** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

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** **

**FORM 10-Q**

** **

| **ý****    QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------------------------------------------------------------------------------------|

 

**For the Quarter Ended September 30,2002**

** **

**CommissionFile 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.) |
|                                                                                 |   |                                  |
| **195 Albany Street  Cambridge, Massachusetts**                                      |   | **02139**                             |
| (Address of  principal executive offices)                                            |   | (Zip Code)                            |
|                                                                                 |   |                                  |
| Registrant’s  telephone number, including area code:   **(617)  349-0200** |

 

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

 

Yes        ý        No        o

 

At October 31,2002, there were 34,842,922 shares of Common Stock, $.01 par value,outstanding.

 

 

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TranskaryoticTherapies, Inc.

 

INDEX

 
| PART  I.  | FINANCIAL INFORMATION                                                                                             |
|----------------|-------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                              |
| Item  1.  | Condensed  Consolidated Financial Statements (unaudited)                                                          |
|           |                                                                                                              |
|           | Condensed  Consolidated Balance Sheets as of  September 30, 2002 and December 31, 2001                            |
|           |                                                                                                              |
|           | Condensed  Consolidated Statements of Operations for the  Three and Nine Months Ended September 30, 2002 and 2001 |
|           |                                                                                                              |
|           | Condensed  Consolidated Statements of Cash Flows for the  Nine Months Ended September 30, 2002 and 2001           |
|           |                                                                                                              |
|           | Notes  to Condensed Consolidated Financial Statements                                                             |
|           |                                                                                                              |
| Item  2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |
|           |                                                                                                              |
| Item  3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                       |
|           |                                                                                                              |
| Item  4.       | Controls  and Procedures                                                                                          |
|           |                                                                                                              |
| PART  II. | OTHER INFORMATION                                                                                                 |
|           |                                                                                                              |
| Item 1.        | Legal Proceedings                                                                                                 |
|           |                                                                                                              |
| Item 6.        | Exhibits and  Reports on Form 8-K                                                                                 |
|           |                                                                                                              |
| SIGNATURES     |
|           |                                                                                                              |
| CERTIFICATIONS |

 

2

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PARTI - Item 1 -Condensed Consolidated Financial Statements

 

Transkaryotic Therapies,Inc.

Condensed ConsolidatedBalance Sheets

(unaudited)

 
| **(in thousands,  except par values)**                                                                                                                                        |   | **September  30,  2002** |    | **December  31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
| **Assets**                                                                                                                                                                    |   |                     |    |                    |   |
| Current assets:                                                                                                                                                               |   |                     |    |                    |   |
| Cash and cash  equivalents                                                                                                                                                    |   | $                        | 181,179 |                    | $      | 323,877 |   |
| Marketable  securities                                                                                                                                                        |   | 107,271                  |    | 75,877                  |   |
| Accounts  receivable                                                                                                                                                          |   | 11,591                   |    | 2,374                   |   |
| Inventories                                                                                                                                                                   |   | 18,372                   |    | 7,147                   |   |
| Prepaid expenses  and other current assets                                                                                                                                    |   | 4,516                    |    | 4,620                   |   |
| Total current  assets                                                                                                                                                         |   | 322,929                  |    | 413,895                 |   |
| Property and  equipment, net                                                                                                                                                  |   | 68,132                   |    | 41,587                  |   |
| Other assets                                                                                                                                                                  |   | 1,934                    |    | 2,225                   |   |
| Total assets                                                                                                                                                                  |   | $                        | 392,995 |                    | $      | 457,707 |   |
|                                                                                                                                                                          |   |                     |    |                    |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                |   |                     |    |                    |   |
| Current  liabilities:                                                                                                                                                         |   |                     |    |                    |   |
| Accounts payable                                                                                                                                                              |   | $                        | 10,041  |                    | $      | 9,394 |   |
| Accrued expenses                                                                                                                                                              |   | 10,713                   |    | 12,150                  |   |
| Total current  liabilities                                                                                                                                                    |   | 20,754                   |    | 21,544                  |   |
|                                                                                                                                                                          |   |                     |    |                    |   |
| Stockholders’  equity:                                                                                                                                                   |   |                     |    |                    |   |
| Series A  convertible preferred stock, $.01 par value, 10,000 shares authorized; no  shares issued and outstanding at September 30, 2002 and December 31, 2001,  respectively |   | —                   |    | —                  |   |
| Series B  preferred stock, $.01 par value, 1,000 shares authorized; no shares issued  and outstanding at September 30, 2002 and December 31, 2001, respectively               |   | —                   |    | —                  |   |
| Common stock,  $.01 par value; 100,000 shares authorized; 34,834 and 34,302 shares issued  and outstanding at September 30, 2002 and December 31, 2001, respectively          |   | 348                      |    | 343                     |   |
| Additional  paid-in capital                                                                                                                                                   |   | 688,222                  |    | 670,959                 |   |
| Accumulated  deficit                                                                                                                                                          |   | (317,922                 | )       | (235,672                | )      |
| Deferred  compensation                                                                                                                                                        |   | (1                       | )       | (114                    | )      |
| Accumulated  other comprehensive income                                                                                                                                       |   | 1,594                    |    | 647                     |   |
| Total  stockholders’ equity                                                                                                                                              |   | 372,241                  |    | 436,163                 |   |
| Total  liabilities and stockholders’ equity                                                                                                                              |   | $                        | 392,995 |                    | $      | 457,707 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

3

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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)**                |   | **2002**                              |    | **2001**                             |   | **2002** |   | **2001** |   |
|                                                         |   |                                  |    |                                 |   |   |   |   |   |
| Revenues:                                                    |   |                                  |    |                                 |   |   |   |   |   |
| Product sales                                                |   | $                                     | 7,873   |                                 | $      | 537 |   | $ | 22,713 |   | $ | 834 |   |
| License and  research revenues                               |   | 17                                    |    | 294                                  |   | 652 |   | 1,922 |   |
|                                                         |   | 7,890                                 |    | 831                                  |   | 23,365 |   | 2,756 |   |
| Operating  expenses:                                         |   |                                  |    |                                 |   |   |   |   |   |
| Cost of goods  sold                                          |   | 2,743                                 |    | —                               |   | 4,941 |   | — |   |
| Research and  development                                    |   | 20,450                                |    | 14,139                               |   | 59,727 |   | 49,450 |   |
| Intellectual  property license expense                       |   | —                                |    | —                               |   | 26,000 |   | — |   |
| Selling, general  and administrative                         |   | 7,304                                 |    | 5,507                                |   | 21,203 |   | 16,297 |   |
|                                                         |   | 30,497                                |    | 19,646                               |   | 111,871 |   | 65,747 |   |
| Loss from  operations                                        |   | (22,607                               | )       | (18,815                              | )      | (88,506 | ) | (62,991 | ) |
| Other income:                                                |   |                                  |    |                                 |   |   |   |   |   |
| Interest income,  net                                        |   | 1,705                                 |    | 2,947                                |   | 6,256 |   | 9,241 |   |
| Gain on sale of  investment                                  |   | —                                |    | —                               |   | — |   | 2,785 |   |
|                                                         |   | 1,705                                 |    | 2,947                                |   | 6,256 |   | 12,026 |   |
|                                                         |   |                                  |    |                                 |   |   |   |   |   |
| Net loss                                                     |   | $                                     | (20,902 | )                                    | $      | (15,868 | ) | $ | (82,250 | ) | $ | (50,965 | ) |
|                                                         |   |                                  |    |                                 |   |   |   |   |   |
| Basic and  diluted net loss per share                        |   | $                                     | (0.60   | )                                    | $      | (0.60 | ) | $ | (2.38 | ) | $ | (2.12 | ) |
|                                                         |   |                                  |    |                                 |   |   |   |   |   |
| Shares used to  compute basic and diluted net loss per share |   | 34,819                                |    | 26,408                               |   | 34,539 |   | 24,009 |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

 

4

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Transkaryotic Therapies,Inc.

Condensed ConsolidatedStatements of Cash Flows

(unaudited)

 
| **(in  thousands)**                                                              |   | **Nine  Months Ended  September 30,** |       |
|----------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                             |   | **2002**                              |       | **2001** |   |
|                                                                             |   |                                  |       |   |   |
| **Operating  activities:**                                                       |   |                                  |       |   |   |
| Net loss                                                                         |   | $                                     | (82,250    | ) | $ | (50,965 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |                                  |       |   |   |
| Issuance of  common stock related to intellectual                                |   |                                  |       |   |   |
| property license  expense                                                        |   | 15,000                                |       | — |   |
| Depreciation and  amortization                                                   |   | 5,332                                 |       | 4,304 |   |
| Compensation  expense related to equity issuances                                |   | 113                                   |       | 513 |   |
| Changes in  operating assets and liabilities                                     |   | (20,227                               | )          | 39 |   |
|                                                                             |   |                                  |       |   |   |
| Net cash used  for operating activities                                          |   | (82,032                               | )          | (46,109 | ) |
|                                                                             |   |                                  |       |   |   |
| **Investing  activities:**                                                       |   |                                  |       |   |   |
| Proceeds from  sales and maturities of marketable securities                     |   | 205,950                               |       | 184,977 |   |
| Purchases of  marketable securities                                              |   | (237,585                              | )          | (64,126 | ) |
| Purchases of  property and equipment                                             |   | (31,877                               | )          | (19,557 | ) |
| Changes in other  assets                                                         |   | 291                                   |       | (672 | ) |
|                                                                             |   |                                  |       |   |   |
| Net cash  provided by (used for) investing activities                            |   | (63,221                               | )          | 100,622 |   |
|                                                                             |   |                                  |       |   |   |
| **Financing  Activities:**                                                       |   |                                  | ** ** |   | ** ** |
| Issuance of  common stock, net                                                   |   | 2,269                                 |       | 97,361 |   |
| Repayment of  long-term debt                                                     |   | —                                |       | (2,000 | ) |
|                                                                             |   |                                  |       |   |   |
| Net cash  provided by financing activities                                       |   | 2,269                                 |       | 95,361 |   |
| Effect of  exchange rate changes on cash and cash equivalents                    |   | 286                                   |       | (66 | ) |
|                                                                             |   |                                  |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                            |   | (142,698                              | )          | 149,808 |   |
|                                                                             |   |                                  |       |   |   |
| Cash and cash  equivalents at January 1                                          |   | 323,877                               |       | 49,445 |   |
|                                                                             |   |                                  |       |   |   |
| Cash and cash  equivalents at September 30                                       |   | $                                     | 181,179    |   | $ | 199,253 |   |
|                                                                             |   |                                  |       |   |   |
| 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 CondensedConsolidated Financial Statements (unaudited)

September 30, 2002 and2001

 

1.             BASIS OFPRESENTATION

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generallyaccepted in 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 the financialposition, results of operations and cash flows for the periods presented.  The results of operations for the interimperiod ended September 30, 2002 are not necessarily indicative of the resultsto be expected for the year ending December 31, 2002.

 

These financialstatements should be read in conjunction with the audited financial statementsand notes thereto for the year ended December 31, 2001 included in theCompany’s Annual Report on Form 10-K as filed with the Securities and ExchangeCommission.

 

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

 

2.             NET LOSS PER SHARE

 

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

 

Basic net loss pershare was equivalent to diluted net loss per share for the three and ninemonths ended September 30, 2002 and 2001 because common equivalent shares fromconvertible preferred stock and stock options have been excluded as theireffect is antidilutive.

 

3.             COMPREHENSIVE LOSS

 

Comprehensive losscomprises net loss, unrealized gains and losses on marketable securitiesdesignated as available-for-sale, and cumulative foreign currency translationadjustments.  The Company had a totalcomprehensive loss of $20,705,000 and $15,940,000 for the three months endedSeptember 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 and 2001, the Company had atotal comprehensive loss of $81,303,000 and $50,573,000, respectively.

 

6

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4.             INVENTORIES

 

Inventories consist of the following:

 
| **(in thousands)** |   | **September 30,  2002** |   | **December 31,  2001** |   |
|--------------------|--------|-------------------------|--------|------------------------|--------|
| Raw materials      |   | $                       | 1,082  |                   | $      | 452 |   |
| Work in process    |   | 10,612                  |   | 4,214                  |   |
| Finished goods     |   | 6,678                   |   | 2,481                  |   |
|               |   | $                       | 18,372 |                   | $      | 7,147 |   |

 

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

 

5.                                       INTELLECTUALPROPERTY LICENSE EXPENSE

 

In June 2002, the Companyobtained an exclusive license to certain intellectual property from CellGenesys, Inc., related to Cell Genesys’ approach to gene activation. For thenine months ended September 30, 2002, the Company incurred a license feeexpense of $26,000,000, which was funded with $11,000,000 in cash and $15,000,000worth of shares of the Company’s common stock. As part of the arrangement, the Company agreed that the number of sharesinitially issued to Cell Genesys would be adjusted at the time the Companyregisters such shares for resale under the Securities Act of 1933, as amended,if the market value of such shares at that time is greater or less than$15,000,000, as calculated in accordance with a predetermined formula.  The Company has filed a registration statementwith the SEC covering the shares.  Ifthe shares are registered in the fourth quarter and, pursuant to the agreedupon formula, the Company is obligated to issue additional shares to CellGenesys, the Company will likely be required to recognize a charge at thattime.  The exact amount of the charge isnot determinable at this time because it is dependent on a number of factors,including the price of the Company’s common stock at the time the initialshares issued to Cell Genesys are registered. At November 8, 2002, the closingprice of the Company’s common stock was $12.76 per share.  Assuming the same stock price on the datethe shares are registered, the Company would be required to issue to CellGenesys an additional 808,621 shares of its common stock and incur anadditional license fee expense of approximately $7,610,000. Cell Genesys alsohas the potential to receive certain milestone payments contingent upon theoutcome of related patent matters under the license agreement.   If Cell Genesys achieves all of themilestones, the Company will be obligated to pay Cell Genesys up to anaggregate of $17,000,000 funded with both cash and stock.  The Company is not required to make royaltypayments to Cell Genesys.

 

6.             LEGAL PROCEEDINGS

 

The Company cannot provide assurance as to the outcome of any legalproceeding. A decision by a court in any jurisdiction in a manner adverse tothe Company could have a material adverse effect on the Company’s business,financial position, and results of operations.

 

##### *Replagal PatentLitigation*

 

Since July 2000, the Company has been involved in patent litigationrelating to Replagal

 

7

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broughtby Genzyme Corporation (“Genzyme”) and Mount Sinai School of Medicine of NewYork University (“Mount Sinai”) in the United States District Court for theDistrict of Delaware (the “Federal District Court of Delaware”) regarding apatent licensed by Genzyme from Mount Sinai. In January 2002, the Federal District Court of Delaware dismissedthis patent litigation.  In March 2002,Genzyme appealed the ruling to the United States Court of Appeals for theFederal Circuit (the “Federal Circuit”). If Genzyme is successful in its appeal, the case will be remanded to theFederal District Court of Delaware for further proceedings on non-infringementand invalidity issues.  As of September30, 2002, the Company had incurred approximately $4.6 million in litigationexpenses associated with the Replagal litigation.

 

##### *Dynepo PatentLitigation*

 

The Company and Aventis areinvolved in a patent infringement action with Amgen Inc. (“Amgen”).    In April 1997, Amgen commenced a patentinfringement action against the Company and Aventis in the United StatesDistrict Court for the District of Massachusetts (the “Federal District Courtof Massachusetts”). In January 2001, the Federal District Court ofMassachusetts concluded that Dynepo (epoietin delta), the Company’sGene-Activated erythropoietin for the treatment of anemia related to chronicrenal failure, infringed eight of the 18 claims of patents asserted by Amgen.The Company and Aventis have filed an appeal of the decision with the FederalCircuit. Amgen has also appealed this decision.

 

In addition, in July 1999,Aventis and the Company commenced legal proceedings in the United Kingdomagainst Kirin-Amgen, Inc. (“Kirin-Amgen”), seeking a declaration that a UnitedKingdom patent held by Kirin-Amgen will not be infringed by the Company’sactivities relating to Dynepo.  InApril 2001, the High Court of Justice in the United Kingdom ruled thatDynepo infringed one of four claims of the patent asserted by Kirin-Amgen.  In July 2002, the Court of Appeals in theUnited Kingdom reversed the High Court of Justice and ruled that Dynepo did notinfringe Kirin-Amgen’s patent. Kirin-Amgen asked the Court of Appeals for permission to appeal itsdecision to the House of Lords.  Thatrequest was refused by the Court of Appeals. Nevertheless, Kirin-Amgen hasdirectly petitioned the House of Lords to hear its appeal.

 

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

 

8

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Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

*OVERVIEW*

 

TKT is a biopharmaceuticalcompany developing protein- and cell-based therapeutics for the treatment of awide range of human diseases.  TKT isbuilding a broad and renewable product pipeline based on three proprietarydevelopment platforms: Niche Protein products, Gene-Activated proteins andTranskaryotic Therapy gene therapy products.

 

During 2001, the Companyreceived its first product marketing approvals.  In August 2001, Replagal (agalsidase alfa), the Company’s enzymereplacement therapy for the long-term treatment of patients with Fabry disease,was granted marketing authorization in the European Union. Since August 2001,the Company has received approval to market Replagal in a number of othercountries but has not received approval to market Replagal in the UnitedStates.  In September 2001, the Companylaunched Replagal in Europe.

 

In the United States, theCompany has submitted a Biologics License Application (“BLA”) to the Food andDrug Administration (“FDA”) seeking marketing authorization for Replagal.  In January 2001, the FDA issued a completereview letter regarding the BLA.  The FDAletter stated that the data that the Company provided was not adequate for approvalof the BLA at that time and requested additional information.  In response to this letter, TKT hasdiscussed the BLA with the FDA and has submitted additional data.

 

On September 20, 2002, the FDApostponed the previously scheduled meeting of the Endocrinologic and MetabolicDrugs Advisory Committee (the “Advisory Committee”) to evaluate the Company’sBLA for Replagal due to administrative reasons. The FDA has rescheduled themeeting of the Advisory Committee to evaluate the Company’s BLA for Replagal onJanuary 14, 2003. The postponement of the Advisory Committee meeting will delaythe timing of a decision on the approval of Replagal into the first half of2003, at the earliest.  Based upon theNovember 2002 expiration of the six month review period under the PrescriptionDrug User Fee Act, the Company anticipates that, prior to the AdvisoryCommittee meeting, it will receive another complete review letter from the FDAreiterating most or all of the comments in the previous letter.

 

The FDA’s review of the ReplagalBLA for the postponed meeting expressed concerns regarding the Company’sclinical data, particularly with respect to pain.  As a result, TKT has concluded that the best approach to obtain aprompt approval for Replagal in the United States is to seek approval on thebasis of its renal and cardiac data and not to seek approval on the basis ofits pain data. While TKT will seek approval based on these functional data,TKT’s recent extensive communications with the FDA indicate that the FDA is alsoconsidering using kidney pathology data as a surrogate endpoint for a possibleaccelerated approval. After the Advisory Committee meeting, the FDA mayeither approve the Company’s BLA or decline to approve it.  If it declines to approve the BLA, the FDAmay request additional information, possibly including data from additionalclinical trials.

 

With the exception of 1995, theCompany has incurred substantial annual operating losses since inception.  The Company expects that its research anddevelopment expenditures

 

9

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willincrease in future years as product development efforts accelerate.  Accordingly, the Company expects to incursignificant operating losses until substantial product sales are generated.   Until such time, the Company is dependentupon product sales, existing cash resources, interest income, externalfinancing from equity offerings, debt financings and collaborative research anddevelopment arrangements with corporate sponsors to finance its operations. AtSeptember 30, 2002, the Company’s accumulated deficit was $317,922,000.    For the years ending December 31, 2001,2000 and 1999, the Company had a net loss of $70,243,000, $51,021,000 and$44,456,000, respectively.  In addition,the Company had a net loss of $20,902,000 and $82,250,000 for the three andnine months ended September 30, 2002, respectively. Included in the loss forthe nine months ended September 30, 2002 is an intellectual property licensefee expense of $26,000,000, which increased basic and diluted net loss pershare by $0.75.

 

Results of operations may varysignificantly from period to period depending on, among other factors, Replagalproduct sales, costs associated with the manufacture, marketing and sale ofReplagal, expenses related to the Company’s research and development efforts,the timing of approvals, if granted, to market the Company’s products eitheradditional jurisdictions, including the United States, the ability of theCompany to access capital markets, the timing of additional license fees andmilestone payments under existing collaborative research agreements and theestablishment of additional collaborative research agreements, if any.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s significantaccounting policies are more fully described in the Company’s Annual Report onForm 10-K for the year ended December 31, 2001 under the caption “Item 7Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and in the Notes to the Consolidated Financial Statements. Application of these policies is particularly important to the portrayal of theCompany’s financial condition and results of operations.  These accountingpolicies require the Company to make subjective judgements in determiningestimates about the effect of matters that are inherently uncertain. Actual results could differ materially from these estimates. The followingaccounting policies meet these characteristics and are considered significant:

 

# Revenue Recognition

 

The Company recognizes revenuefrom product sales when there is persuasive evidence that an arrangementexists, delivery has occurred, the price is fixed and determinable, andcollection is reasonably assured. The Company recorded its first product salesfrom the sale of Replagal in Europe in 2001. In Europe and in some other countries outside of the United States,collection is reasonably assured once reimbursement agreements and pricingarrangements are established and formalized, as these agreements establish therelevant governmental agency’s intent to pay.  The Company has onlyrecorded revenues in those countries for which these agreements have beenestablished, thereby reasonably assuring collection. The Company does notprovide the right of return to its customers and, consequently, has notrecorded a reserve for sales returns and allowances.

 

10

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# Inventories

 

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

 

The following discussion of thefinancial condition and results of operations of the Company should be read inconjunction with the accompanying condensed consolidated financial statementsand the related footnotes thereto.

 

RESULTS OF OPERATIONS

 

# *Revenues*

 

Product sales for the quartersended September 30, 2002 and 2001 totaled $7,873,000 and $537,000,respectively.   For the nine monthsended September 30, 2002 and 2001, product sales totaled $22,713,000 and$834,000, respectively.  Substantiallyall Replagal product sales were made in Europe.  Prior to product approval in August 2001, product sales were madein Europe under compassionate use programs. Compassionate use programs in certain countries in Europe allow limitedsales of products that have not yet been approved by the appropriate regulatoryagency.  As compared to the secondquarter of 2002, Replagal sales decreased by $909,000 or 10%.  The Company believes that the quarter toquarter decrease was due to a slowdown of patients receiving Replagaltreatments, new patients initiating treatment during the summer months, and thesubmission and processing of individual patient reimbursements. The Companyexpects sales of Replagal to increase in the fourth quarter of 2002, asadditional patients begin Replagal therapy.

 

License and research revenuestotaled $17,000 and $294,000 for the third quarter of 2002 and 2001,respectively.   For the nine monthsended September 30, 2002, license and research revenues totaled $652,000 ascompared to $1,922,000 the corresponding period in 2001.  License and research revenues were primarilyearned from collaborative agreements with Sumitomo Pharmaceutical Co. Ltd.(“Sumitomo”) and Wyeth, formerly Genetics Institute, Inc.   The decrease in license and researchrevenues in both periods was due to the timing of completion of obligations andreceipt of payments related to both collaborative agreements.

 

# *Cost of Goods Sold*

 

For the three and nine monthsended September 30, 2002, cost of goods sold was $2,743,000 and $4,941,000, or35% and 22% of product sales, respectively.  For the same periods in 2001, there were no cost of goods sold.  Inventory and components of inventory, whichwere previously expensed as a research and development cost prior to marketingapproval of Replagal in August 2001, were sold in 2001 and in the first half of2002.  As of June 30, 2002, this inventoryhad been fully utilized.  As a result,the cost of goods sold for the three months ended September 30, 2002 nowreflects the Company’s current full production costs.  For fiscal year 2002, the Company expects that its cost of goodssold will be approximately 25% of product sales.  For 2003 and beyond, the Company expects to increase productionto meet the increasing

 

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demandfor Replagal that the Company anticipates, thereby creating volumeefficiencies, and that cost of goods sold, as a percentage of product sales,will likely decline.

 

# *Research and Development Expenses*

 

Research and developmentexpenses increased $6,311,000, or 45%, to $20,450,000 in the third quarter of2002, compared to $14,139,000 during the same period in 2001.   In the first nine months of 2002, researchand development expenses totaled $59,727,000 versus $49,450,000 for the sameperiod in 2001, an increase of $10,277,000, or 21%.

 

The Company began to capitalize Replagal productioncosts as inventory during the third quarter of 2001 following regulatoryapproval of Replagal in Europe.  Duringthe first six months of 2002, the Company capitalized $9,167,000 of Replagalproduction costs which would have beenincluded in research and development expenses in 2001.   Taking into account the capitalization ofinventory costs in 2002, research and development expenditures for the ninemonths ended September 30, 2002 would have increased by $19,444,000, or39%.  The overall increases in researchand development spending were due to increases in research and developmentstaffing and manufacturing development costs as the Company’s product platformscontinue to expand and mature as well as increases in research and developmentoccupancy costs.  In addition, duringthe first nine months of 2002, the Company incurred expenditures totaling$5,500,000 related to set-up and technology transfer fees to a contractmanufacturer.

 

The Company expects that duringthe remainder of 2002, costs relating to both preclinical and clinical programswill increase significantly as product development activities are initiated orexpanded.  The Company is advancingseveral preclinical programs toward the Investigational New Drug stage.  The largest component of increases for theremainder of 2002 is expected to be costs related to building and operating itsmanufacturing facilities for its preclinical and clinical candidates.  In November 2002, the Company beganoccupying a new headquarters and research and development facility, which willcontinue to increase its occupancy costs for the remainder of 2002 and beyond.

 

The Company’s two largestresearch and development programs, Replagal and iduronate-2-sulfatase (“I2S”)for the treatment of Hunter Syndrome, represent the majority of its researchand development spending.  The expensesassociated with these programs totaled approximately 71% of total research anddevelopment expenses for the quarter ended September 30, 2002 and 67% of totalresearch and development expenses for the corresponding period in 2001. For thefirst nine months of 2002 and 2001, expenses associated with these research anddevelopment programs totaled approximately 76% and 69% of total research anddevelopment expenses, respectively.

 

For the three months endedSeptember 2002, research and development expenses for the Replagal programamounted to $9,053,000, an increase of $2,038,000, or 29%, over thecorresponding period of 2001.  For thenine months ended September 30, 2002 and 2001, Replagal expenditures totaled$31,851,000 and $26,424,000, respectively, resulting in an increase of$5,427,000, or 21%.  The increases inboth periods were due primarily to planned increases in manufacturingdevelopment costs.  Costs for theReplagal program primarily include basic research, the costs of clinicaltrials, manufacturing costs of clinical supplies and regulatory

 

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costsassociated with preparation of worldwide product marketing applications.  In 2001, after receipt of its first productmarketing approval, the Company began to capitalize Replagal production costsas inventory, reducing the amount classified as research and developmentexpense.  The amount of future researchand development expenses associated with the Replagal program is not reasonablycertain as these costs are dependent principally upon the regulatory processand information required by regulatory agencies, as well as the timing ofobtaining marketing authorization in the United States and other countries, ifgranted. The Company expects expenses associated with the development ofReplagal to decrease during the fourth quarter of 2002 and beyond, as many ofthe costs related to its development have previously been incurred.

 

For the three and nine monthsended September 30, 2002, research and development expenses for the I2S programwere $5,418,000 and $13,357,000, respectively, resulting in increases of  $2,893,000, or 115%, and $5,479,000, or 70%,respectively, over the comparable periods in 2001.  The increase for both comparable periods is due to increases inexpenditures related to the I2S program’s Phase I/II clinical trial as well asthe manufacture of clinical supplies for the clinical trials. Based onpreliminary results of the Phase I/II trial completed during 2002, the Companyintends to conduct a pivotal Phase III study of I2S. Future research anddevelopment costs for the I2S program are not reasonably certain because suchcosts are dependent on a number of variables, including the cost and design ofthe Phase III study and additional clinical trials, if any, uncertainties inthe timing of the regulatory process, and the costs associated with large scalemanufacture of iduronate-2-sulfatase. The Company expects that these costs will be significant and are likelyto increase each year until such time, if ever, as marketing approvals arereceived, which the Company believes will not be earlier than 2005.

 

# *Intellectual Property License FeeExpense*

 

In June 2002, the Companyobtained an exclusive license to certain intellectual property from CellGenesys, Inc., related to Cell Genesys’ approach to gene activation. For thenine months ended September 30, 2002, the Company incurred a license feeexpense of $26,000,000, which was funded with $11,000,000 in cash and $15,000,000worth of shares of the Company’s common stock. As part of the arrangement, the Company agreed that the number of sharesinitially issued to Cell Genesys would be adjusted at the time the Companyregisters such shares for resale under the Securities Act of 1933, as amended,if the market value of such shares at that time is greater or less than$15,000,000, as calculated in accordance with a predetermined formula.  The Company has filed a registrationstatement with the SEC covering the shares. If the shares are registered in the fourth quarter and, pursuant to theagreed upon formula, the Company is obligated to issue additional shares toCell Genesys, the Company will likely be required to recognize a charge at thattime.  The exact amount of the charge isnot determinable at this time because it is dependent on a number of factors,including the price of the Company’s common stock at the time the initialshares issued to Cell Genesys are registered. At November 8, 2002, the closing price of the Company’s common stock was$12.76 per share.  Assuming the samestock price on the date the shares are registered, the Company would berequired to issue to Cell Genesys an additional 808,621 shares of its commonstock and incur an additional license fee expense of approximately$7,610,000.  Cell Genesys also has thepotential to receive certain milestone payments contingent upon the outcome ofrelated patent matters under the license

 

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agreement.  If Cell Genesys achieves all of themilestones, the Company will be obligated to pay Cell Genesys up to anaggregate of $17,000,000 funded with both cash and stock.  The Company is not required to make royaltypayments to Cell Genesys.

 

# *Selling, General and AdministrativeExpenses*

 

For the three and nine monthsended September 30, 2002, selling, general and administrative expenses were$7,304,000 and $21,203,000, respectively, resulting in increases of  $1,797,000, or 33%, and $4,906,000, or 30%,respectively, over the comparable periods in 2001. Major components of bothincreases include costs incurred in preparation of the launch of Replagal inEurope and other countries and the creation of a global commercialinfrastructure including sales, marketing and distribution capabilities.  Selling, general and administrative expensesrelated to the preparation of the launch of Replagal and the creation of aglobal commercial infrastructure amounted to $3,829,000 and $10,505,000 for thethree and nine months ended September 30, 2002, respectively.  Components of the increase attributed to thepreparation of the launch of Replagal amounted to $1,678,000 and $3,725,000 forthe three and nine month comparable periods, respectively.  During the remainder of 2002, selling,general and administrative costs are expected to increase significantly inanticipation of a possible launch of Replagal in the United States.  In addition, with the completion of the newcorporate headquarters selling, general and administrative occupancy costs willcontinue to increase significantly in 2002.

 

# *Gain on Sale of Investment*

 

During the nine months endedSeptember 30, 2001, TKT sold substantially all of its investment in a Europeanbiotechnology company resulting in a gain of $2,785,000.  In 1996, TKT made a strategic investment of$300,000 in such company.

 

# *Net Interest Income*

 

Net interest income was$1,705,000 and $2,947,000 for the three months ended September 30, 2002 and2001, respectively.   For the ninemonths ended September 30, 2002, net interest income was $6,256,000 versus$9,241,000 for the corresponding period of 2001.  During the third quarter of 2002, average cash and marketablesecurities balances were $307,538,000 as compared to $285,671,000 for the sameperiod of 2001.  For the nine monthsended September 30, 2002 and 2001, the average cash and marketable securitiesbalances were $348,082,000 and $249,855,000, respectively.  Despite higher average cash and marketablesecurities balances in 2002, interest income decreased by $1,242,000 and$2,985,000 in the three and nine months ended September 30, 2002, respectively,as a result of significantly lower rates of return in 2002.

 

# *Net Loss*

 

The Company had a net loss of$20,902,000 and $15,868,000 for the third quarter ended September 30, 2002 and2001, respectively. Basic and diluted net loss per share was $0.60 for both thethree months ended September 30, 2002 and 2001.

 

The Company had a net loss of$82,250,000 and $50,965,000 for the nine months ended September 30, 2002 and2001, respectively. Basic and diluted net loss per share was $2.38 for the ninemonths ended September 30, 2002, as compared to a basic and diluted net lossper share of $2.12 for the corresponding period in 2001.  Included in the loss for the nine monthsended

 

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September30, 2002 is an intellectual property license fee expense of $26,000,000, whichimpacted basic and diluted net loss per share by $0.75 per share.

 

For the three months endedSeptember 30, 2002 and 2001, weighted average shares outstanding were34,819,000 and 26,408,000, respectively. For the nine months ended September30, 2002 and 2001, weighted average shares outstanding were 34,539,000 and24,009,000, respectively.    Theincrease in weighted average shares outstanding reflects the sale of 7,785,000common shares from the Company’s public offerings of Common Stock in June andDecember 2001 and the issuance of 3,571,000 shares of Common Stock upon theconversion of all of the then outstanding Series A Convertible Preferred Stockin November 2001.

 

LIQUIDITY AND SOURCES OF CAPITAL

 

Since its inception, the Companyhas financed its operations through the sale of Common and Preferred Stock,borrowings under debt agreements, revenues from collaborative agreements,interest income and, more recently, with proceeds from product sales.

 

The Company had cash, cashequivalents and marketable securities totaling $288,450,000 at September 30,2002, including restricted marketable securities collateralizing letters ofcredit totaling $7,955,000.  Cashequivalents and marketable securities are invested in United States governmentand agency obligations and money market funds.

 

Substantial additional funds maybe 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, expansion of manufacturing capabilities,selling, general and administrative expenses and the buyout of the minorityinterests in TKT Europe – 5S AB (“TKT Europe”), if applicable, as discussedbelow.

 

The Company expects that itsexisting capital resources, together with cash from collaborative agreements,product sales, and interest income, will be sufficient to fund its operationsthrough at least 2004.  The Company’scash requirements for operating activities, financing activities and investmentactivities have exceeded its internally generated funds.  The Company expects that its cashrequirements for such activities will continue to exceed its internallygenerated funds until it is able to generate substantial product sales,particularly because it expects operating expenses to continue to increase in thefuture, including its research and development expenses, as its productdevelopment efforts accelerate.

 

The Company’s cash requirementsmay vary depending on a number of factors, including Replagal product sales,costs associated with the manufacture, marketing and sale of Replagal, expensesrelated to the Company’s research and development efforts, the timing ofapprovals, if granted, to market the Company’s products either in the UnitedStates or abroad, the ability of the Company to access capital markets, thetiming of additional license fees and milestone payments under existingcollaborative research agreements and the establishment of additionalcollaborative research agreements, if any.

 

Until such time, if any, as theCompany’s operations generate significant product sales,

 

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theCompany will seek to fund operations with cash resources, interest income,proceeds from equity offerings, and debt financings, and funding fromcollaborative agreements. Lack of necessary funds may require the Company todelay, scale back or eliminate some or all of its research and productdevelopment programs or to license its potential products or technologies tothird parties.

 

The Company may pursueopportunities to obtain additional financing in the future through equityfinancings, debt financings, lease arrangements related to facilities andcapital 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.

 

In December 2001, the Companysold 4,220,000 shares of its Common Stock, resulting in net proceeds to theCompany of $158,945,000.

 

In June 2001, the Company sold3,565,000 shares of its Common Stock, resulting in net proceeds to the Companyof $96,161,000.

 

In January 2001, the Companypurchased a manufacturing facility for $8,800,000 and leased an adjoiningfacility. The Company expects to make improvements to these facilities, whichcould total approximately $30,000,000. The Company expects that thesefacilities will be used to manufacture one or more of the proteins in itsproduct pipeline.

 

The Company may seek financingfor all or a significant portion of the cost of the leasehold improvementsdescribed above.  There can be noguarantee that financing will be available on favorable terms, if at all.

 

In August 2000, the Companyentered into a lease for a new corporate headquarters and research anddevelopment facility in Cambridge, Massachusetts.  The Company expects to spend approximately $12,000,000 forleasehold improvements and equipment for the remainder of 2002 to outfit thebuilding.

 

In April 2000, the Companyentered into an agreement with stockholders of TKT Europe to establish theCompany’s European sales and marketing subsidiary.   Prior to this agreement, these stockholders were neitheremployees nor affiliated parties of the Company.  These stockholders are the principal managers of TKT Europe andown a 20% interest in it, while the Company owns the remaining 80%interest.  The agreement includesprovisions entitling the Company to purchase the stockholders’ ownershipinterest in TKT Europe in August 2004, under a specified formula.  Should the Company not exercise that right,the stockholders of TKT Europe can require the Company to purchase itsownership interest sixty days thereafter. The buy out price is equal to (a) 20% of operating profits of TKTEurope, as defined, for the period from September 1, 2003 to August 31, 2004,multiplied by a buy-out factor of four, subject to adjustment, plus (b) 20% ofthe accumulated positive earnings of TKT Europe.  As a result, the amount of the buy out price will be dependent onthe revenues and profits of TKT Europe, primarily from the commercial successof Replagal in Europe. These revenues and profits cannot

 

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beestimated at this time.  However, theCompany expects the buy out price to be substantial.

 

In June 2002, the Companyobtained an exclusive license to certain intellectual property from CellGenesys, Inc., related to Cell Genesys’ approach to gene activation. For thenine months ended September 30, 2002, the Company incurred a license feeexpense of $26,000,000, which was funded with $11,000,000 in cash and$15,000,000 worth of shares of the Company’s Common Stock. Cell Genesys alsohas the potential to receive certain milestone payments contingent upon theoutcome of related patent matters under the license agreement. If Cell Genesysachieves all of the milestones, the Company will be obligated to pay CellGenesys up to an aggregate of $17,000,000 funded with both cash and stock.  The Company is not required to make royaltypayments to Cell Genesys.

 

At September 30, 2002, theCompany had committed to pay approximately $39,045,000 to third parties forcertain product development activities through 2004.  The Company has the right to terminate the agreements upon sixmonths written notice.

 

At December 31, 2001, theCompany had net operating loss carryforwards of approximately $200,075,000,which expire at various times through 2022. 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 futureutilization of net operating loss carryforwards and tax credits may be subjectto limitation under the changes in stock ownership rules of the InternalRevenue Code.  Because of thislimitation, it is possible that taxable income in future years, which wouldotherwise be offset by net operating losses, will not be offset and, therefore,will be subject to tax.

 

The Company has been engaged inpatent litigation with Genzyme and Mount Sinai with respect to the developmentof Replagal.  As of September 30, 2002,the Company had incurred approximately $4,600,000 in litigation expensesassociated with the Replagal litigation.

 

In addition, the Company andAventis have been involved in a patent infringement action with Amgen andKirin-Amgen with respect to the development of Dynepo.  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 todeduct up to 50% of any royalties due to the Company from the sale of Dynepountil Aventis has recouped the full amount of TKT’s share of litigationexpenses.  The Company currentlyestimates that its share of the expenses associated with the litigation willtotal between approximately $5,000,000 and $10,000,000 by the time the matteris finally adjudicated. Although Dynepo was approved by the European Agency forthe Evaluation for Medicinal Products in March 2002, Aventis has not launchedDynepo due to the uncertainty of the outcome of litigation in the UnitedStates.

 

The Company can provide noassurance as to the outcome of these proceedings.  A decision by a court in any jurisdiction in a manner adverse tothe Company would have a material adverse effect on the Company’s business,financial condition, and the results of operations.

 

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FORWARD-LOOKING STATEMENTS

 

This quarterlyreport contains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the Securities andExchange Act of 1934, as amended, that involve risks and uncertainties.  TheCompany may, in some cases, use words such as “project,” “believe,”“anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,”“could,” “will,” or “may,” or other words that convey uncertainty of 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.”  Thesefactors and the other cautionary statements made in this quarterly report shouldbe read as being applicable to all related forward–looking statements whereverthey 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 FUTURE RESULTS

 

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

 

Clinical and Regulatory Risks

 

*We maynot be able to obtain marketing approvals for our products.*

 

We are not able tomarket any of our products in Europe, the United States or in any otherjurisdiction without marketing approval from the European Agency for theEvaluation of Medicinal Products, the United States Food and DrugAdministration, or 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.

 

Replagal wasgranted marketing authorization in the fifteen countries of the European Unionby the European Commission in August 2001, approximately one year after wesubmitted our Marketing Authorization Application to the European Agency forthe Evaluation of Medicinal Products and approximately five years after wefiled our Investigational New Drug application with the FDA. We have alsoreceived approval to market Replagal in a number of other countries.

 

In the UnitedStates, we submitted a Biologics License Application to the FDA seekingmarketing authorization for Replagal. In January 2001, the FDA issued acomplete review letter regarding the Biologics License Application. The FDAletter stated that the data that we had provided was not adequate for approvalof the Biologics License Application at that time and

 

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requested additionalinformation. In response to this letter, we have discussed the BiologicsLicense Application with the FDA and have submitted additional data.

 

On September 20, 2002, the FDApostponed the previously scheduled meeting of the Endocrinologic and MetabolicDrugs Advisory Committee to evaluate the Company’s BLA for Replagal due toadministrative reasons. The FDA has rescheduled the meeting of the AdvisoryCommittee to evaluate the Company’s BLA for Replagal on January 14, 2003. Thepostponement of the Advisory Committee meeting will delay the timing of adecision on the approval of Replagal into the first half of 2003, at theearliest.

 

The FDA’s review of the ReplagalBiologic License Application for the postponed meeting expressed concernsregarding the Company’s clinical data, particularly with respect to pain. As aresult, TKT has concluded that the best approach to obtain a prompt approvalfor Replagal in the United States is to seek approval on the basis of its renaland cardiac data and not to seek approval on the basis of its pain data. WhileTKT will seek approval based on these functional data, TKT’s recent extensivecommunications with the FDA indicate that the FDA is also considering using kidneypathology data as a surrogate endpoint for a possible accelerated approval. Afterthe Advisory Committee meeting, the FDA may either approve the Company’s BLA ordecline to approve it.  If it declinesto approve the BLA, the FDA may request additional information, possiblyincluding data from additional clinical trials.

 

During 2000,Aventis submitted a Marketing Authorization Application to the European Agencyfor the Evaluation of Medicinal Products seeking marketing authorization ofDynepo in the European Union for the treatment of anemia associated with kidneydisease. In March 2002, the European Commission granted marketing approvalof Dynepo in the European Union. Aventis has not launched Dynepo in Europe due to ongoing litigation.

 

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

 

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

 

*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, amongother things, of our products are subject to extensive regulation bygovernmental authorities in Europe, the United States, and elsewhere throughoutthe world.

 

In general, therecan be no assurance that submission of materials requesting permission toconduct clinical trials will result in authorization by the FDA or equivalentforeign regulatory

 

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agency to commenceclinical trials, or that once clinical trials have begun, testing will becompleted successfully within any specific time period, if at all, with respectto any of our products. Once trials are complete and an application has beensubmitted to the relevant regulatory agency, the regulatory agency may deny theapplication if applicable regulatory criteria are not satisfied, or may requireadditional testing or information.

 

If regulatoryapproval of a product is granted, such approval may be subject to limitationson the indicated uses for which the product may be marketed or containrequirements for costly post-marketing testing and surveillance to monitor thesafety or efficacy of the product. As to any product for which we obtainmarketing approval, the product, the facilities at which the product ismanufactured, any post-approval clinical data and our promotional activitieswill be subject to continual review and periodic inspections by the EuropeanAgency for the Evaluation of Medicinal Products, the FDA and other regulatoryauthorities.  Failure to comply with anyregulatory requirements could result in financial penalties, inability tosupply the market, or both.

 

In addition toregulations adopted by the European Agency for the Evaluation of MedicinalProducts, the FDA, and other foreign regulatory authorities, we are alsosubject to regulation under the Occupational Safety and Health Act, the ToxicSubstances Control Act, the Resource Conservation and Recovery Act, and otherfederal, state, and local regulations.

 

Although we havedevoted substantial resources to comply with all applicable regulatoryrequirements and we are not aware of any significant regulatory violations, wecannot be sure that we are in compliance with such regulations.  Any violations of regulatory requirementsmay result in various adverse consequences, including the European Agency forthe Evaluation of Medicinal Products’ or FDA’s delay in approving or refusal toapprove a product, suspension or withdrawal of an approved product from themarket, operating restrictions, or the imposition of civil or criminalpenalties.

 

*We maynot be able to obtain orphan drug exclusivity for our Niche Protein products.If our competitors are able to obtain orphan drug exclusivity before us, we maybe precluded from marketing our Niche Protein products.*

 

Somejurisdictions, including Europe and the United States, may designate drugs forrelatively small patient populations as “orphan drugs.” Orphan drug designationmust be requested before submitting a Biologics License Application. Orphandrug designation does not convey any advantage in, or shorten the duration of,the regulatory review and approval process but does make the product eligiblefor orphan drug exclusivity and certain tax credits in the United States.Generally, if a product which has an orphan drug designation subsequentlyreceives the first marketing approval for the indication for which it has suchdesignation, the product is entitled to orphan drug exclusivity. Orphan drugexclusivity means that applications to market the same product for the same usemay not be approved, except in circumstances specified by regulation andstatute, for a period of up to ten years in Europe and for a period ofseven years in the United States. Obtaining orphan drug designations and orphandrug exclusivity for our Niche Protein products may be critical to the successof this platform. Even if we obtain orphan drug exclusivity for any of ourpotential products, we may not be able to maintain it. For example, if acompetitive product is shown to be clinically superior to our product, anyorphan drug exclusivity we have obtained will not apply to such competitiveproduct. Our competitors may also seek and obtain orphan drug exclusivity for

 

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products competitive withour products before we obtain marketing approval.

 

Replagal wasgranted marketing authorization in the fifteen countries of the European Unionby the European Commission in August 2001. A competitive product for thetreatment of patients with Fabry disease, marketed by Genzyme, was also grantedmarketing authorization in the European Union. Both Replagal and Genzyme’scompeting product were granted co-exclusive orphan drug status in the EuropeanUnion for up to 10 years.

 

In the UnitedStates, both we and Genzyme have received orphan drug designation for ourrespective products for Fabry disease. Whichever product is the first toreceive FDA marketing approval would likely receive orphan drug exclusivity forthat product. Once a product receives orphan drug exclusivity, the FDA may notapprove any other applications to market the same product for Fabry disease fora period of seven years, except in circumstances specified by regulation andstatute.

 

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

 

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

 

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

 

The rate ofcompletion of clinical trials is dependent in part upon the rate of enrollmentof patients. Patient accrual is a function of many factors, including the sizeof the patient population, the proximity of patients to clinical sites, theeligibility criteria for the study, the existence of competitive clinicaltrials, and the availability of alternative treatments. In particular, thepatient populations for some of our Niche Protein products are small. Forinstance, we believe there are up to 5,000 patients worldwide afflicted withFabry disease and a similar number afflicted with Hunter syndrome. We arecurrently conducting clinical trials of iduronate-2-sulfatase for the treatmentof Hunter syndrome and Factor VIII gene therapy for the treatment of hemophiliaA. Delays in planned patient enrollment may result in increased costs andprolonged clinical development.

 

We and ourcollaborators may not be able to successfully complete any clinical trial of apotential product within any specified time period. In some cases, we may notbe able to complete the trial at all. Moreover, clinical trials may not showour potential product to be both safe and efficacious. Thus, the EuropeanAgency for Evaluation to Medicinal Products, the FDA and other regulatoryauthorities may not approve any of our potential products for any indication.

 

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*Our research and development efforts may not result inproducts appropriate for testing in human clinical trials.*

 

We expendsignificant resources on research and development and preclinical studies ofproduct candidates.  However, these effortsmay not result in the development of products appropriate for testing in humanclinical trials.   For example, ourresearch may result in product candidates that are not expected to beefficacious in treating disease or that reveal safety concerns.  We may postpone or terminate research anddevelopment of a product candidate or a program at any time for any reason suchas the safety or efficacy of the potential product, allocation of resources orunavailability of qualified research and development personnel.

 

*Becausegene therapy is a relatively new technology and gene therapy products have notbeen extensively tested in humans, we may face delays and incur increased costsin the regulatory process related to our gene therapy products.*

 

We are developinggene therapy products. Because gene therapy is a relatively new technology andproducts for gene therapy have not been extensively tested in humans, theregulatory requirements governing gene therapy products may be more uncertainthan for other types of products. This uncertainty may cause delays in theregulatory process relating to our gene therapy products, including delays inour initiating clinical trials of these products. This uncertainty may alsoincrease the cost of obtaining regulatory approvals of our gene therapyproducts.

 

*Ethicaland social issues may cause regulatory authorities to increase the regulationof gene therapy clinical trials, which may impair our ability to conduct genetherapy clinical trials in the future.*

 

Patients in our genetherapy clinical trials of Factor VIII for the treatment ofhemophilia have experienced serious adverse events but none have beenjudged to be related to our gene therapy products.  However, due to adverse events that have occurred during somegene therapy clinical trials conducted by other biotechnology andpharmaceutical companies and institutions, including the death of a patient,the Federal government, the European Agency for Evaluation to MedicinalProducts, the FDA, industry organizations, and institutions conducting genetherapy clinical trials have grown increasingly concerned about the safety ofthese clinical trials. An increased concern over gene therapy trials generallymay lead the Federal government, the European Agency for Evaluation to MedicinalProducts, the FDA or other regulatory agencies to impose further regulation ongene therapy clinical trials. If further regulations are imposed on genetherapy research generally, the delays and costs involved in complying withsuch regulations may impair our ability to conduct gene therapy clinical trialsin the future.

 

Patent Litigation and Intellectual Property Risks

 

*We area party to litigation with Genzyme and Mount Sinai involving Replagal whichcould preclude us from manufacturing or selling Replagal.*

 

SinceJuly 2000, we have been involved in patent litigation relating to Replagalbrought by Genzyme and Mount Sinai in the U.S. District Court for the Districtof Delaware regarding a patent licensed by Genzyme from Mount Sinai. InJanuary 2002, the Federal District Court of Delaware

 

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dismissed this patentlitigation, granting our motion for summary judgment of non-infringement anddenying Genzyme’s motion for summary judgment of infringement. InMarch 2002, Genzyme appealed the ruling to the U.S. Federal Circuit Courtof Appeals. If Genzyme is successful in its appeal, the case will be remandedto the Federal District Court of Delaware for further proceedings onnon-infringement and invalidity issues. If we were to ultimately lose this caseafter trial and appeal, we would be precluded from making, using and sellingReplagal. We can provide no assurance as to the outcome of this litigation. Asof September 30, 2002, we have incurred approximately $4.6 million inlitigation expenses associated with the Replagal litigation.

 

*We area party to litigation with Amgen and Kirin-Amgen involving Dynepo which couldpreclude us from manufacturing or selling Dynepo.*

 

InApril 1997, Amgen commenced a patent infringement action against us andAventis in the U.S. District Court for the District of Massachusetts. InJanuary 2001, the Federal District Court of Massachusetts concluded thatDynepo infringed 8 of the 18 claims of patents asserted by Amgen. Amgen did notseek and was not awarded monetary damages. We and Aventis have filed an appealof the decision with the U.S. Federal Circuit Court of Appeals. Amgen has alsoappealed this decision. If we are not successful in our appeal, we and Aventiswould be precluded from making, using and selling Dynepo in the United States.

 

In addition, inJuly 1999, we and Aventis commenced legal proceedings in the UnitedKingdom against Kirin-Amgen, seeking a declaration that a United Kingdom patentheld by Kirin-Amgen will not be infringed by our activities related to Dynepoand that certain claims of Kirin-Amgen’s United Kingdom patent are invalid. InApril 2001, the High Court of Justice in the United Kingdom ruled thatDynepo infringed one of four claims of a patent asserted by Kirin-Amgen. InJuly 2002, the Court of Appeals in the United Kingdom reversed the High Courtof Justice and ruled that Dynepo did not infringe Kirin-Amgen’s patent. Kirin-Amgen asked the Court of Appeals for permission to appeal itsdecision to the House of Lords.  Thatrequest was refused by the Court of Appeals. Nevertheless, Kirin-Amgen hasdirectly petitioned the House of Lords to hear its appeal.

 

We can provide noassurance as to the outcome of either litigation. In addition, Aventis has notlaunched Dynepo due to the uncertainty of the outcomes of the litigation.  We are required to reimburse Aventis, whichis paying the litigation expenses, for 50% of the expenses. Aventis is entitledto deduct up to 50% of any royalties due to us from it with respect to the saleof Dynepo until Aventis has recouped the full amount of our share of litigationexpenses. We currently estimate that our share of the expenses associated withthe litigation will total between approximately $5 million and $10 millionby the time the matter is finally adjudicated.

 

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

 

The biotechnologyindustry has been characterized by significant litigation, and interference andother proceedings regarding patents, patent applications, and otherintellectual property rights. We may become a party to additional patentlitigation and other proceedings with respect to our Niche Protein products,Gene-Activated proteins, Transkaryotic Therapy gene therapy technology or othertechnologies. Such litigation could result in liability for damages, preventour development and commercialization efforts, and divert management’sattention and resources.

 

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

 

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

 

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

 

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

 

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

 

As of September30, 2002, we owned over 25 issued U.S. patents, over 40 pending U.S. patents,over 90 corresponding issued foreign patents, and over 225 correspondingpending foreign patent applications. As of September 30, 2002, we licensedover 30 issued U.S. patents and additional corresponding foreign patents. Thepatents owned or licensed by us expire at various dates through 2020 and coverour Niche Protein products, Gene-Activated protein products and gene therapyproducts.

 

*If we are unable to protect the confidentiality of ourproprietary information and know-how, the value of our technology and productswill be adversely affected.*

 

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

 

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*If wefail to comply with any of our obligations under any of the agreements underwhich we license commercialization rights to products or technology from thirdparties, we could lose license rights.*

 

We are a party toover 30 patent licenses under which we have acquired rights to proprietarytechnology of third parties and expect to enter into additional patent licensesin the future, including a license to patents related to I2S. These licensesimpose various commercialization, sublicensing, royalty, insurance, and otherobligations on us. If we fail to comply with these obligations, the licensormay have the right to terminate the license and we could lose our license touse the acquired rights.  If theserights are lost, we may not be able to market products that were covered by thelicense.

 

Business Risks

 

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

 

During 2001, wereceived marketing authorizations for our first product. Replagal was grantedmarketing authorization in the European Union in August 2001. We have alsoreceived approval to market Replagal in seven other countries. We expect thatReplagal will account for all of our product sales into 2005, at the earliest.Through September 30, 2002, we had recorded $22.7 million of product sales fromthe sale of Replagal.

 

The commercialsuccess of Replagal will depend on its acceptance by physicians, patients andother key decision-makers for the treatment of Fabry disease. If Replagal doesnot continue to generate significant product sales, we will be required to fundoperations with cash resources, interest income, proceeds from equity offeringsand debt financings and funding from collaborative agreements.

 

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

 

The commercialsuccess of any of our products for which we obtain marketing approval from theEuropean Agency for the Evaluation of Medicinal Products, the FDA, and otherregulatory authorities will depend upon their acceptance by patients, themedical community and third party payors as clinically effective, safe andcost-effective. It may be difficult for us to achieve market acceptance of ourproducts.

 

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

 

•                                          the timing ofthe receipt of marketing approvals;

•                                          the countriesin which such approvals are obtained; and

•                                          thesafety, efficacy, convenience, and cost-effectiveness of the product ascompared to competitive products.

 

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*We havelimited experience and resources in manufacturing and will incur significantcosts to develop this experience or rely on third parties to manufacture our productson our behalf.*

 

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

 

To the extent thatwe are a party to manufacturing arrangements with third parties, we will bedependent upon these third parties to perform their obligations in a timelymanner and in accordance with applicable government regulations.  For instance, we are parties to severalmanufacturing arrangements with respect to the manufacture of Replagal.  Each of these manufacturing arrangementsrelates to only certain aspects of the manufacturing process.  In the event that any one of thesemanufacturers fails to or is unable to comply with its obligations under itsmanufacturing agreement with us and if the manufacturer’s failure materiallydelays the ultimate production of Replagal and adversely affects our Replagalinventory levels, our sales of Replagal could be adversely affected.

 

There are a limited number of third-partymanufacturers capable of manufacturing our protein products with a limitedamount of production capacity. As a result, we may experience difficulty inobtaining adequate manufacturing capacity for our needs. If we are unable toobtain or maintain contract manufacturing of these products, or to do so oncommercially reasonable terms, we may not be able to complete development ofthese products or market them.

 

To the extent thatwe elect not to or cannot contract for third-party manufacturing for any of ourproducts, we will need to manufacture these products in our own manufacturingfacilities. We plan to manufacture iduronate-2-sulfatase in our ownfacilities.  We have limitedmanufacturing experience. We are investing, and may need to invest in thefuture, substantial additional funds to build our own manufacturing facilitiesand need to recruit qualified personnel in order to build or lease and operateany manufacturing facilities. There can be no assurance that we will be able tosuccessfully build or operate our own facilities, that our facilities willcomply with applicable regulations or that our facilities will enable us tomanufacture our products at a commercially reasonable cost.

 

Any manufacturingof our products must comply with the FDA’s Good Manufacturing Practices. Beforeapproving a Biologics License Application for a product, the FDA will inspectthe facilities at which the product is manufactured. If the FDA determines thatwe or our third party manufacturers do not comply with Good ManufacturingPractices, the FDA may refuse to approve our future Biologics LicenseApplications, require additional testing or information, or requirepost-marketing testing and surveillance to monitor the safety or efficacy of aproduct. Once the FDA approves a product, we or our third party manufacturersmust continue to comply with Good Manufacturing Practices. If we or our thirdparty manufacturers fail to maintain compliance with Good ManufacturingPractices, the FDA could impose fines on us or restrictions on a product or onus, including requiring us to withdraw a product from the market. We expendsignificant funds, time and effort in the area of production and qualitycontrol to maintain compliance with Good Manufacturing Practices.

 

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

 

In certaincountries, particularly the countries of the European Union, the pricing ofprescription pharmaceuticals and the level of reimbursement are subject togovernmental control. In the United States, the availability of reimbursementby governmental and other third party payors affects the market for anypharmaceutical product. These third party payors continually attempt to containor reduce the costs of health care by challenging the prices charged formedical products and services.

 

We expect that theprices for many of our products, when commercialized, including in particular,our Niche Protein products, may be high compared to other pharmaceuticalproducts. We have established pricing and reimbursement in substantially allcountries in which Replagal has been approved. The price was established at anaverage of approximately $165,000 per patient per year, and fluctuatesdepending upon exchange rates. We have not received any revenues from the saleof Replagal in the countries where we have received marketing approval but havenot established reimbursement. We have recorded revenues in countries where wehave not received marketing approval but have secured reimbursement on apatient by patient basis.  We do notexpect to receive any revenues in those countries until reimbursement isestablished. The price of our products may make reimbursement more difficult toobtain, if it can be obtained at all.

 

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

 

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

 

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

 

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

 

We may be unableto develop technologies and products that are more clinically efficacious orcost-effective than products developed by our competitors. Even if we obtainmarketing approval for our product candidates, many of our competitors havemore extensive and

 

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established sales,marketing, and distribution capabilities than we do. Litigation with thirdparties, including litigation with Amgen and Genzyme, 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.

 

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

 

We believe thatthe primary competition with respect to our Niche Protein product program isfrom biotechnology and smaller pharmaceutical companies. Competitors includeBioMarin Pharmaceutical Inc., Genzyme, Osiris Therapeutics, Inc., andOxford GlycoSciences plc. The markets for some of the potential Niche Proteinproducts are quite small. As a result, if competitive products exist, we maynot be able to successfully commercialize our products.

 

We believe thatour primary competition with respect to Replagal is Genzyme. In August 2001, Replagal was granted marketingauthorization in the European Union. Since August 2001, we have receivedapproval to market Replagal in a number of other countries but have notreceived approval to market Replagal in the United States. A competitiveproduct for the treatment of patients with Fabry disease, marketed by Genzyme,was also granted marketing authorization in the European Union. Both Replagaland Genzyme’s competing product were granted co-exclusive orphan drug status inthe European Union for up to 10 years.

 

In the UnitedStates, both we and Genzyme have received orphan drug designation for ourrespective products for Fabry disease. Whichever product is the first toreceive FDA marketing approval would likely receive orphan drug exclusivity forthat product. Once a product receives orphan drug exclusivity, the FDA may notapprove any other applications to market the same class of product for Fabrydisease for a period of seven years, except in limited circumstances.

 

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

 

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

 

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

 

*Competitionfor technical, commercial and administrative personnel is intense in our industryand we may not be able to sustain our operations or grow if we are unable toattract and retain key personnel.*

 

Our success ishighly dependent on the retention of principal members of our technical,commercial, and administrative staff including, in particular, Dr. RichardF Selden, our founder and President and Chief Executive Officer. We are a partyto an employment agreement with Dr. Selden, but this agreement may beterminated by us or Dr. Selden for any reason or no reason at any timeupon notice to the other party. We do not have key man life insurance forDr. Selden.

 

Our future growthwill require hiring a significant number of qualified technical, commercial andadministrative personnel. Accordingly, recruiting and retaining such personnel inthe future will be critical to our success. There is intense competition fromother companies and research and academic institutions for qualified personnelin the areas of our activities. If we are not able to continue to attract andretain, on acceptable terms, the qualified personnel necessary for thecontinued development of our business, we may not be able to sustain ouroperations or grow.

 

*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 limitedsales and marketing experience and capabilities. In order to market ourproducts, including Replagal, we will need to develop this experience and thesecapabilities or rely upon third parties, such as our collaborators, to performthese functions. If we rely on third parties to sell, market, or distribute ourproducts, our success will be dependent upon the efforts of these third partiesin performing these functions. In many instances, we may have little or nocontrol over the activities of these third parties in selling, marketing, anddistributing our products. If we choose to conduct these activities directly,as we plan to do with respect to some of our potential products, we may not beable to recruit and maintain an effective sales force. Currently, TKT Europe,our 80% owned subsidiary, markets Replagal in Europe. As a result, our abilityto successfully market and sell Replagal in Europe is dependent on themarketing personnel of TKT Europe. Under our agreement with Aventis, Aventis is responsible for the saleand marketing of Dynepo. Due to the uncertainty of the outcomes of the ongoinglitigation, Aventis has not launched Dynepo.

 

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*Wedepend on our collaborators to develop, conduct clinical trials, obtainregulatory approvals for, and manufacture, market and sell certain products onour behalf and none of their efforts may be scientifically or commerciallysuccessful.*

 

We are parties tocollaborative agreements with third parties relating to certain of ourprincipal products. We are relying on Aventis to develop, conduct clinicaltrials, obtain regulatory approvals for, and manufacture, market, and sellDynepo in the United States and Europe; Sumitomo Pharmaceuticals Co., Ltd.to develop and commercialize Replagal for Fabry disease in Japan and otherAsian countries; and Genetics Institute, Inc. to co-develop andcommercialize Factor VIII gene therapy for hemophilia A in Europe. Ourcollaborators may not devote the resources necessary or may otherwise be unableor unwilling to complete development and commercialization of these potentialproducts. Our existing collaborations are subject to termination without causeon short notice under specified circumstances.

 

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

 

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

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

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

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

 

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

 

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

 

Financing Risks

 

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

 

We haveexperienced significant operating losses since our inception in 1988. As ofSeptember 30, 2002, our accumulated deficit was $317.9 million. We had a netloss of $82.3

 

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million for the ninemonths ended September 30, 2002 and net losses of $70.2 million, $51.0 millionand $44.5 million in 2001, 2000 and 1999, respectively.

 

We expect that we will continue to incur substantiallosses and that, until we have substantial product sales, our cumulative losseswill increase as our research and development, sales and marketing, andmanufacturing efforts expand. We expect that the losses that we incur willfluctuate from quarter to quarter and that these fluctuations may besubstantial. We recorded $3.5 million in product sales in 2001, and $22.7million in product sales in the nine months ended September 30, 2002.

 

*We mayneed additional financing, which may be difficult to obtain.*

 

We believe thatour existing capital resources, together with cash from collaborativeagreements, product sales, and interest income, will be sufficient to fund ouroperations through at least 2004. Our cash requirements for operatingactivities, financing activities and investment activities have exceeded our internallygenerated funds. We expect that our cash requirements for such activities willcontinue to exceed our internally generated funds until we are able to generatesubstantial product sales, particularly because we expect our operatingexpenses to continue to increase in the future, including our research anddevelopment expenses, as our product development efforts accelerate. Our futurecapital requirements will depend on many factors, including the following:

 

•                                          thetiming, receipt, and amount of product sales;

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

•                                          the scope andresults of our clinical trials;

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

•                                          the cost of manufacturingactivities;

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

•                                          the cost ofadditional facilities requirements;

•                                          thecosts involved in preparing, filing, prosecuting, maintaining, and enforcing patentclaims and other patent-related costs, including litigation costs and theresults of such litigation;

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

•                                          our abilityto establish and maintain collaborative arrangements;

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

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

•                                          other workingcapital requirements.

 

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

 

If we raiseadditional funds by issuing equity securities, further dilution to our then

 

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

 

## **Item3.    Quantitative and Qualitative Disclosures About MarketRisk**

 

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

 

Accordingly,the Company does not believe that there is any material market risk exposurewith respect to derivative or other financial instruments that would requiredisclosure under this item.

 

In June 2002, the Companyobtained an exclusive license to certain intellectual property from CellGenesys, Inc., related to Cell Genesys’ approach to gene activation. For thenine months ended September 30, 2002, the Company incurred a license feeexpense of $26,000,000, which was funded with $11,000,000 in cash and$15,000,000 worth of shares of the Company’s common stock.  As part of the arrangement, the Companyagreed that the number of shares initially issued to Cell Genesys would beadjusted at the time the Company registers such shares for resale under theSecurities Act of 1933, as amended, if the market value of such shares at thattime is greater or less than $15,000,000, as calculated in accordance with apredetermined formula.  The Company hasfiled a registration statement with the SEC covering the shares.  If the shares are registered in the fourthquarter and, pursuant to the agreed upon formula, the Company is obligated toissue additional shares to Cell Genesys, the Company will likely be required torecognize a charge at that time.  Theexact amount of the charge and the shares to be issued is not determinable atthis time because it is dependent on the price of the Company’s common stock atthe time the shares issued to Cell Genesys are registered.

 

Asof September 30, 2002, the Company did not have any off-balance sheetarrangements.

 

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Item 4.    Controls andProcedures.

 

*(a)  Evaluation of disclosure controls andprocedures*.  Based ontheir evaluation of the Company’s disclosure controls and procedures (asdefined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of1934) as of a date within 90 days of the filing date of this Quarterly Reporton Form 10-Q, the Company’s chief executive officer and chief financial officerhave concluded that the Company’s disclosure controls and procedures aredesigned to ensure that information required to be disclosed by the Company inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms and are operating in an effective manner.

 

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

 

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PART II - OtherInformation

 

### Item 1.  Legal Proceedings

 

The Company can provide noassurance as to the outcome of any legal proceedings. A decision by a court inany other jurisdiction in a manner adverse to the Company could have a materialadverse effect on the Company’s business, financial position, and results ofoperations.

 

##### *ReplagalTM PatentLitigation*

 

Since July 2000, the Company hasbeen involved in patent litigation relating to Replagal brought by Genzyme andMount Sinai in the Federal District Court of Delaware regarding a patentlicensed by Genzyme from Mount Sinai. In January 2002, the Federal District Court of Delaware dismissedthis patent litigation.  In March 2002,Genzyme appealed the ruling to the Federal Circuit.  If Genzyme is successful in its appeal, the case will be remandedto the Federal District Court of Delaware for further proceedings on non-infringementand invalidity issues.  As of September30, 2002, the Company had incurred approximately $4.6 million in litigationexpenses associated with the Replagal litigation.

 

##### *DynepoTM PatentLitigation*

 

The Company and Aventis areinvolved in patent infringement actions with Amgen in the United States andKirin-Amgen in the United Kingdom.

 

The Company and Aventis areinvolved in a patent infringement action with Amgen Inc.  In April 1997, Amgen commenced a patentinfringement action against the Company and Aventis in the Federal DistrictCourt of Massachusetts. In January 2001, the Federal District Court ofMassachusetts concluded that Dynepo (epoietin delta), the Company’sGene-Activated erythropoietin for the treatment of anemia related to chronic renalfailure, infringed eight of the 18 claims of patents asserted by Amgen. TheCompany and Aventis have filed an appeal of the decision with the FederalCircuit.  Amgen has also appealed thisdecision.

 

In addition, in July 1999,Aventis and the Company commenced legal proceedings in the United Kingdomagainst Kirin-Amgen, seeking a declaration that a United Kingdom patent held byKirin-Amgen will not be infringed by the Company’s activities relating toDynepo.  In April 2001, the HighCourt of Justice in the United Kingdom ruled that Dynepo infringed one of fourclaims of the patent asserted by Kirin-Amgen. In July 2002, the Court of Appeals in the United Kingdom reversed theHigh Court of Justice and ruled that Dynepo did not infringe Kirin-Amgen’spatent.  Kirin-Amgen asked the Court ofAppeals for permission to appeal its decision to the House of Lords.  That request was refused by the Court ofAppeals. Nevertheless, Kirin-Amgen as directly petitioned the House of Lords tohear its appeal.

 

The Company is required toreimburse Aventis, which is paying the litigation expenses, for 50% of theexpenses.  In addition, Aventis isentitled 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 Companycurrently estimates that its share of the expenses associated with thelitigation will total between approximately $5 million and $10 million by thetime the matter is finally adjudicated. Although

 

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Dyneporeceived marketing approval from the EMEA in March 2002, Aventis has notlaunched Dynepo due to the uncertainty of the outcome of the litigation in theUnited States.

 

### Item 6.  Exhibits and Reports on Form 8-K

 

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

 

(b)                        Reports onForm 8-K

 

Current Report on Form8-K, dated September 20, 2002 regarding the Food and Drug Administration’sannouncement of the postponement of the Endocrinologic and Metabolic DrugsAdvisory Committee meeting scheduled for September 26 and 27, 2002 due toadministrative reasons.

 

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SIGNATURES

 

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

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

 

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CERTIFICATIONS

 

I, Richard F Selden, certify that:

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

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

 

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

 
|                                             |                          | /s/ Richard F Selden                  |   |
|--------------------------------------------------|-------------------------------|---------------------------------------|--------|
| Dated:    November  14, 2002 | Richard F Selden, M.D., Ph.D. |
|                                             |                          | President and Chief Executive Officer |

 

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I, Daniel E. Geffken, certify that:

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

a)              all significantdeficiencies in the design or operation of internal controls which could adverselyaffect the Registrant’s ability to record, process, summarize and reportfinancial data and have identified for the Registrant’s auditors any materialweaknesses in internal controls; and

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

 

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

 
|                                             |              | /s/ Daniel E. Geffken                                       |   |
|--------------------------------------------------|-------------------|-------------------------------------------------------------|--------|
| Dated:    November  14, 2002 | Daniel E. Geffken |
|                                             |              | Senior Vice President, Finance and Chief  Financial Officer |

 

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**EXHIBIT INDEX**

 

10.32#                                                              CommercialSupply and Process Validation Agreement, entered into as of December 6, 1999,by and between TKT and Chesapeake Biological Laboratories, Inc.

 

10.33#                                                              MasterProduction Agreement, made as of December 1, 1998, between BioScience ContractProduction Corp. and TKT.

 

99.1                                                                           Certificationby the Registrant’s President and Chief Executive Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

99.2                                                                           Certificationby the Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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

 

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