** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For the Quarter Ended September 30, 2001**

 

 

**CommissionFile Number 0–21481**

 

**TRANSKARYOTIC THERAPIES, INC.**

(Exact name ofregistrant as specified in its charter)

 

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|                                                                    |   |                                  |
|-------------------------------------------------------------------------|--------|---------------------------------------|
| **Delaware**                                                            |   | **04-3027191**                        |
| (State  or other jurisdiction of incorporation or organization)         |   | (I.R.S.  Employer Identification No.) |
|                                                                    |   |                                  |
|                                                                    |   |                                  |
| **195  Albany Street Cambridge, Massachusetts**                         |   | **02139**                             |
| (Address  of principal executive offices)                               |   | (Zip  Code)                           |
|                                                                    |
|                                                                    |
| Registrant's  telephone number, including area code: **(617) 349-0200** |

** **

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** **

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 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**

 

 

AtOctober 31, 2001, there were 26,437,191 shares of Common Stock, $.01 par value,outstanding.

 

 

 

Transkaryotic Therapies,Inc.

 

INDEX

 
|           |                                                                                                              |
|----------------|-------------------------------------------------------------------------------------------------------------------|
| PART  I.  | FINANCIAL INFORMATION                                                                                             |
|           |                                                                                                              |
| Item  1.  | Condensed  Consolidated Financial Statements (unaudited)                                                          |
|           |                                                                                                              |
|           | Condensed Consolidated  Balance Sheets as of September 30, 2001 and December 31, 2000                             |
|           |                                                                                                              |
|           | Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  September 30, 2001 and 2000 |
|           |                                                                                                              |
|           | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended September 30,  2001 and 2000           |
|           |                                                                                                              |
|           | Notes  to Condensed Consolidated Financial Statements                                                             |
|           |                                                                                                              |
| Item  2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |
|           |                                                                                                              |
| PART  II. | OTHER  INFORMATION                                                                                                |
|           |                                                                                                              |
| Item 1.        | Legal Proceedings                                                                                                 |
|           |                                                                                                              |
| Item 6.        | Exhibits and Reports  on Form 8-K                                                                                 |
|           |                                                                                                              |
| SIGNATURES     |                                                                                                              |

 

 

Part 1- Item 1- Condensed ConsolidatedFinancial Statements

 

Transkaryotic Therapies, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

 
| (in  thousands, except par values)                                                                                                                                          |   | **September 30,** |    | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|------------------|--------|
|                                                                                                                                                                        |   | **2001**          |    | **2000**         |   |
| **Assets**                                                                                                                                                                  |   |              |    |             |   |
| Current  assets:                                                                                                                                                            |   |              |    |             |   |
| Cash  and cash equivalents                                                                                                                                                  |   | $                 | 199,253 |             | $      | 49,445 |   |
| Marketable  securities                                                                                                                                                      |   | 75,633            |    | 196,011          |   |
| Inventory                                                                                                                                                                   |   | 3,421             |    | -                |   |
| Prepaid  expenses and other current assets                                                                                                                                  |   | 2,599             |    | 1,842            |   |
| Total  current assets                                                                                                                                                       |   | 280,906           |    | 247,298          |   |
| Property  and equipment, net                                                                                                                                                |   | 38,850            |    | 23,597           |   |
| Other  assets                                                                                                                                                               |   | 2,170             |    | 1,498            |   |
| Total  assets                                                                                                                                                               |   | $                 | 321,926 |             | $      | 272,393 |   |
|                                                                                                                                                                        |   |              |    |             |   |
| **Liabilities and Stockholders' Equity**                                                                                                                                    |   |              |    |             |   |
| Current  liabilities:                                                                                                                                                       |   |              |    |             |   |
| Accounts  payable                                                                                                                                                           |   | $                 | 7,288   |             | $      | 3,986 |   |
| Accrued  expenses                                                                                                                                                           |   | 9,480             |    | 8,550            |   |
| Current  maturities of long-term debt                                                                                                                                       |   | 2,000             |    | 2,500            |   |
| Total  current liabilities                                                                                                                                                  |   | 18,768            |    | 15,036           |   |
|                                                                                                                                                                        |   |              |    |             |   |
| Long-term  debt, less current maturities                                                                                                                                    |   | 8,000             |    | 9,500            |   |
|                                                                                                                                                                        |   |              |    |             |   |
| Stockholders'  equity:                                                                                                                                                      |   |              |    |             |   |
| Series  A convertible preferred stock, $.01 par value,10 shares authorized; 10 shares  issued and outstandingat September 30, 2001 and December 31, 2000,  respectively     |   | 1                 |    | 1                |   |
| Series  B preferred stock, $.01 par value, 1,000 shares authorized; no shares issued  and outstanding at September 30, 2001 and December 31, 2000, respectively             |   | -                 |    | -                |   |
| Common  stock, $.01 par value;  100,000 shares  authorized; 26,427 and 22,700 shares issued and outstanding at September 30,  2001 and December 31, 2000, respectively |   | 264               |    | 227              |   |
| Additional  paid-in capital                                                                                                                                                 |   | 510,476           |    | 413,242          |   |
| Accumulated  deficit                                                                                                                                                        |   | (216,394          | )       | (165,429         | )      |
| Deferred  compensation                                                                                                                                                      |   | (257              | )       | (860             | )      |
| Accumulated  other comprehensive income                                                                                                                                     |   | 1,068             |    | 676              |   |
| Total  stockholders' equity                                                                                                                                                 |   | 295,158           |    | 247,857          |   |
| Total  liabilities and stockholders' equity                                                                                                                                 |   | $                 | 321,926 |             | $      | 272,393 |   |

 

Seeaccompanying Notes to Condensed Consolidated Financial Statements.

 

TranskaryoticTherapies, Inc.

Condensed ConsolidatedStatements of Operations

(unaudited)

 
| (in  thousands, except per share amounts)                    |   | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** |   |
|--------------------------------------------------------------|--------|--------------------------------------|------------|-------------------------------------|--------|
|                                                         |   | **2001**                             |       | **2000**                            |   | **2001** |   | **2000** |   |
| Revenues:                                                    |   |                                 |       |                                |   |   |   |   |   |
| Product  sales                                               |   | $                                    | 537        |                                | $      | - |   | $ | 834 |   | $ | - |   |
| License  and research revenues                               |   | 294                                  |       | 5,357                               |   | 1,922 |   | 6,871 |   |
|                                                         |   | 831                                  |       | 5,357                               |   | 2,756 |   | 6,871 |   |
| Operating  expenses:                                         |   |                                 |       |                                |   |   |   |   |   |
| Research  and development                                    |   | 14,139                               |       | 13,373                              |   | 49,450 |   | 39,700 |   |
| Selling,  general and administrative                         |   | 5,507                                |       | 3,723                               |   | 16,297 |   | 9,772 |   |
|                                                         |   | 19,646                               |       | 17,096                              |   | 65,747 |   | 49,472 |   |
| Loss  from operations                                        |   | (18,815                              | )          | (11,739                             | )      | (62,991 | ) | (42,601 | ) |
| Other  income:                                               |   |                                 |       |                                |   |   |   |   |   |
| Interest  income, net                                        |   | 2,947                                |       | 4,233                               |   | 9,241 |   | 9,776 |   |
| Gain  on sale of investment                                  |   | -                                    |       | -                                   |   | 2,785 |   | - |   |
|                                                         |   | 2,947                                |       | 4,233                               |   | 12,026 |   | 9,776 |   |
| Net  loss                                                    |   | $                                    | (15,868    | )                                   | $      | (7,506 | ) | $ | (50,965 | ) | $ | (32,825 | ) |
|                                                         |   |                                 |       |                                |   |   |   |   |   |   |   |   |   |
| Basic  and diluted net loss per share                        |   | $                                    | (0.60      | )                                   | $      | (0.33 | ) | $ | (2.12 | ) | $ | (1.45 | ) |
| Shares  used to compute basic and diluted net loss per share |   | 26,408                               |       | 22,688                              |   | 24,009 |   | 22,668 |   |

 

Seeaccompanying Notes to Condensed Consolidated Financial Statements.

 

TranskaryoticTherapies, Inc.

Condensed ConsolidatedStatements of Cash Flows

(unaudited)

 
| (in  thousands)                                                               |   | **Nine Months Ended** |       |
|-------------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                          |   | **September 30,**     |       |
|                                                                          |   | **2001**              |       | **2000** |   |
| **Operating activities:**                                                     |   |                  |       |   |   |
| Net  loss                                                                     |   | $                     | (50,965    | ) | $ | (32,825 | ) |
| Adjustments  to reconcile net loss to net cash used for operating activities: |   |                  |       |   |   |
| Depreciation  and amortization                                                |   | 4,304                 |       | 1,777 |   |
| Compensation  expense related to equity issuances                             |   | 513                   |       | 561 |   |
| Changes  in operating assets and liabilities                                  |   | 39                    |       | 681 |   |
| Net  cash used for operating activities                                       |   | (46,109               | )          | (29,806 | ) |
|                                                                          |   |                  |       |   |   |
| **Investing activities:**                                                     |   |                  |       |   |   |
| Proceeds  from maturities of marketable securities                            |   | 184,977               |       | 86,815 |   |
| Purchases  of marketable securities                                           |   | (64,126               | )          | (223,106 | ) |
| Purchases  of property and equipment                                          |   | (19,557               | )          | (3,629 | ) |
| Changes  in other assets                                                      |   | (672                  | )          | (723 | ) |
|                                                                          |   |                  |       |   |   |
| Net  cash provided by (used for) investing activities                         |   | 100,622               |       | (140,643 | ) |
|                                                                          |   |                  |       |   |   |
| **Financing Activities:**                                                     |   |                  | ** ** |   | ** ** |
| Issuance  of common stock                                                     |   | 97,361                |       | 1,519 |   |
| Repayment  of long-term debt                                                  |   | (2,000                | )          | (1,000 | ) |
| Issuance  of convertible preferred stock                                      |   | -                     |       | 99,787 |   |
|                                                                          |   |                  |       |   |   |
| Net  cash provided by financing activities                                    |   | 95,361                |       | 100,306 |   |
|                                                                          |   |                  |       |   |   |
| Net  increase (decrease) in cash and cash equivalents                         |   | 149,874               |       | (70,143 | ) |
|                                                                          |   |                  |       |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                 |   | (66                   | )          | - |   |
|                                                                          |   |                  |       |   |   |
| Cash  and cash equivalents at January 1                                       |   | 49,445                |       | 151,202 |   |
|                                                                          |   |                  |       |   |   |
| Cash  and cash equivalents at September 30                                    |   | $                     | 199,253    |   | $ | 81,059 |   |

 

Seeaccompanying Notes to Condensed Consolidated Financial Statements.

 

 

TranskaryoticTherapies, Inc.

Notesto Condensed Consolidated Financial Statements(unaudited)

September30, 2001 and 2000

 

1.             BASISOF PRESENTATION

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10–Qand Article 10 of Regulation S–X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, the accompanying financial statements include alladjustments, consisting only of normal recurring adjustments, necessary for afair presentation of the financial position, results of operations and cashflows for the periods presented.  Theresults of operations for the interim period ended September 30, 2001 are notnecessarily indicative of the results to be expected for the year endingDecember 31, 2001.

 

These financialstatements should be read in conjunction with the audited consolidated financialstatements and footnotes thereto for the year ended December 31, 2000 includedin the Company's Annual Report on Form 10-K as filed with the Securities andExchange Commission.

 

Niche Protein®,Gene-Activated®, and the TKT® logo are registered trademarks of TranskaryoticTherapies, Inc. ReplagalTM and Transkaryotic TherapyTM, are trademarks ofTranskaryotic Therapies, Inc.  DynepoTMis a trademark of Aventis Pharmaceuticals, Inc. (“Aventis”).

 

2.             BASICAND DILUTED NET LOSS PER SHARE

 

The Company calculatesnet loss per share in accordance with Statement of Financial AccountingStandard (“SFAS”) No. 128, “Earnings Per Share.”  Basic earnings per share is computed using the weighted averageshares outstanding.

 

Basic net loss per sharewas equivalent to diluted net loss per share for the three and nine monthsended September 30, 2001 and 2000 since common equivalent shares fromconvertible preferred stock and stock options have been excluded as theireffect is antidilutive.

 

3.             COMPREHENSIVEINCOME

 

TheCompany had total comprehensive loss of $15,940,000 and $7,211,000 for thethree months ended September 30, 2001 and 2000, respectively.  For the nine months ended September 30, 2001and 2000, total comprehensive loss was $50,573,000 and $32,463,000, respectively.  The items of comprehensive income consistprimarily of changes in unrealized gains on marketable securities.

 

 

4.             INVENTORY

 

TheCompany capitalized $3,421,000 of Replagal production costs as inventory duringthe third quarter of 2001.  At September30, 2001, inventory primarily consisted of work in process manufacturing costsincurred subsequent to the European Agency for the Evaluation of MedecinalProducts (the "EMEA") approval of Replagal.  Replagal produced before approval was included in research anddevelopment expenses.  Inventory isstated at the lower of cost or market.

 

5.             COMMON STOCK OFFERING

 

In June 2001, theCompany agreed to sell 3,565,000 shares of its common stock at $28.50 pershare. Proceeds from the offering were approximately $96,184,000.

 

6.             TKT EUROPE - 5S AB

 

In April 2000, theCompany entered into an agreement with certain stockholders of TKT Europe –5SAB (“TKT Europe”) to establish the foundation for the Company’s Europeanoperations.   These stockholders are theprincipal managers of TKT Europe and hold a 20% ownership interest in it, whilethe Company holds the remaining 80% interest. The agreement includes provisions entitling the Company to purchase theentire 20% minority interest in TKT Europe in August 2004, under a specifiedformula.  Should the Company notexercise that right, the stockholders of TKT Europe can require the Company topurchase its interest sixty days thereafter. The buyout price cannot be determined at this time.

 

7.             LEGALPROCEEDINGS

 

The Company cannotprovide assurance as to the outcome of any legal proceeding.  A decision by a court in the U.S. or in anyother jurisdiction in a manner adverse to the Company could have a materialadverse effect on the Company’s business, financial position, or results ofoperations.

 

*ReplagalTM Patent Litigation*

 

In July 2000, GenzymeCorporation (“Genzyme”) and Mount Sinai School of Medicine of New YorkUniversity (“Mt. Sinai”) filed a patent infringement suit against the Companyin the U.S. District Court for the District of Delaware, alleging that themanufacture, use, intended sale, and/or intended offer for sale of theCompany’s Replagal product infringes one or more claims of its U.S. Patent No.5,356,804.  Genzyme and Mt. Sinai seekinjunctive relief and an accounting for damages.  Discovery proceedings commenced in February 2001, and theDistrict Court has scheduled a jury trial in this action to begin in March2002.

 

*DynepoTM Patent Litigation*

 

The Company and Aventis,its collaborative partner in the development of Dynepo (Gene-Activatederythropoietin), are involved in patent infringement actions with respect toDynepo with Amgen Inc. (“Amgen”) in the United States and Kirin-Amgen, Inc.(“Kirin Amgen”) in the United Kingdom.

 

In January 2001, theU.S. District Court for the District of Massachusetts ruled that eight ofeighteen patent claims asserted by Amgen were infringed by the Company andAventis.  In particular, the DistrictCourt ruled that the asserted claims of U.S. Patent No. 5,547,933 were notinfringed (and, if this finding is in error, that the asserted claims wereinvalid); that the asserted claims of U.S. Patent 5,618,698 were not infringed;that Claims 2, 3 and 4 of U.S. Patent No. 5,621,080 were valid, enforceable andinfringed under the doctrine of equivalents; that Claims 1, 3, 4 and 6 of U.S.Patent No. 5,756,349 were valid, enforceable and literally infringed, but thatClaim 7 of the ’349 patent was not infringed; and that Claim 1 of U.S. PatentNo. 5,955,422 was valid, enforceable and literally infringed.  Amgen did not seek and was not awardedmonetary damages.

 

In January 2001, TKT andAventis filed a Notice of Appeal from the Judgment of the District Court withthe U.S. Court of Appeals for the Federal Circuit in this case.  The Company believes it has strong groundsfor appeal.  Amgen filed a Notice ofCross-Appeal in February 2001.

 

In April 2001, theEnglish High Court of Justice ruled that one of four claims of a patentasserted by Kirin-Amgen was infringed by the Company and Aventis. The Companybelieves it has strong grounds for appeal and filed a Notice of Appeal in April2001.

 

Pursuant to an Amendedand Restated License Agreement, dated March 1995, between Aventis and theCompany, Aventis has assumed the legal costs of the Amgen and Kirin-Amgenlitigation.  The Company will reimburseAventis for the Company’s share of the litigation expenses, as defined, fromfuture royalties, if any, received from the sale of Dynepo and in certain othercircumstances.

 

PART I - FinancialInformation

 

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

 

OVERVIEW

 

Since its inception in1988, the Company has been primarily engaged in the development andcommercialization of products based on the Company’s three proprietarydevelopment platforms: Niche Protein® products, Gene-Activated® proteins andgene therapy. ReplagalTM (agalsidase alfa) - the Company’s enzyme replacementtherapy for long-term treatment of patients with Fabry disease - is currentlyapproved in the fifteen countries of the European Union, as well as Norway,Iceland, and New Zealand.  Replagalreceived co-exclusive orphan drug status in the European Union in August2001.  Since approval, the Company hasbeen working with European authorities to obtain reimbursement and pricing forReplagal on a country by country basis. As of October 2001, reimbursement has been established in threecountries- Germany, Sweden, and Norway. The timing of establishing reimbursement in each remaining country inEurope is uncertain and will influence sales for 2001 and 2002.  To date, the Company has not recordedsignificant revenues from the sale of products.** **The Company has incurred substantial annual operating lossessince inception and expects to incur significant operating losses untilsubstantial product sales are generated. Until such time, the Company isdependent upon existing cash resources, interest income, external financingfrom equity offerings, debt financings or collaborative research anddevelopment arrangements with corporate sponsors to finance its operations. AtSeptember 30, 2001, the Company’s accumulated deficit was $216,394,000.

 

Results of operations mayvary significantly from period to period depending on, among other factors,product sales of Replagal and the costs of manufacturing, marketing and sellingReplagal, the timing of approvals, if granted, to market the Company’s productseither in the U.S. or abroad, the progress of the Company’s research anddevelopment efforts, the timing of additional license fees and milestonepayments, if any, the timing of certain expenses, and the establishment ofadditional collaborative research agreements.

 

The following discussionof the financial condition and results of operations of the Company should beread in conjunction with the accompanying condensed consolidated financialstatements and the related footnotes thereto.

 

RESULTS OF OPERATIONS

 

*For the Three Months Ended September 30, 2001 and 2000*

 

Inthe third quarter of 2001, the Company recorded product sales of Replagalprimarily under compassionate use programs in Europe.  Sales for the quarter totaled $537,000.  The Company recorded no sales in 2000.

 

Inthe third quarter of 2001, there were no costs of sales because, prior toapproval by the EMEA, the costs of producing Replagal were included in researchand development expenses. Costs associated with product produced beforeapproval, which will be sold in future periods, have been previously expensedand, as a result, sales margins will not reflect full production costs untilsome time in 2002.

 

License and researchrevenues totaled $294,000 and $5,357,000 for the three months ended September30, 2001 and 2000, respectively. License and research revenues in the third quarter of 2001 were earnedthrough the Company’s collaborative agreement with Genetics Institute, Inc.,relating to the Company’s Factor VIII gene therapy program for the treatment ofhemophilia A.  Revenues for the thirdquarter of 2000 included a $3,500,000 milestone payment from Aventis relatingto the submission of a Biologics License Application (“BLA”) to the U.S. Foodand Drug Administration (the “FDA”) for Dynepo (Gene-Activated erythropoietin)for the treatment of anemia, as well as payments earned from collaborativeagreements with Sumitomo Pharmaceutical Co., Ltd. (“Sumitomo”) and GeneticsInstitute, Inc.

 

Research and developmentexpenses totaled $14,139,000 in the third quarter of 2001, as compared to$13,373,000 during the same period in 2000. The increase in 2001 of $766,000, or 6%, was principally due to expectedincreases in external development services and research and developmentstaffing as the Company’s product development platforms continue to expand andmature.   In addition, the Companycapitalized $3,421,000 of Replagal production costs as inventory during thethird quarter that, prior to product approval, would have been included inresearch and development expenses.

 

Selling, general andadministrative expenses were $5,507,000 in the quarter ended September 30,2001, compared with $3,723,000 during the same period in 2000.  The increase in 2001 of $1,784,000, or 48%,was principally due to costs incurred in preparation of the launch of Replagalin Europe and the creation of a global commercial infrastructure.  During the remainder of 2001, selling,general and administrative costs will increase as these activities expand.

 

Net interest income was$2,947,000 and $4,233,000 for the three months ended September 30, 2001 and2000, respectively.  The average cashand marketable securities balances were $285,671,000 and $263,297,000 for thequarter ended September 30, 2001 and 2000, respectively.  The decrease in interest income of$1,286,000 resulted primarily from significantly lower rates of return onaverage cash and marketable securities balances.

 

The Company had a netloss of $15,868,000 and $7,506,000 for the three months ended September 30,2001 and 2000, respectively. Basic and diluted net loss per share was $0.60 forthe three months ended September 30, 2001, as compared to a basic and dilutednet loss per share of $0.33 for the corresponding period in 2000.  For the three months ended September 30,2001 and 2000, weighted average shares outstanding were 26,408,000 and22,688,000, respectively. The significant increase reflects the sale of3,565,000 common shares from the Company’s offering in June 2001.

 

*For the Nine Months Ended September 30, 2001 and 2000*

 

For the nine monthsended September 30, 2001, the Company had product sales of $834,000 primarily from compassionate use sales ofReplagal in Europe.   There were nosales in 2000.

 

Forthe nine months ended September 30, 2001, there were no costs of sales because,prior to approval by the EMEA, the costs of producing Replagal were included inresearch and development expenses.

 

License and researchrevenues totaled $1,922,000 and $6,871,000 for the nine months ended September30, 2001 and 2000, respectively. License and research revenues for the nine months ended September 30,2001 and 2000, respectively, were earned under the Company’s agreements withGenetics Institute and Sumitomo.  Inaddition, for the nine months ended September 30, 2000, revenues included a$3,500,000 milestone payment from Aventis relating to the submission of a BLAto the FDA for Dynepo for the treatment of anemia.

 

Research and developmentexpenses totaled $49,450,000 in the first nine months of 2001, as compared to$39,700,000 during the same period in 2000. The increase in the first three quarters of 2001 of $9,750,000, or 25%,was principally due to increases in external development services and researchand development staffing as the Company’s three product development platformscontinue to expand and mature.  Inaddition, the Company capitalized $3,421,000 of Replagal production costs asinventory during the third quarter of 2001 that, prior to product approval,would have been included in research and development expenses.

 

Selling, general andadministrative expenses were $16,297,000 for the nine months ended September30, 2001, compared with $9,772,000 during the same period in 2000.  The increase in 2001 of $6,525,000, or 67%,was principally due to costs incurred in preparation for the launch of Replagalin Europe and the creation of a global commercial infrastructure.

 

Net interest income was$9,241,000 and $9,776,000 for the nine months ended September 30, 2001 and2000, respectively.  The average cashand marketable securities balances were $249,855,000 and $214,669,000 for thenine months ended September 30, 2001 and 2000, respectively.  The decrease in interest income of $535,000resulted primarily from significantly lower interest rate yields in 2001 onaverage cash and marketable securities balances as compared to 2000.

 

In 1996, TKT made astrategic investment of $300,000 in a European biotechnology company. In June2001, TKT sold substantially all of its investment resulting in a gain of$2,785,000. The remaining portion of this investment was sold in October 2001resulting in a gain of approximately $446,000.

 

The Company had a netloss of $50,965,000 and $32,825,000 for the nine months ended September 30,2001 and 2000, respectively. Basic and diluted net loss per share was $2.12 forthe nine months ended September 30, 2001, as compared to a basic and dilutednet loss per share of $1.45 for the corresponding period in 2000.  For the nine months ended September 30, 2001and 2000, weighted average shares outstanding were 24,009,000 and 22,668,000,respectively. The significant increase reflects the sale of 3,565,000 commonshares from the Company’s offering in June 2001.

 

LIQUIDITY AND SOURCES OF CAPITAL

 

Since its inception, theCompany has financed its operations through the sale of common and preferredstock, borrowings under debt agreements, revenues from collaborativeagreements, and interest income.

 

The Company had cash,cash equivalents, and marketable securities totaling $274,886,000 at September30, 2001, including marketable securities collateralizing letters of credittotaling $8,643,000.  Cash equivalentsand marketable securities are invested in U.S. government and agencyobligations and money market funds.

 

In June 2001, theCompany announced the sale of 3,565,000 shares of its common stock at $28.50per share. Proceeds to the Company totaled approximately $96,184,000.

 

In June 2000, theCompany sold 10,000 shares of Series A Convertible Preferred Stock toinvestment funds affiliated with E. M. Warburg, Pincus & Co., L.L.C.,resulting in net proceeds to the Company of $99,797,000.

 

In December 1998, theCompany obtained an unsecured term loan facility for up to $14,000,000 tofinance the capital costs related to leased space. At September 30, 2001,$10,000,000 was outstanding under the loan. In October 2001, this loan was repaid in full.

 

In August 2000, theCompany entered into a ten-year lease for a new corporate headquarters andresearch and development facility in Cambridge, Massachusetts.  The lease requires a security deposit of$7,680,000, of which $680,000 was paid in cash and the balance provided in theform of a letter of credit.  Aninvestment with a value of $8,070,000 collateralizes the letter of credit.   The Company expects to spend up to $35,000,000for leasehold improvements and related equipment through December 2002.

 

In January 2001, theCompany purchased a 45,000 square foot manufacturing facility for$8,800,000.  In addition, it leased anadjoining 44,000 square foot facility under the terms of a ten-year lease. TheCompany is in the process of designing capital improvements of these facilitiesand may make substantial investments in the next two years.

 

The Company may seekfinancing for all or a significant portion of the cost of the leaseholdimprovements described above.  There canbe no guarantee that financing will be available on favorable terms, if at all.

 

At September 30, 2001,the Company had committed to pay, under certain conditions, approximately$25,000,000 to third parties for certain product development activities through2004.

 

At December 31, 2000, the Companyhad net operating loss carryforwards of approximately $144,264,000, whichexpire at various times through 2020. Due to the degree of uncertainty related to the ultimate use of losscarryforwards and tax credits, the Company has fully reserved against anypotential tax benefit. The future utilization of net operating losscarryforwards and tax credits may be subject to limitation under the changes instock ownership rules of the Internal Revenue Code. Because of this limitation,it is possible that taxable income in future years, which would otherwise beoffset by net operating losses, will not be offset and, therefore, will besubject to tax.

 

Substantial additional fundswill be required to support the Company’s research and development programs,acquisition of technologies, preclinical and clinical testing of its products,pursuit of regulatory approvals, acquisition of capital equipment, expansion oflaboratory and office facilities, establishment of manufacturing capabilities,and selling, general and administrative expenses.  Until such time, if any, as the Company’s operations generatesignificant revenues from product sales, the Company will be required to fund operationswith cash resources, interest income, proceeds from equity offerings and debtfinancings, and funding from collaborative arrangements.

 

The Company expects topursue opportunities to obtain additional financing in the future throughequity financings, debt financings, lease arrangements related to facilitiesand capital equipment, and collaborative research agreements.  The source, timing and availability of anyfuture financing will depend principally upon equity and debt marketconditions, interest rates and, more specifically, on the Company’s continuedprogress in its exploratory, preclinical, and clinical development programs,and the extent of its commercial success. There can be no assurance that such funds will be available on favorableterms, if at all.

 

The Company expects thatits existing capital resources, together with revenues from collaborativeagreements, product sales, and interest income, will be sufficient to fund itsoperations through 2003.  The Company’scash requirements may vary depending on numerous factors.  Lack of necessary funds may require theCompany to delay, scale back or eliminate some or all of its research andproduct development programs or to license its potential products ortechnologies to third parties.

 

TheCompany has been engaged in litigation with Amgen and Kirin-Amgen with respectto the development of Dynepo and with Genzyme and Mt. Sinai with respect to thedevelopment of Replagal.  Pursuant tothe Amended and Restated License Agreement, dated March 1995, between Aventisand the Company, Aventis has assumed the legal cost of the Amgen andKirin-Amgen litigation.  The Company isrequired to reimburse Aventis for the Company’s share of litigation expenses,as defined, from future royalties, if any, received from the sale of Dynepo andin certain other circumstances.

 

FORWARD-LOOKING STATEMENTS

 

Statementsthat are not historical facts, including statements about the Company’sconfidence and strategies and its expectations about future products, technologiesand opportunities, market demand or acceptance of future products areforward-looking statements.  Withoutlimiting the foregoing, the words “believes,” “projects,” “anticipates,”“plans,” “expects,”  “estimates,”“intends,” “should,” “could,” “will,” “may,” and similar expressions areintended to identify forward-looking statements.  There are a number of important factors that could cause theCompany’s actual results to differ materially from those indicated by suchforward-looking statements.  These include,without limitation, the following:  (1)whether any of the Company’s Niche Protein product, Gene-Activated protein orgene therapy product candidates will advance in the clinical trial process, (2)whether such clinical trials will proceed in a timely manner, (3) whether theCompany’s clinical trial results will warrant continued product development,(4) whether the required regulatory filings, such as Investigational New Drugapplications and Biologics License Applications, are made in a timely manner,(5) whether the Company’s products will receive approval from the U.S. Food and Drug Administration,EMEA, or equivalent foreign regulatory agencies, (6) if such products receiveapproval, whether they will be successfully manufactured, distributed andmarketed, (7) whether patent litigation or orphan drug issues in which theCompany is involved or may become involved are resolved in a manner adverse tothe Company, (8) the effects of competition on the Company’s products, (9) theCompany’s dependence on  third parties,including collaborators, manufacturers and distributors, (10) market acceptanceof our products upon their introduction, including Replagal, and (11) the otherrisks set forth under the caption “Risk Factors” which are filed with this QuarterlyReport on Form 10-Q as Exhibit 99.1, which “Risk Factors” are incorporatedherein by reference.  In addition, anyforward-looking statements represent the Company’s estimates only as of thedate this Quarterly Report was filed with the Securities and ExchangeCommission and should not be relied upon as representing the Company’sestimates as of any subsequent date. While the Company may elect to update forward-looking statements at somepoint in the future, the Company specifically disclaims any obligation to doso, even if its estimates change.

 

PARTII - OtherInformation

 

Item1.  Legal Proceedings

 

The Company can provideno assurance as to the outcome of any legal proceedings. A decision by a courtin the U.S. or in any other jurisdiction in a manner adverse to the Companycould have a material adverse effect on the Company’s business, financialposition, and results of operations.

 

*ReplagalTM Patent Litigation*

 

In July 2000, Genzymeand Mt. Sinai filed a patent infringement suit against the Company in the U.S.District Court for the District of Delaware, alleging that the manufacture,use, intended sale, and/or intended offer for sale of the Company’s Replagalproduct infringes one or more claims of its U.S. Patent No. 5,356,804.  Genzyme and Mt. Sinai seek injunctive reliefand an accounting for damages.  Discoveryproceedings commenced in February 2001, and the District Court has scheduledtrial in this action to begin in March 2002.

 

*DynepoTM Patent Litigation*

 

The Company and Aventis,its collaborative partner to commercialize Dynepo (a Gene-Activatederythropoietin product), are involved in patent infringement actions with Amgenin the United States and Kirin-Amgen in the United Kingdom.

 

In January 2001, theU.S. District Court for the District of Massachusetts ruled that eight ofeighteen patent claims asserted by Amgen were infringed by the Company andAventis.  In particular, the DistrictCourt ruled that the asserted claims of U.S. Patent No. 5,547,933 were notinfringed (and, if this finding is in error, that the asserted claims wereinvalid); that the asserted claims of U.S. Patent 5,618,698 were not infringed;that Claims 2, 3 and 4 of U.S. Patent No. 5,621,080 were valid, enforceable andinfringed under the doctrine of equivalents; that Claims 1, 3, 4 and 6 of U.S.Patent No. 5,756,349 were valid, enforceable and literally infringed, but thatClaim 7 of the ’349 patent was not infringed; and that Claim 1 of U.S. PatentNo. 5,955,422 was valid, enforceable and literally infringed.  Amgen did not seek and was not awardedmonetary damages.

 

In January 2001, TKT andAventis filed a Notice of Appeal from the Judgment of the District Court withthe U.S. Court of Appeals for the Federal Circuit in this case.  The Company believes it has strong groundsfor appeal.  Amgen filed a Notice ofCross-Appeal in February 2001.

 

In April 2001, theEnglish High Court of Justice ruled that one of four claims of a patentasserted by Amgen and Kirin-Amgen was infringed by the Company and Aventis. TheCompany believes it has strong grounds for appeal and filed a Notice of Appealin April 2001.

 

Pursuant to an Amendedand Restated License Agreement, dated March 1995, between Aventis and theCompany, Aventis has assumed the legal costs of the Amgen and Kirin-Amgenlitigation.  The Company will reimburseAventis for the Company’s share of the litigation expenses, as defined, fromfuture royalties, if any, received from the sale of Dynepo and in certain othercircumstances.

 

Item6.  Exhibits and Reports on Form 8-K

 

(a)           Exhibits

 

99.1         Risk Factors

 

(b)           Reports on Form 8-K

 

Current Report on Form8-K, filed August 7, 2001, regarding the Company’s announcement that theEuropean Commission had granted marketing authorization for ReplagalTM(agalsidase alfa) - the Company’s enzyme replacement therapy for long-termtreatment of patients with Fabry disease - for the fifteen countries of theEuropean Union.

 

Current Report on Form8-K, filed July 2, 2001, regarding the Company’s announcement of the completionof a public offering of common stock.

 

SIGNATURES

 

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

 
|                          |   | TRANSKARYOTIC  THERAPIES, INC. |
|-------------------------------|--------|--------------------------------|
|                          |   |                           |   |
| Date:  November 14, 2001 |   | By:                            | /s/ Daniel E. Geffken |
|                          |   |                           | Daniel E. Geffken  Senior Vice President, Finance and  Chief Financial Officer (Principal and  Financial and Accounting Officer) |