**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

 

**ý****  QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarter EndedSeptember 30, 2003**

**Commission File Number 0-21481**

 

**TRANSKARYOTICTHERAPIES, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                                         |   | **04-3027191**                        |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                 |   |                                  |
| **700 Main Street**                                                                  |   |                                  |
| **Cambridge, Massachusetts**                                                         |   | **02139**                             |
| (Address of  principal executive offices)                                            |   | (Zip Code)                            |
|                                                                                 |   |                                  |
| Registrant’s  telephone number, including area code:   **(617)  349-0200** |

 

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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 thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes    ý       No    o

 

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

 

Yes    ý       No    o

 

AtOctober 31, 2003, there were 34,965,794 shares of Common Stock, $.01 parvalue, outstanding.

 

 

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TranskaryoticTherapies, Inc.

 

INDEX

 
| PART  I.   | FINANCIAL  INFORMATION                                                                                                                            |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                              |
| Item 1.    | Condensed Consolidated Financial Statements  (unaudited)                                                                                          |
|       |                                                                                                                                              |
|       | Condensed  Consolidated Balance Sheets as of  September 30, 2003 and December 31, 2002                                                  |
|       |                                                                                                                                              |
|       | Condensed  Consolidated Statements of Operations for the  Three Months and Nine Months Ended September 30, 2003  and September 30, 2002 |
|       |                                                                                                                                              |
|       | Condensed  Consolidated Statements of Cash Flows For the  Nine Months ended September 30, 2003 and September 30,  2002                  |
|       |                                                                                                                                              |
|       | Notes  to Condensed Consolidated Financial Statements                                                                                             |
|       |                                                                                                                                              |
| Item 2.    | Management’s Discussion and Analysis of  Financial  Condition and Results of Operations                                                      |
|       |                                                                                                                                              |
| Item 3.    | Quantitative and Qualitative Disclosures About  Market Risk                                                                                       |
|       |                                                                                                                                              |
| Item 4.    | Controls and Procedures                                                                                                                           |
|       |                                                                                                                                              |
| PART  II.  | OTHER  INFORMATION                                                                                                                                |
|       |                                                                                                                                              |
| Item 1.    | Legal Proceedings                                                                                                                                 |
|       |                                                                                                                                              |
| Item 6.    | Exhibits and Reports on Form 8-K                                                                                                                  |
|       |                                                                                                                                              |
| SIGNATURES |

 

2

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PART I                                FINANCIAL INFORMATION

 

Item1.  CondensedConsolidated Financial Statements

 

Transkaryotic Therapies, Inc.Condensed Consolidated BalanceSheets (unaudited)

 
| **(in thousands, except par  values)**                                                                                                                                              |   | **September 30,  2003** |       | **December 31,  2002** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                |   |                         | ** ** |                        | ** ** |
| **Assets**                                                                                                                                                                          |   |                         |       |                        |       |
| Current assets:                                                                                                                                                                     |   |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                           |   | $                            | 169,943    |                        | $          | 154,604 |   |
| Marketable securities                                                                                                                                                               |   | 18,004                       |       | 102,104                     |       |
| Accounts receivable                                                                                                                                                                 |   | 21,121                       |       | 15,684                      |       |
| Inventories                                                                                                                                                                         |   | 17,247                       |       | 21,650                      |       |
| Prepaid expenses and other  current assets                                                                                                                                          |   | 4,210                        |       | 4,450                       |       |
| Total current assets                                                                                                                                                                |   | 230,525                      |       | 298,492                     |       |
| Property and equipment, net                                                                                                                                                         |   | 58,784                       |       | 59,372                      |       |
| Other assets                                                                                                                                                                        |   | 1,818                        |       | 1,942                       |       |
| Total assets                                                                                                                                                                        |   | $                            | 291,127    |                        | $          | 359,806 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                      |   |                         |       |                        |       |
| Current liabilities:                                                                                                                                                                |   |                         |       |                        |       |
| Accounts payable                                                                                                                                                                    |   | $                            | 6,346      |                        | $          | 11,804 |   |
| Accrued expenses                                                                                                                                                                    |   | 11,311                       |       | 12,767                      |       |
| Accrued restructuring  expenses                                                                                                                                                     |   | 7,958                        |       | —                      |       |
| Accrued intellectual  property license expense                                                                                                                                      |   | —                       |       | 11,368                      |       |
| Total current liabilities                                                                                                                                                           |   | 25,615                       |       | 35,939                      |       |
|                                                                                                                                                                                |   |                         |       |                        |       |
| Minority interest                                                                                                                                                                   |   | 305                          |       | —                      |       |
|                                                                                                                                                                                |   |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                                          |   |                         |       |                        |       |
| Series A convertible  preferred stock, $.01 par value, 10 shares authorized; no shares issued and  outstanding at September 30, 2003 and December 31, 2002,  respectively |   | —                       |       | —                      |       |
| Series B preferred stock,  $.01 par value, 1,000 shares authorized; no shares issued and outstanding at  September 30, 2003 and December 31, 2002, respectively           |   | —                       |       | —                      |       |
| Common stock, $.01 par  value; 100,000 shares authorized; 34,935 and 34,845 shares issued and  outstanding at September 30, 2003 and December 31, 2002,  respectively     |   | 349                          |       | 348                         |       |
| Additional paid-in capital                                                                                                                                                          |   | 686,190                      |       | 685,566                     |       |
| Accumulated deficit                                                                                                                                                                 |   | (425,952                     | )          | (365,434                    | )          |
| Accumulated other  comprehensive income                                                                                                                                             |   | 6,902                        |       | 3,387                       |       |
|                                                                                                                                                                                |   | 267,489                      |       | 323,867                     |       |
| Less treasury stock, at  cost; 367 shares at September 30, 2003                                                                                                                |   | (2,282                       | )          | —                      |       |
| Total stockholders’ equity                                                                                                                                                     |   | 265,207                      |       | 323,867                     |       |
| Total liabilities and  stockholders’ equity                                                                                                                                    |   | $                            | 291,127    |                        | $          | 359,806 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

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Transkaryotic Therapies,Inc.

Condensed ConsolidatedStatements of Operations

(unaudited)

 
|                                                         |   | **Three  Months Ended September 30,** |    | **Nine Months  Ended September 30,** |   |
|--------------------------------------------------------------|--------|--------------------------------------------|---------|-------------------------------------------|--------|
| **(in thousands, except per  share amounts)**                |   | **2003**                                   |    | **2002**                                  |   | **2003** |   | **2002** |   |
| Revenues:                                                    |   |                                       |    |                                      |   |   |   |   |   |
| Product sales                                                |   | $                                          | 15,199  |                                      | $      | 7,873 |   | $ | 41,782 |   | $ | 22,713 |   |
| License and research  revenues                               |   | 1,519                                      |    | 17                                        |   | 1,533 |   | 652 |   |
|                                                         |   | 16,718                                     |    | 7,890                                     |   | 43,315 |   | 23,365 |   |
| Operating expenses:                                          |   |                                       |    |                                      |   |   |   |   |   |
| Cost of goods sold                                           |   | 2,769                                      |    | 2,743                                     |   | 11,045 |   | 4,941 |   |
| Research and development                                     |   | 17,895                                     |    | 20,450                                    |   | 55,730 |   | 59,727 |   |
| Intellectual property  license expense                       |   | —                                     |    | —                                    |   | 1,350 |   | 26,000 |   |
| Selling, general and  administrative                         |   | 7,285                                      |    | 7,304                                     |   | 25,863 |   | 21,203 |   |
| Restructuring charges                                        |   | 2,765                                      |    | —                                    |   | 11,324 |   | — |   |
|                                                         |   | 30,714                                     |    | 30,497                                    |   | 105,312 |   | 111,871 |   |
| Loss from operations                                         |   | (13,996                                    | )       | (22,607                                   | )      | (61,997 | ) | (88,506 | ) |
| Other income:                                                |   |                                       |    |                                      |   |   |   |   |   |
| Interest income                                              |   | 412                                        |    | 1,705                                     |   | 1,784 |   | 6,256 |   |
| Minority interest                                            |   | 31                                         |    | —                                    |   | (305 | ) | — |   |
|                                                         |   | 443                                        |    | 1,705                                     |   | 1,479 |   | 6,256 |   |
| Net loss                                                     |   | $                                          | (13,553 | )                                         | $      | (20,902 | ) | $ | (60,518 | ) | $ | (82,250 | ) |
| Basic and diluted net loss  per share                        |   | $                                          | (0.39   | )                                         | $      | (0.60 | ) | $ | (1.75 | ) | $ | (2.38 | ) |
| Shares used to compute  basic and diluted net loss per share |   | 34,567                                     |    | 34,819                                    |   | 34,551 |   | 34,539 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

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TranskaryoticTherapies, Inc.

CondensedConsolidated Statements of Cash Flows

(unaudited)

 
|                                                                             |   | **Nine Months Ended September 30,** |       |
|----------------------------------------------------------------------------------|--------|------------------------------------------|------------|
| **(in thousands)**                                                               |   | **2003**                                 |       | **2002** |   |
|                                                                             |   |                                     |       |   |   |
| **Operating  activities:**                                                       |   |                                     |       |   |   |
| Net loss                                                                         |   | $                                        | (60,518    | ) | $ | (82,250 | ) |
| 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                                                   |   | 8,658                                    |       | 5,332 |   |
| Loss on fixed asset  disposals                                                   |   | 625                                      |       | — |   |
| Compensation expense  related to equity issuances                                |   | 624                                      |       | 113 |   |
| Change in accrued  intellectual property license expense                         |   | (11,368                                  | )          | — |   |
| Changes in accrued  restructuring charges                                        |   | 7,958                                    |       | — |   |
| Changes in operating assets  and liabilities                                     |   | (5,768                                   | )          | (20,227 | ) |
| Net cash used for operating  activities                                          |   | (59,789                                  | )          | (82,032 | ) |
|                                                                             |   |                                     |       |   |   |
| **Investing  activities:**                                                       |   |                                     |       |   |   |
| Proceeds from sales and  maturities of marketable securities                     |   | 99,784                                   |       | 205,950 |   |
| Purchases of marketable  securities                                              |   | (15,939                                  | )          | (237,585 | ) |
| Purchases of property and  equipment                                             |   | (8,735                                   | )          | (31,877 | ) |
| Proceeds from fixed asset  disposal                                              |   | 40                                       |       | — |   |
| Changes in other assets                                                          |   | 430                                      |       | 291 |   |
| Net cash provided by (used  for) investing activities                            |   | 75,580                                   |       | (63,221 | ) |
|                                                                             |   |                                     |       |   |   |
| **Financing  Activities:**                                                       |   |                                     | ** ** |   | ** ** |
| Issuance of common stock,  net                                                   |   | 1                                        |       | 2,269 |   |
| Repurchase of treasury  stock                                                    |   | (2,282                                   | )          | — |   |
| Net cash provided by/(used  for) financing activities                            |   | (2,281                                   | )          | 2,269 |   |
| Effect of exchange rate  changes on cash and cash equivalents                    |   | 1,829                                    |       | 286 |   |
| Net increase (decrease) in  cash and cash equivalents                            |   | 15,339                                   |       | (142,698 | ) |
| Cash and cash equivalents  at January 1                                     |   | 154,604                                  |       | 323,877 |   |
| Cash and cash equivalents  at September 30                                  |   | $                                        | 169,943    |   | $ | 181,179 |   |
|                                                                             |   |                                     |       |   |   |
| 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.

 

5

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Transkaryotic Therapies,Inc.

Notes to Condensed ConsolidatedFinancial Statements (unaudited)

September 30, 2003and 2002

 

1.               BASIS OFPRESENTATION

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesin the United States for complete financial statements.  In the opinion of management, theaccompanying financial statements include all adjustments, consisting only ofnormal recurring adjustments, necessary for a fair presentation of thefinancial position, results of operations and cash flows for the periodspresented.  The results of operationsfor the interim period ended September 30, 2003 are not necessarilyindicative of the results to be expected for the year ending December 31,2003.

 

These financial statements should be read in conjunction with theaudited consolidated financial statements and notes thereto for the year endedDecember 31, 2002 included in the Company’s Annual Report on Form 10-K asfiled with the Securities and Exchange Commission.

 

Gene-Activated®, and TKT® are registered trademarks and ReplagalTM is atrademark of the Company.  DynepoTM is atrademark of Aventis Pharmaceuticals, Inc. (“Aventis”) and FabrazymeTM is atrademark of Genzyme Corporation (“Genzyme”). All other trademarks, service marks or trade names referenced in thisquarterly report are the property of their respective owners.

 

2.               NET LOSS PER SHARE

 

The Company calculates net loss per share in accordance with Statementof Financial Accounting Standard (“SFAS”) No. 128, “Earnings Per Share,” andrelated interpretations.  Basic earningsper share is computed using the weighted average shares outstanding.

 

Basic net loss per share was equivalent to diluted net loss per sharefor the three and nine months ended September 30, 2003 and 2002 becausecommon equivalent shares from convertible preferred stock and stock optionshave been excluded, as their effect is antidilutive.

 

3.               COMPREHENSIVE LOSS

 

Comprehensive loss comprises net loss, unrealized gains and losses onmarketable securities designated as available-for-sale, and foreign currencytranslation adjustments.  The Companyhad a total comprehensive loss of $13,216,000 and $20,705,000 for the threemonths ended September 30, 2003 and 2002, respectively.  For the nine months ended September 30,2003 and 2002, the Company had a total comprehensive loss of $57,003,000 and$81,303,000, respectively.

 

6

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4.               INVENTORIES

 

Inventories consist of the following:

 
| **(in thousands)** |   | **September 30,  2003** |   | **December 31,  2002** |   |
|--------------------|--------|------------------------------|--------|-----------------------------|--------|
|               |   |                         |   |                        |   |
| Raw materials      |   | $                            | 188    |                        | $      | 947 |   |
| Work in process    |   | 11,186                       |   | 14,689                      |   |
| Finished goods     |   | 5,873                        |   | 6,014                       |   |
|               |   | $                            | 17,247 |                        | $      | 21,650 |   |

 

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

 

5.               INTELLECTUALPROPERTY LICENSE FEE EXPENSE

 

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

 

Under the license agreement, the Company agreed that the number ofshares of common stock initially issued to Cell Genesys would be adjusted atthe time the Company registered such shares for resale under the Securities Actof 1933, as amended, if the market value of such shares at that time wasgreater or less than $15,000,000, as calculated in accordance with apredetermined formula. Pursuant to the agreed upon formula, atDecember 31, 2002, with the closing price of the Company’s common stock at$9.90 per share, the Company would have been required to issue to Cell Genesysan additional 1,148,000 shares of common stock. As a result, the Companyrecorded an additional non-cash license fee expense of $8,660,000 in the fourthquarter of 2002.

 

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

 

Under the license agreement, Cell Genesys also has the potential toreceive certain milestone payments from the Company contingent upon the outcomeof related patent matters under the

 

7

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license agreement. If all of the milestones are achieved, the Companywill be obligated to pay Cell Genesys an aggregate of $17,000,000 payable inpart in cash and in part in stock. The Company is not required to make royaltypayments to Cell Genesys.

 

6.               RESTRUCTURINGCHARGES

 

In February 2003, TKT announced a major reorganization in aneffort to reduce costs and narrow the scope of the Company’s researchinitiatives. Under this reorganization, TKT is focusing its research,development, and commercialization efforts primarily on therapeutics for thetreatment of rare genetic diseases caused by protein deficiencies. The Companyis seeking collaborative partners for programs outside its core focus,including its Gene-Activated protein products, which are versions of proteinsthat would compete with proteins currently being marketed by third parties, andfor its gene therapy programs.

 

As part of this restructuring, during the first quarter of 2003, TKTreduced its U.S. headcount by approximately 100 positions. TKT has furtherreduced its headcount through attrition, with the goal of having approximately310 to 325 full-time U.S. employees by the end of 2003.  As of September 30, 2003, TKT had 320full-time U.S. employees. TKT has also consolidated its facilities as part ofthe restructuring.

 

As a result of the restructuring, the Company recorded charges of$2,765,500 and $11,324,000 during the three and nine months period endedSeptember 30, 2003, respectively, in accordance with SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities”.  The charges in the third quarter primarilyinclude the remaining lease obligations for one of the Company’s facilitiesthat was vacated during the quarter. Included in the charges are $1,354,000 of employee severance andoutplacement services costs for 74 employees, primarily in research anddevelopment, $9,396,000, representing the remaining lease obligation for fourfacilities that the Company no longer occupies, and a write-down of $574,000 ofleasehold improvements that were abandoned in connection with vacating suchfacilities.  The Company’s employee-related and facility consolidation restructuringactions were substantially completed as of September 30, 2003.  The Company will continue to recordrestructuring charges primarily related to vacated facility expenses during theremainder of the lease terms until suchfacilities are sublet.

 

The following table outlines the components of the Company’srestructuring charges and accrual as of September 30, 2003:

 
| **(in  thousands)**                  |   | **Charges** |   | **Payments** |   | **Other** |   | **Ending balance** |   |
|--------------------------------------|--------|-------------|--------|--------------|--------|-----------|--------|--------------------|--------|
|                                 |   |        |   |         |   |      |   |               |   |
| Employee  severance and outplacement |   | $           | 1,354  |         | $      | (1,302    | )      | $                  | — |   | $ | 52 |   |
| Lease  obligations                   |   | 9,396       |   | (1,350       | )      | (140      | )      | 7,906              |   |
| Write-off of  fixed assets           |   | 574         |   | —       |   | (574      | )      | —             |   |
| Total                                |   | $           | 11,324 |         | $      | (2,652    | )      | $                  | (714   | ) | $ | 7,958 |   |

 

7.               STOCK BASEDCOMPENSATION

 

The Company accounts for qualified stock option grants in accordancewith Accounting Principles Board Opinion No. 25, Accounting for Stock Issued toEmployees (“APB 25”) and 

 

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Financial Accounting Standards Board (“FASB”) Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation, anInterpretation of APB No. 25, and related interpretation, and, accordingly,recognizes no compensation expense for the issue thereof.  For certain non-qualified stock optionsgranted, the Company recognizes as compensation expense the excess of the fairvalue of the common stock issuable upon exercise over the aggregate exerciseprice of such options.  The compensationis amortized over the vesting period of each option or the recipient’s term ofemployment, if shorter.  The Company hasadopted the disclosure-only provisions of SFAS No. 123, “Accounting forStock-Based Compensation” as amended by SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure”.

 

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

 
|                                                                                                                  |   | **For the  three months  ended September 30,** |    | **For the  nine months ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|---------|----------------------------------------------------|--------|
| **(in  thousands, except per share prices)**                                                                          |   | **2003**                                            |    | **2002**                                           |   | **2003** |   | **2002** |   |
|                                                                                                                  |   |                                                |    |                                               |   |   |   |   |   |
| Net loss                                                                                                              |   | $                                                   | (13,553 | )                                                  | $      | (20,902 | ) | $ | (60,518 | ) | $ | (82,250 | ) |
| Add:  Stock based compensation included in net  loss as reported                                                 |   | $                                                   | —  |                                               | $      | 4 |   | $ | 624 |   | $ | 113 |   |
| Deduct: Total stock-based  employee compensation expense determined under the fair value based method  for all awards |   | $                                                   | (1,688  | )                                                  | $      | (1,667 | ) | $ | (15,244 | ) | $ | (13,800 | ) |
| Proforma net loss                                                                                                     |   | $                                                   | (15,241 | )                                                  | $      | (22,565 | ) | $ | (75,138 | ) | $ | (95,937 | ) |
| Basic and diluted net loss  per share- as reported                                                                    |   | $                                                   | (0.39   | )                                                  | $      | (0.60 | ) | $ | (1.75 | ) | $ | (2.38 | ) |
| Basic and diluted net loss  per share- proforma                                                                       |   | $                                                   | (0.44   | )                                                  | $      | (0.65 | ) | $ | (2.17 | ) | $ | (2.78 | ) |

 

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

 
|                  |   | **For the three months  ended September 30,** |   | **For the nine months ended  September 30,** |   |
|-----------------------|--------|----------------------------------------------------|--------|---------------------------------------------------|--------|
|                  |   | **2003**                                           |   | **2002**                                          |   | **2003** |   | **2002** |   |
| Expected life (years) |   | 1.5-7.5                                            |   | 1.5-7.5                                           |   | 1.5-7.5 |   | 1.5-7.5 |   |
| Interest rate         |   | 1.1%-4.1%                                          |   | 1.5%-4.0%                                         |   | 1.1%-4.1% |   | 1.5%-4.0% |   |
| Expected volatility   |   | 0.74                                               |   | 1.00                                              |   | 0.74 |   | 1.00 |   |

 

9

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The Company has never declared or paid dividends on any of its capitalstock and does not expect to do so in the foreseeable future.

 

The pro forma effects of expensing the estimated fair value of issuedstock options on net loss and net loss per share for the nine months endedSeptember 30, 2003 and 2002, respectively, are not necessarilyrepresentative of the effects on reporting the results of operations for futureyears as options vest over several years and the Company expects to grantoptions in future years.

 

### 8.                                       LEGALPROCEEDINGS

###  

The Company is a party toa number of legal proceedings.  TheCompany can provide no assurance as to the outcome of any of these proceedings.A decision by a court in the United States or in any other jurisdiction in amanner adverse to the Company could have a material adverse effect on theCompany’s business, financial condition and results of operations.

 

*Replagal Patent Litigation*

 

In July 2000,Genzyme, a competitor, and Mount Sinai School of Medicine of New YorkUniversity (“Mount Sinai”) filed a patent infringement action against theCompany in the U.S. District Court of Delaware. The complaint alleges thatactivities relating to Replagal infringe a patent licensed by Genzyme fromMount Sinai. In January 2002, the U.S. District Court of Delawaredismissed this patent litigation granting TKT’s motion for summary judgment ofnon-infringement and denying Genzyme’s and Mount Sinai’s motion for summaryjudgment of infringement. Genzyme and Mount Sinai sought monetary damages andinjunctive relief.

 

In March 2002, Genzyme appealed the U.S. District Court ofDelaware’s ruling to the U.S. Court of Appeals for the Federal Circuit, and inJanuary 2003 the U.S. Court of Appeals for the Federal Circuit heard oralarguments on the appeal.  InOctober 2003, pursuant to a global legal settlement, Genzyme agreed towithdraw from this suit and agreed to pay the Company $1,555,000.  In October 2003, the U.S. Court ofAppeals for the Federal Circuit affirmed a finding of non-infringement byTKT.  Mount Sinai has filed a petitionto the Federal Circuit for a rehearing en banc.  TKT believes it is possible, but unlikely, that Mount Sinai willobtain further appellate review of this decision.

 

As of September 30,2003, the Company had incurred $4,669,000 in litigation expenses associatedwith the Replagal litigation.

 

*Dynepo Patent Litigation*

 

In April 1997, AmgenInc. (“Amgen”) commenced a patent infringement action against the Company andAventis in the U.S. District Court of Massachusetts. In January 2001, theU.S. District Court of Massachusetts concluded that Dynepo infringed eight ofthe 18 claims of five patents that Amgen had asserted. Amgen did not seek andwas not awarded monetary damages.

 

In January  2003,the U.S. Court of Appeals for the Federal Circuit issued a decision affirmingin 

 

10

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part and reversing inpart the decision of the U.S. District Court of Massachusetts and remanded theaction to the U.S. District Court of Massachusetts for further proceedings. Inparticular, the U.S. Court of Appeals for the Federal Circuit:

 

•                                          upheldthe U.S. District Court of Massachusetts’ determination of invalidity of one ofAmgen’s patents;

 

•                                          upheldthe U.S. District Court of Massachusetts’ determination that some claims of twoother Amgen patents were infringed, but vacated the U.S. District Court ofMassachusetts’ determination that those patents were not invalid; and

 

•                                          vacatedthe U.S. District Court of Massachusetts’ determination that Replagal infringedsome claims of the two remaining Amgen patents, and vacated the U.S. DistrictCourt of Massachusetts’ determination that one of these patents was notinvalid.

 

As part of the U.S. Courtof Appeals for the Federal Circuit’s ruling, it remanded the case to the U.S.District Court of Massachusetts and instructed it to reconsider the validity ofAmgen’s patents in light of potentially invalidating prior art.  The U.S. District Court of Massachusetts hasrecently concluded the remand proceedings and heard oral argument on some ofthese issues in July 2003.  Additionalevidence was taken and the U.S. District Court of Massachusetts has set a schedulefor the filing of post-trial briefs. The Company expects that the briefing will be completed in December 2003and the U.S. District Court of Massachusetts will enter a decision on theremanded issues at some point during the first half of 2004.  The U.S. District Court of Massachusettsalso recently issued a decision upholding its earlier findings that Amgensuccessfully rebutted the presumption of prosecution history estoppel withrespect to certain patents, and therefore, Aventis and the Company infringesuch patents in light of recent Supreme Court precedents.  On remand, Aventis and the Company presentedaffirmative defenses with respect to such patents.  Both Amgen and Aventis, together with the Company, will have theright to appeal the decision of the U.S. District Court of Massachusetts to theU.S. Court of Appeals for the Federal Circuit.

 

In addition, inJuly 1999, Aventis and the Company commenced legal proceedings in theUnited Kingdom against Kirin-Amgen, Inc. (“Kirin-Amgen”), which sought adeclaration that a European patent held by Kirin-Amgen will not be infringed bythe Company’s activities relating to Dynepo and that certain claims ofKirin-Amgen’s U.K. patent are invalid. In April 2001, the High Court of Justice in the United Kingdomruled that Dynepo infringed one of four claims of the patent asserted byKirin-Amgen.  In July 2002, theCourt of Appeals in the United Kingdom reversed the High Court of Justice andruled that Dynepo did not infringe Kirin-Amgen’s patent. Kirin-Amgen petitionedthe House of Lords to hear an appeal from the decision of the Court of Appeals.The House of Lords agreed to hear this appeal during the summer of 2004.

 

The Company is requiredto reimburse Aventis, which is paying the expenses of the Amgen and Kirin-Amgenlitigations relating to Dynepo, for 50% of the expenses. Aventis is alsoentitled to deduct up to 50% of any royalties due to the Company from the saleof Dynepo until Aventis has recouped the full amount of TKT’s share oflitigation expenses. The Company currently estimates that its share of theexpenses associated with the litigation will total between approximately$15,000,000 and $20,000,000 by the time the matter is finally adjudicated.

 

*Serono Patent Litigation*

 

In January 2003,Applied Research Systems ARS Holdings, N.V., a wholly owned subsidiary ofSerono International S.A. (“Serono”), commenced an action against TKT in theDistrict Court at The Hague in the Netherlands claiming that Replagal infringesSerono’s European Patent No. 0 505 500 which Serono asserted enabled isapproach to gene activation and covered TKT’s product and processed . InJanuary 2002, the European Patent Office revoked the Serono patent ongrounds of invalidity due to non-enablement. Serono had 

 

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appealed the revocationto the Technical Board of Appeal at the European Patent Office and thelitigation was stayed pending the outcome of the appeal.  In October 2003, the Technical Board ofAppeals of the European Patent Office upheld the revocation of European PatentNo. 0 505 500.  In November 2003, the District Court in The Hagueaccepted Serono’s withdrawal, terminating this litigation.

 

*Purported Class Action Shareholder Suit*

 

In January andFebruary 2003, various parties filed purported class action lawsuitsagainst the Company and Richard Selden, the Company’s then Chief ExecutiveOfficer, in the United States District Court for the District of Massachusetts.The complaints generally allege securities fraud during the period fromJanuary 2001 through January 2003. Each of the complaints asserts claims under Section 10(b) of theExchange Act, Rule 10b-5 promulgated thereunder, and Section 20(a) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), and allegesthat the Company and its officers made false and misleading statements andfailed to disclose material information concerning the status and progress forobtaining U.S. marketing approval of its ReplagalTM product to treat Fabrydisease during that period.

 

In March 2003, various plaintiffs filed motions to consolidate, toappoint lead plaintiff, and to approve plaintiff’s selections of leadplaintiffs’ counsel.  InApril 2003, various plaintiffs filed a Joint Stipulation and ProposedOrder of Lead Plaintiff Applicants to Consolidate Actions, to Appoint LeadPlaintiffs and to Approve Lead Plaintiffs’ Selection of Lead Counsel, ExecutiveCommittee and Liaison Counsel.  InApril 2003, the Court endorsed the Proposed Order, thereby consolidatingthe various matters under one matter:  Inre Transkaryotic Therapies Inc., Securities Litigation, C.A. No. 03-10165-RWZ.

 

In July 2003, the plaintiffs filed a Consolidated and AmendedClass Action Complaint (the “Amended Complaint”) against the Company; Dr.Selden; Daniel Geffken (the Company’s former Chief Financial Officer); WalterGilbert, Jonathan S. Leff, William R. Miller, Rodman W. Moorhead, III, James E.Thomas and Wayne P. Yetter (members of the Company’s Board of Directors); SGCowen Securities Corporation; Deutsche Bank Alex. Brown; Pacific GrowthEquities, Inc.; and Leerink Swann & Company.

 

The Amended Complaint alleges securities fraud during the period fromJanuary 4, 2001 through January 10, 2003.  The Amended Complaint asserts claims against each of thedefendants under Section 11 of the Securities Act and against Dr. Seldenunder Section 15 of the Securities Act; against SG Cowen SecuritiesCorporation, Deutsche Bank Alex. Brown, Pacific Growth Equities, Inc., andLeerink Swann & Company under Section 12(a)(2) of the Securities Act;against Dr. Selden and the Company under Section 10(b) of the Exchange Actand Rule 10b-5 promulgated thereunder; and against Dr. Selden underSection 20(a) of the Exchange Act. The Amended Complaint alleges that the defendants made false andmisleading statements and failed to disclose material information concerningthe status and progress for obtaining U.S. marketing approval of its ReplagalTMproduct to treat Fabry disease during that period.

 

In September 2003, the Company filed a motion to dismiss theAmended Complaint.  The plaintiffs’opposition to our motion has been filed, and the Company’s reply brief is duein 

 

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November 2003.  A hearingof the motion is set to occur on December 4, 2003.  A class has not been certified.  The plaintiffs seek equitable and monetaryrelief, an unspecified amount of damages, with interest, and attorney’s feesand costs.  The Company expects the costs of this litigation to be significant.

 

*DerivativeSuit*

 

In April 2003, South Shore Gastrointerology UA 6/6/1980 FBO HaroldJacob and Nancy R. Jacob Ttee filed a Shareholder Derivative Complaint againstDr. Selden and the following members of the Company’s Board of Directors:  Jonathan S. Leff, Walter Gilbert, Wayne P.Yetter, Rodman W. Moorehead III, James E. Thomas, and William Miller, andagainst the Company as nominal defendant, in Middlesex Superior Court in theCommonwealth of Massachusetts, Civil Action No. 03-1669.  On May 29, 2003, the parties moved totransfer venue to the Business Litigation Session in Suffolk Superior Court inthe Commonwealth of Massachusetts.  Theparties’ motion was allowed, and in June 2003 the matter was accepted intothe Business Litigation Session as Civil Action No. 03-02630-BLS.

 

The complaint alleges that the individual defendants breached fiduciaryduties owed to the Company and its shareholders by disseminating materiallyfalse and misleading statements to the market and causing or allowing theCompany to conduct its business in an “unsafe, imprudent and unlawfulmanner.”  The complaint purports toassert derivative claims against the individual defendants for breach offiduciary duty, and to assert a claim for contribution and indemnification onbehalf of the Company for any liability it incurs as a result of the individualdefendants’ alleged misconduct.  Thecomplaint seeks declaratory, equitable and monetary relief, an unspecifiedamount of damages, with interest, and attorney’s fees and costs.

 

In August 2003, the plaintiff filed its Verified AmendedDerivative Complaint (“Amended Derivative Complaint”).  The Amended Derivative Complaint allegesthat the individual defendants breached fiduciary duties owed to the Companyand its shareholders by causing the Company to issue materially false andmisleading statements to the public and signing its Form 10-Ks for the years2000 and 2001 as well as a registration statement.  The Amended Derivative Complaint also alleges that defendant Dr.Selden sold the Company’s stock while in possession of material non-publicinformation.

 

In September 2003, the Company served a motion to dismiss theAmended Derivative Complaint.  Theplaintiff’s opposition to the Company’s motion was served in November 2003and the Company’s reply brief is due in December 2003.  A hearing of the motion is set to occur inDecember 2003.  The plaintiffs seekdeclaratory, equitable and monetary relief, an unspecified amount of damages,with interest, and attorney’s fees and costs. The Company expects the costs ofthis litigation to be significant.

 

*SEC Investigation*

 

On May 14, 2003, TKT received a copy of a formal order ofinvestigation by the Securities and Exchange Commission (“SEC”). The order ofinvestigation relates to TKT’s disclosures and public filings with regard toReplagal and the status of the United States Food and Drug

 

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Administration (the “FDA”) approval process for Replagal, as well astransactions in the Company’s securities. The Company is and will continue to fully cooperate with the SEC in theinvestigation.

 

### 9.                                       RECENTACCOUNTING PRONOUNCEMENTS

###  

In January 2003, the FASB issued Interpretation No. 46,“Consolidation of Variable Interest Entities.” This interpretation addressesthe requirements for business enterprises to consolidate related entities inwhich they are determined to be the primary beneficiary as a result of theirvariable economic interest. The interpretation is intended to provide guidancein judging multiple economic interests in an entity and in determining theprimary beneficiary. The interpretation outlines disclosure requirements forVariable Interest Entities in existence prior to January 31, 2003, andoutlines consolidation requirements for Variable Interest Entities createdafter January 31, 2003. This interpretation is not expected to have animpact on the Company’s consolidated financial statements.

 

The Emerging Issues Task Force (“EITF”) recently reached a consensus onits tentative conclusions for EITF 00-21, “Revenue Arrangements with MultipleDeliverables.” EITF 00-21 provides accounting guidance for customer solutionswhere delivery or performance of products, services and/or performance mayoccur at different points in time or over different periods of time.  Companies are required to adopt thisconsensus for fiscal periods beginning after June 15, 2003. The adoptionof EITF 00-21 did not have a material impact on the Company’s financialposition, results of operations or liquidity.

 

In May 2003, the FASB issued Statement 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity.” Statement 150 establishes standards for classifying and measuringcertain financial instruments with characteristics of both liabilities andequity. Statement 150 requires that an issuer classify a financial instrumentthat is within its scope as a liability (or an asset in some circumstances)because that financial instrument embodies an obligation of the issuer.Statement 150 is effective for financial instruments entered into or modifiedafter May 31, 2003, and otherwise is effective for public companies duringthe first interim period beginning after June 15, 2003. The adoption ofthis pronouncement did not have a material impact on the Company’s financialposition, results of operations or liquidity.

 

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**ITEM 2****.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Overview*

 

TKT is a biopharmaceutical company developingtherapeutics for the treatment of rare genetic diseases caused by proteindeficiencies. TKT has received approval to market and sell Replagal (agalsidasealfa), an enzyme replacement therapy for the long-term treatment of patientswith Fabry disease, in 27 countries, principally in Europe. The Company iscurrently conducting a pivotal clinical trial for its iduronate-2-sulfataseproduct (“I2S”), an enzyme replacement therapy for the treatment of Huntersyndrome.  The Company anticipatesstarting a clinical trial for its Gene-Activated glucocese brosidase (“GA-GCB”)for the treatment of Gaucher disease in 2004. TKT is also currently evaluating out-licensing opportunities forGA-GCB.  

 

With the exception of 1995, the Company hasincurred substantial annual operating losses since inception. The Companyexpects to incur significant operating losses until substantial product sales aregenerated. Until such time, the Company is dependent upon product sales,existing cash resources, interest income, external financing from equityofferings, debt financings, and collaborative research and developmentalliances to finance its operations. At September 30, 2003, the Company’saccumulated deficit was $425,952,000.

 

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

 

•                  thetiming and amount of Replagal product sales, as well as the collection ofreceivables;

•                  continuedprogress in its research and development programs, particularly I2S;

•                  thescope and results of its clinical trials;

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

•                  thecost of manufacturing activities;

•                  thetiming and cost of expansion of TKT’s internal manufacturing facilities;

•                  thevariability in foreign exchange rates for sales denominated in currencies otherthan the United States dollar**;**

•                  thequality and timeliness of the performance of third party suppliers;

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

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

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

•                  theoutcome of the SEC investigation; and

•                  TKT’sability to establish and maintain collaborative arrangements.

 

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*Corporate Reorganization*

 

In February 2003, TKT’s Board of Directorsappointed Michael J. Astrue as President and Chief Executive Officer of theCompany and a member of the Board of Directors. Mr. Astrue replaced Richard FSelden, M.D., Ph.D., who resigned from TKT and TKT’s Board of Directors.

 

Upon the appointment of Mr. Astrue, TKT announceda major reorganization in an effort to reduce costs and narrow the scope of theCompany’s research initiatives. Under this reorganization, TKT is focusing itsresearch, development, and commercialization efforts primarily on therapeuticsfor the treatment of rare genetic diseases caused by protein deficiencies. TheCompany is seeking collaborative partners for programs outside its core focus,including its Gene-Activated protein products, which are versions of proteinsthat would compete with proteins currently being marketed by third parties, andfor its gene therapy programs.

 

As part of the restructuring, during the firstquarter of 2003, TKT reduced its U.S. headcount by approximately 100 positions.TKT has further reduced headcount through attrition, with the goal of havingapproximately 310 to 325 full-time U.S. employees by the end of 2003.  As of September 30, 2003, TKT had 320full-time U.S. employees. TKT has also consolidated its facilities as part ofthe restructuring.

 

As a result of the restructuring, the Companyrecorded charges of $11,324,000 during the first nine months of 2003 inaccordance with SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities”.  Included in thecharges are $1,354,000 of employee severance and outplacement services costsfor 74 employees, primarily in research and development, $9,396,000,representing the remaining lease obligation for four facilities that theCompany no longer occupies, and a write-down of $574,000 for leaseholdimprovements for facilities which were vacated.  The Company’s employee-related and facility consolidationrestructuring actions have been substantially completed as ofSeptember 30, 2003.  The Companywill continue to record restructuring charges primarily related to vacatedfacility expenses during the remainder of the lease terms until such facilitiesare sublet.

 

*RegulatoryStatus of Replagal in the United States*

 

TKT has not received approval to market and sellReplagal in the United States. In April 2003, Genzyme received marketingauthorization in the United States for Fabrazyme (agalsidase beta), itscompeting enzyme replacement therapy product for the treatment of Fabrydisease.  Because Fabrazyme had receivedorphan drug designation in the United States, upon its marketing approval,Fabrazyme received orphan drug exclusivity. Once a product receives orphan drugexclusivity, the FDA may not approve another application to market the samedrug for the same indication for a period of seven years, except in limitedcircumstances set forth under the United States Food, Drug and Cosmetic Act(the “FDA Statute”) and implementing regulations. Because Fabrazyme receivedmarketing approval in the United States before Replagal and received orphandrug exclusivity, the FDA may not approve Replagal and Replagal will beexcluded from the U.S. market for seven years, until April 2010, unlessTKT can demonstrate that Replagal satisfies the limited criteria for exceptionsset forth in the FDA Statute and implementing

 

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regulations and TKT receives approval to marketand sell Replagal in the United States.

 

Since the Company submitted a Biologics LicenseApplication (“BLA”) for Replagal to the FDA in June 2000, the Company hasreceived two Complete Response Letters from the FDA.  In the second Complete Response Letter, which the Companyreceived in November 2002, the FDA indicated that the data relating toReplagal which TKT had previously submitted were not adequate for approval,primarily because of questions concerning efficacy, but that the data would bediscussed at a meeting of the FDA’s Endocrinologic & Metabolic DrugsAdvisory Committee (the “Endocrinologic & Metabolic Drugs AdvisoryCommittee”).

 

On January 14, 2003, the Endocrinologic& Metabolic Drugs Advisory Committee convened to discuss TKT’s BLA forReplagal and concluded by a unanimous vote that TKT’s clinical data did notprovide substantial evidence of efficacy. The Endocrinologic & MetabolicDrugs Advisory Committee also concluded by a vote of eight to seven that therenal pathology data presented by TKT were not adequate to serve as the basisfor accelerated approval. As part of its consideration of an application formarketing authorization, the FDA often requests a review of all or parts of anapplication for marketing authorization by an advisory committee of outsideexperts. The FDA is free to accept or reject the advisory committee’srecommendations.

 

The Company is in the process of examiningpossible options to break Fabrazyme’s orphan drug exclusivity and securingmarketing authorization for Replagal in the United States.  The Company may need to conduct additionalclinical trials and analyses in an attempt to break Fabrazyme’s orphan drugexclusivity.

 

The Company plans to submit a request for special protocol assessmentto the FDA in November 2003 in order to identify a possible regulatoryapproach, if any, that could lead to approval of Replagal in the UnitedStates.  This is a new and untested processin the area of orphan drugs, and the Company cannot predict the outcome ofthese discussions or guarantee that it will pursue approval in the UnitedStates.

 

*Application ofCritical Accounting Policies and Estimates*

 

The discussion and analysis of TKT’s financialcondition and results of operations is based on our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires TKT to make estimates and judgments that affect itsreported assets and liabilities, revenues and expenses, and other financialinformation. Actual results may differ significantly from these estimates underdifferent assumptions and conditions. In addition, TKT’s reported financialcondition and results of operations could vary due to a change in theapplication of a particular accounting standard.

 

The Company regards an accounting estimateunderlying its financial statements as a “critical accounting estimate” if theaccounting estimate requires the Company to make assumptions about matters thatare highly uncertain at the time of estimation and if different estimates thatreasonably could have been used in the current period, or changes in theestimate that are reasonably likely to occur from period to period, would havehad a material effect on the

 

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presentation of financial condition, changes infinancial condition, or results of operations.

 

The Company’s significant accounting policies aredescribed in the Notes to the Consolidated Financial Statements in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002.The Company regards its policies with respect to revenue recognition,inventories and asset impairment as “critical accounting estimates.” There havebeen no changes to such policies or significant changes in assumptions orestimates that would affect such policies in the third quarter of 2003.  These policies are described under thecaption “Item 7 Management’s Discussion and Analysis of Financial Condition andResults of Operations” in the Company’s Annual Report on Form 10-K for the yearended December 31, 2002.

 

**Results of Operations**

 

*Revenues*

 

Product sales for the quarter endedSeptember 30, 2003 totaled $15,199,000, an increase of $7,326,000, or 93%,from $7,873,000 for the corresponding period in 2002.  For the nine months ended September 30, 2003, product salestotaled $41,782, 000, an increase of $19,069,000, or 84%, from $22,713,000 forthe corresponding period in 2002. Substantially all Replagal product sales were in Europe.  The increases in sales in the 2003 periodsover the comparative periods in 2002 are due to additional patients beginningReplagal therapy as well as pricing and reimbursement arrangements beingestablished and formalized in additional countries in Europe.  In addition, foreign currency fluctuationspositively contributed $1,997,000 and $6,916,000 to the increases over thethree and nine month comparative periods of 2002, respectively.

 

License and research revenues for the thirdquarter and for the first nine months of 2003 totaled $1,519,000 and$1,533,000, respectively.  License andresearch revenues totaled $17,000 and $652,000 for the three and nine monthsended September 30, 2002, respectively. License and research revenues for the three and nine months endedSeptember 30, 2003 were earned under a collaborative agreement forReplagal in Japan with Sumitomo Pharmaceutical Co. Ltd. (“Sumitomo”).  The Company also received $500,000 in thethird quarter of 2003 as a result of the termination of its Factor VIII genetherapy collaboration with Wyeth, which succeeded Genetics Institute, Inc.  (“Wyeth”). For the corresponding periods in 2002, license and research revenueswere earned from collaborative agreements with Sumitomo and Wyeth.  The increase in license and researchrevenues from the 2002 periods was due to the timing of completion ofobligations related to each collaborative agreement.

 

*Cost of GoodsSold*

 

For the three months ended September 30,2003, cost of goods sold totaled $2,769,000, or 18% of product sales, anincrease of $26,000 from $2,743,000, or 35% of product sales, in thecorresponding period in 2002.  For thenine months ended September 30, 2003, cost of goods sold totaled$11,045,000, or 26% of product sales, an increase of $6,104,000 from$4,941,000, or 22% of product sales, in the corresponding period in 2002.  Cost of goods sold consists of expenses inconnection with the manufacture of Replagal.

 

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Prior to receiving marketing approval of Replagalin Europe in August 2001, the Company expensed all of the cost tomanufacture Replagal as research and development costs.  Following marketing approval, the Companybegan recording the costs of manufacturing Replagal as inventory rather than asa research and development expense.

 

For the three months ended September 30,2003, the Company’s cost of goods sold as a percentage of product salesdecreased to 18% compared to 35% in the corresponding period in 2002.  The decrease in cost of goods sold as apercentage of sales for the comparative quarterly periods primarily reflects adecrease in Replagal unit costs due to continuing improvements in manufacturingand production efficiencies.

 

For the nine months ended September 30,2003, the Company’s cost of goods sold included continuing improvements inmanufacturing and production efficiencies as well as additional chargesamounting to $2,590,000, or 6% of product sales for such period. These chargesrelated to excess capacity at the terminated contract manufacturer of the bulkdrug substance of Replagal.  Excludingthe excess capacity charges, costs of goods sold as a percentage of salesincreased from the corresponding period in 2002 primarily because of increasedsales volume and because costs of goods sold during the nine months endedSeptember 30, 2002 included sale of inventory that had been previouslycharged to research and development expense at the time of production.

 

The Company has historically relied on contractmanufacturing arrangements with third parties for the production of Replagalfor commercial sale, including contract fill and finish services. These thirdparties have both manufactured Replagal bulk drug substance for the Company andperformed fill and finish services.  InJanuary 2003, the Company terminated its agreement with a third partymanufacturer of the bulk drug substance of Replagal, effective in July 2003.  In July 2003, the Company’s manufacturingfacility in Cambridge, Massachusetts was approved by the European Commission tomanufacture the bulk drug substance for Replagal and the Company nowmanufactures bulk drug substance for Replagal at that facility. The costs tomanufacture Replagal at the Company’s Cambridge, Massachusetts manufacturingfacility prior to approval were expensed as research and developmentcosts.  The Cambridge facility was idleduring the third quarter of 2003 so that infrastructure and capacityenhancements could be completed. Production at the Cambridge facility is scheduled to recommence in early2004.  At the present time, the Companyanticipates that existing inventory will be sufficient to fill customer ordersfor Replagal into 2004.  The Companywill continue to rely on third party manufacturers for fill and finishservices.

 

The Company expects that inventory produced bothat the contract manufacturer and at TKT’s Cambridge, Massachusettsmanufacturing facility will be sold during the fourth quarter of 2003 and into2004.  Cost of goods sold will moreclosely reflect full production costs with respect to inventory produced at thecontract manufacturer but will not reflect full production costs with respectto inventory manufactured at the Company’s Cambridge, Massachusettsmanufacturing facility as some of such costs were previously expensed.

 

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*Research and Development Expenses*

 

Research and development expenses decreased by$2,555,000, or 12%, to $17,895,000 in the third quarter of 2003, from$20,450,000 during the same period in 2002. The decrease was primarily due to decreases in research and developmentstaffing and in outside testing and supplies costs in connection with theCompany’s restructuring plan.  In thefirst nine months of 2003, research and development expenses decreased by$3,997,000, or 7%, to $55,730,000 from $59,727,000 for the same period in2002.  This decrease reflected$5,500,000 in one time expenditures during 2002 related to set-up and technologytransfer fees paid to the contract manufacturer of the bulk substanceReplagal.  The decrease also reflectsdecreases in research and development staffing costs and in consulting andoutside testing costs in conformance with the Company’s restructuringplan.  This decrease in research anddevelopment expenses was partially offset by increases in research anddevelopment occupancy costs.

 

The Company does not intend to engage in anyfurther product development activities related to its Gene-Activated proteinproducts, which are versions of proteins that would compete with proteinscurrently being marketed by third parties, except with respect to its potentialproduct for the treatment of Gaucher disease. The Company also does not intend to engage in further productdevelopment activities related to its gene therapy programs unless thoseactivities are funded under a collaboration agreement with a third party. TheCompany expects its research and development expenses in the fourth quarter of2003 to increase marginally compared to the third quarter of 2003 as patientscontinue to enroll in the Company’s pivotal clinical trial for I2S, an enzymereplacement therapy for the treatment of Hunter syndrome.

 

The Company’s two largest research anddevelopment programs for Replagal and I2S represent the majority of theCompany’s research and development spending. The expenses associated with theseprograms totaled approximately 73% of total research and development expensesfor both the three and nine months ended September 30, 2003, respectively,as compared to 70% and 75% of total research and development expenses for thecorresponding periods in 2002. Expenses associated with the Company’spreclinical and clinical programs related to the Company’s products for thetreatment of other rare genetic diseases, and Gene-Activated protein products,accounted for the balance of the Company’s research and development expensesfor the three and nine months ended September 30, 2003.

 

For the three months ended September 30,2003, research and development expenses for the Replagal program totaled$6,260,000, a decrease of $3,091,000, or 33%, from $9,351,000 in thecorresponding period of 2002.  For thenine months ended September 30, 2003, research and development expenses forthe Replagal program totaled $18,927,000, a decrease of $13,715,000, or 42%,from $32,642,000 in the corresponding period of 2002.  The decreases in the 2003 periods primarily are the result of theconclusion of certain Replagal clinical trials prior to the beginning of the2003 periods as well as decreased expenses incurred in connection withproducing clinical materials.  Also, inthe first quarter of 2002, the Company incurred set up and technology transferfees totaling $5,500,000 paid to the contract manufacturer referred toabove.  Costs for the Replagal programinclude basic research, the costs of clinical trials, manufacturing costs ofclinical supplies and regulatory costs associated with preparation of worldwideproduct marketing applications.

 

The amount of future research and developmentexpenses associated with the Replagal program 

 

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is not reasonably certain because these costs aredependent principally upon the regulatory requirements which may lead toadditional expenditures.  Thoseadditional expenditures include costs for additional regulatory information ,additional clinical trials and obtaining marketing authorization in othercountries, if granted, particularly with respect to the United States.

 

For the three months ended September 30,2003, research and development expenses for the I2S program totaled $6,849,000,an increase of $1,431,000, or 26%, from $5,418,000 in the corresponding periodof 2002.  For the nine months endedSeptember 30, 2003, research and development expenses for the I2S programtotaled $21,802,000, an increase of $8,445,000, or 63%, from $13,357,000 in thecorresponding period of 2002.  Theincreases in the 2003 periods were due to increases in allocated employee costsassociated with I2S research and development and the Company’s pivotal clinicaltrial for which enrollment was initiated in September 2003.  In addition, expenditures for themanufacture of I2S for use in the Company’s pivotal clinical trial and costsfor ongoing maintenance of clinical trials for patients who were enrolled inthe completed Phase I/II study contributed to the increase in expenses periodover period.

 

Future research and development costs for the I2Sprogram are not reasonably certain because such costs are dependent on a numberof variables, including the cost and design of any additional clinical trials,uncertainties in the timing of the regulatory process, and the costs associatedwith large-scale manufacture of I2S. The Company estimates that the total cost of its pivotal clinical trialof I2S may total approximately $10,000,000 to $15,000,000 in 2004.  The Company expects that costs to supportapplications for marketing approval of I2S in 2005 for I2S will be significantin 2004.

 

*Intellectual Property License Fee Expense*

 

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

 

Under the license agreement, the Company agreedthat the number of shares of common stock initially issued to Cell Genesyswould be adjusted at the time the Company registered such shares for resaleunder the Securities Act of 1933, as amended (the “Securities Act”), if themarket value of such shares at that time was greater or less than $15,000,000,as calculated in accordance with a predetermined formula. Pursuant to theagreed upon formula, at December 31, 2002 with the closing price of theCompany’s common stock at $9.90 per share, the Company would have been requiredto issue to Cell Genesys an additional 1,148,000 shares of common stock. As aresult, the Company recorded an additional non-cash license fee expense of$8,660,000 in the fourth quarter of 2002.

 

In January 2003, the Company and CellGenesys renegotiated the consideration paid for the license, and the Companyrepurchased the shares of stock issued to Cell Genesys for $15,000,000 in cash.The Company incurred an additional license expense in the first quarter of 2003of $1,350,000, which represents the further decline in the market value of theCompany’s 

 

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common stock from December 31, 2002 toJanuary 15, 2003.  The repurchasedshares have been recorded as treasury stock.

 

Under the license agreement, Cell Genesys alsohas the potential to receive certain milestone payments from the Companycontingent upon the outcome of related patent matters under the licenseagreement. If all of the milestones are achieved, the Company will be obligatedto pay Cell Genesys an aggregate of $17,000,000 payable in part in cash and inpart in stock. The Company is not required to make royalty payments to CellGenesys.

 

*Selling, General and Administrative Expenses*

 

For the three months ended September 30,2003, selling, general and administrative expenses were $7,285,000, a decreaseof $19,000, from $7,304,000 for the corresponding period in 2002.  For the nine months ended September 30,2003, selling, general and administrative expenses were $25,863,000, anincrease of $4,660,000, or 22%, from $21,203,000 for the corresponding periodin 2002.  Contributing to this increasewere costs incurred for ongoing Replagal sales and marketing initiatives inEurope and other countries, executive severance charges and occupancy costsrelated to the Company’s new corporate headquarters.  The Company anticipates that selling, general and administrativeexpenses related to TKT’s new corporate headquarters will continue to increasein 2003 as compared to 2002, because the Company will occupy the facility for afull year in 2003 and it only occupied the facility for two months in 2002.

 

Selling, general and administrative expensesrelated to sales and marketing activities for Replagal for the three monthsended September 30, 2003 decreased by $888,000 to $3,089,000 from$3,977,000 for the three months ended September 30, 2002. The decreasequarter over quarter reflects expenses related to the expansion of U.S.commercial operations incurred in the third quarter of 2002 which expansion wasdiscontinued in 2003.  Sales andmarketing expenses related primarily to Replagal for the nine months endedSeptember 30, 2003 increased by $602,000 to $11,436,000 from $10,834,000for the nine months ended September 30, 2002.  In general, the increase year over year was due to increasedEuropean sales and marketing efforts by TKT Europe - 5S AB, the Company’smajority owned, consolidated subsidiary (“TKT Europe”).

 

*Restructuring Charges*

 

In February 2003, TKT announced a majorreorganization in an effort to reduce costs and narrow the scope of theCompany’s research initiatives. Under this reorganization, TKT is focusing itsresearch, development, and commercialization efforts primarily on therapeuticsfor the treatment of rare genetic diseases caused by protein deficiencies. TheCompany is seeking collaborative partners for its Gene-Activated proteinproducts, which are versions of proteins that would compete with proteinscurrently being marketed by third parties, and for its gene therapy programs.

 

As part of the restructuring, during the firstquarter of 2003, TKT reduced its U.S. headcount by approximately 100 positions.TKT has further reduced its headcount through attrition, with the goal ofhaving approximately 310 to 325 full-time U.S. employees by the end of 2003.  As of 

 

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September 30, 2003, TKT had 320 full-timeU.S. employees. TKT has also consolidated its facilities as part of therestructuring.

 

As a result of the restructuring, the Companyrecorded charges of $2,765,000 and $11,324,000 for the three and nine monthsended September 30, 2003, respectively, in accordance with SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities”.  The charges in the three month periodended September 30, 2003 primarily include the remaining lease obligation forone of the Company’s facilities that was vacated during the quarter.  Includedin the nine month charge is $1,354,000 of employee severance and outplacementservices costs for 74 employees, primarily in research and development,$9,396,000, representing the remaining lease obligation for four facilitiesthat the Company no longer occupies, and a write-down of $574,000 for leaseholdimprovements for facilities which were vacated.  The Company’s employee-related and facility consolidationrestructuring actions have been substantially completed as ofSeptember 30, 2003.  The Companywill continue to record restructuring charges primarily related to vacated facilityexpenses during the remainder of the lease terms until such facilities aresublet.

 

*Interest Income*

 

Interest income was $412,000 for the three monthsended September 30, 2003, a decrease of $1,293,000, from $1,705,000 forthe three months ended September 30, 2002.  For the nine months ended September 30, 2003, interestincome was $1,784,000, a decrease of $4,472,000, from $6,256,000 for the ninemonths ended September 30, 2002. Interest income decreased in the three and nine months ended September 30,2003 as a result of significantly lower cash and marketable securities balancesand as well as lower rates of return in 2003. Specifically, during the third quarter of 2003, average cash andmarketable securities balances were $191,753,000 compared to $ 307,538,000 forthe same period of 2002.  For the ninemonths ended September 30, 2003 and 2002, the average cash and marketablesecurities balances were $210,300,000 and $ 348,082,000, respectively.

 

*Minority Interest*

 

The Company recorded minority interest in the netincome/(loss) of TKT Europe of $31,000 net loss during the three months endedSeptember 30, 2003 and $305,000 of TKT Europe net income during the ninemonths ended September 30, 2003.

 

*Net Loss*

 

The Company had a net loss of $13,553,000 and$20,902,000 for the third quarter ended September 30, 2003 and 2002,respectively. Basic and diluted net loss per share was $0.39 and $0.60 for thethree months ended September 30, 2003 and 2002, respectively.

 

The Company had a net loss of $60,518,000 and$82,250,000 for the nine months ended September 30, 2003 and 2002,respectively. Basic and diluted net loss per share was $1.75 for the ninemonths ended September 30, 2003, as compared to a basic and diluted netloss per share of $2.38 for the corresponding period in 2002.  Included in the loss for the nine monthsended September 30, 2003 and 2002 is an intellectual property license feeexpense of $1,350,000 and $26,000,000, respectively.  These charges contributed $0.04 and $0.75 to basic and diluted net

 

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loss per share for the nine months endedSeptember 30, 2003 and 2002, respectively.

 

*Liquidity and Sources of Capital*

 

Since its inception, TKT has financed itsoperations through:

•                  thesale of common and preferred stock;

•                  borrowingsunder debt agreements;

•                  revenuesfrom collaborative agreements;

•                  interestincome; and

•                  morerecently, with proceeds from product sales.

 

In the near term, TKT expects to finance itsoperations principally from existing cash, cash equivalents, marketable securities,and continued sales of Replagal.

 

*Cash Flows*

 

The Company had cash, cash equivalents andmarketable securities totaling $187,947,000 at September 30, 2003,including restricted marketable securities collateralizing letters of credittotaling $7,992,000. Cash equivalents and marketable securities are invested inUnited States government and agency obligations and money market funds.

 

The Company’s cash requirements for operatingactivities, financing activities and investment activities have significantlyexceeded its internally generated funds. The Company expects that its cashrequirements for such activities will continue to significantly exceed itsinternally generated funds until it is able to generate substantial productsales.

 

The Company used net cash of $59,789,000 foroperating activities in the first nine months of 2003.  The Company used net cash of $8,735,000during the nine months ended September 30, 2003 for property and equipmentpurchases, primarily related to leasehold improvements and equipment for theCompany’s manufacturing and research and development facilities. The Companyexpects to spend a total of approximately $10,000,000 to $20,000,000 forpurchases of property and equipment in 2003, principally for expanding itsinternal manufacturing capabilities.

 

The Company’s accounts receivable balances were$21,121,000 and $15,684,000 at September 30, 2003 and December 31,2002, respectively.  The increase atSeptember 30, 2003 was primarily due to higher Replagal sales in Europe in2003.  In certain European countries,customary payment terms on accounts receivable are significantly longer than inthe United States, particularly for orphan drug indications. In some cases, theCompany expects it could receive payments in excess of one year from theinvoice date. The Company monitors its days sales outstanding with suchcustomers in these countries, and, to date, these customers have been payingwithin the customary payment terms in such countries which may be significantlylonger than the customary payment terms in the United States. If sales in theseEuropean countries continue to increase relative to total accounts receivable,the Company expects its days sales outstanding to increase accordingly.

 

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The Company will require substantial additionalfunds to support its research and development programs, acquisition oftechnologies, preclinical and clinical testing of its products, pursuit ofregulatory approvals, acquisition of capital equipment, expansion of internalmanufacturing capabilities, selling, general and administrative expenses, andthe buyout of the minority interests in TKT Europe. The Company expects thatits existing capital resources, together with anticipated proceeds from productsales and interest income, will be sufficient to fund its operations into 2005.

 

The Company may pursue opportunities to obtainadditional external financing in the future through equity financings, debtfinancings, lease arrangements related to facilities and capital equipment, andcollaborative research and development agreements. The source, timing andavailability of any future financing will depend principally upon equity anddebt market conditions, interest rates and, more specifically, on the Company’scontinued progress in its preclinical and clinical development programs, andthe extent of its commercial success. There can be no assurance that externalfunds will be available on favorable terms, if at all.

 

The following table summarizes the Company’ssignificant contractual obligations at September 30, 2003:

 
|                                |   | **Payments Due by Period** |   |
|-------------------------------------|--------|----------------------------|--------|
| **(in thousands)**                  |   | **Less than 1  year**      |   | **1-3 years** |   | **4-5 years** |   | **After 5 years** |   | **Total** |   |
| Non-cancelable operating  leases    |   | $                          | 10,394 |   | $ | 30,152 |   | $ | 22,858 |   | $ | 20,603 |   | $ | 84,007 |   |
| Total contractual cash  obligations |   | $                          | 10,394 |   | $ | 30,152 |   | $ | 22,858 |   | $ | 20,603 |   | $ | 84,007 |   |

 

*ContractualObligations*

* *

The Company also is subject to the potentialcommitments discussed in the following two paragraphs that are not included inthe above table:

 

In April 2000, the Company established TKTEurope for the purpose of marketing, selling and distributing Replagal inEurope. Under the stockholders’ agreement for TKT Europe, the Company isentitled to purchase the European stockholders’ 20% ownership interest in TKTEurope in August 2004, for a price determined in accordance with aformula. Should the Company not exercise that right, the European stockholdersof TKT Europe can require the Company to purchase the European stockholders’ ownershipinterest sixty days thereafter. The buyout price is equal to (a) 20% of theoperating profits, as defined in the stockholders’ agreement, for the periodfrom September 1, 2003 to August 31, 2004, multiplied by a buyoutfactor of four, subject to adjustment, plus (b) 20% of the accumulated positiveearnings of TKT Europe. As a result, the amount of the buyout price isdependent on the profits of TKT Europe and the commercial success of Replagalin Europe.  While these profits cannotbe estimated at this time, the Company estimates the buyout price could bebetween $50,000,000 and $70,000,000 based on the Company’s current estimatesfor sales and expenses.

 

In June 2002, the Company obtained anexclusive license to certain patent and patent applications from Cell Genesysrelated to Cell Genesys’ approach to gene activation. In 

 

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consideration for the license, the Company paid$11,000,000 cash in June 2002 and an additional $15,000,000 inJanuary 2003. If Cell Genesys achieves all the milestones related topatent matters under the license agreement, the Company will be obligated topay Cell Genesys an aggregate of $17,000,000 payable in part in cash and inpart in stock. The Company is not required to make royalty payments to CellGenesys.

 

*Net Operating Loss Carryforwards*

 

At December 31, 2002, the Company had netoperating loss carryforwards of approximately $266,075,000, which expire atvarious times through 2022. Due to the degree of uncertainty related to theultimate use of loss carryforwards and tax credits, the Company has fullyreserved against any potential tax benefit. The future utilization of netoperating loss carryforwards and tax credits may be subject to limitation underthe changes in stock ownership rules of the Internal Revenue Code. Because ofthis limitation, it is possible that taxable income in future years, whichwould otherwise be offset by net operating losses, will not be offset and,therefore, will be subject to tax.

 

*Litigation*

 

In January and February 2003, various parties filed purportedclass action lawsuits against the Company and Dr. Richard F Selden, theCompany’s then Chief Executive Officer, in the United States District Court forthe District of Massachusetts. The complaints generally allege securities fraudduring the period from January 2001 through January 2003.  Each of the complaints asserts claims underSection 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, andSection 20(a) of the Exchange Act, and alleges that the Company and itsofficers made false and misleading statements and failed to disclose materialinformation concerning the status and progress for obtaining U.S. marketingapproval of its Replagal product to treat Fabry disease during that period.  InApril 2003, the Court consolidated the various actions under onematter.  In July2003, the plaintiffsamended the consolidated complaint to include as defendants in the action theCompany’s former Chief Financial Officer, each of the individual members of theCompany’s Board of Directors (other than Mr. Astrue), SG Cowen SecuritiesCorporation, Deutsche Bank Securities, Pacific Growth Equities, Inc., andLeerink Swann & Company and to further allege that the new defendants madefalse and misleading statements and failed to disclose material informationconcerning the status and progress for obtaining U.S. marketing approval of itsReplagal product to treat Fabry disease. In September 2003, the Company filed a motion to dismiss theAmended Complaint.  The plaintiffs’opposition to the Company’s motion has been filed, and the Company’s replybrief is due in November 2003.  Ahearing of the motion is set to occur in December 2003.  A class has not been certified.  The plaintiffs seek equitable and monetaryrelief, an unspecified amount of damages, with interest, and attorney’s feesand costs.  The Company expects that expenses related to this litigation will besignificant.  The Company expects thiscosts related to this litigation will be significant.

 

In April 2003, a shareholder derivative suitwas filed against individual members of the Company’s Board of Directors, theCompany’s former Chief Executive Officer, and the Company in Middlesex SuperiorCourt in the Commonwealth of Massachusetts. In May 2003, the parties moved to transfer venue to the BusinessLitigation Session in Suffolk Superior Court in the Commonwealth ofMassachusetts.  The parties’ motion wasallowed, and the matter was 

 

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accepted into the Business Litigation Session as Civil Action No.03-02630-BLS.  The complaint generallyalleges that the individual defendants breached fiduciary duties owed to theCompany and its stockholders by disseminating false and misleading statementsto the market concerning the status and progress for obtaining U.S. marketingapproval of Replagal and causing or allowing the Company to conduct itsbusiness improperly.  In August 2003,the plaintiff filed its Amended Derivative Complaint alleging that the individualdefendants breached fiduciary duties owed to the Company and its shareholdersby causing the Company to issue materially false and misleading statements tothe public and signing the Company’s Annual Reports on Forms 10-K for the years2000 and 2001 as well as a registration statement.  The Amended Derivative Complaint also alleges that the Company’sformer chief executive officer sold shares of Company common stock while inpossession of material non-public information. In September 2003, the Companyserved a motion to dismiss the Amended Derivative Complaint.  The plaintiff’s opposition to the Company’smotion was served in November 2003 and the Company’s reply brief is due inDecember 2003.  A hearing of the motionis set to occur in December 2003.  Theplaintiffs seek declaratory, equitable and monetary relief, an unspecifiedamount of damages, with interest, and attorney’s fees and costs.  The Company expects that expenses related tothis litigation will be significant.

 

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

 

The Company has been engaged in patent litigation with Genzyme andMount Sinai with respect to Replagal. As of September 30, 2003, the Company hadincurred approximately $4,669,000 in litigation expenses associated with theReplagal litigation.  In October 2003,pursuant to a global legal settlement, Genzyme agreed to withdraw from thissuit and agreed to pay the Company $1,555,000. In October 2003, the U.S. Court of Appeals for the Federal Circuitaffirmed a finding of non-infringement by TKT. Mount Sinai has indicated that it will petition the Federal Circuit fora rehearing en banc.  TKT believes it ispossible, but unlikely, that Mount Sinai will obtain further appellate reviewof this decision.

 

The Company and Aventis have been involved inpatent infringement actions with Amgen and Kirin-Amgen with respect to Dynepo(epoietin delta), a fully human erythropoietin for the treatment of anemiarelated to chronic renal failure. The litigation is costly and the Company isrequired to reimburse Aventis, which is paying the litigation expenses, for 50%of the expenses. Aventis is entitled to deduct up to 50% of any royalties dueto the Company from the sale of Dynepo until Aventis has recouped the fullamount of TKT’s share of litigation expenses. The Company currently estimatesthat its share of the expenses associated with the litigation will totalbetween approximately $15,000,000 and $20,000,000 by the time the matter isfinally adjudicated.

 

The Company can provide no assurance as to theoutcome of these proceedings. A decision by a court in any jurisdiction in amanner adverse to the Company could have a material adverse effect on theCompany’s liquidity and capital resources.

 

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FORWARD-LOOKING STATEMENTS

 

This quarterly report contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Exchange Act that involve risks and uncertainties.  TheCompany may, in some cases, use words such as “project,” “believe,”“anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,”“could,” “will,” or “may,” or other words that convey uncertainty of futureevents or outcomes to identify these forward—looking statements. There are anumber of important factors that could cause actual results to differmaterially from the results anticipated by these forward—looking statements.These important factors include those set forth below under “Certain FactorsThat May Affect Future Results.” These factors and the other cautionary statements made in this quarterlyreport should be read as being applicable to all related forward—looking statementswherever they appear in this quarterly report. If one or more of these factorsmaterialize, or if any underlying assumptions prove incorrect, the Company’sactual results, performance or achievements may vary materially from any futureresults, performance or achievements expressed or implied by theseforward—looking statements. In addition, any forward-looking statementsrepresent the Company’s estimates only as of the date this quarterly report wasfiled with the Securities and Exchange Commission and should not be relied uponas representing the Company’s estimates as of any subsequent date.  Whilethe Company may elect to update forward-looking statements at some point in thefuture, the Company specifically disclaims any obligation to do so, even if itsestimates change.

 

CERTAIN FACTORS THAT MAY AFFECT FUTURERESULTS

 

The following important factors could causeactual results to differ from those indicated by forward-looking statementsmade by the Company from time to time.

 

*Clinicaland Regulatory Risks*

 

**Unlesswe are able to break Fabrazyme’s orphan drug exclusivity, we will not be ableto obtain marketing approval for Replagal in the United States untilApril 2010.**

 

In April  2003, Genzyme received marketing authorization in theUnited States for Fabrazyme, its enzyme replacement therapy product for thetreatment of Fabry disease.  BecauseFabrazyme had received orphan drug designation in the United States, upon itsmarketing approval, Fabrazyme received orphan drug exclusivity. Once a productreceives orphan drug exclusivity, the FDA may not approve another applicationto market the same drug for the same indication for a period of seven years,except in limited circumstances set forth under the FDA Statute andimplementing regulations. Because Fabrazyme received marketing approval in theUnited States before Replagal and received orphan drug exclusivity, Replagalwill be excluded from the U.S. market until April 2010 unless we candemonstrate that Replagal satisfies the limited criteria for exceptions setforth in the FDA Statute and implementing regulations.

 

We are in the process of examining possible options to breakFabrazyme’s orphan drug exclusivity, and are preparing to talk to the FDA inmore detail about our options.  We mayneed to conduct additional clinical trials or analyses in order to breakFabrazyme’s orphan drug 

 

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exclusivity.  We plan to submit a request for specialprotocol assessment to the FDA in November 2003 in order to identify apossible regulatory approach that could lead to approval of Replagal in theUnited States.  This is a new and untested process in the area of orphan drugs, and wecannot predict the outcome of these discussions or guarantee that we willpursue approval in the United States.

 

**We maynot be able to obtain marketing approvals for our products, whether or not wereceive orphan drug exclusivity for our products.**

 

We are not able to market any of our products in Europe, the UnitedStates or in any other jurisdiction without marketing approval from theEuropean Commission, the FDA, or any equivalent foreign regulatory agency. Theregulatory process to obtain market approval for a new drug or biologic takesmany years and requires the expenditure of substantial resources. We have hadonly limited experience in preparing applications and obtaining regulatoryapprovals.

 

In August 2001, the European Commission granted marketingauthorization of Replagal in the European Union, approximately one year afterwe submitted our Marketing Authorization Application, or MAA, to the EuropeanAgency for the Evaluation of Medicinal Products, or EMEA, and approximatelyfive years after we filed our Investigational New Drug Application, or IND,with the FDA. We have also received approval to market Replagal in a number ofother countries.

 

We have not received approval to market and sell Replagal in the UnitedStates. As noted above, because Fabrazyme has received orphan drug exclusivity,we cannot receive approval in the United States until April 2010 unless weare able to break Fabrazyme’s orphan drug exclusivity.

 

Since we submitted a BLA for Replagal to the FDA in June 2000, wehave received two Complete Response Letters from the FDA. In the secondComplete Response Letter, which we received in November 2002, the FDAindicated that the data relating to Replagal which we had previously submittedwere not adequate for approval, primarily because of questions concerningefficacy, but that the data would be discussed at a meeting of theEndocrinologic & Metabolic Drugs Advisory Committee.

 

In January  2003, the Endocrinologic & Metabolic DrugsAdvisory Committee convened to discuss our BLA for Replagal and concluded by aunanimous vote that our clinical data did not provide substantial evidence ofefficacy. The Endocrinologic & Metabolic Drugs Advisory Committee alsoconcluded by an eight to seven vote that the renal pathology data presented byus were not adequate to serve as the basis for accelerated approval. As part ofits consideration of an application for marketing authorization, the FDA oftenrequests a review of an application for marketing authorization or parts of anapplication for marketing authorization by an advisory committee of outsideexperts. The FDA is free to accept or reject the advisory committee’srecommendations.

 

Some members of the Endocrinologic & Metabolic Drugs AdvisoryCommittee indicated that we could re-examine the pathology slides showing theeffect of Replagal on the kidney using a different analytical method, and ifsuccessful, the data from that re-examination might be sufficient to serve asthe basis for accelerated approval.  Wedecided not to commence the re-examination of the pathology slides following theFDA’s approval of Fabrazyme.  We are in the process of examining possibleoptions to break Fabrazyme’s orphan drug exclusivity and securing marketingauthorization for Replagal in the United States.  We may need to conduct 

 

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additional clinical trials and analyses in anattempt to break Fabrazyme’s orphan drug exclusivity.

 

Although the European Commission has granted marketing approval ofDynepo in the European Union, Dynepo has not been approved in the UnitedStates. In 2000, Aventis submitted a BLA to the FDA seeking marketingauthorization for Dynepo in the United States. The FDA did not accept the BLAfor filing, and requested that Aventis provide additional manufacturing data.Aventis has not yet submitted the requested additional data to the FDA, and wecannot predict whether or when Aventis will do so.  In addition, Aventis has not launched Dynepo in Europe.

 

Our I2S product for the treatment of Hunter Syndrome has completed aPhase I/II clinical trial and we are currently enrolling patients in a pivotaltrial of I2S.  We expect enrollment inthe pivotal clinical trial will be complete by the end of February 2004.

 

There can be no assurance as to whether or when any of theseapplications for marketing authorization relating to Replagal, Dynepo, I2S, oradditional applications for marketing authorization that we may make in thefuture as to these or other products, will be approved by the relevantregulatory authorities.  If approval isgranted, it may be subject to limitations on the indicated uses for which theproduct may be marketed or contain requirements for costly post-marketingtesting and surveillance to monitor safety or efficacy of the product.  If approval is not granted on a timely basisor at all, our business may be materially harmed.

 

**We maynot be able to obtain orphan drug exclusivity for our products for thetreatment of rare genetic diseases.**

 

Some jurisdictions, including Europe and the United States, maydesignate drugs for relatively small patient populations as “orphan drugs.”Orphan drug designation must be requested before submitting an application formarketing authorization. Orphan drug designation does not convey any advantagein, or shorten the duration of, the regulatory review and approval process, butdoes make the product eligible for orphan drug exclusivity and certain taxcredits in the United States. Generally, if a product with an orphan drugdesignation subsequently receives the first marketing approval for theindication for which it has such designation, the product is entitled to orphandrug exclusivity. Orphan drug exclusivity means that another application tomarket the same drug for the same indication may not be approved, except inlimited circumstances set forth in the FDA Statute and implementing regulations,for a period of up to ten years in Europe and for a period of seven years inthe United States. Obtaining orphan drug designations and orphan drugexclusivity for our products for the treatment of rare genetic diseases may becritical to the success of these products. Our competitors may obtain orphandrug exclusivity for products competitive with our products before we do asGenzyme did with Fabrazyme in the United States. Even if we obtain orphan drugexclusivity for any of our potential products, we may not be able to maintainit. For example, if a competitive product is shown to be clinically superior toour product, any orphan drug exclusivity we have obtained will not block theapproval of such competitive product.

 

In August 2001, the EMEA granted marketing authorization ofReplagal in the European Union. Genzyme’s Fabrazyme was also granted marketingauthorization in the European Union in August 2001. Replagal and Fabrazymewere granted co-exclusive orphan drug status in the European Union for up to10 years.

 

In November 2001, our I2S product for the treatment of HunterSyndrome was designated an 

 

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“orphan drug” in the United States and in Europe.

 

**If wefail to comply with the extensive regulatory requirements to which our productsare subject, we could be subject to adverse consequences and penalties.**

 

The testing, manufacturing, labeling, advertising, promotion, export,and marketing, among other things, of our products are subject to extensiveregulation by governmental authorities in Europe, the United States, andelsewhere throughout the world.

 

If one of our products is approved by the European Commission, the FDAor another regulatory agency, we and any third party manufacturers we use willbe required to comply with a number of post-approval requirements. In eachcase, the product, the facilities at which the product is manufactured, anypost-approval clinical data and our promotional activities will be subject tocontinual review and periodic inspections by the EMEA, the FDA and otherregulatory authorities.  For example, inthe United States we will be required to report certain adverse events to theFDA and to comply with certain requirements concerning advertising andpromotional labeling of the products. Also, quality control and manufacturingprocedures must continue to conform to current Good Manufacturing Practice(“GMP”) regulations after approval, and the FDA periodically inspectsmanufacturing facilities to assess compliance with GMP. Accordingly,manufacturers must continue to expend time, monies, and effort in the area ofproduction and quality control to maintain GMP compliance. In addition,discovery of problems may result in financial penalties, suspension or withdrawalof an approved product from the market, operating restrictions, and theimposition of criminal penalties.

 

In addition to regulations adopted by the EMEA, the FDA, and otherforeign regulatory authorities, we are also subject to regulation under theOccupational Safety and Health Act, the Toxic Substances Control Act, theResource Conservation and Recovery Act, and other federal, state, and localregulations.

 

**If ourclinical trials are not successful, we may not be able to develop andcommercialize our products.**

 

In order to obtain regulatory approvals for the commercial sale of ourpotential products, we and our collaborators will be required to completeextensive clinical trials in humans to demonstrate the safety and efficacy ofour products. We may not be able to commence or complete these clinical trials,either because the FDA or other regulatory agencies object, or for otherreasons.

 

The results from preclinical testing of a product that is underdevelopment may not be predictive of results that will be obtained in humanclinical trials. In addition, the results of early human clinical trials maynot be predictive of results that will be obtained in larger scale, advancedstage clinical trials. Furthermore, we, one of our collaborators, or a regulatoryagency with jurisdiction over the trials may suspend clinical trials at anytime if the subjects or patients participating in such trials are being exposedto unacceptable health risks, or for other reasons.

 

The rate of completion of clinical trials is dependent in part upon therate of enrollment of patients. Patient accrual is a function of many factors,including the size of the patient population, the proximity of patients toclinical sites, the eligibility criteria for the study, the existence of competitiveclinical trials, and the availability of alternative treatments. In particular,the patient populations for some of our products for rare genetic diseases aresmall. For instance, we believe there are about 5,000 patients worldwideafflicted with Fabry disease and about 2,000 patients worldwide afflicted withHunter syndrome in jurisdictions where 

 

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reimbursement may be possible. We are currently enrolling patients inclinical trials of I2S for the treatment of Hunter syndrome and additionaltrials of Replagal. Our I2S product for the treatment of Hunter Syndrome hascompleted a Phase I/II clinical trial and we are currently enrolling patientsin a pivotal trial of I2S.  We expectenrollment in the pivotal clinical trial will be complete by the end ofFebruary 2004.  Delays in plannedpatient enrollment may result in increased costs and prolonged clinicaldevelopment.

 

We and our collaborators may not be able to successfully complete anyclinical trial of a potential product within any specified time period. In somecases, we may not be able to complete the trial at all. Moreover, clinicaltrials may not show our potential product to be both safe and efficacious.Thus, the EMEA, the FDA and other regulatory authorities may not approve any ofour potential products for any indication.

 

**Ourresearch and development efforts may not result in products appropriate fortesting in human clinical trials.**

 

We expend significant resources on research and development andpreclinical studies of product candidates. However, these efforts may notresult in the development of products appropriate for testing in human clinicaltrials. For example, our research may result in product candidates that are notexpected to be efficacious in treating disease or that reveal safety concerns.We may postpone or terminate research and development of a product candidate ora program at any time for any reason such as the safety or efficacy of thepotential product, allocation of resources or unavailability of qualifiedresearch and development personnel.

 

**Recentadverse events in the field of gene therapy may impair our ability to obtaincollaborative partners for our gene therapy programs.**

 

We have terminated internal development of our gene therapy programsand are seeking collaborative partners with which to continue to develop theseprograms. Recent adverse events in the field of gene therapy, although notoccurring in our clinical trials, may impair our ability to enter intocollaborations for our programs. In particular, in November 1999, apatient with a rare metabolic disorder died in a gene therapy trial conductedat the University of Pennsylvania. In addition, in October 2002, a Frenchboy developed a leukemia-like disease nearly three years after participating ina gene therapy study as a baby. As a result of these and other events, a numberof gene therapy clinical trials have been terminated or suspended in the UnitedStates and in other countries, and regulatory authorities have grownincreasingly concerned about the safety of gene therapy.

 

*Litigation and Intellectual PropertyRisks*

 

**We are aparty to litigation with involving Replagal which could preclude us frommanufacturing or selling Replagal.**

 

In July 2000, Genzymeand Mount Sinai filed a patent infringement action against us in the U.S.District Court of Delaware. The complaint alleges that our activities relatingto Replagal infringe a patent licensed by Genzyme from Mount Sinai. InJanuary 2002, the U.S. District Court of Delaware dismissed this patentlitigation granting our motion for summary judgment of non-infringement anddenying Genzyme and Mount Sinai’s motion for summary judgment of infringement.Genzyme and Mount Sinai sought monetary damages and injunctive relief.

 

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In March 2002, Genzyme appealed the U.S. District Court ofDelaware’s ruling to the U.S. Court of Appeals for the Federal Circuit, and inJanuary 2003 the U.S. Court of Appeals for the Federal Circuit heard oralarguments on the appeal.  InOctober 2003, pursuant to a global legal settlement, Genzyme agreed towithdraw from this suit and agreed to pay us $1,555,000.  In October 2003, the U.S. Court ofAppeals for the Federal Circuit affirmed a finding of non-infringement byus.  Mount Sinai has filed a petition tothe Federal Circuit for a rehearing en banc. We believe it is possible, but unlikely, that Mount Sinai will obtainfurther appellate review of this decision.

 

We are a party to litigation with Amgen and Kirin-Amgen involvingDynepo which could preclude us from manufacturing or selling Dynepo.

 

In April 1997, Amgen commenced a patent infringement actionagainst us and Aventis in the U.S. District Court of Massachusetts. InJanuary 2001, the U.S. District Court of Massachusetts concluded thatDynepo infringed eight of the 18 claims of five patents that Amgen hadasserted. Amgen did not seek and was not awarded monetary damages.

 

In January 2003, theU.S. Court of Appeals for the Federal Circuit issued a decision affirming inpart and reversing in part the decision of the U.S. District Court ofMassachusetts and remanded the action to the U.S. District Court ofMassachusetts for further proceedings. In particular, the U.S. Court of Appealsfor the Federal Circuit:

 

•                                          upheldthe U.S. District Court of Massachusetts’ determination of invalidity of one ofAmgen’s patents;

 

•                                          upheldthe U.S. District Court of Massachusetts’ determination that some claims of twoother Amgen patents were infringed, but vacated the U.S. District Court ofMassachusetts’ determination that those patents were not invalid; and

 

•                                          vacatedthe U.S. District Court of Massachusetts’ determination that Replagal infringedsome claims of the two remaining Amgen patents, and vacated the U.S. DistrictCourt of Massachusetts’ determination that one of these patents was notinvalid.

 

As part of the U.S. Court of Appeals for the Federal Circuit’s ruling,it remanded the case to the U.S. District Court of Massachusetts and instructedit to reconsider the validity of Amgen’s patents in light of potentiallyinvalidating prior art.  The U.S.District Court of Massachusetts has recently concluded the remand proceedingsand heard oral argument on some of these issues in July 2003.  Additional evidence was taken and the U.S.District Court of Massachusetts has set a schedule for the filing of post-trialbriefs.  We expect that the briefingwill be completed in December 2003 and the U.S. District Court of Massachusettswill enter a decision on the remanded issues at some point during the firsthalf of 2004.  The U.S. District Courtof Massachusetts also recently issued a decision upholding its earlier findingsthat Amgen successfully rebutted the presumption of prosecution history estoppelwith respect to certain patents, and therefore, we and Aventis infringe suchpatents in light of recent Supreme Court precedents.  On remand, we and Aventis presented affirmative defenses withrespect to such patents.  Both Amgen andAventis, together with us, will have the right to appeal the decision of theU.S. District Court of Massachusetts to the U.S. Court of Appeals for theFederal Circuit.

 

 

In addition, inJuly 1999, we commenced legal proceedings with Aventis in the UnitedKingdom against Kirin-Amgen, which sought a declaration that a European patentheld by Kirin-Amgen will not be infringed by our activities relating to Dynepoand that certain claims of Kirin-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 ofthe patent asserted by Kirin-Amgen.  InJuly 2002, the Court of Appeals in the United Kingdom reversed the HighCourt of Justice and ruled that Dynepo did not infringe Kirin-Amgen’s patent.Kirin-Amgen petitioned the House of Lords to hear an

 

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appeal from the decisionof the Court of Appeals. The House of Lords agreed to hear this appeal duringthe summer of 2004.

 

We can provide no assurance as to the outcome of either litigation. Ifwe and our collaborator, Aventis, are not successful in the Dynepo litigation,we and Aventis would be precluded from making, using and selling Dynepo in theUnited States and/or in the United Kingdom. We are required to reimburseAventis, which is paying the litigation expenses, for 50% of the expenses.Aventis is entitled to deduct up to 50% of any royalties due to us from it withrespect to the sale of Dynepo until Aventis has recouped the full amount of ourshare of litigation expenses. We currently estimate that our share of theexpenses associated with the litigation will total between approximately$15.0 million and $20.0 million by the time the matter is finallyadjudicated.

 

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

 

In January and February 2003, various parties filed purportedclass action lawsuits against us and Richard Selden, our then Chief ExecutiveOfficer, in the United States District Court for the District of Massachusetts.The complaints generally allege securities fraud during the period fromJanuary 2001 through January 2003. Each of the complaints asserts claims under Section 10(b) of theExchange Act, Rule 10b-5 promulgated thereunder, and Section 20(a) of theExchange Act, and alleges that we and our officers made false and misleadingstatements and failed to disclose material information concerning the statusand progress for obtaining U.S. marketing approval of our Replagal product totreat Fabry disease during that period.

 

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

 

In July 2003, the plaintiffs filed a Consolidated and AmendedClass Action Complaint (the “Amended Complaint”) against the Company; Dr.Selden; Daniel Geffken (our former Chief Financial Officer); Walter Gilbert,Jonathan S. Leff, William R. Miller, Rodman W. Moorhead, III, James E. Thomasand Wayne P. Yetter (members of our Board of Directors); SG Cowen SecuritiesCorporation; Deutsche Bank Securities; Pacific Growth Equities, Inc.; andLeerink Swann & Company.

 

The Amended Complaint alleges securities fraud during the period fromJanuary 4, 2001 through January 10, 2003.  The Amended Complaint asserts claims against each of thedefendants under Section 11 of the Securities Act and against Dr. Seldenunder Section 15 of the Securities Act; against SG Cowen SecuritiesCorporation, Deutsche Bank Alex. Brown, Pacific Growth Equities, Inc., andLeerink Swann & Company under Section 12(a)(2) of the Securities Act;against Dr. Selden and us under Section 10(b) of the Exchange Act and Rule10b-5 promulgated thereunder; and against Dr. Selden under Section 20(a)of the Exchange Act.  The Amended 

 

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Complaint alleges that the defendants made false and misleadingstatements and failed to disclose material information concerning the status andprogress for obtaining U.S. marketing approval of our Replagal product to treatFabry disease during that period.

 

In September 2003, we filed a motion to dismiss the AmendedComplaint.  The plaintiffs’ oppositionto our motion has been filed, and our reply brief is due inNovember 2003.  A hearing of themotion is set to occur on December 4, 2003.  A class has not been certified. The plaintiffs seek equitable and monetary relief, an unspecified amountof damages, with interest, and attorney’s fees and costs.

 

In April 2003, South Shore Gastrointerology UA 6/6/1980 FBO HaroldJacob, and Nancy R. Jacob Ttee filed a Shareholder Derivative Complaint againstDr. Selden and the following members of our Board of Directors:  Jonathan S. Leff, Walter Gilbert, Wayne P.Yetter, Rodman W. Moorehead III, James E. Thomas, and William Miller, andagainst us as nominal defendant, in Middlesex Superior Court in theCommonwealth of Massachusetts, Civil Action No. 03-1669.  On May 29, 2003, the parties moved totransfer venue to the Business Litigation Session in Suffolk Superior Court inthe Commonwealth of Massachusetts.  Theparties’ motion was allowed, and in June 2003 the matter was accepted intothe Business Litigation Session as Civil Action No. 03-02630-BLS.

 

The complaint alleges that the individual defendants breached fiduciaryduties owed to us and our shareholders by disseminating materially false andmisleading statements to the market and causing or allowing us to conduct ourbusiness in an “unsafe, imprudent and unlawful manner.”  The complaint purports to assert derivativeclaims against the individual defendants for breach of fiduciary duty, and toassert a claim for contribution and indemnification on behalf of us for anyliability we incur as a result of the individual defendants’ allegedmisconduct.  The complaint seeksdeclaratory, equitable and monetary relief, an unspecified amount of damages,with interest, and attorney’s fees and costs.

 

In August 2003, the plaintiff filed its Verified Amended DerivativeComplaint (“Amended Derivative Complaint”). The Amended Derivative Complaint alleges that the individual defendantsbreached fiduciary duties owed to us and our shareholders by causing us toissue materially false and misleading statements to the public and signing ourForm 10-Ks for the years 2000 and 2001 as well as a registrationstatement.  The Amended DerivativeComplaint also alleges that defendant Dr. Selden sold our stock while inpossession of material non-public information.

 

In September 2003, we served a motion to dismiss the AmendedDerivative Complaint.  The plaintiff’sopposition to our motion was served in November 2003 and the Company’sreply brief is due in December 2003. A hearing of the motion is set to occur in December 2003.  The plaintiffs seek declaratory, equitableand monetary relief, an unspecified amount of damages, with interest, andattorney’s fees and costs.

 

We expect that the costsrelated to these suits will be significant. We can provide no assurance as to the outcome of any of these suits. Ifwe are not successful in defending these actions, our business, results ofoperations and financial condition could be adversely affected.

 

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**The SEC is investigating us regarding ourpublic disclosures and filings, as well as transactions in our securities,which could have a material adverse effect on our financial condition.**

 

On May 14, 2003, we received a copy of a formal order ofinvestigation by the SEC. The order of investigation relates to our disclosuresand public filings with regard to Replagal and the status of the FDA’s approvalprocess for Replagal, as well as transactions in our securities.  We are and will continue to fullycooperate with the SEC in the investigation.

 

If this investigation results in a determination that we have failed toproperly disclose information relating to Replagal and the status of the FDA’sapproval process for Replagal or that there were improper transactions in oursecurities, we could be subject to substantial fines or penalties and othersanctions. An adverse determination could have a material effect on ourfinancial position and results of operations. However, at this time, we cannotaccurately predict the outcome of this proceeding.  In addition, even if we are successful, this investigation maydivert the attention of our management and other resources that would otherwisebe engaged in running our business.

 

**We maybecome involved in additional and expensive patent litigation or otherproceedings.**

 

The biotechnology industry has been characterized by significantlitigation, and other proceedings regarding patents, patent applications, andother intellectual property rights. We may become a party to additional patentlitigation and other proceedings with respect to our proteins or othertechnologies. Such litigation could result in liability for damages, preventour development and commercialization efforts, and divert management’sattention and resources.

 

An adverse outcome in any patent litigation or other proceedinginvolving patents could subject us to significant liabilities to third partiesand require us to cease using the technology or product that is at issue or tolicense the technology or product from third parties. We may not be able toobtain any required licenses on commercially acceptable terms, or at all.

 

The cost to us of any patent litigation or other proceeding, even ifresolved in our favor, could be substantial. Some of our competitors may beable to sustain these costs more effectively than we can because of theirsubstantially greater financial resources. Uncertainties resulting from theinitiation and continuation of patent litigation or other proceedings couldhave a material adverse effect on our ability to develop, manufacture, andmarket products, form strategic alliances, and compete in the marketplace.

 

**If weare unable to obtain patent protection for our discoveries, the value of ourtechnology and products may be adversely affected.**

 

Our success will depend in large part on our ability to obtain patentprotection for our processes and products in the United States and othercountries. The patent situation in the field of biotechnology generally ishighly uncertain and involves complex legal, scientific and factual questions.We may not be issued patents relating to our technology. Even if issued,patents may be challenged, invalidated, or circumvented. Our patents also maynot afford us protection against competitors with similar technology. Becausepatent applications in the United States are 

 

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maintained in secrecy until patents issue, third parties may have filedor maintained patent applications for technology used by us or covered by ourpending patent applications without our being aware of these applications.

 

We may not hold proprietary rights to certain product patents, processpatents, and use patents related to our products or their methods ofmanufacture. In some cases, these patents may be owned or controlled by thirdparties. As a result, we may be required to obtain licenses under third partypatents to market certain of our potential products. If licenses are notavailable to us on acceptable terms, we may not be able to market theseproducts.

 

**If weare unable to protect the confidentiality of our proprietary information andknow-how, the value of our technology and products will be adversely affected.**

 

We rely upon unpatented proprietary technology, processes, andknow-how. We seek to protect this information in part by confidentialityagreements with our employees, consultants, and other third party contractors.These agreements may be breached, and we may not have adequate remedies for anysuch breach. In addition, our trade secrets may otherwise become known or beindependently developed by competitors.

 

**If wefail to comply with our obligations under the agreements under which we licensecommercialization rights to products or technology from third parties, we couldlose license rights.**

 

We are a party to over 20 patent licenses under which we haveacquired rights to proprietary technology of third parties, including a licenseto patents related to I2S, and expect to enter into additional patent licensesin the future. These licenses impose various commercialization, sublicensing,royalty, insurance, and other obligations on us. If we fail to comply withthese obligations, the licensor may have the right to terminate the license andwe could lose our license to use the acquired rights. If these rights are lost,we may not be able to market products that were covered by the license.

 

*Business Risks*

 

**Ourrevenue from product sales is dependent on the commercial success of Replagal.**

 

Replagal is our only commercial product. We expect that Replagal willaccount for all of our product sales into at least 2005. The commercial successof Replagal will depend on its acceptance by physicians, patients and other keydecision-makers for the treatment of Fabry disease. The commercial success ofReplagal will depend in part upon Replagal receiving marketing approval in theUnited States, Japan and other countries. As noted above, because Fabrazyme received orphan drug exclusivity inthe United States, approval for Replagal in the United States will be difficultto obtain.

 

**We facesignificant competition, which may result in others discovering, developing orcommercializing products before, or more successfully, than we do.**

 

The biotechnology industry is highly competitive and characterized byrapid and significant technological change. Our competitors includepharmaceutical companies, biotechnology firms, universities, and other researchinstitutions. Many of these competitors have substantially greater financialand other resources than we do and are conducting extensive research anddevelopment activities on technologies and products similar to, or competitivewith, ours.

 

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We may be unable to develop technologies and products that are moreclinically efficacious or cost-effective than products developed by ourcompetitors. Even if we obtain marketing approval for our product candidates,many of our competitors have more extensive and established sales, marketing,and distribution capabilities than we do. Litigation with third parties,including litigation with Amgen, Genzyme and Serono, could delay our time tomarket or preclude us from reaching the market for certain products and enableour competitors to more quickly and effectively penetrate certain markets.

 

*Therapeuticsfor the Treatment of Rare Genetic Diseases*

 

We believe that the primary competition with respect to our productsfor the treatment of rare genetic diseases is from biotechnology and smallerpharmaceutical companies. Competitors include BioMarinPharmaceutical Inc., Celltech Group plc, Genzyme, and OsirisTherapeutics, Inc. The markets for some of the potential therapeutics forrare genetic diseases caused by protein deficiencies are quite small. As aresult, if competitive products exist, we may not be able to successfullycommercialize our products.

 

We believe that our primary competition with respect to Replagal isGenzyme. Replagal and Fabrazyme were each granted marketing authorization inthe European Union and were also granted co-exclusive orphan drug status in theEuropean Union for up to 10 years. Fabrazyme has received marketing authorization and orphan drugexclusivity in the United States.

 

We believe Genzyme’s product Cerezyme is our primary competition withrespect to our enzyme replacement therapy for the treatment of Gaucher disease.

 

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

 

In our Gene-Activated protein program, we are developing Gene-Activatedprotein products that would compete with proteins that are currently beingmarketed by third parties. For instance, in the case of Dynepo, competingproducts are marketed by Amgen, Johnson & Johnson, F. Hoffmann-LaRoche Ltd. (Boehringer Mannheim GmbH), Sankyo Company Ltd., ChugaiPharmaceutical Co., Ltd., and the pharmaceutical division of Kirin BreweryCo., Ltd. in Japan.

 

Many of the products against which our Gene-Activated proteins wouldcompete have well-known brand names, have been promoted extensively and haveachieved market acceptance by third-party payors, hospitals, physicians, andpatients. In addition, many of the companies that produce these proteinproducts have patents covering techniques used to produce these products, whichhave often served as effective barriers to entry in the therapeutic proteinsmarket. As with Amgen and its erythropoietin product, these companies may seekto block our entry into the market by asserting that our Gene-Activatedproteins infringe their patents. Many of these companies are also seeking todevelop and commercialize new or potentially improved versions of theirproteins.

 

*GeneTherapy*

 

Our gene therapy system will have to compete with other gene therapysystems, as well as with conventional methods of treating the disease andconditions targeted. Although no gene therapy product is currently marketed, anumber of companies, including major biotechnology and pharmaceuticalcompanies, such as Amgen and Serono, are actively involved in this field.

 

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**Themarket may not be receptive to our products upon introduction.**

 

The commercial success of any of our products for which we obtainmarketing approval from the European Commission, the FDA, and other regulatoryauthorities will depend upon their acceptance by patients, the medicalcommunity and third party payors as clinically effective, safe andcost-effective. It may be difficult for us to achieve market acceptance of ourproducts.

 

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

 

•      the timing ofthe receipt of marketing approvals;

•      the countriesin which such approvals are obtained; and

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

 

**We havelimited experience and resources in manufacturing and are incurring significantcosts to develop this experience, and we continue to rely on third parties tomanufacture our products on our behalf.**

 

We have limited manufacturing experience.  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, both internalmanufacturing and contract manufacturing by third parties to meet ourproduction requirements for preclinical testing, clinical trials, andcommercial supply.

 

We are investing, and may need to invest in the future, substantial additionalfunds to build our own manufacturing facilities, and we need to recruitqualified personnel in order to operate any manufacturing facilities. There canbe no assurance that we will be able to successfully build or operate our ownfacilities, that our facilities will comply with applicable regulations or thatour facilities will enable us to manufacture our products at a commerciallyreasonable cost.

 

Prior to July 2003, we relied on contract manufacturingarrangements with third parties for the production of Replagal for commercialsale, including fill and finish services. These third parties manufacturedReplagal bulk drug substance and performed fill and finish services. InJuly 2003, we received approval from European regulators to manufacture thebulk drug substance of Replagal at our manufacturing facility in Cambridge,Massachusetts. We intend to manufacture bulk substance for Replagal at thisfacility.  We also intend to manufactureI2S for clinical trials in our Cambridge, Massachusetts manufacturing facility.If we are unable to successfully manufacture Replagal and I2S in this facility,we may not be able to supply our markets or complete our clinical trials.

 

To the extent that we are a party to manufacturing arrangements withthird parties, we are dependent upon these third parties to perform theirobligations in a timely manner and in accordance with applicable governmentregulations. For instance, we are a party to several arrangements with respectto various aspects of the manufacture of Replagal and I2S, including fill andfinish activities. Each of these manufacturing arrangements relates to onlycertain aspects of the manufacturing process. In the event that any one ofthese manufacturers fails to or is unable to comply with its obligations underits manufacturing agreement with us, and if the manufacturer’s failurematerially delays the ultimate production of Replagal or I2S and adverselyaffects our inventory levels, our sales of Replagal or the timing of our I2Sclinical trials could be adversely affected.

 

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In addition, the value of the inventory under the control of a thirdparty finish and fill company far exceeds the amount of liability such thirdparties are willing to assume for their negligence.

 

Under our collaborative agreement with Aventis, Aventis is responsiblefor the manufacture of Dynepo for clinical trials and commercial sales and isalso responsible for conducting future clinical trials and commercial sales. Weare not a party to any other arrangements relating to the manufacture of Dynepoand, as a result, we are dependent on Aventis and its third party manufacturerfor the manufacture of Dynepo.

 

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

 

Any manufacturing of our products must comply with GMP as required bythe countries in which we intend to sell our products. Before approving anapplication for marketing authorization for a product, the FDA, the EuropeanCommission, or other equivalent foreign regulatory agency will inspect thefacilities at which the product is manufactured. If we or our third partymanufacturers do not comply with applicable GMP, such regulatory agency mayrefuse to approve our application for marketing authorization. Once theregulatory agency approves a product, we or our third party manufacturers mustcontinue to comply with GMP. If we or our third party manufacturers fail tomaintain compliance with GMP, adverse consequences can result, includingsuspension or withdrawal of an approved product from the market, operatingrestrictions, and the imposition of civil and criminal penalties.

 

**If we failto manage our inventory correctly, we could experience supply shortages or asignificant build-up of high-cost products.**

 

Manufacture of proteins, including our products and potential products,is expensive and requires lengthy production cycle times.  We build inventory in order to ensure theadequate supply to patients of our products and potential products, includingReplagal and I2S.  Accordingly, we havesignificant capital invested in inventory because of the high cost ofmanufacturing protein products, including Replagal and I2S.  However, we have limited experience inmanaging our supply for Replagal and our other potential products.  If we fail to keep an adequate inventory ofour products, it is possible that patients could miss treatments, which couldhave an adverse effect on our ability to sell our products.  Conversely, if we are unable to sell ourhigh-cost inventory in a timely manner, or if our high-cost inventory were tobe destroyed or expire, we could experience cash flow difficulties as well aslosses.

 

**If wefail to obtain reimbursement, or an adequate level of reimbursement, by thirdparty payors in a timely manner for our products, we may not have commerciallyviable markets for our products.**

 

In certain countries, particularly the countries of the European Union,the pricing of prescription pharmaceuticals and the level of reimbursement aresubject to governmental control. In some countries, it can take an extendedperiod of time to establish and obtain reimbursement, and reimbursementapproval may be required at the individual patient level, which can lead tofurther 

 

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delays. In addition, in some countries such as Italy, Spain andBelgium, it can take an extended period of time to collect payment even afterreimbursement has been established.  Inthe United States, the availability of reimbursement by governmental and otherthird party payors affects the market for any pharmaceutical product. Thesethird party payors continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for medical products and services. If weare not able to obtain pricing and reimbursement at satisfactory levels for ourproducts that receive marketing approval, our revenues and results ofoperations will be adversely affected, possibly materially.

 

We expect that the prices for many of our products, whencommercialized, including in particular our products for the treatment of raregenetic diseases, may be high compared to other pharmaceutical products. Forexample, we have established pricing and reimbursement for substantially allpatients receiving Replagal in Europe. Pricing was initially established as thelocal currency equivalent of an average of approximately $165,000 per patientper year. The price remains fixed in the local currencies and varies in U.S.dollars with exchange rate fluctuations. We may encounter particular difficultyin obtaining satisfactory pricing and reimbursement for products for which we seeka high price.

 

The Centers for Medicare and Medicaid Services of the United StatesDepartment of Health and Human Services has considered proposals from time totime to reduce the reimbursement rate with respect to erythropoietin. If Dynepois approved and commercialized, adoption by the Centers for Medicare andMedicaid Services of any such proposal might have an adverse effect on thepricing of Dynepo.

 

We also may experience pricing pressure with respect to Replagal andother products for which we may obtain marketing approval due to the trendtoward managed health care, the increasing influence of health maintenanceorganizations and legislative proposals. We may not be able to sell ourproducts profitably if reimbursement is unavailable or limited in scope oramount.

 

**We havelimited sales and marketing experience and capabilities and will need todevelop this expertise or depend on third parties to successfully sell andmarket our products on our behalf.**

 

We have limited sales and marketing experience and capabilities. Inorder to market our products, including Replagal, we will need to develop thisexperience and these capabilities or rely upon third parties, such as ourcollaborators, to perform these functions. If we rely on third parties to sell,market, or distribute our products, our success will be dependent upon theefforts of these third parties in performing these functions. In manyinstances, we may have little or no control over the activities of these thirdparties in selling, marketing, and distributing our products. If we choose toconduct these activities directly, as we plan to do with respect to some of ourpotential products, we may not be able to recruit and maintain an effectivesales force.

 

Currently, TKT Europe, our 80% owned subsidiary, markets Replagal inEurope. As a result, our ability to successfully market and sell Replagal inEurope is dependent on the marketing personnel of TKT Europe. We have an 80%equity interest in TKT Europe; the European stockholders own the remaining 20%equity interest in TKT Europe. Although our consent is required for varioussignificant matters relating to the operation of TKT Europe, most day-to-dayoperations of TKT Europe are directed by the European stockholders. If weshould determine to buy out TKT Europe or if the European stockholders exercisetheir contractual right to require us 

 

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to buy them out, our ability to successfully market and sell Replagalin Europe would be dependent on our ability to attract and retain experiencedmarketing and sales personnel.

 

**Competitionfor technical, commercial and administrative personnel is intense in ourindustry and we may not be able to sustain our operations or grow if we areunable to attract and retain key personnel.**

 

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

 

Our future growth will require hiring a significant number of qualifiedtechnical, commercial and administrative personnel. Accordingly, recruiting andretaining such personnel in the future will be critical to our success. Thereis intense competition from other companies and research and academicinstitutions for qualified personnel in the areas of our activities. If we arenot able to continue to attract and retain, on acceptable terms, the qualifiedpersonnel necessary for the continued development of our business, we may notbe able to sustain our operations or grow.

 

**Wedepend on our collaborators to develop, conduct clinical trials, obtainregulatory approvals for, and manufacture, market and sell certain products onour behalf and their efforts may not be scientifically or commercially successful.**

 

We are parties to collaborative agreements with third parties relatingto certain of our principal products. We are relying on Aventis to develop,conduct clinical trials, obtain regulatory approvals for, and manufacture,market, and sell Dynepo in the United States and Europe; and Sumitomo todevelop and commercialize Replagal for Fabry disease in Japan, Korea, andChina. Our collaborators may not devote the resources necessary or mayotherwise be unable or unwilling to complete development and commercializationof these potential products. Our existing collaborations are subject totermination without cause on short notice under specified circumstances.

 

Our existing collaborations and any future collaborative arrangementswith third parties may not be scientifically or commercially successful.Factors that may affect the success of our collaborations include thefollowing:

 

•      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 that could affect our collaborative partners’ commitment to thecollaboration with us;

 

•      reductions in marketing orsales efforts or a discontinuation of marketing or sales of our products by ourcollaborators would reduce our revenues, which will be based on a percentage ofnet sales by the collaborator;

 

•      our collaborators mayterminate their collaborations with us, as Aventis has done with respect to ourGA-GCSF product, which could make it difficult for us to attract newcollaborators or adversely affect the perception of us in the business andfinancial communities; and

 

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•      our collaborators may pursuehigher priority programs or change the focus of their development programs,which could affect the collaborator’s commitment to us.

 

**We maybe exposed to product liability claims and may not be able to obtain adequateproduct liability insurance.**

 

Our business exposes us to the risk of product liability claims that isinherent in the manufacturing, testing, and marketing of human therapeuticproducts. We maintain clinical trial liability insurance and product liabilityinsurance in amounts that we believe to be reasonable. This insurance issubject to deductibles and coverage limitations. We may not be able to obtainadditional insurance or maintain insurance on acceptable terms or at all.Moreover, any insurance that we do obtain may not provide adequate protectionagainst potential liabilities. If we are unable to obtain insurance atacceptable cost or otherwise protect against potential product liabilityclaims, we will be exposed to significant liabilities, which may materially andadversely affect our business and financial position. These liabilities couldprevent or interfere with our product commercialization efforts.

 

*Financing Risks*

 

**We havenot been profitable and expect to continue to incur substantial losses.**

 

We have experienced significant operating losses since our inception in1988. As of September 30, 2003, our accumulated deficit was $426.0million. We had net losses of $129.8 million, $70.2 million and$51.0 million in 2002, 2001 and 2000, respectively.

 

We expect that we will continue to incur substantial losses and that,until we have substantial product sales, our cumulative losses will continue toincrease. We recorded $34.7 million in product sales in 2002 and $41.8million in product sales for the nine months ended September 30, 2003. Weexpect that the losses that we incur will fluctuate from quarter to quarter andthat these fluctuations may be substantial.

 

**We mayneed additional financing, which may be difficult to obtain. If we do notobtain additional financing, our financial condition will be adverselyaffected.**

 

We expect that our existing capital resources, together withanticipated proceeds from product sales, anticipated cash payments undercollaborative agreements, and interest income, will be sufficient to fund ouroperations into 2005. 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. Our future capital requirements will depend on manyfactors, including the following:

 

•      the timing andamount of Replagal product sales, as well as the cash collections on receivables;

 

•      continued progress in ourresearch and development programs, particularly I2S, as well as the magnitudeof these programs;

 

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•      the scope and results of ourclinical trials;

 

•      the timing of, and the costsinvolved in, obtaining regulatory approvals;

 

•      the cost of manufacturingactivities;

 

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

 

•      the costs involved inpreparing, filing, prosecuting, maintaining, and enforcing patent claims andother patent-related costs, including litigation costs and the results of suchlitigation;

 

•      our ability to establish andmaintain collaborative arrangements; and

 

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

 

If we determine to seek additional funding, we may do so throughcollaborative arrangements and public or private financings. Additionalfinancing may not be available to us on acceptable terms, if at all. If we donot obtain additional financing, our financial condition will be adverselyaffected.

 

If we raise additional funds by issuing equity securities, furtherdilution to our then existing stockholders will result. In addition, the termsof the financing may adversely affect the holdings or the rights of suchstockholders. If we are unable to obtain funding on a timely basis, we may berequired to significantly curtail one or more of our research or developmentprograms. We also could be required to seek funds through arrangements withcollaborators or others that may require us to relinquish rights to certain ofour technologies, product candidates, or products which we would otherwisepursue on our own.

 

**ITEM 3****.   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

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

 

As of September 30, 2003, the Company did not have any off-balancesheet arrangements.

 

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The Company has exposure to currency risk for Replagal sales in Europe.Pricing was initially established as the local currency equivalent of anaverage annual per patient price of approximately $165,000. The price remainsfixed in the local currencies and varies in U.S. dollars with exchange ratefluctuations.  Foreign currencyfluctuations favorably contributed $1,997,000and $6,916,000, respectively, to product sales for the three and ninemonths ended September 30, 2003 as compared to the same periods of 2002.

 

**ITEM 4****.   CONTROLSAND PROCEDURES.**

 

The Company’s management, with the participation of the Company’s Presidentand Chief Executive Officer and the Company’s Chief Financial Officer,evaluated the effectiveness of the Company’s disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as ofSeptember 30, 2003. Based on this evaluation, the Company’s President andChief Executive Officer and the Company’s Chief Financial Officer concludedthat, as of September 30, 2003, the Company’s disclosure controls andprocedures were (1) designed to ensure that material information relating tothe Company, including the Company’s consolidated subsidiaries, is made knownto the Company’s President and Chief Executive Officer and the Company’s ChiefFinancial Officer by others within these entities, particularly during theperiod in which this report was being prepared and (2) effective, in that theyprovide reasonable assurance that information required to be disclosed by theCompany in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

 

In 2002, sales of the Company’s Replagal product became material to theCompany’s consolidated financial statements. Sales totaled approximately $35million for 2002 and approximately $41.8 million for the nine months endedSeptember 30, 2003. The sales are transacted through and recorded by theCompany’s 80% owned subsidiary, TKT Europe. During 2002, with respect to TKTEurope, the Company did not have a timely flow of critical accounting andrelated financial information and experienced difficulties and delays inverifying that product sales were being properly recognized as revenue inaccordance with United States generally accepted accounting principles. TheCompany’s independent auditors, in connection with their audit of the Company’sconsolidated financial statements for the year ended December 31, 2002,informed management and the Company’s audit committee that, in their judgment,a material weakness in the Company’s internal control system existed as aresult of these issues. Members of the Company’s United States accounting andfinance group have been discussing implementing procedures to address theseissues with the accounting personnel of TKT Europe.

 

Notwithstanding these issues, in light of the processes involved in thepreparation by the Company of its consolidated financial statements for theyear ended December 31, 2002, management of the Company believes thatthose financial statements fairly presented the Company’s consolidatedfinancial position as of, and the consolidated results of its operations for,the year ended on that date. Moreover, as part of these processes, managementconcluded that no adjustments were needed to such financial statements or withrespect to amounts reported for interim periods in the year endedDecember 31, 2002. The Company’s independent auditors rendered anunqualified opinion with respect to the Company’s consolidated financialstatements 

 

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for the year ended December 31, 2002.

 

In connection with the preparation by the Company of its consolidatedfinancial statements for the three months and nine months endedSeptember 30, 2003, the Company did not experience any difficulties ordelays in obtaining critical accounting and related financial information orconducting its internal review processes with respect to TKT Europe. Managementof the Company believes that the condensed consolidated financial statementsfor the three months and nine months ended September 30, 2003 fairlypresent the Company’s condensed consolidated financial position as of, and thecondensed consolidated results of its operations for, the three months and ninemonths ended September 30, 2003.

 

No change to the Company’s internal control over financial reporting(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurredduring the fiscal quarter ended September 30, 2003 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**PARTII****Other Information**

 

**ITEM 1****.****                                                   LEGALPROCEEDINGS**

 

The description of thelegal proceedings set forth under note 8 of the Company’s condensed consolidatedfinancial statements in this Quarterly Report on Form 10-Q are incorporatedherein by reference.

 

**ITEM 6****.****                                                   EXHIBITSAND 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.

 

(b)                                 Reportson Form 8-K

 

Current Report on Form 8-K, furnished on July 29,2003, containing a copy of a press release announcing the Company’s financialresults for the quarter ended June 30, 2003 (including financialstatements).

 

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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:   November 14, 2003 | By:                           |    /s/ Michael J. Astrue |
|                                |                          | Michael J. Astrue |
|                                |                          | President and Chief Executive |
|                                |                          | Officer |
|                                |                          |   |
|                                |                          |   |
| Date:   November 14, 2003 | By:                           |      /s/ Gregory D. Perry |
|                                |                          | Gregory D. Perry |
|                                |                          | Vice President, Finance, and Chief  Financial Officer (Principal  Financial and Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                            |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                       |
| 10.41*          |   | Indemnification Agreement between Richard F Selden,  M.D. and the Registrant.                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                       |
| 31.1*           |   | Certification by the Registrant’s President and  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                         |
|            |   |                                                                                                                                                                                                                                                                       |
| 31.2*           |   | Certification by the Registrant’s Chief Financial  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                       |
|            |   |                                                                                                                                                                                                                                                                       |
| 32.1*           |   | Certification by the Registrant’s President and  Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange  Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002. |
|            |   |                                                                                                                                                                                                                                                                       |
| 32.2*           |   | Certification by the Registrant’s Chief Financial Officer  pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as  amended, and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.               |

 

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*  Filed herewith.

 

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