##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarter Ended September 30, 2004 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Period fromto Commission File Number 0-21481 TRANSKARYOTIC THERAPIES, INC.  Delaware
    
    04-3027191(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)700 Main StreetCambridge, Massachusetts
    
    02139(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (617) 349-0200    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ    No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). Yes þ    No o At October 31, 2004, there were 34,772,809 shares of Common Stock, $.01 par
value, outstanding.




---



Transkaryotic Therapies, Inc. INDEX PART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2004 and September 30, 2003Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2004 and September 30, 2003Notes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 6. ExhibitsSIGNATURESEXHIBIT INDEXEX-10.1 SERVICES AGREEMENT DATED JULY 23, 2004EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
  2




---



##### Table of Contents



PART I FINANCIAL INFORMATION 
 Item 1. Condensed Consolidated Financial Statements Transkaryotic Therapies, Inc. 
 
 September 30,
    
    December 31,(in thousands, except par values)
    
    2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    215,013
    
    
    $
    172,954Marketable securities
    
    
    7,820
    
    
    
    7,993Accounts receivable
    
    
    28,659
    
    
    
    23,064Inventories
    
    
    12,342
    
    
    
    16,741Prepaid expenses and other current assets
    
    
    5,931
    
    
    
    4,587Total current assets
    
    
    269,765
    
    
    
    225,339Property and equipment, net
    
    
    62,737
    
    
    
    61,908Other assets
    
    
    4,846
    
    
    
    1,922Total assets
    
    $
    337,348
    
    
    $
    289,169Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    6,105
    
    
    $
    7,466Accrued expenses
    
    
    19,290
    
    
    
    11,925Current portion of accrued restructuring charges
    
    
    1,805
    
    
    
    1,523Current portion of deferred revenue
    
    
    259
    
    
    
    235Interest payable
    
    
    480
    
    
    
    Total current liabilities
    
    
    27,939
    
    
    
    21,149Long-term portion of accrued restructuring charges
    
    
    5,656
    
    
    
    6,518Long-term portion of deferred revenue
    
    
    3,366
    
    
    
    2,767Convertible notes payable
    
    
    94,000
    
    
    
    Minority interest
    
    
    358
    
    
    
    413Stockholders equity:Series B preferred stock, $.01 par value, 1,000 shares
authorized; no shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively
    
    
    
    
    
    
    Common stock, $.01 par value; 100,000 shares authorized;
35,139 and 34,974 shares issued, and 34,772 and 34,607
shares outstanding,
at September 30, 2004 and December 31, 2003, respectively
    
    
    351
    
    
    
    350Additional paid-in capital
    
    
    687,812
    
    
    
    686,545Accumulated deficit
    
    
    (493,839
    )
    
    
    (440,668
    )Accumulated other comprehensive income
    
    
    13,987
    
    
    
    14,377Less treasury stock, at cost; 367 shares at September 30, 2004
and December 31, 2003
    
    
    (2,282
    )
    
    
    (2,282
    )Total stockholders equity
    
    
    206,029
    
    
    
    258,322Total liabilities and stockholders equity
    
    $
    337,348
    
    
    $
    289,169
 See accompanying Notes to Condensed Consolidated Financial Statements. 3




---



##### Table of Contents



Transkaryotic Therapies, Inc. 
 
 Three Months Ended September 30,
    
    Nine Months Ended September 30,(in thousands, except per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Revenues:Product sales
    
    $
    19,479
    
    
    $
    15,185
    
    
    $
    54,920
    
    
    $
    41,738License and research revenues
    
    
    79
    
    
    
    1,533
    
    
    
    239
    
    
    
    1,57719,558
    
    
    
    16,718
    
    
    
    55,159
    
    
    
    43,315Operating expenses:Cost of goods sold
    
    
    3,387
    
    
    
    2,769
    
    
    
    8,907
    
    
    
    11,045Research and development
    
    
    23,527
    
    
    
    17,895
    
    
    
    65,674
    
    
    
    55,730Selling, general and administrative
    
    
    9,984
    
    
    
    7,285
    
    
    
    30,893
    
    
    
    25,863Restructuring charges
    
    
    1,257
    
    
    
    2,765
    
    
    
    3,030
    
    
    
    11,324Intellectual property license expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,35038,155
    
    
    
    30,714
    
    
    
    108,504
    
    
    
    105,312Loss from operations before minority
interest
    
    
    (18,597
    )
    
    
    (13,996
    )
    
    
    (53,345
    )
    
    
    (61,997
    )Minority interest
    
    
    23
    
    
    
    31
    
    
    
    55
    
    
    
    (305
    )Loss from operations after minority
interest
    
    
    (18,574
    )
    
    
    (13,965
    )
    
    
    (53,290
    )
    
    
    (62,302
    )Other income (loss):Interest income, net
    
    
    166
    
    
    
    417
    
    
    
    552
    
    
    
    1,834Loss on disposal of fixed assets
    
    
    (402
    )
    
    
    (5
    )
    
    
    (433
    )
    
    
    (50
    )(236
    )
    
    
    412
    
    
    
    119
    
    
    
    1,784Net loss
    
    $
    (18,810
    )
    
    $
    (13,553
    )
    
    $
    (53,171
    )
    
    $
    (60,518
    )Basic and diluted net loss per share
    
    $
    (0.54
    )
    
    $
    (0.39
    )
    
    $
    (1.53
    )
    
    $
    (1.75
    )Shares used to compute basic and
diluted net loss per share
    
    
    34,728
    
    
    
    34,567
    
    
    
    34,665
    
    
    
    34,551
 See accompanying Notes to Condensed Consolidated Financial Statements. 4




---



##### Table of Contents



Transkaryotic Therapies, Inc. 
 
 Nine Months EndedSeptember 30,(in thousands)
    
    2004
    
    2003Operating activities:Net loss
    
    $
    (53,171
    )
    
    $
    (60,518
    )Adjustments to reconcile net loss to net
cash used for operating activities:Depreciation and amortization
    
    
    9,931
    
    
    
    8,658Amortization of debt offering costs
    
    
    182
    
    
    
    Loss on fixed asset disposals
    
    
    433
    
    
    
    625Compensation expense related to equity issuances
    
    
    
    
    
    
    624Minority interest
    
    
    (55
    )
    
    
    305Change in accrued intellectual property license expense
    
    
    
    
    
    
    (11,368
    )Change in accrued restructuring charges
    
    
    (580
    )
    
    
    7,958Changes in other operating assets and liabilities
    
    
    4,404
    
    
    
    (5,768
    )Net cash used for operating activities
    
    
    (38,856
    )
    
    
    (59,484
    )Investing activities:Proceeds from sales and maturities of marketable securities
    
    
    39,932
    
    
    
    99,784Purchases of marketable securities
    
    
    (39,765
    )
    
    
    (15,939
    )Purchases of property and equipment
    
    
    (11,386
    )
    
    
    (8,735
    )Proceeds from fixed asset disposal
    
    
    193
    
    
    
    40Changes in other assets
    
    
    35
    
    
    
    125Net cash provided by (used for) investing activities
    
    
    (10,991
    )
    
    
    75,275Financing Activities:Issuance of common stock, net
    
    
    1,268
    
    
    
    1Net proceeds from issuance of convertible notes
    
    
    90,859
    
    
    
    Repurchase of treasury stock
    
    
    
    
    
    
    (2,282
    )Net cash provided by (used for) financing activities
    
    
    92,127
    
    
    
    (2,281
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    (221
    )
    
    
    1,829Net increase in cash and cash equivalents
    
    
    42,059
    
    
    
    15,339Cash and cash equivalents at January 1
    
    
    172,954
    
    
    
    154,604Cash and cash equivalents at September 30
    
    $
    215,013
    
    
    $
    169,943
 See accompanying Notes to Condensed Consolidated Financial Statements. 5




---



##### Table of Contents



Transkaryotic Therapies, Inc. 
 
 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements. In the
opinion of management, the accompanying financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position, results of operations and cash
flows for the periods presented. The results of operations for the interim
period ended September 30, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004 or for any other
period. These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2003 included in the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission. Gene-Activated®, and TKT® are registered trademarks and Replagal is a
trademark of the Company. Dynepo is a trademark of Aventis Pharmaceuticals,
Inc., which is a subsidiary of Sanofi-Aventis SA, the successor to Aventis SA
(Sanofi-Aventis). Fabrazyme is a trademark of Genzyme Corporation
(Genzyme). All other trademarks, service marks or trade names referenced in
this quarterly report are the property of their respective owners. 2. NET LOSS PER SHARE The Company calculates net loss per share in accordance with Statement of
Financial Accounting Standard (SFAS) No. 128, Earnings Per Share, and related
interpretations. Basic earnings per share is computed using the weighted
average shares outstanding. Basic net loss per share was equivalent to diluted net loss per share for the
three and nine months ended September 30, 2004 and 2003 because common
equivalent shares from the Companys 1.25% Senior Convertible Notes due 2011
(the Notes) as described in note 8 and stock options have been excluded, as
their effect is antidilutive. 3. COMPREHENSIVE LOSS Comprehensive loss comprises net loss, unrealized gains and losses on
marketable securities designated as available-for-sale, and cumulative foreign
currency translation adjustments. The Company had a total comprehensive loss of
$15,374,000 and $13,216,000 for the three months ended September 30, 2004 and
2003, respectively. For the nine months ended September 30, 2004 and 2003, the
Company had a total comprehensive loss of $53,561,000 and $57,003,000,
respectively. 4. REVENUE RECOGNITION The Company recognizes revenue from product sales in accordance with Staff
Accounting Bulletin (SAB) 104, Revenue Recognition, when there is
persuasive evidence that an arrangement exists, delivery has occurred, the
price is fixed or determinable, and collection is reasonably assured. The
Company determines that the fee is fixed and determinable, and that collection
is reasonably assured in Europe and in some other countries outside of the
United States once reimbursement agreements and pricing arrangements are
established and formalized, as these agreements establish the relevant payors
intent to pay, or once there are legally binding purchase agreements between a
hospital or other customer and the Company, or once 6




---



##### Table of Contents



approval has been granted by the payor for the reimbursement of cost for
individual patients. The Company only records revenues in those countries for
which one of the conditions set forth in the previous sentence has been met. During the first quarter of 2004, the Company recorded a $481,000 reversal of a
price rebate accrual to product sales that it recorded in 2003 because the
Company determined it was no longer probable that it would be required to pay
this amount to customers. In the European pharmaceutical industry, it is common practice that customers,
principally hospitals, have a general right of return on purchases of product.
To date, the Company has not had any sales returns. The Company generally ships
small quantities of Replagal to customers on the basis of firm purchase orders.
The customers generally order Replagal for specific patients, and the drug is
typically utilized within one month of receipt. In part due to the expensive
price of the drug, customers typically maintain small inventories of Replagal.
Because of these circumstances, the Company expects that it will have no or
minimal returns in the future and, accordingly, has not recorded a reserve for
sales returns and allowances in accordance with SFAS No. 48, Revenue
Recognition When Right-of-Return Exists. For multiple-deliverable arrangements entered into after July 1, 2003, the
Company applies Emerging Issues Task Force (EITF) Issue 00-21, Revenue
Arrangements with Multiple Deliverables. The Company evaluates such
arrangements to determine if the deliverables are separable into units of
accounting and then applies applicable revenue recognition criteria to each
unit of accounting. The Company applied EITF 00-21 in accounting for the
payments made to the Company under the distribution agreement and legal
settlement that the Company entered into with Genzyme in October 2003. The Company records contract revenue for research and development as it is
earned based on the performance requirements of the contract. Non-refundable
contract fees for which there are neither further performance obligations nor
continuing involvement by the Company are recognized on the earlier of when the
fees are received or when collection is reasonably assured. The Company
recognizes revenue from non-refundable up-front license fees and milestone
payments where TKT has continuing involvement through development collaboration
or an obligation to supply product, as the obligation is fulfilled or ratably
over the development period or the period of the manufacturing obligation, as
appropriate. The Company recognizes revenue associated with substantive
performance milestones upon the achievement of the milestones, as defined in
the respective agreements. Advance payments received in excess of amounts
earned are classified as deferred revenue. In June 2004, the Company entered into an agreement to distribute Replagal in
Australia. Due to an unpredictable rebate process mandated by the Australian
government reimbursement agency, the sales price is not fixed or
determinable. Therefore, the Company is deferring revenues related to shipments
to the
Australian distributor until the rebate amounts are finalized by the
Australian government. The Company expects
the rebate amounts to be finalized in the third or fourth quarter of 2005. As of September 30, 2004, the
Company has recorded approximately $781,000 as deferred revenue for shipments
to Australia. 5. INVENTORIES Inventories consist of the following: September 30,
    
    December 31,(in thousands)
    
    2004
    
    2003Raw materials
    
    $
    2,071
    
    
    $
    574Work in process
    
    
    1,545
    
    
    
    7,931Finished goods
    
    
    8,726
    
    
    
    8,236$
    12,342
    
    
    $
    16,741
 7




---



##### Table of Contents



Inventories are stated at the lower of cost or market with cost determined
under a first-in, first-out method. Inventories are reviewed periodically for
slow-moving or obsolete status based on sales activity, both projected and
historical. 6. RESTRUCTURING CHARGES In February 2003, TKT announced a major reorganization in an effort to reduce
costs and narrow the scope of the Companys research initiatives. Under this
reorganization, TKT refocused its research, development, and commercialization
efforts primarily on therapeutics for the treatment of rare genetic diseases
caused by protein deficiencies. The Company is seeking collaborative partners
for programs outside of its core focus, including some of its Gene-Activated
protein products, which are versions of proteins that would compete with
proteins currently being marketed by third parties, and for its gene therapy
programs. During 2003, TKT reduced its United States headcount by approximately
100 positions and further reduced headcount through attrition. As of September
30, 2004, TKT had 350 full-time United States employees. TKT also vacated four
facilities as part of the restructuring. The Companys employee-related and
facility consolidation restructuring actions were substantially completed as of
December 31, 2003. As a result of the restructuring, the Company recorded charges of $12,461,000
in 2003, in accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activitieswhich consisted of costs related to employee
severance and outplacement services costs for 74 employees, primarily in
research and development, remaining lease obligations for the four facilities
that the Company vacated, and a write-down of leasehold improvements for some
of the facilities which were vacated. Since the first quarter of 2003, the Company has recorded
$1,319,000 related to employee severance and outplacement services costs,
$13,574,000 related to lease obligations and $598,000 for write-off of fixed
assets. The Company recorded restructuring charges of $3,030,000 for the nine
months ended September 30, 2004 related to ongoing lease obligations for the
vacated facilities that have not yet been sublet. The Company expects to
continue to record restructuring charges related to vacated facility expenses
during the remainder of the lease terms until such facilities are sublet. The
last to expire lease term expires in 2011. The remaining lease obligation costs
are included in restructuring charges in the statements of operations and in
accrued expenses on the balance sheet at September 30, 2004. The following
table sets forth the restructuring activity and liability balance included in
accrued expenses: Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 30,2003
    
    Charges
    
    Payments
    
    Other
    
    2004(in thousands)Lease obligations
    
    $
    8,041
    
    
    $
    3,030
    
    
    $
    (3,543
    )
    
    $
    (67
    )
    
    $
    7,461Less: current portion
of accrued
restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,805
    )Long-term portion of accrued
restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (5,656
    )
 7. STOCK BASED COMPENSATION The Company accounts for qualified stock option grants under the intrinsic
value method in accordance with Accounting Principles Board
(APB) Opinion No. 25,
Accounting for Stock Issued to Employees and Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB No.
25, and related interpretation, and, accordingly, recognizes no compensation
expense for the issue thereof. For certain non-qualified stock options granted,
the Company recognizes as compensation expense the excess of the fair value of
the
common stock issuable upon exercise over the aggregate exercise price of such
options. The compensation 8




---



##### Table of Contents



is amortized over the vesting period of each option
or the recipients term of employment, if shorter. The Company has adopted the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation,as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. The table below presents the net loss and basic and diluted net loss per common
share if compensation cost for the Companys stock option plans had been
determined based on the estimated fair value of awards under those plans on the
grant or purchase date: For the three months
    
    For the nine monthsended September 30,
    
    ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except per share prices)Net loss
    
    $
    (18,810
    )
    
    $
    (13,553
    )
    
    $
    (53,171
    )
    
    $
    (60,518
    )Add: Employee stock based compensation
included in net loss as reported
    
    


    
    
    
    
    
    
    
    
    
    
    
    624Deduct: Total stock-based compensation expense
determined under the fair value based method for
all employee awards
    
    
    (3,233
    )
    
    
    (1,688
    )
    
    
    (10,508
    )
    
    
    (15,244
    )Pro forma net loss
    
    $
    (22,043
    )
    
    $
    (15,241
    )
    
    $
    (63,679
    )
    
    $
    (75,138
    )Basic and diluted net loss per share- as reported
    
    $
    (0.54
    )
    
    $
    (0.39
    )
    
    $
    (1.53
    )
    
    $
    (1.75
    )Basic and diluted net loss per share- pro forma
    
    $
    (0.63
    )
    
    $
    (0.44
    )
    
    $
    (1.84
    )
    
    $
    (2.17
    )
 Fair value of awards granted under the stock option plans were estimated at
grant or purchase dates using a Black-Scholes option pricing model. The Company
uses the multiple option approach and the following assumptions: For the three months
    
    For the nine monthsended September 30,
    
    ended September 30,2004
    
    2003
    
    2004
    
    2003Expected life (years)
    
    
    1.5-7.5
    
    
    
    1.5-7.5
    
    
    
    1.5-7.5
    
    
    
    1.5-7.5Interest rate
    
    
    2.0%-4.1
    %
    
    
    1.1%-4.1
    %
    
    
    1.4%-4.6
    %
    
    
    1.1%-4.1
    %Expected volatility
    
    
    1.00
    
    
    
    0.74
    
    
    
    1.00
    
    
    
    0.74-0.95Weighted average fair value
per share of options
granted during the period
    
    
    $11.32
    
    
    
    $7.06
    
    
    
    $8.46
    
    
    
    $3.86
 The Company has never declared or paid dividends on any of its capital stock
and does not expect to do so in the foreseeable future. The pro forma effects of expensing the estimated fair value of stock options on
net loss and net loss per share for the three and nine months ended September
30, 2004 and 2003, respectively, are not necessarily representative of the
effects on reporting the results of operations for future years as options vest
over several years and the Company expects to grant options in future years. 8. CONVERTIBLE NOTES During the second quarter of 2004, the Company sold $94,000,000 of 1.25% senior
convertible notes which mature on May 15, 2011. The Company received net
proceeds of $90,859,000 from the sale and recorded issuance costs of $2,959,000
as deferred issuance costs in other assets on its balance sheet at September
30,
2004. The Company records amortization of the deferred issuance costs over the
term of the Notes and 9




---



##### Table of Contents



records the amortization as interest expense. Holders of
the Notes may convert the Notes at any time prior to the maturity date into
shares of the Companys common stock at an initial conversion rate of 54.0972
shares of common stock per $1,000 of notes, which is equivalent to a conversion
price of approximately $18.49 per share of common stock. The conversion rate is
subject to adjustment upon the occurrence of specified events. The Company may
redeem all or part of the Notes for cash at any time on or after May 20, 2007
and before May 20, 2009 at a redemption price equal to 100% of the principal
amount of the Notes to be redeemed, plus accrued and unpaid interest, if the
closing price of the Companys common stock exceeds 145% of the conversion
price for 20 trading days within a period of 30 consecutive trading days ending
on the trading day prior to the date the Company mails notice of redemption. On
or after May 20, 2009, the Company may redeem for cash all or part of the Notes
for cash at a redemption price equal to 100% of the principal amount of the
Notes to be redeemed, plus accrued and unpaid interest. Holders of the Notes
may also require the Company to repurchase all or a portion of their Notes,
subject to specified exceptions, upon the occurrence of a fundamental change of
the Company, as defined, for a price equal to 100% of the principal amount of
the Notes to be repurchased, plus accrued and unpaid interest. The Company
intends to use the net proceeds from the sale of the Notes for general
corporate purposes. 9. LITIGATION EXPENSES The Company is a party to a number of legal proceedings. The costs related to
these proceedings have been significant and the Company expects that these
costs will continue to be significant. The Company can provide no assurance as
to the timing and the outcome of any of these proceedings. A decision by a
court in the United States or in any other jurisdiction in a manner adverse to
the Company could have a material adverse effect on the Companys business,
financial condition and results of operations. The Company has not established
any reserves or provisions for these legal proceedings. Replagal Patent Litigation In July 2000, Genzyme and Mount Sinai School of Medicine (Mount Sinai) filed
a patent infringement action against the Company in the United States District
Court of Delaware. The complaint alleged that the Companys activities relating
to Replagal infringe a patent licensed by Genzyme from Mount Sinai. In January
2002, the United States District Court of Delaware dismissed this patent
litigation granting the Companys motion for summary judgment of
non-infringement and denying Genzyme and Mount Sinais motion for summary
judgment of infringement. Genzyme and Mount Sinai sought monetary damages and
injunctive relief. In March 2002, Genzyme and Mount Sinai appealed the United States District
Court of Delawares ruling to the United States Court of Appeals for the
Federal Circuit. In October 2003, pursuant to a global legal settlement,
Genzyme agreed to withdraw from this suit and paid the Company $1,555,000.
Mount Sinai is not a party to the settlement. In October 2003, the United
States Court of Appeals for the Federal Circuit affirmed a finding of
non-infringement by the Company. In January 2004, the Federal Circuit denied
Mount Sinais petition for a rehearing en banc. The deadlines associated with
further appeal have expired. Dynepo Patent Litigation In July 1999, the
Company and Sanofi-Aventis commenced legal proceedings in the United Kingdom
against Kirin-Amgen, Inc. (Kirin-Amgen), which sought a declaration that a
U.K. patent held by Kirin-Amgen will not be infringed by the Companys
activities relating to Dynepo and that certain claims of Kirin-Amgens U.K.
patent are invalid. In April 2001, the High Court of Justice in the United
Kingdom ruled that Dynepo infringed one of four claims of the patent asserted
by Kirin-Amgen. In July 2002, the Court of Appeals in the United Kingdom
reversed the High Court of Justice and ruled that Dynepo did not infringe
Kirin-Amgens patent. Kirin-Amgen petitioned the House of Lords to hear an
appeal from the decision of the Court of Appeals. The House of Lords heard this
appeal during July 2004, and in October 2004, upheld the
decision by the Court of Appeals that Dynepo did not infringe Kirin-Amgens
patent and also held that Kirin-Amgen's patent is invalid. 10




---



##### Table of Contents



In addition, in April 1997, Amgen Inc. (Amgen) commenced a patent
infringement action against the Company and Sanofi-Aventis in the United States
District Court of Massachusetts. In January 2001, the United States District
Court of Massachusetts concluded that Dynepo infringed eight of the 18 claims
of five patents that Amgen had asserted. Amgen did not seek and was not awarded
monetary damages. This decision was subsequently appealed to the United States
Court of Appeals for the Federal Circuit. In January 2003, the United States Court of Appeals for the Federal Circuit
issued a decision affirming in part and reversing in part the decision of the
United States District Court of Massachusetts and remanded the action to the
United States District Court of Massachusetts for further proceedings. In
particular, the United States Court of Appeals for the Federal Circuit:  
    
    upheld the United States District Court of Massachusetts
determination of invalidity of one of Amgens patents;
    
    upheld the United States District Court of Massachusetts
determination that some claims of two other Amgen patents were
infringed, but vacated the United States District Court of
Massachusetts determination that those patents were not invalid; and
    
    vacated the United States District Court of Massachusetts
determination that Dynepo infringed some claims of the two remaining
Amgen patents, and vacated the United States District Court of
Massachusetts determination that one of these patents was not invalid. As part of the United States Court of Appeals for the Federal Circuits ruling,
it remanded the case to the United States District Court of Massachusetts and
instructed it to reconsider the validity of Amgens patents in light of
potentially invalidating prior art. The United States District Court of
Massachusetts concluded the remand proceedings in July 2003. The United States District
Court of Massachusetts also issued a decision upholding its January 2001
findings that Amgen successfully rebutted the presumption of prosecution
history estoppel with respect to certain of its patents, and therefore, that
the Company and Sanofi-Aventis infringe such patents in light of recent Supreme
Court precedents. On remand, the Company and Sanofi-Aventis presented
affirmative defenses with respect to such patents. In October 2004,
the United States District Court of Massachusetts issued a decision on the
remanded issues, finding that certain claims related to four patents held by
Amgen are valid and infringed by the Company. The Company intends to appeal
the decision of the United States District Court of Massachusetts to the United
States Court of Appeals for the Federal Circuit. In March 2004, the Company and Sanofi-Aventis amended the license agreement
between the Company and Sanofi-Aventis relating to Dynepo. Under the amended
license agreement, Sanofi-Aventis retained the right to control the Amgen
litigation in the United States and assumed responsibility for 100% of the
litigation costs incurred with respect to both the United States litigation and
the Kirin-Amgen litigation in the United Kingdom prior to March 26, 2004.
Sanofi-Aventis is required to pay all U.S. litigation expenses incurred from
and after March 26, 2004, but the Company is required to reimburse
Sanofi-Aventis for 50% of these litigation costs. Sanofi-Aventis is entitled to
deduct up to 50% of any royalties that Sanofi-Aventis may otherwise owe the
Company with respect to the sale of Dynepo until Sanofi-Aventis has recouped
the full amount of the Companys share of the U.S. litigation costs. The
Company has the right to control the U.K. litigation and is responsible for all
litigation costs incurred with respect to such litigation and any other
litigation that might arise outside of the United States from and after March
26, 2004. Subsequent to the amendment of the license agreement and as of
September 30, 2004, the Company had incurred approximately $1,300,000 related
to the U.K. litigation. Based on the House of Lords favorable ruling in
October 2004, the Company does not expect to incur further significant costs
related to the U.K. litigation, and expects that, pursuant to U.K. fee-shifting
rules, Kirin-Amgen will have to pay the Company a
substantial percentage of the legal fees it has incurred since March 26, 2004.
The Company expects that 11




---



##### Table of Contents



there will be ongoing costs related to the U.S.
litigation, specifically the appeal of the decision of the United Stated
District Court of Massachusetts. Gene Activation Patent Litigation In August 2004, Applied Research Systems ARS Holding N.V., a wholly-owned
subsidiary of Serono SA (Serono), served the Company with an amended
complaint that was filed in the U.S. District Court of Massachusetts alleging
that the Company infringes Seronos U.S. Patent No. 5,272,071 (the 071
patent) which purportedly covers certain methods of gene activation. In the
original complaint, Serono appealed an adverse decision by the Board of Patent
Appeals and Interferences of the U.S. Patent and Trademark Office (PTO) in an
interference proceeding between Cell Genesys, Inc. (Cell Genesys) and Serono
regarding the 071 patent declared in 1996. In June 2004, the PTO held that
both Serono and Cell Genesys were entitled to certain claims in their
respective patent and patent application, and both parties appealed the
decision on the interference. The Company was not a party to this interference.
In October, 2004, the Company filed a motion to dismiss the amended complaint.
The European counterpart to the 071 patent, EP No. 0 505 500 (the 500
patent), was revoked by the European Patent Office in January 2002 on grounds
of invalidity due to insufficiency of disclosure. When the revocation of the
patent was still on appeal, Serono prematurely sued the Company in the
Netherlands in January 2003 and claimed that Replagal infringed the 500
patent. Serono withdrew the suit in November 2003 after the earlier revocation
of its patent was affirmed by a unanimous Technical Board of Appeals. Purported Class Action Shareholder Suit In January and February 2003, various parties filed purported class action
lawsuits against the Company and Richard Selden, the Companys former Chief
Executive Officer, in the United States District Court for the District of
Massachusetts. The complaints generally allege securities fraud during the
period from January 2001 through January 2003. Each of the complaints asserts
claims under Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5
promulgated thereunder, and Section 20(a) of the Exchange Act, and alleges that
the Company and its officers made false and misleading statements and failed to
disclose material information concerning the status and progress for obtaining
United States marketing approval of the Companys Replagal product to treat
Fabry disease during that period. In March 2003, various plaintiffs filed motions to consolidate, to appoint lead
plaintiff, and to approve plaintiffs selections of lead plaintiffs counsel.
In April 2003, various plaintiffs filed a Joint Stipulation and Proposed Order
of Lead Plaintiff Applicants to Consolidate Actions, To Appoint Lead Plaintiffs
and to Approve Lead Plaintiffs Selection of Lead Counsel, Executive Committee
and Liaison Counsel. In April 2003, the Court endorsed the Proposed Order,
thereby consolidating the various matters under one matter: In re Transkaryotic
Therapies, Inc., Securities Litigation, C.A. No. 03-10165-RWZ. In July 2003, the plaintiffs filed a Consolidated and Amended Class Action
Complaint, which the Company refers to as the Amended Complaint, against the
Company; Dr. Selden; Daniel Geffken, the Companys former Chief Financial
Officer; Walter Gilbert, Jonathan S. Leff, Rodman W. Moorhead, III, and Wayne
P. Yetter, members of the Companys board of directors; William R. Miller and
James E. Thomas, former members of the Companys board of directors; and SG
Cowen Securities Corporation, Deutsche Bank Securities Inc., Pacific Growth
Equities, Inc. and Leerink Swann & Company, underwriters of the Companys
common stock in prior public offerings. The Amended Complaint alleges securities fraud during the period from January
4, 2001 through January 10, 2003. The Amended Complaint alleges that the
defendants made false and misleading statements and failed to disclose material
information concerning the status and progress for obtaining United States
marketing approval of Replagal during that period. The Amended Complaint
asserts claims against Dr. Selden and the Company under Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder; and against Dr. Selden
under Section 20(a) of the Exchange Act. The Amended Complaint also asserts
claims based on the Companys public offerings of June 29, 2001, December 18,
2001 and December 26, 12




---



##### Table of Contents



2001 against each of the defendants under Section 11 of
the Securities Act of 1933 and against Dr. Selden under Section 15 of the
Securities Act; against SG Cowen Securities Corporation, Deutsche Bank
Securities, Pacific Growth Equities, Inc., and Leerink Swann & Company under
Section 12(a)(2) of the Securities Act. The plaintiffs seek equitable and
monetary relief, an unspecified amount of damages, with interest, and
attorneys fees and costs. In September 2003, the Company filed a motion to dismiss the Amended Complaint.
A hearing of the motion occurred in December 2003. In May 2004, the United
States District Court for the District of Massachusetts issued a Memorandum of
Decision and Order denying in part and granting in part the Companys motion to
dismiss the purported class action lawsuit. In the Memorandum, the Court found
several allegations against the Company arose out of forward-looking statements
protected by the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 (PSLRA). The Court dismissed those statements as falling
within the PSLRAs safe harbor provisions. The Court also
dismissed claims based on the public offerings
of June 29, 2001 and December 18, 2001 because no plaintiff had standing to bring such claims. The Court
allowed all other allegations to remain. In June 2004, TKT submitted an unopposed motion seeking clarification from the
Court that the Memorandum dismissed claims based on the first two offerings as
to all defendants. The Court granted the motion. In July 2004, the plaintiffs voluntarily dismissed all claims based on the
third offering because no plaintiff had standing to bring such claims. The plaintiffs subsequently filed a motion seeking permission to notify certain
TKT investors of the dismissal of the claims based on the offerings, and to
inform those investors of their opportunity to intervene in the lawsuit. TKT
filed an opposition to this motion in July 2004. The Court has not yet ruled on
this motion. The Company filed an answer to the Amended Complaint in July 2004.
The plaintiffs then filed a motion for class certification in July 2004. Any
opposition to this motion is due in December 2004. A hearing on class
certification is scheduled to be held in January 2005. As of September 30, 2004, the Company had spent approximately $1,400,000
related to this lawsuit and the shareholder derivative suit described below.
The Company expects that future costs related to these suits will be
significant. Shareholder Derivative Suit In April 2003, South Shore Gastrointerology UA 6/6/1980 FBO Harold Jacob, and
Nancy R. Jacob Ttee filed a Shareholder Derivative Complaint against Dr.
Selden; against the following members of the Companys board of directors:
Jonathan S. Leff, Walter Gilbert, Wayne P. Yetter, Rodman W. Moorhead III;
against the following former members of the Companys board of directors: James
E. Thomas, and William Miller; and against the Company as nominal defendant, in
Middlesex Superior Court in the Commonwealth of Massachusetts, Civil Action No.
03-1669. On May 29, 2003, the parties moved to transfer venue to the Business
Litigation Session in Suffolk Superior Court in the Commonwealth of
Massachusetts. The parties motion was allowed, and in June 2003 the matter was
accepted into the Business Litigation Session as Civil Action No. 03-02630-BLS. The complaint alleges that the individual defendants breached fiduciary duties
owed to the Company and its shareholders by disseminating materially false and
misleading statements to the market and causing or allowing the Company to
conduct its business in an unsafe, imprudent and unlawful manner. The complaint
purports to assert derivative claims against the individual defendants for
breach of fiduciary duty, and to assert a claim for contribution and
indemnification on behalf of the Company for any liability the Company incurs
as a result of the individual defendants alleged misconduct. The complaint
seeks declaratory,
equitable and monetary relief, an unspecified amount of damages, with interest,
and attorneys fees and costs. 13




---



##### Table of Contents



In August 2003, the plaintiff filed its Verified Amended Derivative Complaint,
which the Company refers to as the Amended Derivative Complaint. The Amended
Derivative Complaint alleges that the individual defendants breached fiduciary
duties owed to the Company and its stockholders by causing the Company to issue
materially false and misleading statements to the public, by signing the
Companys Form 10-Ks for the years 2000 and 2001 and by signing a registration
statement. The Amended Derivative Complaint also alleges that defendant Dr.
Selden sold the Companys stock while in possession of material non-public
information. The plaintiffs seek declaratory, equitable and monetary relief, an
unspecified amount of damages, with interest, and attorneys fees and costs. In September 2003, the Company filed a motion to dismiss the Amended Derivative
Complaint. A hearing of the motion was held in January 2004. In May 2004, the
Court granted the Companys motion to dismiss. In June 2004, the plaintiff
filed a Notice of Appeal appealing the dismissal of the Amended Derivative
Complaint to the Massachusetts Court of Appeals. As of September 30, 2004, the Company had spent approximately $1,400,000
related to this lawsuit and the purported class action shareholder suit
described above. The Company expects that future costs related to these suits
will be significant. SEC Investigation In May 2003, the Company received a copy of a formal order of investigation by
the Securities and Exchange Commission. The order of investigation relates to
the Companys disclosures and public filings with regard to Replagal and the
status of the approval process of the United States Food and Drug Administration
(the FDA) for Replagal, as well as transactions in the Companys
securities. In July 2004, the Company and Dr. Selden, its former Chief Executive Officer,
received Wells notices from the staff of the SEC, in connection with the SEC
investigation. The Wells notices state that the SEC staff has preliminarily
determined to recommend that the Commission bring a civil action for possible
violations of the federal securities laws in which it may seek an injunction
and civil penalties against TKT, and an injunction, disgorgement, and an
officer and director bar as to Dr. Selden. The Company intends to continue to
cooperate fully with the SEC in the investigation. As of September 30, 2004,
the Company had spent approximately $1,600,000 related to this matter. 10. CONTRACTUAL COMMITMENTS In July 2004, the Company entered into a manufacturing agreement with Lonza
Biologics plc (Lonza) under which Lonza agreed to manufacture Dynepo bulk
drug substance at Lonzas cGMP production facility in Slough, UK. The Company
has committed to pay Lonza approximately $13,000,000 related to initial
start-up and manufacturing costs of Dynepo bulk drug substance through 2006.
The Company may terminate the agreement upon at least 30 days notice to Lonza.
However, in the event that the Company terminates the agreement upon less than
twelve months notice to Lonza, the Company will be required to pay Lonza for
any binding orders for the manufacture of Dynepo bulk drug substance placed by
the Company prior to the date of notice of termination. 11. SUBSEQUENT EVENT On October 22, 2004, the Company completed the purchase of the 20% equity
interest in TKT Europe AB, formerly known as TKT Europe-5S AB (TKT Europe),
the Companys sales and marketing
subsidiary in Europe, held by the founding European executives of TKT Europe. With this purchase,
the Company now owns 100% of TKT Europe. The purchase price, based on a predefined formula
included in the stockholders agreement between the Company and the founding
European executives, was $61,130,000
and was funded by the Companys existing cash balances. The purchase price will be
allocated to the assets acquired and to the liabilities assumed based
on 20 percent of their estimated fair value of the date of
acquisition. The acquisition will
be accounted for as a step acquisition in the fourth quarter of 2004. The
Company expects that the majority of the purchase price will 14




---



##### Table of Contents



be allocated to
tangible and intangible assets. 15




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Overview Transkaryotic Therapies, Inc. (the Company or TKT) is a biopharmaceutical
company researching, developing and commercializing therapeutics, primarily for
the treatment of rare genetic diseases caused by protein deficiencies. TKT has
approval to market and sell Replagal (agalsidase alfa) (Replagal), its enzyme
replacement therapy for the long-term treatment of patients with Fabry disease,
in 34 countries outside of the United States. The Company recorded $19,479,000
and $54,920,000 of product sales of Replagal in the three months and nine
months periods ended September 30, 2004, respectively. The Companys most
advanced active clinical programs include iduronate-2-sulfatase (I2S), its
enzyme replacement therapy for the treatment of Hunter syndrome, and
Gene-Activated glucocerebrosidase (GA-GCB), its enzyme replacement therapy
for the treatment of Gaucher disease. The Company is currently conducting a
pivotal Phase III clinical trial of I2S and a Phase I/II clinical trial of
GA-GCB. TKT is currently evaluating out-licensing opportunities for a number of
other of its Gene-Activated and gene therapy products. In addition to its focus
on rare diseases, TKT intends to commercialize Dynepo (epoeitin delta)
(Dynepo), its Gene-Activated erythropoietin product for anemia related to
kidney disease, in the European Union by entering into arrangements with third
parties to distribute, sell and market Dynepo. With the exception of 1995, the Company has incurred substantial annual
operating losses since inception. The Company expects to incur significant
operating losses until it generates substantially greater product sales than it
is currently generating. Until such time, the Company is dependent upon product
sales, collections of accounts receivable, existing cash resources, interest
income, external financing from equity offerings, debt financings, and
collaborative research and development alliances to finance its operations. At
September 30, 2004, the Companys accumulated deficit was $493,839,000. The
Company expects, based on its current operating plan, that its existing capital
resources and anticipated proceeds from collections on existing accounts
receivable and on future accounts receivable from future product sales,
anticipated cash payments under collaborative agreements, and interest income,
will be sufficient to fund its operations into 2006. The Companys results of operations may vary significantly from period to
period depending on, among other factors:  
    
    the timing and amount of Replagal product sales, as well as the
collections of receivables;
    
    continued progress in TKTs research and development programs,
particularly with respect to I2S and GA-GCB;
    
    the Companys ability to manufacture Dynepo product on a timely and
cost-effective basis, including the ability to obtain approval from
the European Commission of a site change amendment to its existing
marketing approval application (MAA) for Dynepo and to enter into successful third party
arrangements for the marketing of Dynepo in the European Union and
elsewhere;
    
    the scope and results of the Companys clinical trials;
    
    the timing of, and the costs involved in, obtaining regulatory
approvals and the scope of such regulatory approvals, if any;
    
    the cost of expansion of the Companys internal manufacturing facilities;
    
    the inherent variability of product yields in biological manufacturing activities;
    
    fluctuations in foreign exchange rates for sales denominated in
currencies other than the United States dollar; 16




---



##### Table of Contents




    
    the quality and timeliness of the performance of third party suppliers;
    
    the cost of commercialization activities, including product marketing, sales and distribution;
    
    the costs involved in preparing, filing, prosecuting, maintaining,
and enforcing patent claims and other patent-related costs, including
litigation costs and the results of such litigation;
    
    the outcome of pending purported class action and other related, or
potentially related, actions and the litigation costs with respect to
such actions;
    
    the integration of TKT Europes infrastructure into the Companys
existing infrastructure and the retention of key employees of TKT
Europe;
    
    the outcome of the Securities and Exchange Commission (the SEC)
investigation referred to in the notes to the condensed, consolidated
financial statements in this report; and
    
    the Companys ability to establish and maintain collaborative
arrangements. Recent Product Development and Business Activities TKT Europe On October 22, 2004, the Company completed the purchase of the 20% equity
interest in TKT Europe held by the founding European executives of TKT Europe.
The purchase price, based on a predefined formula included in the stockholders
agreement between the Company and the founding European executives, was
$61,130,000 and was funded by existing cash balances. The purchase price will
be allocated to the assets acquired and to the liabilities assumed based on 20
percent of their estimated fair value at the date of acquisition. The
acquisition will be accounted for as a step acquisition in the fourth quarter
of 2004. The Company expects that the majority of the purchase price will be
allocated to tangible and intangible assets. Dynepo In September 2004, Sanofi-Aventis granted the Company a license to clinical
trial results from a controlled Phase III clinical trial conducted by
Sanofi-Aventis evaluating Dynepo for the treatment of anemia in cancer patients
treated with chemotherapy. The Company expects that top-line results of the
clinical trial will be available in the first half of 2005. If the data are
positive, the Company intends to file an amendment to the European Dynepo
product license and seek to expand the label to include anemia associated with
chemotherapy. In July 2004, the Company entered into a manufacturing agreement with Lonza
under which Lonza agreed to manufacture Dynepo bulk drug substance at Lonzas
cGMP production facility in Slough, UK. In the future, the Company plans to
enter into arrangements with contract manufacturers for the preparation and
packaging of Dynepo bulk drug substance into finished product, work with its
contract manufacturers to set up and validate manufacturing processes, and
obtain the approval by the
European Commission of an amendment to the approved MAA for Dynepo reflecting the new manufacturing sites. The Company intends to commercialize Dynepo by entering
into arrangements with third parties for the sales and marketing of Dynepo. Application of Critical Accounting Policies and Estimates The discussion and analysis of TKTs financial condition and results of
operations is based on the Companys consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires 17




---



##### Table of Contents



TKT to make estimates and judgments that affect its reported assets and
liabilities, revenues and expenses, and other financial information. Actual
results may differ significantly from these estimates under different
assumptions and conditions. The Company regards an accounting estimate underlying its financial statements
as a critical accounting estimate if the accounting estimate requires the
Company to make assumptions about matters that are highly uncertain at the time
of estimation and if different estimates that reasonably could have been used
in the current period, or changes in the estimate that are reasonably likely to
occur from period to period, would have had a material effect on the
presentation of financial condition, changes in financial condition, or results
of operations. The Company regards its policies with respect to revenue recognition, accounts
receivable, inventories, asset impairment and restructuring charges as
critical accounting estimates. There have been no changes to such policies or
significant changes in assumptions or estimates that would affect such policies
for the nine months ended September 30, 2004. These policies are described
under the caption Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations in the Companys Annual Report on Form
10-K for the year ended December 31, 2003, which is on file with the SEC. Results of Operations The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the accompanying condensed,
consolidated financial statements and the related notes thereto. Revenues Revenues for the three and nine months ended September 30, 2004 and 2003 were: Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    $ Change
    
    % Change
    
    2004
    
    2003
    
    $ Change
    
    % Change(in thousands, except percentages)Product sales
    
    $
    19,479
    
    
    $
    15,185
    
    
    $
    4,294
    
    
    
    28
    %
    
    $
    54,920
    
    
    $
    41,738
    
    
    $
    13,182
    
    
    
    32
    %License and research revenues
    
    
    79
    
    
    
    1,533
    
    
    
    (1,454
    )
    
    
    -95
    %
    
    
    239
    
    
    
    1,577
    
    
    
    (1,338
    )
    
    
    -85
    %$
    19,558
    
    
    $
    16,718
    
    
    $
    2,840
    
    
    
    17
    %
    
    $
    55,159
    
    
    $
    43,315
    
    
    $
    11,844
    
    
    
    27
    %
 Product Sales The majority of Replagal product sales were in Europe. The increase in sales in
the three months and nine months periods of 2004 over the comparative periods
in 2003 reflects an overall increase in unit sales and the favorable effects of
foreign currency fluctuations as described below. For both comparative periods,
unit sales increased due in part to additional patients commencing therapy. In
addition, a reversal of a 2003 price rebate accrual during the first quarter of
2004 contributed approximately $481,000 to product sales in the nine months
ended September 30, 2004 as the Company determined it was no longer probable
that it would be required to pay this amount to customers. The Company prices Replagal in the functional currency of the country into
which it is sold. While overall price levels in local currencies are generally
consistent period over period, foreign exchange fluctuations caused an increase
in the United States dollar denominated average selling prices. In the third
quarter of 2004, foreign currency fluctuations increased sales and gross
margins by approximately $1,490,000, or 10%,
as compared to the third quarter of 2003. For the nine months ended September
30, 2004, foreign currency fluctuations increased sales and gross margins by
approximately $4,870,000, or 12%, as compared to the corresponding period in
2003. 18




---



##### Table of Contents



Substantially all of the Companys manufacturing costs are in United States
dollars. Therefore, any fluctuation in the value of the payment currencies
relative to the United States dollar is likely to impact gross margins in the
future since the Companys manufacturing costs would remain approximately the
same while its revenue in terms of United States dollars would change. Product
sales and gross margins will be negatively affected if the United
States dollar
strengthens against currencies in which the Company sells Replagal. The Company
currently does not engage in foreign currency hedging activities. License and Research Revenues The decrease in license and research revenues in the three and nine month
periods in 2004 from the corresponding periods in 2003 reflects non-recurring
amounts earned under the Companys collaborative agreements during the third
quarter of 2003. License and research revenues in the three and nine months
ended September 30, 2004 reflects amounts received under the global legal
settlement and distribution agreement that the Company executed with Genzyme
Corporation (Genzyme) in the fourth quarter of 2003. Revenues related
to these agreements are being
recognized ratably over a thirteen year period, representing the term over
which the Company has agreed to supply bulk drug substance to Genzyme under the
distribution agreement. During the fourth quarter of 2003, the Company received
a total of $3,055,000 under these agreements with Genzyme which the Company
recorded as deferred revenue. During the third quarter of 2003, the Company
earned $1,018,000 under a collaborative agreement for Replagal in Japan with
Sumitomo Pharmaceutical Co. Ltd. (Sumitomo). The Company also received
$500,000 in the third quarter of 2003 from Wyeth, which succeeded Genetics
Institute, Inc. (Wyeth), in connection with the termination of its Factor
VIII gene therapy collaboration with Wyeth. Cost of Goods Sold Components of cost of goods sold are as follows: Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    $ Change
    
    % Change
    
    2004
    
    2003
    
    $ Change
    
    % Change(in thousands, except percentages)Cost of product sales
    
    $
    3,387
    
    
    $
    2,769
    
    
    $
    618
    
    
    
    22
    %
    
    $
    8,907
    
    
    $
    8,455
    
    
    $
    452
    
    
    
    5
    %Termination of
contract
manufacturing
agreement and
related charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,590
    
    
    
    (2,590
    )
    
    
    -100
    %Cost of goods sold
    
    $
    3,387
    
    
    $
    2,769
    
    
    $
    618
    
    
    
    22
    %
    
    $
    8,907
    
    
    $
    11,045
    
    
    $
    (2,138
    )
    
    
    -19
    %Cost of goods sold
as a percentage of
product sales
    
    
    17
    %
    
    
    18
    %
    
    
    
    
    
    
    
    
    
    
    16
    %
    
    
    26
    %
 Cost of goods sold consists of expenses incurred in connection with the
manufacture of Replagal. The increase in cost of goods sold for the three and
nine months ended September 30, 2004 primarily reflects increased unit sales.
The decrease in cost of goods sold as a percentage of sales for the three and
nine months ended September 30, 2004 reflects continuing improvements in
manufacturing and production efficiencies as well as the contribution of
foreign currency fluctuations on product sales. This decrease also reflects the
fact that the Company incurred non-recurring charges amounting to $2,590,000,
or 6% of product sales, during the nine month period ended in 2003 related to
excess capacity at the terminated contract manufacturer of bulk drug substance
of Replagal. The Company has historically relied on contract manufacturing arrangements with
third parties for the production of Replagal bulk drug substance for commercial
sale, as well as contract packaging and labeling services. In January 2003, the
Company terminated its agreement with a third-party manufacturer of the bulk
drug substance of Replagal, effective in July 2003. In July 2003, the European
Commission approved the Companys manufacturing facility at Cambridge,
Massachusetts (the Alewife Facility) for the commercial manufacture of bulk
drug substance for Replagal. In October 2003, the Company began significant
renovations to its manufacturing facility in the Alewife Facility in order to
expand its manufacturing capacity and configure the facility for the production
on a commercial scale of products other than Replagal. 19




---



##### Table of Contents



In anticipation of these
renovations, in the third quarter of 2003, the Company ceased all manufacturing
operations at the Alewife Facility. In June 2004, the Company completed
renovations to the Alewife Facility and recommenced manufacturing operations.
At the present time, the Company anticipates that existing inventory will be
sufficient to fill customer orders for Replagal into 2005. The Company intends
to continue to rely on third-party manufacturers for fill/finish and packaging
services. The Company expects that it will sell Replagal inventory produced both at the
terminated contract manufacturer and at the Companys Alewife Facility in the
remainder of 2004. Cost of goods sold will reflect a mix of full production
costs with respect to inventory produced at the former contract manufacturer,
and partial production costs with respect to inventory manufactured at the
Alewife Facility as the majority of such costs were previously expensed. Research and Development Expenses Research and development expenses increased by $5,632,000, or 31%, to
$23,527,000 in the third quarter of 2004, as compared to $17,895,000 during the
same period in 2003. For the nine month period ended September 30, 2004,
research and development expenses totaled $65,674,000 versus $55,730,000 for
the same period in 2003, an increase of $9,944,000, or 18%. The increase for
both periods reflects increased clinical trial and manufacturing costs in 2004
related to the Companys I2S and GA-GCB clinical programs. The Company expects
its research and development costs will continue to increase relative to the
nine month period of 2004, primarily as expenditures increase for the ongoing
I2S and GA-GCB clinical trials, for the manufacture of I2S and GA-GCB for use
in these studies, and in connection with the continuation of contract
manufacturing activities related to Dynepo. The Companys four
largest research and development programs, Replagal, I2S, GA-GCB and
Dynepo, represent the majority of the Companys research and
development spending. Expenses associated with the Companys
preclinical and clinical programs related to the Companys
products for the treatment of other rare genetic diseases, and
Gene-Activated protein products, accounted for the balance of the
Companys research and development expenses for the three months
ended September 30, 2004. The following table details the
Companys significant research and development programs: Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    $ Change
    
    % Change
    
    2004
    
    2003
    
    $ Change
    
    % Change(in thousands, except percentages)Replagal
    
    $
    3,820
    
    
    $
    4,851
    
    
    $
    (1,031
    )
    
    
    -21
    %
    
    $
    10,698
    
    
    $
    16,640
    
    
    $
    (5,942
    )
    
    
    -36
    %I2S
    
    
    13,006
    
    
    
    7,702
    
    
    
    5,304
    
    
    
    69
    %
    
    
    34,391
    
    
    
    23,720
    
    
    
    10,671
    
    
    
    45
    %GA-GCB
    
    
    2,879
    
    
    
    2,412
    
    
    
    467
    
    
    
    19
    %
    
    
    7,437
    
    
    
    6,897
    
    
    
    540
    
    
    
    8
    %Dynepo
    
    
    1,852
    
    
    
    
    
    
    
    1,852
    
    
    
    
    
    
    
    2,113
    
    
    
    
    
    
    
    2,113
    
    
    
    Subtotal
    
    
    21,557
    
    
    
    14,965
    
    
    
    6,592
    
    
    
    44
    %
    
    
    54,639
    
    
    
    47,257
    
    
    
    7,382
    
    
    
    16
    %Total research and
development
expenses
    
    $
    23,527
    
    
    $
    17,895
    
    
    $
    5,632
    
    
    
    31
    %
    
    $
    65,674
    
    
    $
    55,730
    
    
    $
    9,944
    
    
    
    18
    %Major program costs
as a percentage of
total research and development expenses
    
    
    92%
    
    
    
    84%
    
    
    
    
    
    
    
    
    
    
    
    83%
    
    
    
    85%
 Replagal The decrease in research and development expenses for Replagal in both periods
of 2004 is primarily due to the Companys decision in January 2004 to cease
efforts to seek the approval of Replagal in the United States. The Company
expects the amount of future Replagal-related research and development expenses
will decrease. The Company expects that substantially all of future Replagal
research and development expenses will relate to the conditions associated with
the Companys European and Canadian approvals of Replagal, including the
Companys obligations to conduct additional clinical trials and to submit an
annual assessment of Replagal for review by the European regulatory agency and
additional studies required in Canada. 20




---



##### Table of Contents



I2S The increases in research and development expenses for I2S in both periods of
2004 were due to increased expenditures related to the Companys ongoing I2S
pivotal trial and costs to manufacture I2S for this study. In September 2003, the
Company began enrolling patients in its pivotal trial,
referred to as the AIM (Assessment of I2S in MPS II) study, which is a
randomized, double-blind, placebo-controlled, clinical trial to evaluate the
effect of I2S over 12 months in patients with Hunter syndrome. The pivotal
clinical trial includes 96 patients with Hunter syndrome at nine sites around
the world. The Company completed enrollment in the study in March 2004. The
Company expects preliminary results from the study in the second quarter of
2005 and, if positive, the Company expects to submit applications for marketing
approval of I2S in both the United States and Europe in the second half of
2005. Future research and development costs for the I2S program are not reasonably
certain because such costs are dependent on a number of variables, including
the cost and design of any additional clinical trials, uncertainties in the
timing of the regulatory process, and the costs associated with large-scale
manufacture of I2S. The Company estimates that the total cost of its pivotal
clinical trial of I2S may aggregate approximately $10,000,000 to $15,000,000 in
2004. The Company expects that expenses related to the pivotal I2S trial will
continue to be significant. GA-GCB The increases in research and
development expenses for GA-GCB in both periods of 2004 were due to
increased expenditures related to the Companys ongoing GA-GCB
phase I/II trial and costs to manufacture GA-GCB for this study. In December 2003, the Company
submitted an investigational new drug application, or IND, to the
FDA to commence human clinical
trials of GA-GCB. This IND became effective in January 2004. In April
2004, the Company initiated a phase I/II clinical trial to evaluate the safety
and clinical activity of GA-GCB. In this clinical trial, the Company
plans to
evaluate GA-GCB in 12 patients with Gaucher disease who will receive
treatment for nine months. The Company expects to complete this phase I/II
trial in 2005. Future research and
development costs for the GA-GCB program are not reasonably certain
because such costs are dependent on a number of variables, including
the cost and design of any additional clinical trials, uncertainties
in the timing of the regulatory process, and the costs associated
with large-scale manufacture of GA-GCB. The Company expects that
expenses related to the phase I/II and subsequent pivotal trials
will continue to be significant. Dynepo The significant majority of
expenses relating to Dynepo are in connection with a manufacturing
agreement that the Company entered into with Lonza
in July 2004 under which Lonza agreed to manufacture Dynepo bulk drug substance at Lonzas
cGMP production facility in Slough, UK. The Company incurred $1,733,000 and
$1,990,000 for the three and nine month periods ended September 30, 2004,
respectively, for initial start up and development work under the manufacturing
agreement. Expenses related to development and manufacturing of the Dynepo
product will result in increases in future research and development expenses.
The Company has committed to pay Lonza approximately $13,000,000
related to initial start-up and manufacturing costs of Dynepo bulk
drug substance through 2006. Research and development costs for Dynepo are not reasonably certain because
such costs are dependent on a number of variables, including costs related to
technology transfer, costs associated with the startup of Dynepo manufacturing,
and uncertainties in the timing and approval of the manufacturing facility and
processes by the appropriate regulatory authorities. In September 2004,
Sanofi-Aventis granted the Company a license to clinical trial
results from a controlled Phase III clinical trial conducted by
Sanofi-Aventis evaluating Dynepo for the treatment of anemia in
cancer patients treated with chemotherapy. The Company expects that
top-line results of the clinical trial will be available in the first
half of 2005. If the data are positive, the Company intends to file
an amendment to the European Dynepo product license and seek to
expand the label to include anemia associated with chemotherapy. Intellectual Property License Fee Expense In June 2002, the Company obtained an exclusive license to certain patents and
patent applications from Cell Genesys related to Cell Genesys approach to gene
activation. In consideration for the license, the Company initially paid Cell
Genesys $11,000,000 in cash and issued to Cell Genesys shares of the Companys
common stock worth $15,000,000 as of the date of the agreement. On January 15, 2003, the Company and Cell Genesys renegotiated the
consideration paid for the license, and the Company repurchased the shares of
stock issued to Cell Genesys for $15,000,000 in cash. The Company incurred a
license expense in the first quarter of 2003 of $1,350,000, which represents
the decline in the
market value of the Companys common stock from December 31, 2002 to January
15, 2003. The repurchased shares have been recorded as treasury stock. Under the license agreement, Cell Genesys also has the potential to receive
certain milestone payments from the Company contingent upon the outcome of
related patent matters under the license agreement. If all of the milestones
are achieved, the Company will be obligated to pay Cell Genesys an aggregate of
$17,000,000 payable in part in cash and in part in stock. The Company cannot
predict when those milestones will become due, if ever. The Company is not
required to make royalty payments to Cell Genesys. Selling, General and Administrative Expenses The Companys selling, general and administrative expenses were as follows: 21




---



##### Table of Contents



Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    $ Change
    
    % Change
    
    2004
    
    2003
    
    $ Change
    
    % Change(in thousands, except percentages)General and administrative
    
    $
    4,437
    
    
    $
    4,196
    
    
    $
    241
    
    
    
    6
    %
    
    $
    14,455
    
    
    $
    14,426
    
    
    $
    29
    
    
    
    0
    %Selling and marketing
    
    
    5,547
    
    
    
    3,089
    
    
    
    2,458
    
    
    
    80
    %
    
    
    16,438
    
    
    
    11,437
    
    
    
    5,001
    
    
    
    44
    %Selling, general and
administrative expenses
    
    $
    9,984
    
    
    $
    7,285
    
    
    $
    2,699
    
    
    
    37
    %
    
    $
    30,893
    
    
    $
    25,863
    
    
    $
    5,030
    
    
    
    19
    %
 The increase in selling, general and administrative costs for the three months
ended September 30, 2004 as compared to the same period in 2003 reflects
primarily increased sales and marketing costs, including incentive
compensation, at TKT Europe. For the nine months ended September 30, 2004,
selling, general and administrative costs increased primarily due to incentive
compensation at TKT Europe, as well as costs incurred in connection with the UK
Dynepo litigation which totaled $1,300,000. The increase was
partially offset by non-recurring executive severance charges
incurred in 2003. The Company expects selling, general and administrative expenses related to
selling and marketing expenses to continue to increase in 2004 as the Company
establishes infrastructure and distribution capabilities to support
commencement of Replagal product sales in additional countries outside of the
European Union. In addition, the Company is incurring transition costs related
to the buyout of the minority interest in TKT Europe that it completed in
October 2004. The Company is currently evaluating potential commercialization strategies for
Dynepo in Europe, which could contribute to increases in future selling,
general and administrative expenses. Future selling, general and administrative
costs for Dynepo are not reasonably certain because such costs are dependent on
a number of variables, including costs related to entering into and
supporting potential sales and marketing licensing agreements with third parties. The Company expects selling, general and administrative costs, primarily
related to Dynepo litigation, to total approximately $2,000,000 in 2004. Restructuring Charges In February 2003, the Company announced a major reorganization in an effort to
reduce costs and narrow the scope of the Companys research initiatives. As
part of this restructuring, during the first quarter of 2003, the Company
reduced its United States headcount by approximately 100 positions and vacated
four of its facilities throughout 2003. The Companys restructuring actions
were substantially completed as of December 31, 2003. For the three months ended September 30, 2004 and 2003, restructuring charges
amounted to $1,257,000 and $2,765,000, respectively. Restructuring charges were
$3,030,000 and $11,324,000 for the nine months
ended September 30, 2004 and 2003, respectively. Restructuring charges recorded
in the three and nine month periods ended September 30, 2004 were primarily
related to ongoing facility and lease expenses related to the four vacated
facilities. Also included in the nine months ended September 30, 2003 was
$1,354,000 of employee severance and outplacement services costs for 74
employees, primarily in research and development, $9,396,000 representing the
remaining lease obligation for three of the four facilities that the Company no
longer occupied, and a write-down of $574,000 for leasehold improvements for
facilities which were vacated. The Company will continue to record
restructuring charges primarily related to vacated facility expenses during the
remainder of the lease terms until such facilities are sublet. The last to
expire lease expires in 2011. Minority Interest The Company recorded minority interest charges in the net loss of TKT Europe of
$23,000 and $55,000 for the three and nine months ended September 30, 2004,
respectively. To date, the Company has recorded 22




---



##### Table of Contents



minority interest charges
amounting to $358,000 related to the 20% minority interest in the cumulative
net income of TKT Europe. Interest Income, Net Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    $ Change
    
    % Change
    
    2004
    
    2003
    
    $ Change
    
    % Change(in thousands, except percentages)Interest income
    
    $
    571
    
    
    $
    417
    
    
    $
    154
    
    
    
    37
    %
    
    $
    1,208
    
    
    $
    1,834
    
    
    $
    (626
    )
    
    
    -34
    %Interest expense
    
    
    (405
    )
    
    
    
    
    
    
    (405
    )
    
    
    
    
    
    
    (656
    )
    
    
    
    
    
    
    (656
    )
    
    
    Interest income, net
    
    $
    166
    
    
    $
    417
    
    
    $
    (251
    )
    
    
    -60
    %
    
    $
    552
    
    
    $
    1,834
    
    
    $
    (1,282
    )
    
    
    -70
    %
 Interest income increased in the three month period ended September 30, 2004
primarily due to higher cash and marketable securities balances,
primarily as a result of the Notes offering, and a higher
rate of return relative to the same period in 2003. During the third quarter of
2004, average cash and marketable securities balances were $228,431,000 as
compared to $191,753,000 for the same period in 2003. Interest income decreased
for the nine month period ended September 30, 2004 primarily due to lower cash
and marketable securities balances, and a lower rate of return relative to the
same period in 2003. For the nine months ended September 30, 2004 and 2003, the
average cash and marketable securities balances were $199,128,000 and
$210,300,000, respectively. As a result of the Notes offering, the Company
recorded $405,000 and $656,000 for interest expense and amortization of
deferred issuance costs for the three and nine month periods ended September
30, 2004, respectively. The Company expects a decrease in interest income as a
result of lower cash and marketable securities balances due to ongoing
operating activities. Loss on Disposal of Fixed Assets The Company recorded losses on disposals of fixed assets amounting to $402,000
and $433,000 for the three and nine month periods ended September 30, 2004,
respectively. Fixed asset disposals primarily relate to the write-off of
manufacturing equipment and computer equipment that is no longer in use,
off-set from the sale of related equipment. Net Loss The Company had a net loss of $18,810,000 and $13,553,000 for the three months
ended September 30, 2004 and 2003, respectively. Basic and diluted net loss per
share was $0.54 and $0.39 for the three months ended September 30, 2004 and
2003, respectively. Restructuring charges contributed $(0.04) to the net loss
per share in the third quarter 2004 compared with $(0.08) in the third quarter
of 2003. The Companys net loss was $53,171,000 and $60,518,000 for the nine months
ended September 30, 2004 and 2003, respectively. Basic and diluted net loss per
share was $1.53 for the nine months ended September 30, 2004, as compared to a
basic and diluted net loss per share of $1.75 for the corresponding period in
2003. Restructuring charges contributed $(0.09) and $(0.33) for the nine month
periods ended September 30, 2004 and 2003, respectively. Liquidity and Sources of Capital Since its inception, TKT has financed its operations through:  
    
    the sale of common stock, preferred stock, and the
Companys 1.25% Senior Convertible Notes (the Notes);
    
    revenues from collaborative agreements;
    
    interest income; 23




---



##### Table of Contents




    
    more recently, with product sales and collections from accounts receivable; and
    
    borrowings under debt agreements. Cash Flows The Company had cash, cash equivalents and marketable securities totaling
$222,833,000 at September 30, 2004, including restricted marketable securities
collateralizing letters of credit totaling $7,820,000. Included in the
Companys cash, cash equivalents and marketable securities as of September 30,
2004 was $100,511,000 held by TKT Europe, which were denominated in Swedish
Krona, British Pound, and Euros. Cash equivalents and
marketable securities are invested in United States government and agency
obligations and money market funds. The Company used net cash of $38,856,000 for operating activities in the nine
months ended September 30, 2004. Significant cash flow changes
consisted of a net
loss of $53,171,000, and depreciation expense of $9,931,000. Working capital at
September 30, 2004, was $241,826,000 compared to $204,190,000 at December 31,
2003. Accounts receivable increased by $5,595,000 for the nine months ended
September 30, 2004 due to increased Replagal sales. Inventory decreased by
$4,399,000 for the nine months ended September 30, 2004, primarily due to
product sales and minimal Replagal manufacturing activity at the Companys
Alewife Facility during the nine month period ended September 30, 2004 as a
result of the renovation of the Alewife Facility. In certain European countries, such as Italy and Belgium, customary payment
terms on accounts receivable are significantly longer than in the United
States, particularly for products treating orphan drug indications. In these
countries, the Company historically has received, and expects to continue to
receive, payments approximately one year from the invoice date. Aggregate
accounts receivable balances for Italy and Belgium were 55% and 56% of total
accounts receivable at September 30, 2004 and December 31, 2003, respectively.
The Company monitors its days sales outstanding and collections in these
countries. To date, these customers have been paying within the customary
payment terms. If collections and days sales outstanding in these countries
deteriorate in the future, the Companys liquidity will be adversely affected. Net cash used for investing activities was $10,991,000 for the nine months
ended September 30, 2004. The Company used $11,386,000 during the nine month
period ended September 30, 2004 for property and equipment purchases primarily
related to leasehold improvements and equipment for the Companys Alewife
Facility. The Company expects to spend a total of approximately $3,600,000 for
purchases of property and equipment during the balance of 2004, principally for
expanding its internal manufacturing and information technologies capabilities. On October 22, 2004, the Company completed the purchase of the 20% equity
interest in TKT Europe,
the Companys sales and marketing
subsidiary in Europe, held by the founding European executives of TKT Europe. With this purchase,
the Company now owns 100% of TKT Europe. The purchase price, based on a predefined formula
included in the stockholders agreement between the Company and the founding
European executives, was $61,130,000
and was funded by the Companys existing cash balances. The purchase price will be
allocated to the assets acquired and to the liabilities assumed based
on 20 percent of their estimated fair value of the date of
acquisition. The acquisition will
be accounted for as a step acquisition in the fourth quarter of 2004. The
Company expects that the majority of the purchase price will be
allocated to tangible and intangible assets. The effect of exchange rate changes decreased cash and cash equivalents by
$221,000 during the nine months ended September 30, 2004 and is primarily due
to the strengthening of the United States dollar relative to the Swedish Krona
and the translation of our foreign subsidiaries cash and accounts receivable
balances, which are primarily denominated in Euros. The Companys cash requirements for operating activities and investment
activities have significantly exceeded its internally generated funds. The
Company expects that its cash requirements for such activities will continue to
exceed its internally generated funds until it is able to generate
substantially greater product sales. The Company expects that it will require substantial additional funds to
support its research and development programs, obligations under license
agreements, long-term debt interest and principal payment obligations,
acquisition of technologies, preclinical and clinical testing of its products,
pursuit of regulatory approvals, acquisition of capital equipment, expansion of
internal manufacturing capabilities, and selling, general and administrative
expenses. 24




---



##### Table of Contents



During the second quarter of 2004, the Company sold $94,000,000 of Notes for
net proceeds of $90,859,000. The Company has used these proceeds to fund its
purchase of the minority interest in TKT Europe and plans to use the balance of
such proceeds to fund its operations. Interest on the Notes is payable at a
rate of 1.25% per annum and is payable semi-annually on May 15 and November 15
of each year commencing November 15, 2004. In the near term, TKT expects to finance its operations principally from
existing cash and cash equivalents, and collections of accounts receivable
related to sales of Replagal. The Company expects, based on its
current operating plan, that its existing capital
resources and anticipated proceeds from collections on existing accounts
receivable and on future accounts receivable from future product sales,
anticipated cash payments under collaborative agreements, and interest income,
will be sufficient to fund its operations into 2006. The Company also plans to meet its long-term cash requirements through
anticipated proceeds from collections on existing accounts receivable and on
future accounts receivable from future product sales, anticipated cash payments
under collaborative agreements, and interest income. Because the Company expects to incur substantial operating losses in the
future, the Company may need to seek additional funding for its operations. The
Company may do so through collaborative arrangements and public or private debt
or equity financings or lease arrangements related to facilities and capital
equipment. In December 2000, the Company filed a shelf registration statement on Form S-3
with the SEC, which became effective in December 2000. This shelf registration
statement permits the Company to offer, from time to time, any combination of
common stock, preferred stock, debt securities and warrants of up to an
aggregate of $500,000,000. Following the sale of the Notes, the Company had
approximately $138,000,000 worth of securities available for issuance under a
shelf registration statement. If the Company is unable to obtain additional future financing, the Company may
be required to significantly curtail one or more of its research or development
programs or some of its commercial activities, which could harm the Companys
business, financial condition and operating results. The source, timing and
availability of any future financing will depend principally upon equity and
debt market conditions, interest rates and, more specifically, on the Companys
continued progress in its preclinical and clinical development programs, and
the extent of its commercial success. There can be no assurance that external
funds will be available on favorable terms, if at all. Contractual Obligations The following table summarizes the Companys significant contractual
obligations as of September 30, 2004: Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    After(in thousands)
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 Years
    
    TotalNon-cancelable operating leases
    
    $
    8,665
    
    
    $
    23,523
    
    
    $
    22,631
    
    
    $
    22,256
    
    
    $
    77,075Notes interest payment
    
    
    1,214
    
    
    
    2,350
    
    
    
    2,350
    
    
    
    2,350
    
    
    
    8,264TKT Europe buyout price
    
    
    61,130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,130Estimate clinical trial commitments
    
    
    9,029
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,029Estimate contract manufacturing commitments
    
    
    4,586
    
    
    
    4,925
    
    
    
    
    
    
    
    
    
    
    
    9,511Purchase commitments
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Total contractual cash obligations
    
    $
    85,374
    
    
    $
    30,798
    
    
    $
    24,981
    
    
    $
    24,606
    
    
    $
    165,759
 In October 2004, the Company completed the purchase of the 20% equity interest
in TKT Europe. The purchase price was $61,130,000 and was funded by existing
cash balances. 25




---



##### Table of Contents



As of September 30, 2004, the Company had committed to pay approximately
$9,029,000 to various contract vendors for administering and executing clinical
trials. The timing of payments is not reasonably certain as payments are
dependent upon actual services performed by such vendors. However, the Company
expects to pay for these commitments throughout 2004 and into 2005 as ongoing
trials are completed. In July 2004, the Company entered into a manufacturing agreement with Lonza
under which Lonza agreed to manufacture Dynepo bulk drug substance at Lonzas
cGMP production facility in Slough, UK. The Company has committed to pay Lonza
approximately $13,000,000 related to initial start-up and manufacturing costs
of Dynepo bulk drug substance through 2006. To date, the Company has paid Lonza
$3,370,000. The Company may terminate the agreement upon at least 30 days
notice to Lonza. However, in the event that the Company terminates the
agreement upon less than twelve months notice to Lonza, the Company is
required to pay Lonza for any binding orders for the manufacture of Dynepo bulk
drug substance placed by the Company prior to the date of notice of
termination. The Company also is subject to the potential commitment discussed in the
following paragraph that are not included in the above table: In June 2002, the Company obtained an exclusive license to certain patent and
patent applications from Cell Genesys related to Cell Genesys approach to gene
activation. In consideration for the license, the Company paid $11,000,000 cash
in June 2002 and an additional $15,000,000 in January 2003. If Cell Genesys
achieves all the milestones related to patent matters under the license
agreement, the Company will be obligated to pay Cell Genesys an aggregate of
$17,000,000 payable in part in cash and in part in stock. The Company cannot
predict when these milestones will become due, if ever. The Company is not
required to make royalty payments to Cell Genesys. Net Operating Loss Carryforwards At December 31, 2003, the Company had net operating loss carryforwards of
approximately $298,410,000, which expire at various times through 2023. Due to
the degree of uncertainty related to the ultimate use of loss carryforwards and
tax credits, the Company has fully reserved against any potential tax benefit.
The future utilization of net operating loss carryforwards and tax credits may
be subject to limitation under the changes in stock ownership rules of the
Internal Revenue Code. Because of this limitation, it is possible that
taxable income in future years, which would otherwise be offset by net
operating losses, will not be offset and, therefore, will be subject to tax. Litigation Expenses The Company is a party to the legal proceedings listed below which are
described in greater detail under note 9 to the Condensed Consolidated
Financial Statements. The costs related to these proceedings have been
significant and the Company expects that these costs will continue to be
significant. The Company can provide no assurance as to the outcome of any of
these proceedings. A decision by a court in the United States or in any other
jurisdiction in a manner adverse to the Company could have a material adverse
effect on the Companys business, financial condition and results of
operations.  The Company has been engaged in patent litigation with Genzyme and Mount
Sinai with respect to Replagal. In October 2003, pursuant to a global legal
settlement, Genzyme agreed to withdraw from this patent litigation and paid the
Company $1,555,000. Mount Sinai is not a party to the settlement. In October
2003, the United States Court of Appeals for the Federal Circuit affirmed a
finding of non-infringement by the Company. In January 2004, the Federal
Circuit denied Mount Sinais petition for a rehearing en banc. The deadlines
associated with further appeal have expired. The Company did not incur any
litigation expenses in the three months ended September 30, 2004 and does not
expect to incur any additional expenses relating to this litigation. 26




---



##### Table of Contents



 The Company and Sanofi-Aventis have been involved in patent infringement
actions with Kirin-Amgen and Amgen with respect to Dynepo. The litigation is
costly and the Company is required to reimburse Sanofi-Aventis, which is paying
the United States litigation expenses, for 50% of the expenses incurred in the
United States after March 26, 2004. Sanofi-Aventis is entitled to deduct up to
50% of any royalties due to the Company from the sale of Dynepo until
Sanofi-Aventis has recouped the full amount of TKTs share of litigation
expenses. The Company is responsible for all litigation expenses outside of the
United States incurred after March 26, 2004. As of September 30, 2004, the
Company had incurred approximately $1,300,000 in litigation expenses associated
with litigation in the U.K. In October 2004, the House of Lords upheld the 2002
decision by the Court of Appeals that Dynepo did not infringe Kirin-Amgens patent
and also held that Kirin-Amgens patent is invalid. Based on
the House of Lords favorable ruling, the Company does not expect that there will be further
significant costs related to the U.K. litigation, and expects that, pursuant to
U.K. fee-shifting rules, Kirin-Amgen may have to pay the Company a substantial
percentage of the legal fees the Company has incurred since March 26, 2004. With respect
to the U.S. litigation, in October 2004, the United States District Court of
Massachusetts on remand found certain claims related to four patents held by
Amgen are valid and infringed by the Company. The Company intends to appeal
the decision of the United Stated District Court of Massachusetts to the United
States Court of Appeals for the Federal Circuit. The
Company expects that there will be ongoing expenses associated with the appeal in the U.S.  In August 2004, Applied Research Systems ARS Holding N.V., a
wholly-owned subsidiary of Serono, served the Company with an amended complaint
that was filed in the U.S. District Court of Massachusetts alleging that the
Company infringes the 071 patent which purportedly covers certain methods of
gene activation. In the original complaint, Serono appealed an adverse
decision by the Board of Patent Appeals and Interferences of the U.S. Patent
and Trademark Office (PTO) in an interference proceeding between Cell
Genesys and Serono regarding the 071 patent declared in 1996. In June 2004,
the PTO held that both Serono and Cell Genesys were entitled to certain claims
in their respective patent and patent application, and both parties appealed
the decision on the interference. The Company was not a party to this
interference. In October, 2004, the Company filed a motion to dismiss the
amended complaint. The European counterpart to the 071 patent, EP No. 0 505
500 (the 500 patent), was revoked by the European Patent Office in January
2002 on grounds of invalidity due to insufficiency of disclosure. When the
revocation of the patent was still on appeal, Serono prematurely sued the
Company in the Netherlands in January 2003 and claimed that Replagal infringed
the 500 patent. Serono withdrew the suit in November 2003 after the earlier
revocation of its patent was affirmed by a unanimous Technical Board of
Appeals. The Company expects that there will be ongoing expenses
associated with the Serono litigation.  In 2003, various parties filed purported class action lawsuits against
the Company, its former Chief Executive Officer, former Chief Financial
Officer, the members of the Companys Board of Directors and other parties. In
April 2003 a derivative law suit was filed against the Companys former Chief
Executive Officer, the members of the Companys Board of Directors and the
Company as a nominal defendant, alleging that the individual defendants
breached fiduciary duties owed to the Company and its shareholders. In May
2004, the Court granted the Companys motion to dismiss the derivative law
suit. In June 2004, the plaintiffs appealed this ruling. As of September 30,
2004, the Company had incurred approximately $1,400,000 related to the
shareholders law suit and derivative law suit.  In May 2003, the Company received a copy of a formal order of
investigation by the SEC. In July 2004, the Company and its former Chief
Executive Officer received Wells notices from the staff of the SEC, in
connection with its investigation. The Wells notices state that the SEC staff
has preliminarily determined to recommend that the Commission bring a civil
action for possible violations of the federal securities laws in which it may
seek an injunction and civil penalties against TKT, and an injunction,
disgorgement, and an officer and director bar as to Dr. Selden. The Company
intends to continue to cooperate fully in the investigation. As of September
30, 2004, the Company had incurred approximately $1,600,000 related to this
matter. 27




---



##### Table of Contents



FORWARD-LOOKING STATEMENTS This quarterly report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act that involve risks and uncertainties. The Company may, in some
cases, use words such as project, believe, anticipate, plan, expect,
estimate, intend, should, would, could, will, or may, or other
words that convey uncertainty of future events or outcomes to identify these
forward-looking statements. There are a number of important factors that could
cause actual results to differ materially from the results anticipated by these
forward-looking statements. These important factors include those set forth
below under Certain Factors That May Affect Future Results. These factors and
the other cautionary statements made in this quarterly report should be read as
being applicable to all related forward-looking statements wherever they appear
in this quarterly report. If one or more of these factors materialize, or if
any underlying assumptions prove incorrect, the Companys actual results,
performance or achievements may vary materially from any future results,
performance or achievements expressed or implied by these forward-looking
statements. In addition, any forward-looking statements represent the Companys
estimates only as of the date this quarterly report was filed with the
Securities and Exchange Commission and should not be relied upon as
representing the Companys estimates as of any subsequent date. While the
Company may elect to update forward-looking statements at some point in the
future, the Company specifically disclaims any obligation to do so, even if its
estimates change. Certain Factors That May Affect Future Results The following important factors could cause actual results to differ from those
indicated by forward-looking statements made by the Company in this quarterly
report and elsewhere from time to time. Financing risks We have not been profitable and expect to continue to incur substantial losses. We have experienced significant operating losses since our inception in 1988.
As of September 30, 2004, our accumulated deficit was $493.8 million. We had
net losses of $18.8 million, $13.6 million, $20.9 million and $15.9 million in
the three months ended September 30, 2004, 2003, 2002 and 2001. We had net
losses of $53.2 million in the nine months ended September 30, 2004, $60.5
million in 2003, $82.3 million in 2002 and $51.0 million in 2001. We expect that, until we have substantially greater product sales, we will
continue to incur substantial losses and that our cumulative losses will
continue to increase. We recorded $19.5 million and $54.9 million in product
sales in the three and nine months ended September 30, 2004, respectively,
$57.2 million in product sales in 2003, and $34.7 million in product sales in
2002. We expect that the losses that we incur will fluctuate from quarter to
quarter and that these fluctuations may be substantial. We may need additional financing, which may be difficult to obtain. If we do
not obtain additional financing, our business, results of operations and
financial condition may be adversely affected. Our cash requirements for operating activities, financing activities and
investment activities have historically exceeded our internally generated
funds. We expect that our cash requirements for such activities will continue
to exceed our internally generated funds until we are able to generate
substantially greater product sales. We expect, based on our current operating plan,  that our existing capital resources and anticipated proceeds from
collections on existing accounts receivable and on future accounts
receivable from product sales, anticipated cash payments under collaborative agreements,
and interest income, will be sufficient to fund our operations into 2006.
However, our existing capital resources and our other anticipated sources of
capital may not provide adequate funds to 28




---



##### Table of Contents



satisfy our capital requirements. Our
future capital requirements will depend on many factors, including the
following:  
    
    the timing and amount of Replagal product sales, as well as the cash
collections on receivables;
    
    continued progress in our research and development programs,
particularly with respect to I2S and GA-GCB;
    
    our ability to manufacture Dynepo product on a timely and
cost-effective basis, including the ability to obtain approval from
the European Commission of a site change amendment to our existing
MAA for Dynepo, and to enter into successful third party
arrangements for the marketing of Dynepo in the European Union;
    
    the scope and results of our clinical trials;
    
    the timing of, and the costs involved in, obtaining regulatory
approvals and the scope of such regulatory approvals, if any;
    
    the cost of expansion of our internal manufacturing facilities;
    
    the inherent variability of product yields in biological manufacturing activities;
    
    fluctuations in foreign exchange rates for sales denominated in
currencies other than the United States dollar;
    
    the quality and timeliness of the performance of third party suppliers;
    
    the cost of commercialization activities, including product marketing, sales, and distribution;
    
    the costs involved in preparing, filing, prosecuting, maintaining,
and enforcing patent claims and other patent-related costs, including
litigation costs and the results of such litigation;
    
    the outcome of pending purported class action and other related, or
potentially related, actions and the litigation costs with respect to
such actions;
    
    the integration of TKT Europes infrastructure into our existing
infrastructure and the retention of key employees of TKT Europe;
    
    the outcome of the SEC investigation referred to in the condensed,
consolidated financial statements; and
    
    our ability to establish and maintain collaborative arrangements. Because we expect to incur substantial operating losses in the future, we may
need to seek additional funding for our operations. We may do so through
collaborative arrangements and public or private debt or equity financings or
lease arrangements related to facilities and capital equipment. Additional
financing may not be available to us on acceptable terms, if at all. If we do
not obtain additional financing, our financial condition may be adversely
affected. If we raise additional funds by issuing equity securities, further dilution to
our then existing stockholders will result. If we raise additional funds by
issuing debt securities, our total indebtedness will increase and we may
subject ourselves to covenants that limit or restrict our ability to take
specified actions, such as incurring additional debt or making capital
expenditures. In addition, the terms of the financing may adversely affect the
holdings or the rights of our stockholders. If we are unable to obtain funding
on a timely basis, we may be required to significantly curtail one or more of
our research or development programs or some of our commercialization
activities. We also could be required to seek funds through arrangements 29




---



##### Table of Contents



with
collaborators or others that may require us to relinquish rights to certain of
our technologies, product candidates, or products which we would otherwise
pursue on our own. We have significant indebtedness and we may incur additional indebtedness in
the future. Our current indebtedness and any future indebtedness we incur
exposes us to risks that could adversely affect our business, operating results
and financial condition. We incurred $94 million of indebtedness when we sold the Notes. We may also
incur additional long-term indebtedness or obtain working capital lines of
credit to meet future financing needs. This indebtedness could have significant
negative consequences for our business, operating results and financial
condition, including:  
    
    increasing our vulnerability to adverse economic and industry conditions;
    
    limiting our ability to obtain additional financing;
    
    requiring the dedication of a substantial portion of our cash flow
from operations to service our indebtedness, thereby reducing the amount
of our cash flow available for other purposes;
    
    limiting our flexibility in planning for, or reacting to, changes in
our business; and
    
    placing us at a possible competitive disadvantage with less leveraged
competitors and competitors that may have better access to capital
resources. If we experience a decline in revenues, we could have difficulty making
required payments on the Notes and any indebtedness which we may incur in the
future. If we are unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments, or if we fail to comply with the
various requirements of the Notes or any indebtedness which we may incur in the
future, we would be in default, which would permit the holders of the notes and
any such indebtedness to accelerate the maturity of the notes and any such
indebtedness and could cause defaults under the Notes or any such indebtedness
we may incur in the future. Any default under the Notes or any indebtedness
which we may incur in the future could have a material adverse effect on our
business, operating results and financial condition. Our stock price has been and may in the future be volatile. This volatility may
make it difficult for you to sell common stock when you want or at attractive
prices. Our common stock has been and in the future may be subject to substantial price
volatility. The value of your investment could decline due to the effect of any
of the following factors upon the market price of our common stock:  
    
    announcements of technological innovations or new commercial products by our competitors;
    
    disclosure of results of clinical testing or regulatory proceedings by us or our competitors;
    
    results of litigation;
    
    the timing, amount and receipt of revenue from sales of our products
and margins on sales of our products;
    
    the integration of TKT Europes infrastructure into our existing
infrastructure and the retention of key employees of TKT Europe;
    
    governmental regulation and approvals; 30




---



##### Table of Contents



 developments in patent or other proprietary rights;  public concerns as to the safety of products developed by us or the
fields of study in which we work; and  general market conditions. In addition, the stock market has experienced significant price and volume
fluctuations, and the market prices of biotechnology companies have been highly
volatile. Moreover, broad market and industry fluctuations that are not within
our control may adversely affect the trading price of our common stock. During
the period from January 1, 2002 to September 30, 2004, the closing sale price
of our common stock on the Nasdaq National Market ranged from a low of $3.74
per share to a high of $46.50 per share. You must be willing to bear the risk
of fluctuations in the price of our common stock and the risk that the value of
your investment in our securities could decline. Our corporate governance structure, including provisions in our certificate of
incorporation and by-laws, our stockholder rights plan, our employee stock
option plans, and Delaware law, may prevent a change in control or management
that securityholders may consider desirable. Section 203 of the Delaware General Corporation Law and our certificate of
incorporation, by-laws and stockholder rights plan contain provisions that
might enable our management to resist a takeover of our company or discourage a
third party from attempting to take over our company. These provisions include
the inability of stockholders to act by written consent or to call special
meetings, and the ability of our board of directors to designate the terms of
and issue new series of preferred stock without stockholder approval. In
addition, our employee stock option plans contain provisions which accelerate
the vesting of employee stock options under specified circumstances following a
change in control of us. These provisions could have the effect of delaying, deferring, or preventing a
change in control of us or a change in our management that securityholders may
consider favorable or beneficial. These provisions could also discourage proxy
contests and make it more difficult for stockholders to elect directors and
take other corporate actions. These provisions could also limit the price that
investors might be willing to pay in the future for shares of our common stock
or our other securities. Development, clinical and regulatory risks If our clinical trials are not successful, we may not be able to develop and
commercialize our products. In order to obtain regulatory approvals for the commercial sale of our
potential products, we and our collaborators will be required to complete
extensive clinical trials in humans to demonstrate the safety and efficacy of
our products. However, we may not be able to commence or complete these
clinical trials in any specified time period, or at all, either because the FDA
or other regulatory agencies object, because we are unable to attract or retain
clinical trial participants, or for other reasons. We currently are conducting
a pivotal clinical trial of I2S and a phase I/II clinical trial of GA-GCB. Even if we complete a clinical trial of one of our potential products, the data
collected from the clinical trial may not indicate that our product is safe or
effective to the extent required by the FDA, the European Commission, or other
regulatory agencies to approve the potential product. For example, in November
2002, the FDA indicated to us that the data for Replagal that we submitted in
connection with our biologics license application, or BLA, was not adequate for
approval, and in January 2003, the FDAs Endocrinologic & Metabolic Drugs
Advisory Committee concluded that our clinical data did not provide substantial
evidence of efficacy. In January 2004, we withdrew our BLA for Replagal. The results from preclinical testing of a product that is under development may
not be predictive of results that will be obtained in human clinical trials. In
addition, the results of early human clinical trials may not be 31




---



##### Table of Contents



predictive of
results that will be obtained in larger scale, advanced-stage clinical trials.
Furthermore, we, one of our collaborators, or a regulatory agency with
jurisdiction over the trials may suspend clinical trials at any time if the
patients participating in such trials are being exposed to unacceptable health
risks, or for other reasons. The timing of completion of clinical trials is dependent in part upon the rate
of enrollment of patients. Patient accrual is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study, the existence of
competitive clinical trials, and the availability of alternative treatments.
Delays in planned patient enrollment may result in increased costs and
prolonged clinical development. In addition, patients may withdraw from a
clinical trial for a variety of reasons. If we fail to accrue and maintain the
number of patients into one of our clinical trials for which the clinical trial
was designed, the statistical power of that clinical trial may be reduced which
would make it harder to demonstrate that the products being tested in such
clinical trial are safe and effective. Regulatory authorities, clinical investigators, institutional review boards,
data safety monitoring boards and the hospitals at which our clinical trials
are conducted all have the power to stop our clinical trials prior to
completion. If our studies are not completed, we would be unable to show the
safety and efficacy required to obtain marketing authorization for our
products. We may not be able to obtain marketing approvals for our products, which would
materially impair our ability to generate revenue. We are not able to market any of our products in the United States, Europe or
in any other jurisdiction without marketing approval from the FDA, the European
Commission, or any equivalent foreign regulatory agency. The regulatory process
to obtain marketing approval for a new drug or biologic takes many years and
requires the expenditure of substantial resources. This process can vary
substantially based on the type, complexity, novelty and indication of the
product candidate involved. In August 2001, the European Commission granted marketing authorization of
Replagal in the European Union, approximately one year after we submitted our
MAA to the European Agency for the Evaluation of Medicinal Products, or EMEA,
and approximately five years after we filed our investigational new drug
application, or IND, with the FDA. The FDA never approved Replagal in the
United States and, in January 2004, we withdrew our BLA for Replagal. We are
continuing to seek marketing approval for Replagal in a number of other
countries in the world. We may not obtain approvals in one or more of these
countries when we anticipate receiving such approval, if at
all. Approval in Japan has been delayed and we do not know when, or
if, we will receive such approval. We are currently conducting a pivotal clinical trial of I2S in 96 patients with
Hunter syndrome at nine sites around the world. If the results are positive, we
expect to submit applications for marketing approval in the United States and
in the European Union in the second half of 2005. However, even if we submit
such applications, the FDA, the European Commission and other regulatory
agencies to which we submit applications may not agree that our product is safe
and effective and may not approve our product. Although the European Commission has granted marketing approval of Dynepo in
the European Union, Dynepo has not been approved in the United States. In 2000,
Aventis Pharmaceuticals, Inc., a subsidiary of Sanofi-Aventis, submitted a BLA
to the FDA seeking marketing authorization for Dynepo in the United States. The
FDA did not accept the BLA for filing, and requested that Sanofi-Aventis
provide additional manufacturing data. Sanofi-Aventis has not yet submitted the
requested additional data to the FDA, and we cannot predict whether or when
Sanofi-Aventis will do so. There can be no assurance as to whether or when any of our applications for
marketing authorization relating to any of our products, including Replagal,
I2S, and Dynepo, or additional applications for marketing authorization that we
may make in the future as to these or other products, will be approved by the
relevant regulatory authorities. Among other things, we have had only limited
experience in preparing applications and obtaining regulatory approvals. If
approval is granted, it may be subject to limitations on the indicated 32




---



##### Table of Contents



uses for
which the product may be marketed or contain requirements for costly
post-marketing testing and surveillance to monitor safety or efficacy of the
product. For example, there are conditions associated with our European Union
approval of Replagal, including an obligation to conduct additional clinical
trials and an obligation to submit an annual assessment of Replagal for review
by the Committee for Medicinal Products for Human Use, or CHMP. If we do not
complete these clinical trials on a timely basis or the results of these trials
are not satisfactory to the CHMP, the European Commission may withdraw or
suspend our Replagal approval. If approval of an application to market a
product is not granted on a timely basis or at all, or we are unable to
maintain our approval, our business may be materially harmed. We may not be able to obtain orphan drug exclusivity for our products for the
treatment of rare genetic diseases. If our competitors are able to obtain
orphan drug exclusivity for their products, we may not be able to have our
competitive products approved by the applicable regulatory authority for a
significant period of time. Some jurisdictions, including the European Union and the United States, may
designate drugs for relatively small patient populations as orphan drugs.
Orphan drug designation must be requested before submitting an application for
marketing authorization. Orphan drug designation does not convey any advantage
in, or shorten the duration of, the regulatory review and approval process, but
does make the product eligible for orphan drug exclusivity and, in the United
States, certain tax credits. Generally, if a product with an orphan drug
designation subsequently receives the first marketing approval for the
indication for which it has such designation, the product is entitled to orphan
drug exclusivity. Orphan drug exclusivity means that another application to
market the same drug for the same indication may not be approved for a period
of up to 10 years in the European Union, and for a period of seven years in the
United States, except in limited circumstances set forth in the U.S. Food, Drug
and Cosmetic Act and its implementing regulations, which we refer to as the FDA
law. Obtaining orphan drug designations and orphan drug exclusivity for our
products for the treatment of rare genetic diseases may be critical to the
success of these products. Our competitors may obtain orphan drug exclusivity
for products competitive with our products before we do as Genzyme did with its
Fabrazyme product in the United States, as discussed below. Even if we obtain
orphan drug exclusivity for any of our potential products, we may not be able
to maintain it. For example, if a competitive product is shown to be clinically
superior to our product, any orphan drug exclusivity we have obtained will not
block the approval of such competitive product. In August 2001, the European Commission granted marketing authorization of
Replagal in the European Union. The European Commission also granted marketing
authorization of Genzyme Corporations Fabrazyme product in the European Union
in August 2001. In connection with these approvals, the
European Commission granted Replagal and Fabrazyme co-exclusive orphan drug
status in the European Union for up to 10 years. In April 2003, Genzyme received marketing authorization in the United States
for Fabrazyme. Because Fabrazyme had received orphan drug designation in the
United States, upon its marketing approval, Fabrazyme received orphan drug
exclusivity. Because Fabrazyme received marketing approval in the United States
before Replagal and received orphan drug exclusivity, the FDA may not approve
Replagal and Replagal will be excluded from the United States market for seven
years, until April 2010, unless we receive approval to market and sell Replagal
in the United States and we can demonstrate that Replagal satisfies the limited
criteria for exceptions set forth in the FDA law. In January 2004, we withdrew
our BLA for Replagal. We will not be able to market Replagal in the United
States unless we resubmit, and obtain the FDAs approval of, our BLA for
Replagal. In November 2001, our I2S product for the treatment of Hunter syndrome was
designated an orphan drug in the European Union and in the United
States. If
our I2S product is the first such product to receive marketing approval for
Hunter syndrome, then our I2S product will be entitled to orphan drug
exclusivity and no other application to market the same drug for the same
indication may be approved, except in limited circumstances, for a period of up
to 10 years in the European Union and for a period of seven years in the 33




---



##### Table of Contents



United
States. If we are not able to maintain this orphan drug exclusivity, our
business may be adversely affected. If we fail to comply with the extensive regulatory requirements to which we and
our products are subject, our products could be subject to restrictions or
withdrawal from the market and we could be subject to penalties. The testing, manufacturing, labeling, advertising, promotion, export, and
marketing, among other things, of our products, both before and after approval,
are subject to extensive regulation by governmental authorities in the United
States, Europe and elsewhere throughout the world. Failure to comply with the
law administered by the FDA, the EMEA, or other governmental authorities could
result in any of the following:  
    
    delay in approving or refusal to approve a product;
    
    product recall or seizure;
    
    interruption of production;
    
    operating restrictions;
    
    warning letters;
    
    injunctions;
    
    criminal prosecutions; and
    
    unanticipated expenditures. For example, the European Commission approved Replagal under exceptional
circumstances. Approval under exceptional circumstances means that the
European Commission accepted less-than-complete clinical data because it
determined that it would be impractical or unethical for the drug sponsor to
carry out full-scale pivotal clinical trials. The European Commission imposes
specific obligations on the drug sponsor when granting such approvals. These
obligations form part of the formal marketing authorization issued by the
European Commission and are reviewed by the CHMP at the intervals specified,
minimally on an annual basis. The annual review includes a reassessment of the
overall benefit/risk ratio of the product. If the drug sponsor does not fulfill
the specific obligations imposed in connection with approval, the European
Commission may vary, suspend or withdraw the marketing authorization for the
product. The European Commission required us as part of its post-approval
requirements for Replagal to conduct additional clinical trials of Replagal. If
we do not complete these clinical trials on a timely basis, the results of
these studies are not satisfactory to the CHMP or we otherwise fail to comply
with the conditions imposed on us pursuant to the approval under exceptional
circumstances, the European Commission could withdraw or suspend its approval
of Replagal. Because Replagal is currently our only commercial product, the
withdrawal or suspension of the European Commissions approval of Replagal
could materially adversely affect our business, results of operations and
financial condition. We are required to maintain pharmacovigilance systems for collecting and
reporting information concerning suspected adverse reactions to our products.
In response to pharmacovigilance reports, regulatory authorities may initiate
proceedings to revise the prescribing information for our products or to
suspend or revoke our marketing authorizations. Procedural safeguards are often
limited, and marketing authorizations can be suspended with little or no
advance notice. Both before and after approval of a product, quality control and manufacturing
procedures must conform to current good manufacturing practice regulations, or
cGMP. Regulatory authorities, including the EMEA and the FDA, periodically
inspect manufacturing facilities to assess compliance with cGMP. Accordingly,
we 34




---



##### Table of Contents



and our contract manufacturers will need to continue to expend time, monies,
and effort in the area of production and quality control to maintain cGMP
compliance. In addition to regulations adopted by the EMEA, the FDA, and other foreign
regulatory authorities, we are also subject to regulation under the
Occupational Safety and Health Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act, and other federal, state, and local
regulations. If we fail to obtain marketing authorizations in a timely manner, our costs
associated with clinical trials will increase. After completion of a clinical trial designed to show safety or effectiveness,
we often enroll patients taking our products in maintenance clinical trials in
which these patients continue to receive treatment with our products pending
approval for marketing authorization in the relevant jurisdiction. We receive
no payments for such treatment. The costs associated with maintaining
open-ended maintenance clinical trials can be significant. If we fail to obtain
marketing authorizations in a timely manner for the product being tested in
such trials, our costs associated with these maintenance clinical trials will
increase and we may continue to supply the product for use in clinical trials
without remuneration to us. Our research and development efforts may not result in products appropriate for
testing in human clinical trials. We expend significant resources on research and development and preclinical
studies of product candidates. However, these efforts may not result in the
development of products appropriate for testing in human clinical trials. For
example, our research may result in product candidates that are not expected to
be effective in treating diseases or may reveal safety concerns with respect to
product candidates. We may postpone or terminate research and development of a
product candidate or a program at any time for any reason such as the safety or
effectiveness of the potential product, allocation of resources or
unavailability of qualified research and development personnel. Adverse events in the field of gene therapy may impair our ability to enter
into collaborative arrangements for our gene therapy programs. In connection with our restructuring in the first quarter of 2003, we
terminated internal development of our gene therapy programs and now are
seeking collaborators with which to continue to develop these programs. Adverse
events in the field of gene therapy, although not occurring in our clinical
trials, may impair our ability to generate value from our gene therapy programs
or to enter into collaborations for our programs. In
particular, in November 1999, a patient with a rare metabolic disorder died in
a gene therapy trial conducted at the University of Pennsylvania. In addition,
in October 2002, a French boy developed a leukemia-like disease nearly three
years after participating in a gene therapy study as a baby. As a result of
these and other events, a number of gene therapy clinical trials have been
terminated or suspended in the United States and in other countries, and
regulatory authorities have grown increasingly concerned about the safety of
gene therapy. Litigation and intellectual property risks We are a party to litigation with Amgen Inc. involving Dynepo which could
preclude us from manufacturing or selling Dynepo in the United States. In April 1997, Amgen commenced a patent infringement action against us and
Sanofi-Aventis in the United States District Court of Massachusetts. In January
2001, the United States District Court of Massachusetts concluded that Dynepo
infringed eight of the 18 claims of five patents that Amgen had asserted. Amgen
did not seek and was not awarded monetary damages. This decision was
subsequently appealed to the United States Court of Appeals for the Federal
Circuit. 35




---



##### Table of Contents



In January 2003, the United States Court of Appeals for the Federal Circuit
issued a decision affirming in part and reversing in part the decision of the
United States District Court of Massachusetts and remanded the action to the
United States District Court of Massachusetts for further proceedings. In
particular, the United States Court of Appeals for the Federal Circuit:  
    
    upheld the United States District Court of Massachusetts
determination of invalidity of one of Amgens patents;
    
    upheld the United States District Court of Massachusetts
determination that some claims of two other Amgen patents were
infringed, but vacated the United States District Court of
Massachusetts determination that those patents were not invalid; and
    
    vacated the United States District Court of Massachusetts
determination that Dynepo infringed some claims of the two remaining
Amgen patents, and vacated the United States District Court of
Massachusetts determination that one of these patents was not invalid. As part of the United States Court of Appeals for the Federal Circuits ruling,
it remanded the case to the United States District Court of Massachusetts and
instructed it to reconsider the validity of Amgens patents in light of
potentially invalidating prior art. The United States District Court of
Massachusetts concluded the remand proceedings in July 2003.
The United States District
Court of Massachusetts also issued a decision upholding its January 2001
findings that Amgen successfully rebutted the presumption of prosecution
history estoppel with respect to certain of its patents, and therefore, that
we and Sanofi-Aventis infringe such patents in light of recent Supreme
Court precedents. On remand, we and Sanofi-Aventis presented
affirmative defenses with respect to such patents. In October 2004,
the United States District Court of Massachusetts issued a decision on the
remanded issues, finding that certain claims related to four patents held by
Amgen are valid and infringed by us. We intend to appeal
the decision of the United States District Court of Massachusetts to the United
States Court of Appeals for the Federal Circuit. We can provide no assurance as to the outcome of the appeal. If we and
Sanofi-Aventis are not successful in the Dynepo litigation at the appellate
level, we and Sanofi-Aventis would be precluded from making, using and selling
Dynepo in the United States. We are required to reimburse Sanofi-Aventis, which
controls the litigation and is paying the litigation expenses, for 50% of the
expenses incurred in connection with the litigation from and after March 26,
2004. Sanofi-Aventis is entitled to deduct up to 50% of any royalties that
Sanofi-Aventis may otherwise owe us with respect to the sale of Dynepo until
Sanofi-Aventis has recouped
the full amount of our share of the litigation expenses. We have the right to
control any other litigation that might arise outside of the United States and
are responsible for all litigation expenses incurred in connection with such
litigation from and after March 26, 2004. We are a party to litigation with Serono involving gene activation which could
preclude us from using certain gene activation methods in the production of our
products. In August 2004, Applied Research Systems ARS Holding N.V., a wholly-owned
subsidiary of Serono, served the Company with an amended complaint that was
filed in the U.S. District Court of Massachusetts alleging that the Company
infringes Seronos 071 patent which purportedly covers certain methods of gene
activation. In the original complaint, Serono appealed an adverse decision by
the Board of Patent Appeals and Interferences of the U.S. PTO in an
interference proceeding between Cell Genesys and Serono regarding the 071
patent declared in 1996. In June 2004, the PTO held that both Serono and Cell
Genesys were entitled to certain claims in their respective patent and patent
application, and both parties appealed the decision on the interference. The
Company was not a party to this interference. In October, 2004, the Company
filed a motion to dismiss the amended complaint. 36




---



##### Table of Contents



We can provide no assurance as to the outcome of the Serono litigation. If we
are not successful in the gene activation litigation, we would be precluded
from using certain methods of gene activation currently used in the development
of our products. This could have a materially adverse effect on our business. We are a party to a shareholder lawsuit and a derivative action regarding the
adequacy of our public disclosure which could have a material adverse affect on
our business, results of operations and financial condition. In January and February 2003, various parties filed purported class action
lawsuits against us and Richard Selden, our former Chief Executive Officer, in
the United States District Court for the District of Massachusetts. The
complaints generally allege securities fraud during the period from January
2001 through January 2003. Each of the complaints asserts claims under Section
10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated
thereunder, and Section 20(a) of the Exchange Act, and alleges that we and our
officers made false and misleading statements and failed to disclose material
information concerning the status and progress for obtaining United States
marketing approval of our Replagal product to treat Fabry disease during that
period. In March 2003, various plaintiffs filed motions to consolidate, to appoint lead
plaintiff, and to approve plaintiffs selections of lead plaintiffs counsel.
In April 2003, various plaintiffs filed a Joint Stipulation and Proposed Order
of Lead Plaintiff Applicants to Consolidate Actions, To Appoint Lead Plaintiffs
and to Approve Lead Plaintiffs Selection of Lead Counsel, Executive Committee
and Liaison Counsel. In April 2003, the Court endorsed the Proposed Order,
thereby consolidating the various matters under one matter: In re Transkaryotic
Therapies, Inc., Securities Litigation, C.A. No. 03-10165-RWZ. In July 2003, the plaintiffs filed a Consolidated and Amended Class Action
Complaint, which we refer to as the Amended Complaint, against us; Dr. Selden;
Daniel Geffken, our former Chief Financial Officer; Walter Gilbert, Jonathan S.
Leff, Rodman W. Moorhead, III, and Wayne P. Yetter, members of our board of
directors; William R. Miller and James E. Thomas, former members of our board
of directors; and SG Cowen Securities Corporation, Deutsche Bank Securities
Inc., Pacific Growth Equities, Inc. and Leerink Swann & Company, underwriters
of our common stock in prior public offerings. The Amended Complaint alleges securities fraud during the period from January
4, 2001 through January 10, 2003. The Amended Complaint alleges that the
defendants made false and misleading statements and failed to disclose material
information concerning the status and progress for obtaining United States
marketing approval of Replagal during that period. The Amended Complaint
asserts claims against Dr. Selden and us under Section 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder; and against Dr. Selden under Section
20(a) of the Exchange Act. The Amended Complaint also asserts claims based on
our public offerings of June 29, 2001, December 18, 2001 and December 26, 2001
against each of the defendants under Section 11 of the Securities Act of 1933
and against Dr. Selden under Section 15 of the Securities Act; against SG Cowen
Securities Corporation, Deutsche Bank Securities, Pacific Growth Equities,
Inc., and Leerink Swann & Company under Section 12(a)(2) of the Securities Act.
The plaintiffs seek equitable and monetary relief, an unspecified amount of
damages, with interest, and attorneys fees and costs. In September 2003, we filed a motion to dismiss the Amended Complaint. A
hearing of the motion occurred in December 2003. In May 2004, the United States
District Court for the District of Massachusetts issued a Memorandum of
Decision and Order denying in part and granting in part our motion to dismiss
the purported class action lawsuit. In the Memorandum, the Court found several
allegations against us arose out of forward-looking statements protected by the
safe harbor provisions of the PSLRA. The Court dismissed
those statements as falling within the PSLRAs safe harbor
provisions. The Court also dismissed claims based on the public
offerings of June 29, 2001 and December 18, 2001 because
no plaintiff 37




---



##### Table of Contents



had standing to bring such claims. The Court allowed
all other allegations to remain. In June 2004, we submitted an unopposed motion seeking clarification from the
Court that the Memorandum dismissed claims based on the first two offerings as
to all defendants. The Court granted the motion. In July 2004, the plaintiffs voluntarily dismissed all claims based on the
third offering because no plaintiff had standing to bring such claims. The plaintiffs subsequently filed a motion seeking permission to notify certain
of our investors of the dismissal of the claims based on the offerings, and to
inform those investors of their opportunity to intervene in the lawsuit. We
filed an opposition to this motion in July 2004. The Court has not yet ruled on
this motion. We filed an answer to the Amended Complaint on July 16, 2004. The
plaintiffs then filed a motion for class certification in July 2004. Any
opposition to this motion is due in December 2004. A hearing on class
certification is scheduled to be held in January 2005. In April 2003, South Shore Gastrointerology UA 6/6/1980 FBO Harold Jacob, and
Nancy R. Jacob Ttee filed a Shareholder Derivative Complaint against Dr.
Selden; against the following members of our board of directors: Jonathan S.
Leff, Walter Gilbert, Wayne P. Yetter, Rodman W. Moorhead III; against the
following former members of our board of directors: James E. Thomas, and
William Miller; and against us as nominal defendant, in Middlesex Superior
Court in the Commonwealth of Massachusetts, Civil Action No. 03-1669. On May
29, 2003, the parties moved to transfer venue to the Business Litigation
Session in Suffolk Superior Court in the Commonwealth of Massachusetts. The
parties motion was allowed, and in June 2003 the matter was accepted into the
Business Litigation Session as Civil Action No. 03-02630-BLS. The complaint alleges that the individual defendants breached fiduciary duties
owed to us and our shareholders by disseminating materially false and
misleading statements to the market and causing or allowing us to conduct our
business in an unsafe, imprudent and unlawful manner. The complaint purports to
assert derivative claims against the individual defendants for breach of
fiduciary duty, and to assert a claim for contribution and indemnification on
behalf of us for any liability we incur as a result of the individual
defendants alleged misconduct. The complaint seeks declaratory, equitable and
monetary relief, an unspecified amount of damages, with interest, and
attorneys fees and costs. In August 2003, the plaintiff filed its Verified
Amended Derivative Complaint, which we refer to as the Amended Derivative
Complaint. The Amended Derivative Complaint alleges that the individual
defendants breached fiduciary duties owed to us and our stockholders by causing
us to issue materially false and misleading statements to the public, by
signing our Form 10-Ks for the years 2000 and 2001 and by signing a
registration statement. The Amended Derivative Complaint also alleges that
defendant Dr. Selden sold our stock while in possession of material non-public
information. The plaintiffs seek declaratory, equitable and monetary relief, an
unspecified amount of damages, with interest, and attorneys fees and costs. In September 2003, we filed a motion to dismiss the Amended Derivative
Complaint. A hearing of the motion was held in January 2004. In May 2004, the
Court granted our motion to dismiss. In June 2004, the plaintiff filed a Notice
of Appeal appealing the dismissal of the Amended Derivative Complaint to the
Massachusetts Court of Appeals. As of September 30, 2004, we had spent approximately $1.4 million related to
these lawsuits. We expect that the costs related to these suits will be
significant. We can provide no assurance as to the outcome of any of these
suits. If we are not successful in defending these actions, our business,
results of operations and financial condition could be materially adversely
affected. In addition, even if we are successful, the defense of these actions
may divert the attention of our management and other resources that would
otherwise be engaged in running our business. 38




---



##### Table of Contents



The SEC is investigating us regarding our public disclosures and filings, as
well as transactions in our securities, which could have a material adverse
effect on our business, results of operations and financial condition. In May 2003, we received a copy of a formal order of investigation by the SEC.
The order of investigation relates to our disclosures and public filings with
regard to Replagal and the status of the FDAs approval process for Replagal,
as well as transactions in our securities. In July 2004, we and Dr. Richard F Selden, our former Chief Executive Officer,
received Wells notices from the staff of the SEC, in connection with its
investigation. The Wells notices state that the SEC staff has preliminarily
determined to recommend that the Commission bring a civil action for possible
violations of the federal securities laws in which it may seek an injunction
and civil penalties against us, and an injunction, disgorgement, and an officer
and director bar as to Dr. Selden. We are cooperating fully and will continue
to cooperate fully with the SEC in the investigation. As of September 30, 2004,
we had spent approximately $1.6 million related to this matter. If this investigation results in a determination that we have failed to
properly disclose information relating to Replagal and the status of the FDAs
approval process for Replagal or that there were improper transactions in our
securities, we could be subject to substantial fines or penalties and other
sanctions. An adverse determination could have a material adverse effect on our
business, results of operations and financial condition. However, at this time,
we cannot accurately predict the outcome of this proceeding. In addition, even
if we are successful, this investigation may divert the attention of our
management and other resources that would otherwise be engaged in running our
business. We may become involved in additional and expensive patent litigation or other
proceedings, which could result in our incurring substantial costs and expenses
or substantial liability for damages or require us to stop our development and
commercialization efforts. The biotechnology industry has been characterized by significant litigation,
and other proceedings regarding patents, patent applications, and other
intellectual property rights. We may become a party to additional patent
litigation beyond the Amgen and Serono litigation described above and to other
proceedings with respect to our products and technologies. An adverse outcome in any patent litigation or other proceeding involving
patents could subject us to significant liabilities to third parties and
require us to cease using the technology or product that is at issue or to
license the technology or product from third parties. We may not be able to
obtain any required licenses on commercially acceptable terms, or at all. The cost to us of any patent litigation or other proceeding, even if resolved
in our favor, could be substantial. In addition, any such litigation or
proceeding will divert managements attention and resources. Some of our
competitors may be able to sustain these costs more effectively than we can
because of their substantially greater financial resources. Uncertainties
resulting from the initiation and continuation of patent litigation or other
proceedings could have a material adverse effect on our ability to develop,
manufacture, and market products, form collaborations, and compete in the
marketplace. If we are unable to obtain and maintain patent protection for our discoveries,
the value of our technology and products may be adversely affected. Our success will depend in large part on our ability to obtain and maintain
patent protection for our processes and products in the United States and other
countries. The patent situation in the field of biotechnology generally is
highly uncertain and involves complex legal, scientific and factual questions.
We may not be issued patents relating to our technology or products. Even if
issued, patents may be challenged, invalidated, or circumvented, which could
limit our ability to stop competitors from marketing similar products or limit
the length of term of patent protection we may have for our products. Changes
in patent 39




---



##### Table of Contents



laws or in interpretations of patent laws in the United States and
other countries may diminish the value of our intellectual property or narrow
the scope of our patent protection. Our patents also may not afford us protection against competitors with similar
technology. Because some patent applications in the United States and many
foreign jurisdictions are typically not published until 18 months after filing
or are maintained in secrecy until patents issue from those patent
applications, third parties may have filed or maintained patent applications
for technology used by us or covered by our pending patent applications without
our being aware of these applications. For this reason, we cannot be certain
that we were the first to make the inventions claimed in issued patents or
pending patent applications, or that we were the first to file for protection
of the inventions set forth in these patent applications. As a result, third
parties could assert claims against us concerning our gene activation or other
technology. Our overall patent strategy with respect to our gene activation technology and
our protein products made using our gene activation technology is to attempt to
obtain patent coverage for gene activation of the gene that encodes the
product, the composition of matter of the product, the method of making the
product, cells or cell lines capable of expressing the product, and the genetic
constructs used to obtain the product. We have been unable to obtain patent
claims in all categories with respect to all of our Gene-Activated protein
products. Nonetheless, while our patent portfolio may afford us protection
against competitors with similar technology and competitors which attempt to
make products in human cell or cell lines, it may not afford us protection
against all competitors, such as those who make the same products in mouse,
rodent, bacterial or yeast cells. The expiration dates for the patents and patent applications covering our
principal products are as follows:  
    
    ReplagalThe principal issued patents and patents that may issue from
pending patent applications covering Replagal expire or will expire in
the United States at various dates from 2011 to 2023, and in Europe at
various dates from 2012 to 2023.
    
    I2SThe principal issued patents and patents that may issue from
pending patent applications covering I2S expire or will expire in the
United States at various dates from 2015 to 2024, and in Europe in 2024.
    
    GA-GCBThe principal issued patents and patents that may issue from
pending patent applications covering GA-GCB expire or will expire in the
United States at various dates from 2011 to 2020 and in Europe at
various dates from 2012 to 2021.
    
    DynepoThe principal issued patents and patents that may issue from
pending patent applications covering Dynepo expire or will expire in the
United States at various dates from 2011 to 2015, and in Europe in 2012. Third parties may own or control patents or patent applications and require us
to seek licenses, which would increase our development and commercialization
costs, or prevent us from developing or marketing our products or technologies. We may not hold proprietary rights to certain product patents, process patents,
and use patents related to our products or their methods of manufacture. In
some cases, these patents may be owned or controlled by third parties.
Therefore, in some cases, in order to develop, manufacture, sell or import some
of our existing and proposed products or processes, we may choose to seek, or
be required to seek, licenses under third party patents or those patents that
might issue from patent applications. In such event, we would be required to
pay license fees or royalties or both to the licensor. If licenses are not
available to us on acceptable terms, we or our collaborators may not be able to
develop, manufacture, sell, use or import the affected products or processes. 40




---



##### Table of Contents



For example, we are aware of third party patents and patent applications that
relate to gene activation. We believe that our gene activation technology does
not infringe any third party patents that we believe to be valid. We use our
gene activation technology to manufacture Replagal, Dynepo, GA-GCB and other
products. If the use of our gene activation technology were found to infringe a
valid third party patent, we could be precluded from manufacturing and selling
such products and our business, results of operations and financial condition
would be materially adversely affected. If we are unable to protect the confidentiality of our proprietary information
and know-how, the value of our technology and products will be adversely
affected. We rely upon unpatented proprietary technology, processes, and know-how. We
seek to protect this information in part by confidentiality agreements with our
employees, consultants, and other third party contractors. These agreements may
be breached, and we may not have adequate remedies for any such breach. In
addition, our trade secrets may otherwise become known or be independently
developed by competitors. If we fail to comply with our obligations under the agreements under which we
license commercialization rights to products or technology from third parties,
we could lose license rights. We are a party to over 20 patent licenses under which we have acquired rights
to proprietary technology of third parties, including licenses to patents
related to I2S and Dynepo, and expect to enter into additional patent licenses
in the future. These licenses impose various commercialization, sublicensing,
royalty, insurance, and other obligations on us. If we fail to comply with
these obligations, the licensor may have the right to terminate the license and
we could lose our license to use the acquired rights. If these rights are lost,
we may not be able to market products that were covered by the license. Business risks Our revenue from product sales is dependent on the commercial success of
Replagal. Replagal is our only commercial product. We expect that Replagal will account
for all of our product sales until at least the fourth quarter of 2005. The
commercial success of Replagal will depend on its acceptance by physicians,
patients and other key decision-makers for the treatment of Fabry disease. The
commercial success of Replagal will also depend in part upon Replagal receiving
marketing approval in Japan and other countries. We have ceased our efforts to
seek the approval of Replagal in the United States. If Replagal is not
commercially successful, our business, results of operations and financial
condition will be materially adversely affected. Our revenue from sales of Replagal and our cash held by TKT Europe are subject
to foreign currency fluctuations. We have exposure to currency risk for Replagal sales in Europe.
Country-by-country pricing of Replagal was initially established as the local
currency equivalent of between approximately $165,000 and $175,000 per patient
per year for an average patient weighing 70 kilograms. The price generally
remains fixed in the local currencies and varies in United States dollars with
exchange rate fluctuations. Since the approval of Replagal in August 2001, the
United States dollar has generally weakened versus most European currencies,
including the Euro, which has resulted in increased revenues for us from sales
of Replagal. If the United States dollar were to strengthen versus these
currencies, this currency fluctuation would adversely impact our Replagal
product sales. Foreign currency fluctuations favorably contributed $4.9 million
to product sales for the nine months ended September 30, 2004 as compared to
the same period of 2003, and $9.4 million to product sales for the year ended
December 31, 2003 as compared to the same period of 2002. We also have exposure to currency risk for cash and cash equivalents held by
TKT Europe, which are primarily denominated in Swedish Krona, British Pound and
Euro. Any change in the value of the United 41




---



##### Table of Contents



States dollar as compared to these
foreign currencies may have an adverse effect on our liquidity. For example, a
hypothetical 10 percent strengthening of the United States dollar relative to
these foreign currencies would result in an approximate $7.3 million decrease
in our cash and marketable securities held by TKT Europe as of September 30,
2004. The continuity of our sales of Replagal in Europe and our ability to comply
with SEC regulations may be affected by our ability to integrate the operations
of TKT Europe. In April 2000, we established an 80%-owned subsidiary, TKT Europe, for the
purpose of marketing, selling and distributing Replagal in Europe. Under the
stockholders agreement for TKT Europe, we agreed that the holders of the
remaining 20% interest in TKT Europe would, with specified exceptions, manage
the day-to-day operations of TKT Europe. As a result, our ability to
successfully market and sell Replagal in Europe has been dependent on the
efforts of the minority stockholders of TKT Europe. In October 2004, we exercised our right under the stockholders agreement for
TKT Europe to purchase the minority stockholders 20% ownership interest in TKT
Europe in the fourth quarter of 2004 for a price determined in accordance with
a formula based on sales of Replagal in Europe as set forth in the
stockholders agreement. The purchase price for the transaction was $61.1
million. As a result of this purchase, our ability to successfully market and sell
Replagal in Europe now will depend in part on our ability to integrate the
functions of TKT Europe into our infrastructure. In addition, if we cannot
retain the founding executives of TKT Europe and the existing marketing and
sales personnel of TKT Europe for a sufficient period, it is likely that the
current relationships that TKT Europe maintains with patients, physicians and
other key decision-makers for the treatment of Fabry disease in Europe will be
affected, which could adversely affect our business and results of operations
in Europe, including our sales of Replagal, and could result in the loss of
sales and market share for Replagal in Europe. Substantially all of the sales of Replagal are transacted through and recorded
by TKT Europe. As a result of the purchase, we will require the cooperation of
the existing managers of TKT Europe to provide us with critical accounting and
related financial information in order to enable us to report to investors,
complete SEC filings, and complete Sarbanes-Oxley Section 404 compliance work,
which involves documenting the operational design of TKT Europes internal
controls and testing operating effectiveness of such controls, on a timely
basis. In the event that we do not receive a timely flow of information from
TKT Europe, our ability to comply with the regulatory requirements imposed on
us by the SEC may be adversely affected, which could have a material adverse
effect on our business. We face significant competition, which may result in others discovering,
developing or commercializing products before, or more successfully, than we
do. The biotechnology industry is highly competitive and characterized by rapid and
significant technological change. Our competitors include pharmaceutical
companies, biotechnology firms, universities, and other research institutions.
Many of these competitors have substantially greater financial and other
resources than we do and are conducting extensive research and development
activities on technologies and products similar to, or competitive with, ours. We may be unable to develop technologies and products that are more clinically
efficacious or cost-effective than products developed by our competitors. Even
if we obtain marketing approval for our product candidates, many of our
competitors have more extensive and established sales, marketing, and
distribution capabilities than we do. Litigation with third parties, such as
our litigation with Amgen, could delay our time to market or preclude us from
reaching the market for certain products and enable our competitors to more
quickly and effectively penetrate certain markets. 42




---



##### Table of Contents



Therapeutics for the treatment of rare genetic diseases We believe that the primary competition with respect to our products for the
treatment of rare genetic diseases is from biotechnology and smaller
pharmaceutical companies. Competitors include Actelion Ltd., BioMarin
Pharmaceutical Inc., and Genzyme. The markets for some of the potential
therapeutics for rare genetic diseases caused by protein deficiencies are quite
small. As a result, if competitive products exist, we may not be able to
successfully commercialize our products. Our primary competition with respect to Replagal is Genzymes Fabrazyme.
Replagal and Fabrazyme were each granted marketing authorization in the
European Union and were also granted co-exclusive orphan drug status in the
European Union for up to 10 years. Fabrazyme has received marketing
authorization and orphan drug exclusivity in the United States. We believe that our primary competition with respect to our GA-GCB product for
the treatment of Gaucher disease will be Genzymes product for the treatment of
Gaucher disease, Cerezyme. Gene-Activated versions of proteins that would compete with currently-marketed
proteins We have developed several Gene-Activated protein products that would compete
with proteins that are currently being marketed by third parties. For instance,
in the case of Dynepo, competing products are marketed by Amgen, Johnson &
Johnson, F. Hoffmann-La Roche Ltd. (Boehringer Mannheim GmbH), Sankyo Company
Ltd., Chugai Pharmaceutical Co., Ltd., and the pharmaceutical division of Kirin
Brewery Co., Ltd. in Japan. Additional competitors to Dynepo may emerge
following the expiration of Amgens European patents in December 2004. Many of the products against which our Gene-Activated protein products, such as
Dynepo and GA-GCB, would compete have well-known brand names, have been
promoted extensively, and have achieved market acceptance by third-party
payors, hospitals, physicians, and patients. In addition, many of the companies
that produce these protein products have patents covering techniques used to
produce these products, which have often served as effective barriers to entry
in the therapeutic proteins market. As with Amgen and its erythropoietin
product, these companies may seek to block our entry into the market by
asserting that our Gene-Activated protein products infringe their patents. Many
of these companies are also seeking to develop and commercialize new or
potentially improved versions of their proteins. Gene therapy Although we made a
substantial investment in our gene therapy programs through March
2003, we have discontinued work in this area and believe, due to
technical disappointments across the industry, that it is unlikely
that we will be able to generate substantial revenue from
its past investments in gene therapy. The commercial success of our products will depend on the degree that the
market is receptive to our products upon introduction. The commercial success of any of our products for which we obtain marketing
approval from the European Commission, the FDA, and other regulatory
authorities will depend upon their acceptance by patients, the medical
community and third-party payors as clinically effective, safe and
cost-effective. It may be difficult for us to achieve market acceptance of our
products. Other factors that we believe will materially affect market acceptance of our
products include:  
    
    the timing of the receipt of marketing approvals;
    
    the scope of marketing approval as reflected in a products label;
    
    the countries in which such approvals are obtained; and 43




---



##### Table of Contents




    
    the safety, efficacy, convenience, and cost-effectiveness of the
product as compared to competitive products. If we cannot achieve market acceptance for our products, our business, results
of operations and financial condition will be adversely affected. We have limited manufacturing experience and may not be able to develop the
experience and capabilities needed to manufacture our products in compliance
with regulatory requirements. If we cannot develop this experience or
capabilities, we may not be able to manufacture our products, the manufacture
of our products may be subject to significant delays or we may incur
significant costs. The manufacture of proteins is complicated and technical. We have limited
manufacturing experience. In order to continue to develop products, apply for
regulatory approvals, and commercialize our products, we will need to develop,
contract for, or otherwise arrange for the necessary manufacturing
capabilities. We have manufactured, and plan to continue in the future to
manufacture, the bulk drug substance for Replagal, I2S and GA-GCB for
preclinical testing, clinical trials, and commercial sale. We have engaged
Lonza to manufacture Dynepo bulk drug substance and intend to engage additional
third-party contract manufacturers for the preparation and packaging of Dynepo
bulk drug substance into finished product for us. Any manufacturing of our products must comply with cGMP as required by the
countries in which we intend to sell our products. Before approving an
application for marketing authorization for a product, the FDA, the European
Commission, or any other equivalent foreign regulatory agency will inspect the
facilities at which the product is manufactured. If we or our third-party
manufacturers do not comply with applicable cGMP, such regulatory agency may
refuse to approve our application for marketing authorization. Once the
regulatory agency approves a product, we or our third-party manufacturers must
continue to comply with cGMP. If we or our third-party manufacturers fail to
maintain compliance with cGMP, adverse consequences can result, including
suspension or withdrawal of an approved product from the market, operating
restrictions, and the imposition of civil and criminal penalties. We have modified our manufacturing facility to increase the scale of the
process used to produce bulk drug substance for Replagal. In the European
Union, we need to obtain regulatory approval of an amendment to our MAA
describing these modifications and associated scale changes for Replagal before
we can sell Replagal manufactured using this modified scale process. If we
cannot obtain this regulatory approval, we will not be able to sell Replagal
manufactured using these processes. In some of our manufacturing processes, we use bovine-derived serum sourced
from Canada and the United States. The discovery of cattle in both Canada and
the United States with bovine spongiform encephalopathy, or mad cow disease,
could cause the regulatory agencies in some countries to impose restrictions on
our products, or prohibit us from using our products at all in such countries. We are incurring significant costs to expand and renovate our manufacturing
facility. Any delays in completing the expansion and renovation of our facility
and bringing the facility into compliance with cGMP could adversely affect our
ability to supply the bulk drug substance needed to manufacture our products
other than Dynepo. We are investing substantial funds to expand the capacity of our manufacturing
facility in Cambridge, Massachusetts and to configure the facility for the
production at a commercial scale of additional products. In anticipation of
this expansion and renovation, in the third quarter of 2003, we ceased all
manufacturing operations at our manufacturing facility, including the
manufacture of Replagal. We recommenced manufacturing operations at our
manufacturing facility in June 2004. We need to comply with cGMP before we
can ship bulk drug substance made at our manufacturing facility for commercial
sale and clinical trials. If we are unable to successfully bring the facility
into compliance with cGMP, our ability to supply our products for 44




---



##### Table of Contents



commercial
sale and clinical use, including Replagal, I2S and GA-GCB, could be interrupted
and our sales of Replagal and the timing of our I2S or GA-GCB clinical trials
could be adversely affected. We depend on third party contract manufacturers for various aspects of the
manufacture of Replagal, I2S and GA-GCB, including the preparation and
packaging of TKT-manufactured bulk drug substance into finished product, and
plan to depend entirely on third party contract manufacturers for the
manufacture of Dynepo. If these manufacturers fail to meet our requirements or
applicable regulatory requirements, our product development and
commercialization efforts may be materially harmed. To the extent that we are a party to manufacturing arrangements with third
parties, we are dependent upon these third parties to perform their obligations
in a timely manner and in accordance with applicable government regulations.
For instance, other than with respect to the manufacturing of the bulk drug
substance for Replagal, I2S, and GA-GCB, we rely on contract manufacturing
arrangements with third parties for all aspects of the manufacture of our
products, including the preparation and packaging of TKT-manufactured bulk drug
substance into finished product. Each of these manufacturing arrangements
relates to only some aspects of the manufacturing process. In the event that
any one of these manufacturers fails to or is unable to comply with its
obligations under its manufacturing, agreement with us, and if the
manufacturers failure materially delays the ultimate production of Replagal,
I2S, or GA-GCB or adversely affects our inventory levels, our sales of Replagal
or the timing of our I2S or GA-GCB clinical trials could be adversely affected. In July 2004, we entered into a manufacturing agreement with Lonza under
which Lonza agreed to manufacture Dynepo bulk drug substance at Lonzas cGMP
production facility in Slough, UK. In the future, we plan
to enter into arrangements with contract manufacturers for the preparation
and packaging of Dynepo bulk drug substance into finished product, work with
our contract manufacturers to set up and validate manufacturing processes, and
obtain the approval of an amendment to the approved MAA for Dynepo reflecting
the new manufacturing sites by the European Commission. We intend to
commercialize Dynepo by entering into arrangements with third parties for the
sales and marketing of Dynepo. If we cannot establish contract manufacturing
arrangements on favorable terms or at all, successfully set up and validate
manufacturing processes or obtain the approval of the European Commission, we
will not be able to sell Dynepo in the European Union when planned, which could
result in Dynepo being subject to additional competition and which would
adversely affect our cash resources. The value of the inventory under the control of our third party contract
manufacturers far exceeds the amount of liability such third parties are
willing to assume for their negligence. In the event that inventory in the
possession of one of our third-party manufacturers is damaged, we could face
significant financial losses
and we could also experience an interruption in supply which could have a
significant adverse affect on our sales. There are a limited number of third-party manufacturers capable of
manufacturing our protein products with a limited amount of production
capacity. As a result, we may experience difficulty in obtaining adequate
manufacturing capacity for our needs. If we are unable to obtain or maintain
contract manufacturing of our products, or to do so on commercially reasonable
terms, we may not be able to complete development of our products or market
them. If we fail to manage our inventory correctly, or our inventory is destroyed,
damaged or expires, we could experience supply shortages and significant costs
to build inventory or a significant build-up of high-cost products and raw
materials, which could cause us to experience cash flow difficulties as well as
financial losses. Manufacture of proteins, including our products and potential products, is
expensive and requires lengthy production cycle times. We build inventory of
both bulk drug substance and of finished product in order to ensure the
adequate supply to patients of our products and potential products, including
Replagal and I2S. Accordingly, we have significant capital invested in
inventory because of the high cost of manufacturing 45




---



##### Table of Contents



protein products, including
Replagal and I2S. In the event that any of our facilities containing inventory
are damaged, the inventory at the facility could be destroyed or damaged. We
may not be able to produce or have produced replacement inventory on a timely
basis or at all. We also have limited experience in managing our supply for
Replagal and our other potential products. If we fail to keep an adequate
inventory of our products, it is possible that patients could miss treatments,
which could have an adverse effect on our ability to sell our products and on
our clinical trials. Conversely, if we are unable to sell our high-cost
inventory in a timely manner, or if our high-cost inventory were to be
destroyed or expire, we could experience cash flow difficulties as well as
financial losses. Some of the raw materials used to manufacture our products are expensive and
are available from a small number of suppliers. If we fail to keep an adequate
inventory of our raw materials, it is possible that we would be unable to
manufacture our products in a timely manner. Conversely, if we are unable to
use our high-cost raw materials, or if our high-cost raw materials were to be
destroyed or expire, we could experience cash flow difficulties as well as
financial losses. If we fail to obtain reimbursement, or an adequate level of reimbursement, by
third-party payors in a timely manner for our products, or if we are unable to
collect payment in a timely manner, we may not have commercially viable markets
for our products. In certain countries, including the countries of the European Union, Australia,
and Canada, the pricing of prescription pharmaceuticals and the level of
reimbursement are subject to governmental control. In some countries, it can
take an extended period of time to establish and obtain reimbursement, and
reimbursement approval may be required at the individual patient level, which
can lead to further delays. In addition, in some countries such as Italy, Spain
and Belgium, it normally takes an extended period of time to collect payment
even after reimbursement has been established. In the United States and elsewhere, the availability of reimbursement by
governmental and other third-party payors affects the market for any
pharmaceutical product. These third-party payors continually attempt to contain
or reduce the costs of health care by challenging the prices charged for
medical products and services. For example, in Germany, the reimbursement
authority unilaterally reduced the price that it would reimburse for all
pharmaceutical products, including Replagal, by six percent in 2003 and an
additional 10 percent in 2004. In addition, in Australia, the reimbursement
authorities have limited their overall budget for purchase of enzyme
replacement therapy for Fabry disease to $10,000,000 Australian dollars, and in
Canada, federal reimbursement authorities have a recommendation that is pending
regarding reimbursement of Replagal by provincial authorities. Governmental and
reimbursement authorities or third-party payors in other countries may attempt
to control costs by limiting access to pharmaceutical products such as Replagal
and the other products we are developing or by narrowing the class of patients
for which a pharmaceutical product such as Replagal or the other products we
are developing may be prescribed. If we are not able to obtain pricing and
reimbursement at satisfactory levels for our products that receive marketing
approval, our revenues and results of operations will be adversely affected,
possibly materially. We expect that the prices for many of our products, when commercialized,
including in particular our products for the treatment of rare genetic
diseases, may be high compared to other pharmaceutical products. For example,
we have established pricing and reimbursement for substantially all patients
receiving Replagal in the European Union. Country-by-country pricing was
initially established as the local currency equivalent of between approximately
$200,000 and $215,000 per patient per year for an average patient weighing 70
kilograms. The price generally remains fixed in the local currencies and varies
in United States dollars with exchange rate fluctuations. We may encounter
particular difficulty in obtaining satisfactory pricing and reimbursement for
products for which we seek a high price. We also may experience pricing pressure with respect to Replagal and other
products for which we may obtain marketing approval in the United States due to
the trend toward managed health care, the increasing influence of health
maintenance organizations and legislative proposals. We may not be able to sell
our products profitably if reimbursement is unavailable or is limited in scope
or amount. 46




---



##### Table of Contents



We have limited sales and marketing experience and capabilities and will need
to develop this expertise or depend on third parties to successfully sell and
market our products on our behalf to generate revenue. Except for TKT Europe with respect to the marketing and selling of Replagal, we
have limited sales and marketing experience and capabilities, and limited
resources to devote to sales and marketing activities. In order to market our
products, including Replagal and Dynepo, we will need to develop this
experience and these capabilities or rely upon third parties to perform these
functions. We are seeking a marketing partner for Dynepo in Europe. If we rely
on third parties to sell, market, or distribute our products, our success will
be dependent upon the efforts of these third parties in performing these
functions. In many instances, we may have little or no control over the
activities of these third parties in selling, marketing, and distributing our
products. If we choose to conduct these activities directly, as we plan to do
with respect to some of our potential products, including Replagal, we may not
be able to recruit and maintain sales and marketing personnel, which would
adversely affect our sales efforts in Europe. Competition for technical, commercial and administrative personnel is intense
in our industry and we may not be able to sustain our operations or grow if we
are unable to attract and retain qualified personnel. While we do not feel that any single individual is indispensable, our success
is highly dependent on the retention of principal members of our technical,
commercial, and administrative staff. Our future growth will require hiring a significant number of qualified
technical, commercial and administrative personnel. Accordingly, recruiting and
retaining such personnel in the future will be critical to our success. There
is intense competition from other companies and research and academic
institutions for qualified personnel in the areas of our activities. If we are
not able to continue to attract and retain, on acceptable terms, the qualified
personnel necessary for the continued development of our business, we may not
be able to sustain our operations or grow. We depend on our collaborators to develop, conduct clinical trials of, obtain
regulatory approvals for, and manufacture, distribute, market and sell products
on our behalf and their efforts may not be scientifically or commercially
successful. We are parties to collaborative agreements with third parties relating to
certain of our principal products. We are relying on Genzyme to develop and
commercialize I2S in Japan and certain other countries in Asia; on
Sanofi-Aventis to develop, obtain regulatory approvals for, and manufacture,
market, and sell Dynepo in the
United States; and Sumitomo to develop and commercialize Replagal in Japan,
Korea, China and Taiwan. We also use third party distributors to distribute
Replagal in many areas of the world including Australia, Canada, Europe, and
Israel. Our collaborators may not devote the resources necessary or may
otherwise be unable or unwilling to complete development and commercialization
of these potential products. Our existing collaborations are subject to
termination without cause on short notice under specified circumstances. In
some cases, we may not receive payments contemplated in the agreements with our
collaborators if our collaborators fail to achieve certain regulatory and
commercial milestones. Our existing collaborations and any future collaborative arrangements with
third parties may not be scientifically or commercially successful. Factors
that may affect the success of our collaborations include the following:  
    
    reductions in marketing or sales efforts or a discontinuation of
marketing or sales of our products by our collaborators would reduce our
revenues;
    
    under our collaboration agreements, we cannot conduct specified types
of research and development and marketing and sales activities in the
field that is the subject of the collaboration. These 47




---



##### Table of Contents



agreements have
the effect of limiting the areas of research and development that we may
pursue, either alone or in cooperation with third parties;
    
    our collaborators may underfund or not commit sufficient resources to
the testing, marketing, distribution or other development of our
products;
    
    our collaborators may be pursuing alternative technologies or
developing alternative products, either on their own or in collaboration
with others, that may be competitive with the product as to which they
are collaborating with us or that could affect our collaborators
commitment to the collaboration with us;
    
    our collaborators may not properly maintain or defend our
intellectual property rights or they may utilize our proprietary
information in such a way as to invite litigation that could jeopardize
or invalidate our proprietary information or expose us to potential
liability;
    
    our collaborators may terminate their collaborations with us, as
Sanofi-Aventis has done with respect to our GA-GCSF product, which could
make it difficult for us to attract new collaborators or adversely
affect the perception of us in the business and financial communities;
and
    
    our collaborators may pursue higher priority programs or change the
focus of their development programs, which could affect the
collaborators commitment to us. If third parties on whom we rely for clinical trials do not perform as
contractually required or as we expect, we may not be able to obtain regulatory
approval for or commercialize our product candidates, and our business may
suffer. We do not have the ability to independently conduct the clinical trials
required to obtain regulatory approval for our products. We depend on
independent clinical investigators, contract research organizations and other
third party service providers to conduct the clinical trials of our product
candidates and expect to continue to do so. Although we rely heavily on these
parties for successful execution of our clinical trials, we do not control many
aspects of their activities. For example, the investigators are not our
employees. However, we are responsible for ensuring that each of our clinical
trials is conducted in accordance with the general investigational plan and
protocols for the trial. Third parties may not complete activities on schedule,
or may not conduct our clinical trials in accordance with regulatory
requirements or our stated protocols. The failure of these third parties to
carry out their obligations could delay or prevent the development, approval
and commercialization of our product candidates. A significant portion of our revenues are concentrated among a limited number
of significant customers. The loss of a significant customer could lower our
revenues and adversely affect our business, results of operations and financial
condition. We have three significant customers who accounted for 18%, 12% and 12%,
respectively, of our product sales in 2003. The same customers accounted for
8%, 6% and 22% of our product sales in 2002. The loss of any significant
customer may significantly lower our revenues and adversely affect our
business, results of operations and financial conditions. We may be exposed to product liability claims and may not be able to obtain
adequate product liability insurance. If we cannot successfully defend
ourselves against such claims, we may incur substantial liabilities and may be
required to limit commercialization of our products. Our business exposes us to the risk of product liability claims that is
inherent in the manufacturing, testing, and marketing of human therapeutic
products. We maintain clinical trial liability insurance and product liability
insurance in amounts that we believe to be reasonable. This insurance is
subject to deductibles and coverage limitations. We may not be able to obtain
additional insurance or maintain insurance on acceptable 48




---



##### Table of Contents



terms or at all.
Moreover, any insurance that we do obtain may not provide adequate protection
against potential liabilities. If we are unable to obtain insurance at
acceptable cost or otherwise protect against potential product liability
claims, we will be exposed to significant liabilities, which may materially and
adversely affect our business and financial position. These liabilities could
prevent or interfere with our product commercialization efforts. If we fail to comply
with SEC regulations relating to internal control over financial
reporting, current and potential investors could lose confidence in
our financial reports, which would harm our business and have an
adverse effect on our stock price. Under Section 404 of the
Sarbanes-Oxley Act of 2002, we are required to include in our future
10-K filings, beginning with our 10-K for 2004, a report on internal
controls. This report must contain an assessment, as of the end of the
year, of the effectiveness of our internal control structure and
procedures for financial reporting. Section 404 also requires our
independent auditors to attest to and report on the assessment made
by management. In order to meet these requirements, we must document
and test the effectiveness of our internal controls, allow time for
our independent auditors to audit our internal control structure and
remediate any deficiencies identified by us or our auditors. We are working toward
evaluating and documenting our internal controls in order to allow
management to report on, and our independent auditors to attest to,
our internal controls. However, this work is extensive and time
consuming. In addition, substantially all of the sales of Replagal
are transacted through and recorded by TKT Europe. We did not begin
much of our Section 404 compliance work for TKT Europe until we
completed the purchase of the minority interest in TKT Europe in
October 2004. We can not be certain as to the timing of completion of
our evaluation, testing and remediation actions or of the timing of
our auditors. Because the Section 404 requirements are new, and
interpretations and related implementation guidance have been
evolving, estimating the time to complete the assessment of our
internal controls is difficult. We may identify deficiencies as we
move forward with our work which we will be unable to remediate by the end
of the year. If we and our auditors are
unable to complete our Section 404 compliance work on a timely basis,
we may be unable to state that our internal control over financial
reporting is effective as of December 31, 2004 and our auditors
may be unable to attest to our managements assessment of our
internal controls. If any of these events occurs, we could lose
investor confidence in the accuracy and completeness of our financial
reports, which in turn could harm our business and have an adverse
effect on our stock price. 49




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company maintains its investment portfolio consistent with its Investment
Policy, which has been approved by the Board of Directors. The Companys
investment portfolio consists of investments only in U.S. government and agency
obligations. The Companys investments are also subject to interest rate risk
and will decrease in value if market interest rates increase. However, due to
the relatively short duration of the Companys investments, interest rate risk
is mitigated. The Company does not own derivative financial instruments in its
investment portfolio. Accordingly, the Company does not believe that there is any material market
risk exposure with respect to derivative or other financial instruments which
would require disclosure under this item. As of September 30, 2004, the Company did not have any off-balance sheet
arrangements. The Company has exposure to currency risk for Replagal sales in Europe. Pricing
was initially established as the local currency equivalent of an average annual
per patient price of approximately $165,000 to $175,000. The price remains
fixed in the local currencies and varies in United States dollars with exchange
rate fluctuations. Foreign currency fluctuations favorably contributed
approximately $1,490,000 and $4,870,000 to product sales for the three and nine
months ended September 30, 2004, respectively, as compared to the same periods
of 2003. 
 ITEM 4. CONTROLS AND PROCEDURES. The Companys management, with the participation of the Companys President and
Chief Executive Officer and its Vice President, Finance and Chief Financial
Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of September 30, 2004. Based on this evaluation, the Companys President and
Chief Executive Officer and its Vice President, Finance and Chief Financial
Officer concluded that, as of September 30, 2004, the Companys disclosure
controls and procedures were (1) designed to ensure that material information
relating to the Company, including its consolidated subsidiaries, is made known
to its President and Chief Executive Officer and its Vice President, Finance
and Chief Financial Officer by others within these entities, particularly
during the period in which this report was being prepared and (2) effective, in
that they provide reasonable assurance that information required to be
disclosed by the Company in the reports that it files or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. No change to the Companys internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the quarter ended September 30, 2004, that has materially affected, or
is reasonably likely to materially affect, the Companys internal control over
financial reporting. 50




---



##### Table of Contents



PART II Other Information 
 ITEM 1. LEGAL PROCEEDINGS The description of the legal proceedings set forth under note 9 of the
Companys condensed consolidated financial statements in this Quarterly Report
on Form 10-Q are incorporated herein by reference. 
 ITEM 6. EXHIBITS The Exhibits listed in the Exhibit index immediately preceding such Exhibits
are filed as part of this Quarterly Report on Form 10-Q, and such Exhibit Index
is incorporated herein by reference. 51




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. TRANSKARYOTIC THERAPIES, INC.Date: November 9, 2004
    
    By:
    
    /s/ Michael J. AstrueMichael J. AstruePresident and Chief Executive OfficerDate: November 9, 2004
    
    By:
    
    /s/ Gregory D. PerryGregory D. PerryVice President, Finance, and Chief Financial Officer(Principal Financial and Accounting Officer)




---



##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description10.1*#
    
    Services Agreement, dated July 23, 2004, between Lonza Biologics PLC and the Registrant.31.1*
    
    Certification by the Registrants President and Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2*
    
    Certification by the Registrants Vice President, Finance and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1*
    
    Certification by the Registrants President and Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2*
    
    Certification by the Registrants Vice President, Finance and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 * Filed herewith. # Confidential treatment requested as to certain portions pursuant to Rule
24b-2 promulgated under the Securities Exchange Act of 1934, as
amended. Such portions have been omitted and filed separately with
the Securities and Exchange Commission.