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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-21481
TRANSKARYOTIC THERAPIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 04-3027191
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
195 ALBANY STREET
CAMBRIDGE, MASSACHUSETTS 02139
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 349-0200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 5, 1999, the approximate aggregate market value of the voting
stock held by non-affiliates of the registrant was $214,000,000, based on the
last reported sale price of the registrant's Common Stock on the Nasdaq National
Market as of the close of business on March 5, 1999. There were 19,166,209
shares of Common Stock outstanding as of March 5, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Document 10-K Part
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Specifically Identified Portions of the Registrant's
Proxy Statement for the Annual Meeting of Stockholders
to be held on June 10, 1999 III
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PART I
ITEM 1. BUSINESS
SUMMARY
Transkaryotic Therapies, Inc. ("TKT" or "the Company") is a
biopharmaceutical company dedicated to the development and commercialization
of products based on its three proprietary development platforms--Gene
Activated(TM) proteins, Niche Protein(TM) products and gene therapy.
The Company's Gene Activation(TM) technology is a proprietary approach
to the large scale production of therapeutic proteins which does not require
the cloning of genes and their subsequent insertion into non-human cell
lines. Consequently, the Company believes its Gene Activation technology
avoids using patented approaches to protein production associated with such
conventional genetic engineering techniques which have served as effective
barriers to competition in the protein therapeutics market, which the Company
estimates is a $15 billion market (1998 worldwide revenues). As a result,
the Company believes it will be able to develop and successfully
commercialize a broad range of Gene Activated versions of proteins which have
proven medical utility, received marketing approval from regulatory
authorities and generated significant revenues in major markets. The
Company's most advanced Gene Activation development program is Gene Activated
erythropoietin ("GA-EPO(TM)"), which Hoechst Marion Roussel, Inc. ("HMRI"),
the Company's collaborative partner, advanced into Phase III trials in
September 1998. See "Item 3 -- Legal Proceedings."
TKT's Niche Protein platform is based on protein replacement for the
treatment of rare genetic diseases which are characterized by the absence of
certain metabolic enzymes. Since the defect in many of these disorders is
understood in depth, product development pathways have the potential to be
straightforward. The Company believes that manufacturing and marketing of
these products will require a relatively modest investment in infrastructure
and plans to commercialize these products itself. In December 1998, the
Company, in collaboration with the National Institutes of Health, initiated a
Phase II clinical trial of the alpha-galactosidase A protein ("alpha-gal") in
patients with Fabry disease.
The Company's gene therapy technology ("Transkaryotic Therapy(TM)") is a
non-viral, ex vivo system based on genetically modifying patients' cells to
produce and deliver therapeutic proteins for extended periods of time. In
preclinical animal studies, the Company's Transkaryotic Therapy system has
produced target proteins at therapeutic levels for the lifetime of the
experimental animals. In November 1998, the Company commenced a Phase I
clinical trial of TKT's gene therapy system for the long-term delivery of Factor
VIII for the treatment of hemophilia A.
GENE ACTIVATION: TECHNOLOGY BACKGROUND
PROTEIN PRODUCTION: THREE TECHNOLOGICAL WAVES. The therapeutic value of
certain proteins produced by the human body has been known for decades. One of
the major advances in 20th-century medicine was the development of systems for
the large-scale production of therapeutic proteins outside the body. For
example, prior to the development of a manufacturing process for insulin more
than seventy years ago, patients with Type I (juvenile onset) diabetes were
offered no effective treatment and generally died of starvation at an early age.
Following the development of pharmaceutical insulin preparations for injection,
Type I diabetics could live long and relatively normal lives. During this first
wave of protein production technology, proteins were generally purified from
human or animal tissue. Insulin, for example, was isolated from the pancreas of
pigs and cattle, and growth hormone, for the treatment of short stature, was
isolated from the pituitaries of cadavers.
During the second wave of protein production technology, based on the
cloning of human genes, proteins were manufactured using conventional genetic
engineering techniques. As a result, by the mid-1980's, it became routine to
engineer cells to produce therapeutic proteins at levels that were substantially
in excess of what could be obtained by purification from tissue. However, since
many of the proteins produced by conventional genetic engineering techniques had
previously been purified, the patent protection afforded to this second wave of
protein production technology tended to focus on the genes encoding therapeutic
proteins. Accordingly, many patents have been issued covering isolated and
purified DNA sequences encoding such proteins, various vectors used to insert
such DNA sequences into production cell lines, and cell lines modified by the
insertion of such DNA sequences.
TKT believes its proprietary Gene Activation technology represents the
third wave in the evolution of protein production technology in that it is based
on the activation of genes encoding therapeutic proteins in human cells rather
than the cloning and transfer of these genes. TKT's Gene Activation technology
avoids using the approach to protein production associated with the second wave.
The Company believes this will allow it to develop and commercialize a large
number of therapeutic proteins, including potentially improved versions of many
that are currently marketed.
GENE STRUCTURE AND REGULATION OF GENE EXPRESSION. Recent advances in
molecular biology, cell biology, and genomics have led to a much better
understanding of the structure and function of human genes than was possible
only a few years ago. It is now generally accepted that virtually all genes
contain certain DNA sequences that provide information necessary for the cell to
assemble a specific sequence of amino acids that make up a protein ("coding DNA
sequences"). Thus each gene can be viewed as the blueprint for a particular
protein, and "gene expression" is the process which leads to the synthesis of
the protein it encodes. Gene expression is controlled by certain DNA sequences
which function as switches that "turn on" the gene and trigger the synthesis of
the protein ("regulatory DNA sequences"). Despite the staggering variety of
proteins synthesized by the cells of the body, this process is universal.
Essentially every human cell contains the same set of approximately 100,000
genes, but each cell type actually produces only a subset of the 100,000
proteins possible. For example, although essentially all human cells contain
the insulin gene, only certain cells of the pancreas actually produce insulin.
The regulatory switches that turn on gene expression in the appropriate cell
type also turn off gene expression in all other cell types. For this reason,
only pancreatic cells express insulin--the regulatory DNA sequences normally
associated with the insulin gene prevent expression elsewhere in the body.
TKT's Gene Activation technology is based on activating previously silent genes
by bypassing regulatory DNA sequences set in the "off position" with regulatory
DNA sequences set in the "on position."
CONVENTIONAL RECOMBINANT PROTEIN PRODUCTION. By the 1970's, the clinical
benefits of several proteins were well-known and the potential benefit of many
others was envisioned. Based on a series of basic discoveries in the 1960's and
1970's, scientists learned to clone and manipulate genes of therapeutic
interest, leading directly to the birth of the biotechnology industry and the
large scale production of therapeutic proteins. To produce large quantities of
a therapeutic protein using conventional genetic engineering techniques,
scientists first clone the relevant human gene by isolating the coding DNA
sequences for the gene from the human cell and transferring them to bacteria,
where large quantities of the gene are copied. The cloned gene is then isolated
from the bacteria and placed in a test tube. In this test tube, the cloned gene
is then fused to appropriate regulatory DNA sequences, and the resulting DNA
fragment containing both the regulatory DNA sequences and the coding DNA
sequences is inserted into a non-human (mammalian, yeast, or bacterial) cell.
This genetically modified cell is then propagated in large bioreactors for
commercial-scale production of the protein.
TKT'S GENE ACTIVATION TECHNOLOGY
Although the conventional approach to recombinant protein production is
quite powerful, its use today faces certain commercial barriers and technical
limitations. The primary barrier is that biotechnology companies have sought
and obtained patent protection covering many of the techniques used to produce
commercially-marketed proteins using conventional genetic engineering
techniques.
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These patent rights have served as an effective entry barrier, minimizing
competition in the $15 billion protein therapeutics market (1998 worldwide
revenues). In addition, conventional genetic engineering techniques for protein
production may face technical limitations arising from the need to first clone
the gene of interest. For certain proteins, this step adds to development
times, increases costs and is technically challenging. Technical difficulties
may also arise from the use of non-human production cell lines, which may result
in the production of proteins which may have therapeutically significant
differences from those naturally produced by the cells of the human body.
Furthermore, production processes based on conventional genetic engineering may
not have incorporated recent advances in cell culture systems with significant
efficiency and cost advantages as compared to processes originally developed
over a decade ago.
To overcome these commercial barriers and technical limitations, TKT has
developed Gene Activation technology for the production of therapeutic proteins
that does not rely on the manipulation of cloned genes. Using its proprietary
technology, TKT has succeeded in producing therapeutic proteins in human cells
by bypassing regulatory DNA sequences set in the "off position" with regulatory
DNA sequences set in the "on position" in order to activate the gene of
interest. The Company's Gene Activation technology does not require the
manipulation of the protein coding DNA sequences of the gene. The bypass of an
"off switch" with an "on switch" is accomplished by "gene targeting."
Gene targeting is a technology by which DNA fragments can be "cut and
pasted" precisely at pre-selected, desirable locations within the cell's
genome. Gene targeting can be thought of as molecular surgery, with the
surgical tools literally functioning at the molecular level. The technical
term for gene targeting, homologous recombination, reflects its underlying
mechanism: cells have the capacity to align two homologous DNA sequences (two
sequences that are quite similar) and exchange one with the other. In Gene
Activation, the new regulatory sequences are flanked with "homing" sequences
and structural sequences which allow the cell to exchange the new active
regulatory sequences in place of the old inactive ones. The new sequences
must be introduced precisely in order to allow the proper initiation of gene
expression.
In order to manufacture a protein of therapeutic interest using Gene
Activation, a human cell line producing the protein must be generated. This
cell line will ultimately become the master cell bank for large scale
manufacturing and is generated as follows:
1. Determine the sequence of a portion of the regulatory DNA
sequences that control the gene of interest;
2. Build a "targeting fragment" by fusing homing sequences to a new
regulatory region known to be active in the human cell line
chosen for manufacturing;
3. Introduce the targeting fragment into the cell line;
4. Identify and propagate an activated cell line producing the
protein of interest; and
5. Optimize protein productivity and prepare the cell line for
commercial scale manufacturing.
The Company has successfully accomplished all of the steps described
above for GA-EPO and its second, undisclosed Gene Activated product ("GA-II").
The results of TKT's work in this area have led to proof-of-concept that (i)
gene targeting can be used to direct the integration of regulatory and
structural sequences to a specific, pre-selected position in the genome, (ii)
the product of the targeting event is a cell containing an activated gene and
(iii) the protein production properties of cells created by Gene Activation
are predictable and suitable for, and have been successfully used in,
large-scale manufacturing. Accordingly,
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the Company believes that these methods may be used to express a wide variety of
therapeutically valuable proteins at levels suitable for large-scale
manufacturing purposes. Because the Gene Activation process avoids many of the
technical limitations of conventional recombinant protein production technology,
the Company also believes that the Gene Activation process is at least as
efficient as, and may be more cost effective than, conventional genetic
engineering techniques for protein production.
TKT'S GENE ACTIVATION PRODUCTS
The Company's initial strategy in exploiting its technology is to
commercialize Gene Activated proteins that have proven medical utility, have
received marketing approval from regulatory authorities and have achieved
significant revenues in major markets. These protein products have experienced
high rates of acceptance among physicians and health care providers. The
Company believes, based primarily on information obtained from annual reports of
public companies and other published sources, that the total sales of the ten
largest marketed proteins in 1998 was approximately $15 billion. See Table I.
As the number of new approved protein products increases and as the number of
approved indications for such products increases, the Company believes that the
market for these protein products will continue to experience substantial
growth. The Company also believes that the broad applicability of its Gene
Activation technology for protein production and the fact that many additional
proteins are currently in clinical development will provide a large number of
candidates for commercialization using TKT's Gene Activation technology.
TABLE I. COMPANY ESTIMATE OF 1998 WORLDWIDE PROTEIN PRODUCT REVENUES (IN
MILLIONS)
PROTEIN PRIMARY INDICATION REVENUES
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Erythropoietin Anemia $3,900
Insulin Diabetes 2,800
G-CSF Neutropenia 1,900
Growth Hormone Short stature 1,500
alpha Interferon Hepatitis/Cancer 1,300
Factor VIII Hemophilia A 1,300
beta Interferon Multiple sclerosis 800
FSH Infertility 800
tPA Myocardial infarction 400
Glucocerebrosidase Gaucher disease 400
TKT has focused its initial Gene Activation efforts on the development of
its GA-EPO product in collaboration with HMRI. Erythropoiesis is the process by
which red blood cells (erythrocytes) are produced. When the body requires
additional red blood cells, the kidney normally produces erythropoietin, a
circulating protein hormone which stimulates the differentiation of certain
progenitor cells in the bone marrow. The kidney's critical role in red blood
cell production was determined in the 1950's, and erythropoietin was first
isolated and purified from the urine of patients with anemia in the 1970's (the
first wave). The gene encoding erythropoietin was cloned in the 1980's and used
for production of the protein using conventional genetic engineering techniques
(the second wave). Erythropoietins have been successfully used to treat anemia
associated with a variety of conditions, including the anemia of kidney failure
(which causes a reduction in the body's ability to produce the protein) and the
anemia of chemotherapy (which causes the destruction of a large number of bone
marrow progenitor cells).
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GA-EPO DEVELOPMENT STATUS. TKT has successfully applied its Gene
Activation technology to produce GA-EPO in human cells (the third wave). To
illustrate the underlying concept of the Gene Activation process, consider that
essentially all human cells contain the erythropoietin gene, yet only certain
cells of the kidney actually produce erythropoietin. In all other cells in the
human body, the erythropoietin gene is inactive. The erythropoietin gene is not
expressed in most human cells because regulatory sequences in those cells
prevent the protein from being made; the gene is controlled by a switch
("regulatory DNA sequences") that is permanently in the "off" position. The
goal of TKT's GA-EPO program was to remove this "off switch" in a human cell in
which the erythropoietin gene is inactive and, in effect, replace it with
regulatory sequences comprising an "on switch" to activate erythropoietin
expression.
TKT has generated a GA-EPO producing cell line that has been scaled up to
commercial production levels. To accomplish this, TKT first studied the
regulatory region that prevents expression of the erythropoietin gene in most
human cells and developed an activation strategy. Next, a targeting fragment
was constructed by fusing certain homing sequences to a new regulatory region
known to be active in the human cell line chosen for manufacturing. The
targeting fragment was then introduced into the cell line under conditions
appropriate for homologous recombination to occur, and a resulting cell line
that produced GA-EPO was identified. The GA-EPO productivity of the cell line
was optimized, and the cells were prepared for commercial-scale manufacturing.
The production process is at commercial scale and has been successfully used to
produce GA-EPO for clinical trials.
The purified protein has been subjected to an extensive series of analyses
and has the properties expected of a human erythropoietin preparation. In
particular, the protein has an appropriate molecular weight, amino acid
composition, amino acid sequence, secondary structure, and glycosylation
profile. GA-EPO has been shown to function in vitro and in vivo in a
dose-dependent manner. Finally, preclinical safety tests performed to date have
yielded satisfactory results.
In a Phase I study completed in 1997 by HMRI, twelve healthy volunteers
were administered GA-EPO. The goal of the study was to assess safety of GA-EPO
administration. The study demonstrated that GA-EPO exhibited a satisfactory
safety profile and resulted in a dose-dependent increase in hematocrit.
In 1998, HMRI completed a Phase II study of GA-EPO. Thirty-two patients
with end stage renal disease were treated in two dosage groups. The Phase II
trial resulted in no adverse events related to GA-EPO and demonstrated a
dose-dependent increase in hematocrit.
In September 1998, HMRI commenced Phase III trials of GA-EPO, the goal of
which is to support a Biologics License Application ("BLA") for U.S. FDA
approval for the indications of renal failure in patients who are receiving
dialysis and in patients who are not yet undergoing dialysis. Furthermore, the
clinical program has been designed to obtain FDA approval for intravenous and
subcutaneous administration of GA-EPO. The program is expected to be completed
by the end of 1999. During 1999, HMRI is expected to commence a Phase III trial
of GA-EPO for oncology related anemia. GA-EPO is being reviewed within the FDA
by the Center for Biologics Evaluation and Research ("CBER").
DEVELOPMENT STATUS OF OTHER GENE ACTIVATION PRODUCTS. In collaboration
with HMRI, TKT is developing GA-II. HMRI accepted for development the Gene
Activated cell line for GA-II in June 1997 and manufacturing is at commercial
scale. Pre-clinical testing is in progress, with satisfactory results
achieved to date. The Company expects HMRI to file an Investigational New
Drug application ("IND") for this product in 1999.
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TKT's third Gene Activated protein ("GA-III") is in pre-clinical testing.
Manufacturing scale-up is in process, and the Company expects to file an IND for
this product in late 1999 or early 2000. TKT is currently developing GA-III
independently.
TKT believes that numerous development opportunities exist for Gene
Activated proteins. In addition to the proteins discussed above, the Company is
currently developing four other Gene Activated proteins. These programs are in
the research or pre-clinical stage.
GENE ACTIVATION COLLABORATIONS AND COMMERCIALIZATION STRATEGY
In order to rapidly develop and exploit its Gene Activation technology, TKT
has entered into two strategic alliances with HMRI, the first in May 1994 and
the second in March 1995. HMRI, with its affiliates, is one of the largest
pharmaceutical groups in the world, with significant distribution capabilities
in all major markets. The alliances are focused on the development of two
products, GA-EPO and GA-II.
Under two licenses agreements, HMRI was granted worldwide exclusive rights
to make, use and sell the two products. HMRI is responsible, at its own
expense, for all worldwide development, manufacturing and marketing activities
for both products. Pursuant to the agreement pertaining to GA-II, TKT also
granted HMRI an option to commercialize certain aspects of TKT's gene therapy
technologies. As to both products, TKT has successfully generated cell lines
sufficient for scale-up to commercial production levels that have been accepted
and scaled up by HMRI.
TKT has the potential to receive up to $125,000,000 ($58,000,000 for GA-EPO
and $67,000,000 for GA-II) from HMRI from the two alliances, consisting of
license fees, equity investments, milestones and research funding. As of
December 31, 1998, TKT had received approximately $57,000,000 of such amount
(approximately $26,500,000 for GA-EPO and approximately $30,500,000 for GA-II).
The remaining payments are contingent upon the achievement of milestones in
connection with the continued development of these products. TKT also is
entitled to royalties on sales of these two products.
In December 1998, HMRI announced its intention to merge with Rhone-Poulenc
SA. The merger is expected to be completed in 1999, subject to regulatory
approval, and will create the second largest global pharmaceutical company.
Future Gene Activation products may include currently-marketed proteins,
proteins currently in late stage clinical development or proteins that are in
much earlier stages of development. At present, TKT intends to focus on the
currently-marketed products until products from these latter two categories
demonstrate clinical and commercial viability. TKT believes that its focus on
currently-marketed proteins for near-term commercialization and on
development-stage proteins for the long-term appropriately utilizes Company
resources, maximizes near-term commercial potential and will allow the Company
to build a strong Gene Activation product pipeline for the future.
NICHE PROTEIN(TM) PRODUCT DEVELOPMENT PLATFORM
It is well established that certain genetic diseases are caused by the
deficiency of a single, well-defined protein. Therefore, the most direct
approach to treatment is to manufacture the missing protein and administer it to
the patient. TKT's Niche Protein development is focused on developing protein
replacement products to treat patients suffering from rare genetic diseases
characterized by protein deficiencies such as Fabry disease, Gaucher disease,
Hurler syndrome, Hunter syndrome, Pompe disease, and Tay-Sachs disease.
Due to mutations in certain genes, individuals with these rare genetic
diseases are born lacking the ability to produce sufficient amounts of a
specific protein, resulting in symptoms which can be
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debilitating and, ultimately, life threatening. Unfortunately, no effective
treatment currently exists for most of these rare diseases. The Company plans
to develop and commercialize products for a number of these diseases, with the
goal of reducing symptoms and potentially reversing progression of the disease.
TKT'S NICHE PROTEIN(TM) DEVELOPMENT PROGRAMS AND COMMERCIALIZATION STRATEGY
The Company's product development strategy for its Niche Protein platform
is to leverage the Company's core competencies in gene expression, cell culture,
and protein characterization to create protein replacement products to treat
rare genetic diseases which are characterized by the absence of certain
metabolic enzymes. Since the defects in many of the diseases which the Company
intends to address with its Niche Protein platform are understood in depth,
product development pathways have the potential to be straightforward. The
Company is currently developing seven niche protein products, including
treatments for Fabry disease, Hunter syndrome, and Gaucher disease.
The Company believes that it will be able to arrange for manufacturing of
its Niche Protein products under the terms of contract manufacturing agreements.
In addition, the Company believes that it will be able effectively to serve
Niche Protein markets with a small, focused sales force, thereby limiting the
Company's investment in sales and marketing infrastructure. Thus, TKT views its
Niche Protein program as a nearer term opportunity to move into a series of
markets with a cost-effective, lower-risk approach and thereby build a
commercialization capability. TKT expects to develop and commercialize these
products in the U.S. and Europe and obtain collaborative partners for Japan.
FABRY DISEASE. TKT's first target in the Niche Protein program is Fabry
disease. Fabry disease is an X-linked lysosomal storage disease caused by the
deficiency of alpha-gal. The disorder is characterized by the accumulation of
lipids in lysosomes of vascular endothelial and smooth muscle cells and in a
variety of other tissues. Patients with classic Fabry disease of early onset,
generally in adolescence, show diverse clinical manifestations including
severe pain and cardiovascular and renal complications. It is estimated that
there are several thousand Fabry disease patients in the developed world.
Current treatment of the disease is limited to the reduction of symptoms.
Clinical trials of enzyme replacement therapy in the late 1970's have been
reported using infusions of alpha-gal purified from placenta, spleen or
plasma. The intravenous injection of the enzyme resulted in the transient
reduction in the plasma levels of the deleterious lipid.
The Company believes that enzyme replacement therapy could result in an
elimination of the medium- and long-term complications of the disease and in
an increased life expectancy and improved quality of life. In 1997, the
Company, in collaboration with the National Institutes of Health under a
collaborative research and development agreement ("CRADA"), conducted a Phase
I clinical trial designed to characterize the safety and pharmacokinetic
profile of alpha-gal. Ten patients with Fabry disease were treated with a
single dose of highly purified alpha-gal manufactured at TKT, with two
patients treated at each of five escalating dose levels. Plasma half-life and
alpha-gal enzyme activity were examined before and after treatment, along with
a series of clinical and laboratory safety assessments. Nine out of ten
patients showed a reduction of the toxic lipid that causes the symptoms of
Fabry disease, with the reduction observed in both liver and kidney. The
treatment was well-tolerated, and no clinically significant side-effects were
observed. The half-life of the enzyme appears to support dosing at intervals
of one week or longer.
The Company initiated Phase II trials of its alpha-gal product in
December 1998 with patients with Fabry disease. The 24 patient,
placebo-controlled trial is being conducted at the National Institutes of
Health and is expected to be completed by the end of 1999. The goal of the
study is to assess safety and efficacy of the alpha-gal protein as a treatment
for the disorder.
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The Company has received Fast Track designation for alpha-gal from the
FDA; accordingly, the FDA is expected to review the Company's BLA within six
months of submission. TKT has also received Orphan Drug status for alpha-gal,
potentially giving the Company a seven year market exclusivity in the U.S.
following FDA approval. The Company has entered into a contract manufacturing
agreement to produce alpha-gal. Development of a cell line for commercial
manufacturing has been completed.
In December 1998, the Company announced that it had entered into a
distribution agreement with Sumitomo Pharmaceuticals Co., Ltd. to commercialize
TKT's alpha-gal in Japan and other Asian territories. Under the terms of the
agreement, Sumitomo paid TKT an upfront fee of $2,000,000 and is obligated to
make additional payments to TKT as the product moves through development and
commercialization.
HUNTER SYNDROME. TKT's second target in the Niche Protein platform is
Hunter syndrome. Hunter syndrome is a X-linked lysosomal storage disorder
caused by a deficiency of the enzyme iduronate-2-sulphatase (I2S). As a result
of this deficiency, complex carbohydrates accumulate in cells of the body,
causing debilitating symptoms in the patient. Physical manifestations include
skeletal deformities, obstructive airway disease, cardiac failure and, in severe
cases, central nervous system involvement. Cardiac and respiratory illness are
often the cause of death at an early age in patients with the disorder. It is
estimated that there are several thousand Hunter syndrome patients in the
developed world.
The Company believes that I2S enzyme replacement therapy could result in an
elimination of many of the clinical manifestations associated with Hunter
syndrome and an increased life expectancy and quality of life. The Company
plans to file an IND covering its I2S product in late 1999 or early 2000. The
Company has entered into a contract manufacturing agreement to produce I2S. A
commercial quality cell line has been developed, and commercial scale up is
nearing completion.
GENE THERAPY TECHNOLOGY
TKT'S GENE THERAPY APPROACH. The first three waves of protein production
have a critical feature in common: regardless of methodology, the proteins are
manufactured outside the human body. The Company believes that its approach to
gene therapy, Transkaryotic Therapy, represents the fourth wave of protein
production--a system that would restore the patient's natural ability to
produce a required therapeutic protein.
TKT's approach to gene therapy is based on genetically modifying patients'
cells to produce and deliver therapeutic proteins for extended periods. The
Company believes the approach will be safe, cost-effective and clinically
superior to the conventional delivery of proteins by injection. In preclinical
animal studies, a single administration of one of the Company's gene therapy
products resulted in the lifetime production and delivery of therapeutic
proteins.
TKT believes its gene therapy system is broadly enabling and, accordingly,
may be applicable to the treatment of a wide range of human diseases. Because
TKT's gene therapy has demonstrated long-term delivery of therapeutic proteins
in animal model systems, the Company believes its approach may be well-suited to
the treatment of chronic protein deficiency states including hemophilia,
diabetes and hypercholesterolemia. The diseases targeted by TKT are
characterized by a significant unmet medical need, and the clinical goals that
must be achieved by TKT's gene therapy products are well-defined. The potential
benefits of TKT's gene therapy products include improved therapeutic outcome,
elimination of frequent painful injections and the problem of patient
compliance, a minimization of side effects due to over- or under-dosing of
conventional proteins and a reduction in costs.
There are a large number of technical approaches to gene therapy, but two
basic distinctions can be used to characterize the field. The first distinction
is viral versus non-viral. Viral gene therapy
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approaches use genetically modified viruses to introduce genes into human cells
by infection. Non-viral approaches use noninfectious (chemical or physical)
means to introduce the genes. The second distinction is in vivo versus ex vivo.
in vivo gene therapies are based on the administration of DNA-based drugs
directly to the patient. ex vivo gene therapies are based on removing a small
number of cells from a patient, introducing a gene into the cells and implanting
the engineered cells into the patient.
TKT's enabling gene therapy technology platform is a non-viral, ex vivo
system which the Company believes is significantly different from other
approaches to gene therapy. The Company believes that these differences will
allow for physiologic levels of protein expression in patients for extended
periods, a goal that historically has represented a major obstacle in
alternative gene therapy systems. The major alternative to TKT's system is
based on the use of genetically-modified retroviruses and adenoviruses to infect
patients' cells. The Company believes that such viral ex vivo approaches
present a significant safety risk due to the possibility of causing new viral
infections in patients. In addition, such approaches have not allowed long-term
production of the therapeutic protein in animal models or patients.
To the best of the Company's knowledge, neither viral nor non-viral in vivo
gene therapy technologies have allowed long-term or high level protein
expression in the patient. Accordingly, these technologies may be best-suited
for non-chronic applications, such as immunotherapy. TKT believes Transkaryotic
Therapy is well-suited to allow safe and long-term delivery of therapeutic
proteins for the treatment of chronic protein deficiency states as demonstrated
by the long-term delivery of therapeutic proteins in animal models.
In order to develop a safe, effective, non-viral, ex vivo gene therapy
system, the Company believes that several major tasks must first be accomplished
in basic and preclinical settings. Each of the steps must be carried out to
allow the ultimate product to be manufactured efficiently, reproducibly and
cost-effectively, to be subjected to rigorous quality control to ensure safety
and to direct the long-term production and delivery of the therapeutic protein
in the patient. The first step involves the development of techniques for
obtaining and propagating the cell types of interest. Next, non-viral
methodologies must be developed that allow DNA fragments to be stably introduced
into these cells. DNA fragments containing the appropriate DNA regulatory
sequences fused to the desired protein encoding sequences, for example, must be
constructed and introduced into cells to generate genetically-engineered cells
which express the therapeutic protein at clinically relevant levels. After the
DNA fragments have been successfully introduced into human cells, methodologies
must then be developed which allow the engineered cells to properly process the
therapeutic protein. The final step involves the development of methods and
formulations for the implantation of the engineered cells.
TKT scientists have successfully accomplished all of the tasks set forth in
Table II and, in model systems, have successfully delivered therapeutic proteins
for the lifetime of the experimental animals. Much of TKT's work has focused on
gene therapy using fibroblasts, a cell type present in the skin (and throughout
the body) that is readily obtained from patients and propagated in culture. The
Company has developed a variety of methodologies for the stable transfection of
normal human cells. "Stable transfection" means that the introduced DNA
fragment becomes part of a chromosome in the treated cell. One such methodology
is electroporation, a technique based on subjecting cells to a brief electrical
pulse. The pulse transiently opens small pores in the cell membrane that allow
the DNA fragments of interest to enter the cell. The technique is simple,
reproducible (it works for a variety of cell types and for cells derived from
newborns to the elderly), efficient (one electroporation provides many more
transfected cells than required for treatment) and cost-effective (less than one
dollar per reaction).
-9-
TABLE II. TKT'S GENE THERAPY SYSTEM: SUMMARY OF SELECTED TECHNICAL
ACCOMPLISHMENTS
TASKS ACHIEVEMENT COMMENTS
----- ----------- --------
Cell types propagated Fibroblasts, myoblasts, mammary epithelial Cells retain normal properties
cells
Proteins expressed Factor VIII, Factor IX, Growth Hormone, All expressed at levels of at least 1
Insulin, Interleukin-2, LDL receptor, alpha-gal ug/million cells/day
Transfection methodologies applied Electroporation, microinjection, polybrene All with efficiencies greater than 1
and calcium phosphate precipitation stably transfected cell per thousand
treated cells
Proteins characterized Factor VIII, Factor IX, Growth Hormone, All with natural post-translational
alpha-gal modifications
In vivo expression observed Factor VIII, Factor IX, Growth Hormone, All at physiologic levels in animal
Insulin models
The Company believes it has developed the basic technologies required for a
safe and effective gene therapy approach which can be refined and optimized for
patient use. In patients, TKT envisions that, in general, the system would
function as follows:
1. The clinician would identify the patient to be treated and
perform a small skin biopsy.
2. In TKT's manufacturing facility, patient cells would be harvested
from the biopsy specimen.
3. The DNA fragment containing DNA regulatory sequences and protein
coding sequences would be introduced into the harvested cells by
electroporation. The DNA fragment and the electroporation
methodology would be the same for all patients with a given
disease.
4. A genetically-engineered cell expressing the therapeutic protein
would be identified, propagated, subjected to appropriate
characterization and quality control tests and formulated in a
syringe. The syringe would then be returned to the physician.
5. The physician would then inject the engineered cells under the
patient's skin as an outpatient procedure.
These patient techniques have been successfully carried out in an ongoing
Phase I clinical trial of growth hormone as a treatment for cachexia (described
below). The procedures might vary based on the disease to be treated. For
example, different cell types, sites of implantation and genes of interest could
be advantageous for a given disease.
CLINICAL DEVELOPMENT STATUS. The Company's first gene therapy clinical
trial is a Phase I study based on the implantation of genetically modified skin
fibroblasts to express growth hormone in cancer patients at risk for cachexia.
The principal purpose of this study is to determine the safety of the Company's
gene
-10-
therapy in humans. At December 31, 1998, a total of 20 patients had been
enrolled in five escalating dosage blocks, with four patients per block.
Community physicians have injected the modified cells under the skin of
subjects; all patient procedures have been performed on an out-patient basis.
Preliminary data from this study suggests that the administration of the
genetically-engineered cells appears to be well-tolerated. Prior to
proceeding with further clinical development (beyond Phase I) of this product,
the Company intends to seek a collaborative partner.
In December 1998, the Company began the first clinical trial evaluating a
gene therapy treatment for hemophilia. Twelve patients will be enrolled in the
Phase I safety study, which will be conducted at the Beth Israel Deaconess
Medical Center in Boston, Massachusetts. The trial is expected to take up to
three years to complete, including a two year follow up period following the
treatment phase.
The Company believes that Transkaryotic Therapy offers several clinical and
commercial advantages over conventional treatments and other gene therapies for
targeted diseases, including:
- - SAFETY. Transkaryotic Therapy does not use infectious agents such as
retroviruses to genetically engineer the patient's cells. TKT's non-viral
method of producing genetically engineered cells allows for extensive
safety testing prior to implantation of such cells in the patient. In
studies of TKT's gene therapy system involving over 5,000 animals, no side
effects have been observed.
- - LONG-TERM EXPRESSION. Transkaryotic Therapy is designed to produce
long-term results with a single treatment. In preclinical animal studies,
the Company has produced target proteins at therapeutic levels for the
lifetime of the animals, suggesting the possibility of long-term
effectiveness in humans.
- - CONTROLLABILITY. Transkaryotic Therapy is designed to deliver therapeutic
proteins at levels which meet a patient's specific needs. The Company
believes that its gene therapy system will allow the physiologic and
pharmacologic regulation of expression. Further, the Company believes that
the treatment afforded by Transkaryotic Therapy will be readily reversible
so that therapy can be discontinued if no longer required.
- - FLEXIBILITY. The Company has focused on genetically-engineering a wide
variety of human cell types because, although certain cell types are useful
in the gene therapy of particular diseases, no single cell type is
appropriate for the gene therapy of all diseases.
- - EASE OF ADMINISTRATION. Transkaryotic Therapy will allow for the
administration of its products by a single injection under the patient's
skin on an out-patient basis. Furthermore, the potential long-term
effectiveness of the treatment could eliminate problems of patient
compliance.
- - COST-EFFECTIVENESS. Transkaryotic Therapy takes advantage of the patient's
natural ability to synthesize therapeutic proteins for extended periods.
The potential benefits of Transkaryotic Therapy include improved
therapeutic outcome, the elimination of frequent painful injections and
patient compliance problems, a reduction of side effects due to overdosing
and underdosing of conventional proteins and significant reductions in
cost. Accordingly, the Company believes that its therapy may be less
costly than therapy using conventional protein pharmaceuticals which
require frequent administration.
TKT'S GENE THERAPY DEVELOPMENT PROGRAMS AND COMMERCIALIZATION STRATEGY
The Company is focusing its development efforts on gene therapy products
for the treatment of chronic diseases with straightforward and
well-characterized etiologies. For certain of these diseases, such as
hemophilia A, effectiveness, dose ranges and safety have been clearly
established in the context of
-11-
currently approved and marketed products. For other diseases, preliminary in
vitro and animal model data strongly suggest that the long-term delivery of
appropriate therapeutic proteins will effectively treat the disease. The
Company believes that this initial focus will provide strategic advantages by
allowing evaluation of Transkaryotic Therapy based on well understood clinical
parameters, thereby facilitating the regulatory approval process. Furthermore,
the Company believes that when administered as part of its proprietary gene
therapy system, these proteins may provide therapeutic benefits not achievable
using conventional methods of delivery.
HEMOPHILIA A. When a blood vessel ruptures, an intricate series of events
allows the rapid formation of a clot in normal individuals. One of the
best-studied coagulation disorders is hemophilia A, caused by a deficiency or
defect in protein coagulation Factor VIII. Patients with the disease experience
acute, debilitating and often life-threatening bleeding episodes. Depending on
the severity of the disease, bleeding may occur spontaneously or after minor
trauma. Conventional treatment consists of temporarily increasing the patient's
Factor VIII levels through infusions of plasma-derived or recombinantly-produced
Factor VIII. Factor VIII levels typically rise to therapeutic levels for only
two to three days following intravenous administration, then return to the
baseline subtherapeutic level, once again placing the patient at risk for a
serious bleeding episode. It is estimated that there are about 19,000
hemophilia A patients in the U.S. and Canada, 25,000 in Europe, and 4,000 in
Japan. In the U.S., an adult suffering from the disease receives Factor VIII
protein treatment only during bleeding crises at an average annual cost of
approximately $65,000.
TKT's approach to the treatment of hemophilia A is based on the production
and delivery of Factor VIII using Transkaryotic Therapy. The Company believes
that its Factor VIII gene therapy product has the potential to provide a
constant supply of therapeutic levels of the missing protein, effectively
eliminating the problem of rapid disappearance of the therapeutic protein. The
Company has produced clonal populations of human fibroblasts which have been
transfected to express Factor VIII in vitro, demonstrated that the protein is
properly processed and achieved protein expression in animals. As described
above, the Company commenced Phase I clinical trials of its gene therapy
approach for the long-term delivery of Factor VIII in November 1998.
In July 1993, the Company entered into a Collaboration and License
Agreement with Genetics Institute, Inc. ("GI") relating to a joint development
and marketing program for a hemophilia A gene therapy product based on the
Company's non-viral technology. The agreement provides that the parties will
collaborate to develop and commercialize a non-viral gene therapy product for
the treatment of hemophilia A using TKT's proprietary technology and GI's
patented Factor VIII genes. Under the agreement, GI has granted TKT a
nonexclusive worldwide license under GI's patents covering truncated versions of
the gene encoding Factor VIII for use in certain non-viral gene therapy
applications. GI has agreed to pay a portion of the clinical development costs
of the product in the U.S., Canada and the European Community. TKT retained
exclusive manufacturing rights throughout the world and exclusive marketing
rights to all countries of the world except those in Europe. Subject to certain
conditions, GI received exclusive rights to market the product in Europe. The
agreement is terminable by GI in the event certain product development and
regulatory approval milestones are not reached.
LONG-TERM GENE THERAPY TARGETS. The Company's long-term gene therapy
product development strategy is focused on products for the treatment of
commonly occurring diseases, including both juvenile- and adult-onset diabetes,
hypercholesterolemia and osteoporosis. These are diseases for which either (i)
a proven therapeutic protein exists but effective treatment of the disease
requires complex patterns of regulation in the patient (for example, insulin is
widely used in the treatment of diabetes but delivery of insulin by conventional
methods is imprecise and does not prevent the serious complications of the
disease) or (ii) no protein has yet been proven effective in treating the
disease (for example, many proteins are thought to have potential in the
treatment of hypercholesterolemia, but that has yet to be proven conclusively in
patients).
-12-
MANUFACTURING. One of the critical aspects of any cell-based therapy is
the approach to manufacturing. The manufacturing process takes up to six weeks.
It is essential to optimize the process to allow for a commercially-viable
product, and the Company believes it has accomplished such optimization. To
produce early clinical materials, TKT has constructed a pilot manufacturing
facility designed to conform to FDA guidelines for Current Good Manufacturing
Practice ("cGMP"). For Phase III clinical trials and commercialization, TKT
intends to construct a cGMP-certified facility.
The Company intends to manufacture its gene therapy products in central
manufacturing facilities. Initially, the Company plans to construct a central
facility to serve the U.S. As the Company's product pipeline matures, the
Company believes that demand will increase, possibly requiring the Company to
construct an additional manufacturing facility in the U.S. Other gene therapy
companies have adopted a strategy based on locating a cell processing facility
in every large city (or potentially large hospital). TKT believes that the
requirements for strict quality control and the benefits of economy of scale are
better achieved using the central manufacturing strategy.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
PROPRIETARY ISSUES. For many currently marketed proteins, the product
manufactured using conventional genetic engineering techniques does not
represent the first time the protein was isolated and purified. As such, it was
generally not possible to obtain a broad composition of matter patent for many
of the currently marketed proteins. In contrast, the isolated and purified DNA
sequences encoding these proteins, various vectors used to insert such DNA
sequences into production cell lines, cell lines modified by the insertion of
such DNA sequences, and corresponding methods (including methods of producing
proteins using this approach) led to issued patents in many cases. TKT believes
that, by completely avoiding the use of isolated and purified DNA sequences
encoding proteins of commercial interest, the Company's technology does not
infringe claims based on isolated and purified DNA sequences encoding such
proteins. Furthermore, the Company intends to avoid the use of technologies
(such as specific protein purification procedures) that are the subject of
patents that are not limited to protein products manufactured using conventional
genetic engineering techniques.
Over the past decade, there has been a dramatic increase in the number of
approaches to gene therapy under development in both academic and industrial
laboratories. A large number of patent applications have been filed in the U.S.
and worldwide relating to this work, and a number of gene therapy patents have
issued to date. The Company requested, and the U.S. Patent and Trademark Office
(the "PTO") declared in January 1996, an interference regarding an issued patent
with broad claims to ex vivo gene therapy. The participants in the interference
are TKT, Genetic Therapy, Inc. (a wholly-owned subsidiary of Novartis AG),
Syntex (U.S.A.) (a wholly-owned subsidiary of Roche Holdings, Inc.), and Somatix
Therapy Corporation ("Somatix"). Somatix subsequently merged into Cell Genesys,
Inc. With the possible exception of the patent involved in the interference,
the Company believes its Transkaryotic Therapy technology does not infringe on
patents issued to date.
The PTO proceeding will determine the patentability of the subject matter
of the interference and which of the parties first developed this subject
matter. The process to resolve the interference can take many years. The
outcome of interferences can be quite variable: for example, none of the four
parties may receive the desired claims, one party may prevail, or a settlement
involving two or more of the parties may be reached. There can be no assurance
that TKT will prevail in this interference or that, even if it does prevail, the
Company can meaningfully protect its proprietary position.
In the event TKT does not prevail, a January 1997 Federal Trade Commission
("FTC") decision may then be relevant. The FTC entered a consent order to
resolve anticompetitive concerns raised by the merger of Ciba-Geigy Limited and
Sandoz Limited into Novartis AG. As part of the consent order, the constituent
entities of Novartis will be required to provide all gene therapy researchers
and developers
-13-
with non-exclusive licenses to the patent upon which Novartis is involved in the
interference. The Company has entered into an agreement with Somatix under
which the Company's ability to market its non-viral gene therapy products will
not be affected should Somatix win the interference.
At December 31, 1998, the Company had six issued U.S. patents and 28
pending patent applications in the U.S. to protect its proprietary methods and
processes. It has also filed corresponding foreign patent applications for
certain of these U.S. patent applications. The issued U.S. patents and patent
applications relate to the Gene Activation platform in general, DNA sequences
required for Gene Activation, vectors required for Gene Activation, cells
modified by Gene Activation, proteins produced by Gene Activation, corresponding
Gene Activation methods, the Transkaryotic Therapy platform in general, the
Niche Protein Platform in general, methods of propagating and transfecting
cells, methods for obtaining expression of therapeutic proteins and homologous
recombination in cells, and cells modified by the preceding methods.
The Company believes that protection of the proprietary nature of its
products and technology is important to its business. Accordingly, it has
adopted and will maintain a vigorous program to secure and maintain such
protection. The Company's practice is to file patent applications with respect
to technology, inventions and improvements that are important to its business.
The Company also relies upon trade secrets, unpatented know-how, continuing
technological innovation and the pursuit of licensing opportunities to develop
and maintain its competitive position. There can be no assurance that others
will not independently develop substantially equivalent proprietary technology
or that the Company can meaningfully protect its proprietary position.
As a general matter, patent positions in the fields of biotechnology and
biopharmacology are highly uncertain and involve complex legal, scientific and
factual matters. To date, there has emerged no consistent policy regarding the
breadth of claims allowed in biotechnology patents. Consequently, although TKT
plans to prosecute aggressively its applications and defend its patents against
third parties, there can be no assurance that any of the Company's patent
applications relating to the technology used by the Company will result in the
issuance of patents or that, if issued, such patents or the Company's existing
patents will not be challenged, invalidated or circumvented or will afford the
Company protection against competitors with similar technology. Any litigation
or interference proceedings regarding patent or other proprietary rights may
result in substantial cost to the Company, regardless of outcome, and, further,
may adversely affect TKT's ability to develop, manufacture and market its
products and to form strategic alliances.
The Company's technologies and potential products may conflict with patents
which have been or may be granted to competitors, universities or others. As
the biotechnology industry expands and more patents are issued, the risk
increases that the Company's technologies and potential products may give rise
to claims that they infringe the patents of others. Such other persons could
bring legal actions against the Company claiming damages and seeking to enjoin
commercialization of a product or use of a technology. If any such actions are
successful, in addition to any potential liability for damages, the Company
could be required to obtain a license in order to continue to use such
technology or to manufacture or market such product or could be required to
cease using such product or technology. There can be no assurance that the
Company would prevail in any such action or that any license required under any
such patent would be made available or would be made available on acceptable
terms. The Company believes that there may be significant litigation regarding
patent and other intellectual property rights in the fields of all three of its
product platforms.
In April 1997, Amgen Inc. ("Amgen") filed a civil action in the U.S.
District Court in Massachusetts against the Company and HMRI relating to GA-EPO
and the processes for producing GA-EPO. See "Item 3 - Legal Proceedings."
-14-
To further protect its trade secrets and other proprietary property, the
Company requires all employees, Scientific Advisory Board members, consultants
and collaborators having access to such proprietary property to execute
confidentiality and invention rights agreements in favor of the Company before
beginning their relationship with the Company. While such arrangements are
intended to enable the Company to better control the use and disclosure of its
proprietary property and provide for the Company's ownership of proprietary
technology developed on its behalf, they may not provide meaningful protection
for such property and technology in the event of unauthorized use or disclosure.
LICENSING. The Company has entered into several licensing agreements under
which it has acquired certain worldwide rights to use proprietary genes and
related technology in its non-viral gene therapy products. In particular, the
Company has a nonexclusive license for certain non-viral gene therapy
applications from GI with respect to GI's patented Factor VIII genes and a
nonexclusive sublicense for non-viral gene therapy applications from British
Technology Group plc ("BTG") with respect to BTG's patented Factor IX gene. In
addition, the Company has an exclusive license to certain pending and issued
patents from Women's and Children's Hospital, North Adelaide, Australia related
to certain mucopolysaccharidoses (MPS), including Hurler and Scheie syndrome
(MPS I), Hunter syndrome (MPS II) and Sanfilippo syndrome (MPS III). TKT's
rights under these gene licenses and sublicenses are for the term of the last to
expire patent included in the licensed patent rights. Although the Company is
not currently in default under any of these agreements, there can be no
assurance that such defaults will not occur in the future. Should such a
default occur and any of these licenses or sublicenses be terminated in the
future, the Company could lose the right to continue to develop one or more of
its potential products, which loss could have a material adverse effect upon the
Company's business.
COMPETITION
The Company believes that the primary competitive factors relating to the
products that it is developing include safety, efficacy, reliability,
distribution channels and price, and disease management services. In addition,
the length of time required for products to be developed and to obtain
regulatory and, in some cases, reimbursement approval are important competitive
factors. The biotechnology industry is characterized by rapid and significant
technological change. Accordingly, the Company's success will depend in part on
its ability to respond quickly to medical and technological changes through the
development and introduction of new products. The Company believes it competes
favorably with respect to these factors, although there can be no assurance that
it will be able to continue to do so.
Many of the Company's competitors have substantially greater financial and
other resources than the Company, including larger research and development
staffs and more experience and capabilities in conducting research and
development activities, testing products in clinical trials, obtaining
regulatory approvals and manufacturing, marketing and distributing products.
Smaller companies may obtain access to such skills and resources through
collaborative arrangements with pharmaceutical companies or academic
institutions.
There can be no assurance that TKT will succeed in developing and marketing
technologies and products that are more clinically efficacious and
cost-effective than existing established treatments or new approaches and
products developed and marketed by competitors. The development by others of
alternative or superior treatment methods could render the Company's products
obsolete or noncompetitive with respect to some or all of the competitive
factors described above. In addition, treatment methods not clearly superior to
the Company's could achieve greater market penetration through competitors'
superior sales, marketing or distribution capabilities.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection, secure licenses of
necessary genes and technology from third parties,
-15-
or otherwise develop proprietary products or processes and secure sufficient
capital resources for the typically substantial expenditures and period of time
prior to commercial sales of each product.
GENE ACTIVATION. At present, the Company considers its primary competition
with respect to its Gene Activation technology to be companies involved in the
current production of therapeutic proteins. These companies have obtained
patent protection covering many of the techniques used to produce
commercially-marketed proteins using conventional genetic engineering
techniques. These patent rights have served as an effective entry barrier in
the $15 billion protein therapeutics market (1998 worldwide revenues). Several
pharmaceutical and biotechnology companies have an established presence in the
field of therapeutic protein production. For example, erythropoietin is
marketed by Johnson & Johnson ("J&J") and Amgen in the U.S.; by Boehringer
Mannheim GmbH and J&J in Europe; and by Sankyo Company Ltd. and Chugai
Pharmaceutical Co., Ltd. in Japan.
NICHE PROTEINS. For many of the disease targets of the Company's Niche
Protein program, there is currently no cure or effective treatment. Treatments
are generally focused on the management of the disease's clinical symptoms,
particularly pain. In general, the Company believes that these diseases may
represent markets too small to attract the resources of larger pharmaceutical
companies, but provide attractive commercial opportunities to smaller
companies, such as TKT. The Company believes its major competition with respect
to Fabry disease and Gaucher disease to be Genzyme Corporation.
The Orphan Drug Act of 1983 generally provides incentives to manufacturers
to undertake development and marketing of products to treat relatively rare
diseases or diseases where fewer than 200,000 persons in the United States at
the time of application for Orphan Drug designation would be likely to receive
the treatment. The Company believes that many of the potential products in its
Niche Protein program will qualify as Orphan Drugs and intends to pursue Orphan
Drug designations, where appropriate. A drug that receives Orphan Drug
designation by the FDA and is the first product to receive FDA marketing
approval for its stated product claim is entitled to a seven-year exclusive
marketing period in the United States for that product claim.
There can be no assurance, however, that other companies will not seek an
Orphan Drug designation and obtain FDA marketing approval for a product
competitive with a Niche Protein product before the Company obtains such
approval. If another company obtains Orphan Drug marketing approval and
receives seven-year marketing exclusivity, it is possible that the Company would
not be permitted by the FDA to market a similar product in the United States
during the exclusivity period.
GENE THERAPY. The Company's gene therapy system will have to compete with
other gene therapy systems as well as with conventional methods of treating the
diseases and conditions targeted by the Company and new non-gene therapy
treatments which may be developed in the future. A number of commercial
entities, including major established biotechnology and pharmaceutical
companies, as well as development stage entities, currently are involved in the
field of human gene therapy.
GOVERNMENT REGULATION
All of the Company's products will require regulatory approval by U.S. and
foreign government agencies prior to commercialization in such countries. In
particular, protein therapeutics are subject to rigorous preclinical and
clinical testing, and other pre-market approval procedures administered by the
FDA and similar authorities in foreign countries. In addition, gene therapy is
a new technology, and regulatory approvals may be obtained more slowly than for
products produced using conventional technologies. In the U.S., various federal
and in some cases, state and local statutes and regulations also govern or
influence the manufacturing, labeling, storage, record keeping and marketing of
such products.
-16-
Obtaining approval from the FDA and other regulatory authorities for a
therapeutic product may take several years and involve substantial expenditures.
Moreover, ongoing compliance with applicable requirements can entail the
expenditure of substantial resources. Difficulties or unanticipated costs may
be encountered by the Company in its efforts to secure necessary governmental
approvals, which could delay or preclude the Company from marketing its
products.
The activities required before a new pharmaceutical agent may be marketed
in the U.S. begin with preclinical testing. Preclinical tests include
laboratory evaluation and animal studies to assess the potential safety and
efficacy of the product. The results of these studies must be submitted to the
FDA as part of an IND, which must be reviewed and cleared by the FDA before
proposed clinical testing can begin. Clinical trials are conducted in
accordance with specific federal regulations (known as Good Clinical Practices).
The clinical protocols detail the objectives of the study, the parameters to be
used to monitor safety and the efficacy criteria to be evaluated. Each clinical
protocol must be submitted to the FDA as part of an IND. Further, each clinical
study must be conducted under the auspices of an independent IRB at the
institution at which the study will be conducted. Each IRB will consider, among
other things, ethical factors, the safety of human subjects, and informed
consent.
Clinical trials are typically conducted in three sequential phases. In
Phase I, clinical trials typically include a small number of subjects (often
healthy volunteers) to determine the early safety profile and the pattern of
drug distribution and metabolism. In Phase II, clinical trials are conducted
with larger groups of patients afflicted with a specific disease in order to
further test safety and determine optimal dose amounts, dose schedules, and
routes of drug administration. In Phase III, larger-scale, multi-center,
comparative clinical trials are conducted with patients afflicted with a target
disease in order to provide enough data for a valid statistical test of efficacy
and safety required by the FDA and others. In the case of products for
life-threatening disease, the initial human testing may be done in patients
rather than healthy volunteers. Since these patients are already afflicted with
the target disease, it is possible that such studies may provide results
traditionally obtained in Phase II trials. These trials are frequently referred
to as Phase I/II trials. Although some of the Company's products are being
considered for patients with life-threatening diseases, there can be no
assurance that the FDA will allow Phase I/II studies, or that if Phase I/II
studies are permitted, that this study design would shorten the development time
for any of the Company's products. The FDA receives reports on the progress of
each phase of clinical testing, and it may require the modification, suspension,
or termination of clinical trials if, among other things, an unreasonable risk
is presented to patients, or if the design of the trial is insufficient to meet
its stated objective.
After completion of clinical trials of a new product, FDA marketing
approval must be obtained. License applications submitted to the FDA have
historically taken two to five years to receive approval. The Company expects
that its products will be regulated as biologics. Traditionally, both a
Product License Application and an Establishment License Application have been
required prior to commercial marketing. The FDA will be proposing regulations
to implement the new BLA provision in the Food and Drug Administration
Modernization Act of 1997 (the "Act"), which allows for a single license
application. The Act sets as a goal for the FDA, but does not require the
review and action on a complete license application within 12 months. In
addition, if the FDA determines that a product would be a significant
improvement in the safety or effectiveness of the treatment, diagnosis or
prevention of a serious or life threatening disease, the FDA may designate the
product for priority review, in which case the FDA's goal is to review and
act on the complete license application within six months of the submission
date. To the extent one of the Company's products might fall within the
existing or future BLA regulations for certain enumerated biotechnology
products, these regulations may provide guidance regarding FDA expectations.
If the FDA determines that an application is incomplete, or that important
issues are unanswered by the data in the application, approval times could be
delayed significantly. Notwithstanding the submission of relevant data, the
FDA may ultimately decide that the license application does not satisfy its
criteria for approval.
-17-
Even if FDA clearances are obtained, a marketed product is subject to
continual review. Later discovery of previously unknown problems or failure to
comply with the applicable regulatory requirements may result in restriction on
the marketing of a product or withdrawal of the product from the market as well
as possible civil or criminal sanctions. In addition, the manufacturing
facility for the Company's products will be subject to FDA inspection for
adherence to cGMP prior to marketing clearance and periodically following
approval. This will require the Company to observe rigorous manufacturing
specifications.
The Company believes that many of its Gene Activation products are likely
to be reviewed within the FDA by CBER. CBER currently has no "bioequivalence"
pathway for the rapid approval of closely-related biologics. The Company
believes that its Gene Activated products will be treated as new biologic
entities and require a complete regulatory and clinical program. However, these
programs may have the advantage of focusing on Gene Activated products with
conventional, previously approved, counterparts that are well-known to
regulatory authorities around the world (in contrast to a typical new biologic,
which has no related history concerning its safety and efficacy in humans).
In April 1996, the FDA issued a document entitled "FDA Guidance Concerning
Demonstration of Comparability of Human Biological Products, Including
Therapeutic Biotechnology-derived Products." This document describes situations
in which a manufacturer can make manufacturing changes and establish the
comparability of the product using physical, chemical, bioassay, preclinical
animal and/or pharmacological methods, without the need for additional clinical
trials.
In addition to regulations enforced by FDA, the Company is also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. The Company's research and development involves the controlled use
of hazardous materials, chemicals, biological materials and various radioactive
compounds. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company.
For marketing outside the U.S., the Company also is subject to foreign
regulatory requirements governing human clinic trials and marketing approval for
products. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary greatly from country to country.
EMPLOYEES
As of December 31, 1998, the Company had 178 full-time employees, including
155 in research and development. The Company's employees are not covered by any
collective bargaining agreement. TKT considers relations with its employees to
be good.
TRADEMARKS
TRANSKARYOTIC THERAPIES(TM), TKT(TM), TRANSKARYOTIC THERAPY(TM),
NICHE PROTEIN(TM), GA-EPO(TM), GENE ACTIVATED(TM), and GA(TM) are
trademarks of the Company.
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ITEM 2. PROPERTIES
The Company leases a total of approximately 108,000 square feet of
laboratory and office space in buildings located in Cambridge, Massachusetts.
These facilities include pilot facilities for gene therapy and protein product
manufacturing.
The Company's current facilities may not be adequate to accommodate the
Company's needs beyond 2000. The Company currently expects to meet its
facilities requirements through development of a new facility or conversion of
an existing building. The Company expects to seek financing for all or a
significant portion of the cost of any new facility.
ITEM 3. LEGAL PROCEEDINGS
In April 1997, Amgen filed a civil action in the U.S. District Court in
Massachusetts against the Company and HMRI, the Company's collaborative partner.
The complaint in the action alleges that the Company's Gene Activated
erythropoietin product ("GA-EPO") and processes for producing GA-EPO infringe on
Amgen's U.S. Patent Numbers 5,547,933, 5,618,698, and 5,621,080 and requests
that TKT and HMRI be enjoined from making, using, or selling GA-EPO and that the
court award Amgen monetary damages. In November 1997, TKT and HMRI filed a
Motion for Summary Judgment. On the same date, Amgen filed a Motion for Summary
Judgment of Infringement. TKT and HMRI opposed that motion, stating that there
has been no infringement.
In April 1998, the U.S. District Court granted TKT and HMRI's Motion for
Summary Judgment and denied Amgen's Motion for Summary Judgment on the ground
that all of TKT and HMRI's GA-EPO related activities to that date had been
solely for uses reasonably related to the production of information for
submission to the FDA for regulatory approval and, under the Hatch-Waxman Act,
do not constitute acts of patent infringement. The Court ordered Amgen's
remaining claim for declaratory judgment of future infringement administratively
closed, to be reopened upon motion of either party for good cause shown. The
Court also stated that issuance by the FDA of a product license presumably would
constitute good cause to reopen that claim. Finally, the Court stated that,
should the case be reopened and should Amgen seek preliminary equitable relief,
the Court will combine any hearing on a preliminary injunction with trial on the
merits. The Company expects that the case will be reopened.
Should the case be reopened, the Company can provide no assurance as to the
outcome of this litigation. A decision by the court in Amgen's favor, including
the issuance of an injunction against the making, use or sale of GA-EPO by the
Company and HMRI in the United States, or any other conclusion of the litigation
in a manner adverse to the Company and HMRI, would have a material adverse
effect on the Company's business, financial condition, and results of
operations.
Pursuant to the Amended and Restated License Agreement, dated March 1995,
by and between HMRI and the Company, HMRI assumed the cost of defense of the
suit by Amgen. The Company will reimburse HMRI for the Company's share of
litigation expenses, as defined, from future royalties, if any, received from
the sale of GA-EPO and in certain other circumstances.
There can be no assurance that the Company will not in the future become
subject, in the United States or any other country, to additional patent
infringement claims, interferences and other litigation involving patents, or
any patents that may issue on any pending patent applications, including Amgen
patent applications.
-19-
The Company is currently involved in a patent interference proceeding
before the PTO involving a patent and several patent applications in the gene
therapy field. See "Item 1 - Business--Patents- Proprietary Rights and
Licenses."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICES OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position held with the Company
---- --- ------------------------------
Richard F Selden, M.D., Ph.D. 40 President, Chief Executive Officer
Douglas A. Treco, Ph.D. 41 Senior Vice President, Research and
Development
Christoph M. Adams, Ph.D. 42 Vice President, Business Development
Daniel E. Geffken 42 Vice President, Finance, Chief Financial
Officer and Secretary
Kurt C. Gunter, M.D. 44 Vice President, Clinical and Regulatory
Affairs
Each officer's term of office extends until the first meeting of the Board
of Directors following the next annual meeting of stockholders and until a
successor is elected and qualified.
Richard F Selden, M.D., Ph.D. is the founder of TKT. He has served as
Chief Scientific Officer, Chairman of the Scientific Advisory Board and a
Director since the Company's inception in 1988 and as President and Chief
Executive Officer since June 1994. Prior to founding TKT, Dr. Selden was an
Instructor in pediatrics at Harvard Medical School. He received an A.B. in
Biology from Harvard College, an A.M. in Biology from the Harvard University
Graduate School of Arts and Sciences, a Ph.D. in genetics from the Division of
Medical Sciences at Harvard Medical School and an M.D. from Harvard Medical
School.
Douglas A. Treco, Ph.D. has directed research at the Company since its
inception in 1988. Since February 1997, he has served as the Senior Vice
President, Research and Development and from June 1993 to February 1997, he
served as Vice President, Director of Research and Development. Prior to
joining the Company, Dr. Treco was a Research Fellow in Genetics, Department of
Molecular Biology, Massachusetts General Hospital and Department of Genetics,
Harvard Medical School. He received a B.S. in Biology and Chemistry from the
University of Delaware and a Ph.D. in Biochemistry and Molecular Biology from
the State University of New York, Stony Brook.
Christoph M. Adams, Ph.D. has served as Vice President, Business
Development of the Company since March 1994. From May 1991 to February 1994,
Dr. Adams was Business Development Manager at the Pharmaceuticals Division of
Ciba-Geigy AG in Basel, Switzerland. Dr. Adams received a Ph.D. in Organic
Chemistry from the University of Zurich and a M.B.A. from INSEAD, Fontainebleau,
France.
-20-
Daniel E. Geffken has served as Vice President, Finance and Chief Financial
Officer of the Company since February 1997. From June 1993 to February 1997,
Mr. Geffken was Chief Financial Officer of CytoTherapeutics, Inc., a
biotechnology company, and from December 1995 to February 1997, he served as
Vice President. He received a B.S. in Economics from The Wharton School,
University of Pennsylvania and a M.B.A. from the Harvard Business School.
Kurt C. Gunter, M.D. has served as a consultant to the Company since
September 1993 and as Vice President, Clinical and Regulatory Affairs since July
1996. From September 1993 to June 1996, Dr. Gunter worked in the Department of
Laboratory Medicine at Children's National Medical Center, most recently as
Director of Stem Cell Processing, Hematology and Blood Donor Center. He
received a B.S. in Biological Sciences from Stanford University and an M.D. from
the University of Kansas School of Medicine.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock commenced trading on October 17, 1996 on the
Nasdaq National Market under the symbol "TKTX." As of March 5, 1999, there were
165 holders of record of the Company's Common Stock.
The following table sets forth for the fiscal periods indicated the range
of high and low closing prices for the Company's Common Stock on the Nasdaq
National Market.
HIGH LOW
---------- --------
1998
QUARTER ENDED:
December 31 . . . . . . . . . . . . . . . . . . . . . $ 25 15/16 $ 15 1/8
September 30 . . . . . . . . . . . . . . . . . . . . 30 19 1/8
June 30 . . . . . . . . . . . . . . . . . . . . . . . 36 25 3/4
March 31 . . . . . . . . . . . . . . . . . . . . . . 39 1/8 29
1997
QUARTER ENDED:
December 31 . . . . . . . . . . . . . . . . . . . . . $ 43 1/4 $ 27
September 30 . . . . . . . . . . . . . . . . . . . . 44 3/4 27 3/4
June 30 . . . . . . . . . . . . . . . . . . . . . . . 32 1/4 12 3/4
March 31 . . . . . . . . . . . . . . . . . . . . . . 25 3/4 17
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain all future
earnings, if any, to fund the development and growth of its business and does
not anticipated paying any cash dividends on its Common Stock in the foreseeable
future.
-21-
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company for the
five years ended December 31, 1998 are derived from the consolidated financial
statements of the Company. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included as Item 7 and the consolidated financial
statements and related footnotes included as Item 8 in this Form 10-K.
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994
STATEMENT OF OPERATIONS DATA
License and research revenues $ 5,325 $ 5,788 $ 4,225 $ 15,400 $ 10,000
Research and development expenses 25,617 18,111 14,019 10,529 9,126
Net income (loss) (19,965) (12,871) (11,972) 2,074 (3,422)
Basic net income (loss) per share (pro forma in (1.05) (0.74) (0.98) 0.19
1996 and 1995)
Shares used to compute basic net income (loss) per 19,052 17,394 12,262 10,862
share (pro forma in 1996 and 1995)
December 31,
(IN THOUSANDS) 1998 1997 1996 1995 1994
BALANCE SHEET DATA
Cash and marketable securities $110,155 $129,554 $ 86,255 $ 34,485 $ 7,579
Total assets 117,962 134,948 90,998 39,218 13,472
Redeemable preferred stock -- -- -- 4,440 4,230
Total stockholders' equity 113,646 131,749 89,644 33,541 7,073
The Company has implemented Statement of Financial Accounting Standards No.
128, "Earnings Per Share", which requires the presentation of both basic and
diluted earnings per share in the Consolidated Statements of Operations. The
per share amounts presented above and in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", are based on the
basic weighted average shares outstanding unless specifically identified as
diluted.
-22-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1988, Transkaryotic Therapies, Inc. (the "Company")
has been primarily engaged in the development and commercialization of products
based on the Company's three proprietary development platforms: Gene Activated
proteins, Niche Protein products and gene therapy. No revenues have been
derived from the sale of any products, and the Company does not expect to
receive revenues from product sales until at least 2000. The Company expects
that its research and development expenditures will increase substantially in
future years as product development efforts accelerate. With the exception of
1995, the Company has incurred substantial annual operating losses since
inception and expects to incur substantial operating losses in the future. At
December 31, 1998, the Company's accumulated deficit was $69,952,000. As a
result, the Company is dependent upon existing cash resources, interest income,
external financing from equity offerings, debt financings or collaborative
research and development arrangements with corporate sponsors to finance its
operations.
Results of operations may vary significantly from period to period
depending on, among other factors, the progress of the Company's research and
development efforts, the receipt, if any, of additional license fees and
milestone payments, the timing of certain expenses, and the establishment of
additional collaborative research agreements.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the accompanying
consolidated financial statements and the related footnotes thereto.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
License and research revenues totaled $5,325,000, $5,788,000 and $4,225,000
for the years ended December 31, 1998, 1997 and 1996, respectively. With the
exception of a $2,000,000 non-refundable upfront payment from Sumitomo
Pharmaceuticals Co., Ltd. relating to the development and commercialization of
the Company's Fabry disease product in Japan and other Asian countries in
1998, all other revenues in each fiscal year were earned from two collaborative
agreements with Hoechst Marion Roussel, Inc. ("HMRI").
Research and development expenses totaled $25,617,000 in 1998, as compared
to $18,111,000 in 1997 and $14,019,000 in 1996. The increase in 1998 of
$7,506,000, or 41%, was principally due to increases in external development
services, research and development staffing and laboratory supplies in each of
the Company's product development platforms. In particular, preclinical and
clinical costs for the Company's Fabry disease and hemophilia A programs, as
well as manufacturing costs associated with the Fabry disease program, were
significant components of the increase. During 1999, the costs related to both
preclinical and clinical programs are expected to increase significantly as
product development activities are initiated or expanded. The increase in 1997
of $4,092,000, or 29%, was principally due to an increase in external
development costs, research and development staffing and laboratory supplies
and expenses related thereto in each of the Company's product development
platforms.
General and administrative expenses were $6,409,000 for the year ended
December 31, 1998, compared with $6,279,000 and $4,729,000 in 1997 and 1996,
respectively. The increase in 1998 of
-23-
$130,000, or 2%, was principally due to increases in the number of
administrative staff. The increase in 1997 of $1,550,000, or 33%, was
principally due to increases in administrative employee costs and expenses
associated with being a publicly-held company. During 1999, general and
administrative costs are expected to increase significantly as the Company
begins to build sales, marketing and distribution capabilities related to the
commercialization of products in its Niche Protein product platform.
Interest income was $6,736,000, $5,731,000 and $2,551,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. The average cash and
marketable securities balances were $120,779,000, $102,161,000 and $48,673,000
in 1998, 1997 and 1996, respectively. The increases in interest income in 1998
and 1997 resulted generally from higher average balances in each of the years.
Higher average balances in the respective years resulted from the Company's
initial public offering in October 1996 and a follow-on offering in July 1997.
In 1998, the effect of the increase in average balances on interest income was
offset by a decline in yield. In the current interest rate environment, the
Company anticipates yields from cash and marketable securities will decline
significantly from amounts earned in 1998 and 1997.
The Company had a net loss of $19,965,000, $12,871,000 and $11,972,000 in
1998, 1997 and 1996, respectively.
LIQUIDITY AND SOURCES OF CAPITAL
Since its inception, the Company has financed its operations through the
sale of Common and Preferred Stock, borrowings under debt agreements, revenues
from collaborative agreements and interest income.
The Company had unrestricted cash, cash equivalents and marketable
securities totaling $110,155,000 at December 31, 1998. Cash equivalents and
marketable securities are invested in U.S. Treasury notes, agencies of the U.S.
government and money market funds.
In July 1997, the Company completed a direct placement of 1,700,000 shares
of common stock, resulting in net proceeds to the Company of $52,900,000.
The Company leased additional facilities in the fourth quarter of 1998
which will be used for research and development. Equipment and improvements to
the space are estimated to cost approximately $14,000,000. In December 1998,
the Company obtained an unsecured term loan facility for up to $14,000,000 to
finance the capital costs related to the leased space. The loan is payable
beginning in December 1999 on the basis of a seven year amortization schedule
over a five year period, with a final payment for any remaining amount in
September 2004. The note contains certain restrictive covenants, including,
among other things, minimum cash and tangible net asset requirements and
limitations on the payment of dividends. At December 31, 1998, no amounts were
outstanding under this facility.
Even after lease of the new space referred to in the prior paragraph, the
Company's facilities may not be adequate to accommodate the Company's needs
beyond 2000. The Company currently expects to meet any additional facilities
requirements through development of a new facility or conversion of an existing
building. The Company intends to seek financing for all or a significant
portion of the cost of any additional facilities. There can be no guarantee
that financing will be available on favorable terms, if at all.
-24-
At December 31 1998, the Company had commitments totaling $6,911,000 for
certain product development activities with third parties for 1999.
In May 1994, the Company and HMRI entered into an agreement to
commercialize the Company's GA-EPO product. Under the terms of the agreement,
HMRI is obligated to pay the Company a total of $58,000,000 upon completion of
all milestones and objectives set forth in the agreement. As of December 31,
1998, the Company had received $26,500,000. The remaining $31,500,000 in
payments are contingent upon HMRI's achievement of certain GA-EPO clinical
development milestones.
In March 1995, the Company entered into a second agreement with HMRI to
commercialize GA-II. Pursuant to the agreement, the Company also granted HMRI
an option to commercialize certain aspects of the Company's gene therapy
technologies applicable to this protein. Under the terms of the agreement, HMRI
is obligated to pay the Company a total of $67,000,000 upon completion of all
milestones and objectives set forth in the agreement. At December 31, 1998, the
Company had received $30,500,000. The remaining $36,500,000 to be paid to the
Company by HMRI consists primarily of milestone payments contingent upon the
development of the product resulting from the licensed technology.
HMRI is responsible for the worldwide development, manufacturing and
marketing of GA-EPO, and the Company is entitled to receive a royalty based on
net sales.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $62,700,000, which expire at various times through 2013. Due to
the degree of uncertainty related to the ultimate use of loss carryforwards and
tax credits, the Company has fully reserved against any potential tax benefit.
The future utilization of net operating loss carryforwards and tax credits may
be subject to limitation under the changes in stock ownership rules of the
Internal Revenue Code. Because of this limitation, it is possible that taxable
income in future years, which would otherwise be offset by net operating losses,
will not be offset and, therefore, will be subject to tax.
Substantial additional funds will be required to support the Company's
research and development programs, for acquisition of technologies, for
preclinical and clinical testing of its products, pursuit of regulatory
approvals, acquisition of capital equipment, expansion of laboratory and office
facilities, establishment of production capabilities, establishment of sales,
marketing and distribution capabilities and for general and administrative
expenses. Until such time, if any, as the Company's operations generate
significant revenues from product sales, cash resources, interest income and
proceeds from equity offerings, debt financings and funding from collaborative
arrangements will be required to fund operations.
The Company expects to pursue opportunities to obtain additional financing
in the future through equity financings, debt financings, lease arrangements
related to facilities and capital equipment and collaborative research
agreements. The source, timing and availability of any future financing will
depend principally upon equity and debt market conditions, interest rates and,
more specifically, on the Company's continued progress in its exploratory,
preclinical and clinical development programs. There can be no assurance that
such funds will be available on favorable terms, if at all.
The Company expects that its existing capital resources, together with
revenues from collaborative agreements and interest income, will be sufficient
to fund its operations into 2001. The Company's cash requirements may vary,
however, depending on numerous factors. Lack of necessary funds may require the
Company to delay, scale back or eliminate some or all of its research and
product development programs or to license its potential products or
technologies to third parties.
-25-
The Company has been engaged in litigation with Amgen Inc. with respect to
the development of GA-EPO. See Note 11 to Notes to Consolidated Financial
Statements, which is incorporated by reference herein.
YEAR 2000
The Year 2000 issue results from computer programs and systems that were
created to accept only two digit dates. As a result, some computer programs are
unable to differentiate between the year 1900 and the year 2000. This could
result in miscalculations and system failures.
The Company has established a multidisciplinary Year 2000 project
committee. The committee has assessed the Company's software, hardware,
communications systems, applications and networks, as well as other date
sensitive equipment. Mission critical systems such as the accounting system
have been found compliant or will be upgraded prior to June 1999. The remaining
systems are currently being tested to identify those systems which would be
affected by Year 2000 non-compliance. In most cases, vendors have offered free
upgrades or the systems were already scheduled for upgrade. Therefore, the
cost for obtaining Year 2000 compliance will be minimal for internal systems.
The Company believes its internal systems will not pose significant operating
issues for the Company as a result of the Year 2000.
In addition to the Company's internal risks, the Company is dependent upon
a number of third parties that provide information, goods and services to the
Company. These include financial institutions, suppliers, service providers,
public utilities and research partners. If these third parties experience
failures in their computer systems or equipment due to Year 2000 non-compliance,
it could seriously affect the Company's business operations. The Company is in
the process of contacting its significant external business partners to
determine the extent to which the Company is vulnerable to their failure. The
Company expects this process to be complete by September 1999.
If third party providers are not able to supply the Company, the Company
could experience delays in its research and development including delays in
clinical trial development or the submission of products for regulatory
approval. As a contingency plan, the Company expects to identify, if available,
a secondary source for critical third party providers. The Company has not yet
incurred significant cost to address the Year 2000 issue. While the total cost
of obtaining Year 2000 compliance is not known at this time, the Company
believes the cost will not be material.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence and strategies and its expectations about future products,
technologies and opportunities, market demand or acceptance of future products
are forward-looking statements. Without limiting the foregoing, the words
"believes", "anticipates", "plans", "expects", "intends" and similar expressions
are intended to identify forward-looking statements. There are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements, including,
without limitation, whether any of the Company's Gene Activated, gene therapy,
or Niche Protein product candidates will advance in the clinical trial process,
the timing of such clinical trials, whether the clinical trial results will
warrant continued product development, the timing of making required regulatory
filings such as Investigational New Drug applications, and other risks set forth
below, under the caption "Certain Factors That May Affect Future Results."
-26-
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results
to differ from those indicated by forward-looking statements made in this Annual
Report on Form 10-K for the year ended December 31, 1998 and presented elsewhere
by management from time to time.
PATENT LITIGATION. The biotechnology industry has been characterized by
significant litigation and interference proceedings regarding patents, patent
applications and other intellectual property rights, and many companies in the
biotechnology industry have attempted to employ intellectual property litigation
to gain or preserve a competitive advantage. For example, there has been
substantial intellectual property litigation between suppliers of erythropoietin
throughout the world.
In April 1997, Amgen Inc. filed a civil action in the U.S. District Court
in Massachusetts against the Company and Hoechst Marion Roussel, Inc. ("HMRI"),
the Company's collaborative partner. The complaint in the action alleged that
the Company's Gene Activated product development program for the production of
GA-EPO and processes for producing GA-EPO infringe on Amgen's U.S. Patent
Numbers 5,547,933, 5,618,698, and 5,621,080 and requested that TKT and HMRI be
enjoined from making, using, or selling GA-EPO and that the court award Amgen
monetary damages.
In November 1997, TKT and HMRI filed a Motion for Summary Judgment. On the
same date, Amgen filed a Motion for Summary Judgment of Infringement. TKT and
HMRI opposed that motion, stating that there had been no infringement.
In April 1998, the U.S. District Court granted TKT and HMRI's Motion for
Summary Judgment and denied Amgen's Motion for Summary Judgment on the ground
that all of TKT and HMRI's GA-EPO related activities to that date had been
solely for uses reasonably related to the production of information for
submission to the FDA for regulatory approval and, under the Hatch-Waxman Act,
do not constitute acts of patent infringement. The Court ordered Amgen's
remaining claim for declaratory judgment of future infringement
administratively closed, to be reopened upon motion of either party for good
cause shown. The Court also stated that the issuance by the FDA of a product
license presumably would constitute good cause to reopen that claim. Finally,
the Court stated that, should the case be reopened and should Amgen seek
preliminary equitable relief, the Court will combine the hearing on a
preliminary injunction with trial on the merits. The Company expects that the
case will be reopened.
Should the case be reopened, the Company can provide no assurance as to the
outcome of the litigation. A decision by the court in Amgen's favor, including
the issuance of an injunction against the making, use or sale of GA-EPO by the
Company and HMRI in the United States, or any other conclusion of such
litigation in a manner adverse to the Company and HMRI, would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Pursuant to the Company's license agreement with HMRI, HMRI assumed the
cost of defense of the suit by Amgen. The Company will reimburse HMRI for the
Company's share of litigation expenses, as defined, from future royalties, if
any, received from the sale of GA-EPO and in certain other circumstances.
There can be no assurance that the Company will not in the future become
subject, in the United States or any other country, to additional patent
infringement claims, interferences and other litigation involving patents, or
any patents that may issue on any pending patent applications, including Amgen
patent applications.
-27-
The defense and prosecution of intellectual property suits and related
legal and administrative proceedings can be both costly and time consuming.
Litigation and interference proceedings could result in substantial expense to
the Company or its corporate partner and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation to which the Company may become a party could subject the Company to
significant liabilities to third parties or require the Company to seek licenses
from third parties. Although a number of patent and intellectual property
disputes in the biotechnology area have been settled through licensing or
similar arrangements, costs associated with any such arrangement may be
substantial and could include ongoing royalties. Furthermore, there can be no
assurance that necessary licenses would be available to the Company or its
corporate partner or would be available on acceptable terms. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company or its corporate partner from
manufacturing and selling some or all of its products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
With respect to gene therapy technology, the Company requested, and the
U.S. Patent and Trademark Office (the "PTO"), declared in January 1996, an
interference regarding a third party's issued patent with broad claims to ex
vivo gene therapy. The participants in the interference are TKT, Genetic
Therapy, Inc. (a wholly-owned subsidiary of Novartis AG), Syntex (U.S.A.) (a
wholly-owned subsidiary of Roche Holdings, Inc.), and Somatix. Somatix
subsequently merged into Cell Genesys, Inc. With the possible exception of the
patent involved in the interference, the Company believes its Transkaryotic
Therapy technology does not infringe on patents issued to date. The PTO
proceeding will determine the patentability of the subject matter of the
interference and which of the parties first developed this subject matter. The
process to resolve the interference can take many years. The outcome of
interferences can be quite variable: for example, none of the four parties may
receive the desired claims, one party may prevail, or a settlement involving two
or more of the parties may be reached. There can be no assurance that TKT will
prevail in this interference or that, even if it does prevail, that the Company
can meaningfully protect its proprietary position. In the event TKT does not
prevail in the interference, a January 1997 Federal Trade Commission (the "FTC")
decision may then be relevant. The FTC entered a consent order to resolve
anticompetitive concerns raised by the merger of Ciba-Geigy Limited and Sandoz
Limited into the newly formed Novartis AG. As part of the consent order, the
constituent entities of Novartis will be required to provide all gene therapy
researchers and developers with non-exclusive licenses to the patent upon which
Novartis is involved in the interference. The Company has entered into an
agreement with Somatix under which the Company's ability to market its non-viral
gene therapy products will not be affected should Somatix win the interference.
Should any of its competitors have filed additional patent applications in
the U.S. that claim technology also invented by the Company, the Company may
have to participate in additional interference proceedings declared by the PTO,
all of which could result in substantial cost to the Company to determine its
rights or potential loss of rights.
PATENTS AND PROPRIETARY RIGHTS. The Company's success may depend in large
part on its ability to obtain patent protection for its processes and potential
products in the U.S. and other countries and to obtain the right to use in its
potential products genes or other technology that have been or may be patented
by others. At December 31, 1998, the Company had six issued U.S. patents and
28 pending patent applications in the U.S. to protect its proprietary methods
and processes; it has also filed foreign patent applications corresponding to
certain of these U.S. patent applications. In addition, the Company has entered
into several agreements to license proprietary rights from other parties.
However, the patent situation in the field of biotechnology generally is highly
uncertain and involves complex legal, scientific and factual questions. To date
there has emerged no consistent policy regarding the breadth of claims allowed
in biotechnology patents. Accordingly, there can be no
-28-
assurance that patent applications relating to the technology used by the
Company will result in patents being issued or that, if issued, the patents will
not be challenged, invalidated or circumvented or will afford protection against
competitors with similar technology.
Many biotechnology and pharmaceutical companies, universities and research
institutions, including competitors with substantial resources, have filed
patent applications and have been issued patents potentially relating to the
Company's technologies. In addition, certain competitors have filed patent
applications and have been issued patents relating to certain methods of
producing therapeutic proteins that the Company anticipates producing using its
Gene Activation technology. The Company's technologies and potential products
may be found to conflict or be alleged to conflict with patents which have been
or may be granted to competitors, universities or others. There are a
substantial number of biotechnology patent applications under review at the PTO.
Because patent applications in the U.S. are maintained in secrecy until patents
issue, the Company cannot be certain that others have not filed or maintained
patent applications for technology used by the Company or covered by the
Company's pending patent applications or that the Company was the first to file
patent applications for such technology. Competitors may have filed
applications for, or may have received patents and may obtain additional patents
and proprietary rights relating to, compositions of matter or processes that
block or compete with those of the Company. Furthermore, as is the case with
any pending patent application, competitors may attempt to amend existing
applications to claim rights to compositions of matter or processes that may
block the Company. No assurance can be given that the Company's products or
processes do not infringe patents that may issue under pending patent
applications.
Although the Company has licensed proprietary rights to certain genes (for
example, for Factor VIII and Factor IX) to be used in its gene therapy products
and to certain patents (for example, for certain pending and issued patents
related to mucopolysaccharidoses), the Company presently has no proprietary
rights to certain other genes that it may later seek to use in its products and
which may be the subject of issued third party patents or pending patent
applications. As a result, the Company may be required to obtain licenses under
third party patents in order to market certain of its products. If such
licenses are not made available to the Company on acceptable terms, the Company
will not be able to market such products. In addition, under the Company's
license and sublicense agreements, the licensors and sublicensors may terminate
these agreements upon the Company's failure to meet certain specified
milestones. Any such termination of an existing license or sublicense by any
such licensor or sublicensor, or any inability by the Company to obtain any
required license, could have a material adverse effect on the Company's
business.
The Company also relies upon unpatented proprietary technology, processes
and know-how, which the Company protects in part by confidentiality agreements
with its employees, consultants and certain contractors. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors.
EARLY STAGE OF DEVELOPMENT; COMMERCIAL UNCERTAINTY. TKT is at an early
stage of development. All of the Company's potential products are in research,
preclinical development or clinical development. No revenues have been
generated from product sales, and no such revenues are expected until 2000 at
the earliest.
The Gene Activation products currently under development by the Company
will require significant additional development efforts, including extensive
preclinical and clinical testing and regulatory approval, prior to commercial
use. There can be no assurance that any Gene Activation products will
ultimately be developed by the Company and its corporate partners, or that, even
if developed, these products will receive regulatory approval. If approved,
these products may compete
-29-
with established products of proven safety and efficacy, the manufacturers of
which can be expected to employ intellectual property challenges to
commercialization of these products. There can be no assurance that the
Company's Gene Activation products, if any, will be able to be commercialized
or, if commercialized, that they will be accepted by medical centers, hospitals,
physicians or patients in lieu of existing treatments. Accordingly, there can
be no assurance that these products can be successfully manufactured and
marketed at prices that would permit the Company and its corporate partners to
operate profitably.
The Company's potential gene therapy products may be even further from
commercial introduction. Due to the early stage of development of the Company's
potential gene therapy products and the extensive research, development,
preclinical and clinical testing, and regulatory review process required before
marketing approval can be obtained, the Company cannot predict with certainty
when it will be able to commercialize any of its potential gene therapy
products, if at all.
All of TKT's potential Niche Protein products are in research, preclinical
development or clinical development. No revenues have been generated from
product sales, and the Company believes no such revenues will be realized until
at least 2000. Extensive research, development, preclinical and clinical
testing and the regulatory review process will be required before marketing
approval can be obtained. The Company cannot predict with certainty when it
will be able to commercialize any of its potential Niche Protein products, if at
all.
TECHNOLOGICAL UNCERTAINTY. Each of the Company's three product platforms
involves new and rapidly evolving technologies. All of the Company's potential
products are in pre-clinical or clinical stages of development and will require
substantial additional development efforts and regulatory approvals prior to
market introduction.
The Company's Gene Activated and Niche Protein products are either in
clinical development or have not yet been tested in humans. While certain of
the Company's potential gene therapy products are in clinical development, the
Company believes that its product candidates in this area are even further from
commercial introduction. Existing preclinical and clinical data on the safety
and efficacy of the Company's potential products are limited.
For any given indication, the Company's potential products may not be
efficacious or may prove to have undesirable and unintended side effects,
toxicities or other characteristics that may prevent or limit commercial use.
There can be no assurance that any of the Company's products will obtain
approval from the FDA or equivalent foreign regulatory authorities for any
indication.
UNCERTAINTY ASSOCIATED WITH CLINICAL TRIALS. The Company's potential
products are in various stages of research or preclinical or clinical
development. Subject to compliance with FDA regulations, TKT and its corporate
partners plan to undertake extensive clinical testing in humans to evaluate the
safety and efficacy of its products in development.
The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in the
anticipated Gene Activation clinical trials may result in program delays, which
could have a material adverse effect on TKT. Even if clinical trials are
completed, there can be no assurance that the Company or its partners will be
able to submit a license application to the FDA or comparable regulatory
agencies in foreign countries on the schedule anticipated or that such
applications will be reviewed and approved by such regulatory agencies in a
timely manner.
-30-
Of the gene therapy products under development at the Company, one, for the
treatment of cachexia, and a second, for the treatment of hemophilia A, are in
Phase I clinical trials. There can be no assurance that the Company will be able
to obtain authorization from the FDA for additional human clinical testing for
any of its other gene therapy products currently in research or preclinical
development.
There can be no assurance that any authorized clinical testing will be
completed successfully within any specified time period, if at all, with respect
to any potential product. There also can be no assurance that such testing will
show any potential product to be safe or efficacious or that any such product
will be approved by the FDA for any indication. Furthermore, the Company or the
FDA may suspend clinical trials at any time if the subjects or patients
participating in such trials are being exposed to unacceptable health risks.
There can be no assurance that the Company will not encounter problems in
clinical trials which will cause the Company or the FDA to delay or suspend
clinical trials.
UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS; LENGTHY APPROVAL
PROCESS. The Company's research and development, preclinical testing, clinical
trials, facilities and manufacturing and marketing of its products will be
subject to extensive regulation by numerous governmental authorities in the U.S.
and other countries. The regulatory process for new therapeutic products, which
includes preclinical and clinical testing of each product to establish its
safety and efficacy, can take many years and require the expenditure of
substantial resources. Data obtained from preclinical and clinical activities
are susceptible to varying interpretations which could delay, limit or prevent
FDA regulatory approval. In addition, delays or rejections may be encountered
based upon changes in FDA policy during the period of product development and
FDA regulatory review of each submitted license application. Similar delays may
also be encountered and substantial resources expended in foreign countries.
There can be no assurance that even after such time and expenditures,
regulatory approval will be obtained for any Gene Activated or gene therapy
products developed by the Company. Moreover, if regulatory approval of a
product is granted, such approval may entail limitations on the indicated uses
for which it may be marketed and contain requirements for post-marketing
follow-up studies. Because gene therapy is a relatively new technology and
products for gene therapy have not been extensively tested in humans, the
regulatory requirements governing gene therapy products may be subject to
substantial additional review by various regulatory authorities in the U.S. and
abroad. These requirements may result in extensive delays in initiating
clinical trials of gene therapy products and in the regulatory approval process
in general.
Any of the foregoing effects of government regulation, as well as of
comparable foreign regulation, could delay the marketing of the Company's
products for a considerable or indefinite period of time, materially increase
the cost involved in developing, manufacturing and marketing the Company's
products, diminish or eliminate any competitive advantage the Company may enjoy,
or otherwise adversely affect the Company's ability to conduct its business.
Compliance with applicable government regulations governing each of the
Company's potential products will require a significant commitment of time,
money and effort by the Company and its corporate partners with no assurances
that any approval will ultimately be granted on a timely basis, if at all.
HISTORY OF OPERATING LOSSES; FUTURE CAPITAL NEEDS; UNCERTAINTY OF
ADDITIONAL FUNDING. The Company has experienced significant operating losses
since its inception in 1988. As of December 31, 1998, the Company had an
accumulated deficit of $69,952,000. The Company expects that it will continue
to incur substantial losses until at least 2000 and expects cumulative losses to
increase until then as the Company's research and development efforts expand.
The Company expects that such losses will fluctuate from quarter to quarter and
that such fluctuations may be substantial. There can
-31-
be no assurance that the Company will ever achieve sales or profitability. To
date, the Company has not received any revenues from product sales.
The Company will require substantial funds to conduct research and
development (including preclinical and clinical testing) of its potential
products and to manufacture and market any products that are approved for
commercial sale. Based on its current operating plan, the Company believes that
its available cash will be adequate to satisfy its capital needs into 2001. The
Company's future capital requirements will depend on many factors, including
continued progress in its research and development programs, the magnitude of
these programs, the scope and results of clinical trials, the timing and receipt
of milestone payments, the time and costs involved in obtaining regulatory
approvals, the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, competing technological
and market developments, the ability of the Company to establish and maintain
collaborative arrangements, and the cost of manufacturing and commercialization
activities. The Company also will require capital to fund the costs of its
additional facilities requirements. The Company intends to seek additional
funding through collaborative arrangements and/or through public or private
financings. There can be no assurance that additional financing will be
available on acceptable terms, if at all.
COMPETITION. The biotechnology industry is characterized by rapid and
significant technological change. There can be no assurance that TKT will
succeed in developing and marketing technologies and products that are more
clinically efficacious and cost-effective than existing established treatments
or new approaches and products developed and marketed by its competitors. The
development by others of alternative or superior treatment methods could render
the Company's products obsolete or noncompetitive. In addition, treatment
methods not clearly superior to the Company's could achieve greater market
penetration through competitors' superior sales, marketing or distribution
capabilities.
The Company's products and technologies will be subject to substantial
competition from companies engaged in the commercialization of therapeutic
proteins and gene therapy as well as from companies which have other forms of
treatment for the diseases targeted by the Company. Many of these competitors
have substantially greater financial and other resources than the Company,
including larger research and development staffs and more experience and
capabilities in conducting research and development activities, testing products
in clinical trials, obtaining regulatory approvals and manufacturing, marketing
and distributing products. Smaller companies may obtain access to such skills
and resources through collaborative arrangements with pharmaceutical companies
or academic institutions.
The Company is initially focusing its Gene Activated product efforts on
established products with proven safety and efficacy. The Company anticipates
that companies selling such products will compete vigorously against any Gene
Activated products offered by the Company or its collaborators. There can be no
assurance that the Company's Gene Activated products will be accepted by medical
centers, hospitals, physicians or patients in lieu of existing products, or as
to the effect of such competition on the market prices of the Company's
products.
The Company's Niche Protein products are targeted at patients suffering
from rare genetic diseases. The Company anticipates that the market for such
products in some instances may be quite small, and that competition in the form
of competitive products could place significant pressure on TKT's ability to
successfully commercialize its products.
The Company's competitive position also depends on its ability to attract
and retain qualified personnel, obtain patent protection, secure licenses of
necessary genes and technology from third parties, or otherwise develop
proprietary products or processes and secure sufficient capital resources
-32-
for the typically substantial expenditures and period of time prior to
commercial sales of each product. There can be no assurance that the Company
will be successful in achieving these goals.
NO MANUFACTURING OR DISTRIBUTION OR MARKETING CAPABILITIES; DEPENDENCE ON
THIRD PARTY MANUFACTURERS. Although the Company has pilot gene therapy and
protein manufacturing facilities, it has only limited manufacturing experience
and no commercial scale manufacturing capabilities. The Company will need to
develop, contract for or otherwise arrange for such capabilities, for example,
through collaborative partners, to commercialize any of its products. If the
Company is delayed in establishing suitable manufacturing capabilities, the
Company's ability to conduct human clinical testing may be adversely affected,
resulting in the delay of submission of potential products for regulatory
approval and initiation of new development programs. In addition, there can be
no assurance that the Company will be able to manufacture products at a
reasonable cost, that the Company will be able to price products competitively
or, if priced competitively, that the Company will be able to achieve margins
sufficient to allow it to achieve profitability.
The Company plans to provide its gene therapy products through central
manufacturing facilities. The establishment of these facilities will require
substantial additional funds and personnel and will require compliance with
extensive regulations applicable to such facilities. There can be no assurance
that such funds and personnel will be available on acceptable terms, if at all,
or that the Company will be able to comply with such regulations at acceptable
cost, if at all. In addition, in managing this expansion the Company may
encounter unforeseen regulatory, logistical or management problems or incur
unexpected operating costs. Failure or delays in establishing these facilities,
or the incurrence of unexpected operating costs, could adversely affect the
ability of the Company to manufacture and market its gene therapy products.
To the extent that the Company contracts with third parties for the
manufacture of its products, the Company will be dependent on such third parties
to comply with the terms of the contracts and to manufacture for the Company on
a timely basis and in accordance with applicable regulations. Any failures by
third parties to person their contract obligations satisfactorily may delay
clinical trial development or the submission of products for regulatory
approval, impair the Company's ability to commercialize its products as planned
and deliver products on a timely basis or otherwise adversely affect the
Company's competitive position.
The Company has no product sales, marketing or distribution capabilities or
experience. In order to market any of its products, the Company must develop
sales, marketing and distribution capabilities, either on its own or in
conjunction with others. There can be no assurance that the Company will be
able to enter into any arrangements for the sale, marketing and distribution of
its products, that such arrangements will be successful or that the Company will
be able to obtain additional capital and expertise to conduct such activities
independently. In addition, if the Company chooses to conduct such activities
directly, there can be no assurance that the Company will be able to recruit and
maintain a sales force or that a sales force will be able to successfully access
the markets for the Company's products.
POSSIBILITY OF ORPHAN DRUG STATUS. The Company believes that many of the
potential products in its Niche Protein platform may qualify as Orphan Drugs.
TKT intends to pursue this designation aggressively, where appropriate, with
respect to its Niche Protein products intended for patient populations in the
United States of less than 200,000. A drug that receives Orphan Drug
designation by the FDA and is the first product to receive FDA marketing
approval for its stated product claim is entitled to a seven-year exclusive
marketing period in the United States for that product claim. A drug that is
considered by the FDA to be different than a particular Orphan Drug is not
barred from sale in the United States during such seven-year exclusive marketing
period. Furthermore, Orphan Drug exclusivity can be terminated for a variety of
reasons, including that the manufacturer of an
-33-
Orphan Drug cannot provide an adequate supply of the product. There can be no
assurance that Orphan Drug status will be afforded to any of the Company's
potential products, or, if afforded, that such designations will be maintained.
In addition, the Company could incur substantial costs in asserting any rights
to prevent such uses it may have under the Orphan Drug Act.
Legislation has in the past been introduced to limit the marketing
exclusivity provided for certain Orphan Drugs. Although the outcome of that
legislation, if reintroduced, is uncertain, there remains a possibility that
future legislation will limit the incentives currently afforded to the
developers of Orphan Drugs.
There can be no assurance that other companies will not seek such
designation and obtain FDA marketing approval before the Company obtains such
approval. If another company obtains Orphan Drug marketing approval and
receives seven-year marketing exclusivity, it is possible that the Company would
not be permitted by the FDA to market a similar product in the United States
during the exclusivity period.
DEPENDENCE ON KEY PERSONNEL. The Company's success is highly dependent on
the retention of principal members of its scientific and management staff.
Furthermore, the Company's future growth will require the hiring of significant
numbers of qualified scientific and management personnel. Accordingly,
recruiting and retaining such personnel in the future will be critical to the
Company's success. There is intense competition from other companies and
research and academic institutions for qualified personnel in the areas of the
Company's activities, and there can be no assurance that the Company will be
able to continue to attract and retain on acceptable terms the qualified
personnel necessary for the development of its business.
DEPENDENCE ON COLLABORATIVE PARTNERS. The Company has entered into
arrangements with HMRI on two of its Gene Activation development programs, with
Sumitomo on one of its Niche Protein products, and with GI on a gene therapy
development program. Each agreement with HMRI is subject to termination without
cause on short notice under certain circumstances, and there is no assurance
that in the future either partner will not exercise its termination rights. The
Company is relying on HMRI to develop, conduct clinical trials, obtain
regulatory approval for the sale of, manufacture and market worldwide GA-EPO and
GA-II. There can be no assurance that these collaborative partners will devote
the resources necessary to complete development of and commercialize these
potential products. Should these collaborative partners fail to develop and
commercialize these two potential products, the Company's business would be
materially adversely affected.
The Company's strategy for the research, development and commercialization
of certain of its potential products includes the possibility that it will enter
into various additional arrangements with corporate partners, licensors,
licensees and others. There can be no assurance that any further arrangements
will be effected in the future. Although the Company believes parties to any
existing and future arrangements, if entered into, would have economic and other
motivations to perform their contractual responsibilities in full, the amount
and timing of resources which they would devote to these activities would not be
within the control of the Company. There can be no assurance that such parties
would perform their obligations as expected or that any revenue would be derived
by the Company from such arrangements.
PRODUCT LIABILITY AND INSURANCE. The Company's business will in the future
expose it to potential product liability risks which are inherent in the
testing, manufacturing and marketing of human therapeutic products. Although
the Company has clinical trial liability insurance for trials conducted in the
U.S., the Company does not currently have any product liability insurance, and
there can be no assurance that it will be able to obtain or maintain such
insurance on acceptable terms, if at
-34-
all, or that any insurance obtained will provide adequate protection against
potential liabilities. An inability to obtain insurance at acceptable cost or
otherwise protect against potential product liability claims, in addition to
exposing the Company to significant liabilities, could prevent or inhibit the
commercialization of products developed by the Company.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT. The business and
financial condition of pharmaceutical and biotechnology companies will continue
to be affected by the efforts of government and third-party payors to contain or
reduce the cost of health care through various means. For example, in certain
foreign markets, pricing and profitability of prescription pharmaceuticals is
subject to government control. In particular, individual pricing negotiations
are often required in each country of the European Community, even if approval
to market the drug is obtained.
In the U.S. there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government control. In addition, an increasing emphasis on managed care in the
U.S. has and will continue to increase the pressure on pharmaceutical pricing.
While the Company cannot predict whether any such legislative or regulatory
proposals will be adopted or the effect such proposals or managed care efforts
may have on its business, the announcement of such proposals or efforts could
have a material adverse effect on the Company's ability to raise capital, and
the adoption of such proposals or efforts could have a material adverse effect
on the Company's business, financial condition and results of operations.
Further, to the extent that such proposals or efforts have a material adverse
effect on other pharmaceutical companies that are prospective corporate partners
for the Company, the Company's ability to establish corporate collaborations may
be adversely affected.
In addition, in both domestic and foreign markets, sales of the Company's
products, if any, will be dependent in part on the availability of reimbursement
from third party payors, such as government and private insurance plans. Third
party payors are increasingly challenging the prices charged for medical
products and services. If the Company succeeds in commercializing products,
there can be no assurance that these products will be considered cost effective,
that reimbursement will be available, or if available, that the payor's
reimbursement policies will be adequate to permit the Company to realize a
reasonable return.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments that would
require disclosure under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplementary data are included as
part of this Annual Report on Form 10-K:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
Consolidated Statement of Stockholders' Equity for the period January 1,
1996 through December 31, 1998
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
-35-
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Transkaryotic Therapies, Inc.
We have audited the accompanying consolidated balance sheets of Transkaryotic
Therapies, Inc. (the Company) as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Transkaryotic
Therapies, Inc. at December 31, 1998 and 1997, and the results of its
consolidated operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 5, 1999
-36-
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values) DECEMBER 31,
-----------------------
1998 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 31,760 $ 23,922
Marketable securities 78,395 105,632
Prepaid expenses and other current assets 2,334 551
---------- ----------
Total current assets 112,489 130,105
Property and equipment, net 5,140 4,505
Other assets 333 338
---------- ----------
$ 117,962 $ 134,948
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,456 $ 1,656
Accrued expenses 2,860 1,543
---------- ----------
Total current liabilities 4,316 3,199
Stockholders' equity:
Preferred stock, $1.00 par value, 10,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value; 30,000 shares
authorized, 19,126 and 18,929 shares issued
and outstanding at December 31, 1998 and 1997,
respectively 191 189
Additional paid-in capital 186,067 185,451
Accumulated deficit (69,952) (49,987)
Deferred compensation (2,632) (3,940)
Accumulated other comprehensive
income (loss) (28) 36
---------- ----------
Total stockholders' equity 113,646 131,749
---------- ----------
$ 117,962 $ 134,948
---------- ----------
---------- ----------
See accompanying Notes to Consolidated Financial Statements.
-37-
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
License and research revenues $ 5,325 $ 5,788 $ 4,225
Operating expenses:
Research and development 25,617 18,111 14,019
General and administrative 6,409 6,279 4,729
-------- -------- --------
32,026 24,390 18,748
-------- -------- --------
Loss from operations (26,701) (18,602) (14,523)
Interest income 6,736 5,731 2,551
-------- -------- --------
Net loss $(19,965) $(12,871) $(11,972)
-------- -------- --------
-------- -------- --------
Basic and diluted net loss per share
(pro forma in 1996) $ (1.05) $ (0.74) $ (0.98)
-------- -------- --------
-------- -------- --------
Shares used in computing basic and
diluted net loss per share (pro forma
in 1996) 19,052 17,394 12,262
-------- -------- --------
-------- -------- --------
See accompanying Notes to Consolidated Financial Statements.
-38-
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands) PREFERRED STOCK COMMON STOCK
------------------------------ -------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
BALANCE AT JANUARY 1, 1996 2,944 $ 2,944 5,198 $ 52
Issuance of convertible preferred stock 1,133 1,133 -- --
Issuance of common stock, net -- -- 2,831 28
Deferred compensation related to restricted
stock and stock options granted -- -- -- --
Compensation expense related to equity issuances -- -- -- --
Redeemable preferred stock dividend accretion -- -- -- --
Conversion of preferred stock into common stock (4,077) (4,077) 8,585 86
Unrealized loss on marketable securities -- -- -- --
Net loss -- -- -- --
Comprehensive loss -- -- -- --
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1996 -- -- 16,614 166
Issuance of common stock, net -- -- 2,315 23
Deferred compensation related to stock options
granted -- -- -- --
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted, net -- -- -- --
Compensation expense related to equity issuances -- -- -- --
Unrealized gain on marketable securities -- -- -- --
Net loss -- -- -- --
Comprehensive loss -- -- -- --
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 -- -- 18,929 189
Issuance of common stock, net -- -- 201 2
Compensation expense related to equity issuances -- -- -- --
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted, net -- -- (4) --
Unrealized loss on marketable securities -- -- -- --
Net loss -- -- -- --
Comprehensive loss -- -- -- --
------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 -- -- 19,126 $ 191
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
See accompanying Notes to Consolidated Financial Statements
-39-
CUMULATIVE
ADDITIONAL ACCRETION OF
(in thousands) PAID-IN PREFERRED ACCUMULATED
CAPITAL STOCK DEFICIT
------------- ------------- -------------
BALANCE AT JANUARY 1, 1996 $ 58,331 $ (1,440) $ (25,144)
Issuance of convertible preferred stock 22,388 -- --
Issuance of common stock, net 39,032 -- --
Deferred compensation related to restricted
stock and stock options granted 5,054 -- --
Compensation expense related to equity issuances -- -- --
Redeemable preferred stock dividend accretion -- (158) --
Conversion of preferred stock into common stock 6,991 1,598 --
Unrealized loss on marketable securities -- -- --
Net loss -- -- (11,972)
Comprehensive loss -- -- --
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1996 131,796 -- (37,116)
Issuance of common stock, net 53,754 -- --
Deferred compensation related to stock options
granted 526 -- --
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted, net (625) -- --
Compensation expense related to equity issuances -- -- --
Unrealized gain on marketable securities -- -- --
Net loss -- -- (12,871)
Comprehensive loss -- -- --
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 185,451 -- (49,987)
Issuance of common stock, net 808 -- --
Compensation expense related to equity issuances -- -- --
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted, net (192) -- --
Unrealized loss on marketable securities -- -- --
Net loss -- -- (19,965)
Comprehensive loss -- -- --
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 $ 186,067 -- $ (69,952)
------------- ------------- -------------
------------- ------------- -------------
See accompanying Notes to Consolidated Financial Statements
-40-
ACCUMULATED
OTHER TOTAL
(in thousands) DEFERRED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION INCOME (Loss) EQUITY
------------- ------------- -------------
BALANCE AT JANUARY 1, 1996 $(1,244) $42 $ 33,541
Issuance of convertible preferred stock -- -- 23,521
Issuance of common stock, net -- -- 39,060
Deferred compensation related to restricted
stock and stock options granted (5,054) -- --
Compensation expense related to equity issuances 1,080 -- 1,080
Redeemable preferred stock dividend accretion -- -- (158)
Conversion of preferred stock into common stock -- -- 4,598
Unrealized loss on marketable securities -- (26) (26)
Net loss -- -- (11,972)
-------------
Comprehensive loss -- -- (11,998)
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1996 (5,218) 16 89,644
Issuance of common stock, net -- -- 53,777
Deferred compensation related to stock options granted (526) -- --
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted, net 625 -- --
Compensation expense related to equity issuances 1,179 -- 1,179
Unrealized gain on marketable securities -- 20 20
Net loss -- -- (12,871)
-------------
Comprehensive loss -- -- (12,851)
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 (3,940) 36 131,749
Issuance of common stock, net -- -- 810
Compensation expense related to equity issuances 1,116 -- 1,116
Reversal of deferred compensation related to
forfeited restricted stock and stock options
granted, net 192 -- --
Unrealized loss on marketable securities -- (64) (64)
Net loss -- -- (19,965)
-------------
Comprehensive loss -- -- (20,029)
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 $(2,632) $(28) $113,646
------------- ------------- -------------
------------- ------------- -------------
See accompanying Notes to Consolidated Financial Statements.
-41-
TRANSKARYOTIC THERAPIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
------------- ------------- -------------
OPERATING ACTIVITIES:
Net loss $ (19,965) $ (12,871) $ (11,972)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 2,056 2,092 1,575
Compensation expense related to equity
issuances 1,116 1,179 1,080
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses and
other current assets (1,783) 267 (721)
Increase (decrease) in accounts payable (200) 1,044 97
Increase in accrued expenses 1,317 801 21
------------- ------------- -------------
Net cash used for operating activities (17,459) (7,488) (9,920)
------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales of marketable securities 134,491 117,669 63,871
Purchases of marketable securities (107,318) (147,440) (116,793)
Purchases of property and equipment (2,660) (2,936) (779)
Increase in other assets (26) (74) (86)
------------- ------------- -------------
Net cash provided by (used for) investing activities 24,487 (32,781) (53,787)
------------- ------------- -------------
FINANCING ACTIVITIES:
Issuance of common stock, net 810 53,777 39,060
Issuance of convertible preferred stock -- -- 23,521
------------- ------------- -------------
Net cash provided by financing activities 810 53,777 62,581
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 7,838 13,508 (1,126)
Cash and cash equivalents at January 1 23,922 10,414 11,540
------------- ------------- -------------
Cash and cash equivalents at December 31 $ 31,760 $ 23,922 $ 10,414
------------- ------------- -------------
------------- ------------- -------------
See accompanying Notes to Consolidated Financial Statements.
-42-
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Transkaryotic Therapies, Inc. ("TKT" or "the Company") is a biopharmaceutical
company engaged in the development and commercialization of products based on
its three proprietary development platforms: Gene Activated(TM) proteins,
Niche Protein(TM) products and gene therapy.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All intercompany activity has been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents include funds held in investments with original maturities of
three months or less. Marketable securities consist of U.S. government and
agency obligations. The fair values for marketable securities are based on
quoted market prices.
The Company determines the appropriate classification of cash equivalents and
marketable securities at the time of purchase and reevaluates such designation
as of each balance sheet date. The Company has classified such holdings as
available-for-sale securities, which are carried at fair value, with unrealized
gains and losses reported as a separate component of stockholders' equity.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of temporary cash investments and marketable securities. The
Company maintains cash and cash equivalents with high credit-quality financial
institutions and limits the amount of credit exposure to any one institution.
The Company's credit exposure on its marketable securities is limited by its
diversification among U.S. government and agency obligations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives of the respective asset,
ranging from three to five years. Leasehold improvements are stated at cost and
are amortized using the straight-line method over the term of the lease.
-43-
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for qualified stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and, accordingly, recognizes no compensation expense for
the issue thereof. For certain non-qualified stock options granted, the Company
recognizes as compensation expense the excess of the deemed fair value of the
common stock issuable upon exercise over the aggregate exercise price of such
options. The compensation is amortized over the vesting period of each option or
the recipient's term of employment, if shorter. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standard
("SFAS") No. 123, "Accounting for Stock-Based Compensation," and will continue
to account for its stock options plans in accordance with the provisions of APB
25.
LICENSE AND RESEARCH REVENUE
Revenues from collaborative agreements are recognized as earned upon either the
execution of the underlying license agreement, the incurrence of reimbursable
expenses or the achievement of certain milestones.
INCOME TAXES
Deferred tax assets are determined based on differences between financial
reporting and income tax bases of assets and liabilities, as well as net
operating loss carryforwards, and are measured using the enacted tax rates and
laws that are expected to be in effect when the differences reverse. Deferred
tax assets are reduced by a valuation allowance to reflect the uncertainty
associated with their ultimate realization.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board ("the FASB") issued and the
Company adopted SFAS No. 128, "Earnings per Share." SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. All loss per share amounts for all periods have been presented and,
where appropriate, restated to conform to SFAS No. 128 and Securities and
Exchange Commission ("SEC") requirements.
Net loss per share for 1998 and 1997 is computed using the weighted average
number of common shares outstanding. Pro forma net loss per share for 1996 is
computed using the weighted average number of common shares and convertible
preferred shares outstanding assuming conversion at date of issuance.
Historical loss per share for 1996 has not been presented since such amounts are
not deemed meaningful due to the significant change in the Company's capital
structure that occurred in connection with the Company's initial public offering
in that year.
-44-
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes rules for the reporting and
display of comprehensive income and its components, including the requirement
that unrealized gains or losses on the Company's available-for-sale securities,
which prior to adoption were reported separately in stockholders' equity, be
included in other comprehensive income. The adoption of SFAS No. 130 had no
impact on the Company's net loss or stockholders' equity. Prior year financial
statements have been modified to conform to the requirements of SFAS No. 130.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
All of the Company's efforts are devoted to product development platforms that
are managed and reported in one segment: therapeutic products. The Company is
located in the U.S. and derives substantially all of its license and research
revenues from services provided in the U.S. Current licensing agreements provide
for the sale of products in both the U.S. and abroad. To date, the Company has
not recorded revenues from the sale of any product.
3. MARKETABLE SECURITIES
The following is a summary of available-for-sale securities:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
- ----------------- -------- ---------- ---------- ----------
December 31, 1998 $100,768 $100 $(128) $100,740
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
December 31, 1997 $124,795 $ 64 $ (28) $124,831
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
These securities are classified in the accompanying balance sheet as follows:
(in thousands) December 31,
----------------------
1998 1997
-------- --------
Cash equivalents $ 22,345 $ 19,199
Marketable securities 78,395 105,632
-------- --------
$100,740 $124,831
-------- --------
-------- --------
-45-
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of marketable securities held at December 31, 1998 are as follows:
(in thousands)
Less than one year $ 58,562
One through three years 19,833
--------
$ 78,395
--------
--------
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
(in thousands) DECEMBER 31,
--------------------
1997 1998
------- -------
Leasehold improvements $ 6,935 $ 6,083
Laboratory equipment 4,967 4,056
Office furniture and equipment 2,320 1,877
Construction in process 435 -
------- -------
14,657 12,016
Less accumulated depreciation and amortization 9,517 7,511
------- -------
$ 5,140 $ 4,505
------- -------
------- -------
Depreciation and amortization expense on property and equipment was $2,025,000,
$1,668,000 and $1,540,000 in 1998, 1997 and 1996, respectively.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
(in thousands) DECEMBER 31,
---------------------
1998 1997
------ -------
External development services $1,245 $ 157
Salaries and benefits 530 556
Professional fees 384 555
Other 701 275
------ -------
$2,860 $1,543
------ -------
------ -------
6. BANK LOAN
In December 1998, the Company obtained an unsecured term loan facility for up to
$14,000,000 to finance capital equipment and leasehold improvements. The loan
is repayable beginning in December 1999 on the basis of a seven year
amortization schedule over a five year period, with a final payment for any
remaining outstanding amount in September 2004. The loan bears interest at
either the prime rate or LIBOR plus 1.50%, at the Company's election. The note
contains certain restrictive covenants including, among other things, minimum
cash and tangible net asset requirements. As of December 31, 1998, no amounts
were outstanding on the loan.
-46-
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDERS' EQUITY
COMMON STOCK
In July 1997, the Company completed a directed public offering of 1,700,000
shares of its common stock, resulting in net proceeds to the Company of
approximately $52,900,000.
STOCK COMPENSATION PLANS
The Company has adopted several stock compensation plans, which provide for the
issuance of incentive and nonqualified stock options, stock appreciation rights,
restricted stock, long-term performance awards and stock grants to employees,
Directors and consultants of the Company at prices determined by the Board of
Directors. At December 31, 1998, approximately 2,372,000 shares of common stock
have been reserved for issuance under the plans. Options generally vest ratably
over periods ranging from two to six years and are exercisable for ten years
from the date of grant.
Stock option activity under the plans is as follows:
(in thousands, except share prices) 1998 1997 1996
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------
Outstanding at January 1 976 $ 5.76 906 $ 0.36 136 $ 0.01
Granted 507 25.91 247 21.51 793 0.42
Exercised (51) 1.28 (77) 2.35 - 0.01
Canceled (62) 11.98 (100) 0.56 (23) 0.01
--------- --------- ---------
Outstanding at December 31 1,370 12.99 976 5.76 906 0.36
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Options exercisable at December 31 395 $ 13.95 137 $ 0.67 51 $ 0.01
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average fair value per share of
options granted during the year $ 25.91 $ 24.24 $ 6.59
--------- --------- ---------
--------- --------- ---------
-47-
The exercise price and life information in regard to significant option groups
outstanding at December 31, 1998 is as follows:
(in thousands, except share prices)
EXERCISABLE
----------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE WEIGHTED
EXERCISE OPTIONS CONTRACTUAL EXERCISE NUMBER OF AVERAGE
PRICES OUTSTANDING LIFE (Yrs.) PRICE OPTIONS EXERCISE PRICE
- ------------ ----------- ---------- -------- ---------- --------------
$.01 662 6.90 $0.01 207 $0.01
$15.00-22.50 377 9.25 $20.03 34 $17.51
$23.13-29.75 101 9.34 $26.73 2 $23.92
$30.50-36.69 198 9.05 $31.89 147 $31.77
$38.50-39.00 32 8.90 $38.57 5 $38.57
----- ---
1,370 395
----- ---
----- ---
-48-
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the requirements of SFAS No. 123, the following are the pro forma
net loss and net loss per share for 1998, 1997 and 1996, as if stock-based
compensation had been determined based on the fair value at the grant date for
grants in 1998, 1997 and 1996, consistent with the provisions of SFAS No. 123:
(in thousands, except per share amounts)
1998 1997 1996
--------------------------- -------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
Net loss $(19,965) $(23,774) $(12,871) $(13,729) $(11,972) $(12,783)
Basic and diluted net
loss per share $ (1.05) $ (1.25) $ (0.74) $ (0.79) $ (0.98) $ (1.04)
The fair value of options issued pursuant to the plans at the date of grant were
estimated using the Minimum Value method for options granted prior to the
initial public offering and the Black-Scholes model for options granted
subsequent to the initial public offering. The estimation of the fair value of
these options at the date of grant used the following assumptions:
1998 1997 1996
--------- ------- ----------
Expected life (years) 2.5-7.5 2.5-7.5 2.5-7.5
Interest rate 4.48-4.79% 6.5% 5.79-6.30%
Volatility 0.70 0.65 0.65
Forfeiture rate 10.0% 10.0% 10.0%
The Company's volatility for the period prior to the initial public offering was
not used in the calculation of the fair value of the options. The Company has
never declared or paid dividends on any of its capital stock and does not expect
to do so in the foreseeable future.
The pro forma effects on 1998, 1997 and 1996 net loss and net loss per share of
expensing the estimated fair value of stock options issued are not necessarily
representative of the effects on reporting the results of operations for future
years as the periods presented include only three years, two years and one year,
respectively, of option grants.
8. LICENSE AND RESEARCH AGREEMENTS
The Company has license agreements with Hoechst Marion Roussel, Inc. ("HMRI"),
whereby HMRI was granted exclusive rights to make, use and sell worldwide two
therapeutic products produced under patent rights and technologies owned by the
Company. As of December 31, 1998, the Company has received $57,000,000 from the
sale of stock, nonrefundable licensing fees, milestone payments related to the
successful completion of certain development milestones, and contract research
fundings, pursuant to the agreements with HMRI. As part of these agreements,
HMRI will make additional payments of up to $68,000,000 upon achievement of
certain development milestones and pay royalties based on net sales of the two
products.
For the years ended December 31, 1998, 1997 and 1996, license and research
revenues earned from HMRI totaled $3,325,000, $5,788,000 and $4,225,000,
respectively. At December 31, 1998, HMRI owned 2,187,000 shares of the
Company's common stock.
For the year ended December 31, 1998, license and research revenues from another
collaborator totaled $2,000,000.
-49-
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company licenses certain technology from various universities and research
organizations. Under the terms of these agreements, the Company is required to
make payments of nonrefundable license fees and royalties on future sales of
products employing the technology.
9. EMPLOYEE RETIREMENT PLAN
The Company maintains a qualified defined contribution plan covering
substantially all employees of the Company. The Company matches 50% of employee
contributions, up to 7% of compensation (5% prior to July 1997). Employer
contributions vest ratably over five years. The related expense was $231,000 ,
$159,000 and $91,000 in 1998, 1997 and 1996, respectively.
10. INCOME TAXES
At December 31, 1998, the Company had unused net operating loss carryforwards of
$62,700,000 and research and development tax credits of $3,816,000, both of
which expire through 2013. Due to the degree of uncertainty related to the
ultimate use of the loss carryforwards and tax credits, the Company has fully
reserved this tax benefit. Additionally, the future utilization of the net
operating loss carryforwards and tax credits may be subject to limitations under
the change in stock ownership rules of the Internal Revenue Service.
Significant components of the Company's deferred tax assets are as follows:
(in thousands) December 31
-----------------------
1998 1997
-------- -------
Deferred tax assets:
Net operating loss carryforwards $ 23,842 $18,370
Research and development tax credits 3,816 3,050
Depreciation 1,525 1,350
Other 57 186
-------- -------
Total deferred tax assets 29,240 22,956
Valuation allowance (29,240) (22,956)
-------- -------
Net deferred tax assets $ -- $ --
-------- -------
-------- -------
The valuation allowance increased by $6,284,000 and $5,267,000 during 1998 and
1997, respectively, due primarily to the increase in net operating loss
carryforwards and tax credits.
The difference between the Company's "expected" tax benefit, as computed by
applying the U.S. federal corporate tax rate of 34% to the loss before provision
for income taxes and the actual tax is attributable to tax losses and credits
for which the Company has not recognized any tax benefit.
11. COMMITMENTS AND CONTINGENCIES
In April 1997, Amgen Inc. filed a civil action in the U.S. District Court in
Massachusetts against the Company and HMRI. The complaint in the action alleged
that the Company's Gene Activated erythropoietin product ("GA-EPO") and
processes for producing GA-EPO infringe Amgen's U.S. Patent Numbers 5,547,933,
5,618,698, and 5,621,080 and requested that the Company and HMRI be enjoined
from making, using, or selling GA-EPO and that the court award Amgen monetary
damages. In November 1997, the Company and HMRI filed a Motion for Summary
Judgment. On the same date, Amgen filed a Motion for Summary Judgment of
Infringement. The Company and HMRI opposed that motion, stating that there had
been no infringement.
In April 1998, the U.S. District Court granted the Company and HMRI's Motion for
Summary Judgment and denied Amgen's Motion for Summary Judgment on the ground
that all of the Company and HMRI's GA-EPO
-50-
TRANSKARYOTIC THERAPIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related activities to that date had been solely for uses reasonably related to
the production of information for submission to the U.S. Food and Drug
Administration (the "FDA") for regulatory approval and, under the Hatch-Waxman
Act, do not constitute acts of patent infringement. The Court ordered Amgen's
remaining claim for declaratory judgment of future infringement administratively
closed, to be reopened upon motion of either party for good cause shown. The
Court also stated that issuance by the FDA of a product license presumably
would constitute good cause to reopen that claim. Finally, the Court stated
that, should the case be reopened and should Amgen seek preliminary equitable
relief, the Court will combine the hearing on a preliminary injunction with
trial on the merits. The Company expects that the case will be reopened.
Pursuant to the Amended and Restated License Agreement, dated March 1995, by and
between HMRI and the Company, HMRI has assumed the cost of defense of the suit
by Amgen. The Company will reimburse HMRI for the Company's share of litigation
expenses, as defined, from future royalties, if any, received from the sale of
GA-EPO and in certain other circumstances. The Company and HMRI believe that
they have substantial defenses to the allegations in the complaint and expect
that their position will be thoroughly vindicated in court.
The Company can provide no assurance as to the outcome of this litigation. A
decision by the court in Amgen's favor, including the issuance of an injunction
against the making, use or sale of GA-EPO by the Company and HMRI in the United
States, or any other conclusion of the litigation in a manner adverse to the
Company and HMRI, would have a material adverse effect on the Company's
business, financial condition, and results of operations.
The Company leases its facilities under operating leases which expire through
2008, subject to renewal provisions. In addition, the Company has commitments
for certain product development activities with third parties for 1999. Future
annual minimum payments under such commitments are as follows:
YEAR ENDED
(in thousands)
1999 $ 8,758
2000 1,595
2001 1,605
2002 1,504
2003 1,484
Thereafter 1,747
-------
$16,693
-------
-------
Rent expense was $1,316,000, $1,233,000, $1,068,000 in 1998, 1997 and 1996,
respectively.
-51-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the
caption "Executive Officers of the Company" in PART I hereof, and the remainder
is contained in the Company's Proxy Statement for the Company's Annual Meeting
of Stockholders to be held on June 10, 1999 (the "Proxy Statement") under the
caption "Proposal 1 - Election of Directors" and is incorporated herein by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the caption
"Executive Compensation" in the Company's Proxy Statement and is incorporated
herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Company's Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Company's Proxy
Statement under the caption "Certain Transactions" and is incorporated herein by
this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS FORM 10-K:
1. FINANCIAL STATEMENTS. The following documents are filed as part
of this Annual Report on Form 10-K:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Stockholders' Equity for the period
January 1, 1996 through December 31, 1998
-52-
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES. The Company is not filing any
financial statement schedules as part of this Annual Report on
Form 10-K because they are not applicable or the required
information is included in the financial statements or notes
thereto.
3. EXHIBITS. The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual Report
on Form 10-K, and such Exhibit Index is incorporated herein by
reference.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended December
31, 1998.
-53-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRANSKARYOTIC THERAPIES, INC.
By: /s/ Richard F Selden
-------------------------------
Richard F Selden
President and Chief
Executive Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
Signature Title Date
/s/ Richard F Selden President, Chief Executive March 31, 1999
- --------------------------- Officer and Director
Richard F Selden (Principal Executive Officer)
/s/ Daniel E. Geffken Vice President, Finance and March 31, 1999
- --------------------------- Chief Financial Officer
Daniel E. Geffken (Principal Accounting and
Financial Officer)
/s/ Rodman W. Moorhead, III Chairman of the Board of March 31, 1999
- --------------------------- Directors
Rodman W. Moorhead, III
/s/ William R. Miller Director March 31, 1999
- ---------------------------
William R. Miller
/s/ James E. Thomas Director March 31, 1999
- ---------------------------
James E. Thomas
/s/ Peter Wirth Director March 31, 1999
- ---------------------------
Peter Wirth
-54-
Exhibit Index
EXHIBIT NO. DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (1)
3.2 Amended and Restated By-Laws of the Registrant, as
amended(2)
10.1 Stock Purchase Agreement, dated July 1988, by and between
Warburg, Pincus Capital Company, L.P. ("Warburg") and the
Registrant (3)
10.2 Amended and Restated Registration Rights Agreement, dated
November 3, 1993 and amended on May 13, 1994, March 1, 1995,
October 26, 1995, July 10, 1996 and August 7, 1996, by and
among the Registrant and certain holders of the Registrant's
Preferred Stock named therein (3)
10.3 Lease Agreement, dated January 1, 1994, by and between the
Trust under the Will of Harry F. Stimpson for office space
at 195 Albany Street, Cambridge, Massachusetts (3)
10.4 Sublease Agreement, dated April 7, 1992, by and between the
Massachusetts Institute of Technology and the Registrant,
for office space located at 185 Albany Street, Cambridge,
Massachusetts (3)
10.5 1993 Non-Employee Directors' Stock Option Plan (3) (4)
10.6 1993 Long-Term Incentive Plan (5)
10.7 Form of Letter Agreement re: Confidentiality, Inventions and
Non-Disclosure (3)
10.8 Form of Letter Agreement re: Restricted Stock (3)
10.9 Form of Scientific Advisor Agreement (3)
10.10 Amended and Restated Promissory Note, dated June 16, 1993,
issued by the Registrant to Dr. Richard F Selden, in the
original principal amount of $125,000 (3)
10.11 Amended and Restated Promissory Note, dated April 21, 1995,
issued by the Registrant to Dr. Christoph M. Adams, in the
original principal amount of $15,000 (3)
10.12 Amended and Restated Promissory Note, dated May 5, 1995,
issued by the Registrant to Dr. Christoph M. Adams, in the
original principal amount of $20,000 (3)
10.13 Employment Agreement, dated June 19, 1991, by and between
Dr. Richard F Selden and the Registrant (3) (4)
10.14 Pledge Agreement, dated May 14, 1991, by and between Dr.
Richard F Selden and the Registrant (3)
10.15 Employment Agreement, dated July 26, 1991, by and between
Dr. Douglas A. Treco and the Registrant (3) (4)
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10.16 Employment Agreement, dated November 20, 1993, by and
between Dr. Christoph M. Adams and the Registrant (3) (4)
10.17 Pledge Agreement, dated April 21, 1995, by and between Dr.
Christoph M. Adams and the Registrant (3)
10.18 Agreement, dated September 1, 1991, by and between Mr.
William R. Miller and the Registrant (3)
10.19 Agreement, dated July 30, 1993, by and between Warburg and
the Registrant (3)
10.20 Common Stock Purchase Warrant (3)
10.21 Collaboration and License Agreement, dated July 22, 1993 and
amended on May 30, 1996 (3) (6)
10.22 Amended and Restated License Agreement, dated March 1, 1995,
by and between Hoechst Marion Roussel, Inc. ("HMRI") and the
Registrant (3) (6)
10.23 License Agreement, dated March 1, 1995, by and between HMRI
and the Registrant (3) (6)
10.24 Agreement to Nominate, dated September 23, 1996, by and
between Warburg and the Registrant (3) (6)
10.25 Fifth Amendment to Registration Rights Agreement dated
October 1, 1996 by and among the Registrant and certain
holders of the Registrant's Preferred Stock named therein
(3)
10.26 Employment Agreement dated July 1, 1996 by and between Kurt
C. Gunter and the Registrant (4) (7)
10.27 Consulting Agreement dated November 1, 1996 by and between
Peter Wirth and the Registrant (4) (7)
10.28 Employment Agreement dated February 20, 1997 by and between
Daniel E. Geffken and the Registrant (8)
10.29 Form of Common Stock Purchase Agreement by and between each
Purchaser of shares in the Registrant's directed public
offering in August 1997 and the Registrant (8)
10.30 Lease dated November 10, 1998 between 205 Alewife Limited
Partnership and the Registrant
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
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(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
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(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-10845) and incorporated herein by reference.
(4) Management contract or compensation plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 and incorporated herein by reference.
(6) Confidential treatment granted as to certain portions.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-31957) and incorporated herein by reference.
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