managed health care, the increasing influence of health maintenance organizations and legislative proposals. We may not be able to sell our products profitably if reimbursement is unavailable or is limited in scope or amount.

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We have limited sales and marketing experience and capabilities and will need to develop this expertise or depend on third parties to successfully sell and market our products on our behalf to generate revenue.

Except for TKT Europe with respect to the marketing and selling of Replagal, we have limited sales and marketing experience and capabilities, and limited resources to devote to sales and marketing activities. In order to market our products, including Replagal and Dynepo, we will need to develop this experience and these capabilities or rely upon third parties to perform these functions. We are seeking a marketing partner for Dynepo in Europe. 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, including Replagal, we may not be able to recruit and maintain sales and marketing personnel, which would adversely affect our sales efforts in Europe.

Competition for technical, commercial and administrative personnel is intense in our industry and we may not be able to sustain our operations or grow if we are unable to attract and retain qualified personnel.

While we do not feel that any single individual is indispensable, our success is highly dependent on the retention of principal members of our technical, commercial, and administrative staff.

Our future growth will require hiring a significant number of qualified technical, commercial 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. If we are not able to continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow.

We depend on our collaborators to develop, conduct clinical trials of, obtain regulatory approvals for, and manufacture, distribute, market and sell products on our behalf and their efforts may not be scientifically or commercially successful.

We are parties to collaborative agreements with third parties relating to certain of our principal products. We are relying on Genzyme to develop and commercialize I2S in Japan and certain other countries in Asia; on Sanofi-Aventis to develop, obtain regulatory approvals for, and manufacture, market, and sell Dynepo in the United States; and Sumitomo to develop and commercialize Replagal in Japan, Korea, China and Taiwan. We also use third party distributors to distribute Replagal in many areas of the world including Australia, Canada, Europe, and Israel. Our collaborators may not devote the resources necessary or may otherwise be unable or unwilling to complete development and commercialization of these potential products. Our existing collaborations are subject to termination without cause on short notice under specified circumstances. In some cases, we may not receive payments contemplated in the agreements with our collaborators if our collaborators fail to achieve certain regulatory and commercial milestones.

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:

•		reductions in marketing or sales efforts or a discontinuation of marketing or sales of our products by our collaborators would reduce our revenues;
•		under our collaboration agreements, we cannot conduct specified types of research and development and marketing and sales activities in the field that is the subject of the collaboration. These

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		agreements have the effect of limiting the areas of research and development that we may pursue, either alone or in cooperation with third parties;
•		our collaborators may underfund or not commit sufficient resources to the testing, marketing, distribution or other development of our products;
•		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 or that could affect our collaborators’ commitment to the collaboration with us;
•		our collaborators may not properly maintain or defend our intellectual property rights or they may utilize our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to potential liability;
•		our collaborators may terminate their collaborations with us, as Sanofi-Aventis has done with respect to our GA-GCSF product, 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.

If third parties on whom we rely for clinical trials do not perform as contractually required or as we expect, we may not be able to obtain regulatory approval for or commercialize our product candidates, and our business may suffer.

We do not have the ability to independently conduct the clinical trials required to obtain regulatory approval for our products. We depend on independent clinical investigators, contract research organizations and other third party service providers to conduct the clinical trials of our product candidates and expect to continue to do so. Although we rely heavily on these parties for successful execution of our clinical trials, we do not control many aspects of their activities. For example, the investigators are not our employees. However, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Third parties may not complete activities on schedule, or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our product candidates.

A significant portion of our revenues are concentrated among a limited number of significant customers. The loss of a significant customer could lower our revenues and adversely affect our business, results of operations and financial condition.

We have three significant customers who accounted for 18%, 12% and 12%, respectively, of our product sales in 2003. The same customers accounted for 8%, 6% and 22% of our product sales in 2002. The loss of any significant customer may significantly lower our revenues and adversely affect our business, results of operations and financial conditions.

We may be exposed to product liability claims and may not be able to obtain adequate product liability insurance. If we cannot successfully defend ourselves against such claims, we may incur substantial liabilities and may be required to limit commercialization of our products.

Our business exposes us to the risk of product liability claims that is inherent in the manufacturing, testing, and marketing of human therapeutic products. We maintain clinical trial liability insurance and product liability insurance in amounts that we believe to be reasonable. This insurance is subject to deductibles and coverage limitations. We may not be able to obtain additional insurance or maintain insurance on acceptable

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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 position. These liabilities could prevent or interfere with our product commercialization efforts.

If we fail to comply with SEC regulations relating to internal control over financial reporting, current and potential investors could lose confidence in our financial reports, which would harm our business and have an adverse effect on our stock price.

Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our future 10-K filings, beginning with our 10-K for 2004, a report on internal controls. This report must contain an assessment, as of the end of the year, of the effectiveness of our internal control structure and procedures for financial reporting. Section 404 also requires our independent auditors to attest to and report on the assessment made by management. In order to meet these requirements, we must document and test the effectiveness of our internal controls, allow time for our independent auditors to audit our internal control structure and remediate any deficiencies identified by us or our auditors.

We are working toward evaluating and documenting our internal controls in order to allow management to report on, and our independent auditors to attest to, our internal controls. However, this work is extensive and time consuming. In addition, substantially all of the sales of Replagal are transacted through and recorded by TKT Europe. We did not begin much of our Section 404 compliance work for TKT Europe until we completed the purchase of the minority interest in TKT Europe in October 2004. We can not be certain as to the timing of completion of our evaluation, testing and remediation actions or of the timing of our auditors. Because the Section 404 requirements are new, and interpretations and related implementation guidance have been evolving, estimating the time to complete the assessment of our internal controls is difficult. We may identify deficiencies as we move forward with our work which we will be unable to remediate by the end of the year.

If we and our auditors are unable to complete our Section 404 compliance work on a timely basis, we may be unable to state that our internal control over financial reporting is effective as of December 31, 2004 and our auditors may be unable to attest to our management’s assessment of our internal controls. If any of these events occurs, we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could harm our business and have an adverse effect on our stock price.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company maintains its investment portfolio consistent with its Investment Policy, which has been approved by the Board of Directors. The Company’s investment portfolio consists of investments only in U.S. government and agency obligations. The Company’s investments are also subject to interest rate risk and will decrease in value if market interest rates increase. However, due to the relatively short duration of the Company’s investments, interest rate risk is mitigated. The Company does not own derivative financial instruments in its investment portfolio.

Accordingly, the Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments which would require disclosure under this item.

As of September 30, 2004, the Company did not have any off-balance sheet arrangements.

The Company has exposure to currency risk for Replagal sales in Europe. Pricing was initially established as the local currency equivalent of an average annual per patient price of approximately $165,000 to $175,000. The price remains fixed in the local currencies and varies in United States dollars with exchange rate fluctuations. Foreign currency fluctuations favorably contributed approximately $1,490,000 and $4,870,000 to product sales for the three and nine months ended September 30, 2004, respectively, as compared to the same periods of 2003.

ITEM 4. CONTROLS AND PROCEDURES.

The Company’s management, with the participation of the Company’s President and Chief Executive Officer and its Vice President, Finance and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2004. Based on this evaluation, the Company’s President and Chief Executive Officer and its Vice President, Finance and Chief Financial Officer concluded that, as of September 30, 2004, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to its President and Chief Executive Officer and its Vice President, Finance and Chief Financial Officer by others within these entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change to the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2004, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II Other Information

ITEM 1. LEGAL PROCEEDINGS

The description of the legal proceedings set forth under note 9 of the Company’s condensed consolidated financial statements in this Quarterly Report on Form 10-Q are incorporated herein by reference.

ITEM 6. EXHIBITS

The Exhibits listed in the Exhibit index immediately preceding such Exhibits are filed as part of this Quarterly Report on Form 10-Q, and such Exhibit Index is incorporated herein by reference.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

* Filed herewith.

# Confidential treatment requested as to certain portions pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. Such portions have been omitted and filed separately with the Securities and Exchange Commission.