** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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** **

**FORM 10-Q**

 

| **ý** |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------|----------------------------------------------------------------------------------------------|
|       |   |                                                                                         |
|       |   | **For the Quarter Ended March 31,  2003**                                                    |
|       |   |                                                                                         |
|       |   | **Commission File Number 0-21481**                                                           |

** **

**TRANSKARYOTICTHERAPIES, INC.**

(Exact name ofregistrant as specified in its charter)

 

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| **Delaware**                                                                         |   | **04-3027191**                        |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                 |   |                                  |
| **700 Main Street  Cambridge, 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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

| Yes  ý |   | No** ****o** |
|------------------|--------|-------------------|

 

Indicate by check mark whether the registrant is anaccelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of1934, as amended.

 

| Yes  ý |   | No** ****o** |
|------------------|--------|-------------------|

 

At April 30, 2003, there were 34,903,654 shares ofCommon Stock, $.01 par value, outstanding.

 

 

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TranskaryoticTherapies, Inc.

 

INDEX

 
| PART  I.  | FINANCIAL INFORMATION                                                                                     |
|----------------|-----------------------------------------------------------------------------------------------------------|
|           |                                                                                                      |
| Item  1.  | Condensed  Consolidated Financial Statements (unaudited)                                                  |
|           |                                                                                                      |
|           | Condensed  Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002                         |
|           |                                                                                                      |
|           | Condensed  Consolidated Statements of Operations for the Three  Months Ended March 31, 2003 and 2002 |
|           |                                                                                                      |
|           | Condensed  Consolidated Statements of Cash Flows for the Three  Months Ended March 31, 2003 and 2002 |
|           |                                                                                                      |
|           | Notes  to Condensed Consolidated Financial Statements                                                     |
|           |                                                                                                      |
| Item 2.        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations               |
|           |                                                                                                      |
| Item  3.       | Quantitative  and Qualitative Disclosures About Market Risk                                               |
|           |                                                                                                      |
| Item 4.        | Controls and  Procedures                                                                                  |
|           |                                                                                                      |
| PART II.       | OTHER  INFORMATION                                                                                        |
|           |                                                                                                      |
| Item  1.       | Legal  Proceedings                                                                                        |
|           |                                                                                                      |
| Item 6.        | Exhibits and  Reports on Form 8-K                                                                         |
|           |                                                                                                      |
| SIGNATURES     |
|           |
| CERTIFICATIONS |

 

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PART I                   FINANCIAL INFORMATION

 

Transkaryotic Therapies,Inc.

Condensed ConsolidatedBalance Sheets

(unaudited)

 
|                                                                                                                                                                          |   | **March 31,  2003** |       | **December 31,********2002** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------------|------------|
| **(in thousands, except par values)**                                                                                                                                         |   |                |       |
|                                                                                                                                                                          |   |                | ** ** |                         | ** ** |
| **Assets**                                                                                                                                                                    |   |                |       |                         |       |
| Current assets:                                                                                                                                                               |   |                |       |                         |       |
| Cash and cash  equivalents                                                                                                                                                    |   | $                   | 156,307    |                         | $          | 154,604 |   |
| Marketable  securities                                                                                                                                                        |   | 55,772              |       | 102,104                      |       |
| Accounts  receivable                                                                                                                                                          |   | 16,591              |       | 15,684                       |       |
| Inventories                                                                                                                                                                   |   | 21,521              |       | 21,650                       |       |
| Prepaid expenses  and other current assets                                                                                                                                    |   | 4,952               |       | 4,450                        |       |
| Total current  assets                                                                                                                                                         |   | 255,143             |       | 298,492                      |       |
| Property and  equipment, net                                                                                                                                                  |   | 61,807              |       | 59,372                       |       |
| Other assets                                                                                                                                                                  |   | 1,863               |       | 1,942                        |       |
| Total assets                                                                                                                                                                  |   | $                   | 318,813    |                         | $          | 359,806 |   |
|                                                                                                                                                                          |   |                |       |                         |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                |   |                |       |                         |       |
| Current  liabilities:                                                                                                                                                         |   |                |       |                         |       |
| Accounts payable                                                                                                                                                              |   | $                   | 6,776      |                         | $          | 11,804 |   |
| Accrued expenses                                                                                                                                                              |   | 11,933              |       | 12,767                       |       |
| Accrued  restructuring expenses                                                                                                                                               |   | 3,553               |       | —                       |       |
| Accrued  intellectual property license expense                                                                                                                                |   | —              |       | 11,368                       |       |
| Total current  liabilities                                                                                                                                                    |   | 22,262              |       | 35,939                       |       |
|                                                                                                                                                                          |   |                |       |                         |       |
| Minority  interest                                                                                                                                                            |   | 303                 |       | —                       |       |
|                                                                                                                                                                          |   |                |       |                         |       |
| Stockholders’  equity:                                                                                                                                                   |   |                |       |                         |       |
| Series A  convertible preferred stock, $.01 par value, 10 shares authorized; no shares  issued and outstanding at March 31, 2003 and December 31, 2002, respectively          |   | —              |       | —                       |       |
| Series B  preferred stock, $.01 par value, 1,000 shares authorized; no shares issued  and outstanding at March 31, 2003 and December 31, 2002, respectively                   |   | —              |       | —                       |       |
| Common stock,  $.01 par value;  100,000 shares  authorized;  34,490 and 34,845 shares  issued and outstanding at March 31, 2003 and December 31, 2002, respectively |   | 348                 |       | 348                          |       |
| Additional  paid-in capital                                                                                                                                                   |   | 685,566             |       | 685,566                      |       |
| Accumulated  deficit                                                                                                                                                          |   | (391,380            | )          | (365,434                     | )          |
| Accumulated  other comprehensive income                                                                                                                                       |   | 3,996               |       | 3,387                        |       |
|                                                                                                                                                                          |   | 298,530             |       | 323,867                      |       |
|                                                                                                                                                                          |   |                |       |                         |       |
| Less treasury  stock, at cost 367 shares at March 31, 2003                                                                                                                    |   | (2,282              | )          | —                       |       |
| Total  stockholders’ equity                                                                                                                                              |   | 296,248             |       | 323,867                      |       |
|                                                                                                                                                                          |   |                |       |                         |       |
| Total  liabilities and stockholders’ equity                                                                                                                              |   | $                   | 318,813    |                         | $          | 359,806 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

3

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Part 1 - Item 1 - Condensed Consolidated FinancialStatements

 

Transkaryotic Therapies,Inc.

Condensed ConsolidatedStatements of Operations

(unaudited)

 
|                                                         |   | **Three  Months Ended March 31,** |    |
|--------------------------------------------------------------|--------|-----------------------------------|---------|
| **(in thousands, except per share  amounts)**                |   | **2003**                          |    | **2002** |   |
|                                                         |   |                              |    |   |   |
| Revenues:                                                    |   |                              |    |   |   |
| Product sales                                                |   | $                                 | 12,183  |   | $ | 6,058 |   |
| License and  research revenues                               |   | —                            |    | 552 |   |
|                                                         |   | 12,183                            |    | 6,610 |   |
| Operating  expenses:                                         |   |                              |    |   |   |
| Cost of goods  sold                                          |   | 3,501                             |    | 548 |   |
| Research and  development                                    |   | 20,982                            |    | 20,409 |   |
| Intellectual  property license expense                       |   | 1,350                             |    | — |   |
| Selling, general  and administrative                         |   | 9,166                             |    | 6,423 |   |
| Restructuring  charge                                        |   | 3,602                             |    | — |   |
|                                                         |   | 38,601                            |    | 27,380 |   |
|                                                         |   |                              |    |   |   |
| Loss from  operations                                        |   | (26,418                           | )       | (20,770 | ) |
|                                                         |   |                              |    |   |   |
| Other income:                                                |   |                              |    |   |   |
|                                                         |   |                              |    |   |   |
| Interest income                                              |   | 776                               |    | 2,303 |   |
|                                                         |   |                              |    |   |   |
| Minority interest                                            |   | (303                              | )       | — |   |
|                                                         |   | 473                               |    | 2,303 |   |
|                                                         |   |                              |    |   |   |
| Net loss                                                     |   | $                                 | (25,945 | ) | $ | (18,467 | ) |
|                                                         |   |                              |    |   |   |
| Basic and  diluted net loss per share                        |   | $                                 | (0.75   | ) | $ | (0.54 | ) |
|                                                         |   |                              |    |   |   |
| Shares used to  compute basic and diluted net loss per share |   | 34,550                            |    | 34,331 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

4

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Transkaryotic Therapies,Inc.

Condensed ConsolidatedStatements of Cash Flows

(unaudited)

 
|                                                                             |   | **Three  Months Ended********March 31,** |       |
|----------------------------------------------------------------------------------|--------|------------------------------------------|------------|
|                                                                             |   |                                     |
| **(in thousands)**                                                               |   | **2003**                                 |       | **2002** |   |
|                                                                             |   |                                     |       |   |   |
| **Operating  activities:**                                                       |   |                                     |       |   |   |
| Net loss                                                                         |   | $                                        | (25,945    | ) | $ | (18,467 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |                                     |       |   |   |
| Depreciation and  amortization                                                   |   | 3,013                                    |       | 1,640 |   |
| Compensation  expense related to equity issuances                                |   | —                                   |       | 65 |   |
| Change in  accrued intellectual property license expense                         |   | (11,368                                  | )          | — |   |
| Changes in other  operating assets and liabilities                               |   | (3,142                                   | )          | (1,735 | ) |
|                                                                             |   |                                     |       |   |   |
| Net cash used  for operating activities                                          |   | (37,442                                  | )          | (18,497 | ) |
|                                                                             |   |                                     |       |   |   |
| **Investing  activities:**                                                       |   |                                     |       |   |   |
| Proceeds from  sales and maturities of marketable securities                     |   | 54,288                                   |       | 50,776 |   |
| Purchases of  marketable securities                                              |   | (7,956                                   | )          | (163,175 | ) |
| Purchases of  property and equipment                                             |   | (5,448                                   | )          | (6,329 | ) |
| Changes in other  assets and liabilities                                         |   | 223                                      |       | (769 | ) |
|                                                                             |   |                                     |       |   |   |
| Net cash  provided by (used for) investing activities                            |   | 41,107                                   |       | (119,497 | ) |
|                                                                             |   |                                     |       |   |   |
| **Financing  Activities:**                                                       |   |                                     | ** ** |   | ** ** |
| Issuance of  common stock, net                                                   |   | —                                   |       | 910 |   |
| Repurchase of  treasury stock                                                    |   | (2,282                                   | )          | — |   |
| Net cash  provided by (used for) financing activities                            |   | (2,282                                   | )          | 910 |   |
|                                                                             |   |                                     |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                    |   | 320                                      |       | (107 | ) |
|                                                                             |   |                                     |       |   |   |
| Net decrease in  cash and cash equivalents                                       |   | 1,703                                    |       | (137,191 | ) |
|                                                                             |   |                                     |       |   |   |
| Cash and cash  equivalents at January 1                                          |   | 154,604                                  |       | 323,877 |   |
|                                                                             |   |                                     |       |   |   |
| Cash and cash  equivalents at March 31                                           |   | $                                        | 156,307    |   | $ | 186,686 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

5

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Transkaryotic Therapies,Inc.

Notes to CondensedConsolidated Financial Statements (unaudited)

 March 31, 2003 and 2002

 

### 1.                                       BASISOF PRESENTATION

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles in the United States forcomplete financial statements.  In theopinion of management, the accompanying financial statements include alladjustments, consisting only of normal recurring adjustments, necessary for afair presentation of the financial position, results of operations and cashflows for the periods presented.  Theresults of operations for the interim period ended March 31, 2003 are notnecessarily indicative of the results to be expected for the year endingDecember 31, 2003.

 

These financialstatements should be read in conjunction with the audited consolidatedfinancial statements and notes thereto for the year ended December 31, 2002included in the Company’s Annual Report on Form 10-K as filed with theSecurities and Exchange Commission.

 

Niche Protein®,Gene-Activated®, and TKT® are registered trademarks and ReplagalTM andTranskaryotic TherapyTM are trademarks of Transkaryotic Therapies, Inc.  DynepoTM is a trademark of AventisPharmaceuticals, Inc. (“Aventis”).  Allother trademarks, service marks or trade names referenced in this quarterlyreport are the property of their respective owners.

 

### 2.                                       NETLOSS PER SHARE

 

The Companycalculates net loss per share in accordance with Statement of FinancialAccounting Standard (“SFAS”) No. 128, “Earnings Per Share,” and relatedinterpretations.   Basic earnings pershare is computed using the weighted average shares outstanding.

 

Basic net loss pershare was equivalent to diluted net loss per share for the three months endedMarch 31, 2003 and 2002 because common equivalent shares from convertiblepreferred stock and stock options have been excluded, as their effect isantidilutive.

 

### 3.                                       COMPREHENSIVELOSS

 

Comprehensive losscomprises net loss, unrealized gains and losses on marketable securitiesdesignated as available-for-sale, and foreign currency translationadjustments.  The Company had a totalcomprehensive loss of $25,336,000 and $19,703,000 for the three months endedMarch 31, 2003 and 2002, respectively.

 

6

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### 4.                                       INVENTORIES

 

Inventories consistof the following:

 
|               |   | **March 31,   2003** |   | **December  31,  2002** |   |
|--------------------|--------|----------------------|--------|-------------------------|--------|
| **(in thousands)** |   |                 |   |
| Raw materials      |   | $                    | 610    |                    | $      | 947 |   |
| Work in process    |   | 16,092               |   | 14,689                  |   |
| Finished goods     |   | 4,819                |   | 6,014                   |   |
|               |   | $                    | 21,521 |                    | $      | 21,650 |   |

 

Inventories arestated at the lower of cost or market, with cost determined under a first-in,first-out method.  Inventories arereviewed periodically for slow-moving or obsolete status based on salesactivity, both projected and historical.

 

### 5.                                       INTELLECTUALPROPERTY LICENSE FEE EXPENSE

 

In June 2002, the Company obtained an exclusive license to certainpatents and patent applications from Cell Genesys, Inc. (“Cell Genesys”)related to Cell Genesys’ approach to gene activation. In consideration for thelicense, the Company initially paid Cell Genesys $11,000,000 in cash and issuedto Cell Genesys shares of the Company’s common stock worth $15,000,000 as ofthe date of the Agreement.

 

Under the agreement, the Company agreed that the number of shares ofcommon stock initially issued to Cell Genesys would be adjusted at the time theCompany registered such shares for resale under the Securities Act of 1933, ifthe market value of such shares at that time was greater or less than$15,000,000, as calculated in accordance with a predetermined formula. Pursuantto the agreed upon formula, at December 31, 2002 with the closing price ofthe Company’s common stock at $9.90 per share, the Company would have beenrequired to issue to Cell Genesys an additional 1,148,000 shares of commonstock. As a result, the Company recorded an additional non-cash license feeexpense of $8,660,000 in the fourth quarter of 2002.

 

In January 2003, the Company and Cell Genesys renegotiated theconsideration paid for the license, and the Company repurchased the shares ofstock issued to Cell Genesys for $15,000,000 in cash. The Company incurred anadditional license expense in the first quarter of 2003 of $1,350,000, whichrepresents the further decline in the market value of the Company’s commonstock from December 31, 2002 to January 15, 2003. The repurchased shares havebeen recorded as treasury stock.

 

Under the agreement, Cell Genesys also has the potential to receivecertain milestone payments from the Company contingent upon the outcome ofrelated patent matters under the license agreement. If all of the milestoneswere achieved, the Company will be obligated to pay Cell Genesys an aggregateof $17,000,000 payable in part in cash and in part in stock. The Company is notrequired to make royalty payments to Cell Genesys.

 

7

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### 6.                                       RESTRUCTURINGCHARGE

 

In February 2003, TKT announced a major reorganization in an effortto reduce costs and narrow the scope of the Company’s research initiatives.Under this reorganization, TKT plans to focus its research, development, andcommercialization efforts primarily on therapeutics for the treatment of raregenetic diseases caused by protein deficiencies. The Company is seekingcollaborative partners for its Gene-Activated protein products, which areversions of proteins that would compete with proteins currently being marketedby third parties, and for its gene therapy development programs.

 

As part of thisrestructuring, during the first quarter of 2003, TKT reduced its U.S. headcountby approximately 100 positions. TKT intends to continue to reduce headcountthrough attrition, with the goal of having approximately 300 to 315 full-timeU.S. employees by the end of 2003.  Asof March 31, 2003, TKT had 345 full-time U.S. employees. TKT is also consolidatingits facilities as part of the restructuring.

 

As a result of the restructuring, the Company recorded a charge of$3,602,000 during the first quarter of 2003 in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*.  Includedin the charge is $1,332,000 of employee severance and outplacement servicescosts for 74 employees, primarily in research and development, and $2,270,000,representing the remaining lease obligation for one of four facilities that theCompany no longer occupies.  The Company expects that its employee-related andfacility consolidation restructuring actions will be substantially completed in2003 and expects to continue to record restructuring charges in connection withthe reorganization during the remainder of 2003 and beyond.

 

The following table outlines the components of the Company'srestructuring charge and accrual:

 
| **(in  thousands)**         |   | **Charges** |   | **Payments** |   | **Other** |   | **Balance at 3/31/03** |   |
|-----------------------------|--------|-------------|--------|--------------|--------|-----------|--------|------------------------|--------|
|                        |   |        |   |         |   |      |   |                   |   |
| Employee severance          |   |        |   |         |   |      |   |                   |   |
| and outplacement            |   | $           | 1,332  |         | (28    | )         | — |                   | $      | 1,304 |   |
| Lease obligations           |   | 2,270       |   | —       |   | (21       | )      | 2,249                  |   |
| Total restructuring reserve |   | $           | 3,602  |         | (28    | )         | (21    | )                      | $      | 3,553 |   |

 

### 7.                                       STOCK BASED COMPENSATION

 

The Companyaccounts for qualified stock option grants in accordance with AccountingPrinciples Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB25”) and Financial Accounting Standards Board (“FASB”) Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation, anInterpretation of APB No. 25, and related interpretation, and, accordingly,recognizes no compensation expense for the issue thereof.  For certain non-qualified stock optionsgranted, the Company recognizes as compensation expense the excess of the fairvalue of the common stock issuable upon exercise 

 

8

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over the aggregateexercise price of such options.  Thecompensation is amortized over the vesting period of each option or the recipient’sterm of employment, if shorter.  TheCompany has adopted the disclosure-only provisions of Statement of FinancialAccounting Standard (“SFAS”) No. 123, Accounting for Stock-Based Compensationas amended by SFAS No. 148 Accounting for Stock-Based Compensation-Transitionand Disclosure.

 

The table belowpresents the combined net loss and basic and diluted net loss per common shareif compensation cost for the Company’s stock option plans had been determinedbased on the estimated fair value of awards under those plans on the grant orpurchase date:

 
| **For  the three months ended March 31,   (in thousands, except per share prices)**                             |   | **2003** |    | **2002** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Net loss                                                                                                             |   | $        | (25,945 | )        | $      | (18,467 | ) |
| Add: Stock-based compensation included in net loss as reported                                                       |   | —   |    | 65       |   |
| Deduct: Total stock-based employee compensation expense determined  under the fair value based method for all awards |   | (7,066   | )       | (5,370   | )      |
| Pro forma net loss                                                                                                   |   | $        | (33,011 | )        | $      | (23,772 | ) |
| Basic and diluted net loss per share - as reported                                                                   |   | $        | (0.75   | )        | $      | (0.54 | ) |
| Basic and diluted net loss per share - proforma                                                                      |   | $        | (0.96   | )        | $      | (0.69 | ) |

 

Fair values of awards granted under the stock option plans wereestimated at grant or purchase dates using a Black-Scholes option pricingmodel. The Company uses the multiple option approach and the followingassumptions:

 
| **For the three months   ended March 31,** |   | **2003** |   | **2002** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|
|                                       |   |     |   |     |   |
| Expected life  (years)                     |   | 1.5-7.5  |   | 1.5-7.5  |   |
| Interest rate                              |   | 1.2%-3.7 | %      | 1.5%-4.0 | %      |
| Expected  volatility                       |   | 0.95     |   | 1.00     |   |

 

The Company hasnever declared or paid dividends on any of its capital stock and does notexpect to do so in the foreseeable future.

 

The pro formaeffects of the three months ended March 31, 2003 and 2002, respectively netloss and net loss per share of expensing the estimated fair value of stockoptions issued are not necessarily representative of the effects on reportingthe results of operations for future years as the periods presented includeonly seven years, six years and five years, respectively, of option grants.

 

### 8.                                       LEGALPROCEEDINGS

 

The Company is a party to a number of legal proceedings. The Company canprovide no assurance as to the outcome of any of these proceedings. A decisionby a court in the United States or in any other jurisdiction in a manneradverse to the Company could have a material adverse effect on the Company’sbusiness, financial condition, and results of operations.

 

9

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*Replagal Patent Litigation*

 

In July 2000, Genzyme Corporation (“Genzyme”) and Mount SinaiSchool of Medicine of New York University (“Mount Sinai”) filed a patentinfringement action against the Company in the U.S. District Court of Delaware.The complaint alleges that activities relating to Replagal infringe a patentlicensed by Genzyme from Mount Sinai. In January 2002, the U.S. DistrictCourt of Delaware dismissed this patent litigation granting TKT’s motion forsummary judgment of non-infringement and denying Genzyme’s motion for summaryjudgment of infringement. Genzyme sought monetary damages and injunctiverelief.

 

In March 2002, Genzyme appealed the U.S. District Court ofDelaware’s ruling to the U.S. Court of Appeals for the Federal Circuit, and inJanuary 2003 the U.S. Court of Appeals for the Federal Circuit heard oralarguments on the appeal. If Genzyme is successful in its appeal, the case willbe remanded to the U.S. District Court of Delaware for further proceedings onnon-infringement and invalidity issues. As of March 31, 2003, the Companyhad incurred $4,667,000 in litigation expenses associated with the Replagallitigation.

 

*Dynepo Patent Litigation*

 

In April 1997, Amgen Inc. (“Amgen”) commenced a patent infringementaction against the Company and Aventis in the U.S. District Court ofMassachusetts. In January 2001, the U.S. District Court of Massachusettsconcluded that Dynepo infringed eight of the 18 claims of five patents thatAmgen had asserted. Amgen did not seek and was not awarded monetary damages.

 

On January 6, 2003, the U.S. Court of Appeals for the FederalCircuit issued a decision affirming in part and reversing in part the decisionof the U.S. District Court of Massachusetts and remanded the action to the U.S.District Court of Massachusetts for further proceedings. In particular, theU.S. Court of Appeals for the Federal Circuit:

 

•              upheld the U.S. District Court ofMassachusetts’ determination of invalidity of one of Amgen’s patents;

 

•                                          upheld the U.S. District Court of Massachusetts’determination that some claims of two other Amgen patents were infringed, butvacated the U.S. District Court of Massachusetts’ determination that thosepatents were not invalid; and

 

•                                          vacated the U.S. District Court of Massachusetts’determination that Replagal infringed some claims of the two remaining Amgenpatents, and vacated the U.S. District Court of Massachusetts’ determinationthat one of these patents was not invalid.

 

As part of the U.S. Court of Appeal for the Federal Circuit’s ruling, itinstructed the U.S. District Court of Massachusetts to reconsider the validityof Amgen’s patents in light of potentially invalidating prior art.

 

10

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In addition, in July 1999, Aventis and the Company commenced legalproceedings in the United Kingdom against Kirin-Amgen, Inc. (“Kirin-Amgen”),seeking a declaration that a European patent held by Kirin-Amgen will not beinfringed by the Company’s activities relating to Dynepo and that certainclaims of Kirin-Amgen’s U.K. patent are invalid.  In April 2001, the High Court of Justice in the UnitedKingdom ruled that Dynepo infringed one of four claims of the patent assertedby Kirin-Amgen.  In July 2002, theCourt of Appeals in the United Kingdom reversed the High Court of Justice andruled that Dynepo did not infringe Kirin-Amgen’s patent. Kirin-Amgen petitionedthe House of Lords to hear an appeal from the decision of the Court of Appeals.In February 2003, the House of Lords agreed to hear this appeal.

 

The Company is required to reimburse Aventis, which is paying theexpenses of the Amgen and Kirin-Amgen litigations relating to Dynepo, for 50%of the expenses. Aventis is also entitled to deduct up to 50% of any royaltiesdue to the Company from the sale of Dynepo until Aventis has recouped the fullamount of TKT’s share of litigation expenses. The Company currently estimatesthat its share of the expenses associated with the litigation will totalbetween approximately $15,000,000 and $20,000,000 by the time the matter isfinally adjudicated.

 

*Serono Patent Litigation*

 

In January 2003, Applied Research Systems ARS Holdings, N.V., awholly owned subsidiary of Serono International S.A. (“Serono”), commenced anaction against TKT in the District Court at The Hague in the Netherlandsclaiming that Replagal infringes one of Serono’s European patents.

 

The Serono patent relates to Serono’s approach to gene activation. InJanuary 2002, the European Patent Office revoked the Serono patent ongrounds of invalidity due to non-enablement. Serono has appealed the revocationto the Technical Board of Appeal at the European Patent Office.

 

The Company expects that expenses related to this litigation will besignificant.

 

*Shareholder Lawsuits*

 

In the firstquarter of 2003, at least nine purported class action suits were brought in theU.S. District Court of Massachusetts against the Company, its former ChiefExecutive Officer, Richard F Selden, and in some cases, its Chairman of theBoard of Directors, Rodman W. Moorhead, III. The complaints generally allegethat, during the period from January 2001 through January 2003, TKTmade false and misleading statements and failed to disclose materialinformation concerning the status and progress for obtaining U.S. marketingapproval of Replagal and seek equitable and monetary relief, an unspecifiedamount of damages, with interest, and attorney's fees and costs. On April 9,2003, the Court consolidated the various actions under one matter entitled Inre Transkaryotic Therapies, Inc., Securities Litigation, C.A. No.03-10165RW2.  The Company expects thatexpenses related to this litigation will be significant.

 

OnApril 14, 2003, a shareholder derivative suit was filed against individualmembers of the Company’s Board of Directors, the Company's former ChiefExecutive Officer, and the Company in Middlesex Superior Court in theCommonwealth of Massachusetts entitled South Shore Gastrointerology UA 6/6/1980FBO Harold Jacobs, Nancy R. Jacob TTee v. Richard F Selden, Jonathan S. Leff, Walter Gilbert, Wayne P. Yetter,Rodman W. Moorhead, III, James E. Thomas, William R. Miller and TranskaryoticTherapies, Inc., Civil Action No. 03-1669. The complaint generally alleges that the individual defendants breachedfiduciary duties owed to the Company and its stockholders by disseminatingfalse and misleading statements to the market concerning the status andprogress for obtaining U.S. marketing approval of Replagal and causing orallowing the Company to conduct its business improperly.  The complaint seeks declaratory, equitableand monetary relief, an unspecified amount of damages, with interest, andattorney's fees and costs.  The Companyexpects that expenses related to this litigation will be significant.

 

*SECInvestigation*

 

On May 14,2003, the Company received a copy of a formal order of investigation by theSecurities and Exchange Commission. The order of investigation relates to TKT'sdisclosures and public filings with regard to Replagal and the status of theFDA's approval process for Replagal, as well as transactions in the Company'ssecurities. The Company will fully cooperate with the SEC in the investigation.

 

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## **ITEM 2**                   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

 

**Overview**

 

TKT is a biopharmaceutical company developing therapeutics for thetreatment of rare genetic diseases caused by protein deficiencies. TKT hasreceived approval to market and sell Replagal (agalsidase alfa), anenzyme replacement therapy for the long-term treatment of patients with Fabrydisease, in 26 countries, principally in Europe.TKT has not received approval to market and sell Replagal in the United States.TKT recorded $34,682,000 in Replagal product sales in 2002 and $12,183,000 inReplagal product sales for the first quarter of 2003.

 

With the exception of 1995, the Company has incurred substantial annualoperating losses since inception. The Company expects to incur significantoperating losses until substantial product sales are generated. Until suchtime, the Company is dependent upon product sales, existing cash resources,interest income, external financing from equity offerings, debt financings, andcollaborative research and development alliances to finance its operations. AtMarch 31, 2003, the Company’s accumulated deficit was $391,380,000.

 

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

 

• thetiming, receipt, and amount of Replagal product sales;

•continued progress in our research and development programs, particularlyiduronate-2-sulfatase (“I2S”), as well as the magnitude of these programs;

• thescope and results of our clinical trials;

• thetiming of, and the costs involved in, obtaining regulatory approvals;

• thecost of manufacturing activities;

• thecost of commercialization activities, including product marketing, sales anddistribution;

• thecosts involved in preparing, filing, prosecuting, maintaining, and enforcingpatent claims and other patent-related costs, including litigation costs andthe results of such litigation;

• theoutcome of pending purported class action and other related, or potentiallyrelated, actions and the litigation costs with respect to such actions; and

•TKT’s ability to establish and maintain collaborative arrangements.

 

*Corporate Reorganization*

 

In February 2003, TKT’s Board of Directors appointed Michael J. Astrue asPresident and Chief Executive Officer of the Company and a member of the Boardof Directors. Mr. Astrue replaced Richard F Selden, M.D., Ph.D., who resignedfrom TKT and TKT’s Board of Directors. The Board also named David D. Pendergastto the newly-created position of 

 

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ExecutiveVice President, Operations.  Dr.Pendergast was previously Senior Vice President, Technical Operations.

 

Upon the appointment of Mr. Astrue, TKT announced a major reorganizationin an effort to reduce costs and narrow the scope of the Company’s researchinitiatives. Under this reorganization, TKT plans to focus its research,development, and commercialization efforts primarily on therapeutics for thetreatment of rare genetic diseases caused by protein deficiencies. The Companyis seeking collaborative partners for its Gene-Activated protein products,which are versions of proteins that would compete with proteins currently beingmarketed by third parties, and for its gene therapy development programs.

 

As part of the restructuring, during the first quarter of 2003, TKTreduced its U.S. headcount by approximately 100 positions. TKT intends tocontinue to reduce headcount through attrition, with the goal of havingapproximately 300 to 315 full-time U.S. employees by the end of 2003.  As of March 31, 2003, TKT had 345 full-timeU.S. employees. TKT is also consolidating its facilities as part of therestructuring.

 

As a result of the restructuring, the Company recorded a charge of$3,602,000 during the first quarter of 2003 in accordance with SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*.  Included in the charge is $1,332,000 ofemployee severance and outplacement services costs for 74 employees, primarilyin research and development, and $2,270,000, representing the remaining leaseobligation for one of four facilities that the Company no longer occupies.  TheCompany expects that its employee-related and facility consolidationrestructuring actions will be substantially completed in 2003 and expects tocontinue to record restructuring charges in connection with the reorganizationduring the remainder of 2003 and beyond.

 

*RegulatoryStatus of Replagal in the United States*

 

On April 24, 2003,Genzyme received marketing authorization in the United States for Fabrazyme,its enzyme replacement therapy product for the treatment of Fabry disease.  Because Fabrazyme had received orphan drug designationin the United States, upon its marketing approval, Fabrazyme received orphandrug exclusivity. Once a product receives orphan drug exclusivity, the UnitedStates Food and Drug Administration (the “FDA”) may not approve anotherapplication to market the same drug for the same indication for a period ofseven years, except in limited circumstances set forth under the United StatesFood, Drug and Cosmetic Act (the “FDA Statute”) and implementing regulations.Because Fabrazyme received marketing approval in the United States beforeReplagal and received orphan drug exclusivity, the FDA may not approve Replagaland Replagal will be excluded from the U.S. market for seven years unless TKTcan demonstrate that Replagal satisfies the limited criteria for exceptions setforth in the FDA Statute and implementing regulations.

 

Since the Companysubmitted a Biologics License Application (“BLA”) for Replagal to the FDA inJune 2000, the Company has received two Complete Response Letters from the

 

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FDA. In the secondComplete Response Letter, which the Company received in November 2002, theFDA indicated that the data relating to Replagal which TKT had previouslysubmitted were not adequate for approval, primarily because of questionsconcerning efficacy, but that the data would be discussed at a meeting of theFDA’s Endocrinologic & Metabolic Drugs Advisory Committee (the“Endocrinologic & Metabolic Drugs Advisory Committee”).

 

OnJanuary 14, 2003, the Endocrinologic & Metabolic Drugs AdvisoryCommittee convened to discuss TKT’s BLA for Replagal and concluded by aunanimous vote that TKT’s clinical data did not provide substantial evidence ofefficacy. The Endocrinologic & Metabolic Drugs Advisory Committee alsoconcluded by a vote of 8 to 7 that the renal pathology data presented by TKTwere not adequate to serve as the basis for accelerated approval. Some membersof the Endocrinologic & Metabolic Drugs Advisory Committee indicatedthat TKT could re-examine the pathology slides showing the effect of Replagalon the kidney using a different analytical method, and, if successful, the datafrom that re-examination might be sufficient to serve as the basis foraccelerated approval. As part of its consideration of an application formarketing authorization, the FDA often requests a review of all or parts of anapplication for marketing authorization by an advisory committee of outsideexperts. The FDA is free to accept or reject the advisory committee’srecommendations.

 

The Company is inthe process of examining possible options to break Fabrazyme’s orphan drugexclusivity, and is preparing to talk to the FDA in more detail about itsoptions.  The Company expects to take atleast three to four months before making any strategic decisions on theseissues.

 

**Application of Critical Accounting Policies and Estimates**

 

The discussion andanalysis of TKT’s financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires TKT to make estimates and judgments thataffect its reported assets and liabilities, revenues and expenses, and otherfinancial information. Actual results may differ significantly from theseestimates under different assumptions and conditions. In addition, TKT’s  reported financial condition and results ofoperations could vary due to a change in the application of a particular accountingstandard.

 

The Company regards anaccounting estimate underlying its financial statements as a “criticalaccounting estimate” if the accounting estimate requires the Company to makeassumptions about matters that are highly uncertain at the time of estimationand if different estimates that reasonably could have been used in the currentperiod, or changes in the estimate that are reasonably likely to occur fromperiod to period, would have had a material effect on the presentation offinancial condition, changes in financial condition, or results of operations.

 

The Company’s significant accounting policies are described in the Notesto the Consolidated Financial Statements in the Company’s Annual Report on Form10-K for the year ended December 31, 2002. The Company regards its policieswith respect to revenue recognition, inventories and asset impairment as"critical accounting estimates." These policies are described underthe caption “Item 7 Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in the Company’s Annual Report on Form 10-K.

 

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**Results of Operations**

 

*Revenues*

 

Product sales for the quarters ended March 31, 2003 and 2002 totaled$12,183,000 and $6,058,000, respectively.  Substantially all Replagal product sales were in Europe.   The increase of $6,125,000, or 101%, insales is due to additional patients beginning Replagal therapy, the pricing andreimbursement arrangements being established and formalized in additionalcountries in Europe, and the receipt of marketing authorizations in additionalcountries.

 

There were no license and research revenues in the first quarter of2003.  License and research revenuestotaled $552,000 for the three months ended March 31, 2002.  License and research revenues in the threemonths ended March 31, 2002 were earned from collaborative agreements withSumitomo Pharmaceutical Co. Ltd. (“Sumitomo”) and Wyeth, which succeeded  Genetics Institute, Inc.(“Wyeth”).   The decrease in license and researchrevenues from period to period was due to the timing of completion ofobligations related to each collaborative agreement.  In addition, at Wyeth’s request, the Company and Wyeth were negotiatinga termination of their collaboration. However, those negotiations have terminated and TKT is considering itslegal and regulatory options.

 

*Cost ofGoods Sold*

 

For the three months ended March 31, 2003 and 2002, cost of goods soldwas $3,501,000 and $548,000, or 29% and 9% of product sales, respectively.  Cost of goods sold consists  of expenses in connection with themanufacture of Replagal.

 

Prior to receiving marketing approval of Replagal in Europe in August2001, the Company expensed all of the cost of manufacturing Replagal as researchand development costs.  Followingmarketing approval, the Company began recording the costs of manufacturingReplagal as inventory rather than as a research and development expense.  The Company sold Replagal that had beenmanufactured prior to marketing approval in 2001 and in the first half of2002.  As of June 30, 2002, thisinventory had been fully utilized.   Asa result, unlike the three months ended March 31, 2002, the cost of goods soldfor the three months ended March 31, 2003 reflects the Company’s current fullproduction costs.  In addition, during the first quarter of 2003, the Companyincurred a charge of $832,000, or 7% of 2003 product sales, related to excesscapacity at the terminated contract manufacturer of the bulk drug substance ofReplagal.  As production concludes atthis contract manufacturer, the Company expects that cost of goods sold willinclude further excess capacity charges that will be incurred during the secondand third quarters of 2003.  The Company expects that its cost of goods soldfor 2003 will be approximately 23% to 27% of total 2003 product sales.

 

To date, theCompany has relied on contract manufacturing arrangements with third partiesfor the production of Replagal for commercial sale. These third parties manufactureReplagal bulk drug substance and perform fill and finish services. In February2003, the Company filed with European regulatory authorities for approval tomanufacture the bulk drug 

 

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substance of Replagal atthe Company’s manufacturing facility in Cambridge, Massachusetts. InJanuary 2003, the Company terminated its agreement with a third partymanufacturer of the bulk drug substance of Replagal, to be effective inJuly 2003. The Company plans to use its existing inventory and additionalinventory manufactured under the third party contract manufacturing arrangementto supply customer orders for Replagal at least until such time as the Companyreceives approval to manufacture Replagal at its Cambridge, Massachusettsfacility, if at all, or such time as the Company is able to make othermanufacturing arrangements.

 

*Researchand Development Expenses*

 

Research and development expenses increased by $573,000, or 3%, to$20,982,000 in the first quarter of 2003, compared to $20,409,000 during thesame period in 2002.   The increase was primarily due to increases inresearch and development staffing and research and development occupancy costs.In November 2002, the Company occupied a new combined corporate headquartersand research and development facility, which increased the Company’s researchand development occupancy costs in the first quarter of 2003 by $1,987,000 andwill increase the Company's occupancy costs for the balance of 2003. Offsettingthese increases in the first quarter of 2003 were non-recurring expenditurestotaling $4,300,000 related to set-up and technology transfer fees paid to thecontract manufacturer of the bulk substance of Replagal in the first quarter of2002.

 

Except with respect to its product for the treatment of Gaucher disease,the Company does not intend to engage in any further product developmentactivities related to its Gene-Activated protein products which are versions ofproteins that would compete with proteins currently being marketed by thirdparties, and its gene therapy programs, unless those activities are fundedunder a collaboration agreement with a third party. As a result of this, andthe Company’s restructuring efforts, the Company expects its research and developmentexpenses to decrease in 2003.

 

The Company’s two largest research and development programs, Replagal,enzyme replacement therapy for the treatment of Fabry disease, and I2S, enzymereplacement therapy for the treatment of Hunter syndrome, represent themajority of the Company’s research and development spending. The expensesassociated with these programs totaled approximately 70% of total research anddevelopment expenses for the quarter ended March 31, 2003 and 79% of totalresearch and development expenses for the corresponding period in 2002,respectively. Expenses associated with the Company’s preclinical and clinicalprograms related to the Company’s products for the treatment of other raregenetic diseases,  and otherGene-Activated protein products, accounted for the balance of the Company’s research and developmentexpenses for both quarterly periods.

 

Research and development expenses for the Replagal program totaled$6,723,000 in the first quarter of 2003, a decrease of $5,127,000, or 43% fromthe $11,850,000 in research and development expenses in the correspondingperiod of 2002.   In the first quarterof 2002, the Company incurred a one-time set up fee and technology transferfees totaling $4,300,000 paid to the contract manufacturer referred toabove.   Costs for the Replagal programinclude basic research, the costs of clinical trials, manufacturing costs ofclinical supplies and regulatory costs associated with preparation of worldwideproduct marketing applications.

 

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The amount of future research and development expenses associated withthe Replagal program is not reasonably certain because these costs aredependent principally upon the regulatory process and information required byregulatory agencies, additional clinical trial expenditures required byregulatory agencies, and the timing of obtaining marketing authorization inother countries, if granted, particularly with respect to Replagal in theUnited States where Fabrazyme has received orphan drug exclusivity and theCompany is contemplating its strategic options. The amount of future researchand development expenses are also dependent upon the extent of developmentefforts to build internal manufacturing infrastructure.

 

For the three months ended March 31, 2003 and 2002, research anddevelopment expenses for the I2S program were $7,879,000 and $4,179,000,respectively, an increase of $3,700,000, or 89%.  The increasein the 2003 period was due to increases in expenditures for  the manufacture of I2S for use in the Phase I/II clinical study recently completed by TKT. Based on results of this Phase I/II trial the Company intends to begin apivotal clinical trial of I2S in the second half of 2003.

 

Future research and development costs for the I2S program are notreasonably certain because such costs are dependent on a number of variables,including the cost and design of the pivotal clinical trial and any additionalclinical trials, uncertainties in the timing of the regulatory process, and thecosts associated with large-scale manufacture of I2S. The Company expects thatthese costs will be significant in 2004 in order to support applications forapproval in early 2005.

 

*IntellectualProperty License Fee Expense*

 

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

 

Under the agreement, the Company agreed that the number of shares ofcommon stock initially issued to Cell Genesys would be adjusted at the time theCompany registered such shares for resale under the Securities Act of 1933, ifthe market value of such shares at that time was greater or less than$15,000,000, as calculated in accordance with a predetermined formula. Pursuantto the agreed upon formula, at December 31, 2002 with the closing price ofthe Company’s common stock at $9.90 per share, the Company would have beenrequired to issue to Cell Genesys an additional 1,148,000 shares of commonstock. As a result, the Company recorded an additional non-cash license feeexpense of $8,660,000 in the fourth quarter of 2002.

 

In January 2003, the Company and Cell Genesys renegotiated theconsideration paid for the license, and the Company repurchased the shares ofstock issued to Cell Genesys for $15,000,000 in cash. The Company incurred anadditional license expense in the first quarter of 2003 of $1,350,000, whichrepresents the further decline in the market value of the Company’s commonstock from December 31, 2002 to January 15, 2003. The repurchased shares havebeen recorded as treasury stock.

 

Under the agreement, Cell Genesys also has the potential to receivecertain milestone payments from the Company contingent upon the outcome ofrelated patent matters under the 

 

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licenseagreement. If all of the milestones were achieved, the Company will beobligated to pay Cell Genesys an aggregate of $17,000,000 payable in part incash and in part in stock. The Company is not required to make royalty paymentsto Cell Genesys.

 

*Selling,General and Administrative Expenses*

 

For the three months ended March 31, 2003, selling, general andadministrative expenses were $9,166,000, compared with $6,423,000 for the threemonths ended March 31, 2002.  Theincrease of  $2,743,000, or 43%, overthe comparable period in 2002 reflects costs incurred for ongoing Replagalsales and marketing initiatives in Europe and other countries, executiveseverance charges and occupancy costs related to the Company’s new corporateheadquarters.  Selling, general and administrative expensesrelated to sales and marketing activities for Replagal amounted to $4,006,000and $2,976,000 for the three months ended March 31, 2003 and 2002,respectively. The Company anticipates expenses related to the expansion of U.S.commercial operations will be significantly reduced during the remainder of2003, given the uncertain U.S. regulatory status of Replagal and the orphandrug exclusivity of Fabrazyme.  In addition,in the first quarter of 2003, selling, general and administrative expensesrelated to the Company’s new corporate headquarters increased by $408,000 overthe comparable period in 2002. The Company anticipates that selling, generaland administrative expenses related to this new facility will increase in 2003,primarily as a result of a full year of occupancy costs related to it.

 

*RestructuringCharge*

 

In February 2003, TKT announced a major reorganization in an effortto reduce costs and narrow the scope of the Company’s research initiatives.Under this reorganization, TKT plans to focus its research, development, andcommercialization efforts primarily on therapeutics for the treatment of raregenetic diseases caused by protein deficiencies. The Company is seekingcollaborative partners for its Gene-Activated protein products, which areversions of proteins that would compete with proteins currently being marketedby third parties, and for its gene therapy development programs.

 

As part of the restructuring, during the first quarter of 2003, TKTreduced its U.S. headcount by approximately 100 positions. TKT intends tocontinue to reduce headcount through attrition, with the goal of havingapproximately 300 to 315 full-time U.S. employees by the end of 2003.  As of March 31, 2003, TKT had 345 full-timeU.S. employees. TKT is also consolidating its facilities as part of therestructuring.

 

As a result of the restructuring, the Company recorded a charge of$3,602,000 during the first quarter of 2003 in accordance with SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*.  Included in the charge is $1,332,000 ofemployee severance and outplacement services costs for 74 employees, primarilyin research and development, and $2,270,000, representing the remaining leaseobligation for one of four facilities that the Company no longer occupies.  TheCompany expects that its employee-related and facility consolidationrestructuring actions will be substantially completed in 2003 and expects tocontinue to record 

 

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restructuringcharges in connection with the reorganization during the remainder of 2003 andbeyond.

 

*MinorityInterest*

 

The Companyrecorded a minority interest charge in the net income of TKT Europe - 5S AB,the Company’s majority owned, consolidated subsidiary (“TKT Europe”) of$303,000 during the first quarter of 2003.

 

*InterestIncome*

 

Interest income was $776,000 and $2,303,000 for the three months endedMarch 31, 2003 and 2002, respectively.  During the first quarter of 2003, average cash, cash equivalents, andmarketable securities balances were $231,400,000 as compared to $385,426,000for the same period of 2002. Interestincome decreased by $1,527,000 in the three months ended March 31, 2003compared with the comparable period in 2002 due to lower cash, cash equivalentsand marketable securities balances as well as significantly lower rates ofreturn in 2003.

 

*NetLoss*

 

The Company had a net loss of $25,945,000 and $18,467,000 for the firstquarter ended March 31, 2003 and 2002, respectively.  Basic and diluted net loss per share was $0.75 and $0.54 for thethree months ended March 31, 2003 and 2002, respectively.   Includedin the loss for the quarter ended March 31, 2003 is an intellectualproperty license fee expense of $1,350,000 and a restructuring charge of$3,602,000, which contributed $0.04 and $0.10, respectively, to basic anddiluted net loss per share.

 

For the three months ended March 31, 2003 and 2002, weighted averageshares outstanding were 34,550,000 and 34,331,000, respectively.   The increase in weighted average sharesoutstanding reflects the issuance of common stock upon the exercise of employeestock options.

 

**Liquidity And Sources Of Capital**

 

Since its inception, TKT has financed its operations through:

 

•              the sale of common and preferredstock,

 

•              borrowings under debt agreements,

 

•              revenues from collaborativeagreements,

 

•              interest income and,

 

•              more recently, with proceeds fromproduct sales.

 

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In the near term, TKT expects to finance its operations principally fromexisting cash, cash equivalents, and marketable securities, and from continuedsales of Replagal.

 

*Cash Flows*

 

The Company had cash, cash equivalents and marketable securities totaling$212,079,000 at March 31, 2003, including restricted marketable securitiescollateralizing letters of credit totaling $7,967,000. Cash equivalents andmarketable securities are invested in United States government and agencyobligations and money market funds.

 

The Company’s cash requirements for operating activities, financingactivities and investment activities have significantly exceeded its internallygenerated funds. The Company expects that its cash requirements for suchactivities will continue to significantly exceed its internally generated fundsuntil it is able to generate substantial product sales.

 

The Company used net cash of $37,442,000 in operating activities in thefirst quarter of 2003. This consisted of a net loss of $25,945,000, combinedwith a net use of $11,497,000 related primarily to the payment made to CellGenesys in January 2003.

 

The Company used net cash of $5,448,000 during the first quarter of 2003for property and equipment, primarily related to leasehold improvements andequipment for the Company’s manufacturing and research and developmentfacilities. The Company expects to spend up to approximately $20,000,000 forpurchases of property and equipment for 2003, principally for expanding itsinternal manufacturing capabilities.

 

The Company will require substantial additional funds to support itsresearch and development programs, acquisition of technologies, preclinical andclinical testing of its products, pursuit of regulatory approvals, acquisitionof capital equipment, expansion of internal manufacturing capabilities,selling, general and administrative expenses, and the buyout of the minorityinterests in TKT Europe, if applicable, as discussed below. The Company expectsthat its existing capital resources, together with anticipated proceeds fromproduct sales and interest income, will be sufficient to fund its operationsinto 2005.

 

The Company may pursue opportunities to obtain additional externalfinancing in the future through equity financings, debt financings, leasearrangements related to facilities and capital equipment, and collaborativeresearch agreements. The source, timing and availability of any futurefinancing will depend principally upon equity and debt market conditions,interest rates and, more specifically, on the Company’s continued progress inits preclinical and clinical development programs, and the extent of itscommercial success. There can be no assurance that external funds will beavailable on favorable terms, if at all.

 

*ContractualObligations*

 

In connection with the termination of the Company's manufacturingarrangements with the contract manufacturer of Replagal bulk drug substance,the Company committed to pay approximately $3,240,000 to the 

 

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contractmanufacturer for the purchase of additional inventory of Replagal throughJuly 2003, of which $300,000 was accrued as of March 31, 2003.

 

In April 2000, the Company established TKT Europe for the purposeof marketing, selling and distributing Replagal in Europe. Under thestockholders’ agreement for TKT Europe, the Company is entitled to purchase theEuropean stockholders’ 20% ownership interest in TKT Europe inAugust 2004, for a price determined in accordance with a formula. Shouldthe Company not exercise that right, the European stockholders of TKT Europecan require the Company to purchase the European stockholders’ ownershipinterest sixty days thereafter. The buyout price is equal to (a) 20% ofthe operating profits, as defined in the stockholders’ agreement, for theperiod from September 1, 2003 to August 31, 2004, multiplied by abuyout factor of four, subject to adjustment, plus (b) 20% of theaccumulated positive earnings of TKT Europe. As a result, the amount of thebuyout price is dependent on the profits of TKT Europe and the commercialsuccess of Replagal in Europe. These profits cannot be estimated at this time.However, the Company expects the buyout price to be substantial.

 

In June 2002, the Company obtained an exclusive license to certainpatent 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 inJanuary 2003. If Cell Genesys achieves all the milestone related to patentmatters under the license agreement, the Company will be obligated to pay CellGenesys an aggregate of $17,000,000 payable in part in cash and in part instock. The Company is not required to make royalty payments to Cell Genesys.

 

*Net Operating Loss Carryforwards*

 

At December 31, 2002 , the Company had net operating loss carryforwardsof approximately $266,075,000, which expire at various times through 2022. Dueto the degree of uncertainty related to the ultimate use of loss carryforwardsand tax credits, the Company has fully reserved against any potential taxbenefit. The future utilization of net operating loss carryforwards and taxcredits may be subject to limitation under the changes in stock ownership rulesof the Internal Revenue Code. Because of this limitation, it is possible thattaxable income in future years, which would otherwise be offset by netoperating losses, will not be offset and, therefore, will be subject to tax.

 

*Litigation*

 

In the firstquarter of 2003, at least nine purported class action suits were brought in theU.S. District Court of Massachusetts against the Company, its former ChiefExecutive Officer, and in some cases, its Chairman of the Board of Directors.The complaints generally allege that, during the period from January 2001through January 2003, TKT made false and misleading statements and failedto disclose material information concerning the status and progress forobtaining U.S. marketing approval of Replagal. On April 9, 2003, the Courtconsolidated the various actions under one matter.  The Company expects that expenses related to this litigation willbe significant.

 

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On April 14, 2003,a shareholder derivative suit was filed against individual members of theCompany’s Board of Directors, the Company's former Chief Executive Officer, andthe Company in Middlesex Superior Court in the Commonwealth ofMassachusetts.  The complaint generallyalleges that the individual defendants breached fiduciary duties owed to theCompany and its stockholders by disseminating false and misleading statementsto the market concerning the status and progress for obtaining U.S. marketingapproval of Replagal and causing or allowing the Company to conduct itsbusiness improperly.  The Companyexpects that expenses related to this litigation will be significant.

 

On May 14,2003, the Company received a copy of a formal order of investigation by theSecurities and Exchange Commission. The order of investigation relates to TKT'sdisclosures and public filings with regard to Replagal and the status of theFDA's approval process for Replagal, as well as transactions in the Company'ssecurities. The Company will fully cooperate with the SEC in the investigation.

 

The Company has been engaged in patent litigation with Genzyme and MountSinai with respect to Replagal. Through March 31, 2003, the Company hadincurred approximately $4,667,000 in litigation expenses associated with theReplagal litigation.

 

The Company and Aventis have been involved in patent infringementactions with Amgen and Kirin-Amgen with respect to Dynepo (epoietindelta), a fully human erythropoietin for the treatment of anemia related tochronic renal failure. The litigation iscostly and the Company is required to reimburse Aventis, which is paying thelitigation expenses, for 50% of the expenses. Aventis is entitled to deduct upto 50% of any royalties due to the Company from the sale of Dynepo untilAventis has recouped the full amount of TKT’s share of litigation expenses. TheCompany currently estimates that its share of the expenses associated with thelitigation will total between approximately $15,000,000 and $20,000,000 by thetime the matter is finally adjudicated.

 

The Company has been engaged in patent litigation with Serono withrespect to Replagal. The Company expects that expenses relating to thislitigation will be significant.

 

The Company can provide no assurance as to the outcome of theseproceedings. A decision by a court in any jurisdiction in a manner adverse tothe Company could have a material adverse effect on the Company’s liquidity andcapital resources.

 

FORWARD-LOOKING STATEMENTS

 

This quarterlyreport contains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the Securities andExchange Act of 1934, as amended, that involve risks and uncertainties.  TheCompany 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 toidentify these forward–looking statements. There are a number of importantfactors that could cause actual results to differ materially from the resultsanticipated by these forward–looking statements. These important factorsinclude those set forth below under “Certain Factors That May Affect FutureResults.”  These factors and the othercautionary statements made in this quarterly report should be read as beingapplicable to all related forward–looking statements wherever they appear inthis quarterly report. If one or more of these factors materialize, or if anyunderlying 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–lookingstatements. In addition, any forward-looking statements represent the Company’sestimates only as of the date this quarterly report was filed with theSecurities and Exchange Commission and should not be relied upon asrepresenting the Company’s estimates as of any subsequent date.  While theCompany may elect to update forward-looking statements at some point in thefuture, the Company specifically disclaims any obligation to do so, even if itsestimates change.

 

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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

 

The following important factors could cause actual results to differ fromthose indicated by forward-looking statements made by the Company from time totime.

 

*Clinicaland Regulatory Risks*

 

**Unless we are able to break Fabrazyme's orphan drugexclusivity, we will not be able to obtain marketing approval for Replagal inthe United States for seven (7) years.**

 

On April 24, 2003,Genzyme received marketing authorization in the United States for Fabrazyme,its enzyme replacement therapy product for the treatment of Fabry disease.  Because Fabrazyme had received orphan drugdesignation in the United States, upon its marketing approval, Fabrazymereceived orphan drug exclusivity. Once a product receives orphan drugexclusivity, the FDA may not approve another application to market the samedrug for the same indication for a period of seven years, except in limitedcircumstances set forth under the FDA Statute and implementing regulations.Because Fabrazyme received marketing approval in the United States beforeReplagal and received orphan drug exclusivity, the FDA may not approve Replagaland Replagal will be excluded from the U.S. market for seven years unless TKTcan demonstrate that Replagal satisfies the limited criteria for exceptions setforth in the FDA Statute and implementing regulations.

 

The Company is inthe process of examining possible options to break Fabrazyme’s orphan drugexclusivity, and is preparing to talk to the FDA in more detail about itsoptions.  The Company expects to take atleast three to four months before making any strategic decisions on theseissues.

 

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**We may not be able to obtainmarketing approvals for our products, whether or not we receive orphan drugexclusivity for our products.**

 

We are not able tomarket any of our products in Europe, the United States or in any otherjurisdiction without marketing approval from the European Agency for theEvaluation of Medicinal Products, or EMEA, the FDA, or any equivalent foreignregulatory agency. The regulatory process to obtain market approval for a newdrug or biologic takes many years and requires the expenditure of substantialresources. We have had only limited experience in preparing applications andobtaining regulatory approvals.

 

In August 2001,the EMEA granted marketing authorization of Replagal in the European Union,approximately one year after we submitted our Marketing AuthorizationApplication, or MAA, to the EMEA, and approximately five years after we filedour Investigational New Drug Application, or IND, with the FDA. We have alsoreceived approval to market Replagal in a number of other countries.

 

We have notreceived approval to market and sell Replagal in the United States. As notedabove, because Fabrazyme has received orphan drug exclusivity, we cannotreceive approval in the United States for seven years unless we are able tobreak Fabrazyme's orphan drug exclusivity.

 

Since we submitteda BLA for Replagal to the FDA in June 2000, we have received two CompleteResponse Letters from the FDA. In the second Complete Response Letter, which wereceived in November 2002, the FDA indicated that the data relating toReplagal which we had previously submitted were not adequate for approval,primarily because of questions concerning efficacy, but that the data would bediscussed at a meeting of the Endocrinologic & Metabolic DrugsAdvisory Committee.

 

OnJanuary 14, 2003, the Endocrinologic & Metabolic Drugs AdvisoryCommittee convened to discuss our BLA for Replagal and concluded by a unanimousvote that our clinical data did not provide substantial evidence of efficacy.The Endocrinologic & Metabolic Drugs Advisory Committee also concludedby an 8 to 7 vote that the renal pathology data presented by us were notadequate to serve as the basis for accelerated approval. Some members of theEndocrinologic & Metabolic Drugs Advisory Committee indicated that wecould re-examine the pathology slides showing the effect of Replagal on thekidney using a different analytical method, and if successful, the data fromthat re-examination might be sufficient to serve as the basis for acceleratedapproval. As part of its consideration of an application for marketingauthorization, the FDA often requests a review of an application for marketingauthorization or parts of an application for marketing authorization by anadvisory committee of outside experts. The FDA is free to accept or reject theadvisory committee’s recommendations.

 

We decided not tocommence the re-examination of the pathology slides until we have furtherdiscussion with the FDA regarding potential avenues for approval of Replagal inthe United States.

 

Although the EMEAhas granted marketing approval of Dynepo in the European Union, Dynepo has notbeen approved in the United States. In 2000, Aventis submitted a BLA to the FDAseeking marketing authorization for Dynepo in the United States. The FDA didnot accept the BLA for filing, and requested that Aventis provide additionalmanufacturing data. Aventis has not yet submitted the requested additional datato the FDA, and we cannot predict whether or when Aventis will do so. Inaddition, Aventis has not launched Dynepo in Europe.

 

There can be noassurance as to whether or when any of these applications for marketingauthorization relating to Replagal and Dynepo, or additional applications formarketing authorization that we may make in the future as to these or otherproducts, will be approved by

 

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the relevant regulatoryauthorities.  If approval is granted, itmay be subject to limitations on the indicated uses for which the product maybe marketed or contain requirements for costly post-marketing testing andsurveillance to monitor safety or efficacy of the product.

 

**We may not be able to obtain orphandrug exclusivity for our products for the treatment of rare genetic diseases.**

 

Somejurisdictions, including Europe and the United States, may designate drugs forrelatively small patient populations as “orphan drugs.” Orphan drug designationmust be requested before submitting an application for marketing authorization.Orphan drug designation does not convey any advantage in, or shorten theduration of, the regulatory review and approval process but does make theproduct eligible for orphan drug exclusivity and certain tax credits in theUnited States. Generally, if a product which has an orphan drug designationsubsequently receives the first marketing approval for the indication for whichit has such designation, the product is entitled to orphan drug exclusivity.Orphan drug exclusivity means that another application to market the same drugfor the same indication may not be approved, except in limited circumstancesset forth in the FDA Statute and implementing regulations, for a period of upto ten years in Europe and for a period of seven years in the United States.Obtaining orphan drug designations and orphan drug exclusivity for our productsfor the treatment of rare genetic diseases may be critical to the success ofthese products. Our competitors may obtain orphan drug exclusivity for productscompetitive with our products before we do as Genzyme did with Fabrazyme in theUnited States. Even if we obtain orphan drug exclusivity for any of ourpotential products, we may not be able to maintain it. For example, if acompetitive product is shown to be clinically superior to our product, anyorphan drug exclusivity we have obtained will not block the approval of suchcompetitive product.

 

InAugust 2001, the EMEA granted marketing authorization of Replagal in theEuropean Union. Genzyme’s Fabrazyme was also granted marketing authorization inthe European Union in August 2001. Replagal and Fabrazyme were grantedco-exclusive orphan drug status in the European Union for up to 10 years.

 

**If we fail to comply with theextensive regulatory requirements to which our products are subject, we couldbe subject to adverse consequences and penalties.**

 

The testing,manufacturing, labeling, advertising, promotion, export, and marketing, amongother things, of our products are subject to extensive regulation bygovernmental authorities in Europe, the United States, and elsewhere throughoutthe world.

 

If the FDAapproves one of our products, we and any third party manufacturers we use willbe required to comply with a number of post-approval requirements. For example,we will be required to report certain adverse events to the FDA and to complywith certain requirements concerning advertising and promotional labeling ofthe products. Also, quality control and manufacturing procedures must continueto conform to GMP regulations after approval, and the FDA periodically inspectsmanufacturing facilities to assess compliance with GMP. Accordingly,manufacturers must continue to expend time, monies, and effort in the area ofproduction and quality control to maintain GMP compliance. In addition,discovery of problems may result in financial penalties, suspension orwithdrawal or an approved product from the market, operating restrictions, andthe imposition of criminal penalties.

 

In addition toregulations adopted by the EMEA, the FDA, and other foreign regulatoryauthorities, we are also subject to regulation under the Occupational Safetyand Health Act, the

 

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Toxic Substances ControlAct, the Resource Conservation and Recovery Act, and other federal, state, andlocal regulations.

 

**If our clinical trials are notsuccessful, we may not be able to develop and commercialize our products.**

 

In order to obtainregulatory approvals for the commercial sale of our potential products, we andour collaborators will be required to complete extensive clinical trials inhumans to demonstrate the safety and efficacy of our products. We may not beable to commence or complete these clinical trials, either because the FDA orother regulatory agencies object, or for other reasons.

 

The results frompreclinical testing of a product that is under development may not bepredictive of results that will be obtained in human clinical trials. Inaddition, the results of early human clinical trials may not be predictive ofresults that will be obtained in larger scale, advanced stage clinical trials.Furthermore, we, one of our collaborators, or a regulatory agency withjurisdiction over the trials may suspend clinical trials at any time if thesubjects or patients participating in such trials are being exposed tounacceptable health risks, or for other reasons.

 

The rate ofcompletion of clinical trials is dependent in part upon the rate of enrollmentof patients. Patient accrual is a function of many factors, including the sizeof the patient population, the proximity of patients to clinical sites, theeligibility criteria for the study, the existence of competitive clinicaltrials, and the availability of alternative treatments. In particular, thepatient populations for some of our products for rare genetic diseases aresmall. For instance, we believe there are up to 5,000 patients worldwideafflicted with Fabry disease and up to 3,000 patients worldwide afflicted withHunter syndrome. We are currently conducting clinical trials of I2S for thetreatment of Hunter syndrome and additional trials of Replagal. Delays inplanned patient enrollment may result in increased costs and prolonged clinicaldevelopment.

 

We and ourcollaborators may not be able to successfully complete any clinical trial of apotential product within any specified time period. In some cases, we may notbe able to complete the trial at all. Moreover, clinical trials may not showour potential product to be both safe and efficacious. Thus, the EMEA, the FDAand other regulatory authorities may not approve any of our potential productsfor any indication.

 

Our research anddevelopment efforts may not result in products appropriate for testing in humanclinical trials.

 

We expendsignificant resources on research and development and preclinical studies ofproduct candidates. However, these efforts may not result in the development ofproducts appropriate for testing in human clinical trials. For example, ourresearch may result in product candidates that are not expected to beefficacious in treating disease or that reveal safety concerns. We may postponeor terminate research and development of a product candidate or a program atany time for any reason such as the safety or efficacy of the potentialproduct, allocation of resources or unavailability of qualified research anddevelopment personnel.

 

**Recent adverse events in the field ofgene therapy may impair our ability to obtain collaborative partners for ourgene therapy programs.**

 

We have terminatedinternal development of our gene therapy programs and are seeking collaborativepartners with which to continue to develop these programs. Recent adverseevents

 

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in the field of genetherapy, although not occurring in our clinical trials, may impair our abilityto enter into collaborations for our programs. In particular, inNovember 1999, a patient with a rare metabolic disorder died in a genetherapy trial conducted at the University of Pennsylvania. In addition, inOctober 2002, a French boy developed a leukemia-like disease nearly threeyears after participating in a gene therapy study as a baby. As a result ofthese and other events, a number of gene therapy clinical trials have beenterminated or suspended in the United States and in other countries, andregulatory authorities have grown increasingly concerned about the safety ofgene therapy.

 

*Litigation and Intellectual PropertyRisks*

 

**We are a party to litigation withGenzyme and Mount Sinai involving Replagal which could preclude us frommanufacturing or selling Replagal.**

 

In July 2000,Genzyme and Mount Sinai filed a patent infringement action against us in theU.S. District Court of Delaware. The complaint alleges that activities relatingto Replagal infringe a patent licensed by Genzyme from Mount Sinai. InJanuary 2002, the U.S. District Court of Delaware dismissed this patentlitigation. In March 2002, Genzyme appealed the U.S. District Court ofDelaware’s ruling to the U.S. Court of Appeals for the Federal Circuit, and inJanuary 2003 the U.S. Court of Appeals for the Federal Circuit heard oralarguments on the appeal. If Genzyme is successful in its appeal, the case willbe remanded to the U.S. District Court of Delaware for further proceedings onnon-infringement and invalidity issues. If we were to ultimately lose this caseafter trial and appeal, we would be precluded from making, using and sellingReplagal. We can provide no assurance as to the outcome of this litigation. Asof March 31, 2003, we have incurred approximately $4.7 million inlitigation expenses associated with the Replagal litigation.

 

**We are a party to litigation withAmgen and Kirin-Amgen involving Dynepo which could preclude us frommanufacturing or selling Dynepo.**

 

InApril 1997, Amgen commenced a patent infringement action against us andAventis in the District Court of Massachusetts. In January 2001, theDistrict Court of Massachusetts concluded that Dynepo infringed 8 of the 18claims of patents asserted by Amgen. Subsequent to the decision, we andAventis, as well as Amgen, filed an appeal of the decision with the Court ofAppeals for the Federal Circuit. On January 6, 2003, the Court of Appealsfor the Federal Circuit issued a decision affirming in part and reversing inpart the decision of the District Court of Massachusetts and remanded theaction to the District Court of Massachusetts for further proceedings.

 

In addition, inJuly 1999, we and Aventis commenced legal proceedings in the UnitedKingdom against Kirin-Amgen, seeking a declaration that a European patent heldby Kirin-Amgen will not be infringed by our activities related to Dynepo. InApril 2001, the High Court of Justice in the United Kingdom ruled thatDynepo infringed one of four claims of a patent asserted by Kirin-Amgen. InJuly 2002, the Court of Appeals in the United Kingdom reversed the HighCourt of Justice and ruled that Dynepo did not infringe Kirin-Amgen’s patent.In February 2003, the House of Lords agreed to hear an appeal of thedecision of the Court of Appeals.

 

We can provide noassurance as to the outcome of either litigation. If we and our collaborator,Aventis, are not successful in the Dynepo litigation, we and Aventis would be

 

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precluded from making,using and selling Dynepo in the United States and/or in the United Kingdom. Weare required to reimburse Aventis, which is paying the litigation expenses, for50% of the expenses. Aventis is entitled to deduct up to 50% of any royaltiesdue to us from it with respect to the sale of Dynepo until Aventis has recoupedthe full amount of our share of litigation expenses. We currently estimate thatour share of the expenses associated with the litigation will total betweenapproximately $15.0 million and $20.0 million by the time the matteris finally adjudicated.

 

**We are a party to litigation withSerono and would be prohibited from selling products using gene activationtechnology in some jurisdictions in Europe if we are not successful in thelitigation.**

 

InJanuary 2003, Applied Research Systems ARS Holdings, N.V., a wholly ownedsubsidiary of Serono, commenced an action against us in the District Court atThe Hague in the Netherlands claiming that Replagal infringes one of Serono’sEuropean patents. The Serono patent relates to Serono’s approach to geneactivation. In January 2002, the European Patent Office revoked the Seronopatent on grounds of invalidity due to non-enablement. Serono has appealed therevocation to the Technical Board of Appeal at the European Patent Office. TheCompany expects that expenses related to this litigation will be significant.We can provide no assurance as to the outcome of this litigation. If we losethis litigation, we may prohibited from selling products using gene activationtechnology, including Replagal, in some jurisdictions in Europe.

 

**We are a party to several shareholderlawsuits and a derivative action regarding the adequacy of our publicdisclosure which could have a material adverse affect on our financialcondition.**

 

In the firstquarter of 2003, at least nine purported class action suits were brought in theU.S. District Court of Massachusetts against the Company, its former ChiefExecutive Officer, and in some cases, its Chairman of the Board of Directors.The complaints generally allege that, during the period from January 2001through January 2003, TKT made false and misleading statements and failedto disclose material information concerning the status and progress forobtaining U.S. marketing approval of Replagal and seek equitable and monetaryrelief, an unspecified amount of damages, with interest, and attorney's feesand costs. On April 9, 2003, the Court consolidated the various actions underone matter.

 

On April 14, 2003,a shareholder derivative suit was filed against individual members of theCompany’s Board of Directors, the Company's former Chief Executive Officer, andthe Company in Middlesex Superior Court in the Commonwealth ofMassachusetts.  The complaint generallyalleges that the individual defendants breached fiduciary duties owed to theCompany and its stockholders by disseminating false and misleading statements tothe market concerning the status and progress for obtaining U.S. marketingapproval of Replagal and causing or allowing the Company to conduct itsbusiness improperly.  The complaintseeks declaratory, equitable and monetary relief, an unspecified amount ofdamages, with interest, and attorney's fees and costs.

 

The Companyexpects that expenses related to these suits will be significant. We canprovide no assurance as to the outcome of any of these suits. If we are notsuccessful in defending these actions, our business, results of operations andfinancial condition could be adversely affected.

 

**TheSEC is investigating us regarding our public disclosures and filings, as wellas transactions in our securities, which could have material adverse affect onour financial condition.**

** **

On May 14,2003, the Company received a copy of a formal order of investigation by theSecurities and Exchange Commission. The order of investigation relates to TKT'sdisclosures and public filings with regard to Replagal and the status of theFDA's approval process for Replagal, as well as transactions in the Company'ssecurities. The Company will fully cooperate with the SEC in the investigation.

 

We can provide noassurance as to the outcome of this matter. At a minimum, this investigationmay divert the attention of our management and other resources that wouldotherwise be engaged in running our business.

 

**We may become involved in additionaland expensive patent litigation or other proceedings.**

 

The biotechnologyindustry has been characterized by significant litigation, and interference andother proceedings regarding patents, patent applications, and otherintellectual property rights. We may become a party to additional patentlitigation and other proceedings

 

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with respect to ourproteins or other technologies. Such litigation could result in liability fordamages, prevent our development and commercialization efforts, and divertmanagement’s attention and resources.

 

An adverse outcomein any patent litigation or other proceeding involving patents could subject usto significant liabilities to third parties and require us to cease using thetechnology or product that is at issue or to license the technology or productfrom third parties. We may not be able to obtain any required licenses oncommercially acceptable terms, or at all.

 

The cost to us ofany patent litigation or other proceeding, even if resolved in our favor, couldbe substantial. Some of our competitors may be able to sustain these costs moreeffectively than we can because of their substantially greater financialresources. Uncertainties resulting from the initiation and continuation ofpatent litigation or other proceedings could have a material adverse effect onour ability to develop, manufacture, and market products, form strategicalliances, and compete in the marketplace.

 

**If we are unable to obtain patentprotection for our discoveries, the value of our technology and products may beadversely affected.**

 

Our success willdepend in large part on our ability to obtain patent protection for ourprocesses and products in the United States and other countries. The patentsituation in the field of biotechnology generally is highly uncertain andinvolves complex legal, scientific and factual questions. We may not be issuedpatents relating to our technology. Even if issued, patents may be challenged,invalidated, or circumvented. Our patents also may not afford us protectionagainst competitors with similar technology. Because patent applications in theUnited States are maintained in secrecy until patents issue, third parties mayhave filed or maintained patent applications for technology used by us orcovered by our pending patent applications without our being aware of theseapplications.

 

We may not holdproprietary rights to certain product patents, process patents, and use patentsrelated to our products or their methods of manufacture. In some cases, thesepatents may be owned or controlled by third parties. As a result, we may berequired to obtain licenses under third party patents to market certain of ourpotential products. If licenses are not available to us on acceptable terms, wemay not be able to market these products.

 

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

 

We rely uponunpatented proprietary technology, processes, and know-how. We seek to protectthis information in part by confidentiality agreements with our employees,consultants, and other third party contractors. These agreements may bebreached, and we may not have adequate remedies for any such breach. Inaddition, our trade secrets may otherwise become known or be independentlydeveloped by competitors.

 

**If we fail to comply with ourobligations under the agreements under which we license commercializationrights to products or technology from third parties, we could lose licenserights.**

 

We are a party toover 20 patent licenses under which we have acquired rights to proprietarytechnology of third parties, including a license to patents related to I2S, andexpect to enter into additional patent licenses in the future. These licensesimpose various commercialization, sublicensing, royalty, insurance, and other obligationson us. If we fail to

 

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comply with theseobligations, the licensor may have the right to terminate the license and wecould lose our license to use the acquired rights. If these rights are lost, wemay not be able to market products that were covered by the license.

 

*Business Risks*

 

**Our revenue from product sales isdependent on the commercial success of Replagal.**

 

Replagal is ouronly commercial product. We expect that Replagal will account for all of ourproduct sales into at least 2005. The commercial success of Replagal willdepend on its acceptance by physicians, patients and other key decision-makersfor the treatment of Fabry disease. The commercial success of Replagal willdepend in part upon Replagal receiving marketing approval in the United States,Japan and other countries. As noted above, because Fabrazyme received orphandrug exclusivity in the United States, approval for Replagal in the UnitedStates will be difficult to obtain.

 

**We face significant competition,which may result in others discovering, developing or commercializing productsbefore, or more successfully, than we do.**

 

The biotechnologyindustry is highly competitive and characterized by rapid and significanttechnological change. Our competitors include pharmaceutical companies,biotechnology firms, universities, and other research institutions. Many ofthese competitors have substantially greater financial and other resources thanwe do and are conducting extensive research and development activities ontechnologies and products similar to, or competitive, with ours.

 

We may be unableto develop technologies and products that are more clinically efficacious orcost-effective than products developed by our competitors. Even if we obtainmarketing approval for our product candidates, many of our competitors havemore extensive and established sales, marketing, and distribution capabilitiesthan we do. Litigation with third parties, including litigation with Amgen,Genzyme and Serono, could delay our time to market or preclude us from reachingthe market for certain products and enable our competitors to more quickly andeffectively penetrate certain markets.

 

*Therapeuticsfor the Treatment of Rare Genetic Diseases*

 

We believe thatthe primary competition with respect to our products for the treatment of raregenetic diseases is from biotechnology and smaller pharmaceutical companies.Competitors include BioMarin Pharmaceutical Inc., Genzyme, OsirisTherapeutics, Inc., and Oxford GlycoSciences plc. The markets for some ofthe potential therapeutics for rare genetic diseases caused by proteindeficiencies are quite small. As a result, if competitive products exist, wemay not be able to successfully commercialize our products.

 

We believe thatour primary competition with respect to Replagal is Genzyme. Replagal andFabrazyme were each granted marketing authorization in the European Union andwere also granted co-exclusive orphan drug status in the European Union for upto 10 years. Fabrazyme has received marketing authorization in the UnitedStates and orphan drug exclusivity.

 

 

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We believeGenzyme’s product Cerezyme is our primary competition with respect to ourenzyme replacement therapy for the treatment of Gaucher disease.

 

*Gene-ActivatedVersions of Proteins That Would Compete With Currently-Marketed Proteins*

 

In ourGene-Activated protein program, we are developing Gene-Activated proteinproducts that would compete with proteins that are currently being marketed bythird parties. For instance, in the case of Dynepo, competing products aremarketed by Amgen, Johnson & Johnson, F. Hoffmann-La Roche Ltd.(Boehringer Mannheim GmbH), Sankyo Company Ltd., Chugai PharmaceuticalCo., Ltd., and the pharmaceutical division of Kirin Brewery Co., Ltd.in Japan.

 

Many of theproducts against which our Gene-Activated proteins would compete havewell-known brand names, have been promoted extensively and have achieved marketacceptance by third-party payors, hospitals, physicians, and patients. Inaddition, many of the companies that produce these protein products havepatents covering techniques used to produce these products, which have oftenserved as effective barriers to entry in the therapeutic proteins market. Aswith Amgen and its erythropoietin product, these companies may seek to blockour entry into the market by asserting that our Gene-Activated proteinsinfringe their patents. Many of these companies are also seeking to develop andcommercialize new or potentially improved versions of their proteins.

 

*GeneTherapy*

 

Our gene therapysystem will have to compete with other gene therapy systems, as well as withconventional methods of treating the disease and conditions targeted. Althoughno gene therapy product is currently marketed, a number of companies, includingmajor biotechnology and pharmaceutical companies, such as Amgen and Serono, areactively involved in this field.

 

**The market may not be receptive toour products upon their introduction.**

 

The commercialsuccess of any of our products for which we obtain marketing approval from theEMEA, the FDA, and other regulatory authorities will depend upon theiracceptance by patients, the medical community and third party payors as clinicallyeffective, safe and cost-effective. It may be difficult for us to achievemarket acceptance of our products.

 

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

 

•  the timing of the receipt of marketing approvals;

•  the countries in which such approvals areobtained; and

•  the safety, efficacy, convenience, andcost-effectiveness of the product as compared to competitive products.

 

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**We have limited experience andresources in manufacturing and will incur significant costs to develop thisexperience or rely on third parties to manufacture our products on our behalf.**

 

We have limitedmanufacturing experience and in order to continue to develop products, applyfor regulatory approvals, and commercialize our products, we will need todevelop, contract for, or otherwise arrange for the necessary manufacturingcapabilities. We currently use, and expect to continue to use in the future,internal manufacturing and contract manufacturing by third parties to meet ourproduction requirements for preclinical testing, clinical trials, andcommercial supply.

 

To date, we haverelied on contract manufacturing arrangements with third parties for theproduction of Replagal for commercial sale. These third parties manufactureReplagal bulk drug substance and perform fill and finish services. InFebruary 2003, we filed with European regulatory authorities for approvalto manufacture the bulk drug substance of Replagal at our manufacturingfacility in Cambridge, Massachusetts. In January 2003, we terminated ouragreement with the third party manufacturer of the bulk drug substance ofReplagal, to be effective in July 2003. We plan to use our existinginventory and additional inventory manufactured under the third party contractmanufacturing arrangement to supply customer orders for Replagal at least untilwe receive approval to manufacture Replagal at our Cambridge, Massachusettsfacility or such time as we make other manufacturing arrangements. We areunsure when or if our facility will be approved for the manufacture of Replagalbulk drug substance or if we will be able to make other manufacturingarrangements. Failure to obtain approval for our manufacturing facilities or tomake other manufacturing arrangements before our inventory of Replagal isexhausted could cause us to be unable to supply Replagal to commercialcustomers in Europe and elsewhere, which could have a material adverse effecton sales and on our ability to attract new patients.

 

We are investing,and may need to invest in the future, substantial additional funds to build ourown manufacturing facilities and need to recruit qualified personnel in orderto operate any manufacturing facilities. There can be no assurance that we willbe able to successfully build or operate our own facilities, that ourfacilities will comply with applicable regulations or that our facilities willenable us to manufacture our products at a commercially reasonable cost.

 

To the extent thatwe are a party to manufacturing arrangements with third parties, we will bedependent upon these third parties to perform their obligations in a timelymanner and in accordance with applicable government regulations. For instance,we are parties to several arrangements with respect to various aspects of themanufacture of Replagal. Each of these manufacturing arrangements relates toonly certain aspects of the manufacturing process. In the event that any one ofthese manufacturers fails to or is unable to comply with its obligations underits manufacturing agreement with us and if the manufacturer’s failurematerially delays the ultimate production of Replagal and adversely affects ourReplagal inventory levels, our sales of Replagal could be adversely affected.

 

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

 

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Any manufacturingof our products must comply with GMP as required by the countries in which weintend to sell our products. Before approving an application for marketing  authorization for a product, the FDA or otherequivalent foreign regulatory agency will inspect the facilities at which theproduct is manufactured. If we or our third party manufacturers do not complywith applicable GMP, such regulatory agency may refuse to approve ourapplication for marketing authorization. Once the regulatory agency approves aproduct, we or our third party manufacturers must continue to comply with GMP.If we or our third party manufacturers fail to maintain compliance with GMP,adverse consequences can result, including suspension or withdrawal of an approvedproduct from the market, operating restrictions, and the imposition of civiland criminal penalties.

 

**If we fail to obtain reimbursement,or an adequate level of reimbursement, by third party payors for our products,we may not have commercially viable markets for our products.**

 

In certaincountries, particularly the countries of the European Union, the pricing ofprescription pharmaceuticals and the level of reimbursement are subject togovernmental control. In some countries, it can take an extended period of timeto establish and obtain reimbursement, and reimbursement approval may berequired at the individual patient level, which can lead to further delays. Inthe United States, the availability of reimbursement by governmental and otherthird party payors affects the market for any pharmaceutical product. Thesethird party payors continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for medical products and services. If weare not able to obtain pricing and reimbursement for our products that receivemarketing approval at satisfactory levels, our revenues and results ofoperations will be adversely affected, possibly materially.

 

We expect that theprices for many of our products, when commercialized, including in particular,our products for the treatment of rare genetic diseases, may be high comparedto other pharmaceutical products. For example, have established pricing andreimbursement for substantially all patients receiving Replagal in Europe. Pricingwas initially established as the local currency equivalent of an average ofapproximately $165,000 per patient per year. The price remains fixed in thelocal currencies and varies in U.S. dollars with exchange rate fluctuations. Wemay encounter particular difficulty in obtaining satisfactory pricing andreimbursement for products for which we seek a high price.

 

The Centers forMedicare and Medicaid Services of the United States Department of Health andHuman Services has considered proposals from time to time to reduce thereimbursement rate with respect to erythropoietin. If Dynepo is approved andcommercialized, adoption by the Centers for Medicare and Medicaid Services ofany such proposal might have an adverse effect on the pricing of Dynepo.

 

We also mayexperience pricing pressure with respect to Replagal and other products forwhich we may obtain marketing approval due to the trend toward managed healthcare, the increasing influence of health maintenance organizations andlegislative proposals. We may not be able to sell our products profitably ifreimbursement is unavailable or limited in scope or amount.

 

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**We have limited sales and marketingexperience and capabilities and will need to develop this expertise or dependon third parties to successfully sell and market our products on our behalf.**

 

We have limitedsales and marketing experience and capabilities. In order to market ourproducts, including Replagal, we will need to develop this experience and thesecapabilities or rely upon third parties, such as our collaborators, to performthese functions. If we rely on third parties to sell, market, or distribute ourproducts, our success will be dependent upon the efforts of these third partiesin performing these functions. In many instances, we may have little or nocontrol over the activities of these third parties in selling, marketing, anddistributing our products. If we choose to conduct these activities directly,as we plan to do with respect to some of our potential products, we may not beable to recruit and maintain an effective sales force.

 

Currently, TKTEurope, our 80% owned subsidiary, markets Replagal in Europe. As a result, ourability to successfully market and sell Replagal in Europe is dependent on themarketing personnel of TKT Europe. We have an 80% equity interest in TKTEurope; the European stockholders own the remaining 20% equity interest in TKTEurope. Although our consent is required for various significant matters relatingto the operation of TKT Europe, most day-to-day operations of TKT Europe aredirected by the European stockholders. If we should determine to buy out TKTEurope or if the European stockholders exercise their contractual right torequire us to buy them out, our ability to successfully market and sellReplagal in Europe would be dependent on our ability to attract and retainexperienced marketing and sales personnel.

 

**We depend on our collaborators todevelop, conduct clinical trials, obtain regulatory approvals for, andmanufacture, market and sell certain products on our behalf and their effortsmay not be scientifically or commercially successful.**

 

We are parties tocollaborative agreements with third parties relating to certain of ourprincipal products. We are relying on Aventis to develop, conduct clinicaltrials, obtain regulatory approvals for, and manufacture, market, and sellDynepo in the United States and Europe; and Sumitomo to develop andcommercialize Replagal for Fabry disease in Japan, Korea, and China. Ourcollaborators may not devote the resources necessary or may otherwise be unableor unwilling to complete development and commercialization of these potentialproducts. Our existing collaborations are subject to termination without cause onshort notice under specified circumstances.

 

Our existingcollaborations and any future collaborative arrangements with third parties maynot be scientifically or commercially successful. Factors that may affect thesuccess of our collaborations include the following:

 

•our collaborators may be pursuing alternative technologies or developingalternative products, either on their own or in collaboration with others, thatmay be competitive with the product as to which they are collaborating with usor which could affect our collaborative partners’ commitment to thecollaboration with us;

 

•reductions in marketing or sales efforts or a discontinuation of marketing orsales of our products by our collaborators would reduce our revenues, whichwill be based on a percentage of net sales by the collaborator;

 

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•our collaborators may terminate their collaborations with us, as Aventis hasdone with respect to GA-GCSF, which could make it difficult for us to attractnew collaborators or adversely affect the perception of us in the business andfinancial communities; and

 

•our collaborators may pursue higher priority programs or change the focus oftheir development programs, which could affect the collaborator’s commitment tous.

 

**We may be exposed to productliability claims and may not be able to obtain adequate product liabilityinsurance.**

 

Our businessexposes us to the risk of product liability claims that is inherent in themanufacturing, testing, and marketing of human therapeutic products. Wemaintain clinical trial liability insurance and product liability insurance inamounts that we believe to be reasonable. This insurance is subject todeductibles and coverage limitations. We may not be able to obtain additionalinsurance or maintain insurance on acceptable terms or at all. Moreover, anyinsurance that we do obtain may not provide adequate protection againstpotential liabilities. If we are unable to obtain insurance at acceptable costor otherwise protect against potential product liability claims, we will beexposed to significant liabilities, which may materially and adversely affectour business and financial position. These liabilities could prevent orinterfere with our product commercialization efforts.

 

*Financing Risks*

 

**We have not been profitable andexpect to continue to incur substantial losses.**

 

We haveexperienced significant operating losses since our inception in 1988. As ofMarch 31, 2003, our accumulated deficit was $391.4 million. We had netlosses of $129.8 million, $70.2 million and $51.0 million in2002, 2001 and 2000, respectively.

 

We expect that wewill continue to incur substantial losses and that, until we have substantialproduct sales, our cumulative losses will continue to increase. We recorded$34.7 million in product sales in 2002 and $12.2 million in product salesin the first quarter of 2003. We expect that the losses that we incur willfluctuate from quarter to quarter and that these fluctuations may besubstantial.

 

**We may need additional financing,which may be difficult to obtain. If we do not obtain additional financing ourfinancial condition will be adversely affected.**

 

We expect that ourexisting capital resources, together with anticipated proceeds from productsales, anticipated cash payments under collaborative agreements, and interestincome, will be sufficient to fund our operations into 2005. Our cashrequirements for operating activities, financing activities and investmentactivities have exceeded our internally generated funds. We expect that ourcash requirements for such activities will continue to exceed our internallygenerated funds until we are able to generate substantial product sales. Ourfuture capital requirements will depend on many factors, including thefollowing:

 

•the timing, receipt, and amount of Replagal product sales;

 

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•continued progress in our research and development programs, particularly I2S,as well as the magnitude of these programs;

 

•the scope and results of our clinical trials;

 

•the timing of, and the costs involved in, obtaining regulatory approvals;

 

•the cost of manufacturing activities;

 

•the cost of commercialization activities, including product marketing, salesand distribution;

 

•the costs involved in preparing, filing, prosecuting, maintaining, andenforcing patent claims and other patent-related costs, including litigationcosts and the results of such litigation;

 

•our ability to establish and maintain collaborative arrangements; and

 

•the cost of buying out the minority interest in TKT Europe, if applicable.

 

If we determine toseek additional funding, we may do so through collaborative arrangements andpublic or private financings. Additional financing may not be available to uson acceptable terms, if at all. If we do not obtain additional financing, ourfinancial condition will be adversely affected.

 

If we raiseadditional funds by issuing equity securities, further dilution to our thenexisting stockholders will result. In addition, the terms of the financing mayadversely affect the holdings or the rights of such stockholders. If we areunable to obtain funding on a timely basis, we may be required to significantlycurtail one or more of our research or development programs. We also could berequired to seek funds through arrangements with collaborators or others thatmay require us to relinquish rights to certain of our technologies, productcandidates, or products which we would otherwise pursue on our own.

 

**ITEM 3                   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

The Companymaintains its investment portfolio consistent with its Investment Policy, whichhas been approved by the Board of Directors. The Company’s investment portfolioconsists of investments only in U.S. government and agency obligations. TheCompany’s investments are also subject to interest rate risk and will decreasein value if market interest rates increase. However, due to the relativelyshort duration of the Company’s investments, interest rate risk is mitigated.The Company does not own derivative financial instruments in its investmentportfolio.

 

Accordingly, theCompany does not believe that there is any material market risk

 

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exposure with respect toderivative or other financial instruments which would require disclosure underthis item.

 

As ofMarch 31, 2003, the Company did not have any off-balance sheetarrangements.

 

The Company hasexposure to currency risk for Replagal sales in Europe. Pricing was initiallyestablished as the local currency equivalent of an average annual per patientprice of approximately $165,000. The price remains fixed in the localcurrencies and varies in U.S. dollars with exchange rate fluctuations. Foreigncurrency fluctuations were immaterial for sales and gross margins  for the period ended March 31, 2003.

 

**ITEM 4                   CONTROLS AND PROCEDURES.**

 

*(a) Evaluation of disclosure controls and procedures*.  Based on their evaluation of the Company’sdisclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)under the Securities Exchange Act of 1934) as of a date within 90 days of thefiling date of this Quarterly Report on Form 10-Q, the Company’s chiefexecutive officer and the Company’s controller (as principal financial officer)have concluded that, except as described below, the Company’s disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms and are operating in aneffective manner.

 

In 2002, sales of the Company’s Replagal product became material to theCompany’s consolidated financial statements. Sales totaled approximately $35 million for 2002 and approximately $12.2million for the first quarter of 2003. The sales are transacted through and recorded by the Company’s 80% ownedsubsidiary, TKT Europe.  During 2002,with respect to TKT Europe, the Company did not have a timely flow of criticalaccounting and related financial information and experienced difficulties anddelays in verifying that product sales were being properly recognized asrevenue in accordance with United States generally accepted accountingprinciples.  The Company’s independentauditors, in connection with their audit of the Company’s consolidatedfinancial statements for the year ended December 31, 2002, informed managementand the Company’s audit committee that, in their judgment, a material weaknessin the Company’s internal control system existed as a result of theseissues.  Members of the Company’s UnitedStates accounting and finance group have been discussing implementing proceduresto address these issues with the accounting personnel of TKT Europe.

 

Notwithstanding these issues, in light of the processes involved in thepreparation by the Company of its consolidated financial statements for theyear ended December 31, 2002, management of the Company believes that thosefinancial statements fairly presented the Company’s consolidated financialposition as of, and the consolidated results of its operations for, the yearended on that date.  Moreover, as partof these processes, management concluded that no material adjustments wereneeded to such financial statements or with respect to amounts reported forinterim periods in the year ended December 31, 2002.  The Company’s independent auditors rendered an unqualifiedopinion with respect to the Company’s consolidated financial statements for theyear ended December 31, 2002.

 

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In connection with the preparation by the Company of its consolidatedfinancial statements for the three months ended March 31, 2003, the Company didnot experience any difficulties or delays in obtaining critical accounting andrelated financial information or conducting its internal review processes withrespect to TKT Europe.  Management ofthe Company believes that the consolidated financial statements for the threemonths ended March 31, 2003 fairly present the Company’s consolidated financialposition as of, and the consolidated results of its operations for, the threemonths ended March 31, 2003.

 

*(b) Changes in internal controls*.  There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of their most recent evaluation.

 

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Other Information

 

**ITEM 1.                  LEGAL PROCEEDINGS**

 

The description oflegal proceedings set forth under note 8 of the notes to the Company'sconsolidated financial statements contained in this Quarterly Report of Form10-Q is incorporated herein by reference.

 

**ITEM 6.                  EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)           The Exhibits listed in the Exhibitindex immediately preceding such Exhibits are filed as part of this QuarterlyReport on Form 10-Q, and such Exhibit Index is incorporated herein by reference.

 

(b)           Reports on Form 8-K

 

Current Report on Form 8-K, filed February 14, 2003,regarding the appointment of Michael J. Astrue as President and Chief ExecutiveOfficer of the Company and election of Mr. Astrue to the Company’s Board ofDirectors.

 

Current Report on Form 8-K, filed March 3, 2003,regarding a scheduled speech by Mr. Astrue at the Lehman Brothers 2003 GlobalHealth Care Conference.

 

Current Report on Form 8-K, furnished onMarch 31, 2003 under Item 9, containing a copy of its earnings release forthe quarter and year ended December 31, 2002 (including financial statements)pursuant to Item 12 (Results of Operations and Financial Condition).

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                      | TRANSKARYOTIC THERAPIES, INC. |
|---------------------------|-------------------------------|
|                      |                          |   |
| Date:  May  15, 2003 | By:                           | /s/ Michael J. Astrue |   |
|                      |                          | Michael J. Astrue |
|                      |                          | President and Chief Executive  Officer |
|                      |                          |   |
| Date:  May  15, 2003 | By:                           | /s/ Paul M. Schneider |   |
|                      |                          | Paul M. Schneider |
|                      |                          | Controller (Principal |
|                      |                          | Financial and Accounting Officer) |

 

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CERTIFICATIONS

 

I, Michael J. Astrue, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Transkaryotic Therapies,Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant asof and for the periods presented in this quarterly report;

 

4.                                       TheRegistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the Registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the Registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       TheRegistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the Registrant’s auditors and the audit committee ofRegistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the Registrant’s ability to record, process, summarize andreport financial data and have identified for the Registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the Registrant’s internal controls; and

 

6.                                       TheRegistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   |                                   |              | /s/ Michael J. Astrue                 |   |
|--------|----------------------------------------|-------------------|---------------------------------------|--------|
|   | Dated:    May  15, 2003 | Michael J. Astrue |
|   |                                   |              | President and Chief Executive Officer |

 

 

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I, Paul M. Schneider, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Transkaryotic Therapies, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of and forthe periods presented in this quarterly report;

 

4.               The Registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the Registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the Registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The Registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the Registrant’s auditors and the audit committee ofRegistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the Registrant’s ability to record, process, summarize andreport financial data and have identified for the Registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have a significantrole in the Registrant’s internal controls; and

 

6.               The Registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
|                                         |              | /s/ Paul M. Schneider |   |
|----------------------------------------------|-------------------|-----------------------|--------|
| Dated:      May 15, 2003 | Paul M. Schneider |
|                                         |              | Controller            |   |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                          |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                     |
| 3.1             |   | Amended and Restated Certificate of Incorporation of  the Registrant, as amended to date.                                                                                                |
|            |   |                                                                                                                                                                                     |
| 3.2             |   | Amended and Restated By-Laws of the Registrant, as  amended to date.                                                                                                                     |
|            |   |                                                                                                                                                                                     |
| 10.34           |   | Indemnification Agreement, dated March 13, 2003, by  and between Mr. Daniel E. Geffken and the Registrant.                                                                               |
|            |   |                                                                                                                                                                                     |
| 10.35           |   | Retention Agreement, dated March 13, 2003, by and  between Mr. Daniel E. Geffken and the Registrant.                                                                                     |
|            |   |                                                                                                                                                                                     |
| 10.36           |   | 2002 Stock Incentive Plan and Amendment No. 1  thereto.                                                                                                                                  |
|            |   |                                                                                                                                                                                     |
| 10.37           |   | Indemnification Agreement, dated April 30, 2003, by  and between Mr. Michael J. Astrue and the Registrant.                                                                               |
|            |   |                                                                                                                                                                                     |
| 10.38           |   | Employment Agreement, dated April 30, 2003, by and  between Mr. Michael J. Astrue and the Registrant.                                                                                    |
|            |   |                                                                                                                                                                                     |
| 10.39#          |   | License Agreement, dated February 28, 2003, by and  between Women’s and Children’s Hospital and the Registrant.                                                                |
|            |   |                                                                                                                                                                                     |
| 99.1            |   | 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. |
|            |   |                                                                                                                                                                                     |
| 99.2            |   | Certification by the Registrant’s Controller  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                            |

 

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#   Confidential treatment requested as to certainportions pursuant to Rule 24b-2 promulgated under the Securities Exchange Actof 1934, as amended, which portions have been omitted and filed separately withthe Securities and Exchange Commission.

 

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