**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

 

**ý**** QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2005**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from              to               ..**

 

**Commissionfile number: 000-24207**

 

**ABGENIX, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                            | ** ** | **94-3248826**         |
|-----------------------------------------|------------|------------------------|
| (State or other jurisdiction of         |       | (IRS employer          |
| incorporation or organization)          |       | Identification number) |
|                                    |       |                   |
| **6701  Kaiser Drive, Fremont, CA**     | ** ** | **94555**              |
| (Address of principal executive office) |       | (Zip Code)             |

 

**(510) 608-6500**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).Yes ý No o

 

Indicate by check mark whether the registrant is a shell company  (as defined in Rule 12b-2 of theExchange Act).Yes o No ý

 

As of October 31,2005, there were 90,555,799 shares of the Registrant’s Common Stockoutstanding.

 

 

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**TABLE OF CONTENTS**

** **
| ** **                                                                                                             | **Page No.** |
|------------------------------------------------------------------------------------------------------------------------|-------------------|
|                                                                                                                   |              |
|                                                                                                                   |              |
| **PART I. Financial Information**                                                                                 | ** **        |
| ** **                                                                                                             | ** **        |
| **ITEM 1.  Financial Statements**                                                                                      | ** **        |
| ** **                                                                                                             | ** **        |
| Condensed Consolidated  Balance Sheets at September 30, 2005 and December 31, 2004                           | 3                 |
|                                                                                                                   |              |
| Condensed Consolidated  Statements of Operations for the three and nine months ended  September 30, 2005 and 2004 | 4                 |
|                                                                                                                   |              |
| Condensed Consolidated  Statements of Cash Flows for the nine months ended  September 30, 2005 and 2004           | 5                 |
|                                                                                                                   |              |
| Notes to Condensed  Consolidated Financial Statements                                                                  | 6                 |
|                                                                                                                   |              |
| **ITEM 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                | 14                |
| ** **                                                                                                             |              |
| **ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk**                                                | 53                |
| ** **                                                                                                             |              |
| **ITEM 4. Controls  and Procedures**                                                                                   | 53                |
| ** **                                                                                                             |              |
| **PART II. Other  Information**                                                                                   |              |
| ** **                                                                                                             |              |
| **ITEM  1. Legal Proceedings**                                                                                         | 53                |
| ** **                                                                                                             |              |
| **ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds**                                               | 53                |
| ** **                                                                                                             |              |
| **ITEM 3.  Defaults upon Senior Securities**                                                                           | 54                |
| ** **                                                                                                             |              |
| **ITEM 4.  Submission of Matters to a Vote of Security Holders**                                                       | 54                |
| ** **                                                                                                             |              |
| **ITEM  5. Other Information**                                                                                         | 54                |
| ** **                                                                                                             |              |
| **ITEM 6.  Exhibits**                                                                                                  | 54                |
| ** **                                                                                                             |              |
| **SIGNATURES**                                                                                                         | 55                |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**ITEM1.  Financial Statements**

 

**ABGENIX, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(in thousands,except share and per share data)

(unaudited)

 
| ** **                                                                                                                                                                                     | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                           |       |                         |       |                        |       |
| **ASSETS**                                                                                                                                                                                     |       |                         |       |                        |       |
| Current assets:                                                                                                                                                                                |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                     |       | $                            | 17,138     |                        | $          | 148,929 |   |
| Marketable  securities                                                                                                                                                                         |       | 326,466                      |       | 267,400                     |       |
| Interest  receivable                                                                                                                                                                           |       | 3,298                        |       | 2,370                       |       |
| Accounts receivable,  net                                                                                                                                                                      |       | 2,644                        |       | 5,729                       |       |
| Prepaid expenses  and other current assets                                                                                                                                                     |       | 11,687                       |       | 11,088                      |       |
| Total current  assets                                                                                                                                                                          |       | 361,233                      |       | 435,516                     |       |
| Property and  equipment, net                                                                                                                                                                   |       | 199,884                      |       | 223,004                     |       |
| Long-term  investments                                                                                                                                                                         |       | 17,078                       |       | 23,300                      |       |
| Goodwill                                                                                                                                                                                       |       | 34,780                       |       | 34,780                      |       |
| Identified  intangible assets, net                                                                                                                                                             |       | 31,283                       |       | 60,010                      |       |
| Deposits and  other assets                                                                                                                                                                     |       | 34,394                       |       | 36,108                      |       |
|                                                                                                                                                                                           |       | $                            | 678,652    |                        | $          | 812,718 |   |
|                                                                                                                                                                                           |       |                         |       |                        |       |
| **LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED  STOCK AND STOCKHOLDERS’ EQUITY**                                                                                                         |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                                          |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                               |       | $                            | 5,724      |                        | $          | 6,635 |   |
| Deferred revenue                                                                                                                                                                               |       | 8,920                        |       | 11,692                      |       |
| Accrued  liabilities                                                                                                                                                                           |       | 17,004                       |       | 16,622                      |       |
| Accrued  restructuring charges                                                                                                                                                                 |       | 2,386                        |       | —                      |       |
| Total current  liabilities                                                                                                                                                                     |       | 34,034                       |       | 34,949                      |       |
| Deferred rent                                                                                                                                                                                  |       | 7,615                        |       | 7,519                       |       |
| Convertible  notes                                                                                                                                                                             |       | 449,890                      |       | 463,630                     |       |
| Non-current  portion of accrued restructuring charges                                                                                                                                          |       | 5,214                        |       | —                      |       |
| Other long-term  liabilities                                                                                                                                                                   |       | 63,941                       |       | 25,626                      |       |
| Redeemable  convertible preferred stock, $0.0001 par value; 5,000,000 shares authorized;  Series A-1 50,000 shares issued and outstanding; liquidation preference  $50,000                |       | 49,869                       |       | 49,869                      |       |
| Commitments                                                                                                                                                                                    |       |                         |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                    |       |                         |       |                        |       |
| Common stock,  $0.0001 par value; 220,000,000 shares authorized; 90,307,248 and 89,146,380  shares issued and outstanding at September 30, 2005 and  December 31, 2004, respectively |       | 9                            |       | 9                           |       |
| Additional  paid-in capital                                                                                                                                                                    |       | 981,577                      |       | 973,979                     |       |
| Accumulated  other comprehensive income                                                                                                                                                        |       | 2,346                        |       | 9,391                       |       |
| Accumulated  deficit                                                                                                                                                                           |       | (915,843                     | )          | (752,254                    | )          |
| Total  stockholders’ equity                                                                                                                                                               |       | 68,089                       |       | 231,125                     |       |
|                                                                                                                                                                                           |       | $                            | 678,652    |                        | $          | 812,718 |   |

 

See accompanyingnotes

 

3

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**ABGENIX, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands,except per share data)

(unaudited)

 
| ** **                                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Revenues:                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Contract revenue                                                                   |       | $                                          | 4,689      |                                      | $          | 3,116 |   | $ | 10,751 |   | $ | 10,195 |   |
| Contract  manufacturing revenue                                                    |       | —                                     |       | —                                    |       | — |   | 1,325 |   |
| Total revenues                                                                     |       | 4,689                                      |       | 3,116                                     |       | 10,751 |   | 11,520 |   |
|                                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Operating  expenses:                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Cost of goods  manufactured                                                        |       | —                                     |       | —                                    |       | — |   | 1,857 |   |
| Research and  development                                                          |       | 29,345                                     |       | 29,660                                    |       | 100,674 |   | 94,265 |   |
| Manufacturing  start-up costs                                                      |       | 5,181                                      |       | 6,351                                     |       | 11,965 |   | 16,487 |   |
| Amortization of  identified intangible assets, related to research and development |       | 846                                        |       | 1,441                                     |       | 3,728 |   | 5,024 |   |
| General and  administrative                                                        |       | 5,035                                      |       | 7,673                                     |       | 16,003 |   | 21,038 |   |
| Impairment of  identified intangible assets                                        |       | —                                     |       | —                                    |       | 25,000 |   | 17,241 |   |
| Restructuring  and other                                                           |       | 398                                        |       | —                                    |       | 15,138 |   | — |   |
| Total operating  expenses                                                          |       | 40,805                                     |       | 45,125                                    |       | 172,508 |   | 155,912 |   |
|                                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Loss from  operations                                                              |       | (36,116                                    | )          | (42,009                                   | )          | (161,757 | ) | (144,392 | ) |
|                                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Other income  (expenses):                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Interest and  other income (expenses), net                                         |       | 3,257                                      |       | 1,347                                     |       | 9,216 |   | 4,831 |   |
| Interest expense                                                                   |       | (3,980                                     | )          | (1,758                                    | )          | (11,048 | ) | (5,048 | ) |
| Total other  expenses                                                              |       | (723                                       | )          | (411                                      | )          | (1,832 | ) | (217 | ) |
| Net loss                                                                           |       | $                                          | (36,839    | )                                         | $          | (42,420 | ) | $ | (163,589 | ) | $ | (144,609 | ) |
|                                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Basic and  diluted net loss per share                                              |       | $                                          | (0.41      | )                                         | $          | (0.48 | ) | $ | (1.83 | ) | $ | (1.63 | ) |
|                                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Shares used in  computing basic and diluted net loss per share                     |       | 89,949                                     |       | 88,845                                    |       | 89,617 |   | 88,609 |   |

 

See accompanyingnotes

 

4

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**ABGENIX, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

(unaudited)

 
| ** **                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| **Operating activities**                                                     |       |                                      |       |   |   |
| Net loss                                                                     |       | $                                         | (163,589   | ) | $ | (144,609 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                      |       |   |   |
| Non-cash portion  of restructuring and other                                 |       | 5,665                                     |       | — |   |
| Depreciation                                                                 |       | 20,739                                    |       | 22,961 |   |
| Amortization of  identified intangible assets                                |       | 3,728                                     |       | 5,024 |   |
| Impairment of  identified intangible assets                                  |       | 25,000                                    |       | 17,241 |   |
| Amortization of  debt issuance costs                                         |       | 1,508                                     |       | 943 |   |
| Other                                                                        |       | 102                                       |       | 57 |   |
| Changes for  certain assets and liabilities:                                 |       |                                      |       |   |   |
| Interest  receivable                                                         |       | (928                                      | )          | 1,660 |   |
| Accounts  receivable                                                         |       | 3,085                                     |       | 1,339 |   |
| Inventories                                                                  |       | —                                    |       | (370 | ) |
| Prepaid expenses  and other current assets                                   |       | (651                                      | )          | 1,402 |   |
| Deposits and other  assets                                                   |       | 71                                        |       | (74 | ) |
| Accounts payable                                                             |       | (911                                      | )          | (590 | ) |
| Deferred revenue                                                             |       | (2,772                                    | )          | (3,257 | ) |
| Accrued  liabilities                                                         |       | 986                                       |       | 1,516 |   |
| Accrued  restructuring charges                                               |       | 7,600                                     |       | — |   |
| Contract  cancellation obligation                                            |       | —                                    |       | (22,749 | ) |
| Deferred rent                                                                |       | 765                                       |       | 1,050 |   |
| Other long-term  liabilities                                                 |       | 38,315                                    |       | 6,370 |   |
| Net cash used in operating activities                                        |       | (61,287                                   | )          | (112,086 | ) |
|                                                                         |       |                                      |       |   |   |
| **Investing activities**                                                     |       |                                      |       |   |   |
| Purchases of marketable securities                                           |       | (144,198                                  | )          | (200,955 | ) |
| Maturities of marketable securities                                          |       | 62,755                                    |       | 46,719 |   |
| Sales of marketable securities                                               |       | 21,558                                    |       | 265,708 |   |
| Purchases of property and equipment                                          |       | (3,896                                    | )          | (6,885 | ) |
| Sale of equipment                                                            |       | —                                    |       | 3 |   |
| Net cash (used in) provided by investing activities                          |       | (63,781                                   | )          | 104,590 |   |
|                                                                         |       |                                      |       |   |   |
| **Financing activities**                                                     |       |                                      |       |   |   |
| Repurchase of convertible subordinated notes                                 |       | (13,458                                   | )          | — |   |
| Net proceeds from issuance of common stock                                   |       | 6,735                                     |       | 3,318 |   |
| Net cash (used in) provided by financing activities                          |       | (6,723                                    | )          | 3,318 |   |
| Net decrease in cash and cash equivalents                                    |       | (131,791                                  | )          | (4,178 | ) |
| Cash and cash equivalents at beginning of period                             |       | 148,929                                   |       | 19,141 |   |
| Cash and cash equivalents at end of period                                   |       | $                                         | 17,138     |   | $ | 14,963 |   |

 

See accompanyingnotes

 

5

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**ABGENIX, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**September 30,2005**

**(unaudited)**

 

**1.****             Basisof Presentation and Summary of Significant Accounting Policies**

 

**Basis ofPresentation**–****The unauditedcondensed consolidated financial statements of Abgenix, Inc. (the “Company”or “Abgenix”) included herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission.  Certain information or footnote disclosurenormally included in financial statements prepared in accordance with U.S.generally accepted accounting principles has been condensed or omitted pursuantto such rules and regulations.  Inthe opinion of the Company, the accompanying unaudited condensed consolidatedfinancial statements contain all adjustments, consisting only of normalrecurring adjustments, necessary to present fairly the financial informationincluded therein.  These financialstatements should be read in conjunction with the audited financial statementsfor the year ended December 31, 2004****andaccompanying notes included in the Company’s annual report as filed on Form 10-Kwith the Securities and Exchange Commission. The results of operations for the three months and nine months ended September 30,2005 are not necessarily indicative of the results to be expected for the fullyear or for any other future period.

 

**Recent AccountingPronouncements** – In December 2004, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards (SFAS) No. 123(R),“Share-Based Payment”, which is a revision of SFAS No. 123 and supersedesAPB Opinion No. 25.  SFAS No. 123(R)requires that all share-based payments to employees, including grants ofemployee stock options, be recognized in the financial statements based ontheir fair values.  Pro forma disclosurepreviously permitted under SFAS No. 123 will no longer be analternative.  SFAS No. 123(R) doesnot change the accounting guidance for share-based payment transactions withparties other than employees provided in SFAS No. 123 as originally issuedand EITF Issue No. 96-18, “Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services.”

** **

**SFAS No. 123(R), which is effective for theCompany on January 1, 2006, permits public companies to adopt its requirementsusing either the modified prospective or modified retrospective transitionmethod.  The Company expects to use themodified prospective transition method, which requires that compensation costis recognized for all awards granted, modified or settled after the effectivedate as well as for all awards granted to employees prior to the effective datethat remain unvested as of the effective date.**

** **

**As permitted by SFAS No. 123, the Companycurrently accounts for its share-based payments to employees using APB Opinion No. 25’sintrinsic value method and does not recognize compensation costs for itsemployee stock options.  Accordingly, theCompany expects that the adoption of the SFAS No. 123(R) fair value methodwill have a significant impact on the Company’s results of operations, althoughit will have no impact on the Company’s overall financial position.  The actual annual expense in 2006 will dependon a number of factors, including the level of share-based payments granted,the Company’s stock price and other assumptions used in estimating the fairvalue of stock options at the time of the grant.**

** **

**RevenueRecognition** – The Company receives payments from customers for license, option,service and milestone fees, as well as for contract manufacturing the Companyperforms.  These payments, which aregenerally non-refundable, are recognized as revenue or reported as deferredrevenue until they meet the criteria for revenue recognition.  The Company recognizes revenue when (1) persuasiveevidence of the arrangement exists; (2) delivery has occurred or serviceshave been rendered; (3) the price is fixed or determinable and (4) thecollectibility is reasonably assured, in accordance with

 

6

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**Securities and Exchange Commission Staff AccountingBulletin No. 104, “Revenue Recognition”. In addition, the Company has followed the following principles inrecognizing revenue:**

** **

**•**      Abgenix enters into revenue arrangements with multipledeliverables in order to meet its customer’s needs.  For example, the arrangements may include acombination of up-front fees, license payments, research services, milestonepayments, future royalties and manufacturing arrangements.  Multiple element revenue agreements enteredinto on or after July 1, 2003 are evaluated under Emerging Issues TaskForce No. 00-21, “Revenue Arrangements with Multiple Deliverables,” todetermine whether the delivered item has value to the customer on a stand-alonebasis and whether objective and reliable evidence of the fair value of theundelivered item exists.  Deliverables inan arrangement that do not meet the separation criteria in Issue 00-21 must betreated as one unit of accounting for purposes of revenue recognition.  Generally, the revenue recognition guidanceapplicable to the last deliverable is followed for the combined unit ofaccounting.

** **

**•**      Research and product license fees are recognized only afterboth the license period has commenced and the technology has been delivered.

** **

**•**      Option fees for granting options to obtain product licenses todevelop a product are recognized when the option is exercised or when theoption period expires, whichever occurs first. Option fees are paid in cash, are non-refundable, and require theCompany to reserve rights to the therapeutic target during the option periodfor the customer.

** **

**•**      Fees the Company receives for research services the Companyperforms under its technology out-licensing agreements are generally recognizedratably over the entire period the Company performs these services.  Research services include process sciencesservices the Company performs under its production services agreements, such ascell line development.

** **

**•**      Incentive milestone payments are recognized as revenue when thespecified milestone is achieved. Incentive milestone payments are triggered either by the results of theCompany’s research efforts or by events external to Abgenix, such as regulatoryapproval to market a product.  Incentivemilestone payments are substantially at risk at the inception of the contract,and the values assigned thereto are commensurate with the type of milestoneachieved.  The Company has no futureperformance obligations related to an incentive milestone that has beenachieved.

** **

**•**      Contract manufacturing fees the Company receives under itsproduction services agreements are recognized when the manufacture of anantibody product candidate is complete, and the antibody product candidate isreleased and delivered, as defined in the relevant agreement.

** **

**Stock-BasedCompensation**–****TheCompany accounts for stock-basedawards to employees and directors using the intrinsic value method inaccordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees.” Accordingly, the Company does not recognize compensation expense foremployee stock options granted at or above fair market value. For purposes of disclosures pursuant to SFAS No. 123,as amended by SFAS No. 148, the estimated fair value of options isamortized to expense on a straight-line basis over the options’ vestingperiod.  The following table illustrates what net loss would have been had theCompany accounted for its stock-based awards under the provisions of SFAS No. 123.Pro forma amounts may not be representative of future periods.

 

7

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| ** **                                                                                                                                                              | ** ** | **Three Months Ended**                       | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **September 30,**                       | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                                                              | ** ** | **2005**                                     | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                              | ** ** | **(in thousands, except per share amounts)** | ** ** |
| ** **                                                                                                                                                              | ** ** | ** **                                   | ** ** |
| Net loss                                                                                                                                                                |       | $                                            | (36,839    | )                      | $          | (42,420 | ) | $ | (163,589 | ) | $ | (144,609 | ) |
|                                                                                                                                                                    |       |                                         |       |                   |       |   |   |   |   |
| Stock-based  employee compensation costs included in the determination of net loss                                                                                      |       | —                                       |       | —                 |       | 615 |   | — |   |
| Stock-based  employee compensation costs that would have been included in the  determination of net loss if the fair value based method had been applied to  all awards |       | (3,326                                       | )          | (10,368                | )          | (12,259 | ) | (34,778 | ) |
| Pro forma net  loss as if the fair value based method had been applied to all awards                                                                                    |       | $                                            | (40,165    | )                      | $          | (52,788 | ) | $ | (175,233 | ) | $ | (179,387 | ) |
|                                                                                                                                                                    |       |                                         |       |                   |       |   |   |   |   |
| Basic and  diluted net loss per share as reported                                                                                                                       |       | $                                            | (0.41      | )                      | $          | (0.48 | ) | $ | (1.83 | ) | $ | (1.63 | ) |
|                                                                                                                                                                    |       |                                         |       |                   |       |   |   |   |   |
| Pro forma basic  and diluted loss per share                                                                                                                             |       | $                                            | (0.45      | )                      | $          | (0.59 | ) | $ | (1.96 | ) | $ | (2.02 | ) |

 

Thefair value for these options was estimated as of the date of grant using aBlack-Scholes option pricing model with the following weighted-averageassumptions for the three and nine months ended September 30, 2005 and2004:

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                           | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free interest  rate                                             |       | 4.18                   | %          | 3.59                   | %          | 4.12 | % | 3.39 | % |
| Dividend yield                                                       |       | 0.00                   | %          | 0.00                   | %          | 0.00 | % | 0.00 | % |
| Volatility  factors of the expected market price of our Common Stock |       | 0.55                   |       | 0.90                   |       | 0.55 |   | 0.90 |   |
| Weighted-average  expected life of option (years)                    |       | 4.77                   |       | 5.71                   |       | 5.10 |   | 5.63 |   |

 

Thesesame assumptions above were also applied in the determination of the optionvalues related to stock options granted to non-employees, except that the termof the consulting contracts (ranging from six months to five years) wasused for the expected life of the option. For the three months ended September 30, 2005, the Company recordedan expense of $126,000 related to non-employee stock options, of which $90,000was included in manufacturing start-up costs and $36,000 in general and administrativeexpenses.  For the nine months ended September 30,2005, the Company recorded an expense of $234,000 related to non-employee stockoptions, of which $186,000 was included in manufacturing start-up costs and$48,000 in general and administrative expenses. The Company did not incur such expense in the three and nine monthsended September 30, 2004.

 

Forthe nine months ended September 30, 2005, the Company also recorded astock-based compensation expense of $615,000 related to employees that were affectedby the restructuring plan described in Note 4 below, and this stock-basedcompensation expense was included in restructuring and other expenses.  No stock-based compensation expense relatedto employees affected by the restructuring plan was recorded in the threemonths ended September 30, 2005.

 

**Restructuring Charges** – The Company records costs and liabilities associatedwith exit and disposal activities, as defined in SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities,” at fair value in theperiod the liability is incurred.  SFAS No. 146requires that the estimated future cash flows to be used in the fair valuecalculation be discounted using a credit-adjusted

 

8

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risk-free interest rate and that such interest rate shall have amaturity date that approximates the expected timing of future cash flows.  Future cash flows related to leaseobligations shall include the effect of sublease rental income and other leaseoperating expenses.  In periodssubsequent to initial measurement, changes to a liability are measured usingthe same credit-adjusted risk-free rate that was applied in the initialperiod.  The Company has recorded costsand liabilities in accordance with SFAS No.146 for exit activities related to arestructuring plan described in Note 4 below. The Company will evaluate and adjust the liability on a quarterly basisas appropriate for changes in sublease assumptions due to changes in marketconditions.

 

**Net LossPer Share**– Basic net loss per share is calculated based onthe weighted-average number of shares outstanding during the period. The impactof common stock options, warrants and shares issuable upon the conversion ofthe convertible notes and the redeemable convertible preferred stock wasexcluded from the computation of diluted net loss per share, as their effect isantidilutive for the periods presented.

 

**Reclassification**–****Certain prioryear’s balances have been reclassified to conform to the current period’spresentation.

 

**2.****             ComprehensiveLoss**

 

**The components of comprehensive loss, net of tax,were as follows (in thousands):**

** **
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                               | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                 |       | $                      | (36,839    | )                      | $          | (42,420 | ) | $ | (163,589 | ) | $ | (144,609 | ) |
| Other  comprehensive income (loss):                      |       |                   |       |                   |       |   |   |   |   |
| Unrealized  holding gains (losses) arising during period |       | 492                    |       | (1,648                 | )          | (7,045 | ) | (5,633 | ) |
| Comprehensive  loss                                      |       | $                      | (36,347    | )                      | $          | (44,068 | ) | $ | (170,634 | ) | $ | (150,242 | ) |

 

**3.****            ****Impairment of Identified Intangible Assets**

 

Inthe quarter ended June 30, 2005, management determined that an impairment of the Company’s acquired SelectedLymphocyte Antibody Method (SLAM)technology had occurred and that the estimated fair value had declined to $2.0million.  This technology, which includesintellectual property, was acquired in 2000 through the acquisition of AbgenixBiopharma Inc., formerly known as ImmGenics Pharmaceuticals, Inc.  In the second quarter of 2005, the Companycompleted a strategic planning process, which included an assessment of itstechnologies.  After assessing the SLAMtechnology, the Company determined that its use of the SLAM technology haddeclined and would continue to decline substantially because of significant improvementsin the use of other technologies and processes. Because of this impairment indicator, the Company tested the SLAMtechnology for recoverability and found that the undiscounted future cash flowsestimated to be generated from the use of the SLAM technology were less thanthe carrying value of the SLAM technology. As a result, the Company determined that an impairment of the SLAMtechnology had occurred and recorded an impairment charge of $23.1 million in thesecond quarter of 2005 to adjust the carrying value of the SLAM technology toits estimated fair value, which is based on the estimated discounted futurecash flows to be generated from the SLAM technology.

 

Inthe quarter ended June 30, 2005, management also determined that animpairment of the Company’s acquired technology in the field of intrabodies(antibodies that can access intracellular targets) had occurred and that theestimated value had declined to zero. This technology, which includes intellectual property, was acquired in2000 through the acquisition of IntraImmune, Inc.  The Company

 

9

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decidedto discontinue the development of the intrabody program and performed anassessment of the associated patent position and the likelihood of sale orlicense of the technology to a third party. The Company determined that the possibility of generating positivefuture cash flows from the technology was remote.  As a result, the Company recorded animpairment charge of $1.9 million in the second quarter of 2005.

 

Inthe quarter ended June 30, 2004, management had determined that animpairment of the Company’s acquired technology in the field of catalyticantibodies had occurred and that the estimated value had declined to zero.  This technology, which includes intellectualproperty, was acquired in 2001 through the acquisition of Hesed Biomed, Inc.  The Company decided to focus its resources onother research and development projects and wind down its catalytic antibodyprogram.  Additionally, after assessingthe associated patent position and the likelihood of sale or license of thetechnology to a third party, management further determined in the quarter endedJune 30, 2004 that the possibility of generating positive future cashflows from the technology was remote.  Asa result of this determination, the Company recorded an impairment charge of$17.2 million in the second quarter of 2004. Intangible assets held and used must be tested for impairment whenevents or changes in circumstances indicate that its carrying amount may not berecoverable.  As of December 31,2004, the Company determined that no changes in circumstances had occurred thatwould indicate that a further impairment of an intangible asset had occurred.

 

Identified intangible assets as of September 30,2005 and December 31, 2004 consisted of the following (in thousands):

 
| ** **                               | ** ** | **Gross  Assets** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|------------------------------------------|------------|-------------------|------------|-------------------------------|------------|---------------------|------------|
| **As of September 30, 2005:**       |       |              |       |                          |       |                |       |
| Acquisition-related developed technology |       | $                 | 48,590     |                          | $          | (17,916             | )          | $ | 30,674 |   |
| Other intangible assets                  |       | 824               |       | (215                          | )          | 609                 |       |
|                                     |       | $                 | 49,414     |                          | $          | (18,131             | )          | $ | 31,283 |   |
|                                     |       |              |       |                          |       |                |       |
| **As of December 31, 2004:**        |       |              |       |                          |       |                |       |
| Acquisition-related developed technology |       | $                 | 85,142     |                          | $          | (26,264             | )          | $ | 58,878 |   |
| Other intangible assets                  |       | 1,442             |       | (310                          | )          | 1,132               |       |
|                                     |       | $                 | 86,584     |                          | $          | (26,574             | )          | $ | 60,010 |   |

 

Amortization of acquisition-relatedintangible assets was approximately $833,000 and $3.7 million, respectively,for the three and nine months ended September 30, 2005, and $1.4 millionand $5.0 million, respectively, for the three and nine months ended September 30,2004.

 

Amortization of other intangibleassets was $13,000 and $58,000, respectively, for the three and nine monthsended September 30, 2005, and $22,000 and $67,000, respectively, for thethree and nine months ended September 30, 2004.

 

Estimated amortization expenserelated to identified intangible assets for the three-month period from October 1,2005 to December 31, 2005 and for each of the fiscal years thereafter isas follows (in thousands):

 
| ** **          | ** ** | **Periods Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2005**                             | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Acquisition-related |       | $                                    | 833        |       | $          | 3,332      |       | $ | 3,332 |   | $ | 3,332 |   | $ | 3,332 |   | $ | 16,513 |   | $ | 30,674 |   |
| Other               |       | $                                    | 13         |       | $          | 51         |       | $ | 51 |   | $ | 51 |   | $ | 51 |   | $ | 392 |   | $ | 609 |   |

 

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**4.****            ****Restructuring and Other**

 

In June 2005,the Company implemented a restructuring plan in which the Company decided toconsolidate its research and certain pre-clinical activities into the Company’sfacility located in Burnaby, British Columbia, and reduce its workforce byapproximately 15%.  As a result of thereduction in workforce and an evaluation of its future needs, the Companydetermined that it would not occupy and would sublease, to the extent possible,certain of its research facilities.  Therestructuring plan was designed to focus resources on the Company’s developmentpipeline and particularly the potential commercial opportunity of its leadproduct candidate, panitumumab.

 

Inconnection with the restructuring plan, the Company recorded restructuringcharges of $15.1 million in total for the nine months ended September 30,2005, of which $14.7 million and $398,000 were recorded in the second and thethird quarters of 2005, respectively. Restructuring charges in the second quarter of 2005 included $2.7million of termination benefits, $6.5 million of lease obligations and $5.6million for the impairment of leasehold improvements, equipment and otherassets.  Restructuring charges in thethird quarter of 2005 included $76,000 of termination benefits, $157,000 ofaccretion expense related to lease obligations, $138,000 for the impairment ofleasehold improvements and $27,000 of facilities and employee relocationexpenses.

 

Thetermination benefits primarily consisted of severance pay, retention bonusesand non-cash, stock-based compensation expense. The substantial majority of the severance pay and retention bonuses areexpected to be paid in full by the end of 2005.

 

The leaseobligations represent the fair value of future lease commitment costs, net ofprojected sublease rental income, for the research facilities that the Companydecided not to occupy as a result of the restructuring plan.  The estimated future cash flows used in thefair value calculation are based on certain estimates and assumptions bymanagement, including the projected sublease rental income, the amount of timethe space will be unoccupied prior to sublease and the length of anysubleases.  The Company has leaseobligations related to the facilities subject to its restructuring activities,which extend to the year 2014. Management will review the sublease assumptions on a quarterlybasis.  Accordingly, management maymodify these estimates to reflect any changes in circumstances in future periods.

 

TheCompany’s decision to consolidate its research facilities was deemed to be animpairment indicator for its equipment and leasehold improvements under SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” As a result of performing an impairment evaluation, the Company recordedan impairment charge of $5.6 million and $138,000 in the second and the thirdquarters of 2005, respectively, to adjust the carrying value of the relatedlong-lived assets to their estimated fair values.  The majority of the impairment charge wasrelated to leasehold improvements and the fair value of these leaseholdimprovements was estimated based upon anticipated future cash flows associatedwith the related facilities, discounted at an interest rate commensurate withthe risks involved.  A portion of theimpairment charge was also related to certain lab and computer equipment andfurniture and fixtures that currently do not have any anticipated future use dueto the restructuring plan.

 

Activities related to theconsolidation of the Company’s research facilities under the restructuring planare expected to continue for the remainder of 2005.  The Company expects to incur additional costsfor the transfer or disposal of equipment, facility remediation and employeerelocation expenses.  These costs will berecorded in the period in which they are incurred in accordance with SFAS No. 146.

 

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The followingtable is a summary of restructuring activities for the nine months ended September 30,2005 and the liability balance as of September 30, 2005 (in thousands):

 
| ** **                                                | ** ** | **Charges to  Operations** | ** ** | **Non-Cash  Charges** | ** ** | **Cash  Payments** | ** ** | **Balance at  September 30,  2005** | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|--------------------|------------|------------------------------------------|------------|
|                                                      |       |                       |       |                  |       |               |       |                                     |       |
| Termination  benefits, including stock-based compensation |       | $                          | 2,770      |                  | $          | (615               | )          | $                                        | (1,442     | ) | $ | 713 |   |
| Lease  obligations, net                                   |       | 6,621                      |       | 670                   |       | (404               | )          | 6,887                                    |       |
| Impairment of  property and equipment                     |       | 5,720                      |       | (5,720                | )          | —             |       | —                                   |       |
| Facilities and  employee relocation expenses              |       | 27                         |       | —                |       | (27                | )          | —                                   |       |
|                                                      |       | $                          | 15,138     |                  | $          | (5,665             | )          | $                                        | (1,873     | ) | $ | 7,600 |   |
|                                                      |       |                       |       |                  |       |               |       |                                     |       |
|                                                      |       |                       |       | Classified as:        |       |               |       |
|                                                      |       |                       |       | Short-term  liability |       | $                  | 2,386      |                                     |
|                                                      |       |                       |       | Long-term  liability  |       | 5,214              |       |
|                                                      |       |                       |       |                  |       |               |       | $                                        | 7,600      |   |
|                                                           |            |                            |            |                       |            |                    |            |                                          |            |  |  |  |  |  |

 

**5.****            ****Convertible Notes**

 

Convertible notesconsisted of the following (in thousands):

 
| ** **                                   | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| 1.75% convertible senior notes due 2011      |       | $                            | 300,000    |                        | $          | 300,000 |   |
| 3.5% convertible subordinated notes due 2007 |       | 100,000                      |       | 113,750                     |       |
| Convertible subordinated note due 2013       |       | 49,890                       |       | 49,880                      |       |
|                                         |       | $                            | 449,890    |                        | $          | 463,630 |   |

 

In September 2005, the Companyrepurchased a portion of the 3.5% convertible subordinated notes due 2007totaling $13.8 million.  In connectionwith this repurchase, the Company recorded a gain on early extinguishment ofdebt of $152,000, which was included in the interest and other income(expenses), net, in the Company’s consolidated statements of operations.

 

**6.****            ****Other Long-Term Liabilities**

 

In 2000,the Company entered into a joint development and commercialization agreementwith Immunex Corporation, a wholly-owned subsidiary of Amgen Inc., for theco-development of ABX-EGF, now known as panitumumab, a fully human antibodycreated by the Company and directed against epidermal growth factor receptor(EGFr).  The parties amended thisagreement in October 2003.  Underthe amended agreement, Amgen has decision-making authority for development andcommercialization activities.  As underthe original agreement, the Company is obligated to pay 50% of the developmentand commercialization costs and is entitled to receive 50% of any profits fromsales of panitumumab.  As provided underthe amended agreement, Amgen advanced $60.0 million that the Company used tofund a portion of its share of development and commercialization costs forpanitumumab.  As of September 30,2005, the Company had a carrying balance of $63.9 million under this facilityconsisting of $60.0 million in advances, the maximum amount available, and $3.9million of interest accrued at the contract rate of 12% per annum.  The amount of any such advances, plusinterest, may be repaid out of profits resulting from future product sales;however, the Company is generally not obligated to repay any portion of theoutstanding balance if panitumumab does not reach commercialization.

 

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**7.****            Segment Information**

 

Theoperations of the Company and its wholly owned subsidiaries constitute onebusiness segment.

 

Informationabout customers who provided 10% or more of contract revenues for the period isas follows:

 
| **Period**                                  | ** ** | **Number of  Customers and Percentage of  Contract Revenues for each of the Customers** |
|---------------------------------------------|------------|-----------------------------------------------------------------------------------------|
| Three  months ended September 30, 2005 |       | 3  customers, 44%, 33% and 17%, respectively                                            |
| Nine  months ended September 30, 2005  |       | 3  customers, 31%, 28% and 20%, respectively                                            |
| Three  months ended September 30, 2004 |       | 3  customers, 65%, 10% and 10%, respectively                                            |
| Nine  months ended September 30, 2004  |       | 4  customers, 27%, 25%, 24% and 15%, respectively                                       |

 

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

*The followingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains forward*-*lookingstatements based upon current expectations that involve risks anduncertainties. In this quarterly report on Form 10-Q, the words “intend,” “anticipate,”“believe,” “estimate,” “plan” and “expect” and similar expressions as theyrelate to Abgenix are included to identify forward*-*looking statements. Our actual results and the timing of certain eventscould differ materially from those anticipated in these forward*-*looking statements as a result of certain factors, including those setforth below and under the heading “Risk Factors that Might Affect FutureResults”.  In this quarterly report on Form 10-Q,references to “Abgenix,” we,” “us,” and “our” are to Abgenix, Inc. and itssubsidiaries.*

 

##### **Overview**

##### ** **

The following Management’s Discussion andAnalysis of Financial Condition and Results of Operations is intended to help thereader understand our company.

 

***Our Business***

 

We are abiopharmaceutical company that is focused on the discovery, development andmanufacture of human therapeutic antibodies for the treatment of a variety ofdiseases.  We intend to use ourproprietary technologies to build a diversified product portfolio that weexpect to develop and commercialize internally or through joint development andcommercialization arrangements with pharmaceutical and biotechnology companies.

 

We are co-developing ourmost advanced proprietary product candidate, panitumumab, with ImmunexCorporation, a wholly owned subsidiary of Amgen Inc.  References in this quarterly report to Amgenare both to Amgen and Immunex.  Based onthe data received to date, we and Amgen are working towards initiating thesubmission by the end of 2005 of the Biologics License Application, or BLA, tothe U.S. Food and Drug Administration, or FDA, for panitumumab in patients withmetastatic colorectal cancer, who have failed prior standard chemotherapy.  ABX-10241, another of our proprietary productcandidates, is in early stage clinical trials. In addition, we have entered into a variety of contractual arrangementswith multiple pharmaceutical and biotechnology companies to jointly develop and commercialize productsor to enable these companies to use our XenoMouse® technology in thedevelopment of their products.  We mayalso use our XenoMax® technology on our customers’ behalf.  Six of our licensing partners, Pfizer, Inc.,Amgen, Chiron Corporation, CuraGen Corporation, Human Genome Sciences, Inc.and Agensys, Inc., have initiated clinical trials or submitted regulatoryapplications for such trials for antibodies generated from our technologies.  We also use our closely integrated processsciences and manufacturing capabilities for the manufacture of our ownproprietary product candidates and also offer these services to ourcollaborators and others.

 

We have entered intojoint development arrangements with companies such as Chugai PharmaceuticalsCo., Ltd., U3 Pharma AG and Dendreon Corporation, and may enter into additionaljoint development agreements.  Wegenerally expect to self-fund preclinical and certain clinical activities todetermine preliminary safety and efficacy before deciding whether to conductfurther product development internally or enter into joint development andcommercialization agreements.

 

We also have a broad collaboration in oncology with AstraZeneca UKLimited.  Pursuant to this collaborationwe are providing preclinical and clinical research support and processdevelopment for therapeutic antibodies against up to 36 targets to be developedby AstraZeneca, and have the opportunity to co-develop therapeutic antibodiesagainst up to 18 additional targets with AstraZeneca.  We also may conduct clinical manufacturing,as well as commercial manufacturing during the first five years of commercialsales for products arising out of our collaboration.

 

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***Our Financial Position and Liquidity***

 

To date, we have derivedour revenues primarily from our technology out-licensing contracts and ourproduction services contracts.  Unlessand until panitumumab is commercialized, we expect that substantially all ofour revenues for the foreseeable future will result from payments under theseand similar arrangements, our joint development arrangements and ourcollaboration with AstraZeneca.  Thepayments we receive under these arrangements will continue to be subject tosignificant fluctuation in both timing and amount.

 

We have incurred andexpect to continue to incur substantial expenses in connection with our productdevelopment activities, both under contractual arrangements with third partiesand related to our independent research and development efforts.  Regulatory and business factors will requireus to expend substantial funds in the course of completing required additionalresearch, preclinical testing and clinical trials of, and attaining regulatoryapprovals for, product candidates.  Theamounts of the expenditures that will be necessary to execute our business planare subject to numerous uncertainties that may adversely affect our liquidityand capital resources.

 

We have incurred netlosses since we were organized as an independent company, including a net lossof $163.6 million for the nine months ended September 30, 2005.  We expect to incur additional losses for theforeseeable future as a result of our research and development costs, includingcosts associated with conducting preclinical development and clinical trials,manufacturing start-up costs and costs associated with preparations for thepotential commercialization of panitumumab, such as costs associated withco-promotion and other commercial activities. We expect that the amount of our operating losses will fluctuatesignificantly from quarter to quarter.

 

Asof September 30, 2005, we had cash, cash equivalents and marketablesecurities of $343.6 million.  We willcontinue to assess our cash position, and may continue to repurchase a portionof our outstanding convertible subordinated notes due in March of 2007, ofwhich $100.0 million were outstanding at September 30, 2005.

 

***Summary of Product Development***

 

*Proprietary Product Development*

 

Twoof our antibody therapeutic product candidates are in clinical trials.  The following is an overview of theseprograms.

 

•      **Panitumumab** (ABX-EGF). Our leading proprietary antibody therapeutic product candidate ispanitumumab.  Generated using ourXenoMouse technology, panitumumab is a fully human antibody therapeutic productcandidate directed against the human epidermal growth factor receptor (EGFr)and a candidate for the potential treatment of a variety of solid tumors. Weare co-developing panitumumab with Amgen under a joint development andcommercialization agreement described under **Summaryof Contractual Arrangements**below. The status of clinical trials of panitumumab is as follows:

 

•      *Colorectal cancer, single agent therapy withpanitumumab: Pivotal studies* – In January 2004, Amgen initiated two pivotal studies ofpanitumumab as monotherapy in patients with metastatic colorectal cancerrefractory to standard irinotecan–and oxaliplatin–containingchemotherapy treatment, one in theUnited States and one outside the United States.  The initiation of the U.S. trial followed thereceipt of a Special Protocol Assessment letter from the FDA endorsing thedesign of the trial (known as the 167 trial) to support a regulatory submissionfor potential accelerated approval. Enrollment in this trial, which began in the first quarter of 2004, isproceeding more slowly than originally anticipated.  The second

 

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pivotaltrial (known as the 408 trial), a randomized, open-label, controlled studycomparing best supportive care with best supportive care and panitumumab, isbeing conducted in Europe, Canada and Australia in support of the globalregistration program.  Enrollment in thisstudy is complete.  In November 2005, weand Amgen announced top-line data from this study indicating that it had metthe primary endpoint of improving progression-free survival.  In this trial, those patients who receivedpanitumumab showed a 46 percent decrease in tumor progression rate, as assessedby central radiology review, versus those who received best supportive carealone.  This primary analysis alsoindicated that a secondary endpoint of objective response rate, assessed bycentral radiology review, was met as well. This study enrolled 463 patients with metastatic colorectal cancer whohad failed standard chemotherapy.  In December 2004,the FDA indicated that data from one pivotal trial, once completed, could beacceptable with additional data from other pending studies to support asubmission for marketing approval in the United States.  The FDA has granted fast trackdesignation for panitumumab for patients with metastatic colorectal cancer whohave failed standard irinotecan–and oxaliplatin–containingchemotherapy treatment.  Fast trackdesignation allows the FDA to accept, on a rolling basis, portions of amarketing application for review prior to the completion of the finalregistrational package.

 

•      *Colorectal cancer, single agent therapy withpanitumumab: Phase 2 studies*–**Amgenis conducting Phase 2 studies evaluating panitumumab as a single agent therapyin the treatment of advanced metastatic colorectal cancer.  One Phase 2 clinical trial, which wasinitiated in December 2001, is closed and treatment is ongoing.  Data from this study, which demonstratedsingle agent antitumor activity and general tolerability of panitumumab in thissetting, was reported at the annual meeting of the American Society of ClinicalOncology, or ASCO, in May 2005.  Amgen is also conducting a trial (known asthe 250 trial) to evaluate panitumumab in metastatic colorectal cancer patientswith tumors having low or undetectable levels of EGFr.  This trial was initiated in 2004 andenrollment is ongoing.

 

•      *Colorectal cancer,combination of panitumumab with chemotherapy* – Amgen is conducting aseparate Phase 2 clinical trial evaluating the effect of panitumumabadministered with irinotecan containing regimens as first-line treatment inpatients with metastatic colorectal cancer. Enrollment in this trial, which was initiated in January 2002, isclosed and treatment is ongoing.  Datafrom this study were reported at the European Cancer Conference in October 2005.

 

•      *Colorectal cancer,combination of panitumumab with chemotherapy and other targeted therapy* – In April 2005, we and Amgen announcedthe initiation of a randomized Phase 3 study in the first line treatment ofpatients with metastatic colorectal cancer, the “Panitumumab AdvancedColorectal Cancer Evaluation,” or PACCE study. This study evaluates the effect of chemotherapy consisting ofoxaliplatin– or irinotecan–containing regimens and bevacizumab (Avastin®), withor without panitumumab.  Enrollment inthis study is ongoing.

 

•      *Non-small cell lung cancer*– Amgen is conducting a Phase 2 clinical trialfor panitumumab in the first line treatment of advanced non-small cell lungcancer administered with standard chemotherapy, compared to standardchemotherapy alone.  Enrollment in thistrial, which was initiated in July 2001, is closed and treatment isongoing.  A primary analysis of thisstudy revealed that when compared with chemotherapy alone, the panitumumabcombination did not improve time to disease progression, the study’s primaryefficacy endpoint.  Secondary efficacyendpoints of the study, tumor response rate and overall survival, were also notmet.  The combination of panitumumab andstandard chemotherapy was generally well tolerated.  These data were recently presented at theEuropean Cancer Conference in October 2005 and further analysis isongoing.

 

•      *Renal cell cancer*–We are conducting a Phase 2 clinicaltrial evaluating the effect of panitumumab as monotherapy in patients withrenal cell cancer.  Enrollment in thistrial, which was initiated in April 2001, is closed and treatment isongoing.  An analysis of this study was presentedat the Fourth International Kidney Cancer Symposium in October 2005.  In patients with metastatic renal cell cancerwho had either not received any prior systemic therapy or had received oneprior biologic therapy, no objective tumor response was observed.  Panitumumab was generally welltolerated.  Further analysis of the datais ongoing.

 

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•      *Various cancers* – We initiated a Phase 1 clinical trial forpanitumumab in various solid tumors in 1999. In 2003, we expanded enrollment to investigate additional panitumumabdose levels and schedules of administration. Enrollment is closed and treatment is complete.  Data from this dose and schedule studywere presented at ASCO in May 2005 and showed that panitumumab wasgenerally well tolerated at weekly, every other week and every third weekdosing regimens.

 

•      *Further development* – Additional Phase 1 and 2 clinical studiesevaluating panitumumab in different tumor types either as a single agent or incombination with different chemotherapeutic agents and targeting agents, havebeen initiated or are expected to be initiated from time to time.  For example, several early phase studies ofpanitumumab in combination with chemotherapy and AMG 706, an Amgen proprietarymulti-kinase inhibitor, are currently ongoing.

 

•      **ABX-10241**(ABX-PTH). Generated using our technology, ABX-10241, or ABX-PTH, is a fully humanantibody therapeutic product candidate directed against parathyroid hormone(PTH) for the potential treatment of secondary hyperparathyroidism.  We filed an investigational new drugapplication, or IND, in December 2003 and initiated a single dose Phase 1clinical trial evaluating the safety and pharmacokinetics of ABX-10241 inpatients with secondary hyperparathyroidism in February 2004.  Preliminary results from an interim analysisof this study were presented at a scientific meeting in 2004.  Enrollment in this trial is ongoing.  In addition, we initiated a multiple-dosePhase 1 trial of ABX-10241 in patients with secondary hyperparathyroidism in September 2005.  Enrollment in this study is ongoing.

 

*Customer Product Development*

 

Wehave licensed our XenoMouse technology to pharmaceutical, biotechnology andgenomics companies interested in developing antibody-based products.  Typically, these agreements provide forup-front and, upon the occurrence of certain events, milestone payments to us,along with royalty payments to us if the product reaches the market.  We do not participate in the development ormarketing of these product candidates. Our customers have advanced ten antibodies generated with XenoMousetechnology into the clinical phase as follows:

 

•      Pfizer – We generated four XenoMouse-derived fully human antibody therapeuticproduct candidates that Pfizer has advanced into the clinical phase, includingone that targets cytotoxic T lymphocyte-associated antigen 4 (CTLA-4) and onethat targets the type 1 insulin-like growth factor receptor (IGF-1R).  The targets of the third and fourth productcandidates have not been disclosed. Three of the product candidates are currently in Phase 1 evaluation andone has advanced to Phase 2 evaluation.

 

•      Amgen – Denosumab (formerly known as AMG 162) is a XenoMouse-derived fullyhuman antibody therapeutic product candidate that Amgen has advanced into apivotal trial as a potential treatment for bone loss.  Amgen has advanced an additionalXenoMouse-derived fully human antibody therapeutic product candidate to anundisclosed target to Phase 1 clinical trials.

 

•      Chiron – We generated a XenoMouse-derivedfully human antibody therapeutic product candidate that binds to andneutralizes CD40, a receptor expressed on immune cells.  Chiron has advanced this candidate, CHIR-12.12,into a Phase 1 clinical trial in patients with B cell malignancies.

 

•      CuraGen – We generated a XenoMouse-derivedfully human antibody therapeutic product candidate that binds toplatelet-derived growth factor D (PDGF-D) that CuraGen has advanced to Phase 1clinical trials as CR002 as a potential treatment for inflammatory kidneydisease.

 

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•      Human Genome Sciences – CCR5 mAb is aXenoMouse-derived fully human antibody therapeutic product candidate that bindsto the chemokine receptor CCR5 that allows entry of the HIV-1 virus into immunecells.  Human Genome Sciences hasinitiated a Phase 1 clinical trial of CCR5 mAb in patients infected with HIV-1.

 

•      Agensys – AGS-PSCA is a XenoMouse-derivedfully human antibody therapeutic product candidate that selectively binds toprostate stem cell antigen (PSCA). Agensys has initiated a Phase 1 clinical trial of this candidate inpatients with advanced prostate cancer.

 

***Summary of Contractual Arrangements***

 

*Overview*

 

We have entered into avariety of contractual arrangements to use our XenoMouse and XenoMaxtechnologies to generate and/or develop fully human antibodies against numerousantigens or to manufacture fully human antibodies.  The following is a summary of these relationships.

 

*AmgenCollaboration*

 

In 2000, we entered into a joint development and commercializationagreement with Immunex, now a wholly-owned subsidiary of Amgen, for theco-development of ABX-EGF, now known as panitumumab.  We amended this agreement in October 2003.  Under the amended agreement, Amgen hasdecision-making authority for development and commercialization activities andwe have the right to co-promote panitumumab in the United States.  We have decided to pursue the co-promotion ofpanitumumab with Amgen in the United States. We are obligated to pay 50% of the development and commercializationcosts and we are entitled to receive 50% of any profits from sales ofpanitumumab worldwide.  As of September 30,2005, Amgen had advanced $60 million, the entire amount available under theagreement, which we have used to fund a portion of our share of development andcommercialization costs for panitumumab. The amount of any such advances, plus interest, may be repaid out ofprofits resulting from future product sales; however, we are generally notobligated to repay any portion of the outstanding balance if panitumumab doesnot reach commercialization. Under a separate agreement with Amgen, we aremanufacturing clinical supplies of panitumumab for the collaboration and willmanufacture commercial supplies for the first five years after commerciallaunch, with Amgen’s support and assistance. The costs of manufacturing clinical and commercial supplies are alsoshared equally.

 

*AstraZeneca Collaboration*

 

We entered into a collaboration and license agreement with AstraZenecain October 2003 for the discovery, development and commercialization offully human monoclonal antibodies to treat cancer.  This alliance involves the joint discoveryand development of therapeutic antibodies for up to 36 cancer targets to becommercialized worldwide by AstraZeneca exclusively.  We will conduct early stage preclinicalresearch on behalf of AstraZeneca with respect to some or all of these targets,and have initiated research programs for numerous targets.  To date, we and AstraZeneca have selected 23targets for inclusion in the collaboration, including several for which we hadpre-existing preclinical programs.  Forany resulting products, we may receive milestone payments at various stages ofdevelopment and royalties on future product sales.  AstraZeneca may make milestone payments to usof up to $51 million per candidate that is developed under the agreement, andfor any antibody we choose to develop to a target that is discontinued from thecollaboration, we may pay AstraZeneca up to $15 million.  In addition, we may conduct early clinicaltrials, process development and clinical manufacturing, as well as commercialmanufacturing during the first five years of commercial sales, and would becompensated for those activities at competitive market rates.  The collaboration also gives us the right toselect and develop an additional pool of antibodies against up to 18 targets,which the companies may elect to further

 

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codevelop on an equal cost and profit sharing basis.  Subject to a number of exceptions, we willwork exclusively with AstraZeneca to generate and develop antibodies fortherapeutic use in the field of oncology during a three-year target selectionperiod.  These exceptions include, amongothers, work on antibodies directed at antigens that are or become subject toexisting collaborations and antigens that we and AstraZeneca decide not topursue in the collaboration, and certain process development and manufacturingservices.  In connection with thiscollaboration, AstraZeneca made a $100.0 million investment in Abgenixsecurities.  Upon the achievement ofcertain milestones, we may also require AstraZeneca to invest up to anadditional $60.0 million in our convertible preferred stock.

 

*Joint Development Collaborations*

 

We have entered into joint development and commercializationarrangements for the development of fully human antibody therapeutic productswith a number of collaborators, including U3 Pharma, Microscience, Sosei,Dendreon and Chugai.  Developmentactivities under these agreements are in various early stages.  Pursuant to these arrangements we and ourcollaborators typically share equally the costs of development andcommercialization as well as any profits from the collaboration.  We intend to enter into additional jointdevelopment agreements for other product candidates.

 

*Technology Out-Licensing*

 

Wehave licensed our XenoMouse technology to third parties for the purpose ofgenerating antibody product candidates to one or more specific antigensprovided by the customer.  We may alsouse our XenoMax technology on the customer’s behalf.  Pursuant to these contracts, we and ourcustomers intend to generate antibodies for development as product candidatesfor the treatment of cancer, inflammation, autoimmune diseases, cardiovasculardisease, neurological diseases, metabolic diseases, infectious diseases andother diseases.  The customer generallyhas an option for a period of time to acquire a product license for anyantibody identified using XenoMouse technology that the customer wishes todevelop and commercialize. The financial terms of these agreements may includelicense fees, option fees and milestone payments paid to us by the customers.Based on our agreements, these payments and fees would average fromapproximately $7.0 million to $10.0 million per antibody if our customertakes the antibody into development and ultimately to commercialization.  Generally, under these agreements, ourcollaborators are responsible for the costs of product development,manufacturing and commercialization. Additionally, these license agreements entitle us to receive royaltieson any future product sales by the customer.

 

*Production Services*

 

We have entered into alimited number of contracts for process sciences and manufacturing services. Wemay offer a variety of process development, cell banking and clinical andcommercial scale manufacturing services for antibody product candidates toexisting and new customers to absorb production services capacity we are notusing for our proprietary product candidates. Pursuant to such arrangements wemay receive fees and, in some circumstances, royalties from future productsales. We continue to assess opportunities and may enter into additionalproduction service contracts.

 

**Results of Operations**

 

*Three Months and Nine Months Ended September 30, 2005and 2004*

 

*Contract Revenues.*

 

Contractrevenues totaled $4.7 million and $10.8 million, respectively, in the three andnine months ended September 30, 2005, compared to $3.1 million and $10.2million, respectively, in the comparable periods in 2004. Because contractrevenues depend to a large extent on the success or failure

 

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ofresearch and development efforts undertaken by our collaborators and licensees,our period-to-period contract revenues can fluctuate significantly and areinherently difficult to predict.

 

Theprimary components of contract revenues for both periods were as follows:

 

•      Technology Licensing

 

Werecognized a total of $4.7 million and $10.7 million, respectively, in thethree and nine months ended September 30, 2005, compared to $2.8 millionand $8.8 million, respectively, in the comparable 2004 periods, from licensingour proprietary technologies. Revenues in these periods consisted primarily of variousfees, such as product license fees, research license and service fees, productdevelopment and research milestone payments and option fees, under agreementsrelated to the licensing of our XenoMouse technology.  These revenues were generated from severalcollaborators, but primarily from Agensys, Amgen and Pfizer in the three andnine months ended September 30, 2005 and from Amgen, CuraGen, Pfizer andAbbott in the three and nine months ended September 30, 2004.

 

•      Production Services

 

Werecognized $5,000 in the three and nine months ended September 30, 2005and approximately $326,000 and $1.4 million, respectively, in the three andnine months ended September 30, 2004 for production services.  These revenues consisted primarily of processsciences services and were generated from a customer under a productionservices agreement.

 

*Contract Manufacturing Revenues.*

 

In the three and nine months ended September 30,2005, we did not recognize any revenues from manufacturing services.  Contract manufacturing revenues totaled $1.3million in the nine months ended September 30, 2004 and were related tothe manufacture of an antibody product for a customer under a productionservices agreement.  We did not recognizeany revenues from manufacturing services in the three months ended September 30,2004.

 

*Cost of Goods Manufactured.*

 

Costsincurred for contract manufacturing pursuant to production service contractsare reported as cost of goods manufactured. In the three andnine months ended September 30, 2005, we did not manufacture any productsfor customers and, therefore, did not incur any cost of goodsmanufactured.  We did not incur any costof goods manufactured in the three months ended September 30, 2004.  In the nine months ended September 30,2004, we incurred $1.9 million in cost of goods manufactured associated withmanufacturing an antibody product for a customer under a production servicesagreement.  Cost of goods manufacturedincluded material, direct labor, outside testing and overhead costs associatedwith manufacturing the antibody product.

 

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*Research and Development Expenses*.

 

Researchand development expenses were $29.3 million and $100.7 million, respectively,in the three and nine months ended September 30, 2005, compared to $29.7million and $94.3 million, respectively, in the same periods in 2004. The majorcomponents of research and development expenses were as follows (in thousands):

 
| ** **          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Product development |       | $                                          | 24,148     |                                      | $          | 21,662 |   | $ | 79,596 |   | $ | 67,027 |   |
| Research            |       | 5,197                                      |       | 7,998                                     |       | 21,078 |   | 27,238 |   |
| Total               |       | $                                          | 29,345     |                                      | $          | 29,660 |   | $ | 100,674 |   | $ | 94,265 |   |

 

Productdevelopment costs include costs of preclinical development, cell linedevelopment and conducting clinical trials for our proprietary productcandidates.  Product development costsrelate both to programs we are developing jointly with collaborators pursuantto joint development arrangements and to programs that we are developingindependently.  The costs of ourjoint development programs represented the majority of our product developmentcosts in both the three and nine months ended September 30, 2005.  Productdevelopment costs also include costs related to cell line development inconnection with production services arrangements.  Typically, our joint development arrangementsprovide that we and our collaborator share the costs of development andcommercialization.  We bear the entirecost of programs we are developing independently.  In the three and nine months ended September 30,2005, our product development costs increased in comparison to the same periodsin 2004, primarily due to a significant increase in costs associated with ourjoint development programs, the substantial majority of which was related tothe panitumumab program.  To a lesserextent, the change was due to an increase in product development costs relatedto our independent programs, including ABX-10241.  The increases were partially offset bya decrease in cell line development activities under a production servicescontract.

 

Theincrease in product development costs for the panitumumab program in 2005 from2004 was primarily attributed to an increase in the amount we reimbursed ourjoint development partner, Amgen.  Underthe joint development and commercialization agreement with Amgen, we areobligated to pay 50% of the total development and commercialization costs ofpanitumumab.  We reimburse Amgen when weincur less than 50% of the total development costs incurred by both parties inthe given period.  In a period where weincur more than 50% of the total development costs, we would record such excessamount, which would be reimbursed to us by Amgen, as a reduction of our productdevelopment costs.  In the threeand nine months ended September 30, 2005, the amount of our reimbursementto Amgen was $8.4 million and $20.7 million, respectively.  In the third quarter of 2004, we incurredmore than 50% of the total development costs and recorded the excess amount of$318,000 as a reduction of product development costs.  In the nine months ended September 30,2004, the net amount of our reimbursement to Amgen was $6.1 million.  Thenet increase in our reimbursements to Amgen in 2005 from 2004 reflected anincrease in development activities performed by Amgen for panitumumab.  Partially offsetting the increase in productdevelopment costs for panitumumab was a decrease in drug supply costs in 2005from 2004 due to the timing of manufacturing the conformance lots and adecrease in clinical research fees to third parties in 2005 from 2004 due tothe completion of patient enrollment for all panitumumab clinical trials thatwe manage.  Clinical research feesconsist of clinical investigator site fees, monitoring costs and datamanagement costs.

 

Productdevelopment costs for ABX-10241 increased by $1.5 million in the nine monthsended September 30, 2005, compared to the same period in 2004, primarilydue to increased activities in process development for ABX-10241.  Product development costs for ABX-10241 inthe third quarter of 2005 were comparable to those incurred in the same period in2004.

 

Productdevelopment costs can vary significantly from period to period depending on theprogress of the development activities in the period.  Overall, we expect costs associated withproduct development in 2005 to continue to be higher than 2004 as we and Amgencontinue to expand our development efforts on the panitumumab program.  In addition, we expect product developmentcosts

 

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relatedto ABX-10241 to increase in 2005 compared to 2004, as we have initiated andcontinue to enroll patients in the multiple-dose Phase 1 study.

 

Research costs include costs associated with research andtesting of antibodies we generate, whether for ourselves or for our customers,prior to the development stage which begins with the commencement ofpreclinical activities.  Research costsalso include the costs of research relating to proprietary technologies,including enhancements to those technologies. The decrease in research costs in 2005 compared to 2004 was primarilydue to a reduction in costs associated with licensing charges from arrangementswith research institutions and others, as well as decreased spending on labsupplies and reduced compensation, depreciation and facilities expenses.  The reductions in compensation, depreciationand facilities expenses were partially attributable to the implementation ofour restructuring plan.

 

*Manufacturing Start-Up Costs.*

 

Manufacturing start-up costswere $5.2 million and $12.0 million, respectively, in the three and nine monthsended September 30, 2005, compared to $6.4 million and $16.5 million,respectively, in the same periods in 2004. Manufacturing start-up costs include certain costs associated with ourmanufacturing facility, including depreciation, outside contractor costs andpersonnel costs for activities such as quality assurance and qualitycontrol.  In the third quarter of2005, we recorded a credit of $1.8 million related to a cancelled manufacturingsupply agreement with an outside contractor, Lonza Biologics plc.  Pursuant to this cancellation arrangement,Lonza is obligated to repay us a portion of the cancellation fee if, prior to December 31,2005, it completes manufacturing of products for other customers in theproduction suite that we had previously reserved.  Excluding the effect of this credit,manufacturing start-up costs increased by $599,000 in third quarter of 2005 butdecreased by $2.7 million in the nine months ended September 30, 2005, ascompared to the same periods in 2004. The increase in the third quarter of 2005 as compared to the same periodin 2004 was primarily due to the timing of the manufacture of the conformancelots for panitumumab and the commissioning and validation of the remainingportions of the manufacturing facility.  The decrease in the nine months ended September 30,2005 as compared to the same period in 2004 was primarily due to the increaseduse of our manufacturing facility for the manufacture of panitumumabconformance lots and other development activities, including processvalidation.  Manufacturing start-up costswill fluctuate from period to period depending on the level of thesemanufacturing and development activities.

 

*Amortizationof Identified Intangible Assets.*

 

Amortizationof intangible assets totaled $846,000 and $3.7 million, respectively, in thethree and nine months ended September 30, 2005, compared to $1.4 millionand $5.0 million, respectively, in the same periods in 2004.  The decrease in 2005 from 2004 reflected areduction in intangible assets that resulted from the impairments of intangibleassets in the second quarters of 2005 and 2004.

 

*General and Administrative Expenses.*

 

Generaland administrative expenses include compensation, professional services,consulting and other expenses related to information systems, legal, finance,human resources and an allocation of facility costs.  General and administrative expenses totaled$5.0 million and $16.0 million, respectively, in the three and nine months endedSeptember 30, 2005, compared to $7.7 million and $21.0 million,respectively, in the same periods in 2004. The decrease in 2005 from 2004, which reflected our efforts to reducegeneral and administrative expenses, was primarily due to a reduction in legal,recruiting, consulting and temporary personnel expenses.

 

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*Impairment of Intangible Assets.*

 

Impairment of intangible assets totaled $25.0 million in the ninemonths ended September 30, 2005, compared to $17.2 million in the sameperiod in 2004.  There was no impairmentof intangible assets in the three months ended September 30, 2005 and2004.

 

In the quarter ended June 30, 2005, we determined that an impairment of our SelectedLymphocyte Antibody Method (SLAM)technology had occurred and that the estimated fair value had declined to $2.0million.  This technology, which includesintellectual property, was acquired in 2000 through the acquisition of AbgenixBiopharma Inc., formerly known as ImmGenics Pharmaceuticals, Inc.  In the second quarter of 2005, we completed astrategic review process, which included an assessment of ourtechnologies.  After assessing the SLAMtechnology, we determined that our use of the SLAM technology had declined andwould continue to decline substantially because of significant improvements inthe use of other technologies and processes. Because of this impairment indicator, we tested the SLAM technology forrecoverability and found that the undiscounted future cash flows estimated tobe generated from the use of the SLAM technology were less than the carryingvalue of the SLAM technology.  As aresult, we determined that an impairment of the SLAM technology had occurredand recorded an impairment charge of $23.1 million in the second quarter of2005 to adjust the carrying value of SLAM technology to its estimated fairvalue, which is based on the estimated discounted future cash flows to begenerated from the SLAM technology.

 

Also in the quarter ended June 30, 2005, we determined that animpairment of the acquired technology in the field of intrabodies (antibodiesthat can access intracellular targets) had occurred and that the estimatedvalue had declined to zero.  Thistechnology, which includes intellectual property, was acquired in 2000 throughthe acquisition of IntraImmune, Inc. We decided to discontinue the development of the intrabody program andperformed an assessment of the associated patent position and the likelihood ofsale or license of the technology to a third party.  We determined that the possibility ofgenerating positive future cash flows from the technology was remote.  As a result, we recorded an impairment chargeof $1.9 million in the second quarter of 2005.

 

Duringthe quarter ended June 30, 2004, we had determined that an impairment ofthe Company’s acquired technology in the field of catalytic antibodies hadoccurred and that the estimated value had declined to zero.  This technology, which includes intellectualproperty, was acquired in 2001 through the acquisition of Hesed Biomed, Inc.  We decided to focus our resources on otherresearch and development projects and wind down our catalytic antibodyprogram.  Additionally, after assessingthe associated patent position and the likelihood of sale or license of thetechnology to a third party, we further determined that the possibility ofgenerating positive future cash flows from the technology was remote.  As a result of this determination, werecorded an impairment charge of $17.2 million in the quarter ended June 30,2004.

 

*Restructuring and Other.*

 

In June 2005,we implemented a restructuring plan in which we decided to consolidate ourresearch and certain pre-clinical activities into the facility located inBurnaby, British Columbia, and reduce our workforce by approximately 15%.  As a result of the reduction in workforce andan evaluation of our future needs, we determined that we would not occupy andwould sublease, to the extent possible, certain of our researchfacilities.  The restructuring plan wasdesigned to focus resources on our development pipeline and particularly thepotential commercial opportunity of our lead product candidate, panitumumab.

 

Inconnection with the restructuring plan, we recorded restructuring charges of$15.1 million in total for the nine months ended September 30, 2005, whichprimarily consisted of $2.8 million of termination benefits, $6.6 million oflease obligations and $5.7 million for the impairment of leaseholdimprovements, equipment and other assets. For the three months ended September 30, 2005, we recordedrestructuring charges of $398,000, which consisted of $76,000 of terminationbenefits, $157,000 of accretion expense related to lease obligations, $138,000for the impairment of leasehold improvements and $27,000 of facilities

 

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and employee relocation expenses.  The termination benefits primarily consistedof severance pay, retention bonuses and non-cash, stock-based compensationexpense.  The substantial majority of theseverance pay and retention bonuses are expected to be paid in full by the endof 2005.

 

The leaseobligations represent the fair value of future lease commitment costs, net ofprojected sublease rental income, for the research facilities that we decidednot to occupy as a result of the restructuring plan.  We will review the sublease assumptions on aquarterly basis, and we may adjust the lease obligations as appropriate forchanges in the sublease assumptions. Additionally, we recordedan impairment charge of $5.6 million and $138,000 in the second and the thirdquarters of 2005, respectively, to adjust the carrying value of the relatedlong-lived assets to their estimated fair values based on our impairmentevaluation in connection with the restructuring.  The majority of the impairment charge wasrelated to leasehold improvements, and the fair value of these leaseholdimprovements was estimated based upon anticipated future cash flows associatedwith the related facilities, discounted at an interest rate commensurate withthe risks involved.  A portion of theimpairment charge was also related to certain lab and computer equipment andfurniture and fixtures that currently do not have any anticipated future usedue to the restructuring plan.

 

Activities related to theconsolidation of our research facilities under the restructuring plan areexpected to continue for the remainder of 2005. We may incur additional costs for the transfer or disposal of equipment,facility remediation and employee relocation expenses.  These costs will be recorded in the period inwhich they are incurred in accordance with SFAS No. 146.

 

As a result of therestructuring, we expect that certain research and development expenses,including compensation, facilities and depreciation of property and equipment,will be lower, starting in the third quarter of 2005, as compared to theperiods prior to the restructuring. Compared to the amounts incurred in the first half of 2005, we expectsuch expenses to decrease by approximately $5 million in total in the secondhalf of 2005.  However, we also expectthat the decrease in these expenses will be offset by an anticipated increasein product development expenses in the second half of 2005, in particular jointdevelopment expenses as discussed above.

 

*Interest and Other Income (Expenses), Net.*

 

Interestand other income (expenses), net, consisted primarily of interest income fromcash, cash equivalents and marketable securities. Interest and other income(expenses), net, increased to $3.3 million and $9.2 million, respectively, inthe three and nine months ended September 30, 2005, compared to $1.3million and $4.8 million, respectively, in the same periods in 2004.  The increase was primarily the result ofhigher interest rates and higher average balance of cash, cash equivalents andmarketable securities in the first nine months of 2005 as compared to the sameperiod in 2004.

 

*Interest Expense.*

 

Interest expensewas primarily related to interest and amortization of issuance costs on ourconvertible notes and interest on the Amgen credit facility.  In the three and nine months ended September30, 2005, interest expense increased to $4.0 million and $11.0 million,respectively, as compared to $1.8 million and $5.0 million, respectively, inthe same periods in 2004.  The increasein the three and nine months ended September 30, 2005 as compared to the sameperiods in 2004 was primarily due to the interest related to the convertiblesenior notes due 2011 and the interest related to the credit facility withAmgen which was not available for advances in the first six months of2004.  A portion of the increase wasoffset by the reduction of interest expense due to the repurchase of $100.0million in principal amount of the convertible subordinated notes due2007.  Interest expense of $266,000 and$804,000, respectively, was capitalized in the three and nine months endedSeptember 30, 2005, compared to $425,000 and $1.3 million, respectively, in thesame periods in 2004.  In December 2004,we issued $300.0 million of convertible senior notes due 2011, which accrueinterest at an annual rate of 1.75% payable semi-annually.  In the three and nine months ended September30, 2005, we recorded an

 

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interest expense of $1.3 million and $3.9 million, respectively,related to the convertible senior notes due 2011 and an interest expense of$1.0 million and $2.9 million, respectively, related to the convertiblesubordinated notes due 2007. For each future quarterly period through March 2007,if the aggregate outstanding principal amount of these convertible notesremains unchanged at $400.0 million, we expect to record approximately $2.2million in aggregate of interest expense related to these notes. We recordinterest at 12% on the amounts we have drawn on our credit facility with Amgenuntil we repay the balance in full. In the three and nine months endedSeptember 30, 2005, the amount of interest recorded under the Amgen arrangementwas $1.4 million and $3.4 million, respectively. The amount of any suchadvances, plus interest, may be repaid out of profits from future productsales; however, we are generally not obligated to repay any portion of theoutstanding balance if panitumumab does not reach commercialization.

 

#### **Liquidity and Capital Resources**

#### ** **

AtSeptember 30, 2005, we had cash, cash equivalents and marketablesecurities of approximately $343.6 million. Our investments in cash equivalentsand marketable securities are primarily in highly liquid, interest bearing,investment grade and government securities in order to preserve principal.  We have also invested in the common stock ofImmunoGen, Inc. and CuraGen for strategic reasons.  These securities had an aggregate fair valueof $17.1 million at September 30, 2005 and were recorded as long-terminvestments.  We will continue to assessour cash position, and may adjust, from time to time, our investments in cashequivalents, marketable securities and our long-term investments.  In addition, we may continue to repurchase aportion of our outstanding convertible subordinated notes due in March of2007, of which $100.0 million was outstanding as of September 30, 2005.

 

*Cash Used in Operating Activities.*  Netcash used in operating activities was $61.3 million and $112.1 million in the nine months ended September 30, 2005 and2004, respectively.  The major componentsof the changes in cash used inoperating activities in the nine months ended September 30, 2005,compared to the same period in 2004, wereprimarily the following:

 

•      Anincrease of $31.9 million in our liability to Amgen under our joint developmentcollaboration for panitumumab.

 

•      Duringthe nine months ended September 30, 2005, we made no contract cancellationpayments, while we made payments of approximately $23.4 million on the Lonzacontract cancellation obligation in the first nine months of 2004.  This obligation was settled in the thirdquarter of 2004.

 

•      Anincrease of $3.6 million in research and development and manufacturing start-upcosts, not including the Lonza contract cancellation charge, amortization ofidentified intangible assets and depreciation related to the development of newproducts.

 

•      Anincrease of $1.5 million in customer payments due primarily to the timing ofpayments received under our contracts.

 

•      Adecrease of $851,000 in the change in accounts payable and accrued liabilities,net.

 

*Cash Used in and Provided by Investing Activities.*  Netcash used in investing activities was $63.8 million in the nine months ended September 30, 2005,compared to net cash provided by investing activities of $104.6 million in thenine months ended September 30, 2004. Net cash used in and provided by investing activities primarily consisted of the following:

 

•      Capitalexpenditures of $3.9 million and $6.9 million in the nine months ended September 30,2005 and 2004, respectively.  Capitalexpenditures in both 2005 and 2004 primarily consisted

 

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of investments inconstruction in progress and equipment for our manufacturing facility andinvestments in lab equipment and software.

 

•      Purchases,net of maturities and sales, of marketable securities of $59.9 million in thenine months ended September 30, 2005, compared to maturities and sales,net of purchases, of marketable securities of $111.5 million in the nine months ended September 30, 2004.

 

*Cash Used in and Provided by Financing Activities.*  Netcash used in financing activities was $6.7 million in the nine months ended September 30,2005, compared to net cash provided by financing activities of $3.3 million inthe nine months ended September 30, 2004. Net cash used in and provided by financing activities consisted of thefollowing:

 

•      $13.5 million used in the third quarter of2005 to repurchase a portion of the 3.5% convertible subordinated notesdue 2007.

 

•      $1.7 million received from the issuance ofcommon stock in connection with an extension of a technology licensingagreement by Genentech in the first quarter of 2005.

 

•      $5.0 million and $3.3 million received fromthe issuance of common stock upon the exercise of stock options and under ouremployee stock purchase plan in the first nine months of 2005 and 2004,respectively.

 

*Financing Uncertainties Related to Our Business Plan.*  Weplan to continue to make significant expenditures to staff and operate our ownmanufacturing facility and support our research and development activities,including preclinical product development and clinical trials.  In addition, we expect the continueddevelopment and potential commercialization of panitumumab to requiresignificant resources.  We also intend tolook for opportunities to acquire new technology through in-licensing,collaborations or acquisitions.  We may spend additional amounts to supportnew production services contracts.

 

Wecurrently intend to use our available cash on hand to finance these projectsand business developments; however, we may choose to, or business conditionsmay require us to, pursue other financing alternatives, such as equity,equity-linked debt or debt financing, a bank line of credit, sale-lease backfinancing, asset sales, funding by one or more collaborators or a mortgagefinancing, that may become available to us from time to time.  We have filed with the Securities andExchange Commission a currently effective shelf registration statement throughwhich we may offer for sale from time to time up to $250 million in equity ordebt securities. Whether we use cash on hand or choose to obtain financing willdepend on, among other things, the future success of our business, theprevailing interest rate environment and the condition of financial marketsgenerally.

 

InOctober 2003, we entered into an amendment of our joint development andcommercialization agreement with Amgen for the co-development ofpanitumumab.  We are obligated to pay 50%of the development and commercialization costs and we are entitled to receive50% of any profits from sales of panitumumab. As of September 30, 2005, Amgen had advanced $60.0 million, theentire amount available under the agreement, which we have used to fund aportion of our share of development and commercialization costs forpanitumumab.

 

Theamounts of the expenditures that will be necessary to execute our business planare subject to numerous uncertainties that may adversely affect our liquidityand capital resources to a significant extent. As of September 30, 2005, two of our proprietary product candidates, panitumumab and ABX-10241,were in various stages of clinical trials. The clinical trials of panitumumab and ABX-10241 are expected to requiresignificant expenditures in the foreseeable future.  Completion of clinical trials may takeseveral years or more, but the length of time generally varies substantiallyaccording to the phase of

 

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the trial, and the type, complexity, novelty and intended use of aproduct candidate.  In order to proceedto subsequent clinical trial stages and to achieve regulatory approval, the FDAmust conclude that our clinical data establish safety and efficacy.  The duration and the cost of clinical trialsmay vary significantly over the life of a project.

 

Wetest our potential product candidates in numerous preclinical studies toidentify disease indications for possible therapeutic application. We mayconduct multiple clinical trials on our own or with our collaborators to covera variety of indications for each product candidate. As we obtain results fromtrials, we may elect to discontinue clinical trials for certain productcandidates or for one or more indications for a given product candidate inorder to focus our resources on more promising product candidates orindications.

 

We may enter into jointdevelopment agreements, similar to our agreement with Amgen for panitumumab,and may enter into additional joint development agreements earlier in thedevelopment life cycle of product candidates. Our strategy is designed to diversify therisks associated with our research and development spending.

 

Inthe event that third parties take over the clinical trial process for one ofour product candidates, the estimated completion date would largely be underthe control of that third party rather than us. We cannot forecast with anydegree of certainty which proprietary products or indications, if any, will besubject to future collaborative arrangements, in whole or in part, or theextent to which third parties may control clinical trials pursuant to sucharrangements, and how such arrangements would affect our capital requirements.

 

Asa result of the uncertainties discussed above, among others, the duration andcompletion costs of our research and development projects are difficult toestimate and are subject to considerable variation. Our inability to completeour research and development projects in a timely manner or our failure toenter into collaborative agreements when appropriate, could significantlyincrease our capital requirements and could adversely impact our liquidity. Wealso may be required to make further substantial expenditures if unforeseendifficulties arise in other parts of our business. These uncertainties couldforce us to seek additional sources of financing from time to time in order tocontinue with our business strategy. Our inability to raise additional capital,or to do so on terms reasonably acceptable to us, would jeopardize the futuresuccess of our business.

 

Webelieve that our current cash balances, cash equivalents, marketablesecurities, and the cash generated from our licensing and other agreements willbe sufficient to meet our operating and capital requirements for at least oneyear. However, because of the uncertainties in our business discussed above,among others, we cannot assure you that this will be the case. In addition, wemay choose to, or prevailing business conditions may require us to, obtainadditional financing from time to time. We may choose to raise additional fundsthrough public or private financing, licensing and other agreements or otherarrangements. We cannot be sure that any additional funding, if needed, will beavailable on terms favorable to us or at all. Furthermore, any additionalequity or equity-related financing may be dilutive to our stockholders, anddebt financing, if available, may subject us to restrictive covenants. We mayalso choose to obtain funding through collaborations, licensing and othercontractual arrangements. Such agreements may require us to relinquish ourrights to certain of our technologies, products or marketing territories. Ourfailure to raise capital when needed would harm our business, financialcondition and results of operations.

 

*History of Net Losses.*  Wehave incurred net losses since our organization as an independent company,including in the last five years net losses of $8.8 million in 2000,$60.9 million in 2001, $208.9 million in 2002, $196.4 million in 2003and $187.5 million

 

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in2004, and $163.6 million in the nine months ended September 30, 2005.  As of September 30, 2005, ouraccumulated deficit was $915.8 million. Our losses to date have resultedprincipally from:

 

•                  research and development costs relating tothe development of our XenoMouse and XenoMax technologies and antibodytherapeutic product candidates;

 

•                  manufacturing start-up costs relating to ournew manufacturing facility including depreciation, costs of outside contractorsand personnel for quality assurance and quality control activities;

 

•                  general and administrative costs relating toour operations;

 

•                  impairment charges relating to ourstrategic investments in CuraGen, ImmunoGen and MDS Proteomics Inc.; and

 

•                  impairment charges relating toacquired technologies, including our SLAM technology and technologies in thefields of intrabodies and catalytic antibodies.

 

Weexpect to incur additional losses for the foreseeable future as a result of ourresearch and development costs, including costs associated with conductingpreclinical development and clinical trials, which will continue to besubstantial, and costs associated with establishing and operating ourmanufacturing facilities. We intend to invest significantly in our productsprior to entering into licensing agreements. This will increase our need forcapital and will result in losses for at least the next several years. Weexpect that the amount of operating losses will fluctuate significantly fromquarter to quarter as a result of increases or decreases in our research anddevelopment efforts, the execution or termination of licensing and otheragreements, and the initiation, and success or failure, of clinical trials.

 

*Net Operating Loss Carryforwards.*  As ofDecember 31, 2004, we had net operating loss carryforwards for federal andstate income tax purposes of approximately $668.0 million and $169.0million, respectively.  Our net operatingloss carryforwards exclude losses incurred prior to our formation in July 1996.Further, we have capitalized the amounts associated with the 1997 patentcross-license and settlement agreement with GenPharm, which we have expensedfor financial statement accounting purposes and we are amortizing those amountsover a period of approximately 15 years for tax purposes. The federal andstate net operating loss and credit carryforwards will expire in the years 2006through 2024, if not utilized. Utilization of the net operating losses andcredits may be subject to a substantial annual limitation due to the “change inownership” provisions of the Internal Revenue Code of 1986 and similar stateprovisions. The annual limitation may result in the expiration of net operatinglosses and credits before utilization.

 

****CriticalAccounting Estimates****

 

Several estimates andjudgments involved in the application of accounting principles impact thefinancial results that we report.  We arerequired to estimate the effect of matters that are inherently uncertain.  Changes in our estimates or judgments couldmaterially impact our results of operations, financial condition and cash flowsin future years.  We believe our mostcritical accounting estimates include those associated with revenuerecognition, accounting for equity investments, goodwill and identifiedintangible assets, restructuring charges, income taxes and stock optionvaluation.

 

***Revenue Recognition***

 

We derive our contractrevenue from license, option, service and milestone fees received fromcustomers. Services include those performed under our technology out-licensingand production services agreements.  Asdescribed below, within the framework of generally accepted accountingprinciples, significant management judgments and estimates must be made andapplied in connection with the revenue recognized in any accounting period. Ifour management made different judgments or utilized different estimates,material differences could result in the amount and timing of our revenue inany period.

 

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We enter into revenuearrangements with multiple deliverables in order to meet our customer’s needs.For example, the arrangements may include a combination of up-front fees,license payments, research and development services, milestone payments, futureroyalties, and manufacturing arrangements. Multiple element revenue agreements entered into on or after July 1,2003 are evaluated under Emerging Issues Task Force No. 00-21, “RevenueArrangements with Multiple Deliverables,” or EITF 00-21, to determine whetherthe delivered item has value to the customer on a stand-alone basis and whetherobjective and reliable evidence of the fair value of the undelivered itemexists.  Deliverables in an arrangementthat do not meet the separation criteria in EITF 00-21 must be treated as oneunit of accounting for purposes of revenue recognition.  Generally, the revenue recognition guidanceapplicable to the final deliverable is followed for the combined unit ofaccounting.  For certain arrangements,the period of time over which certain deliverables will be provided is notcontractually defined. Accordingly, management is required to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes.  For example,during the three and nine months ended September 30, 2005, we recognizedrevenue of approximately $73,000 and $272,000, respectively, related toarrangements for which the period of time over which the research will beperformed was not contractually defined. For these arrangements, we are amortizing up-front fees over the 15- to20-month period of time defined in the research plan established by us and ourcustomer.  As of September 30, 2005,approximately $73,000 remained in deferred revenue related to thesearrangements.  In addition, during thethree and nine months ended September 30, 2005, we recognized revenue ofapproximately $153,000 and $502,000, respectively, related to an arrangementfor which the period of time of continuing obligation is dependent upon thetiming of the commercialization of a product. The length of time necessary to complete preclinical and clinicaltesting, and to obtain marketing approval to commercialize a product, variessubstantially according to the type, complexity, novelty and intended use ofthe product candidate, and many factors may delay commercialization.  For this arrangement, if the date of theproduct commercialization were delayed by one year, the amount of revenue to berecognized in next 12 months would be approximately $526,000, as opposed to$614,000 under our current estimate.  Asof September 30, 2005, approximately $3.7 million remained in deferredrevenue related to this arrangement.  Todate, there has not been a change in an estimate or assumption in the past thathad a material impact on revenue recognition.

 

***Accounting for Equity Investments***

 

Unrealized holding gainsand losses related to our marketable equity investments are reported as acomponent of stockholders’ equity.  Werecognize an impairment charge when the declines in the fair values of theseinvestments below their cost basis are deemed to be other-than-temporary.  We consider various factors in determiningwhether to recognize an impairment charge, including the length of time and theextent to which the fair value has been below the cost basis, the currentfinancial condition of the investee and our intent and ability to hold theinvestment for a period of time sufficient to allow for any anticipatedrecovery in market value.

 

***Accounting for Goodwill and Identified Intangible Assets***

 

As a result of theadoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” in 2002,we no longer amortize goodwill but instead review goodwill for impairment on anannual basis, or sooner if indications of impairment exist. Under ouraccounting policy, we have adopted the beginning of the fourth quarter as anannual goodwill impairment test date.  Followingthis approach, we compare the carrying values available as of September 30with the estimated fair value of the reporting unit to assess if there has beena potential impairment, and, if impairment is indicated, complete themeasurement of impairment under the procedures established by SFAS 142.  Because we have determined that we have onereporting unit under SFAS No. 142, our market capitalization is consideredto be a reasonable proxy

 

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for the fair value of thereporting unit.  We also consider whether current business andgeneral market conditions suggest that the fair value of the reporting unit haslikely declined below its carrying value.  As of September 30, 2005, no impairmenthas occurred.

 

Ifwe were to determine in a future period that an impairment of goodwill existed,the impairment measurement procedures could result in a charge for theimpairment of goodwill.  Furthermore,a change in our determination of reporting units could result in a charge forthe impairment of goodwill in future periods. A change in the determination ofreporting units could occur should we reorganize into reporting units such thateach unit constitutes a business for which discrete financial information isavailable that is regularly reviewed by management to evaluate the performanceof that unit. As of September 30, 2005, the carrying value of our goodwillwas $34.8 million.

 

Under SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” identified intangibleassets held and used must be tested for impairment when events or changes incircumstances indicate that its carrying amount may not be recoverable.  The carrying amount is determined to be notrecoverable when the sum of the undiscounted future cash flows expected toresult from the use and eventual disposition of the asset is less than the carryingamount. Factors that are considered important in determining whether impairmentmight exist include a significant change in the manner in which an asset isbeing used, a significant adverse change in legal factors or the businessclimate that could affect the value of an asset, including an adverse action orassessment by a regulator, or a current expectation that, more likely that not,an asset will be sold or otherwise disposed of before the end of its previouslyestimated useful life.  If it is determinedthat an impairment indicator exists and the asset is not recoverable, animpairment charge is recognized for the excess of the carrying amount over thefair value of the asset.

 

In the second quarter of2005, we determined that impairment indicators existed with respect to our SLAMand intrabody technologies.  We thenestimated the undiscounted future cash flows from the use of the SLAMtechnology and found that the carrying value was not recoverable.  Because neither quoted market prices orcomparables were available, we estimated the fair value of the SLAM technologybased on the net present value of its future cash flows, or $2.0 million.  As a result, we recorded an impairment chargeof $23.1 million.  Future cash flowsassociated with the SLAM technology are estimated based on future cost savingsfrom using the SLAM technology. Significant assumptions used in this estimate include the number ofprograms that would use the SLAM technology, cost savings per each program, thelife of the SLAM technology, the discount rate and the income tax effect.  If one or more of these assumptions changessignificantly in a future period and it is determined at that time that thecarrying value of the SLAM technology is not recoverable, further impairmentcharge may be recognized.  Because futurecash flows estimated to be generated from the intrabody technology weredetermined to be remote, the fair value was determined to be zero and theremaining carrying value of $1.9 million was written off.

 

In the second quarter of2004, we determined that an impairment of our catalytic antibody technology hadoccurred.  Because future cash flowsestimated to be generated from the catalytic antibody technology weredetermined to be remote, the fair value was determined to be zero, and theremaining carrying value of $17.2 million was written off.

 

If we were to determinein a future period that an impairment of intangible assets has occurred, theimpairment measurement procedures could result in a charge for the impairmentof long-lived assets.  As of September 30,2005, the carrying value of our identified intangible assets was $31.3 million,consisting primarily of our XenoMouse technology.

 

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***Restructuring Charges***

 

In June 2005, we implemented a restructuring planin which we decided to consolidate our research and certain pre-clinicalactivities into our facility located in Burnaby, British Columbia, and reduceour workforce by approximately 15%.  As aresult of the reduction in workforce and an evaluation of our future needs, wedetermined that we would not occupy and would sublease, to the extent possible,certain of our research facilities.  Therestructuring plan was designed to focus resources on our development pipelineand particularly the potential commercial opportunity of our lead productcandidate, panitumumab.

 

Inaccordance with SFAS No. 146, we recorded restructuring charges of $15.1million in total for the nine months ended September 30, 2005, which primarily consistedof $2.8 million of termination benefits, $6.6 million of lease obligations and$5.7 million for impairment of leasehold improvements and other assets.  The lease obligations represent the fairvalue of future lease commitment costs, net of projected sublease rentalincome, for the research facilities that we decided not to occupy as a resultof the restructuring.  The estimatedfuture cash flows used in the fair value calculation are based on certainestimates and assumptions by management, including the projected subleaserental income, the amount of time the space will be unoccupied prior tosublease and the length of any subleases.

 

It is possible that ourestimates and assumptions may change in the future, resulting in adjustments tothe estimated sublease income, and the effect of any adjustments could besignificant.  If the sublease rentalrates would differ from our assumptions by approximately 10% in eitherdirection, the liability related to lease obligations as of September 30,2005 would be increased and decreased by approximately $0.6 million and $1.0million, respectively.  If our estimatedsublease timetable were delayed by six months, it would result in an additionalliability of approximately $0.9 million, or more, if there were a furtherdelay.  We will review our estimates andassumptions on a quarterly basis and modify these estimates as necessary toreflect any changes in circumstances.

 

***Income Taxes***

 

Significant managementjudgment is required in developing our provision for income taxes, includingthe calculation of tax liabilities, the determination of deferred tax assetsand liabilities and any valuation allowances that might be required against thedeferred tax assets.  Results ofoperations in each jurisdiction involve intercompany agreements between us andour Canadian subsidiary.  Such agreementscould be unfavorably interpreted by the applicable taxing authorities, causingan increase in the income tax provision and a negative impact on our results ofoperations.  The assessment of the incometax implications of this intercompany relationship requires significantmanagement judgment.

 

***Stock Option Valuation***

 

The preparation of thenotes to our consolidated financial statements requires us to estimate the fairvalue of stock options granted to employees. While fair value may be readily determinable for awards of stock, marketquotes are not available for long-term, nontransferable stock options becausethese instruments are not traded.  Wecurrently use the Black-Scholes option pricing model to estimate the fair valueof employee stock options.  However, theBlack-Scholes option pricing model was developed for use in estimating the fairvalue of traded options, which have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions, includingthe expected stock price volatility. Because our employee stock options have characteristics significantlydifferent from those of traded options and because changes to the subjectiveinput assumptions can materially affect the fair value estimate, in management’sopinion, the existing models do not provide a reliable single measure of thefair value of our employee stock options. We are currently evaluating our option valuation methodologies and assumptionsin light of SFAS No. 123(R), which we are required to adopt on January 1,2006.

 

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****ContractualObligations and Commercial Commitments****

 

As of September 30,2005, future minimum payments for certain contractual obligations for yearssubsequent to December 31, 2004 were as follows (in thousands):

 
| ** **                                      | ** ** | **Total** | ** ** | **Less than  1 year(1)** | ** ** | **1 – 3  years** | ** ** | **4 – 5  years** | ** ** | **After 5  years(2)** | ** ** |
|-------------------------------------------------|------------|-----------|------------|--------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| Operating leases(3)                             |       | $         | 120,401    |                     | $          | 3,492                 |       | $                     | 29,151     |                  | $          | 31,213 |   | $ | 56,545 |   |
| Convertible notes due  2007 & interest |       | 105,250   |       | —                   |       | 105,250               |       | —                |       | —                |       |
| Convertible notes due  2011 & interest |       | 334,154   |       | 2,625                    |       | 10,500                |       | 10,500                |       | 310,529               |       |
| Convertible note due  2013                      |       | 50,000    |       | —                   |       | —                |       | —                |       | 50,000                |       |
| Redeemable convertible  preferred stock         |       | 50,000    |       | —                   |       | —                |       | —                |       | 50,000                |       |
| Amgen(4)                                        |       | 63,941    |       | —                   |       | —                |       | —                |       | —                |       |
| Purchase orders                                 |       | 898       |       | 898                      |       | —                |       | —                |       | —                |       |
| Total                                           |       | $         | 724,644    |                     | $          | 7,015                 |       | $                     | 144,901    |                  | $          | 41,713 |   | $ | 467,074 |   |

 

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| (1) |   | This represents the  period of October 1, 2005 through December 31, 2005.                                                                                                                                                                                                                                                                                                                 |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Amounts represent total  minimum payments for the entire period.                                                                                                                                                                                                                                                                                                                                    |
| (3) |   | Amounts include  approximately $22.9 million of operating lease payments related to facilities  in connection with the restructuring plan implemented in the second quarter  of 2005. The discounted operating lease payments, net of estimated sublease  rental income, related to these facilities were included as a liability on  our consolidated balance sheet as of September 30, 2005. |
| (4) |   | The $63.9 million  long-term obligation to Amgen consists of $60.0 million in advances under the  credit facility and $3.9 million of accrued interest. The timing of future  minimum payments is uncertain as this obligation may be repaid out of profits  resulting from future product sales.                                                                                                   |

 

Wehave a commitment to share equally all development and commercializationcosts for panitumumab pursuant to our development and commercializationagreement with Amgen. As amended in October 2003, that agreement providesthat Amgen has decision-making authority for development and commercializationactivities.  As provided in the amendedagreement, Amgen advanced $60.0 million that we used to fund a portion ofour share of development and commercialization costs for panitumumab.  As of September 30, 2005, we had acarrying balance of $63.9 million under this facility consisting of $60.0million in advances, the maximum amount available, and $3.9 million of interestaccrued at the contract rate of 12% per annum. The amount of any such advances, plus interest, may be repaid out of profitsresulting from future product sales and we are generally not obligated to repayany portion of the loan if panitumumab does not reach commercialization.

 

**Risk Factors That Might AffectFuture Results**

 

**RisksRelated to our Finances**

 

*We arean early stage company without commercial therapeutic products, and we cannotassure you that we will develop sufficient revenues in the future to sustainour business.*

 

You must evaluate us inlight of the uncertainties and complexities present in an early stage biopharmaceuticalcompany. With the exception of panitumumab, all of our product candidates arein early stages of development. We will need to make significant additionalinvestments in research and development, preclinical testing, clinical trials,and regulatory, and sales and marketing activities, to commercialize currentand future product candidates. Our product candidates, if successfullydeveloped and approved for marketing, may not generate sufficient orsustainable revenues to enable us to be profitable.

 

*We havea history of losses and we expect to continue to incur losses for theforeseeable future.*

 

We have incurred netlosses since we were organized as an independent company, including in the lastfive years net losses of $8.8 million in 2000, $60.9 million in 2001,$208.9 million in 2002,

 

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$196.4 million in2003 and $187.5 million in 2004, and $163.6 million in the nine monthsended September 30, 2005.  As of September 30,2005, our accumulated deficit was $915.8 million. Our losses to date haveresulted principally from:

 

•                  research anddevelopment costs relating to the development of our XenoMouse and XenoMaxtechnologies and antibody product candidates, including panitumumab;

 

•                  manufacturingstart-up costs related to our manufacturing facility including depreciation,costs of outside contractors and personnel for quality assurance and qualitycontrol activities;

 

•                  general andadministrative costs relating to our operations;

 

•                  impairment chargesrelated to our strategic investments in CuraGen, ImmunoGen, and MDS Proteomics;and

 

•                  impairmentcharges relating to acquired technologies, including our SLAM technology andtechnologies in the fields of intrabodies and catalytic antibodies.

 

We expect to incuradditional losses for the foreseeable future as a result of our research anddevelopment costs and manufacturing start-up costs, including costs associatedwith conducting preclinical development and clinical trials, which willcontinue to be substantial. We intend to invest significantly in our productsprior to entering into licensing agreements. This will increase our need forcapital and will result in losses for at least the next several years. Weexpect that the amount of operating losses will fluctuate significantly fromquarter to quarter as a result of increases or decreases in our research anddevelopment efforts, the execution or termination of licensing, manufacturingand other contractual arrangements, the progress or lack of progress of productdevelopment candidates in our collaboration with AstraZeneca, the initiation,success or failure of clinical trials and whether any of our productcandidates, including panitumumab, achieve commercial success.

 

*We arecurrently unprofitable and may never be profitable, and our future revenuescould fluctuate significantly.*

 

Since our founding, wehave funded our research and development activities primarily from privateplacements and public offerings of our securities and from revenues generatedby our licensing and other contractual arrangements.

 

Prior to any marketingapproval of panitumumab, we expect that substantially all of our revenues forthe foreseeable future will result from payments under licensing and othercontractual arrangements. To date, payments under licensing and otheragreements have been in the form of license fees, milestone payments,reimbursement for research and development expenses, option fees, and paymentsfor manufacturing services. Payments under our existing and any future customeragreements will be subject to significant fluctuation in both timing andamount. Our revenues may not be indicative of our future performance or of ourability to continue to achieve contractual milestones. Our revenues and resultsof operations for any period may also not be comparable to the revenues orresults of operations for any other period. Our revenues for any period may notbe sufficient to cover our operating costs, including the costs of operatingour manufacturing plant. We may not be able to:

 

•                  enter into further co-development,licensing, manufacturing or other agreements;

 

•                  successfully complete preclinicaldevelopment or clinical trials;

 

•                  obtain required regulatory approvals;

 

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•                  successfully manufacture or marketproduct candidates; or

 

•                  generateadditional revenues or profitability.

 

Our failure to achieveany of the above goals would materially harm our business, financial conditionand results of operations.

 

*We mayrequire additional financing, and an inability to raise the necessary capitalor to do so on acceptable terms would threaten the continued success of ourbusiness.*

 

We will continue toexpend substantial resources to support research and development and operateour manufacturing facility, including costs associated with preclinicaldevelopment and clinical trials. In the years ended December 31, 2004,2003 and 2002, we incurred expenses of $124.8 million, $98.2 millionand $128.5 million, respectively, on research and development.  For the nine months ended September 30,2005, we spent $100.7 million on research and development.  For the nine months ended September 30,2005, our manufacturing start-up costs were $12.0 million. Regulatory andbusiness factors will require us to expend substantial funds in the course ofcompleting required additional development, preclinical testing and clinicaltrials of, and attaining regulatory approvals for, product candidates. Theamounts of expenditures that will be necessary to execute our business plan aresubject to numerous uncertainties that may adversely affect our liquidity andcapital resources. Our future liquidity and capital requirements will depend onmany factors, including:

 

•                  the scope and results of preclinicaldevelopment and clinical trials;

 

•                  theretention of existing and establishment of further co-development, licensing,manufacturing and other agreements, if any;

 

•                  thedecisions of our collaborator, Amgen, under our co-development agreement for panitumumab,which provides Amgen decision-making authority for development andcommercialization activities and obligates us to share 50% of the developmentand commercialization costs;

 

•                  continued scientific progress in ourresearch and development programs and the size and complexity of theseprograms;

 

•                  thecost of operating our manufacturing facility, validating our processes andcomplying with good manufacturing practice regulations;

 

•                  the cost of conductingcommercialization activities and arrangements;

 

•                  the time and expense involved inseeking regulatory approvals;

 

•                  competing technological and marketdevelopments;

 

•                  thetime and expense of filing and prosecuting patent applications, and enforcingand defending against patent claims;

 

•                  our investment in, or acquisition of,other companies;

 

•                  the amount of product or technologyin-licensing in which we engage;

 

•                  the extent and duration of marketexclusivity we can command for our products, through patent and regulatorylaws; and

 

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•                  otherfactors not within our control.

 

We believe that ourcurrent cash balances, cash equivalents, marketable securities, and the cashgenerated from our licensing and other contractual arrangements, will besufficient to meet our operating and capital requirements for at least oneyear. However, because of the uncertainties in our business, including theuncertainties listed above, we cannot assure you that this will be the case. Inaddition, we may choose to obtain additional financing from time to time. Wemay choose to raise additional funds through public or private equity or debtfinancing, licensing and other agreements, a bank line of credit, sale-leaseback financing, mortgage financing, asset sales or other arrangements. Wecannot be sure that any additional funding, if needed, will be available onterms favorable to us or at all. Furthermore, any additional equity or equity-relatedfinancing may be dilutive to our stockholders, and debt financing, if available,may subject us to restrictive covenants and significant interest costs. We mayalso choose to obtain funding through licensing and other contractualarrangements. Such agreements may require us to relinquish our rights tocertain of our technologies, products or marketing territories. Our failure toraise capital when needed would harm our business, financial condition andresults of operations.

 

*Ourindebtedness may harm our financial condition and results of operations.*

 

At September 30,2005, we had $450.0 million principal amount of outstanding notes, including$100.0 million of convertible subordinated notes due March 15, 2007,$300.0 million of outstanding convertible senior notes due December 15,2011 and a $50.0 million note held by AstraZeneca.  In addition, at September 30, 2005, wehad accrued approximately $63.9 million in long-term liabilities to Amgenpursuant to our co-development agreement. We may incur additional indebtedness in the future. Our level ofindebtedness will have several important effects on our future operations,including, without limitation:

 

•                  we will have additional cash requirements in orderto support the payment of interest on our outstanding indebtedness;

 

•                  increases in our outstanding indebtedness andleverage will increase our vulnerability to adverse changes in general economicand industry conditions, as well as to competitive pressure; and

 

•                  depending on the levels of our outstanding debt, ourability to obtain additional financing for working capital, capital expenditures,general corporate and other purposes may be limited.

 

Our ability to makepayments of principal and interest on our indebtedness depends upon our futureperformance, which will be subject to general economic conditions, industrycycles and financial, business and other factors affecting our operations, manyof which are beyond our control. If we are unable to generate sufficient cashflow from operations in the future to service our debt, we may be required,among other things:

 

•                  to seek additional financing in the debt or equitymarkets;

 

•                  to refinance or restructure all or a portion of ourindebtedness, including the notes;

 

•                  to sell selected assets;

 

•                  to reduce or delay planned capital expenditures; or

 

•                  to reduce or delay planned operating expenditures,such as clinical trials.

 

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Such measures might notbe sufficient to enable us to service our debt. In addition, any suchfinancing, refinancing or sale of assets might not be available on economicallyfavorable terms.

 

*Ourstrategic investments expose us to equity price risk and our investments inthose companies may be deemed impaired, which would affect our results ofoperations.*

 

We are exposed to equityprice risk on our strategic investments in CuraGen and ImmunoGen and we mayelect to make additional similar investments in the future. In 1999 and 2000,we purchased an aggregate amount of $80.0 million of the common stock ofCuraGen and ImmunoGen as strategic investments. Unrealized holding gains and losses on available-for-sale securitiesgenerally are excluded from earnings and reported as a component ofstockholders’ equity.  However, if adecline in the fair value of available-for-sale securities is judged to beother than temporary, the cost basis of the security is written down to fairvalue as a new cost basis and the amount of the write-down is included inearnings as an impairment charge.  In2002, declines in the fair value of the CuraGen and ImmunoGen common stock weredeemed to be other-than-temporary and we recorded impairment charges totaling$67.3 million for the year ended December 31, 2002. The public tradingprices of the shares of both companies have fluctuated significantly since wepurchased them and could continue to do so. If the public trading prices of these shares trade below our adjustedcost basis in future periods, we may incur additional impairment chargesrelating to these investments, which could adversely affect our results ofoperations.  The amount of these charges,if any, will equal our unrealized loss on these securities as of the end of therelevant periods.  As of September 30,2005, these investments were recorded at fair value in long-term investments onthe balance sheet, and any net unrealized holding gains and losses are reportedas a component of stockholders’ equity.

 

**RisksRelated to the Development and Commercialization of our Products**

 

*OurXenoMouse and XenoMax technologies may not produce safe, efficacious orcommercially viable products, which will be critical to our ability to generaterevenues from our products.*

 

Our XenoMouse and XenoMaxtechnologies are novel approaches to developing antibodies as products for thetreatment of diseases and medical disorders. To date, neither we nor our customers have commercialized any antibodytherapeutic products based on our technologies. Moreover, we are not aware ofany commercialized, fully human antibody therapeutic products that have beengenerated from any technologies similar to ours. Our antibody therapeuticproduct candidates are still in various stages of development and many are inan early development stage. To date, we have only initiated clinical trialswith respect to four XenoMouse-derived antibody therapeutic product candidates,and our collaborators have initiated clinical trials with respect to ten otherXenoMouse-derived antibody therapeutic product candidates. We cannot be certainthat our technologies will generate antibodies against every antigen to whichthey are exposed in an efficient and timely manner, if at all. Furthermore, ourtechnologies may not result in any meaningful benefits to our current orpotential customers or in product candidates that are safe and efficacious forpatients. Our failure to generate commercial products with our technology wouldmaterially harm our business, financial condition and results of operations.

 

*If wedo not successfully develop our products, or if they do not achieve commercialsuccess, our business will be materially harmed.*

 

Our development ofcurrent and future product candidates, either alone or in conjunction withcollaborators, is subject to the risks of failure inherent in the developmentof new pharmaceutical products and products based on new technologies. Theserisks include:

 

•                  delays in product development, clinical testing ormanufacturing;

 

•                  unplanned expenditures in product development,clinical testing or manufacturing;

 

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•                  failure in clinical trials or failure to receiveregulatory approvals;

 

•                  emergence of superior or equivalent productdevelopment technologies or products;

 

•                  disruption in the available supply ofour animal colony;

 

•                  inability to manufacture on our own, or throughothers, product candidates on a clinical or commercial scale;

 

•                  inability to market products due to third partyproprietary rights;

 

•                  election by our customers not to pursue productdevelopment;

 

•                  failure by our customers to develop productssuccessfully; and

 

•                  failure to achieve market acceptance.

 

In certaininstances, we have terminated the clinical development of product candidateswhen the results of clinical trials did not warrant continued development.  We hope to be able to make up for the loss ofdiversity in our product pipeline through the number and variety of potentialnew product candidates we have in preclinical development.  However, to the extent that we are unable tomaintain a broad and diverse range of product candidates, our success woulddepend more heavily on one or a few product candidates.

 

Because of these risks,our research and development efforts and those of our customers andcollaborators may not result in any commercially viable products. Our failureto successfully complete a significant portion of these development efforts, toobtain required regulatory approvals or to achieve commercial success with anyapproved products would materially harm our business, financial condition andresults of operations.

 

*Beforewe commercialize and sell any of our product candidates, we must conductclinical trials, which are expensive and have uncertain outcomes.*

 

Conducting clinicaltrials is a lengthy, time-consuming and expensive process. Before obtainingregulatory approvals for the commercial sale of any products, we mustdemonstrate through preclinical testing and clinical trials that our productcandidates are safe and effective for use in humans. We have incurred and willcontinue to incur substantial expense for, and we have devoted and expect tocontinue to devote a significant amount of time to, preclinical testing andclinical trials.

 

Completion of clinicaltrials may take several years or more. The length of time generally variessubstantially according to the type, complexity, novelty and intended use ofthe product candidate.

 

Many factors may delayour commencement and rate of completion of clinical trials, including:

 

•                  the number of patients that ultimately participatein the trial, which may be affected by the availability of competingtherapeutic alternatives;

 

•                  the length of time required to enroll suitablepatient subjects;

 

•                  the duration of patient follow-up that seemsappropriate in view of the results;

 

•                  the number of clinical sites included in the trials;

 

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•                  changes in regulatory requirements for clinicaltrials or any governmental or regulatory delays or clinical holds requiringsuspension or termination of the trials;

 

•                  delays, suspensions or termination of the clinicaltrials due to the institutional review board responsible for overseeing thestudy at a particular study site;

 

•                  regulatory policies regarding expedited approvalprocedures;

 

•                  unforeseen safety issues; and

 

•                  inability to manufacture on our own, or throughothers, adequate supplies of the product candidate being tested.

 

We have limitedexperience in conducting and managing clinical trials. We rely on thirdparties, including our collaborators, to assist us in managing and monitoringclinical trials. Our reliance on these third parties may result in delays incompleting, or in failure to complete, these trials if the third parties failto perform under our agreements with them.

 

In addition, we haveongoing research projects that may lead to product candidates, but we have notsubmitted INDs, nor begun clinical trials for these projects. Our ability tofile additional INDs, and to build diversity and scale in our productportfolio, depends to a significant extent on our ability to identifyadditional potential product candidates through our preclinical research and toconduct preclinical research efficiently. Our preclinical or clinicaldevelopment efforts may not be successfully completed, we may not file furtherINDs and clinical trials may not commence as planned.

 

Two of our proprietaryproduct candidates, panitumumab and ABX-10241, are in various stages ofclinical trials. We have discontinued clinical trials of three proprietaryproduct candidates, ABX-MA1, ABX-CBL and ABX-IL8. To date, data obtained fromthese clinical trials have been insufficient to demonstrate safety and efficacyunder applicable FDA guidelines. As a result, these data will not support anapplication for regulatory approval without further clinical trials or furtherresults from ongoing trials. Clinical trials that we conduct or that thirdparties conduct on our behalf may not demonstrate sufficient safety andefficacy to obtain the requisite regulatory approvals for any of our productcandidates. We expect to commence new clinical trials from time to time in thecourse of our business as our product development work continues. However,regulatory authorities may not permit us to undertake any additional clinicaltrials for our product candidates. In addition, the FDA, other regulatoryauthorities, our partners, the institutional review boards for clinical trialsites or we may suspend or terminate clinical trials at any time.

 

Our product candidatesmay fail to demonstrate safety or efficacy in clinical trials. For example, in March 2005,we decided not to pursue further clinical development independently of ABX-MA1.Similarly, in 2002 we completed analysis of a Phase 2b clinical trial ofABX-IL8 in psoriasis, concluded that the results did not warrant continueddevelopment in psoriasis and decided to wind down the studies in other diseaseindications at that time. Failures of clinical trials of any product candidatecould delay the development of other product candidates or hinder our abilityto obtain additional financing. In addition, failures in our clinical trialscan lead to additional research and development expenses. Any delays in, ortermination of, our clinical trials could impede our ability to commercializeour product candidates and materially harm our business, financial conditionand results of operations.

 

*Successin early clinical trials may not be indicative of results obtained insubsequent trials.*

 

Results from our earlystage clinical trials and those of our collaborators are based on a limitednumber of patients and may, upon review, be revised or negated by authoritiesor by later stage clinical trials. Historically, the results from preclinical testing and early clinicaltrials have often not been predictive of results obtained in later clinicaltrials.  A number of new drugs andbiologics have shown promising

 

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results in clinicaltrials, but subsequently failed to establish sufficient safety and efficacydata to obtain necessary regulatory approvals. Data obtained from preclinical and clinical activities are susceptibleto varying interpretations, which may delay, limit or prevent regulatoryapproval.  In addition, we may encounterregulatory delays or rejections as a result of many factors, including:  changes in regulatory policy during theperiod of product development; delays in obtaining regulatory approvals tocommence a study; lack of efficacy during clinical trials; or unforeseen safetyissues.

 

*Our ownability to manufacture is uncertain, which may make it more difficult for us todevelop and sell our products.*

 

We have limitedexperience manufacturing antibody therapeutic product candidates in ourmanufacturing facility. We intend to use our manufacturing facility for themanufacture of product candidates for clinical trials and to support thepotential early commercial launch of a limited number of products, in eachcase, in compliance with FDA and European good manufacturing practices. We haveyet to manufacture a commercial product in our facility. In May 2000, wesigned a long-term lease for the building that contains this manufacturingfacility. Construction has been completed and the facility is operational,although portions of the facility are still to be validated. In October 2003,following an inspection by the California State Department of Health Services,we received a State Drug Manufacturing License. The license permits us tomanufacture and ship clinical material from our manufacturing facility. Thetotal cost of the facility was approximately $150 million. The costs of completingvalidation of this facility and qualifying the facility for regulatorycompliance may be higher than expected. We currently have excess productionservices capacity and this condition may persist for an extended period.However, if the commercial launch of one or more of our product candidatesproves successful, we will likely experience capacity shortages and may need touse one or more third party facilities to produce these products in sufficientquantities.

 

The process ofmanufacturing antibody therapeutic products is complex. While the managers ofthe facility have gained extensive manufacturing experience in prior positionswith other companies, we have limited experience in the clinical or commercialscale manufacturing of our existing product candidates, or any other antibodytherapeutic products, in our facility. We will need to hire, train and retainadditional qualified manufacturing, quality control and quality assurancepersonnel. Also, we will need to manufacture such antibody therapeutic productsin a facility and by an appropriately validated process that comply with FDA,European and other regulations. Our manufacturing operations will be subject toongoing, periodic unannounced inspections by the FDA, European and otherforeign regulatory agencies and state regulatory agencies to ensure compliancewith good manufacturing practices and applicable health and safety regulations.If we are unable to manufacture product or product candidates in accordancewith FDA and European good manufacturing practices we may not be able to obtainregulatory approval for our products. Any significant manufacturing changes forthe production of our product candidates could result in delays in developmentor regulatory approval or in the reduction or interruption of commercial salesof our product candidates. Our inability to manufacture clinical or commercialsupplies or to maintain our manufacturing operations in compliance withapplicable regulations within our planned time and cost parameters could materiallyharm our business, financial condition and results of operations.

 

We also may encounterproblems with the following:

 

•                  production yields;

 

•                  quality control and assurance;

 

•                  availability of qualified personnel;

 

•                  availability of raw materials;

 

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•                  adequate training of new and existing personnel;

 

•                  ongoing compliance with our standard operatingprocedures;

 

•                  ongoing compliance with FDA and other healthauthority regulations;

 

•                  production costs; and

 

•                  development of advanced manufacturing techniques andprocess controls.

 

In addition, the FDA andother regulatory authorities will require us to register any manufacturingfacilities in which our antibody therapeutic products are manufactured. Thesefacilities will be subject to periodic and unannounced inspections to confirmcompliance with FDA good manufacturing practices or other equivalentregulations. The FDA or foreign regulatory bodies will not grant pre-marketapproval of our product candidates, including panitumumab, if our facilitiescannot pass a pre-license inspection. Therefore, both the filing and approval of a BLA for panitumumab couldbe delayed if we are unable to meet the relevant pre-license requirements andor if our facilities and operating systems do not pass a pre-licenseinspection.  In complying with FDAregulations and foreign regulatory requirements, we will be obligated to expendtime, money and effort in production, record keeping and quality control in aneffort to ensure that our product candidates meet applicable specifications andother requirements. Our failure to maintain regulatory compliance wouldmaterially harm our business, financial condition and results of operations.

 

*We mayrely on third party manufacturers, and we may have difficulty conductingclinical trials or commercializing product candidates if a manufacturer doesnot perform in accordance with our expectations.*

 

Previously, we relied oncontract manufacturers to produce candidates under good manufacturing practiceregulations for use in our clinical trials. While we have established our ownmanufacturing facility, we cannot assure you that we will be able to qualifythis facility for compliance with FDA and European good manufacturing practicesor manufacture sufficient quantities of our product candidates for clinicaltrials or a potential early commercial launch. We continually evaluate our options for commercial production of ourproduct candidates, including third party manufacturers.

 

Third party manufacturersmay encounter difficulties in scaling up production, including problemsinvolving production yields, quality control and assurance, shortage ofqualified personnel, shortage of capacity, compliance with FDA and otherapplicable regulations, production costs, and development of advancedmanufacturing techniques and process controls. They may not perform as agreedor may not remain in the contract manufacturing business for the time requiredby us to successfully produce and market our product candidates. Also, thirdparty manufacturers may have difficulty maintaining compliance with FDA goodmanufacturing practices or equivalent regulations, or having their facilitiespass a pre-license or routine inspection. Any failure of third party manufacturersto deliver the required quantities of our product candidates for clinical useon a timely basis and at commercially reasonable prices, and our failure tofind replacement manufacturers or successfully implement our own manufacturingcapabilities, would materially harm our business, financial condition andresults of operations.

 

*Thesuccessful growth of revenues from our manufacturing services depends to alarge extent on our ability to find third parties who agree to use our servicesand our ability to provide those services successfully.*

 

We intend to enhance ourcontract revenues by entering into agreements to provide antibody productionservices to third parties. Potential third parties include our existingcollaborators, as well as other pharmaceutical and biotechnology companies,technology companies, academic institutions and other entities. We must enterinto these agreements to successfully develop this aspect of our business. Todate,

 

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we have entered into onlya few production services agreements and we cannot assure you that we will beable to enter into additional agreements.

 

We may not be able tosecure manufacturing agreements on favorable terms. If we do obtain suchagreements, we may encounter difficulties in performing as agreed. We mayencounter difficulties in scaling up production, including problems involvingproduction yields, quality control and assurance, shortage of qualifiedpersonnel, training of personnel, compliance with FDA good manufacturingpractices and other applicable regulations, production costs, and developmentof advanced manufacturing techniques and process controls. The failure todeliver required quantities of product on a timely basis and at commercially reasonableprices could materially harm our business, financial condition and results ofoperations.

 

*Thesuccessful growth of our business depends in part on our ability to find thirdparty collaborators to assist or share in the costs of product development.*

 

Our strategy for thedevelopment and commercialization of antibody therapeutic products depends, inpart, upon the formation of collaboration agreements with third parties.Potential third parties include pharmaceutical and biotechnology companies,technology companies, academic institutions and other entities. We must enterinto these agreements to successfully develop and commercialize productcandidates. These agreements are necessary in order for us to:

 

•                  access proprietary antigens for which we can generatefully human antibody products;

 

•                  fund research, preclinical development, clinicaltrials and manufacturing;

 

•                  seek and obtain regulatory approvals; and

 

•                  successfully commercialize existing and futureproduct candidates.

 

Our ability to continueour current collaborations and to enter into additional third partycollaborations is dependent in large part on our ability to successfullydemonstrate that our XenoMouse technology is an attractive method of developingantibody therapeutic products.  We havegenerated only a limited number of fully human antibody therapeutic productcandidates pursuant to our collaboration agreements that have advanced to theclinical stage.  Our failure to maintainour existing collaboration agreements or to enter into additional agreementscould materially harm our business, financial condition and results ofoperations.

 

Our dependence onlicensing, collaboration, manufacturing and other agreements with third partiessubjects us to a number of risks.  Theseagreements may not be on terms that prove favorable to us, and we typicallyafford our collaborators significant discretion in electing whether to pursueany of the planned activities. Licensing and other contractual arrangements mayrequire us to relinquish our rights to certain of our technologies, products ormarketing territories.  To the extent weagree to work exclusively with one collaborator in a given therapeutic area,our opportunities to collaborate with other entities could be curtailed.  For example, our collaboration withAstraZeneca for the identification and development of therapeutic antibodies inoncology contains exclusivity provisions that significantly restrict ourability, during a three-year target selection period, to enter intoarrangements with third parties in the field of oncology as well as our abilityto conduct research and development activities in that field.  To the extent that our collaboration withAstraZeneca is not successful, our ability to develop antibodies for use inoncology applications through other collaborations will be severelycurtailed.  Our collaboration withAstraZeneca also limits our ability to develop such antibodies through our ownindependent development.

 

We cannot control theamount or timing of resources our collaborators may devote to a collaboration,and collaborators may not perform their obligations as expected. Additionally,business combinations or significant changes in a collaborator’s businessstrategy may adversely affect a

 

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collaborator’swillingness or ability to complete its obligations under the arrangement. Evenif we fulfill our obligations under an agreement, typically our collaboratorscan terminate the agreement at any time following proper written notice. Thetermination or breach of agreements by our collaborators, or the failure of ourcollaborators to complete their obligations in a timely manner, couldmaterially harm our business, financial condition and results of operations. Ifwe are not able to establish further collaboration agreements or any or all ofour existing agreements are terminated, we may be required to seek newcollaborators or to undertake product development and commercialization at ourown expense. Such an undertaking may:

 

•                  limit the number of product candidates that we willbe able to develop and reduce the likelihood of successful productintroduction;

 

•                  significantly increase our capital requirements; and

 

•                  place additional strain on our management’s time.

 

Existing or potentialcollaborators may pursue alternative technologies, including those of ourcompetitors, or enter into other transactions that could make a collaborationwith us less attractive to them. For example, if an existing collaboratorpurchases a company that is one of our competitors, that company could be lesswilling to continue its collaboration with us. Moreover, disputes may arise with respect to the ownership of rights toany technology or products developed with any current or future collaborator.Lengthy negotiations with potential new collaborators or disagreements betweenus and our collaborators may lead to delays in or termination of the research,development or commercialization of product candidates or result intime-consuming and expensive litigation or arbitration. The decision by ourcollaborators to pursue alternative technologies or the failure of ourcollaborators to develop or commercialize successfully any product candidate towhich they have obtained rights from us could materially harm our business,financial condition and results of operations.

 

*We aresubject to extensive government regulation, which will require us to spendsignificant amounts of money, and we may not be able to obtain regulatoryapprovals, which are required for us to conduct clinical testing andcommercialize our products.*

 

Our product candidatesunder development are subject to extensive and rigorous domestic governmentregulation.  The FDA regulates, amongother things, the development, testing, manufacture, safety, efficacy, record-keeping,labeling, storage, approval, advertising, promotion, sale and distribution ofbiopharmaceutical products.  If we marketour products abroad, they will also be subject to extensive regulation byforeign governments. Neither the FDA nor any other regulatory agency hasapproved any of our product candidates for sale in the United States or anyforeign market.  The regulatory reviewand approval process, which includes preclinical studies and clinical trials ofeach product candidate, is lengthy, expensive and uncertain.  The recent withdrawal of certain approvedproducts from the market may lead to longer review periods by the FDA,particularly for product candidates being reviewed under an acceleratedapproval process, or may result in requests for more extensive trials or data.

 

Securing FDA approvalrequires the submission of extensive preclinical and clinical data,manufacturing data and supporting information to the FDA for each indication toestablish the product candidate’s safety and efficacy.  The generation of data supporting theapproval process takes many years, requires the expenditure of substantialresources, and may involve post-marketing surveillance and requirements for post-marketingstudies.  As we conduct clinical trialsfor a given product candidate, we may decide or the FDA may require us to makechanges in our plans and protocols. Such changes may relate to, for example,changes in the standard of care for a particular disease indication,comparability of efficacy and toxicity of materials where a change in materialsis proposed, or competitive developments foreclosing the availability ofexpedited approval procedures.  We may berequired to support proposed changes with additional preclinical or clinicaltesting, which could delay the expected time line for concluding clinicaltrials.  The approval of a productcandidate may depend on the acceptability to the FDA

 

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of data from clinicaltrials conducted outside the United States. Regulatory requirements are subjectto frequent change. Delays in obtaining regulatory approvals may:

 

•                  adversely affect the successful commercialization ofany drugs that we or our customers develop;

 

•                  impose costly procedures on us or our customers;

 

•                  diminish any competitive advantages that we or ourcustomers may attain; and

 

•                  adversely affect our receipt of revenues orroyalties.

 

Our product candidatesmay not be approved or may be approved with limitations or for indications thatdiffer from those we initially target. Even if marketing approval from the FDAis received, the FDA may impose post-marketing requirements, such as:

 

•                  labeling and advertising requirements, restrictionsor limitations, such as the inclusion of warnings, precautions, contra-indicationsor use limitations that could have a material impact on the futureprofitability of our product candidates;

 

•                  testing and surveillance to monitor our futureproducts and their continued compliance with regulatory requirements; and

 

•                  inspection of products and manufacturing operationsand, if any inspection reveals that the product or operation is not incompliance, prohibiting the sale of all products, suspending manufacturing orwithdrawing market clearance.

 

The discovery ofpreviously unknown problems with our future products may result in restrictionsof the products, including withdrawal from manufacture. Additionally, certainmaterial changes affecting an approved product such as manufacturing changes oradditional labeling claims are subject to further FDA review and approval. TheFDA may revisit and change its prior determination with regard to the safety orefficacy of our products and withdraw any required approvals after we obtainthem. Even prior to any formal regulatory action requiring labeling changes oraffecting manufacturing, we could voluntarily decide to cease the distributionand sale or recall any of our future products if concerns about their safetyand efficacy develop.

 

In their regulation of advertising,the FDA and the Federal Trade Commission (“FTC”) may issue correspondencealleging that particular advertising or promotional practices are false,misleading or deceptive. The FDA or FTC may impose a wide array of sanctions oncompanies for such advertising practices. Additionally, physicians mayprescribe pharmaceutical or biologic products for uses that are not describedin a product’s labeling or differ from those tested by us and approved by theFDA. While such “off-label” uses are common and the FDA does not regulatephysicians’ choice of treatments, the FDA does restrict a manufacturer’scommunications on the subject of “off-label” use. Companies cannot promoteFDA-approved pharmaceutical or biologic products for off-label uses. If our advertisingor promotional activities fail to comply with the FDA’s or FTC’s regulations orguidelines, we may be subject to warnings from, or enforcement action by, theFDA or FTC.

 

If we fail to comply withapplicable FDA and other regulatory requirements at any stage during theregulatory process, we or our third party manufacturers may be subject tosanctions, including:

 

•                  delays;

 

•                  warning letters;

 

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•                  fines;

 

•                  clinical holds;

 

•                  consent decrees;

 

•                  product recalls or seizures;

 

•                  changes to advertising;

 

•                  injunctions;

 

•                  refusal of the FDA to review pending market approvalapplications or supplements to approval applications;

 

•                  total or partial suspension of productmanufacturing, distribution, marketing and sales;

 

•                  civil penalties;

 

•                  withdrawals of previously approved marketingapplications; and

 

•                  criminal prosecutions.

 

In many instances weexpect to rely on our customers and co-developers to file INDs and generallydirect the regulatory approval process for products derived from ourtechnologies.  These customers andco-developers may not be able to or may choose not to conduct clinical testingor obtain necessary approvals from the FDA or other regulatory authorities forany product candidates.  If they fail toobtain required governmental approvals, we will experience delays in or beprecluded from marketing or realizing the commercial benefits from themarketing of products derived from our technologies.  In addition, our failure to obtain therequired approvals would preclude the commercial use of our products.  Any such delays and limitations maymaterially harm our business, financial condition and results of operations.

 

*If weare unable to manufacture our product candidates in compliance with currentgood manufacturing practices requirements and applicable regulations, we willnot be able to commercialize our product candidates.*

 

We are required to complywith the applicable FDA current good manufacturing practice, or “cGMP”regulations and the requirements of other regulatory authorities. Goodmanufacturing practice regulations include requirements relating to qualitycontrol and quality assurance as well as the corresponding maintenance ofrecords and documentation. Manufacturing facilities, including our facility,must pass a pre-license inspection by the FDA before initiating commercialmanufacturing of any product such as panitumumab. Our failure to pass apre-license inspection by the FDA could delay or prevent the approval of ourproduct candidates. In addition, the FDA enforces post-marketing regulatoryrequirements such as cGMP requirements, through periodic unannouncedinspections. We do not know whether we will pass any future FDA inspections.Failure to pass an inspection could disrupt, delay or shut down ourmanufacturing operations.  In addition,cGMP requirements are constantly evolving and new or different requirements mayapply in the future.  Manufacturingfacilities in California, including our facility, are also subject to thelicensing requirements of and inspection by the State of California Departmentof Health Services.  In October 2003,following an inspection, we received a Drug Manufacturing License from theState of California.  The license, whichmust be renewed annually, permits us to manufacture and ship clinicalmaterial.  We are responsible formanufacturing clinical and, for the first five years after launch, commercialsupplies for panitumumab with Amgen’s support and assistance.  We may not be able to

 

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comply with applicablecGMP requirements and other regulatory requirements.  Our failure to comply with these requirementscould delay or prevent the approval of our product candidates and wouldmaterially harm our business, financial condition and results of operations.

 

*If ourproducts do not gain market acceptance among the medical community, ourrevenues would greatly decline and might not be sufficient to support ouroperations.*

 

Our product candidatesmay not gain market acceptance among physicians, patients, third party payorsand the medical community. We may not achieve market acceptance even ifclinical trials demonstrate safety and efficacy, and the necessary regulatoryand reimbursement approvals are obtained. The degree of market acceptance ofany product candidates that we develop will depend on a number of factors,including:

 

•                  establishment and demonstration of clinical efficacyand safety;

 

•                  cost-effectiveness of our product candidates;

 

•                  their potential advantage over alternative treatmentmethods;

 

•                  reimbursement policies of government and third partypayors; and

 

•                  marketing and distribution support for our productcandidates, including the efforts of our collaborators where they have marketingand distribution responsibilities.

 

Physicians will notrecommend therapies using our products until such time as clinical data orother factors demonstrate the safety and efficacy of such procedures ascompared to conventional drug and other treatments. Even if we establish theclinical safety and efficacy of therapies using our antibody productcandidates, physicians may elect not to recommend the therapies for any numberof other reasons, including whether the mode of administration of our antibodyproducts is effective for certain indications. Antibody products, including ourproduct candidates as they would be used for certain disease indications, aretypically administered by infusion or injection, which requires substantialcost and inconvenience to patients. Our product candidates, if successfullydeveloped, will compete with a number of drugs and therapies manufactured andmarketed by major pharmaceutical and other biotechnology companies. Ourproducts may also compete with new products currently under development byothers. Physicians, patients, third party payors and the medical community maynot accept or utilize any product candidates that we or our customers develop.The failure of our products to achieve significant market acceptance would materiallyharm our business, financial condition and results of operations.

 

*We donot have marketing and sales experience, which may require us to rely on othersto market and sell our products and may make it more challenging for us tocommercialize our product candidates.*

 

Although we have beenmarketing our XenoMouse technology to potential customers and collaborators forseveral years, we do not have marketing, sales or distribution experience orcapability with respect to our therapeutic product candidates.  We intend to enter into arrangements withthird parties to market and sell most of our therapeutic product candidateswhen we commercialize them.  For example,pursuant to our amended joint development agreement for panitumumab, Amgen hasdecision-making authority for development and commercialization activitiesrelating to any products developed under the collaboration, and we have theright to co-promote any products in the United States.  We have elected to pursue the co-promotion ofpanitumumab in the United States.  Shouldthis product candidate proceed to commercialization, it will take significantresources to develop the appropriate sales capabilities and there can be noassurance that we will be able to do this successfully.  Regarding other product candidates, to theextent that we enter into marketing and sales arrangements with othercompanies, our revenues, if any, will depend on the efforts of others.  These efforts may not be successful.  If we choose not to, or are unable to,

 

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enter into third partyarrangements, we will need to develop sufficient marketing and salescapabilities, which may need to be substantial, in order to achieve commercialsuccess for any product candidate approved by the FDA.  We may not successfully develop marketing andsales capabilities or have sufficient resources to do so.  If we do develop such capabilities, we willcompete with other companies that have experienced and well-funded marketingand sales operations. Our failure to enter into successful marketingarrangements with third parties and our inability to conduct such activitiesourselves would materially harm our business, financial condition and resultsof operations.

 

**RisksRelated to Intellectual Property**

 

*Ourability to protect our intellectual property rights will be criticallyimportant to the success of our business, and we may not be able to protectthese rights in the United States or abroad.*

 

Our success depends inpart on our ability to:

 

•                  obtain patents;

 

•                  protect trade secrets;

 

•                  operate without infringing the proprietary rights ofothers and defend ourselves from any allegation that we have done so; and

 

•                  prevent others from infringing our proprietaryrights.

 

We will be able toprotect our proprietary rights from unauthorized use by third parties only tothe extent that our proprietary rights are covered by valid and enforceablepatents or are effectively maintained as trade secrets. We attempt to protectour proprietary position by filing U.S. and foreign patent applications relatedto our proprietary technology, inventions and improvements that are importantto the development of our business. However, the patent position ofbiopharmaceutical companies involves complex legal and factual questions, and,therefore, we cannot predict with certainty whether our patent applicationswill be approved or any resulting patents will be enforced. In addition, thirdparties may challenge, seek to invalidate or circumvent any of our patents,once they are issued. Thus, any patents that we own or license from thirdparties may not provide any protection against competitors. Our pending patentapplications, those we may file in the future, or those we may license fromthird parties, may not result in patents being issued. Also, patent rights maynot provide us with adequate proprietary protection or competitive advantagesagainst competitors with similar technologies. The laws of certain foreigncountries do not protect our intellectual property rights to the same extent asdo the laws of the United States.

 

In addition to patents,we rely on trade secrets and proprietary know-how. We seek protection, in part,through confidentiality and proprietary information agreements. Theseagreements may not provide meaningful protection for our technology or adequateremedies in the event of unauthorized use or disclosure of confidential andproprietary information, and, in addition, the parties may breach suchagreements. Also, our trade secrets may otherwise become known to, or beindependently developed by, our competitors. Furthermore, others mayindependently develop similar technologies or duplicate any technology that wehave developed.

 

*We mayface challenges from third parties regarding the validity of our patents andproprietary rights, or from third parties asserting that we are infringingtheir patents or proprietary rights, which could result in litigation thatwould be costly to defend and could deprive us of valuable rights.*

 

Parties have conductedresearch for many years in the antibody and transgenic animal fields. The term “transgenic”,when applied to an animal, such as a mouse, refers to an animal that haschromosomes into which human genes have been incorporated. This research hasresulted in a substantial number of

 

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issued patents and aneven larger number of pending patent applications. The publication ofdiscoveries in the scientific or patent literature frequently occurssubstantially later than the date on which the underlying discoveries weremade. Our commercial success depends significantly on our ability to operatewithout infringing the patents and other proprietary rights of third parties.Our technologies may unintentionally infringe the patents or violate otherproprietary rights of third parties. Such infringement or violation may preventus and our customers from pursuing product development or commercialization.Such a result could materially harm our business, financial condition andresults of operations.

 

Extensive litigationregarding patents and other intellectual property rights has been common in thebiotechnology and pharmaceutical industries. The defense and prosecution ofintellectual property suits, United States Patent and Trademark Officeinterference proceedings, and related legal and administrative proceedings inthe United States and internationally involve complex legal and factualquestions. As a result, such proceedings are costly and time-consuming topursue and their outcome is uncertain. Litigation may be necessary to:

 

•                  enforce patents that we own or license;

 

•                  protect trade secrets or know-how that we own orlicense; or

 

•                  determine the enforceability, scope and validity ofthe proprietary rights of others.

 

Our involvement in anylitigation, interference or other administrative proceedings could cause us toincur substantial expense and could significantly divert the efforts of ourtechnical and management personnel. An adverse determination may subject us to lossof our proprietary position or to significant liabilities, or require us toseek licenses that may not be available from third parties. An adversedetermination in a judicial or administrative proceeding, or a failure toobtain necessary licenses, may restrict or prevent us from manufacturing andselling our products, if any. Costs associated with these arrangements may besubstantial and may include ongoing royalties. Furthermore, we may not be ableto obtain the necessary licenses on satisfactory terms, if at all. Theseoutcomes could materially harm our business, financial condition and results ofoperations.

 

#### **RisksRelated to Our Industry**

#### ** **

*We faceintense competition and rapid technological change, and if we fail to developproducts that keep pace with new technologies and that gain market acceptance,our product candidates or technologies could become obsolete.*

 

The biotechnology andpharmaceutical industries are highly competitive and subject to significant andrapid technological change.  We face competitionin several different forms.  Our antibodygeneration activities currently face competition from several companies andtechnologies.  In addition, the productcandidates that we or our customers are developing also face competition.  Finally, we compete with companies thatcurrently offer antibody production services, and may compete with companiesthat currently only manufacture their own antibodies but could offer antibodyproduction services to third parties.

 

 We are aware of several pharmaceutical andbiotechnology companies that are actively engaged in research and developmentin areas related to antibody therapy. Many of these companies have commenced clinical trials of antibodytherapeutic product candidates or have successfully commercialized antibodytherapeutic products for use on their own or in combination therapies. Many ofthese companies are addressing the same diseases and disease indications as weor our customers are.

 

We compete with companiesthat offer the services of generating monoclonal antibodies for antibody-basedtherapeutics.  These competitors havespecific expertise or technology related to antibody development and introducenew or modified technologies from time to time.

 

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Many of these companiesand institutions, either alone or together with their customers orcollaborators, have substantially greater financial resources and largerresearch and development staffs than we do. In addition, many of thesecompetitors, either alone or together with their customers or collaborators,have significantly greater experience than we do in:

 

•                  developing products;

 

•                  undertaking preclinical testing and human clinicaltrials;

 

•                  obtaining FDA and other regulatory approvals ofproducts; and

 

•                  manufacturing and marketing products.

 

Accordingly, ourcompetitors may succeed in obtaining patent protection, receiving FDA approvalor commercializing products before we do. If we commence commercial productsales, we will be competing against companies with greater marketing andmanufacturing capabilities, areas in which we have limited or no experience.

 

We also face, and willcontinue to face, competition from academic institutions, government agenciesand research institutions. There are numerous competitors working on productsto treat each of the diseases for which we are seeking to develop therapeuticproducts. In addition, any product candidate that we successfully develop maycompete with existing therapies that have long histories of safe and effectiveuse. Competition may also arise from:

 

•                  other drug development technologies and methods ofpreventing or reducing the incidence of disease;

 

•                  new small molecules; or

 

•                  other classes of therapeutic agents.

 

Developments bycompetitors may render our product candidates or technologies obsolete ornon-competitive. We face and will continue to face intense competition fromother companies for agreements with pharmaceutical and biotechnology companies,for establishing relationships with academic and research institutions, and forlicenses to proprietary technology. These competitors, either alone or withtheir customers, may succeed in developing technologies or products that aremore effective than ours.

 

We also face competitionfrom companies that provide production services. These include contractmanufacturers, such as Lonza, Avid Bioservices, Inc., DiosynthBiotechnology, DSM N.V., Cangene Corporation and GoodwinBiotechnology Inc., and other pharmaceutical and biotechnology companiesthat manufacture their own product candidates but can make extra capacityavailable to collaborators and customers, such as Boehringer Ingelheim GmbH,Biogen Idec Inc., ICOS Corporation, Abbott and Novartis AG.

 

*We faceuncertainty over reimbursement and healthcare reform, which, if determinedadversely to us, could seriously hinder the market acceptance of our products.*

 

In both domestic andforeign markets, sales of our product candidates will depend in part upon theavailability of reimbursement from third party payors, such as governmenthealth administration authorities, managed care providers and private healthinsurers.  Third party payors areincreasingly challenging the price and examining the cost effectiveness ofmedical products and services. In addition, significant

 

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uncertainty exists as tothe reimbursement status of newly approved healthcare products.  Adequate third party reimbursement may not beavailable to enable us to maintain price levels sufficient to realize anappropriate return on our investment in product development.  In addition, domestic and foreign governmentscontinue to propose and pass legislation designed to reduce the cost of healthcare,which could further limit reimbursement for pharmaceuticals.  The failure of government and third partypayors to provide adequate coverage and reimbursement rates for our productcandidates could adversely affect the market acceptance of our products.  The failure of our products to receive marketacceptance would materially harm our business, financial condition and resultsof operations.

 

*We mayexperience pressure to lower the prices of any prescription pharmaceuticalproducts we are able to obtain approval for because of new and/or proposedfederal legislation.*

 

Federal legislation,enacted in December 2003, has added an outpatient prescription drugbenefit to Medicare, effective January 2006.  In the interim, Congress has established adiscount drug card program for Medicare beneficiaries.  Both benefits will be provided primarilythrough private entities, which will attempt to negotiate price concessionsfrom pharmaceutical manufacturers.  Thesenegotiations may increase pressures to lower prices.  While the new law specifically prohibits theUnited States government from interfering in price negotiations betweenmanufacturers and Medicare drug plan sponsors, some members of Congress arepursuing legislation that would permit the United States government to use itsenormous purchasing power to demand discounts from pharmaceutical companies,thereby creating de facto price controls on prescription drugs.  In addition, the new law contains triggersfor Congressional consideration of cost containment measures for Medicare inthe event Medicare cost increases exceed a certain level.  These cost containment measures could includesome sorts of limitations on prescription drug prices.  The new legislation also modified themethodology used for reimbursement of physician administered and certain otherdrugs already covered under Medicare Part B.  This new methodology would likely apply tocertain of our products if and when commercialized.  Experience with new reimbursement methodologyis limited, and could be subject to change in the future.  Our results of operations could be materiallyharmed by the different features of the Medicare prescription drug coveragelegislation, by the potential effect of such legislation on amounts thatprivate insurers will pay for our products and by other healthcare reforms thatmay be enacted or adopted in the future.

 

**OtherRisks Related to Our Company**

 

*Ourrestructuring plan may not achieve the results we intend and may harm ourbusiness.*

 

In June 2005, weannounced a restructuring plan, which includes a reduction in headcount. Theplanning and implementation of our restructuring has placed, and may continueto place a strain on our managerial, operational and other resources. Therestructuring may negatively affect our employee turnover, recruiting andretention, and may not enable us to reduce our costs to the extent expected.

 

*Thefuture growth and success of our business will depend on our ability tocontinue to attract and retain our employees and consultants.*

 

For us to pursue ourproduct development, manufacturing, marketing and commercialization plans, wewill need to hire additional qualified scientific, manufacturing, qualitycontrol, quality assurance, sales, marketing and key management personnel. Wemay also need to hire personnel with expertise in clinical testing, governmentregulation, law and finance. Attracting and retaining qualified personnel willbe critical to our success. We may not be able to attract and retain personnelon acceptable terms given the competition for such personnel among biotechnology,pharmaceutical and healthcare companies, universities and non-profit researchinstitutions. The inability to attract and retain qualified personnel couldmaterially harm our business, financial condition and results of operations.

 

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We grant stock options asa method of attracting and retaining employees, to motivate performance and toalign the interests of management with those of our stockholders. Due tofluctuations in the trading price of our common stock in recent years, asubstantial portion of the stock options held by our employees have an exerciseprice that is higher than the current trading price of our common stock. We mayelect to grant additional stock options at the current lower market price, payhigher cash compensation, or provide some combination of these alternatives toretain and attract qualified employees, but we cannot be sure that any of theseactions would be successful.  In addition,the issuance of additional stock options may be dilutive to existingstockholders.  While we will continue toutilize our existing equity compensation plans to compensate employees, we mayhave difficulty attracting and retaining qualified personnel if we are unableto obtain stockholder approval for any new plan as may be required to keepequity compensation available.  Inaddition, the expensing of stock options and other stock-based awards, whichwill be required commencing on January 1, 2006, will increase any netlosses or decrease any net income recorded in any given period and could affectthe price that investors might be willing to pay in the future for shares ofour common stock.

 

As a result of thesefactors, we may have difficulty attracting and retaining qualified personnel,which could materially harm our business, financial condition and results ofoperations.

 

*We mayexperience difficulty in the integration of any future acquisition with theoperations of our business.*

 

We may from time to timeseek to expand our business through corporate acquisitions. Our acquisition ofcompanies and businesses and expansion of operations, involve risks such as thefollowing:

 

•                  the potential inability to identify target companiesbest suited to our business plan;

 

•                  the potential inability to successfully integrateacquired operations and businesses and to realize anticipated synergies,economies of scale or other expected value;

 

•                  incurrence of expenses attendant to transactionsthat may or may not be consummated; and

 

•                  difficulties in managing and coordinating operationsat multiple venues, which, among other things, could divert our management’sattention from other important business matters.

 

In addition, our past andfuture acquisitions of companies and businesses and expansion of operations mayresult in dilutive issuances of equity securities, the incurrence of additionaldebt, U.S. or foreign tax liabilities, large one-time write-offs and thecreation of goodwill or other intangible assets that could result inamortization expense or other charges to expense. For example, we have recordedimpairment charges of $23.1 million and $1.9 million in the quarter ended June 30,2005 and $17.2 million in the quarter ended June 30, 2004, related totechnologies acquired through our acquisitions, respectively, of AbgenixBiopharma and IntraImmune in 2000 and Hesed Biomed in 2001.

 

*We haveimplemented a stockholder rights plan and are subject to other anti-takeoverprovisions, which could deter a party from effecting a takeover of us at apremium to our then-current stock price.*

 

In June 1999, ourboard of directors adopted a stockholder rights plan, which we amended andrestated in November 1999 and May 2002, and amended in October 2003.The stockholder rights plan and certain provisions of our amended and restatedcertificate of incorporation and amended and restated bylaws may have theeffect of making it more difficult for a third party to acquire, or ofdiscouraging a third party from attempting to acquire, control of us. Thiscould affect the price that certain investors might be willing to pay in thefuture for our common stock. Certain provisions of our amended and restatedcertificate of incorporation and amended and restated bylaws allow us to:

 

•                  issue preferred stock without any vote or furtheraction by the stockholders;

 

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•                  eliminate the right of stockholders to act bywritten consent without a meeting;

 

•                  specify procedures for director nominations bystockholders and submission of other proposals for consideration at stockholdermeetings; and

 

•                  eliminate cumulative voting in the election ofdirectors.

 

In October 2003, weentered into a collaboration and license agreement with AstraZeneca for thepurpose of identifying and developing antibody products for use in oncologytherapeutics. The collaboration agreement includes provisions that would allowAstraZeneca to accelerate its selection of target antigens and, in certainsituations, terminate the collaboration agreement, or specific programs oractivities conducted under it, in the event of a change in control in us,particularly if we were acquired by a competitor of AstraZeneca. In the eventof a change in control of us, AstraZeneca could also acquire control over thedevelopment programs and various intellectual property rights in respect ofantigens that are the subject of the collaboration agreement. This would resultin a reduction in the royalties and milestones to be paid by AstraZeneca to usunder the collaboration agreement and the release of AstraZeneca from certainexclusivity provisions. In addition, certain exclusivity provisions containedin the collaboration agreement would apply to an acquirer of our company andwould restrict the acquirer’s ability to operate its business in the oncologyfield after the acquisition, except with respect to pre-existing developmentprograms. These and other provisions of the collaboration agreement could makeour company less attractive to a potential acquirer, particularly an acquirerthat conducts or expects to conduct significant operations in the field ofoncology therapeutics.

 

We are also subject tocertain provisions of Delaware law which could also delay or make moredifficult a merger, tender offer or proxy contest involving us. In particular, Section 203of the Delaware General Corporation Law prohibits a Delaware corporation fromengaging in any business combination with any interested stockholder for aperiod of three years unless the transaction meets certain conditions. Thestockholder rights plan, the possible issuance of preferred stock, theprocedures required for director nominations and stockholder proposals, ourcollaboration agreement with AstraZeneca and Delaware law could have the effectof delaying, deferring or preventing a change in control of us, including,without limitation, discouraging a proxy contest or making more difficult theacquisition of a substantial block of our common stock. The provisions alsocould limit the price that investors might be willing to pay in the future forshares of our common stock.

 

*We faceproduct liability risks and may not be able to obtain adequate insurance, andif we are held liable for an uninsured claim or a claim in excess of ourinsurance limits, our business, financial condition and results of operationsmay be harmed.*

 

The use of any of ourproduct candidates, or of any products manufactured in our facility, inclinical trials, and the sale of any approved products, may expose us toliability claims resulting from such use or sale. Consumers, healthcareproviders, pharmaceutical companies or others selling such products might makeclaims of this kind. We may experience financial losses in the future due toproduct liability claims. We have obtained limited product liability insurancecoverage for our clinical trials and production services activities, underwhich the coverage limits are $15.0 million per occurrence and$15.0 million in the aggregate. We may not be able to maintain insurancecoverage at a reasonable cost or in sufficient amounts to protect us againstlosses. If third parties bring a successful product liability claim or seriesof claims against us for uninsured liabilities or in excess of insuredliabilities, our business, financial condition and results of operations may bematerially harmed.

 

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*Ouroperations involve hazardous materials, and we could be held responsible forany damages caused by such materials.*

 

Our research andmanufacturing activities involve the controlled use of hazardous materials. Inaddition, although we maintain insurance for harm to employees and to ourfacilities caused by hazardous materials, we do not insure against any otherharm (including harm to the environment) caused by the use of hazardousmaterials on our premises. We cannot eliminate the risk of accidentalcontamination or injury from these materials. In the event of an accident orenvironmental discharge, we may be held liable for any resulting damages, whichmay exceed our financial resources and may materially harm our business,financial condition and results of operations.

 

*We donot intend to pay cash dividends on our common stock.*

 

We intend to retain anyfuture earnings to finance the growth and development of our business and we donot plan to pay cash dividends on our common stock in the foreseeable future.

 

*Ourstock price is highly volatile, and you may not be able to sell your shares ofour common stock at a price greater than or equal to the price you paid forthem.*

 

The market price andtrading volume of our common stock are volatile, and we expect such volatilityto continue for the foreseeable future. For example, during the period between September 30,2004 and September 30, 2005, our common stock closed as high as $12.68 pershare and as low as $6.54 per share. This may impact your decision to buy or sell our common stock. Factorsaffecting our stock price include:

 

•                  developmentsin our clinical trials and in clinical trials for potentially competitiveproduct candidates;

 

•                  ourfinancial results;

 

•                  fluctuationsin our operating results;

 

•                  announcementsof technological innovations or new commercial therapeutic products by us orour competitors;

 

•                  publishedreports by securities analysts;

 

•                  governmentregulation;

 

•                  changesin reimbursement policies;

 

•                  developmentsin patent or other proprietary rights;

 

•                  announcementsthat we have entered into new collaboration, licensing or similar arrangementswith new collaborators, or amendments of the terms of our existingcollaborations;

 

•                  developmentsin our relationship with customers;

 

•                  publicconcern as to the safety and efficacy of our products; and

 

•                  generalmarket conditions.

 

 

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##### **Item3. Quantitative and Qualitative Disclosures About Market Risk**

##### ** **

*Interest Rate Risk.*  Weare exposed to interest rate sensitivity on our investments in debt securitiesand our outstanding fixed rate debt. Theobjective of our investment activities is to preserve principal, while at the sametime maximizing yields without significantly increasing risk. To achieve thisobjective, we invest in highly liquid, investment grade and government debtsecurities. Our investments in debt securities are subject to interest raterisk. To minimize the exposure due to an adverse shift in interest rates, weinvest in short-term securities and our goal is to maintain an average maturityof approximately one year. In addition, as of September 30, 2005,we had $100.0 million of outstanding 3.5% convertible subordinated notes due in2007, and $300.0 million of outstanding 1.75% convertible senior notes due in2011. The fair value of these convertible notes may fluctuate with changes inmarket interest rates, as well as changes in the market price of our commonstock.  A hypothetical 1.0% per annum decrease in interest rates would resultin an adverse net change in the fair value of our interest ratesensitive assets and liabilities ofapproximately $17.2 million and $16.6 million at September 30, 2005 and December 31,2004, respectively.

 

*Equity Price Risk.*  We are exposed to equity pricerisk on strategic investments, such as those we have made in CuraGen andImmunoGen. We typically do not attempt to reduce or eliminate our marketexposure on these securities. With respect to CuraGen and ImmunoGen, each ofwhose common stock is publicly traded, the aggregate market value of ourinvestments in these securities was approximately $17.1 million and$23.3 million as of September 30, 2005 and December 31, 2004, respectively.Due to decreases in the market prices of the shares of CuraGen and ImmunoGen,we recorded impairment charges of $67.3 million in 2002 related to theseinvestments. The trading prices of shares of CuraGen and ImmunoGen havefluctuated significantly since we purchased these securities. Each additional10% decrease in market value of these securities would result in a decrease invalue of approximately $1.7 million and $2.3 million from the fair value ofthose investments at September 30, 2005 and December 31, 2004,respectively.  Additional price declinescould cause us to record additional impairment charges in future periods.

 

# **Item 4. Controls and Procedures**

#  

#### **Evaluationof Disclosure Controls and Procedures**

#### ** **

Based on theirevaluation of our disclosure controls and procedures, as that term is definedby Rule 13a-15(e) promulgated under the Securities Exchange Act of1934, as of the end of the period covered by this report, our chief executiveofficer and our chief financial officer have concluded that our disclosurecontrols and procedures are effective in ensuring that all material informationrequired to be included in this quarterly report on Form 10-Q has beenmade known to them in a timely fashion.

 

**Changes in Internal ControlOver Financial Reporting**

 

There has been no changein our internal control over financial reporting during our last fiscal quarterthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

#### **ITEM 1. LegalProceedings**

#### ** **

Not applicable.

 

#### **ITEM2. Unregistered Sales of Equity Securities and Use of Proceeds**

#### ** **

Not applicable.

 

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#### **ITEM3. Defaults upon Senior Securities**

#### ** **

Not applicable.

 

#### **ITEM4. Submission of Matters to a Vote of Security Holders**

#### ** **

Notapplicable.

 

#### **ITEM 5. OtherInformation**

#### ** **

Notapplicable.

 

#### **ITEM 6. Exhibits**

** **
| **Number** |   | **Description**                                                                                                                                              |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                         |
| 3.1(1)     |   | Amended  and Restated Certificate of Incorporation of Abgenix, as currently in effect.                                                                       |
| 3.2(2)     |   | Amended  and Restated Bylaws of Abgenix, as currently in effect.                                                                                             |
| 31.1       |   | Certification  of William R. Ringo Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.              |
| 31.2       |   | Certification  of H. Ward Wolff Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                 |
| 32.1       |   | Certification  of William R. Ringo Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2       |   | Certification of H. Ward Wolff 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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(1)                                  Incorporated by reference to the same exhibitfiled with Abgenix’s Annual Report on Form 10-K for the year ended December 31,2002.

 

(2)                                  Incorporated by reference to the same exhibitfiled with Abgenix’s Current Report on Form 8-K on September 27,2005.

 

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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.

 

 

Dated: November 9,2005

 
|   | **ABGENIX, INC.**                                           |
|--------|-------------------------------------------------------------|
|   | (Registrant)                                                |
|   |                                                        |
|   |                                                        |
|   | /s/   WILLIAM  R. RINGO                      |   |
|   | William  R. Ringo                                           |
|   | President and Chief  Executive Officer                      |
|   | (Principal Executive  Officer)                              |
|   |                                                        |
|   |                                                        |
|   | /s/   H. WARD WOLFF                          |   |
|   | H. Ward Wolff                                               |
|   | Chief Financial Officer  and Senior Vice President, Finance |
|   | (Principal Financial  and Accounting Officer)               |

 

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**Exhibit Index**

 
| **Number** |   | **Description**                                                                                                                                              |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                         |
| 3.1(1)     |   | Amended  and Restated Certificate of Incorporation of Abgenix, as currently in effect.                                                                       |
| 3.2(2)     |   | Amended  and Restated Bylaws of Abgenix, as currently in effect.                                                                                             |
| 31.1       |   | Certification  of William R. Ringo Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.              |
| 31.2       |   | Certification  of H. Ward Wolff Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                 |
| 32.1       |   | Certification  of William R. Ringo Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2       |   | Certification of H. Ward Wolff 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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(1)                                  Incorporated by reference to the same exhibitfiled with Abgenix’s Annual Report on Form 10-K for the year ended December 31,2002.

 

(2)                                  Incorporated by reference to the same exhibitfiled with Abgenix’s Current Report on Form 8-K on September 27,2005.

 

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