**SECURITIES AND 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 theQuarter Ended June 30, 2002**

 

**Commission File Number 0-21481**

 

 

| **TRANSKARYOTIC  THERAPIES, INC.**                                                   |
|--------------------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                              |
|                                                                                 |   |   |
| **Delaware**                                                                         |   | **04-3027191** |
| (State or other  jurisdiction of  incorporation or organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                 |   |   |
| **195 Albany Street  Cambridge, Massachusetts**                                      |   | **02139** |
| (Address of  principal executive offices)                                            |   | (Zip Code) |
|                                                                                 |   |   |
| Registrant’s  telephone number, including area code:   **(617)  349-0200** |

 

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Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes**        ****ý**            No**          ****o**

 

At July 31, 2002,there were 34,811,022 shares of Common Stock, $.01 par value, outstanding.

 

 

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Transkaryotic Therapies, Inc.

 

INDEX

 
| PART  I.  | FINANCIAL INFORMATION                                                                                       |
|----------------|-------------------------------------------------------------------------------------------------------------|
|           |                                                                                                        |
| Item  1.  | Condensed  Consolidated Financial Statements (unaudited)                                                    |
|           |                                                                                                        |
|           | Condensed  Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001                            |
|           |                                                                                                        |
|           | Condensed  Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2002 and 2001 |
|           |                                                                                                        |
|           | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002  and 2001           |
|           |                                                                                                        |
|           | Notes  to Condensed Consolidated Financial Statements                                                       |
|           |                                                                                                        |
| Item  2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 |
|           |                                                                                                        |
| PART  II. | OTHER INFORMATION                                                                                           |
|           |                                                                                                        |
| Item 1.        | Legal Proceedings                                                                                           |
|           |                                                                                                        |
| Item  2.       | Changes  in Securities and Use of Proceeds                                                                  |
|           |                                                                                                        |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                                        |
|           |                                                                                                        |
| Item 6.        | Exhibits and  Reports on Form 8-K                                                                           |
|           |                                                                                                        |
| SIGNATURES     |
|           |
| EXHIBIT INDEX  |

 

2

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Part I - Item 1 - CondensedConsolidated Financial Statements

 

Transkaryotic Therapies, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

 
| **(in  thousands, except par values)**                                                                                                                                  |   | **June 30,  2002** |    | **December  31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
| **Assets**                                                                                                                                                              |   |               |    |                    |   |
|                                                                                                                                                                    |   |               |    |                    |   |
| Current assets:                                                                                                                                                         |   |               |    |                    |   |
| Cash and cash  equivalents                                                                                                                                              |   | $                  | 145,090 |                    | $      | 323,877 |   |
| Marketable  securities                                                                                                                                                  |   | 181,529            |    | 75,877                  |   |
| Accounts  receivable                                                                                                                                                    |   | 9,708              |    | 2,374                   |   |
| Inventories                                                                                                                                                             |   | 14,117             |    | 7,147                   |   |
| Prepaid expenses  and other current assets                                                                                                                              |   | 5,607              |    | 4,620                   |   |
| Total current  assets                                                                                                                                                   |   | 356,051            |    | 413,895                 |   |
| Property and  equipment, net                                                                                                                                            |   | 59,240             |    | 41,587                  |   |
| Other assets                                                                                                                                                            |   | 1,841              |    | 2,225                   |   |
| Total assets                                                                                                                                                            |   | $                  | 417,132 |                    | $      | 457,707 |   |
|                                                                                                                                                                    |   |               |    |                    |   |   |   |
| **Liabilities  and Stockholders' Equity**                                                                                                                               |   |               |    |                    |   |
| Current  liabilities:                                                                                                                                                   |   |               |    |                    |   |
| Accounts payable                                                                                                                                                        |   | $                  | 10,906  |                    | $      | 9,394 |   |
| Accrued expenses                                                                                                                                                        |   | 14,046             |    | 12,150                  |   |
| Total current  liabilities                                                                                                                                              |   | 24,952             |    | 21,544                  |   |
|                                                                                                                                                                    |   |               |    |                    |   |
| Stockholders'  equity:                                                                                                                                                  |   |               |    |                    |   |
| Series A  convertible preferred stock, $.01 par value, 10,000 shares authorized; no  shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively |   | —             |    | —                  |   |
| Series B  preferred stock, $.01 par value, 1,000 shares authorized; no shares issued  and outstanding at June 30, 2002 and December 31, 2001, respectively              |   | —             |    | —                  |   |
| Common stock,  $.01 par value;  100,000 shares  authorized; 34,798 and 34,302 shares issued and outstanding at June 30, 2002  and December 31, 2001, respectively  |   | 348                |    | 343                     |   |
| Additional  paid-in capital                                                                                                                                             |   | 687,460            |    | 670,959                 |   |
| Accumulated  deficit                                                                                                                                                    |   | (297,020           | )       | (235,672                | )      |
| Deferred  compensation                                                                                                                                                  |   | (5                 | )       | (114                    | )      |
| Accumulated  other comprehensive income                                                                                                                                 |   | 1,397              |    | 647                     |   |
| Total  stockholders' equity                                                                                                                                             |   | 392,180            |    | 436,163                 |   |
| Total  liabilities and stockholders' equity                                                                                                                             |   | $                  | 417,132 |                    | $      | 457,707 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

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Transkaryotic Therapies,Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 
|                                                         |   | **Three  Months Ended June 30,** |    | **Six Months  Ended June 30,** |   |
|--------------------------------------------------------------|--------|----------------------------------|---------|--------------------------------|--------|
| **(in  thousands, except per share amounts)**                |   | **2002**                         |    | **2001**                       |   | **2002** |   | **2001** |   |
|                                                         |   |                             |    |                           |   |   |   |   |   |
| Revenues:                                                    |   |                             |    |                           |   |   |   |   |   |
| Product sales                                                |   | $                                | 8,782   |                           | $      | 297 |   | $ | 14,840 |   | $ | 297 |   |
| License and  research revenues                               |   | 83                               |    | 410                            |   | 635 |   | 1,628 |   |
|                                                         |   | 8,865                            |    | 707                            |   | 15,475 |   | 1,925 |   |
| Operating  expenses:                                         |   |                             |    |                           |   |   |   |   |   |
| Cost of goods  sold                                          |   | 1,650                            |    | —                         |   | 2,198 |   | — |   |
| Research and  development                                    |   | 18,868                           |    | 18,805                         |   | 39,277 |   | 35,311 |   |
| Intellectual  property license expense                       |   | 26,000                           |    | —                         |   | 26,000 |   | — |   |
| Selling, general  and administrative                         |   | 7,476                            |    | 5,831                          |   | 13,899 |   | 10,790 |   |
|                                                         |   | 53,994                           |    | 24,636                         |   | 81,374 |   | 46,101 |   |
|                                                         |   |                             |    |                           |   |   |   |   |   |
| Loss from  operations                                        |   | (45,129                          | )       | (23,929                        | )      | (65,899 | ) | (44,176 | ) |
|                                                         |   |                             |    |                           |   |   |   |   |   |
| Other income:                                                |   |                             |    |                           |   |   |   |   |   |
| Interest income,  net                                        |   | 2,248                            |    | 2,864                          |   | 4,551 |   | 6,294 |   |
| Gain on sale of  investment                                  |   | —                           |    | —                         |   | — |   | 2,785 |   |
|                                                         |   | 2,248                            |    | 2,864                          |   | 4,551 |   | 9,079 |   |
|                                                         |   |                             |    |                           |   |   |   |   |   |
| Net loss                                                     |   | $                                | (42,881 | )                              | $      | (21,065 | ) | $ | (61,348 | ) | $ | (35,097 | ) |
|                                                         |   |                             |    |                           |   |   |   |   |   |
| Basic and  diluted net loss per share                        |   | $                                | (1.24   | )                              | $      | (0.92 | ) | $ | (1.78 | ) | $ | (1.54 | ) |
|                                                         |   |                             |    |                           |   |   |   |   |   |
| Shares used to  compute basic and diluted net loss per share |   | 34,462                           |    | 22,859                         |   | 34,397 |   | 22,789 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

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TranskaryoticTherapies, Inc.

CondensedConsolidated Statements of Cash Flows

(unaudited)

 
| **(in  thousands)**                                                              |   | **Six Months  Ended  June 30,** |       |
|----------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                             |   | **2002**                        |       | **2001** |   |
|                                                                             |   |                            |       |   |   |
| **Operating  activities:**                                                       |   |                            |       |   |   |
| Net loss                                                                         |   | $                               | (61,348    | ) | $ | (35,097 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |                            |       |   |   |
| Issuance of  common stock, intellectual property license expense                 |   | 15,000                          |       | — |   |
| Depreciation and  amortization                                                   |   | 3,456                           |       | 2,801 |   |
| Compensation  expense related to equity issuances                                |   | 109                             |       | 357 |   |
| Changes in  operating assets and liabilities                                     |   | (11,106                         | )          | 2,192 |   |
|                                                                             |   |                            |       |   |   |
| Net cash used  for operating activities                                          |   | (53,889                         | )          | (29,747 | ) |
|                                                                             |   |                            |       |   |   |
| **Investing  activities:**                                                       |   |                            |       |   |   |
| Proceeds from  sales and maturities of marketable securities                     |   | 116,773                         |       | 105,171 |   |
| Purchases of  marketable securities                                              |   | (222,598                        | )          | (35,932 | ) |
| Purchases of  property and equipment                                             |   | (21,109                         | )          | (13,685 | ) |
| Changes in other  assets                                                         |   | 384                             |       | (792 | ) |
|                                                                             |   |                            |       |   |   |
| Net cash  provided by (used for) investing activities                            |   | (126,550                        | )          | 54,762 |   |
|                                                                             |   |                            |       |   |   |
| **Financing  Activities:**                                                       |   |                            | ** ** |   | ** ** |
| Issuance of  common stock, net                                                   |   | 1,507                           |       | 95,542 |   |
| Repayment of  long-term debt                                                     |   | —                          |       | (1,500 | ) |
| Net cash  provided by financing activities                                       |   | 1,507                           |       | 94,042 |   |
|                                                                             |   |                            |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                    |   | 145                             |       | (76 | ) |
| Net increase  (decrease) in cash and cash equivalents                            |   | (178,787                        | )          | 118,981 |   |
|                                                                             |   |                            |       |   |   |
| Cash and cash  equivalents at January 1                                          |   | 323,877                         |       | 49,445 |   |
|                                                                             |   |                            |       |   |   |
| Cash and cash  equivalents at June 30                                            |   | $                               | 145,090    |   | $ | 168,426 |   |
|                                                                             |   |                            |       |   |   |
| Supplemental  disclosure of non-cash financing activity:                         |   |                            | ** ** |   | ** ** |
| Issuance of  common stock as consideration for intellectual property license     |   | $                               | 15,000     |   | $ | — |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

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Transkaryotic Therapies,Inc.

Notes to CondensedConsolidated Financial Statements (unaudited)

June 30, 2002 and 2001

 

1.             BASIS OFPRESENTATION

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and with the instructions to Form 10-Q and Article 10 of RegulationS-X.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples in the United States for complete financial statements.  In the opinion of management, the accompanyingfinancial statements include all adjustments, consisting only of normalrecurring adjustments, necessary for a fair presentation of the financialposition, results of operations and cash flows for the periods presented.  The results of operations for the interimperiods ended June 30, 2002 are not necessarily indicative of the results to beexpected for the year ending December 31, 2002.

 

These financial statements should be read inconjunction with the audited financial statements and notes thereto for theyear ended December 31, 2001 included in the Company’s Annual Report on Form10-K as filed with the Securities and Exchange Commission.

 

Niche Protein®, Gene-Activated®, and TKT® areregistered trademarks and ReplagalTM and Transkaryotic TherapyTM are trademarksof Transkaryotic Therapies, Inc. DynepoTM is a trademark of Aventis Pharmaceuticals, Inc. (“Aventis”).

 

2.             NET LOSS PER SHARE

 

The Company calculates net loss per share inaccordance with Statement of Financial Accounting Standard (“SFAS”) No. 128,“Earnings Per Share,” and related interpretations.   Basic earnings per share is computed using the weighted averageshares outstanding.

 

Basic net loss per share was equivalent to diluted netloss per share for the three and six months ended June 30, 2002 and 2001because common equivalent shares from convertible preferred stock and stockoptions have been excluded as their effect is antidilutive.

 

3.             COMPREHENSIVE LOSS

 

Comprehensive loss comprises net loss, unrealizedgains and losses on marketable securities designated as available-for-sale, andcumulative foreign currency translation adjustments.  The Company had a total comprehensive loss of $40,895,000 and$21,492,000 for the three months ended June 30, 2002 and 2001,respectively.  For the six months endedJune 30, 2002 and 2001, the Company had a total comprehensive loss of$60,598,000 and $34,633,000, respectively.

 

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4.             INVENTORIES

 

Inventories consist of the following:

 
| **(in thousands)** |   | **June 30,  2002** |   | **December 31,  2001** |   |
|--------------------|--------|--------------------|--------|------------------------|--------|
| Raw  materials     |   | $                  | 681    |                   | $      | 452 |   |
| Work  in process   |   | 8,612              |   | 4,214                  |   |
| Finished  goods    |   | 4,824              |   | 2,481                  |   |
|               |   | $                  | 14,117 |                   | $      | 7,147 |   |

 

Inventories are stated at the lower of cost or market,with cost determined under a first-in, first-out method.

 

5.                                       INTELLECTUALPROPERTY LICENSE EXPENSE

 

In June 2002, the Company obtained an exclusivelicense to certain intellectual property from Cell Genesys, Inc., related totheir approach to gene activation. For the quarter ended June 30, 2002, theCompany incurred a license fee expense of $26 million, which was funded with$11 million in cash and $15 million worth of shares of the Company’s CommonStock.  Cell Genesys also has thepotential to receive certain milestone payments contingent upon the outcome ofrelated patent matters.   The Company isnot required to make royalty payments under the agreement.

 

6.             LEGAL PROCEEDINGS

 

The Company cannot provide assurance as to the outcomeof any legal proceeding. A decision by a court in any jurisdiction in a manneradverse to the Company could have a material adverse effect on the Company’sbusiness, financial position, and results of operations.

 

*ReplagalPatent Litigation*

 

Since July 2000, the Company has been involved inpatent litigation relating to Replagal brought by Genzyme Corporation(“Genzyme”) and Mount Sinai School of Medicine of New York University (“MountSinai”) in the United States District Court for the District of Delaware (the“Delaware District Court”) regarding a patent licensed by Genzyme from MountSinai.  In January 2002, theDelaware District Court dismissed this patent litigation.  In March 2002, Genzyme appealed the rulingto the United States Court of Appeals forthe Federal Circuit (the “Federal Circuit”). If Genzyme is successful in its appeal, the case will be remanded to theDelaware District Court for further proceedings on non-infringement andinvalidity issues.  As of June 30, 2002,the Company had incurred approximately $4.3 million in litigation expensesassociated with the Replagal litigation.

 

*DynepoPatent Litigation*

 

The Company and Aventis are involved in a patentinfringement action with Amgen Inc. (“Amgen”).    In April 1997, Amgen commenced a patent infringement actionagainst the Company and Aventis in the United States District Court for theDistrict of Massachusetts (the

 

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“Massachusetts District Court”). InJanuary 2001, the Massachusetts District Court concluded that Dynepo(epoietin delta), the Company’s Gene-Activated erythropoietin for the treatmentof anemia, infringed eight of the 18claims of patents asserted by Amgen. The Company and Aventis filed an appeal ofthe decision with the Federal Circuit. Amgen has also appealed this decision.

 

In addition, in July 1999, Aventis and the Companycommenced legal proceedings in the United Kingdom against Kirin-Amgen, Inc.(“Kirin-Amgen”), seeking a declaration that a U.K. patent held by Kirin-Amgenwill not be infringed by the Company’s activities relating to Dynepo.  InApril 2001, the High Court of Justice in the United Kingdom ruled thatDynepo infringed one of four claims of the patent asserted by Kirin-Amgen.  In July 2002, the Court of Appeals in theUnited Kingdom reversed the High Court of Justice and ruled that Dynepo did notinfringe Kirin-Amgen’s patent.  Kirin-Amgen may appeal this decision.

 

The litigation is costly and theCompany is required to reimburse Aventis, which is paying the litigationexpenses, for 50% of the expenses. Aventis is entitled to deduct up to 50% of any royalties due to theCompany from the sale of Dynepo until Aventis has recouped the full amount ofTKT’s share of litigation expenses.  TheCompany currently estimates that its share of the expenses associated with thelitigation will total between approximately $5 million and $10 million by thetime the matter is finally adjudicated. Although Dynepo received marketing approvalfrom the European Agency for the Evaluation for Medicinal Products (“EMEA”) inMarch 2002, the launch of Dynepo has not been planned due to the uncertainty ofthe outcome of the litigation in the United States.

 

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PART I - Financial Information

 

Item 2.              Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

OVERVIEW

 

TKT is a biopharmaceutical company developing protein-and cell-based therapeutics for the treatment of a wide range of humandiseases.  TKT is building a broad andrenewable product pipeline based on three proprietary development platforms:Niche Protein products, Gene-Activated proteins and Transkaryotic Therapy genetherapy products.

 

During 2001, the Company received its first productmarketing approvals.  In August 2001,Replagal (agalsidase alfa), the Company’s enzyme replacement therapy for thelong-term treatment of patients with Fabry disease, was granted marketingauthorization in the European Union. Since August 2001, the Company hasreceived approval to market Replagal in a number of other countries but has notreceived approval to market Replagal in the United States.  In September 2001, the Company launchedReplagal in Europe.

 

In the United States, the Company has submitted aBiologics License Application (“BLA”) to the Food and Drug Administration(“FDA”) seeking marketing authorization for Replagal.  In January 2001, the FDA issued a complete review letterregarding the BLA.  The FDA letterstated that the data that the Company provided was not adequate for approval ofthe BLA at that time and requested additional information.  In response to this letter, TKT hasdiscussed the BLA with the FDA and has submitted additional data.

 

On September 27, 2002, the FDA’s Endocrinologic andMetabolic Drugs Advisory Committee is scheduled to meet to evaluate theCompany’s BLA for Replagal.  FDAAdvisory Committees provide the FDA with independent advice on marketingapplications.  The FDA generally followsthe recommendations of its Advisory Committees but is not bound to do so. Afterthis meeting, the FDA may either approve the Company’s BLA or decline toapprove it.  If it declines to approvethe BLA, the FDA may request additional information, possibly including datafrom additional trials.

 

With the exception of 1995, the Company has incurredsubstantial annual operating losses since inception.  The Company expects that its research and developmentexpenditures will increase in future years as product development effortsaccelerate.  Accordingly, the Companyexpects to incur significant operating losses until substantial product salesare generated.   Until such time, the Companyis dependent upon product sales, existing cash resources, interest income,external financing from equity offerings, debt financings and collaborativeresearch and development arrangements with corporate sponsors to finance itsoperations. At June 30, 2002, the Company’s accumulated deficit was$297,020,000.    For the years endingDecember 31, 2001, 2000 and 1999, the Company had a net loss of $70,243,000,$51,021,000 and $44,456,000, respectively. In addition, the Company had a net loss of $42,881,000 and $61,348,000for the three and six months ended June 30, 2002, respectively. An

 

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intellectual property license fee expense of $26 million increasedbasic and diluted net loss per share by $0.75 and $0.76 for the three and sixmonths ended June 30, 2002, respectively.

 

Resultsof operations may vary significantly from period to period depending on, amongother factors, Replagal product sales, costs associated with the manufacture,marketing and sale of Replagal, expenses related to the Company’s research anddevelopment efforts, the timing of approvals, if granted, to market theCompany’s products either additional jurisdictions, including the UnitedStates, the ability of the Company to access capital markets, the timing ofadditional license fees and milestone payments under existing collaborativeresearch agreements and the establishment of additional collaborative researchagreements, if any.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s significant accounting policies are morefully described in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001 under the caption “Item 7 Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and in the Notes tothe Consolidated Financial Statements.  Application of these policies is particularlyimportant to the portrayal of the Company’s financial condition and results ofoperations.  These accounting policies require the Company to makesubjective judgements in determining estimates about the effect of matters thatare inherently uncertain.  Actual results could differ materially fromthese estimates. The following accounting policies meet these characteristicsand are considered significant:

 

*Revenue Recognition*

 

The Company recognizes revenue from product sales whenthere is persuasive evidence that an arrangement exists, delivery has occurred,the price is fixed and determinable, and collection is reasonably assured. TheCompany recorded its first product sales from the sale of Replagal in Europe in2001.  In Europe and in some othercountries outside of the United States, collection is reasonably assured oncereimbursement agreements and pricing arrangements are established andformalized, as these agreements establish the relevant governmental agency’sintent to pay.  The Company has only recorded revenues in those countriesfor which these agreements have been established, thereby reasonably assuringcollection. The Company does not provide the right of return to its customersand, consequently, has not recorded a reserve for sales returns and allowances.

 

*Inventories*

 

Inventories are stated atthe lower of cost or market with cost determined under the first-in, first-outmethod.  Inventories are reviewedperiodically for slow-moving or obsolete status based on sales activity, bothprojected and historical. Replagal produced before product approval in August2001 was expensed as a research and development cost.  If product sales differ from projections, inventory may not befully utilized and could be subject to impairment.

 

The following discussion of the financial conditionand results of operations of the Company should be read in conjunction with theaccompanying condensed consolidated financial statements and the relatedfootnotes thereto.

 

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RESULTS OF OPERATIONS

 

*For theThree Months Ended June 30, 2002 and 2001*

 

Product sales for the quarter ended June 30, 2002 and2001 totaled $8,782,000 and $297,000, respectively.  Substantially all Replagal product sales were made in Europe.  Prior to product approval in August 2001,product sales were made under compassionate use programs in Europe.  The Company expects sales of Replagal toincrease significantly for the remainder of 2002 and beyond, as additionalpatients begin Replagal therapy, additional pricing and reimbursementarrangements are established and formalized, and marketing authorizations arereceived in additional countries.

 

License and research revenues totaled $83,000 and$410,000 for the three months ended June 30, 2002 and 2001, respectively.  License and research revenues were earnedfrom collaborative agreements with Sumitomo Pharmaceutical Co. Ltd.(“Sumitomo”) and Wyeth, formerly Genetics Institute, Inc.

 

For the second quarter of 2002, cost of goods sold was$1,650,000, or 19% of product sales. In the second quarter of 2001, there wasno cost of goods sold.  Inventory andcomponents of inventory, which were previously expensed as a research anddevelopment cost prior to marketing approval in August 2001, were sold in 2001and in the first half of 2002.  As ofJune 30, 2002, this inventory has been fully utilized.  As a result, gross margins will reflect fullproduction costs in the second half of 2002. For fiscal year 2002, the Company expects that its cost of goods soldwill be approximately 25% of product sales.  For 2003 and beyond, the Company expects to increase production to meetincreasing demand as the launch of Replagal accelerates, thereby creatingvolume efficiencies, and that cost of goods sold, as a percentage of productsales, will likely decline.

 

Research and development expenses totaled $18,868,000in the second quarter of 2002, as compared to $18,805,000 during the sameperiod in 2001**.**During the quarter ended June 30, 2002, the Company capitalized$5,133,000 of Replagal production costs as inventory during the quarter that,prior to product approval in August 2001, would have been included in researchand development expenses.  Taking intoaccount the capitalization of inventory costs in 2002, research and developmentexpenses were higher due to increases in research and development staffing andmanufacturing development costs as the Company’s product platforms continue toexpand and mature as well as increases in research and development occupancycosts.

 

During the remainder of 2002, costs relating to bothpreclinical and clinical programs are expected to increase significantly asproduct development activities are initiated or expanded.  The Company is advancing several otherpreclinical programs toward the Investigational New Drug stage.  The largest component of increases for theremainder of 2002 is expected to be costs related to building and operating itsmanufacturing facilities for its preclinical and clinical candidates.  In late 2002, the Company expects to occupya new headquarters and research and development facility, which will continueto increase its occupancy costs in the second half of 2002 and beyond.

 

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The Company’s four largest research and developmentprograms, Replagal, iduronate-2-sulfatase for the treatment of Hunter Syndrome,glucocerebrosidase for the treatment of Gaucher disease and Factor VIII genetherapy for the treatment of hemophilia A, represent the significant majorityof our research and development spending. The expenses associated with these programs totaled approximately 82% oftotal research and development expenses for the quarter ended June 30, 2002 and88% of total research and development expenses for the corresponding period in2001.

 

During 2002 and 2001, research and developmentexpenses for the Replagal program primarily included basic research, the costsof clinical trials, manufacturing costs of clinical supplies and costsassociated with preparation of worldwide product marketing applications.  In 2001, after receipt of its first productmarketing approval, the Company began to capitalize Replagal production costsas inventory, reducing the amount classified as research and developmentexpense.  The amount of future researchand development expenses associated with the Replagal program is not reasonablycertain as these costs are dependent principally upon the regulatory processand information required by regulatory agencies, as well as the timing ofobtaining marketing authorization in the United States and other countries, ifgranted.  The Company expects expensesassociated with the development of Replagal to decrease during the second halfof 2002 and beyond, as many of the costs related to its development havepreviously been incurred.

 

The iduronate-2-sulfatase (“I2S”)program has completed a Phase I/II clinical trial.   Based on preliminary results, the Companyintends to conduct a pivotal Phase III study of I2S.   Research anddevelopment expenses for the I2Sprogram in the second quarter of 2002 and 2001 include costs associated withthe Company’s Phase I/II clinical trial, including the manufacture of clinicalsupplies.  Future research anddevelopment costs for the I2S program are not reasonably certain because suchcosts are dependent on a number of variables, including the cost, nature andextent of the Phase III study and additional clinical trials, if any,uncertainties in the timing of the regulatory process and information required byregulatory agencies, and the costs associated with large scale manufacture of iduronate-2-sulfatase.  The Company expects that these costs will besignificant and are likely to increase each year until such time, if ever, asmarketing approvals are received, which the Company believes will not beearlier than 2004.

 

The Company’s gene therapyproduct to deliver Factor VIII to patients with hemophilia A has completed aPhase I clinical trial.  For 2002 and2001, research and development expenses included the cost of the Phase Iclinical study, the related manufacture of clinical supplies and additionalbasic research and process development expenses.  The Company is currently designing a Phase II study.   Given the regulatory hurdles likely to beencountered in the

 

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development and marketing approval of any gene therapy product, thetiming or cost associated with the project is not reasonably certain.  As no gene therapy product has ever receivedmarketing approval, the Company expects development costs will be substantial.

 

In June 2002, the Company obtained an exclusivelicense to certain intellectual property from Cell Genesys, Inc., related totheir approach to gene activation. For the quarter ended June 30, 2002, theCompany incurred a license fee expense of $26 million, which was funded with$11 million in cash and $15 million worth of shares of the Company’s CommonStock.

 

Selling, general and administrative expenses were$7,476,000 for the quarter ended June 30, 2002, compared with $5,831,000 forthe same period in 2001.  The increasein 2002 of $1,645,000, or 28%, principally was the result of Replagal launchactivities in Europe and the expansion of the Company’s global commercialinfrastructure including sales, marketing and distribution capabilities andincreased administrative facility costs. During the second half of 2002, selling, general and administrativecosts are expected to increase significantly in anticipation of a possiblelaunch of Replagal in the United States. In addition, with the completion of the new corporate headquartersdiscussed above, selling, general and administrative occupancy costs willcontinue to increase significantly in 2002.

 

Net interest income was $2,248,000 and $2,864,000 forthe three months ended June 30, 2002 and 2001, respectively.  The average cash and marketable securitiesbalances were $351,517,000 and $213,082,000for the three months ended June 30, 2002 and 2001, respectively.  Despite higher average cash and marketablesecurities balances for the second quarter of 2002, interest income decreasedby $616,000 as a result of significantly lower rates of return in the secondquarter of 2002.

 

The Company had a net loss of $42,881,000 and$21,065,000 for the three months ended June 30, 2002 and 2001, respectively.Basic and diluted net loss per share was $1.24 for the three months ended June30, 2002, as compared to a basic and diluted net loss per share of $0.92 forthe corresponding period in 2001.  As notedabove, included in the loss for the second quarter of 2002 is an intellectualproperty license fee expense of $26 million which increased basic and dilutednet loss per share by $0.75.

 

For the three months ended June 30, 2002 and 2001,weighted average shares outstanding were 34,462,000 and 22,859,000,respectively.   The increase in weightedaverage shares outstanding reflects the sale of 7,785,000 common shares fromthe Company’s public offerings of Common Stock in June and December 2001 andthe issuance of 3,571,000 shares of Common Stock upon the conversion of all ofthe then outstanding Series A Convertible Preferred Stock in November 2001.

 

*For theSix Months Ended June 30, 2002 and 2001*

 

Product sales totaled $14,840,000 for the six monthsended June 30, 2002.* *Forthe six months ended June 30, 2001, the Company recognized product revenue of$297,000 from compassionate use sales of Replagal in Europe.

 

License and research revenues totaled $635,000 and$1,628,000 for the six months ended

 

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June 30, 2002 and 2001, respectively. License and research revenues in 2002 and 2001 were earned primarilyunder the Company’s collaboration agreements with Wyeth and Sumitomo.

 

Cost of goods sold was $2,198,000, or 15% of productsales, for the six months ended June 30, 2002.   For the six months ended June 30, 2001, there were no costs ofgoods sold. Inventory and components of inventory, which were previouslyexpensed as a research and development cost prior to marketing approval inAugust 2001, were sold in 2001 and in the first half of 2002.  As of June 30, 2002, this inventory has beenfully utilized.

 

Research and development expenses totaled $39,277,000in the first six months of 2002, as compared to $35,311,000 during the sameperiod in 2001.  The increase in 2002was $3,966,000, or 11%.  In addition,the Company capitalized $9,167,000 of Replagal production costs as inventoryduring the first half of 2002 that, prior to product approval in August 2001, wouldhave been included in research and development expenses.  Increases in research and developmentspending in 2002 were primarily due to increased hiring of research anddevelopment staff, an expenditure of $5.5 million related to set-up andtechnology transfer fees to a contract manufacturer and increased occupancycosts related to the Company’s new headquarters.

 

The expenses associated with the Company’s fourlargest research and development programs totaled approximately 85% of totalresearch and development expenses for the six months ended June 30, 2002 and88% of total research and development expenses for the corresponding period in2001.

 

In June 2002, the Company obtained an exclusivelicense to certain intellectual property from Cell Genesys related to theirapproach to gene activation. For the six months ended June 30, 2002, theCompany incurred a license fee of $26 million.

 

Selling, general and administrative expenses were$13,899,000 for the six months ended June 30, 2002, compared with $10,790,000during the same period in 2001.  Theincrease in 2001 of $3,109,000, or 29%, was principally****due to costs incurred inpreparation for worldwide launch of the Company’s Replagal product andincreased administrative facility costs.

 

Net interest income was $4,551,000 and $6,294,000 forthe six months ended June 30, 2002 and 2001, respectively.  For the six months ended June 30, 2002 and2001, the average cash and marketable securities balances were $368,183,000 and$223,395,000,respectively.  Despite higheraverage cash and marketable securities balances in 2002, interest incomedecreased by $1,743,000 as a result of significantly lower rates of return in2002.

 

During the six months ended June 30, 2001, TKT soldsubstantially all of its investment in a European biotechnology companyresulting in a gain of $2,785,000.  In1996, TKT made a strategic investment of $300,000 in such company.

 

The Company had a net loss of $61,348,000 and$35,097,000 for the six months ended June 30, 2002 and 2001, respectively.Basic and diluted net loss per share was $1.78 for the six months ended June30, 2002, as compared to a basic and diluted net loss per share of $1.54 forthe corresponding period in 2001. Included in the loss for the six months ended June 30, 2002 is

 

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an intellectual property license fee expense of $26 million whichimpacted basic and diluted net loss per share by $0.76 per share.

 

For the six months ended June 30, 2002 and 2001,weighted average shares outstanding were 34,397,000 and 22,789,000,respectively.   The increase in weightedaverage shares outstanding reflects the sale of 7,785,000 common shares fromthe Company’s public offerings of Common Stock in June and December 2001 andthe issuance of 3,571,000 shares of Common Stock upon the conversion of all ofthe then outstanding Series A Convertible Preferred Stock in November 2001.

 

LIQUIDITY AND SOURCES OF CAPITAL

 

Since its inception, the Company has financed itsoperations through the sale of Common and Preferred Stock, borrowings underdebt agreements, revenues from collaborative agreements, interest income, and,more recently, with the sale of Replagal.

 

The Company had cash, cash equivalents and marketablesecurities totaling $326,619,000 at June 30, 2002, including restrictedmarketable securities collateralizing letters of credit totaling$8,123,000.  Cash equivalents andmarketable securities are invested in United States government and agencyobligations and money market funds.

 

Substantial additional funds may be required tosupport the Company’s research and development programs, acquisition oftechnologies, preclinical and clinical testing of its products, pursuit ofregulatory approvals, acquisition of capital equipment, expansion of laboratoryand office facilities, expansion of manufacturing capabilities, selling,general and administrative expenses and the buyout of the minority interests inTKT Europe – 5S AB (“TKT Europe”), if applicable, as discussed below.

 

The Company expects that its existing capitalresources, together with cash from collaborative agreements, product sales, andinterest income, will be sufficient to fund its operations through at least2004.  The Company’s cash requirementsfor operating activities, financing activities and investment activities haveexceeded its internally generated funds. The Company expects that its cash requirements for such activities willcontinue to exceed its internally generated funds until it is able to generatesubstantial product sales, particularly because it expects operating expensesto continue to increase in the future, including its research and developmentexpenses, as its product development efforts accelerate.

 

The Company’s cash requirements may vary depending ona number of factors, including Replagal product sales, costs associated withthe manufacture, marketing and sale of Replagal, expenses related to theCompany’s research and development efforts, the timing of approvals, ifgranted, to market the Company’s products either in the United States orabroad, the ability of the Company to access capital markets, the timing ofadditional license fees and milestone payments under existing collaborativeresearch agreements and the establishment of additional collaborative researchagreements, if any.

 

Until such time, if any, as the Company’s operationsgenerate significant product sales, the Company will seek to fund operationswith cash resources, interest income, proceeds from

 

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equity offerings, and debt financings, and funding from collaborativeagreements. Lack of necessary funds may require the Company to delay, scaleback or eliminate some or all of its research and product development programsor to license its potential products or technologies to third parties.

 

The Company may pursue opportunities to obtainadditional financing in the future through equity financings, debt financings,lease arrangements related to facilities and capital equipment, and collaborativeresearch agreements.  The source, timingand availability of any future financing will depend principally upon equityand debt market conditions, interest rates and, more specifically, on theCompany’s continued progress in its exploratory, preclinical, and clinicaldevelopment programs, and the extent of its commercial success.  There can be no assurance that such fundswill be available on favorable terms, if at all.

 

In December 2001, the Company sold 4,220,000 shares ofits Common Stock resulting in net proceeds to the Company of $158,945,000.

 

In June 2001, the Company sold 3,565,000 shares of itsCommon Stock resulting in net proceeds to the Company of $96,161,000.

 

In January 2001, the Company purchased a manufacturingfacility for $8,800,000 and leased an adjoining facility. The Company expectsto make improvements to these facilities, which could total approximately$30,000,000 in 2002 and 2003.  TheCompany expects that these facilities will be used to manufacture one or moreof the proteins in its product pipeline.

 

The Company may seek financing for all or asignificant portion of the cost of the leasehold improvements describedabove.  There can be no guarantee thatfinancing will be available on favorable terms, if at all.

 

In August 2000, the Company entered into a lease for anew corporate headquarters and research and development facility in Cambridge,Massachusetts.  The Company expects tospend approximately $20,000,000 for leasehold improvements and equipment forthe remainder of 2002 to outfit the building.

 

In April 2000, the Company entered into an agreementwith stockholders of TKT Europe to establish the Company’s European sales andmarketing subsidiary.   Prior to thisagreement, these stockholders were neither employees nor affiliated parties ofthe Company.  These stockholders are theprincipal managers of TKT Europe and own a 20% interest in it, while theCompany owns the remaining 80% interest. The agreement includes provisions entitling the Company to purchase thestockholders’ ownership interest in TKT Europe in August 2004, under aspecified formula.  Should the Companynot exercise that right, the stockholders of TKT Europe can require the Companyto purchase its ownership interest sixty days thereafter.  The buy out price is equal to (a) 20% ofoperating profits of TKT Europe, as defined, for the period from September 1,2003 to August 31, 2004, multiplied by a buy-out factor of four, subject toadjustment, plus (b) 20% of the accumulated positive earnings of TKT Europe.** **As a result, the amount of thebuy out price will be dependent on the revenues and profits of TKT Europe,primarily from the commercial success of Replagal in Europe. These revenues andprofits cannot be estimated at this time.

 

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In June 2002, the Company obtained an exclusivelicense to certain intellectual property from Cell Genesys, related to theirapproach to gene activation. For the quarter ended June 30, 2002, the Companyincurred a license fee expense of $26 million, which was funded with $11million in cash and $15 million worth of shares of the Company’s CommonStock.  Cell Genesys also has thepotential to receive certain milestone payments contingent upon the outcome ofrelated patent matters.   The Company isnot required to make royalty payments under the agreement.

 

At June 30, 2002, the Company had committed to payapproximately $43,050,000 to third parties for certain product developmentactivities through 2004.  The Companyhas the right to terminate the agreements upon six months written notice.

 

At December 31, 2001, the Company had net operatingloss carryforwards of approximately $200,075,000, which expire at various timesthrough 2022.  Due to the degree ofuncertainty related to the ultimate use of loss carryforwards and tax credits,the Company has fully reserved against any potential tax benefit.  The future utilization of net operating losscarryforwards and tax credits may be subject to limitation under the changes instock ownership rules of the Internal Revenue Code.  Because of this limitation, it is possible that taxable income infuture years, which would otherwise be offset by net operating losses, will notbe offset and, therefore, will be subject to tax.

 

The Company has been engaged in patent litigation withGenzyme and Mount Sinai with respect to the development of Replagal.  As ofJune 30, 2002, the Company had incurred approximately $4.3 million inlitigation expenses associated with the Replagal litigation.

 

In addition, the Company andAventis have been involved in a patent infringement action with Amgenand Kirin-Amgen with respect to the development of Dynepo.  Thelitigation is costly and the Company is required to reimburse Aventis, which ispaying the litigation expenses, for 50% of the expenses.  Aventis is entitled to deduct up to 50% ofany royalties due to the Company from the sale of Dynepo until Aventis hasrecouped the full amount of TKT’s share of litigation expenses.  The Company currently estimates that its shareof the expenses associated with the litigation will total between approximately$5 million and $10 million by the time the matter is finally adjudicated.Although Dynepo was approved by the European Agency for the Evaluation forMedicinal Products in March 2002, the launch of Dynepo has not been planned dueto the uncertainty of the outcome of litigation in the United States.

 

The Company can provide no assurance as to the outcomeof these proceedings.  A decision by acourt in any jurisdiction in a manner adverse to the Company would have amaterial adverse effect on the Company’s business, financial condition, and theresults of operations.

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934 that involve risks and uncertainties

 

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The Company may, in some cases, use words such as“project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,”“should,” “would,” “could,” “will,” or “may,” or other words that conveyuncertainty of future events or outcomes to identify these forward–lookingstatements. There are a number of important factors that could cause actualresults to differ materially from the results anticipated by theseforward–looking statements. These important factors include those set forthbelow under “Certain Factors That May Affect Future Results.”  These factors and the other cautionarystatements made in this quarterly report should be read as being applicable toall related forward–looking statements wherever they appear in this quarterlyreport. If one or more of these factors materialize, or if any underlyingassumptions prove incorrect, the Company’s actual results, performance orachievements may vary materially from any future results, performance orachievements expressed or implied by these forward–looking statements. Inaddition, any forward-looking statements represent the Company’s estimates onlyas of the date this quarterly report was filed with the Securities and ExchangeCommission and should not be relied upon as representing the Company’sestimates as of any subsequent date.  While the Company may elect to updateforward-looking statements at some point in the future, the Companyspecifically disclaims any obligation to do so, even if its estimates change.

 

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

 

The following important factors could cause actualresults to differ from those indicated by forward-looking statements made bythe Company from time to time.

 

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**RISK FACTORS**

*                Investingin our common stock involves a high degree of risk. You should carefullyconsider the risks and uncertainties described below before purchasing ourcommon stock. If any of the following risks actually occur, our business,financial condition or results of operations would likely suffer. In that case,the trading price of our common stock could fall, and you could lose all orpart of the money you paid to buy our common stock.*

**Regulatory Risks**

***We may not be able to obtain marketingapprovals for our products.***

                We are not able to market any ofour products in Europe, the United States or in any other jurisdiction withoutmarketing approval from the European Agency for the Evaluation of MedicinalProducts, the United States Food and Drug Administration, or FDA, or anyequivalent foreign regulatory agency. The regulatory process to obtain marketapproval for a new drug or biologic takes many years and requires theexpenditure of substantial resources. We have had only limited experience inpreparing applications and obtaining regulatory approvals.

                Replagal was granted marketing authorizationin the fifteen countries of the European Union by the European Commission inAugust 2001, approximately one year after we submitted our MarketingAuthorization Application to the European Agency for the Evaluation ofMedicinal Products and approximately five years after we filed ourInvestigational New Drug application with the FDA. We have also receivedapproval to market Replagal in a number of other countries.

                In the United States, wesubmitted a Biologics License Application to the FDA seeking marketingauthorization for Replagal. In January 2001, the FDA issued a completereview letter regarding the Biologics License Application. The FDA letterstated that the data that we had provided was not adequate for approval of theBiologics License Application at that time and requested additionalinformation. In response to this letter, we have discussed the BiologicsLicense Application with the FDA and have submitted additional data.

                On September 27, 2002, theFDA’s Endocrinologic and Metabolic Drugs Advisory Committee is scheduled tomeet to evaluate our Biologics License Application for Replagal. FDA AdvisoryCommittees provide the FDA with independent advice on marketing applications.The FDA generally follows the recommendations of its Advisory Committees, butis not bound to do so. The Advisory Committee is scheduled to meet to discussGenzyme’s competing drug for the treatment of Fabry disease onSeptember 26, 2002.

                After the Advisory Committeemeets, the FDA may either approve our Biologics License Application or declineto approve it. If it declines to approve the Biologics License Application, theFDA may request additional information, possibly including data from additionalclinical trials.

                During 2000, Aventis submitted aMarketing Authorization Application to the European Agency for the Evaluationof Medicinal Products seeking marketing authorization of Dynepo in the EuropeanUnion for the treatment of anemia associated with kidney disease. InMarch 2002, the European Commission granted marketing approval of Dynepoin the European Union.

                Also during 2000, Aventissubmitted a Biologics License Application to the FDA seeking marketingauthorization for Dynepo in the United States. The FDA did not accept thisBiologics License Application for filing, requesting that Aventis provideadditional manufacturing data. Aventis is currently accumulating these dataand, when complete, we expect that Aventis will submit a new Biologics LicenseApplication.

                There can be no assurance as towhether or when any of these applications for marketing authorization relatingto Replagal and Dynepo, or additional applications for marketing authorization

 

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that wemay make in the future as to these or other products, will be approved by therelevant regulatory authorities.

***If we fail to comply with the extensiveregulatory requirements to which our products are subject, we could be subjectto adverse consequences and penalties.***

                The testing, manufacturing, labeling,advertising, promotion, export, and marketing, among other things, of ourproducts are subject to extensive regulation by governmental authorities inEurope, the United States, and elsewhere throughout the world.

                In general, there can be noassurance that submission of materials requesting permission to conductclinical trials will result in authorization by the European Agency for theEvaluation of Medicinal Products, the FDA or equivalent foreign regulatoryagency to commence clinical trials, or that once clinical trials have begun,testing will be completed successfully within any specific time period, if atall, with respect to any of our products. Once trials are complete and anapplication has been submitted to the relevant regulatory agency, theregulatory agency may deny the application if applicable regulatory criteriaare not satisfied, or may require additional testing or information.

                If regulatory approval of aproduct is granted, such approval may be subject to limitations on the indicateduses for which the product may be marketed or contain requirements for costlypost-marketing testing and surveillance to monitor the safety or efficacy ofthe product. As to any product for which we obtain marketing approval, theproduct, the facilities at which the product is manufactured, any post-approvalclinical data and our promotional activities will be subject to continualreview and periodic inspections by the European Agency for the Evaluation ofMedicinal Products, the FDA and other regulatory authorities.

                In addition to regulationsadopted by the FDA, the European Agency for the Evaluation of MedicinalProducts and other foreign regulatory authorities, we are also subject toregulation under the Occupational Safety and Health Act, the Toxic SubstancesControl Act, the Resource Conservation and Recovery Act, and other federal,state, or local regulations. We expend significant funds, time and otherresources in our effort to comply with applicable regulatory requirements.

                Violations of regulatoryrequirements may result in various adverse consequences, including the EuropeanAgency for the Evaluation of Medicinal Products’ or FDA’s delay in approving orrefusal to approve a product, suspension or withdrawal of an approved productfrom the market, operating restrictions, or the imposition of civil or criminalpenalties.

***We may not be able to obtain orphan drugexclusivity for our Niche Protein products. If our competitors are able toobtain orphan drug exclusivity before us, we may be precluded from marketingour Niche Protein products.***

                Some jurisdictions, includingEurope and the United States, may designate drugs for relatively small patientpopulations as “orphan drugs.” Orphan drug designation must be requested beforesubmitting a Biologics License Application. Orphan drug designation does notconvey any advantage in, or shorten the duration of, the regulatory review andapproval process but does make the product eligible for orphan drugexclusivity. 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 applications to market the same product for thesame use may not be approved, except in very limited circumstances, for aperiod of up to 10 years in Europe and for a period of seven years in theUnited States. Obtaining orphan drug designations and orphan drug exclusivityfor our Niche Protein products may be critical to the success of this platform.Even if we obtain orphan drug exclusivity for any of our potential products, wemay not be able to maintain it. For example, if a competitive product is shownto be clinically superior to our product, any orphan drug exclusivity we haveobtained will not apply to

 

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suchcompetitive product. Our competitors may also seek and obtain orphan drugexclusivity for products competitive with our products before we obtainmarketing approval.

                Replagal was granted marketingauthorization in the fifteen countries of the European Union by the EuropeanCommission in August 2001. A competitive product for the treatment ofpatients with Fabry disease, marketed by Genzyme, was also granted marketingauthorization in the European Union. Both Replagal and Genzyme’s competingproduct were granted co-exclusive orphan drug status in the European Union forup to 10 years.

                In the United States, both weand Genzyme have received orphan drug designation for our respective productsfor Fabry disease. Whichever product is the first to receive FDA marketingapproval would likely receive orphan drug exclusivity for that product. Once aproduct receives orphan drug exclusivity, the FDA may not approve any otherapplications to market the same class of product for Fabry disease for a periodof seven years, except in limited circumstances.

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

                In order to obtain regulatoryapprovals for the commercial sale of our potential products, we and ourcollaborators will be required to complete extensive clinical trials in humansto demonstrate the safety and efficacy of our products. We may not be able toobtain authority from the European Agency for Evaluation to Medicinal Products,the FDA or other regulatory agencies to commence or complete these clinicaltrials.

                The results from preclinicaltesting of a product that is under development may not be predictive of resultsthat will be obtained in human clinical trials. In addition, the results ofearly human clinical trials may not be predictive of results that will beobtained in larger scale, advanced stage clinical trials. Furthermore, we, oneof our collaborators, or a regulatory agency with jurisdiction over the trialsmay suspend clinical trials at any time if the subjects or patientsparticipating in such trials are being exposed to unacceptable health risks, orfor other reasons.

                The rate of completion ofclinical trials is dependent in part upon the rate of enrollment of patients.Patient accrual is a function of many factors, including the size of thepatient 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 Niche Protein products are small. Forinstance, we believe there are up to 5,000 patients worldwide afflicted withHunter syndrome and up to 5,000 patients worldwide afflicted with Fabrydisease. We are currently conducting clinical trials of iduronate-2-sulfatasefor the treatment of Hunter syndrome and Factor VIII gene therapy for thetreatment of Hemophilia A. Delays in planned patient enrollment may result inincreased costs and prolonged clinical development.

                We and our collaborators may notbe able to successfully complete any clinical trial of a potential productwithin any specified time period. In some cases, we may not be able to completethe trial at all. Moreover, clinical trials may not show our potential productto be both safe and efficacious. Thus, the European Agency for Evaluation toMedicinal Products, the FDA and other regulatory authorities may not approveany of our potential products for any indication.

***Because gene therapy is a relatively newtechnology and gene therapy products have not been extensively tested inhumans, we may face delays and incur increased costs in the regulatory processrelated to our gene therapy products.***

                We are developing gene therapyproducts. Because gene therapy is a relatively new technology and products forgene therapy have not been extensively tested in humans, the regulatoryrequirements governing gene therapy products may be more uncertain than forother types of products. This uncertainty may cause delays in the regulatoryprocess relating to our gene therapy products, including

 

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delays inour initiating clinical trials of these products. This uncertainty may alsoincrease the cost of obtaining regulatory approvals of our gene therapyproducts.

***Ethical and social issues may causeregulatory authorities to increase the regulation of gene therapy clinicaltrials, which may impair our ability to conduct gene therapy clinical trials inthe future.***

                No patients in our gene therapyclinical trials of Factor VIII for the treatment of hemophilia A haveexperienced any serious adverse events that have been judged to be related toour gene therapy products. However, due to adverse events that have occurredduring some gene therapy clinical trials conducted by other biotechnology andpharmaceutical companies and institutions, the Federal government, the EuropeanAgency for Evaluation to Medicinal Products, the FDA, industry organizations,and institutions conducting gene therapy clinical trials have grownincreasingly concerned about the safety of these clinical trials. An increasedconcern over gene therapy trials generally may lead the Federal government, theEuropean Agency for Evaluation to Medicinal Products, the FDA or otherregulatory agencies to impose further regulation on gene therapy clinicaltrials. If further regulations are imposed on gene therapy research generally,the delays and costs involved in complying with such regulations may impair ourability to conduct gene therapy clinical trials in the future.

**Patent Litigation and Intellectual PropertyRisks**

***We are a party to litigation with Genzymeand Mount Sinai involving Replagal which could preclude us from manufacturingor selling Replagal.***

                Since July 2000, we havebeen involved in patent litigation relating to Replagal brought by Genzyme andMount Sinai in the U.S. District Court for the District of Delaware regarding apatent licensed by Genzyme from Mount Sinai. In January 2002, the DelawareDistrict Court dismissed this patent litigation, granting our motion forsummary judgment of non-infringement and denying Genzyme’s motion for summaryjudgment of infringement. In March 2002, Genzyme appealed the ruling tothe U.S. Federal Circuit Court of Appeals. If Genzyme is successful in itsappeal, the case will be remanded to the Delaware District Court for furtherproceedings on non-infringement and invalidity issues. If we were to ultimatelylose this case after trial and appeal, we would be precluded from making, usingand selling Replagal. We can provide no assurance as to the outcome of thislitigation. As of March 31, 2002, we have incurred approximately$4.1 million in litigation expenses associated with the Replagallitigation.

***We are a party to litigation with Amgen andKirin-Amgen involving Dynepo which could preclude us from manufacturing orselling Dynepo.***

                In April 1997, Amgen commenceda patent infringement action against us and Aventis in the U.S. District Courtfor the District of Massachusetts. In January 2001, the MassachusettsDistrict Court concluded that Dynepo infringed 8 of the 18 claims of patentsasserted by Amgen. Amgen did not seek and was not awarded monetary damages. Weand Aventis have filed an appeal of the decision with the U.S. Federal CircuitCourt of Appeals. Amgen has also appealed this decision. If we are notsuccessful in our appeal, we and Aventis would be precluded from making, usingand selling Dynepo in the United States.

                In addition, in July 1999,we and Aventis commenced legal proceedings in the U.K. against Kirin-Amgen,seeking a declaration that a U.K. patent held by Kirin-Amgen will not beinfringed by our activities related to Dynepo and that certain claims ofKirin-Amgen’s U.K. patent are invalid. In April 2001, the High Court ofJustice in the United Kingdom ruled that Dynepo infringed one of four claims ofa patent asserted by Kirin-Amgen. In July 2002, the Court of Appeals in theUnited Kingdom reversed the High Court of Justice and ruled that Dynepo did notinfringe Kirin-Amgen’s patent. Kirin-Amgen may appeal this decision.

 

 

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                We can provide no assurance asto the outcome of either litigation. In addition, the launch of Dynepo has notbeen planned due to the uncertainty of the outcomes of the litigation. Thelitigation is costly and we are required to reimburse Aventis, which is payingthe litigation expenses, for 50% of the expenses. Aventis is entitled to deductup to 50% of any royalties due to us from it with respect to the sale of Dynepountil Aventis has recouped the full amount of our share of litigation expenses.We currently estimate that our share of the expenses associated with thelitigation will total between approximately $5 million and$10 million by the time the matter is finally adjudicated.

***We may become involved in additional andexpensive patent litigation or other proceedings.***

                The biotechnology industry hasbeen characterized by significant litigation, and interference and otherproceedings regarding patents, patent applications, and other intellectualproperty rights. We may become a party to additional patent litigation andother proceedings with respect to our Niche Protein products, Gene-Activatedproteins, Transkaryotic gene therapy technology or other technologies. Suchlitigation could result in liability for damages, prevent our development andcommercialization efforts, and divert management’s attention and resources.

                An adverse outcome in any patentlitigation or other proceeding involving patents could subject us tosignificant 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 of any patentlitigation or other proceeding, even if resolved in our favor, could besubstantial. 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 will depend in largepart on our ability to obtain patent protection for our processes and productsin the United States and other countries. The patent situation in the field ofbiotechnology generally is highly uncertain and involves complex legal,scientific and factual questions. We may not be issued patents relating to ourtechnology. Even if issued, patents may be challenged, invalidated, orcircumvented. Our patents also may not afford us protection against competitorswith similar technology. Because patent applications in the United States aremaintained in secrecy until patents issue, third parties may have filed ormaintained patent applications for technology used by us or covered by ourpending patent applications without our being aware of these applications.

                We may not hold proprietaryrights to certain product patents, process patents, and use patents related toour products or their methods of manufacture. In some cases, these patents maybe owned or controlled by third parties. As a result, we may be required toobtain licenses under third party patents to market certain of our potentialproducts. If licenses are not available to us on acceptable terms, we may notbe able to market these products.

                As of June 30, 2002, weowned 27 issued U.S. patents and 95 corresponding issued foreign patents. As ofJune 30, 2002, we licensed 13 issued U.S. patents and additionalcorresponding foreign patents. The patents owned or licensed by us expire atvarious dates through 2020 and cover our Niche Protein products, Gene-Activatedprotein products and gene therapy products.

 

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***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 upon unpatentedproprietary technology, processes, and know-how. We seek to protect thisinformation 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 any of ourobligations under any of the agreements under which we licensecommercialization rights to products or technology from third parties, we couldlose license rights that are important to our business.***

                We are a party to 13 patentlicenses that are important to our business and expect to enter into additionalpatent licenses in the future. These licenses impose various commercialization,sublicensing, royalty, insurance, and other obligations on us. If we fail to complywith these obligations, the licensor may have the right to terminate thelicense and we may not be able to market products that were covered by thelicense.

**Business Risks**

***Our revenue from product sales is dependenton the commercial success of Replagal***

                During 2001, we receivedmarketing authorizations for our first product. Replagal was granted marketingauthorization in the European Union in August 2001. We have also receivedapproval to market Replagal in seven other countries. We expect that Replagal willaccount for all of our product sales into 2004, at the earliest. ThroughMarch 31, 2002, we had recorded $9.6 million of product sales fromthe sale of Replagal.

                The commercial success ofReplagal will depend on its acceptance by physicians, patients and other keydecision-makers for the treatment of Fabry disease. If Replagal does notgenerate significant product sales, we will be required to fund operations withcash resources, interest income, proceeds from equity offerings and debtfinancings and funding from collaborative agreements.

***The market may not be receptive to ourproducts upon their introduction.***

                The commercial success of any ofour products for which we obtain marketing approval from the European Agencyfor Evaluation to Medicinal Products, the FDA, and other regulatory authoritieswill depend upon their acceptance by patients, the medical community and thirdparty payors as clinically effective, safe and cost-effective. It may bedifficult for us to achieve market acceptance of our products.

 

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

 

•              the timing of the receipt of marketing approvals;

•           thecountries in which such approvals are obtained; and

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

 

***We have limited experience and resources inmanufacturing and will incur significant costs to develop this experience orrely on third parties to manufacture our products on our behalf.***

                We have limited manufacturingexperience and in order to continue to develop products, apply for regulatoryapprovals, and commercialize our products, we will need to develop, contractfor, or otherwise arrange for the necessary manufacturing capabilities. Wecurrently use, and expect to continue to use in the future, internalmanufacturing and contract manufacturing by third parties to meet ourproduction requirements for preclinical testing, clinical trials, andcommercial supply.

                To the extent that we are aparty to manufacturing arrangements with third parties, we will be dependentupon these third parties to perform their obligations in a timely manner and inaccordance with applicable government regulations. There are a limited numberof such third-party manufacturers capable of manufacturing our protein productswith a limited amount of production capacity. As a result, we may experiencedifficulty in obtaining adequate manufacturing capacity for our needs. If weare unable to obtain or maintain contract manufacturing of these products, orto do so on commercially reasonable terms, we may not be able to completedevelopment of these products or market them.

                To the extent that we elect notto or cannot contract for third-party manufacturing for any of our products, wewill need to manufacture these products in our own manufacturing facilities. Wehave limited manufacturing experience. We are investing, and may need to investin the future, substantial additional funds to build our own manufacturingfacilities and need to recruit qualified personnel in order to build or leaseand operate any manufacturing facilities. There can be no assurance that wewill be 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.

                Any manufacturing of ourproducts must comply with the FDA’s Good Manufacturing Practices. Beforeapproving a Biologics License Application for a product, the FDA will inspectthe facilities at which the product is manufactured. If the FDA determines thatwe or our third party manufacturers do not comply with Good Manufacturing Practices,the FDA may refuse to approve our future Biologics License Applications,require additional testing or information, or require post-marketing testingand surveillance to monitor the safety or efficacy of a product. Once the FDAapproves a product, we or our third party manufacturers must continue to complywith Good Manufacturing Practices. If we or our third party manufacturers failto maintain compliance with Good Manufacturing Practices, the FDA could imposefines on us or restrictions on a product or on us, including requiring us towithdraw a product from the market. We expend significant funds, time andeffort in the area of production and quality control to maintain compliancewith Good Manufacturing Practices.

***If we fail to obtain an adequate level ofreimbursement by third party payors for our products, we may not havecommercially viable markets for our products.***

                In certain countries,particularly the countries of the European Union, the pricing of prescriptionpharmaceuticals and the level of reimbursement are subject to governmentalcontrol. In the United States, the availability of reimbursement bygovernmental and other third party payors affects the market for anypharmaceutical product. These third party payors continually attempt to containor reduce the costs of health care by challenging the prices charged formedical products and services.

 

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                We expect that the prices formany of our products, when commercialized, including in particular, our NicheProtein products, may be high compared to other pharmaceutical products. Wehave established pricing and reimbursement in substantially all countries inwhich Replagal has been approved. The price established averages approximately$165,000 per patient per year. We have not received any revenues from the saleof Replagal in the countries where we have received marketing approval but havenot established reimbursement. We do not expect to receive any revenues inthose countries until reimbursement is established. The price of our productsmay make reimbursement more difficult to obtain, if it can be obtained at all.

                The Centers for Medicare andMedicaid Services of the United States Department of Health and Human Serviceshas considered proposals from time to time to reduce the reimbursement ratewith respect to erythropoietin. If Dynepo is approved and commercialized,adoption by the Centers for Medicare and Medicaid Services of any such proposalmight have an adverse effect on the pricing of Dynepo.

                We also may experience pricingpressure with respect to Replagal and other products for which we may obtainmarketing approval due to the trend toward managed health care, the increasinginfluence of health maintenance organizations and legislative proposals. We maynot be able to sell our products profitably if reimbursement is unavailable orlimited in scope or amount.

***We face significant competition, which mayresult in others discovering, developing or commercializing products before, ormore successfully, than we do.***

                The biotechnology industry ishighly competitive and characterized by rapid and significant technologicalchange. Our competitors include pharmaceutical companies, biotechnology firms,universities, and other research institutions. Many of these competitors havesubstantially greater financial and other resources than we do and areconducting extensive research and development activities on technologies andproducts similar to, or competitive, with ours.

                We may be unable to developtechnologies 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 andGenzyme, could delay our time to market or preclude us from reaching the marketfor certain products and enable our competitors to more quickly and effectivelypenetrate certain markets.

*                NicheProtein Products.*    Formany of the disease targets of our Niche Protein product platform, there iscurrently no cure or effective treatment. Treatments generally are focused onthe management of the disease’s symptoms. In general, we believe that thesediseases represent markets too small to attract the resources of largerpharmaceutical companies but may provide attractive commercial opportunities tosmaller companies.

                We believe that the primarycompetition with respect to our Niche Protein product program is frombiotechnology and smaller pharmaceutical companies. Competitors includeBioMarin Pharmaceutical Inc., Genzyme, and Oxford GlycoSciences plc. Themarkets for some of the potential Niche Protein products are quite small. As aresult, if competitive products exist, we may not be able to successfullycommercialize our products.

                We believe that our primarycompetition with respect to Replagal is Genzyme. Replagal was granted marketingauthorization in the fifteen countries of the European Union by the EuropeanCommission in August 2001. A competitive product for the treatment ofpatients with Fabry disease, marketed by Genzyme, was also granted marketingauthorization in the European Union. Both Replagal and Genzyme’s competingproduct were granted co-exclusive orphan drug status in the European Union forup to 10 years.

 

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                In the United States, both weand Genzyme have received orphan drug designation for our respective productsfor Fabry disease. Whichever product is the first to receive FDA marketingapproval would likely receive orphan drug exclusivity for that product. Once aproduct receives orphan drug exclusivity, the FDA may not approve any otherapplications to market the same class of product for Fabry disease for a periodof seven years, except in limited circumstances.

*                Gene-ActivatedProtein Products.*    Inour Gene-Activated protein program, we are developing potentially improvedversions of proteins that are currently marketed and proteins that have nocurrently-marketed counterparts. For instance, in the case of Dynepo,erythropoietin and competing products are marketed by Amgen, Johnson &Johnson, F. Hoffmann-La Roche Ltd. (Boehringer Mannheim GmbH), SankyoCompany Ltd., Chugai Pharmaceutical Co., Ltd., and the pharmaceuticaldivision of Kirin Brewery Co., Ltd.

                Many of the protein productsagainst which our Gene-Activated proteins would compete have well-known brandnames, have been promoted extensively and have achieved market acceptance bythird-party payors, hospitals, physicians, and patients. In addition, many ofthe companies that produce these protein products have patents coveringtechniques used to produce these products, which have served as effectivebarriers to entry in the therapeutic proteins market. As with Amgen and itserythropoietin product, these companies may seek to block our entry into themarket by asserting that our Gene-Activated proteins infringe their patents.Many of these companies are also seeking to develop and commercialize new orpotentially improved versions of their proteins.

*                GeneTherapy.*    Ourgene therapy system will have to compete with other gene therapy systems, aswell as with conventional methods of treating the diseases and conditionstargeted. Although no gene therapy product is currently marketed in the UnitedStates, a number of companies, including major biotechnology and pharmaceuticalcompanies, as well as development stage companies, are actively involved inthis field.

***Competition for technical, commercial andadministrative personnel is intense in our industry and we may not be able tosustain our operations or grow if we are unable to attract and retain keypersonnel.***

                Our success is highly dependenton the retention of principal members of our technical, commercial, andadministrative staff including, in particular, Dr. Richard F Selden, ourfounder and President and Chief Executive Officer. We are a party to an employmentagreement with Dr. Selden, but this agreement may be terminated by us orDr. Selden for any reason or no reason at any time upon notice to theother party. We do not have key man life insurance for Dr. Selden.

                Our future growth will requirehiring a significant number of qualified technical, commercial andadministrative personnel. Accordingly, recruiting and retaining such personnelin the future will be critical to our success. There is intense competitionfrom other companies and research and academic institutions for qualifiedpersonnel in the areas of our activities. If we are not able to continue toattract and retain, on acceptable terms, the qualified personnel necessary forthe continued development of our business, we may not be able to sustain ouroperations or grow.

***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 limited sales andmarketing experience and capabilities. In order to market our products,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

 

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torecruit and maintain an effective sales force. Currently, our 80% ownedsubsidiary, TKT Europe, markets Replagal in Europe. Under our agreement withAventis, Aventis is responsible for the sale and marketing of Dynepo. Due tothe uncertainty of the outcomes of the ongoing litigation, the launch of Dynepohas not been planned.

***We depend on our collaborators to develop,conduct clinical trials, obtain regulatory approvals for, and manufacture,market and sell certain products on our behalf and none of their efforts may bescientifically or commercially successful.***

                We are parties to collaborativeagreements with third parties relating to certain of our principal products. Weare relying on Aventis to develop, conduct clinical trials, obtain regulatoryapprovals for, and manufacture, market, and sell Dynepo in the United Statesand Europe; Sumitomo Pharmaceuticals Co., Ltd. to develop andcommercialize Replagal for Fabry disease in Japan and other Asian countries;and Genetics Institute, Inc. to co-develop and commercialize Factor VIIIgene therapy for hemophilia A in Europe. Our collaborators may not devote theresources necessary or may otherwise be unable or unwilling to completedevelopment and commercialization of these potential products. Our existingcollaborations are subject to termination without cause on short notice underspecified circumstances.

                Our existing collaborations andany future collaborative arrangements with third parties may not bescientifically or commercially successful. Factors that may affect the successof our collaborations include the following:

•                                          ourcollaborators 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 inmarketing or sales efforts or a discontinuation of marketing or sales of ourproducts by our collaborators would reduce our revenues, which will be based ona percentage of net sales by the collaborator;

•                                          ourcollaborators may terminate their collaborations with us, which could make itdifficult for us to attract new collaborators or adversely affect theperception of us in the business and financial communities; and

•                                          ourcollaborators may pursue higher priority programs or change the focus of theirdevelopment programs, which could affect the collaborator’s commitment to us.

***We may be exposed to product liabilityclaims and may not be able to obtain adequate product liability insurance.***

                Our business exposes us to therisk of product liability claims that is inherent in the manufacturing,testing, and marketing of human therapeutic products. We maintain clinicaltrial liability insurance and product liability insurance in amounts that webelieve to be reasonable. This insurance is subject to deductibles and coveragelimitations. We may not be able to obtain additional insurance or maintaininsurance on acceptable terms or at all. Moreover, any insurance that we doobtain may not provide adequate protection against potential liabilities. If weare unable to obtain insurance at acceptable cost or otherwise protect againstpotential product liability claims, we will be exposed to significantliabilities, which may materially and adversely affect our business andfinancial position. These liabilities could prevent or interfere with ourproduct commercialization efforts.

 

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**Financing Risks**

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

                We have experienced significantoperating losses since our inception in 1988. As of March 31, 2002, ouraccumulated deficit was $254.1 million. We had a net loss of$18.5 million for the three months ended March 31, 2002 and netlosses of $70.2 million, $51.0 million and $44.5 million in2001, 2000 and 1999, respectively.

                We expect that we will continueto incur substantial losses and that, until we have substantial product sales,our cumulative losses will increase as our research and development, sales andmarketing, and manufacturing efforts expand. We expect that the losses that weincur will fluctuate from quarter to quarter and that these fluctuations may besubstantial. We recorded $3.5 million in product sales in 2001, and$6.1 million in product sales in the first quarter of 2002.

***We may need additional financing, which maybe difficult to obtain.***

                We believe that our existingcapital resources, together with cash from collaborative agreements, productsales, and interest income, will be sufficient to fund our operations throughat least 2004. Our cash requirements for operating activities, financingactivities and investment activities have exceeded our internally generatedfunds. We expect that our cash requirements for such activities will continueto exceed our internally generated funds until we are able to generatesubstantial product sales, particularly because we expect our operatingexpenses to continue to increase in the future, including our research anddevelopment expenses, as our product development efforts accelerate. Our futurecapital requirements will depend on many factors, including the following:

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

•                                          continuedprogress in our research and development programs, as well as the magnitude ofthese programs;

•                                          the scope andresults of our clinical trials;

•                                          the timingof, and the costs involved in, obtaining regulatory approvals;

•                                          the cost ofmanufacturing activities;

•                                          the cost ofcommercialization activities, including product marketing, sales anddistribution;

•                                          the cost ofadditional facilities requirements;

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

•                                          the cost ofobtaining and maintaining licenses to use patented technologies;

•                                          our abilityto establish and maintain collaborative arrangements;

•                                          thecost of buying out the minority interest in TKT 5S-Europe, a subsidiary of oursin which we own an 80% interest, if applicable;

•                                          the timing,receipt, and amount of milestones, royalties and other payments fromcollaborators; and

•                                          other workingcapital requirements.

                If we determine to seekadditional funding, we may do so through collaborative arrangements and publicor private financings. Additional financing may not be available to us onacceptable terms, if at all.

                If we raise additional funds byissuing equity securities, further dilution to our then existing stockholderswill result. In addition, the terms of the financing may adversely affect theholdings or the rights of such stockholders. If we are unable to obtain fundingon a timely basis, we may be required to significantly curtail one or more ofour research or development programs. We also could be required to seek fundsthrough arrangements with collaborators or others that may require us torelinquish rights to certain of our technologies, product candidates, orproducts which we would otherwise pursue on our own.

 

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PART II - OtherInformation

 

Item 1.  Legal Proceedings

 

The Company can provide no assurance as to the outcomeof any legal proceedings. A decision by a court in any other jurisdiction in amanner adverse to the Company could have a material adverse effect on theCompany’s business, financial position, and results of operations.

 

*ReplagalTMPatent Litigation*

 

Since July 2000, the Company has been involved inpatent litigation relating to Replagal brought by Genzyme and Mount Sinai inthe Delaware District Court regarding a patent licensed by Genzyme from MountSinai.  In January 2002, theDelaware District Court dismissed this patent litigation.  In March 2002, Genzyme appealed the rulingto the Federal Circuit.  If Genzyme is successful in its appeal, thecase will be remanded to the Delaware District Court for further proceedings onnon-infringement and invalidity issues. As of June 30, 2002, the Company had incurred approximately $4.3 millionin litigation expenses associated with the Replagal litigation.

 

*DynepoTMPatent Litigation*

 

The Company and Aventis are involved in patentinfringement actions with Amgen in the United States and Kirin-Amgen in theUnited Kingdom.

 

The Company and Aventis are involved in a patentinfringement action with Amgen Inc.  InApril 1997, Amgen commenced a patent infringement action against the Companyand Aventis in the “Massachusetts District Court. In January 2001, the Massachusetts District Court concluded thatDynepo (epoietin delta), the Company’s Gene-Activated erythropoietin for thetreatment of anemia, infringed eightof the 18 claims of patents asserted by Amgen. The Company and Aventis filed anappeal of the decision with the Federal Circuit.  Amgen has also appealed this decision.

 

In addition, in July 1999, Aventis and the Companycommenced legal proceedings in the United Kingdom against Kirin-Amgen, seekinga declaration that a U.K. patent held by Kirin-Amgen will not be infringed bythe Company’s activities relating to Dynepo. In April 2001, the High Court ofJustice in the United Kingdom ruled that Dynepo infringed one of four claims ofthe patent asserted by Kirin-Amgen.  InJuly 2002, the Court of Appeals in the United Kingdom reversed the High Courtof Justice and ruled that Dynepo did not infringe Kirin-Amgen’s patent.   Kirin-Amgen may appeal this decision.

 

The litigation is costly and theCompany is required to reimburse Aventis, which is paying the litigationexpenses, for 50% of the expenses. Aventis is entitled to deduct up to 50% of any royalties due to theCompany from the sale of Dynepo until Aventis has recouped the full amount ofTKT’s share of litigation expenses.  TheCompany currently estimates that its share of the expenses associated with thelitigation will total between approximately $5 million and $10 million by thetime the matter is finally adjudicated. Although Dynepo received marketingapproval from

 

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the EMEA in March 2002, the launch of Dynepo hasnot been planned due to the uncertainty of the outcome of the litigation in theUnited States.

 

Item 2. Changes in Securities and Use of Proceeds

 

On June 17, 2002, the Company issued 366,928 shares ofcommon stock to Cell Genesys, Inc. in partial consideration for the exclusivelicense by Cell Genesys to the Company of intellectual property of CellGenesys.  Such number of shares will beadjusted at the time of registration so that, at such time, such shares have amarket value of $15 million, as calculated in accordance with a predeterminedformula.  These shares were issued to an“accredited investor” without registration under the Securities Act of 1933, asamended, in reliance on the exemption provided by Section 4(2) of theSecurities Act.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

The following matters were submitted to a vote ofsecurity holders at the Annual Meeting of Stockholders held on June 6, 2002:

 
|   | 1A.    | The election of Walter Gilbert, Jonathan S. Leff,  William R. Miller, Rodman W. Moorhead, III, Richard F Selden, James E. Thomas  and Wayne P. Yetter to serve as directors until the 2003 Annual Meeting of  Stockholders. |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                                        |   |   |   |   |   |
|   |   | **Nominee**                                                                                                                                                                                                                 |   | **Votes For** |   | **Votes Withheld** |   |
|   |   | Walter Gilbert                                                                                                                                                                                                              |   | 29,482,276 |   | 185,841 |   |
|   |   | Jonathan S. Leff                                                                                                                                                                                                            |   | 29,482,462 |   | 185,655 |   |
|   |   | William R.  Miller                                                                                                                                                                                                          |   | 29,441,276 |   | 226,841 |   |
|   |   | Rodman W.  Moorhead, III                                                                                                                                                                                                    |   | 29,482,984 |   | 185,133 |   |
|   |   | Richard F Selden                                                                                                                                                                                                            |   | 25,924,564 |   | 3,743,553 |   |
|   |   | James E. Thomas                                                                                                                                                                                                             |   | 29,441,846 |   | 226,271 |   |
|   |   | Wayne P. Yetter                                                                                                                                                                                                             |   | 29,441,776 |   | 226,341 |   |
|   |   |                                                                                                                                                                                                                        |   |   |   |   |   |
|   | 1B.    | The approval of the Company’s 2002 Stock Incentive  Plan.                                                                                                                                                              |   |
|   |   |                                                                                                                                                                                                                        |   |   |   |   |   |
|   |   | For                                                                                                                                                                                                                         |   | 17,874,028 |   |   |   |
|   |   | Against                                                                                                                                                                                                                     |   | 7,964,740 |   |   |   |
|   |   | Abstain                                                                                                                                                                                                                     |   | 9,326 |   |   |   |
|   |   | Non-Vote                                                                                                                                                                                                                    |   | 3,820,023 |   |   |   |
|        |        |                                                                                                                                                                                                                             |        |  |  |  |  |  |  |  |  |

 

Item 6. Exhibits and Reports on Form 8-K

 

(a)                                  TheExhibits listed in the Exhibit index immediately preceding such Exhibits arefiled as part of this Quarterly Report on Form 10-Q, and such Exhibit Index isincorporated herein by reference.

 

 

 

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(b)                                 Reportson Form 8-K

 

For the quarterly period ended June 30, 2002, theCompany did not file any reports on Form 8-K.

 

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                        |   | TRANSKARYOTIC  THERAPIES, INC.                                                                            |
|-----------------------------|--------|-----------------------------------------------------------------------------------------------------------|
|                        |   |                                                                                                      |
|                        |   |                                                                                                      |
| Date:  August 14, 2002 |   | By:                                                                                                       | /s/ Daniel E. Geffken |   |
|                        |   | Daniel E. Geffken                                                                                         |
|                        |   | Senior Vice President, Finance and  Chief Financial Officer (Principal  Financial and Accounting Officer) |

 

 

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**EXHIBIT INDEX**

 

10.31#                                                              LicenseAgreement, dated June 7, 2002, by and between Cell Genesys, Inc. and theRegistrant

 

99.1                                                                           Certificationby the Registrant’s President and Chief Executive Officer and Chief FinancialOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

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#                                                                                     Confidentialtreatment requested as to certain portions pursuant to Rule 24-b-2 promulgatedunder the Exchange Act of 1934, as amended.

 

 

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