UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2004

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to
.

Commission file number: 000-24207

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ABGENIX, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

94-3248826(IRS employer
Identification number)6701 Kaiser Drive, Fremont, CA(Address of principal executive office)

94555(Zip Code)


(510) 284-6500(Registrant's telephone number, including area code)

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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding in 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes ý    No o

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

As of July 30, 2004 there were 88,843,481 shares of the Registrant's Common Stock outstanding.



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TABLE OF CONTENTS

|                              |                                                                                               |                                                                                                           |    | Page No.
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | -- | --------
|PART I. Financial Information |                                                                                               |                                                                                                          
|                              | ITEM 1. Financial Statements                                                                  |                                                                                                           |   
|                              |                                                                                               | Condensed Consolidated Balance Sheets at June 30, 2004 and December 31,
2003                              |    | 3       
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 |    | 4       
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003           |    | 5       
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                      |    | 6       
|                              | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                           | 13
|                              | ITEM 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                           | 51
|                              | ITEM 4. Controls and Procedures                                                               |                                                                                                           | 52
|PART II. Other Information    |                                                                                               |                                                                                                          
|                              | ITEM 1. Legal Proceedings                                                                     |                                                                                                           | 53
|                              | ITEM 2. Changes in Securities and Use of Proceeds                                             |                                                                                                           | 53
|                              | ITEM 3. Defaults upon Senior Securities                                                       |                                                                                                           | 53
|                              | ITEM 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                           | 53
|                              | ITEM 5. Other Information                                                                     |                                                                                                           | 53
|                              | ITEM 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                           | 53
|SIGNATURES                    |                                                                                               | 54                                                                                                       

2

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ABGENIX, INC.  CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data)  (unaudited)

|                                                                                       |                                                                                                                                                                                               | June 30,
2004              |         | December 31,
2003 |        
|-------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ----------------- | -------
|ASSETS                                                                                 |                                                                                                                                                                                              
|Current assets:                                                                        |                                                                                                                                                                                               |                            |         |                   |        
|                                                                                       | Cash and cash equivalents                                                                                                                                                                     |                            | $       | 9,509             |        
|                                                                                       | Marketable securities                                                                                                                                                                         |                            |         | 259,624           |        
|                                                                                       | Interest receivable                                                                                                                                                                           |                            |         | 2,301             |        
|                                                                                       | Accounts receivable, net                                                                                                                                                                      |                            |         | 1,776             |        
|                                                                                       | Inventories                                                                                                                                                                                   |                            |         | 370               |        
|                                                                                       | Prepaid expenses and other current assets                                                                                                                                                     |                            |         | 8,774             |        
|                                                                                       |                                                                                                                                                                                               |                            |         |                   |        
|                                                                                       |                                                                                                                                                                                               | Total current assets       |         |                   | 282,354
|Property and equipment, net                                                            |                                                                                                                                                                                               |                            | 235,277 |                   |        
|Long-term investments                                                                  |                                                                                                                                                                                               |                            | 18,491  |                   |        
|Goodwill                                                                               |                                                                                                                                                                                               |                            | 34,780  |                   |        
|Identified intangible assets, net                                                      |                                                                                                                                                                                               |                            | 62,892  |                   |        
|Deposits and other assets                                                              |                                                                                                                                                                                               |                            | 28,550  |                   |        
|                                                                                       |                                                                                                                                                                                               |                            |         |                   |        
|                                                                                       |                                                                                                                                                                                               | $                          | 662,344 |                   | $      
|                                                                                       |                                                                                                                                                                                               |                            |         |                   |        
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY           |                                                                                                                                                                                              
|Current liabilities:                                                                   |                                                                                                                                                                                               |                            |         |                   |        
|                                                                                       | Accounts payable                                                                                                                                                                              |                            | $       | 10,781            |        
|                                                                                       | Deferred revenue                                                                                                                                                                              |                            |         | 8,142             |        
|                                                                                       | Accrued liabilities                                                                                                                                                                           |                            |         | 13,905            |        
|                                                                                       | Contract cancellation obligation                                                                                                                                                              |                            |         | 7,704             |        
|                                                                                       | Accrued interest payable                                                                                                                                                                      |                            |         | 2,061             |        
|                                                                                       |                                                                                                                                                                                               |                            |         |                   |        
|                                                                                       |                                                                                                                                                                                               | Total current liabilities  |         |                   | 42,593 
|Deferred rent                                                                          |                                                                                                                                                                                               |                            | 6,878   |                   |        
|Convertible subordinated notes                                                         |                                                                                                                                                                                               |                            | 249,873 |                   |        
|Other long-term liabilities                                                            |                                                                                                                                                                                               |                            | 3,051   |                   |        
|Redeemable convertible preferred stock, $0.0001 par value; 5,000,000 shares authorized |                                                                                                                                                                                               |                            |         |                   |        
|                                                                                       | Series A-1 50,000 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively; liquidation preference $50,000,000 at June 30, 2004 and December 31, 2003, respectively |                            |         | 49,869            |        
|                                                                                       | Series A-2 50,000 shares issued and outstanding at December 31, 2003; liquidation preference $50,000,000 at December 31, 2003; no shares outstanding at June 30, 2004                         |                            |         |                  |        
|Commitments                                                                            |                                                                                                                                                                                               |                            |         |                   |        
|Stockholders' equity:                                                                  |                                                                                                                                                                                               |                            |         |                   |        
|                                                                                       | Common stock, $0.0001 par value; 220,000,000 shares authorized; 88,841,919 and 88,262,457 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively                  |                            |         | 9                 |        
|                                                                                       | Additional paid-in capital                                                                                                                                                                    |                            |         | 972,160           |        
|                                                                                       | Accumulated other comprehensive income                                                                                                                                                        |                            |         | 4,876             |        
|                                                                                       | Accumulated deficit                                                                                                                                                                           |                            |         | (666,965          | )      
|                                                                                       |                                                                                                                                                                                               |                            |         |                   |        
|                                                                                       |                                                                                                                                                                                               | Total stockholders' equity |         |                   | 310,080
|                                                                                       |                                                                                                                                                                                               |                            |         |                   |        
|                                                                                       |                                                                                                                                                                                               | $                          | 662,344 |                   | $      
|                                                                                       |                                                                                                                                                                                               |                            |         |                   |        

See accompanying notes

3

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ABGENIX, INC.  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)  (unaudited)

|                                                              |                                                                                   | Three Months Ended June 30,  |         | Six Months Ended June 30, |       
|------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------- | ------- | ------------------------- | ------
|
|Revenues:                                                     |                                                                                   |                              |         |                           |       
|                                                              | Contract revenue                                                                  |                              | $       | 4,189                     |       
|                                                              | Contract manufacturing revenue                                                    |                              |         | 1,325                     |       
|                                                              |                                                                                   |                              |         |                           |       
|                                                              |                                                                                   | Total revenue                |         |                           | 5,514 
|                                                              |                                                                                   |                              |         |                           |       
|Operating expenses:                                           |                                                                                   |                              |         |                           |       
|                                                              | Cost of goods manufactured                                                        |                              |         | 1,857                     |       
|                                                              | Research and development                                                          |                              |         | 36,148                    |       
|                                                              | Manufacturing start-up costs                                                      |                              |         | 2,790                     |       
|                                                              | Amortization of identified intangible assets, related to research and development |                              |         | 1,791                     |       
|                                                              | General and administrative                                                        |                              |         | 6,477                     |       
|                                                              | Impairment of intangible assets                                                   |                              |         | 17,241                    |       
|                                                              |                                                                                   |                              |         |                           |       
|                                                              |                                                                                   | Total operating expenses     |         |                           | 66,304
|                                                              |                                                                                   |                              |         |                           |       
|Loss from operations                                          |                                                                                   |                              | (60,790 | )                         |       
|Other income (expense):                                       |                                                                                   |                              |         |                           |       
|                                                              | Interest and other income                                                         |                              |         | 1,814                     |       
|                                                              | Interest expense                                                                  |                              |         | (1,647                    | )     
|                                                              |                                                                                   |                              |         |                           |       
|                                                              |                                                                                   | Total other income (expense) |         |                           | 167   
|                                                              |                                                                                   |                              |         |                           |       
|Loss before income tax expense                                |                                                                                   |                              | (60,623 | )                         |       
|                                                              | Foreign income tax expense                                                        |                              |         |                          |       
|                                                              |                                                                                   |                              |         |                           |       
|Net loss                                                      |                                                                                   | $                            | (60,623 | )                         | $     
|                                                              |                                                                                   |                              |         |                           |       
|Basic and diluted net loss per share                          |                                                                                   | $                            | (0.68   | )                         | $     
|                                                              |                                                                                   |                              |         |                           |       
|Shares used in computing basic and diluted net loss per share |                                                                                   |                              | 88,673  |                           |       
|                                                              |                                                                                   |                              |         |                           |       

See
accompanying notes

4

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ABGENIX, INC.  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)  (unaudited)

|                                                                            |                                              | Six Months Ended June 30,                 |         
|--------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | --------
|
|Operating activities                                                        |                                              |                                           |         
|Net loss                                                                    |                                              | $                                         | (102,189
|Adjustments to reconcile net loss to net cash used in operating activities: |                                              |                                           |         
|                                                                            | Depreciation                                 |                                           |         
|                                                                            | Amortization of identified intangible assets |                                           |         
|                                                                            | Impairment of identified intangible asset    |                                           |         
|                                                                            | Amortization of debt issuance cost           |                                           |         
|                                                                            | Loss on sale of equipment                    |                                           |         
|                                                                            | Changes for certain assets and liabilities:  |                                           |         
|                                                                            |                                              | Interest receivable                       |         
|                                                                            |                                              | Accounts receivable                       |         
|                                                                            |                                              | Inventories                               |         
|                                                                            |                                              | Prepaid expenses and other current assets |         
|                                                                            |                                              | Deposits and other assets                 |         
|                                                                            |                                              | Accounts payable                          |         
|                                                                            |                                              | Deferred revenue                          |         
|                                                                            |                                              | Accrued liabilities                       |         
|                                                                            |                                              | Contract cancellation obligation          |         
|                                                                            |                                              | Deferred rent                             |         
|                                                                            |                                              | Other long-term liabilities               |         
|                                                                            |                                              |                                           |         
|Net cash used in operating activities                                       |                                              |                                           | (75,543 
|                                                                            |                                              |                                           |         
|Investing activities                                                        |                                              |                                           |         
|Purchases of marketable securities                                          |                                              |                                           | (110,878
|Maturities of marketable securities                                         |                                              |                                           | 37,210  
|Sales of marketable securities                                              |                                              |                                           | 140,911 
|Purchases of property and equipment                                         |                                              |                                           | (4,573  
|Sale of equipment                                                           |                                              |                                           | 3       
|                                                                            |                                              |                                           |         
|Net cash provided by/(used in) investing activities                         |                                              |                                           | 62,673  
|                                                                            |                                              |                                           |         
|Financing activities                                                        |                                              |                                           |         
|Net proceeds from issuances of common stock                                 |                                              |                                           | 3,238   
|                                                                            |                                              |                                           |         
|Net cash provided by financing activities                                   |                                              |                                           | 3,238   
|                                                                            |                                              |                                           |         
|Net decrease in cash and cash equivalents                                   |                                              |                                           | (9,632  
|Cash and cash equivalents at beginning of period                            |                                              |                                           | 19,141  
|                                                                            |                                              |                                           |         
|Cash and cash equivalents at end of period                                  |                                              | $                                         | 9,509   
|                                                                            |                                              |                                           |         

See
accompanying notes

5

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ABGENIX, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  June 30, 2004  (unaudited)

1.    Basis of Presentation and Summary of Significant Accounting Policies

Basis of PresentationThe unaudited condensed consolidated financial statements of
Abgenix, Inc. (the "Company" or "Abgenix") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information or footnote
disclosure normally included in annual financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to such rules and regulations.
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present
fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2003, and
accompanying notes included in the Company's annual report as filed on Form 10-K with the Securities and Exchange Commission. The results of operations for the three months and six
months ended June 30, 2004, are not necessarily indicative of the results to be expected for the full year or for any other future period.

Foreign ExchangeAccounts denominated in foreign currency have been remeasured using the U.S. dollar as the functional
currency. The aggregate exchange gain/loss included in determining net loss was a $247,000 exchange gain in the three months June 30, 2004 and a $455,000 exchange loss in the six months ended
June 30, 2004 compared to an exchange gain of $130,000 and $174,000, respectively, in the three and six months ended June 30, 2003.

ConsolidationIn January 2003, the FASB issued Interpretation No. 46 (the "Interpretation"), Consolidation of
Variable Interest Entities. The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's
expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. The interpretation was effective immediately for
variable interests created after January 31, 2003. The Company adopted the remaining provision of the Interpretation, pertaining to variable interests existing prior to January 31, 2003,
in the quarter ending March 31, 2004. The adoption of the Interpretation did not have a material impact on the results of operations and the financial position of the Company. Significant
intercompany accounts and transactions have been eliminated.

Revenue RecognitionThe Company receives payments from customers for license, option, service and milestone fees, as well as
for contract manufacturing the Company performs. These payments are generally non-refundable but are reported as deferred revenue until they are recognizable as revenue. The Company has
followed the following principles in recognizing revenue:



6

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Stock-Based CompensationThe Company accounts for stock-based awards to employees and directors using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company does not recognize compensation expense for employee
stock options granted at fair market value. For purposes of disclosures pursuant to Statement of Financial Accounting Standards (SFAS 123), as amended by SFAS 148, the estimated fair
value of options is amortized to expense on a straight-line basis over the options' vesting period. The following table illustrates what the net loss would have been had the

7

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Company
accounted for its stock-based awards under the provisions of SFAS 123. Pro forma amounts may not be representative of future periods.

|                                                                                                                                                                     |  | Three Months Ended
June 30, |         | Six Months Ended
June 30, |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | ------------------------- | -
|
|
|Net loss                                                                                                                                                             |  | $                           | (60,623 | )                         | $
|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 |  |                             | (12,055 | )                         |  
|                                                                                                                                                                     |  |                             |         |                           |  
|Pro forma net loss as if the fair value based method had been applied to all awards                                                                                  |  |                             | (72,678 | )                         | $
|                                                                                                                                                                     |  |                             |         |                           |  
|Basic and diluted net loss per share as reported                                                                                                                     |  | $                           | (0.68   | )                         | $
|                                                                                                                                                                     |  |                             |         |                           |  
|Pro forma basic and diluted loss per share                                                                                                                           |  | $                           | (0.82   | )                         | $
|                                                                                                                                                                     |  |                             |         |                           |  

The
fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the three months and
six months ended June 30, 2004 and 2003:

|                                                                    |  | Three Months Ended
June 30, |   | Six Months Ended
June 30, |  
|------------------------------------------------------------------- |  | --------------------------- | - | ------------------------- | -
|
|Risk-free interest rate                                             |  | 4.03                        | % | 2.75                      | %
|Dividend yield                                                      |  | 0.0                         | % | 0.0                       | %
|Volatility factors of the expected market price of our
Common Stock |  | 0.90                        |   | 1.01                      |  
|Weighted-average expected life of option (years)                    |  | 5.67                        |   | 5.51                      |  

These
same assumptions were applied in the determination of the option values related to stock options granted to non-employees, except the option life, for which the term of
the consulting contracts, 1 to 5 years, was used. The value has been recorded in the financial statements.

Net Loss Per ShareBasic net loss per share is calculated based on the weighted-average number of shares outstanding during
the period. The impact of common stock options, warrants and shares issuable upon the conversion of convertible subordinated notes and the redeemable convertible preferred stock was excluded from the
computation of diluted net loss per share, as their effect is antidilutive for the periods presented.

ReclassificationsCertain prior period balances may have been reclassified to conform to the current period presentation.

8

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2.    Comprehensive Income (Loss)

Other comprehensive income/(losses) consist of unrealized gains or losses on available-for-sale securities. The components of
comprehensive loss, net of tax, were as follows:

|                                   |                                                         | Three Months Ended
June 30, |         | Six Months Ended
June 30, |  
|---------------------------------- | ------------------------------------------------------- | --------------------------- | ------- | ------------------------- | -
|
|
|Net loss                           |                                                         | $                           | (60,623 | )                         | $
|Other comprehensive income (loss): |                                                         |                             |         |                           |  
|                                   | Unrealized holding gains (losses) arising during period |                             |         | (2,880                    | )
|                                   |                                                         |                             |         |                           |  
|Comprehensive loss                 |                                                         | $                           | (63,503 | )                         | $
|                                   |                                                         |                             |         |                           |  

3.    Impairment of Identified Intangible Assets and Balances

During the three months ended June 30, 2004, management determined that an impairment of the Company's acquired technology in the field of catalytic
antibodies had occurred and that the estimated value had declined to zero. This technology, which includes intellectual property, was acquired in 2001 through the acquisition of Hesed
Biomed, Inc. The Company decided to focus its resources on other research and development projects and decided to wind down its catalytic antibody program. Additionally, after assessing the
associated patent position and the likelihood of sale or license of the technology to a third party, management further determined in the three months ended June 30, 2004 that the possibility
of generating positive future cash flows from the technology was remote. As a result of this determination, the Company recorded an impairment charge of $17.2 million in the quarter ended
June 30, 2004.

During
the six months ended June 30, 2003, the Company decided to discontinue the development of anti-properdin antibodies. As a result, the Company recorded an
impairment charge of $1.4 million for previously capitalized costs related to licenses and research funding for the development of therapeutic antibodies to the complement protein properdin,
which the Company licensed from Gliatech, Inc.

Identified
intangible assets consisted of the following (in thousands):

|                                         |  | Gross
Assets |         | Accumulated
Amortization |   | Net   
|---------------------------------------- |  | ------------ | ------- | ------------------------ | - | ------
|As of June 30, 2004:                     |  |              |         |                          |   |       
|Acquisition-related developed technology |  | $            | 85,143  |                          | $ | 23,428
|Other intangible assets                  |  |              | 1,442   |                          |   | 265   
|                                         |  |              |         |                          |   |       
|Identified intangible assets             |  | $            | 86,585  |                          | $ | 23,693
|                                         |  |              |         |                          |   |       
|As of December 31, 2003:                 |  |              |         |                          |   |       
|Acquisition-related developed technology |  | $            | 106,183 |                          | $ | 23,689
|Other intangible assets                  |  |              | 1,442   |                          |   | 220   
|                                         |  |              |         |                          |   |       
|Identified intangible assets             |  | $            | 107,625 |                          | $ | 23,909
|                                         |  |              |         |                          |   |       

Amortization
of acquisition-related intangibles was approximately $1.8 million and $3.6 million, respectively, in each of the three and six months periods ended
June 30, 2004 and 2003. Amortization of other intangible assets was approximately $22,000 and $45,000, respectively, for the three and six months ended June 30, 2004 and $22,000 and
$68,000, respectively, for the three and six months ended June 30, 2003.

9

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Expected
amortization expense related to identified intangible assets for the six-month period from July 1, 2004 to December 31, 2004, and each of the fiscal
years thereafter is as follows (in thousands):

|                                |  | Periods Ending December 31, |       |  |   |      
|------------------------------- |  | --------------------------- | ----- |  | - | -----
|
|Acquisition-related intangibles |  | $                           | 2,837 |  | $ | 5,674
|Other intangible assets         |  | $                           | 45    |  | $ | 90   

4.    Segment Information

The operations of the Company and its wholly owned subsidiaries constitute one business segment.

Information
about customers who provided 10% or more of contract revenues for the period is as follows:

Period

Number of Customers and Percentage of
Contract Revenues for each of the CustomersThree months ended June 30, 2004

3 customers, 42%, 26% and 24%, respectivelySix months ended June 30, 2004

3 customers, 33%, 30% and 20%, respectivelyThree months ended June 30, 2003

4 customers, 35%, 24%, 11% and 11%, respectivelySix months ended June 30, 2003

3 customers, 35%, 16% and 13%, respectively


5.    Convertible Subordinated Note

In October 2003, in connection with a collaboration agreement, the Company entered into a securities purchase agreement with AstraZeneca. Pursuant to the
agreement, the Company issued to AstraZeneca $50.0 million of Series A-1 convertible preferred stock and $50.0 million of Series A-2 convertible
preferred stock. The net proceeds from the securities were $99.7 million. Pursuant to its terms, the Series A-2 preferred stock was redeemed at the option of AstraZeneca on
February 19, 2004 and the Company issued AstraZeneca a convertible subordinated note with a principal amount of $50.0 million, which matures on October 29, 2013. No interest is
payable on the note except in the event of a payment default by the Company.



The Company, subject to certain conditions, can convert the convertible subordinated note into shares of common stock at a conversion price equal to the lower of
(a) the average market price for the 10 days prior to the trading day immediately preceding the conversion date (provided that the average market price shall in no event be higher than
101% of the market price on the trading day immediately preceding the conversion date) or (b) $30.00 per share.

AstraZeneca
may convert the convertible subordinated note into shares of common stock at a conversion price of $30.00 per share, at any time prior to the repayment of the principal
amount of the note.



The convertible subordinated note matures on October 29, 2013, if still outstanding. The Company can, upon 15 days notice to the holder repay the
principal amount of the convertible subordinated note in cash.

AstraZeneca
has the right to require Abgenix to repay the convertible subordinated note at its face amount, upon the occurrence of a change in control of Abgenix after the completion of
a defined

10

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research
period. At its option, and subject to certain conditions, Abgenix may deliver shares of its common stock in lieu of cash upon such an event.

AstraZeneca
has the right to require Abgenix to repay a specified portion of the convertible subordinated note upon the occurrence of (a) a material breach by Abgenix of a
material obligation under the Collaboration Agreement between the Company and AstraZeneca or (b) a change in control of Abgenix or an acquisition by Abgenix in which the other party to the
change in control or acquisition, as the case may be, is a competitor of AstraZeneca, in each case that occurs during a defined research period and results in AstraZeneca's termination of all research
programs and future programs under the collaboration agreement. The amount that AstraZeneca may require Abgenix to redeem will be based upon the extent of completion of the research programs that are
the subject of the collaboration between the Company and AstraZeneca. At its option, and subject to certain conditions, Abgenix may deliver shares of its common stock in lieu of cash upon such events.

Upon
the occurrence of certain events of default, (1) the holders of the convertible subordinated note shall have the right to make the entire outstanding principal amount of the
note due and payable and (2) if the event of default is a payment default, quarterly interest payments shall begin to accrue on the convertible subordinated note at a default rate equal to the
10-year U.S. treasury rate plus three percent (3%) compounded annually. Events of default for purposes of this provision include, but are not limited to, the following (i) a failure
to make a required payment, or a breach by the Company of any of the Company's other obligations under, the Series A-1 preferred stock, the convertible subordinated note or any
subordinated promissory note that may be issued by the Company in the circumstances described below under "Aggregate ownership limitation"; (ii) a breach of the Company of specified obligations
under the securities purchase agreement with AstraZeneca; (iii) the securities purchase agreement, or any other agreement or instrument contemplated by the securities purchase agreement, is
asserted by the Company not to be a legal, valid and binding instrument; (iv) certain bankruptcy and insolvency events involving the Company; and (v) a cross-acceleration of
$25 million or more of other indebtedness of the Company.



The convertible subordinated note has an aggregate principal amount of $50 million. The convertible note does not have any voting rights unless it is
converted into common stock and will not bear any interest unless there is an occurrence of a default that is a payment default. Upon an event of default
that is a payment default, the convertible note will bear interest at a rate equal to the 10-year U.S. treasury rate plus 3% compounded annually.

The
convertible subordinated note is senior to the preferred stock and the common stock and is junior to all senior indebtedness and to the Company's 3.5% convertible subordinated notes
due in 2007.



At no time may any holder of the convertible subordinated note beneficially own, following the conversion of the convertible subordinated note, more than 19.9% of
the Company's common stock then outstanding. If any shares of common stock are issuable to a holder upon conversion of the convertible subordinated note that would result in any holder (together with
its affiliates) owning common stock in excess of the ownership threshold described above, then the Company will be required to redeem the shares in excess of the ownership threshold for a price equal
to (1) the number of such excess shares times (2) the average market price of the common stock for the 30 consecutive days ending on the 15th trading day prior to the
conversion date (such price, the "Excess Shares Redemption Price"). Upon such a redemption of the shares issuable upon conversion of the convertible subordinated note, the Company will have the right,
upon delivery of notice to the holder, to receive a

11

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loan
from the holder in the form of interest-free subordinated promissory note. The face amount of the promissory note shall be the Excess Shares Redemption Price.

6.    Inventories

Inventories consist of materials related to a production service agreement with a collaborator. Inventory cost is computed on a weighted-average cost basis and
stated at lower of cost or market. Inventories at period end were as follows:

June 30, 2004

December 31, 2003(in thousands)Raw material

$
38

$
Finished goods


332


$
370

$



7.    Other Long-Term Liabilities

In 2000, the Company entered into a joint development and commercialization agreement with Immunex Corporation, a wholly-owned subsidiary of Amgen, Inc.,
for the co-development of ABX-EGF, now known as panitumumab, a fully human antibody the Company created. The parties amended this agreement in October 2003. Under the
amended agreement, Immunex has decision-making authority for development and commercialization activities. As under the original agreement, the Company is obligated to pay 50% of the development and
commercialization costs and is entitled to receive 50% of any profits from sales of panitumumab. Under the amended agreement, Immunex is required to make available up to $60.0 million in
advances that the Company may use to fund a portion of its share of development and commercialization costs for panitumumab after the Company has contributed $20.0 million toward development
costs in 2004. As of June 30, 2004, the Company has drawn $3.1 million upon this credit facility and has notified Immunex of its intent to draw a cash advance of an additional
$4.1 million. The Company expects to continue to make use of this credit facility in 2004 and thereafter up to the $60.0 million limit. The amount and timing of the use of the facility
is dependent on the development and related activities directed by Immunex and their cost. The interest rate on this facility is 12% per annum. The amount of any such advances, plus interest, may be
repaid out of profits resulting from future product sales; however, the Company is not obligated to repay any portion of the outstanding balance if panitumumab does not reach commercialization.

12

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements based upon current expectations that involve risks and uncertainties. In this quarterly report on
Form 10-Q, the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and similar expressions as they relate to Abgenix are
included to identify forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those set forth below and under the heading "Additional Factors that Might
Affect Future Results". In this quarterly report on Form 10-Q, references to "Abgenix," we," "us," and "our" are to Abgenix, Inc. and its
subsidiaries.

Overview

The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand our company.



We are a biopharmaceutical company that is focused on the discovery, development and manufacture of human therapeutic antibodies for the treatment of a variety of
diseases. We intend to use our proprietary technologies to build a large and diversified product portfolio that we expect to develop and commercialize largely through joint development and
commercialization arrangements with pharmaceutical companies and others.

We
are co-developing our most advanced proprietary product candidate, panitumumab (formerly known as ABX-EGF), with Immunex Corporation, a wholly-owned subsidiary
of Amgen, Inc. Panitumumab is in pivotal trials, and we have two product candidates in early stage clinical trials. In addition, we have entered into a variety of contractual arrangements with
pharmaceutical, biotechnology and genomics companies involving our technologies. We use our closely integrated process sciences and manufacturing capabilities for the manufacture of our own
proprietary product candidates and also offer these services to our collaborators and others.

We
intend to enter into co-development agreements in addition to our agreement for panitumumab and our other co-development arrangements discussed below. We
generally expect to self-fund preclinical and clinical activities to determine preliminary safety and efficacy before entering into joint development and commercialization agreements. In
some cases we may conduct product development entirely on our own. We are implementing our collaboration strategy through co-development arrangements with companies such as Chugai
Pharmaceuticals Co., Ltd., U3 Pharma AG and Dendreon Corporation, and through a broad collaboration in oncology with AstraZeneca UK Limited. Our strategy is designed to diversify the risks
associated with our research and development spending and to continue to focus our activities on product development and commercialization.

Under
our collaboration agreement with AstraZeneca, we are obligated to provide preclinical and clinical research support for the development of up to 36 product candidates by
AstraZeneca and have an opportunity to co-develop products with AstraZeneca.



We derive our revenues from our technology out-licensing contracts, our proprietary product development agreements, our target sourcing contracts and
our production services contracts. We expect that substantially all of our revenues for the foreseeable future will result from payments under these and similar arrangements and that payments we
receive under these arrangements will continue to be subject to significant fluctuation in both timing and amount.

13

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We
have incurred and expect to continue to incur substantial expenses in connection with our product development activities, both under contractual arrangements with third parties and
related to our independent research and development efforts. Regulatory and business factors will require us to expend substantial funds in the course of completing required additional research on,
preclinical testing and clinical trials of, and attaining regulatory approvals for, product candidates. The amounts of the expenditures that will be necessary to execute our business plan are subject
to numerous uncertainties that may adversely affect our liquidity and capital resources.

We
have incurred net losses since we were organized as an independent company, including a net loss of $60.6 million for the six months ended June 30, 2004. We expect to
incur additional losses for the foreseeable future as a result of our research and development costs and manufacturing start-up costs, including costs associated with conducting
preclinical development and clinical trials, and charges related to purchases of technology or other assets. We expect that the amount of our operating losses will fluctuate significantly from quarter
to quarter.

As
of June 30, 2004, we had cash, cash equivalents and marketable securities of $269.1 million. The amounts of the expenditures that will be necessary to execute our
business plan are subject to numerous uncertainties that may adversely affect our liquidity and capital resources to a significant extent. We plan to continue to make significant expenditures to
establish, staff and operate our own manufacturing facility and support our research and development activities, including preclinical product development and clinical trials. We expect that these
activities will substantially increase our operating expenses over the next few years in comparison to prior periods.



We have entered into a variety of contractual arrangements covering numerous antigens with more than thirty customers to use our XenoMouse® and
XenoMax technologies to generate and/or develop the resulting fully human antibodies. Pursuant to our XenoMouse contracts, we and our customers intend to generate antibodies for
development as product candidates for the treatment of cancer, inflammation, autoimmune diseases, cardiovascular disease, growth factor modulation, neurological diseases, metabolic diseases and
infectious diseases. We have also entered into contracts with two customers to provide process sciences and manufacturing services. We expect that substantially all of our revenues for the foreseeable
future will result from payments under these and other contracts. We have also licensed technology from third parties for use in conjunction with our proprietary technologies. The terms of our current
contractual arrangements vary, but can generally be categorized as follows:



14

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15

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16

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As of June 30, 2004, three of our antibody therapeutic product candidates were in ongoing clinical trials.



17

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"Phase
1" indicates safety and pharmacokinetics testing in a limited patient population. "Phase 2" indicates safety, dosing and efficacy testing in a limited patient population. "Phase
3" indicates efficacy and safety testing in a larger patient population. A "pivotal study" is designed to meet registration requirements. Phase 3 studies designed for registration purposes are
considered pivotal studies. Certain Phase 2 studies can be pivotal studies.

We
have entered into a broad collaboration with AstraZeneca for the development of antibody therapeutics for the treatment of oncology pursuant to which we have an opportunity to
co-develop products with AstraZeneca, as well as provide preclinical and clinical research support for the development of product candidates by AstraZeneca. In addition, we have entered
into co-development agreements for the joint development of antibody product candidates with a variety of companies

18

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including
Chugai and Sosei. We intend to enter into additional joint development agreements for other product candidates.

We
will expend significant capital to conduct clinical trials or share in the costs of conducting clinical trials for our proprietary product candidates. We expect that this will
substantially increase our operating expenses over the next few years in comparison to prior periods.

In
addition to our proprietary antibody therapeutic product candidates in clinical trials, there are four customer-developed antibodies generated with XenoMouse technology in clinical
trials as follows:



Results of Operations

Three Months and Six Months Ended June 30, 2004 and 2003



Contract revenues totaled $4.2 million and $7.1 million, respectively, in the three months and six months ended June 30, 2004, compared to
$2.4 million and $8.5 million, respectively, in the comparable 2003 periods. Because contract revenues depend to a large extent on the success or failure of research and development
efforts undertaken by our collaborators and licensees, our period-to-period contract revenues can fluctuate significantly and are inherently difficult to predict.

The
primary components of contract revenues for both periods were as follows:



19

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Contract manufacturing revenues totaled $1.3 million in the three and six months ended June 30, 2004. These revenues consisted primarily of
manufacturing services for the manufacture of an antibody product for a customer under a production services agreement. In the three and six months ended June 30, 2003, we did not recognize any
revenues from manufacturing services.



Cost of goods manufactured was $1.9 million in the three and six months ended June 30, 2004. Cost of goods manufactured included material, direct
labor, outside testing and overhead costs associated with manufacturing an antibody product for a customer under a production services agreement. In the three and six months ended June 30,
2003, we did not have any cost of goods manufactured.



Research and development expenses were $36.1 million and $64.6 million, respectively, in the three and six months ended June 30, 2004,
compared to $20.7 million and $40.5 million, respectively, in the comparable 2003 periods. The major components of research and development expenses were as follows:

Research
and Development:

|                                     |  | Three months ended
June 30, |        | Six months ended
June 30,
|------------------------------------ |  | --------------------------- | ------ | -------------------------
|
|Product development                  |  | $                           | 26,040 |                          
|Research                             |  |                             | 8,591  |                          
|In-licensing                         |  |                             | 1,517  |                          
|                                     |  |                             |        |                          
|Total research and development costs |  | $                           | 36,148 |                          
|                                     |  |                             |        |                          

20

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Product
development costs include costs of preclinical development, cell line development, manufacturing and conducting clinical trials for our proprietary product candidates.
Additionally, product development includes costs related to cell line development activities we perform under our production services contracts. The primary components of product development include
the costs of Abgenix personnel, drug supply costs, research fees charged by outside contractors, co-development costs, and facility expenses, including depreciation. In the three and six
months ended June 30, 2004, our product development costs increased in comparison to the same periods in 2003, primarily due to a significant increase in the development costs for the
panitumumab program. To a lesser extent the increase was due to costs related to new preclinical and clinical product candidates including ABX-PTH. Offsetting some of the increase in
product development costs were decreases in development costs, primarily for ABX-CBL and ABX-IL8, for which we have discontinued development. Product development costs can vary
from period to period significantly depending on the development activities in the period. Overall, we expect costs associated with product development in 2004 to be higher than 2003 as we and our
co-developer Immunex initiate new trials and add patients to our existing panitumumab clinical trials.

Research
costs include costs associated with research and testing of antibodies we generate, whether for ourselves or for our customers, prior to the development stage which begins with
the commencement of preclinical activities. Research costs also include the costs of research relating to proprietary technologies, including enhancements to those technologies. The primary components
of research costs include the costs of Abgenix personnel, facilities, including depreciation, and lab supplies. Our research costs have generally remained at the same levels in the three and six
months ended June 30, 2004 as compared to the same periods in 2003.

In-licensing
costs include costs to acquire licenses to develop and commercialize various technologies and molecules. In the three months ended June 30, 2004,
in-licensing costs increased as compared to the same period in 2003 primarily due to licensing charges from arrangements with academic institutions and others. In the six months ended
June 30, 2004, in-licensing costs were comparable to the same period in 2003.

Major
components of research and development costs for the three and six months ended June 30, 2004 and 2003 were as follows:



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The
clinical trial status of product candidates included in product development costs is as follows as of June 30 for each of the years indicated:

|                      |  |                                                                                                                                                                                           |  | Clinical Trial Status as of
June 30,                                   | 
|--------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------- | 
|
|
|Panitumumab
(ABX-EGF) |  | Various cancers
Renal cell cancer
Non-small cell lung cancer
Colorectal cancer
Colorectal cancer (with chemotherapy)
Prostate cancer
Colorectal cancer (outside the US)
Colorectal cancer |  | Phase 1
Phase 2
Phase 2(1)
Phase 2(1)
Phase 2(1)
Pivotal(1)
Pivotal(1) | 
|ABX-MA1
ABX-PTH       |  | Metastatic melanoma
Secondary hyperparathyroidism                                                                                                                                         |  | Phase 1
Phase 1                                                        | 

---



Manufacturing start-up costs were $2.8 million and $10.1 million, respectively, in the three and six months ended June 30, 2004,
compared to the $41.3 million and $52.8 million, respectively, in the comparable 2003 periods. Manufacturing start-up costs include certain costs associated with our new
manufacturing facility, including depreciation, outside contractor costs and personnel costs for activities such as quality assurance and quality control. The primary component of this cost in the
three and six months ended June 30, 2003 was a fee of approximately $28.0 million for the negotiated cancellation of a manufacturing supply agreement with an outside contractor, Lonza
Biologics plc. The manufacturing agreement was for a production suite held exclusively for us, which we were not using. In addition to the absence of the cancellation fee in 2004, the decrease in the
three and six months ended June 30, 2004 as compared to the same periods in 2003 was primarily due to the increased use of our manufacturing facility for development activities, including
process validation for the manufacture of panitumumab conformance lots.

We
expect our manufacturing facility to be under-utilized in 2004 and therefore we will continue to incur manufacturing start-up costs through the remainder of 2004. For the
year ending December 31, 2004 we expect manufacturing start-up costs to decrease compared to 2003 as a result of expensing the Lonza cancellation fee in 2003 and the increased
utilization of the facility in 2004. However, manufacturing start-up costs may increase in the second half of 2004 as compared to the first half of

22

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2004
depending on the number of lots of panitumumab and other product candidates we manufacture in the remainder of 2004.



Our identified intangible assets consist primarily of existing technology (including patents and certain royalty rights) we acquired through the acquisitions of
Hesed Biomed Inc. in 2001, Abgenix Biopharma and IntraImmune in 2000, and JT America's interest in Xenotech in 1999. Amortization of intangible assets totaled $1.8 million and
$3.6 million, respectively, in each of the three and six months ended June 30, 2004 and $1.8 million and $3.6 million for the three and six months ended June 30,
2003. As of June 30, 2004, we had written off the remaining value of the intangible assets acquired in the Hesed Biomed acquisition and therefore amortization of intangible assets is expected
to decrease for the remainder of the year.



General and administrative expenses include compensation, professional services, consulting, facilities, including depreciation, and other expenses related to
legal, finance and information systems. General and administrative expenses totaled $6.5 million and $13.4 million, respectively, in the three and six months ended June 30, 2004
and $6.5 million and $13.4 million, respectively, in the three and six months ended June 30, 2003. We expect general and administrative costs in the second half of 2004 to
increase as compared to the first half of 2004.



During the three months ended June 30, 2004, we determined that an impairment of the Company's acquired technology in the field of catalytic antibodies had
occurred and that the estimated value had declined to zero. This technology, which includes intellectual property, was acquired in 2001 through the acquisition of Hesed Biomed, Inc. We decided
to focus its resources on other research and development projects and decided to wind down our catalytic antibody program. Additionally, after assessing the associated patent position and the
likelihood of sale or license of the technology to a third party, we further determined in the three months ended June 30, 2004 that the possibility of generating positive future cash flows
from the technology was remote. As a result of this determination, we recorded an impairment charge of $17.2 million in the quarter ended June 30, 2004.

In
the first quarter of 2003, we decided to discontinue the development of anti-properdin antibodies. As a result, we recorded an impairment charge of $1.4 million for
previously capitalized costs related to licenses and research funding for the development of therapeutic antibodies to the complement protein properdin, which we licensed from Gliatech, Inc.



Interest and other income consist primarily of interest from cash, cash equivalents and marketable securities. Interest and other income decreased to
$1.8 million and $3.5 million, respectively, in the three and six months ended June 30, 2004, compared to $2.8 million and $6.0 million, respectively, in the
comparable 2003 periods. The decrease was primarily the result of lower interest rates, and lower average cash, marketable securities and cash equivalent balances in the second quarter of 2004 as
compared to 2003.



Interest expense was primarily related to interest and amortization of issuance costs on our convertible subordinated notes due 2007. In the three and six months
ended June 30, 2004, interest expense increased to $1.6 million and $3.3 million, respectively, as compared to $1.5 million and

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$2.5 million
in the same period in 2003, as a result of a decrease in the amount of capitalized interest. The amount of interest capitalized decreased in the three and six months ended
June 30, 2004 compared to the same periods in 2003 because we placed into service a portion of our manufacturing facility in the second quarter of 2003 when we began manufacturing antibody
therapeutic candidates in that portion of the facility. Interest expense was capitalized in the amount of $0.4 million and $0.8 million, respectively, in the three and six months ended
June 30, 2004, compared to $0.6 million and $1.7 million, respectively, in the comparable 2003 periods. For each future quarterly period, we expect to accrue approximately
$1.8 million of interest expense related to our convertible subordinated notes due 2007 until the debt matures, until we redeem or repurchase the debt or until all or part of the debt is
converted into shares of our common stock. Additionally, we expect to accrue interest at 12% on the amounts we draw on our credit facility with Immunex until we repay the balance in full. The amount
of any such advances, plus interest, may be repaid out of profits resulting from future product sales; however, we are not obligated to repay any portion of the outstanding balance if panitumumab does
not reach commercialization.



Foreign income tax expense was recorded reflecting an income tax provision on foreign contract research projects of zero in both the three and six months ended
June 30, 2004, compared to zero and $84,000, respectively, in comparable 2003 periods.

Liquidity and Capital Resources

At June 30, 2004, we had cash, cash equivalents and marketable securities of approximately $269.1 million. We invest our cash equivalents and
marketable securities primarily in highly liquid, interest bearing, investment grade and government securities in order to preserve principal. We have also invested in certain marketable equity
securities of ImmunoGen and CuraGen for strategic reasons. These securities had an aggregate fair value of $18.5 million at June 30, 2004.

Cash Used in Operating Activities.Net cash used in operating activities was $75.5 million and $62.7 million in
the six months ended June 30, 2004, and 2003, respectively. The major components of the change in cash used in operating activities in the six months ended June 30, 2004, compared to the
same period in 2003, were primarily the following:



Cash Provided by Investing Activities.Net cash provided by investing activities was $62.7 million in the six months
ended June 30, 2004 as compared to the $112.1 million net used in investing activities in the six months ended June 30, 2003. Cash was provided by and used in investing activities
primarily as follows:

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Cash Provided by Financing Activities.During the six months ended June 30, 2004 and 2003, net cash provided by
financing activities was $3.2 million and $1.4 million, respectively, consisting of proceeds from the exercise of stock options and the issuance of stock under our employee stock
purchase plan.

In
October 2003, in connection with a collaboration agreement, we entered into a securities purchase agreement with AstraZeneca. Pursuant to the agreement, we issued to
AstraZeneca $50.0 million of Series A-1 convertible preferred stock and $50.0 million of Series A-2 convertible preferred stock. The net proceeds
from the securities were $99.7 million. Pursuant to its terms, the Series A-2 preferred stock was redeemed at the option of AstraZeneca in February 2004 and we issued
AstraZeneca a convertible subordinated note with a principal amount of $50.0 million, which matures on October 29, 2013. No interest is payable on the note except in the event of a
payment default by us. The Series A-1 preferred stock matures 7 years from the date of issuance. Due to the redemption feature, we do not record the redeemable convertible
preferred stock in stockholders' equity on our consolidated balance sheet. Subject to various terms and conditions, if a certain milestone event is reached, we will have the option to issue to
AstraZeneca up to $30.0 million of Series A-3 preferred stock and if a further milestone event is reached, we will have the option to issue to AstraZeneca up to
$30.0 million of Series A-4 preferred stock. Each of the Series A-3 preferred stock and the Series A-4 preferred stock will have a
maturity date that is five years from issuance.

Subject
to certain conditions, we can convert the preferred stock and can convert the convertible subordinated note into shares of our common stock at a conversion price equal to the
lower of (a) the average market price for the 10 days prior to the trading day immediately preceding the conversion date (provided that the average market price shall in no event be
higher than 101% of the market price on the trading day immediately preceding the conversion date) or (b) $30.00 per share. AstraZeneca may convert the preferred stock into shares of common
stock at a conversion price of $30.00 per share, at any time prior to the earlier of (a) the redemption date or (b) the maturity date. AstraZeneca may convert the convertible
subordinated note into shares of common stock at a conversion price of $30.00 per share, at any time prior to the repayment of the principal amount of the note. We must redeem all outstanding shares
of the Series A-1 preferred stock, if any, at a cash redemption price per share equal to the liquidation preference by October 29, 2010, the mandatory redemption date. The
note matures on October 29, 2013, if still outstanding. In addition, we can, upon at least 15 days' notice to the holder, redeem the shares of Series A-1 preferred
stock for cash in an amount equal to its liquidation preference at any time prior to maturity. We can, upon at least 15 days' notice to the holder, repay the principal amount of the convertible
subordinated note in cash, at any time prior to maturity. In addition to the mandatory redemption and maturity dates of these securities, certain events can give rise to an earlier redemption. In
certain circumstances, we have certain rights to convert the securities into common stock instead of redeeming the securities for cash.

In
March 2002, we issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of our common stock
at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5% and we are obligated to pay interest on March 15 and
September 15 of each year. The notes will

25

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mature
on March 15, 2007 and are redeemable at our option on or after March 20, 2005, or earlier if the price of our common stock exceeds specified levels. In addition, the holders of
the notes may require us to repurchase the notes if we undergo a change in control. Proceeds from the sale of the notes, net of commissions payable to the initial purchasers of the notes but before
subtracting other offering expenses payable by us, were $194.0 million.

In
March 2000 and February 2001, we obtained stand-by letters of credit for $2.0 million and $3.0 million, respectively, from a commercial bank as
security for our obligations under two facility leases. These were increased in January 2002 to $2.5 and $3.2 million, respectively, in connection with amendments to our facility leases.
In 2003, the $3.2 million stand-by letter of credit increased to $3.5 million. The outstanding stand-by letters of credit are secured by an investment account, in
which we must maintain a balance of approximately $7.0 million.

Financing Uncertainties Related to Our Business Plan.We plan to continue to make significant expenditures to establish,
staff and operate our own manufacturing facility and support our research and development activities, including preclinical product development and clinical trials. We also intend to look for
opportunities to acquire new technology through in-licensing, collaborations or acquisitions. Over the next six months, we estimate that we will spend approximately $15 to
$20 million on leasehold improvements, equipment, computer hardware and software for our new
manufacturing and our research and development facilities. Additionally, we may spend additional amounts to support new production services contracts.

We
currently intend to use our available cash on hand to finance these projects and business developments, but we might also pursue other financing alternatives, such as equity or
equity-related financing, a bank line of credit, sale-lease back financing, funding by one or more collaborators or a mortgage financing, that may become available to us. Whether we use
cash on hand or choose to obtain financing will depend on, among other things, the future success of our business, the prevailing interest rate environment and the condition of financial markets
generally.

The
amounts of the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties that may adversely affect our liquidity and capital resources to
a significant extent. As of June 30, 2004, three of our proprietary product candidates, panitumumab, ABX-MA1 and ABX-PTH were in various stages of clinical trials. The
clinical trials of panitumumab, ABX-MA1 and ABX-PTH are expected to require significant expenditures for the foreseeable future. In October 2003, we entered into an
amendment of our joint development and commercialization agreement with Immunex for the co-development of panitumumab. Under the amended agreement, Immunex is obligated to make available
up to $60.0 million in advances that we may use to fund a portion of our share of development and commercialization costs after we have contributed $20.0 million toward development costs
in 2004. We have drawn $3.1 million under this credit facility and have notified Immunex of our intent to draw a cash advance of an additional $4.1 million. We expect to continue to make
use of this credit facility in 2004 and thereafter up to the $60.0 million limit. The amount and timing of our use of the facility is dependent on the development and related activities
directed by Immunex and their cost. The interest rate on the facility is 12% per annum. Completion of clinical trials may take several years or more, but the length of time generally varies
substantially according to the type, complexity, novelty and intended use of a product candidate. We estimate that clinical trials of the type we generally conduct are typically completed over the
following timelines:

Clinical Phase

Estimated
Completion PeriodPhase 1

1-2 YearsPhase 2

1-2 YearsPhase 3

2-4 Years


26

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However,
the duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trials, including, among
others, the following:



We
test our potential product candidates in numerous preclinical studies to identify disease indications for which they may be product candidates. We may conduct multiple clinical trials
on our own or with
our collaborators to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for one
or more indications for a given product candidate in order to focus our resources on more promising product candidates or indications. For example, in January 2002 and May 2002, we
announced that clinical trials of our proprietary product candidate ABX-IL8 as a treatment for rheumatoid arthritis and psoriasis, respectively, did not support further clinical studies of
that product candidate. Additionally in February 2003, we announced that the clinical trial of our proprietary product candidate ABX-CBL as a treatment for graft versus host
disease, did not support further clinical studies of that product candidate.

An
important element of our business strategy is to pursue the research and development of a diverse range of product candidates for a variety of disease indications. We may enter
co-development agreements, similar to our agreement with Immunex for panitumumab, and may enter into additional joint development agreements earlier in the development life cycle of
product candidates. We are implementing our collaboration strategy through co-development arrangements with companies such as Chugai, U3 and Dendreon. Our strategy is designed to diversify
the risks associated with our research and development spending. The decisions to terminate or wind down our clinical programs for developing ABX-IL8 and ABX-CBL have reduced
the diversity of our product portfolio. We believe that this effect is temporary in view of the number and diversity of potential product candidates we have in preclinical development. For example, we
recently advanced ABX-PTH from the preclinical stage into a clinical study in patients with secondary hyperparathyrodism. To the extent, however, that we are unable to maintain a diverse
and broad range of product candidates, our success would depend to a greater extent on the success of one or a few product candidates.

Our
proprietary product candidates also have not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products. In order to proceed to
subsequent clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that our clinical data establish safety and efficacy. The number, size and type of clinical trials
we conduct for a particular product candidate are also affected by the policies of the FDA and European regulatory agencies regarding the availability of possible expedited approval procedures, which
we may seek to utilize. These policies may change from time to time. As we conduct clinical trials for a given product candidate, we may decide or the FDA may require us to make changes 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
materials is proposed, or competitive developments foreclosing the availability of expedited approval procedures. We may be required to support proposed changes with additional preclinical or clinical
testing, which could delay the expected time line for concluding clinical trials. In addition, the results from preclinical testing and early clinical trials have often not been predictive of results
obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to
obtain necessary regulatory approvals.

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Furthermore, our business strategy includes the option of entering into arrangements with third parties to collaborate in the development and commercialization of our products. In the
event that third parties take over the clinical trial process for one of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We
cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, or the extent to which third
parties may control clinical trials pursuant to such arrangements, and how such arrangements would affect our capital requirements.

As
a result of the uncertainties discussed above, among others, the duration and completion costs of our research and development projects are difficult to estimate and are subject to
considerable variation. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements when appropriate, could significantly
increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional sources of financing from time to time in order to continue with our
business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

We
also may be required to make further substantial expenditures if unforeseen difficulties arise in other parts of our business. In particular, our future liquidity and capital
requirements also will depend on many factors including:



We
believe that our current cash balances, cash equivalents, marketable securities, and the cash generated from our licensing and other agreements will be sufficient to meet our
operating and capital requirements for at least one year. However, because of the uncertainties in our business discussed above, among others, we cannot assure you that this will be the case. In
addition, we may choose to, or prevailing business conditions may require us to, obtain additional financing from time to time. We may choose to raise additional funds through public or private
financing, licensing and other agreements or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any
additional equity or equity-related financing may be dilutive to our stockholders, and debt financing, if available, may subject us to restrictive covenants. We

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may
also choose to obtain funding through collaborations, licensing and other contractual arrangements. Such agreements may require us to relinquish our rights to certain of our technologies, products
or marketing territories. Our failure to raise capital when needed would harm our business, financial condition and results of operations.

History of Net Losses.We have incurred net losses since our organization as an independent company, including in the last
five years net losses of $20.5 million in 1999, $8.8 million in 2000, $60.9 million in 2001, $208.9 million in 2002, $196.4 million in 2003 and $102.2 million
in the six months ended June 30, 2004. As of June 30, 2004, our accumulated deficit was $667.0 million. Our losses to date have resulted principally from:



We
expect to incur additional losses for the foreseeable future as a result of our research and development costs, including costs associated with conducting preclinical development and
clinical trials, which will continue to be substantial, charges related to purchases of technology or other assets, and costs associated with establishing and operating our manufacturing facilities.
We intend to invest significantly in our products prior to entering into licensing agreements. This will increase our need for capital and will result in losses for at least the next several years. We
expect that the amount of operating losses will fluctuate significantly from quarter to quarter as a result of increases or decreases in our research and development efforts, the execution or
termination of licensing and other agreements, and the initiation, and success or failure, of clinical trials.

Net Operating Loss Carryforwards.As of December 31, 2003, we had net operating loss carryforwards for federal and
state income tax purposes of approximately $469.0 million and $102.0 million, respectively. Our net operating loss carryforwards exclude losses incurred prior to our formation in
July 1996. Further, we have capitalized the amounts associated with a 1997 settlement and cross-license with GenPharm International, Inc. that we have expensed for financial statement
accounting purposes and we are amortizing those amounts over a period of approximately 15 years for tax purposes. The federal and state net operating loss and credit carryforwards will expire
in the years 2006 through 2023, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

Critical Accounting Estimates

Several estimates and judgments involved in the application of accounting principles impacts the financial results that we report. We are required to estimate the
effect of matters that are inherently uncertain. Changes in our estimates or judgments could materially impact our results of operations, financial condition and cash flows in future years. We believe
our most critical accounting estimates include revenue recognition, accounting for our equity investments, and accounting for goodwill,

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intangible
assets and income taxes. There have been no significant changes to our critical accounting estimates as reported in our annual report on Form 10-K for the year ended
December 31, 2003 with respect to the accounting for revenue recognition, equity investments, goodwill or income taxes. We have made a significant change to our estimate of the value of certain
intangible assets as described below.



As a result of the adoption of SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", intangible assets held and used
must be tested for impairment when events or changes in circumstances indicate that its carrying amount may not be recoverable. Factors that are considered important in determining whether impairment
might exist include a significant change in the manner in which an asset is being used, a significant adverse change in legal factors or the business climate that could affect the value of an asset,
including an adverse action or assessment by a regulator, and a current expectation that, more likely that not, an asset will be sold or otherwise disposed of before the end of its previously
estimated useful life.

During
the three months ended June 30, 2004, we determined that an impairment of the Company's acquired technology in the field of catalytic antibodies had occurred and that the
estimated value had declined to zero. This technology, which includes intellectual property, was acquired in 2001 through the acquisition of Hesed Biomed, Inc. We decided to focus our resources
on other research and development projects and in the three months ended June 30, 2004 decided to wind down our catalytic antibody program. Additionally, after assessing the assoicated patent
position and the likelihood of sale or license of the technology to a third party, we further determined in the three months ended June 30, 2004 that the possibility of generating positive
future cash flows from the technology was remote. As a result of this determination, we recorded an impairment charge of $17.2 million in the quarter ended June 30, 2004.



As of June 30, 2004, future minimum payments for certain contractual obligations for years subsequent to December 31, 2003 were as follows:

|                        |                                                    | Total |   | Less than
1 year |         | 1-3
years |       | 3-5
years |   | After 5
years(1)
|----------------------- | -------------------------------------------------- | ----- | - | ---------------- | ------- | --------- | ----- | --------- | - | ----------------
|
|Contractual Obligations |                                                    |       |   |                  |         |           |       |           |   |                 
|                        | Operating leases                                   |       | $ | 135,952          |         | $         | 6,660 |           | $ | 27,782          
|                        | Convertible subordinated notes due 2007 & interest |       |   | 221,019          |         |           | 3,500 |           |   | 14,000          
|                        | Convertible subordinated note due 2013             |       |   | 50,000           |         |           |      |           |   |                
|                        | Redeemable convertible preferred stock             |       |   | 50,000           |         |           |      |           |   |                
|                        | Lonza                                              |       |   | 7,704            |         |           | 7,704 |           |   |                
|                        | Immunex                                            |       |   | 3,051            | (2)     |           |      |           |   |                
|                        | Purchase orders                                    |       |   | 1,762            |         |           | 1,762 |           |   |                
|                        |                                                    |       |   |                  |         |           |       |           |   |                 
|                        |                                                    | Total |   | $                | 469,488 | (2)       | $     | 19,626    |   | $               
|                        |                                                    |       |   |                  |         |           |       |           |   |                 

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In
March 2002, we issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of our common stock
at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5%. We are obligated to pay interest on March 15 and
September 15 of each year. We expect to make interest payments on the notes of $7.0 million per year, for years 2003 through 2006, and $3.5 million in 2007, assuming all the notes
remain outstanding until their maturity date. The notes will mature on March 15, 2007 and are redeemable at our option on or after March 20, 2005, or earlier if the price of our common
stock exceeds specified levels. In addition, the holders of the notes may require us to repurchase the notes if we undergo a change in control. Therefore, in March 2007, or earlier if we
undergo a change in control, we may use a significant portion of our cash, cash equivalents and marketable securities to repay the $200.0 million principal amount of our convertible debt. If
our balance of cash, cash equivalents and marketable securities at any time is insufficient to meet our obligations under the notes, we would have to seek additional financing, if available, to
support our obligations under the notes.

In
connection with a collaboration agreement, we have issued to AstraZeneca $50.0 million of Series A-1 convertible preferred stock and a convertible
subordinated note with a principal amount of $50.0 million. The total net proceeds were $99.7 million. The Company, subject to certain conditions, can convert the
Series A-1 convertible preferred stock and can convert the convertible note into shares of common stock at a conversion price equal to the lower of (a) the average market
price for the 10 days prior to the trading day immediately preceding the conversion date (provided that the average market price shall in no event be higher than 101% of the market price on the
trading day immediately preceding the conversion date) or (b) $30.00 per share. AstraZeneca may convert the Series A-1 convertible preferred stock and the convertible note
into shares of common stock at a conversion price of $30.00 per share, at any time prior to the earlier of (a) the redemption date or (b) the maturity date, as applicable. The Company
must redeem all outstanding shares, if any, at a cash redemption price per share equal to the liquidation preference by October 29, 2010, the mandatory redemption date. The note matures on
October 29, 2013, if still outstanding. In addition, we can, upon at least 15 days' notice to the holder, redeem the Series A-1 convertible preferred stock for cash in
an amount equal to its liquidation preference and pre-pay the convertible note for its face amount, at any time prior to maturity. In addition to the mandatory redemption and maturity
dates of these securities, certain events can give rise to an earlier redemption. In such circumstances, we have certain rights to convert the securities into common stock instead of redeeming the
securities for cash.

Effective
June 30, 2003, we canceled our agreement with Lonza for the exclusive use of a cell culture production suite. Upon canceling the agreement, we became obligated to pay
Lonza four equal installments of 4,250,000 British pounds on October 1, 2003, February 1, 2004, May 1, 2004 and August 1, 2004, which eliminated our commitment to pay
approximately $46.0 million in total monthly fees through August 2006. The value of the cancellation fee obligation on the effective date of June 30, 2003 was approximately
$28.0 million. In September 2003, January 2004 and April 2004, we made the first, second and third of four installment payments to Lonza. The balance of the obligation as
of June 30, 2004 was approximately $7.7 million.

We
have a commitment to share equally all development and commercialization costs for panitumumab pursuant to our development and commercialization agreement with Immunex. As amended in
October 2003, that agreement provides that Immunex will have decision-making authority for development and commercialization activities and will make available to us $60.0 million in
advances that we may use to fund our share of development and commercialization costs for panitumumab after we have contributed $20.0 million toward development costs in 2004. As of
June 30, 2004, we have drawn $3.1 million upon this credit facility and have notified Immunex of our intent to draw a cash advance of an additional $4.1 million. We exptect to
continue to make use of this credit facility in 2004 and thereafter up to the $60.0 million limit. The amount and timing of our use of the

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facility
is dependent on the development and related activities directed by Immunex and their cost. The amount of any such advances, plus interest, may be repaid out of profits resulting from future
product sales and we are not obligated to repay any portion of the loan if panitumumab does not reach commercialization.

We
have outstanding purchase orders totaling $1.8 million to contractors related to the purchase of equipment and design and construction of our new manufacturing facility.

Additional Factors That Might Affect Future Results

Risks Related to our Finances

We are an early stage company without commercial therapeutic products, and we cannot assure you that we will develop sufficient revenues in the future to sustain our business.

You must evaluate us in light of the uncertainties and complexities present in an early stage biopharmaceutical company. Our product candidates are in early
stages of development. We will need to make significant additional investments in research and development, preclinical testing and clinical trials, and in regulatory and sales and marketing
activities, to commercialize current and future product candidates. Our product candidates, if successfully developed, may not generate sufficient or sustainable revenues to enable us to be
profitable.

We have a history of losses and we expect to continue to incur losses for the foreseeable future.

We have incurred net losses since we were organized as an independent company, including in the last five years net losses of $20.5 million in 1999,
$8.8 million in 2000, $60.9 million in 2001, $208.9 million in 2002, $196.4 million in 2003 and $102.2 million in the six months ended June 30, 2004. As of
June 30, 2004, our accumulated deficit was $667.0 million. Our losses to date have resulted principally from:



We
expect to incur additional losses for the foreseeable future as a result of our research and development costs and manufacturing start-up costs, including costs associated
with conducting preclinical development and clinical trials, which will continue to be substantial, and charges related to purchases of technology or other assets. We intend to invest significantly in
our products prior to entering into licensing agreements. This will increase our need for capital and will result in losses for at least the next several years. We expect that the amount of operating
losses will fluctuate significantly from quarter to quarter as a result of increases or decreases in our research and development efforts, the execution or termination of licensing, manufacturing and
other contractual arrangements, the progress or lack of progress of product development candidates in our collaboration with AstraZeneca and the initiation, success or failure of clinical trials.

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We are currently unprofitable and may never be profitable, and our future revenues could fluctuate significantly.

Since our founding, we have funded our research and development activities primarily from private placements and public offerings of our securities and from
revenues generated by our licensing and other contractual arrangements.

We
expect that substantially all of our revenues for the foreseeable future will result from payments under licensing and other contractual arrangements. To date, payments under
licensing and other agreements have been in the form of license fees, milestone payments, reimbursement for research and development expenses, option fees, and payments for manufacturing services.
Payments under our existing and any future customer agreements will be subject to significant fluctuation in both timing and amount. Our revenues may not be indicative of our future performance or of
our ability to continue to achieve contractual milestones. Our revenues and results of operations for any period may also not be comparable to the revenues or results of operations for any other
period. Our revenues for any period may not be sufficient to cover our operating costs, including the costs of operating our manufacturing plant. We may not be able to:



Our
failure to achieve any of the above goals would materially harm our business, financial condition and results of operations.

We may require additional financing, and an inability to raise the necessary capital or to do so on acceptable terms would threaten the continued success of our business.

We will continue to expend substantial resources to support research and development and establish and operate our manufacturing facility, including costs
associated with preclinical development and
clinical trials. In the years ended December 31, 2003, 2002, and 2001, we incurred expenses of $99.6 million, $128.5 million and $96.2 million, respectively, on research
and development. For the six months ended June 30, 2004, we incurred $64.6 million of research and development expenses. Regulatory and business factors will require us to expend
substantial funds in the course of completing required additional development, preclinical testing and clinical trials of, and attaining regulatory approvals for, product candidates. The amounts of
the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties that may adversely affect our liquidity and capital resources. Our future liquidity and
capital requirements will depend on many factors, including:



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We
believe that our current cash balances, cash equivalents, marketable securities, and the cash generated from our licensing and other contractual arrangements, will be sufficient to
meet our operating and capital requirements for at least one year. However, because of the uncertainties in our business, including the uncertainties listed above, we cannot assure you that this will
be the case. In addition, we may choose to obtain additional financing from time to time. We may choose to raise additional funds through public or private equity or debt financing, licensing and
other agreements, a bank line of credit, sale-lease back financing, mortgage financing or other arrangements. We cannot be sure that any additional funding, if needed, will be available on
terms favorable to us or at all. Furthermore, any additional equity or equity-related financing may be dilutive to our stockholders, and debt financing, if available, may subject us to restrictive
covenants. We may also choose to obtain funding through licensing and other contractual arrangements. Such agreements may require us to relinquish our rights to certain of our technologies, products
or marketing territories. Our failure to raise capital when needed would harm our business, financial condition and results of operations.

Our indebtedness may harm our financial condition and results of operations.

We have $200 million of convertible subordinated notes due March 15, 2007 and debt service obligations related thereto. In February 2004, we
incurred an additional $50.0 million of indebtedness to AstraZeneca, in the form of a convertible subordinated note due 2013, which we issued to AstraZeneca in connection with our redemption of
the shares of our Series A-2 preferred stock we issued to AstraZeneca in October 2003. There is no interest payable on the note except in the event of
a payment default. Our level of indebtedness will have several important effects on our future operations, including, without limitation:



Our
ability to make payments of principal and interest on our indebtedness depends upon our future performance, which will be subject to general economic conditions, industry cycles and
financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our
debt, we may be required, among other things:



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Such
measures might not be sufficient to enable us to service our debt. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable
terms.

Our strategic investments expose us to equity price risk and our investments in those companies may be deemed impaired, which would affect our results of operations.

We are exposed to equity price risk on our strategic investments in CuraGen and ImmunoGen and we may elect 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 of CuraGen and ImmunoGen as strategic investments. In 2002, declines in the fair value of the CuraGen and
ImmunoGen common stock were deemed to be other than temporary, primarily because the stock of each company traded below our cost basis for more than six months. Accordingly, we recorded a total
impairment charge for the year ended December 31, 2002 of $67.3 million. The public trading prices of the shares of both companies have fluctuated significantly since we purchased them
and could continue to do so. If these shares trade below their new cost bases in future periods, we may incur additional impairment charges relating to these investments. As of June 30, 2004,
these investments were recorded at fair value in long-term investments on the balance sheet, and any net unrealized holding gains and losses are reported as a component of stockholders'
equity.

Risks Related to the Development and Commercialization of our Products

Our XenoMouse and XenoMax technologies may not produce safe, efficacious or commercially viable products, which will be critical to our ability to generate revenues from our
products.

Our XenoMouse and XenoMax technologies are new approaches to developing antibodies as products for the treatment of diseases and medical disorders. We have not
commercialized any antibody therapeutic products based on our technologies. Moreover, we are not aware of any commercialized, fully human antibody therapeutic products that have been generated from
any technologies similar to ours. Our antibody therapeutic product candidates are still in various stages of development and many are in an early development stage. We have initiated clinical trials
with respect to four proprietary fully human antibody therapeutic product candidates, and our collaborators have initiated clinical trials with respect to four other fully human antibody therapeutic
product candidates generated by XenoMouse
technology. We cannot be certain that either XenoMouse technology or XenoMax technology will generate antibodies against every antigen to which they are exposed in an efficient and timely manner, if
at all. Furthermore, XenoMouse technology and XenoMax technology may not result in any meaningful benefits to our current or potential customers or in product candidates that are safe and efficacious
for patients. Our failure to generate antibody therapeutic product candidates that lead to the successful commercialization of products would materially harm our business, financial condition and
results of operations.

If we do not successfully develop our products, or if they do not achieve commercial success, our business will be materially harmed.

Our development of current and future product candidates, either alone or in conjunction with collaborators, is subject to the risks of failure inherent in the
development of new pharmaceutical products and products based on new technologies. These risks include:



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

In
addition, our decisions to terminate our clinical programs for developing ABX-IL8, a fully human antibody product candidate for inflammatory disorders, and
ABX-CBL, an in-licensed antibody product candidate for graft versus host disease, have reduced the diversity of our product portfolio. We hope to be able to make up for this
loss of diversity through the number and variety of potential new product candidates we have in preclinical development. For example, ABX-PTH, which targets the action of parathyroid
hormone in patients with
chronic renal disease, is a new product candidate that we moved from the preclinical stage into a clinical study in 2004 in patients with secondary hyperparathyroidism. However, to the extent that we
are unable to maintain a broad and diverse range of product candidates, our success would depend more heavily on one or a few product candidates.

Before we commercialize and sell any of our product candidates, we must conduct clinical trials, which are expensive and have uncertain outcomes.

Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any
products, we must demonstrate through preclinical testing and clinical trials that our product candidates are safe and effective for use in humans. We have incurred and will continue to incur
substantial expense for, and we have devoted and expect to continue to devote a significant amount of time to, preclinical testing and clinical trials.

Historically,
the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and
biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we may encounter regulatory delays or rejections as
a result of many factors, including changes in regulatory policy during the period of product development.

Completion
of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the product
candidate. However, we estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

Clinical Phase

Estimated
Completion PeriodPhase 1

1-2 YearsPhase 2

1-2 YearsPhase 3

2-4 Years


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



We
have limited experience in conducting and managing clinical trials. We rely on third parties, including our collaborators, to assist us in managing and monitoring clinical trials. Our
reliance on these third parties may result in delays in completing, or in failure to complete, these trials if the third parties fail to perform under our agreements with them.

In
addition, we have ongoing research projects that may lead to product candidates, but we have not submitted INDs nor begun clinical trials for these projects. Our ability to file
additional INDs, and to build diversity and scale in our product portfolio, depends to a significant extent on our ability to identify additional potential product candidates through our preclinical
research and to conduct preclinical research efficiently. Our preclinical or clinical development efforts may not be successfully completed, we may not file further INDs and clinical trials may not
commence as planned.

Three
of our proprietary product candidates, panitumumab, ABX-MA1 and ABX-PTH, are in various stages of clinical trials. We have discontinued development of two
proprietary product candidates, ABX-CBL and ABX-IL8. To date, data obtained from these clinical trials have been insufficient to demonstrate safety and efficacy under
applicable FDA guidelines. As a result, these data will not support an application for regulatory approval without further clinical trials. Clinical trials that we conduct or that third parties
conduct on our behalf may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for any of our product candidates. We expect to commence new clinical trials from
time to time in the course of our business as our product development work continues. However, regulatory authorities may not permit us to undertake any additional clinical trials for our product
candidates.

Our
product candidates may fail to demonstrate safety or efficacy in clinical trials. For example, in 2002 we completed analysis of a Phase 2b clinical trial of ABX-IL8 in
psoriasis, concluded that the results did not warrant continued development in psoriasis and decided not to proceed with studies in other disease indications. Similarly, in February 2003, we
completed a preliminary analysis of the results from the Phase 2/3 clinical trial of ABX-CBL and concluded that the study did not meet its primary endpoint. Therefore, we and our
co-developer, SangStat (now a subsidiary of Genzyme Corporation) do not plan any further development of ABX-CBL. Failures of clinical trials of any product candidate could
delay the development of other product candidates or hinder our ability to obtain additional financing. In addition, failures in our clinical trials can lead to additional research and development
charges. Any delays in, or termination of, our clinical trials could materially harm our business, financial condition and results of operations.

We may rely on third-party manufacturers, and we may have difficulty conducting clinical trials of our product candidates if a manufacturer does not perform in accordance with
our expectations.

Until recently, we relied on a single contract manufacturer, Lonza, to produce ABX-CBL, ABX-IL8 and panitumumab under good manufacturing
practice regulations for use in our clinical trials. In June 2003, we canceled our manufacturing supply agreement with Lonza, pursuant to which we had exclusive access to a cell culture
production suite, because we determined that with the opening of our own manufacturing plant and changes in our product candidate portfolio, we no longer needed access to the Lonza facility. We have
also relied on other contract manufacturers from time to time to

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produce
our product candidates for use in our clinical trials. For example, Fred Hutchinson Cancer Research Center has produced ABX-MA1 for use in our clinical trials. While portions of
our Fremont manufacturing facility are now operational and we are manufacturing material that we intend to use in clinical trials, we cannot assure you that we will be able to qualify this facility
for regulatory compliance. For that reason or others, we may use Lonza or another third-party manufacturer if necessary in the future.

Third-party
manufacturers may encounter difficulties in scaling up production, including problems involving production yields, quality control and assurance, shortage of qualified
personnel, shortage of capacity, compliance with FDA and other applicable regulations, production costs, and development of advanced manufacturing techniques and process controls. If we continue to
use third-party manufacturers, they may not perform as agreed or may not remain in the contract manufacturing business for the time required by us to successfully produce and market our product
candidates. Any failure of third-party manufacturers to deliver the required quantities of our product candidates for clinical use on a timely basis and at commercially reasonable prices, and our
failure to find replacement manufacturers or successfully implement our own manufacturing capabilities, would materially harm our business, financial condition and results of operations.

Our own ability to manufacture is uncertain, which may make it more difficult for us to develop and sell our products.

We are establishing our own manufacturing facility for the manufacture of product candidates for clinical trials and to support the potential early commercial
launch of a limited number of products, in each case, in compliance with FDA and European good manufacturing practices. In May 2000, we signed a long-term lease for the building
that contains this manufacturing facility. Construction has been completed and portions of the facility are operational. We are also conducting validation of the facility and completed significant
stages of validation in 2003. 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 to manufacture and ship clinical material from our
manufacturing facility. We expect the total cost of the facility, including design fees, permits, validation, construction, leasehold improvements and equipment, to be approximately
$155.0 million. Validation of this facility may take longer than expected, and the planned and actual construction costs of building and qualifying the facility for regulatory compliance may be
higher than expected. We currently have excess production services capacity and this condition may persist for an extended period. However, if the commercial launch of one or more of our product
candidates proves successful, we will likely experience capacity shortages and may need to use one or more third-party facilities to produce these products in sufficient quantities.

The
process of manufacturing antibody therapeutic products is complex. While the managers of the facility have gained extensive manufacturing experience in prior positions with other
companies, we have limited experience in the clinical or commercial scale manufacturing of our existing product candidates, or any other antibody therapeutic products. We will need to hire, train and
retain additional qualified manufacturing, quality control and quality assurance personnel. Also, we will need to manufacture such antibody therapeutic products in a facility and by an appropriately
validated process that comply with FDA, European and other regulations. Our manufacturing operations will be subject to ongoing, periodic unannounced inspection by the FDA and state agencies to ensure
compliance with good manufacturing practices. Our inability to complete the establishment of our manufacturing operations and maintain them in compliance with applicable regulations within our planned
time and cost parameters could materially harm our business, financial condition and results of operations.

We
also may encounter problems with the following:



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We
continually evaluate our options for commercial production of our antibody therapeutic products, which include use of third-party manufacturers, establishing a commercial scale
manufacturing facility or entering into a manufacturing joint venture relationship with a collaborator or other third party. We are aware of only a limited number of companies on a worldwide basis
that operate manufacturing facilities in which our product candidates can be manufactured under good manufacturing practice regulations, a requirement for all pharmaceutical products. It may take a
substantial period of time for a contract manufacturing facility that has not been producing antibodies to begin producing antibodies under good manufacturing practice regulations. We may not be able
to contract with any of these companies on acceptable terms, if at all.

In
addition, the FDA and other regulatory authorities will require us to register any manufacturing facilities in which our antibody therapeutic products are manufactured. The FDA and
other regulatory authorities will then subject the facilities to inspections to confirm compliance with FDA good manufacturing practice or other regulations. Our failure or the failure of our
third-party manufacturers to maintain regulatory compliance would materially harm our business, financial condition and results of operations.

The successful growth of revenues from our manufacturing services depends to a large extent on our ability to find third parties who agree to use our services and our ability
to provide those services successfully.

Enhancing our contract revenues depends to a significant extent on entering into agreements to provide antibody production services to third parties. Potential
third parties include our existing collaborators, as well as other pharmaceutical and biotechnology companies, technology companies, academic institutions and other entities. We must enter into these
agreements to successfully develop this aspect of our business. To date, we have entered into two production services agreements and we cannot assure you that we will be able to enter into additional
agreements.

We
may not be able to secure manufacturing agreements on favorable terms. If we do obtain such agreements, we may encounter difficulties in performing as agreed. We may encounter
difficulties in scaling up production, including problems involving production yields, quality control and assurance, shortage of qualified personnel, training of personnel, compliance with FDA and
other applicable regulations, production costs, and development of advanced manufacturing techniques and process controls. The failure to deliver required quantities of product on a timely basis and
at commercially reasonable prices could materially harm our business, financial condition and results of operations.

The successful growth of our business depends to a large extent on our ability to find third-party collaborators to develop and commercialize many of our product candidates.

Our strategy for the development and commercialization of antibody therapeutic products depends, in large part, upon the formation of collaboration agreements
with third parties. Potential third parties include pharmaceutical and biotechnology companies, technology companies, academic institutions and

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other
entities. We must enter into these agreements to successfully develop and commercialize product candidates. These agreements are necessary in order for us to:



Our
ability to continue our current collaborations and to enter into additional third party collaborations is dependent in large part on our ability to successfully demonstrate that our
XenoMouse technology is an attractive method of developing antibody therapeutic products. We have generated only a limited number of fully human antibody therapeutic product candidates pursuant to our
collaboration agreements and only eight fully human antibody therapeutic product candidates generated with XenoMouse technology have entered the clinical stage. We have announced that one of these
product candidates has not met our expectations. Our failure to maintain our existing collaboration agreements or to enter into additional agreements could materially harm our business, financial
condition and results of operations.

Our
dependence on licensing, collaboration, manufacturing and other agreements with third parties subjects us to a number of risks. These agreements may not be on terms that prove
favorable to us, and we typically afford our collaborators significant discretion in electing whether to pursue any of the planned activities. Licensing and other contractual arrangements may require
us to relinquish our rights to certain of our technologies, products or marketing territories. To the extent we agree 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 with AstraZeneca for the identification and development of therapeutic antibodies in oncology
contains exclusivity provisions that significantly restrict our ability to enter into arrangements with third parties in the field of oncology as well as our ability to conduct research and
development activities in that field. To the extent that our collaboration with AstraZeneca is not successful, our ability to develop antibodies for use in oncology applications through other
collaborations will be severely curtailed. Our collaboration with AstraZeneca also limits our ability to develop such antibodies through our own independent development.

We
cannot control the amount 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 business strategy may adversely affect a collaborator's willingness or ability to complete its obligations under the arrangement. Even
if we fulfill our obligations under an agreement, typically our collaborators can terminate the agreement at any time following proper written notice. The termination or breach of agreements by our
collaborators, or the failure of our collaborators to complete their obligations in a timely manner, could materially harm our business, financial condition and results of operations. If we are not
able to establish further collaboration agreements or any or all of our existing agreements are terminated, we may be required to seek new collaborators or to undertake product development and
commercialization at our own expense. Such an undertaking may:



Existing
or potential collaborators may pursue alternative technologies, including those of our competitors, or enter into other transactions that could make a collaboration with us less
attractive to

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them.
For example, if an existing collaborator purchases a company that is one of our competitors, that company could be less willing to continue its collaboration with us. In addition, a company that
has a strategy of purchasing companies with attractive technologies might have less incentive to enter into a collaboration agreement with us. Moreover, disputes may arise with respect to the
ownership of rights to any technology or products developed with any current or future collaborator. Lengthy negotiations with potential new collaborators or disagreements between us and our
collaborators may lead to delays in or termination of the research, development or commercialization of product candidates or result in time-consuming and expensive litigation or
arbitration. The decision by our collaborators to pursue alternative technologies or the failure of our collaborators to develop or commercialize successfully any product candidate to which they have
obtained rights from us could materially harm our business, financial condition and results of operations.

We are subject to extensive government regulation, which will require us to spend significant amounts of money, and we may not be able to obtain regulatory approvals, which are
required for us to conduct clinical testing and commercialize our products.

Our product candidates under development are subject to extensive and rigorous domestic government regulation. The FDA regulates, among other things, the
development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. If we market our products
abroad, they will also be subject to extensive regulation by foreign governments. Neither the FDA nor any other regulatory agency has approved any of our product candidates for sale in the United
States or any foreign market. The regulatory review and approval process, which includes preclinical studies and clinical trials of each product candidate, is lengthy, expensive and uncertain.
Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish the product candidate's safety and
efficacy. The approval process takes many years, requires the expenditure of substantial resources, and may involve post-marketing surveillance and requirements for
post-marketing studies. As we conduct clinical trials for a given product candidate, we may decide or the FDA may require us to make changes 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 materials is proposed, or competitive developments foreclosing the availability of expedited approval
procedures. We may be required to support proposed changes with additional preclinical or clinical testing, which could delay the expected time line for concluding clinical trials. Regulatory
requirements are subject to frequent change. Delays in obtaining regulatory approvals may:



Our
product candidates may not be approved or may be approved with limitations or for indications that differ from those we initially target. If approved, certain material changes
affecting a product such as manufacturing changes or additional labeling claims are subject to further FDA review and approval. The FDA may withdraw any required approvals after we obtain them. We may
not maintain compliance with other regulatory requirements. Further, if we fail to comply with applicable FDA and other regulatory requirements at any stage during the regulatory process, we or our
third-party manufacturers may be subject to sanctions, including:



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In
many instances we expect to rely on our customers and co-developers to file INDs and generally direct the regulatory approval process for products derived from our
technologies. These customers and co-developers may not be able to or may choose not to conduct clinical testing or obtain necessary approvals from the FDA or other regulatory authorities
for any product candidates. If they fail to obtain required governmental approvals, we will experience delays in or be precluded from marketing or realizing the commercial benefits from the marketing
of products derived from our technologies. In addition, our failure to obtain the required approvals would preclude the
commercial use of our products. Any such delays and limitations may materially harm our business, financial condition and results of operations.

We
and our third-party manufacturers also are required to comply with the applicable FDA current good manufacturing practice regulations and other regulatory requirements. Good
manufacturing practice regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing
facilities are subject to inspection by the FDA and the facilities must pass an inspection by the FDA before we can use them in commercial manufacturing of any product. Manufacturing facilities in
California, including our facility, are also subject to the licensing requirements of and inspection by the State of California Department of Health Services. In October 2003, following an
inspection, we received a Drug Manufacturing License from the State of California. The license, which must be renewed annually, permits us to manufacture and ship clinical material. We or our
third-party manufacturers may not be able to comply with the applicable good manufacturing practice requirements and other regulatory requirements. The failure of us or our third-party manufacturers
to comply with these requirements would materially harm our business, financial condition and results of operations.

If our products do not gain market acceptance among the medical community, our revenues would greatly decline and might not be sufficient to support our operations.

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



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Physicians
will not recommend therapies using our products until such time as clinical data or other factors demonstrate the safety and efficacy of such procedures as compared to
conventional drug and other treatments. Even if we establish the clinical safety and efficacy of therapies using our antibody product candidates, physicians may elect not to recommend the therapies
for any number of other reasons, including whether the mode of administration of our antibody products is effective for certain indications. Antibody products, including our product candidates as they
would be used for certain disease indications, are typically administered by infusion or injection, which requires substantial cost and inconvenience to patients. Our product candidates, if
successfully developed, will compete with a number of drugs and therapies manufactured and marketed by major pharmaceutical and other biotechnology companies. Our products may also compete with new
products currently under development by others. Physicians, patients, third-party payors and the medical community may not accept or utilize any product candidates that we or our customers develop.
The failure of our products to achieve significant market acceptance would materially harm our business, financial condition and results of operations.

We do not have marketing and sales experience, which may require us to rely on others to market and sell our products and may make it more challenging for us to commercialize
our product candidates.

Although we have been marketing our XenoMouse technology to potential customers and collaborators for several years, we do not have marketing, sales or
distribution experience or capability with respect to our therapeutic product candidates. We intend to enter into arrangements with third parties to market and sell most of our therapeutic product
candidates when we commercialize them, which may be as early as 2005. For example, pursuant to our amended joint development agreement with Immunex, we have granted to Immunex decision-making
authority for development and commercialization activities relating to any products developed under the collaboration. We may not be able to enter into these marketing and sales arrangements with
others on acceptable terms, if at all. To the extent that we enter into marketing and sales arrangements with other companies, our revenues, if any, will depend on the efforts of others. These efforts
may not be successful. If we are unable to enter into third-party arrangements, we will need to develop a marketing and sales force, which may need to be substantial in size, in order to achieve
commercial success for any product candidate approved by the FDA. We may not successfully develop marketing and sales capabilities or have sufficient resources to do so. If we do develop such
capabilities, we will compete with other companies that have experienced and well-funded marketing and sales operations. Our failure to enter into successful marketing arrangements with
third parties and our inability to conduct such activities ourselves would materially harm our business, financial condition and results of operations.

Risks Related to Intellectual Property

Our ability to protect our intellectual property rights will be critically important to the success of our business, and we may not be able to protect these rights in the
United States or abroad.

Our success depends in part on our ability to:



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We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or
are effectively maintained as trade secrets. We attempt to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and
improvements that are important to the development of our business. However, the patent position of biopharmaceutical companies involves complex legal and factual questions, and, therefore, we cannot
predict with certainty whether our patent applications will be approved or any resulting patents will be enforced. In addition, third parties may challenge, seek to invalidate or circumvent any of our
patents, once they are issued. Thus, any patents that we own or license from third parties may not provide any protection against competitors. Our pending patent applications, those we may file in the
future, or those we may license from third parties, may not result in patents being issued. Also, patent rights may not provide us with adequate proprietary protection or competitive advantages
against competitors with similar technologies. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do 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. These
agreements may not provide meaningful protection for our technology or adequate remedies in the event of unauthorized use or disclosure of confidential and proprietary information, and, in addition,
the parties may breach such agreements. Also, our trade secrets may otherwise become known to, or be independently developed by, our competitors. Furthermore, others may independently develop similar
technologies or duplicate any technology that we have developed.

We may face challenges from third parties regarding the validity of our patents and proprietary rights, or from third parties asserting that we are infringing their patents or
proprietary rights, which could result in litigation that would be costly to defend and could deprive us of valuable rights.

Parties have conducted research 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 has chromosomes into which human genes have been incorporated. This research has resulted in a substantial number of issued patents and an even larger number of pending patent
applications. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Our commercial
success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Our technologies may unintentionally infringe the patents or
violate other proprietary rights of third parties. Such infringement or violation may prevent us and our customers from pursuing product development or commercialization. Such a result could
materially harm our business, financial condition and results of operations.

In
March 1997, we entered into a cross-license and settlement agreement with GenPharm to avoid protracted litigation. Under the cross-license, we licensed on a
non-exclusive basis certain patents, patent applications, third-party licenses and inventions pertaining to the development and use of certain transgenic rodents, including mice, that
produce fully human antibodies that are integral to our products and business. Our business, financial condition and results of operations could be materially harmed if any of the parties breaches the
cross-license agreement.

GlaxoSmithKline,
plc, or Glaxo, has a family of patents relating to certain methods for generating monoclonal antibodies that Glaxo is asserting against Genentech, Inc. in
litigation that was commenced in 1999. On May 4, 2001, Genentech announced that a jury had determined that Genentech had not infringed Glaxo's patents and that all of the patent claims asserted
against Genentech are invalid. We understand that Glaxo has filed a notice of appeal with the Court of Appeals for the Federal Circuit. If any of the claims of these patents are finally determined in
the litigation to be valid, and if we were to use manufacturing processes covered by the patents to make our products, we may then need to obtain

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a
license should one be available. Should a license be denied or unavailable on commercially reasonable terms, we may have difficulty commercializing one or more of our products in any territories in
which these claims were in force.

Genentech,
Johnson & Johnson, Glaxo, Transkaryotic Therapies, Inc. and the Trustees of Columbia University in the City of New York each owns or controls a U.S. patent that
relates to recombinant cell lines or methods of generating recombinant cell lines for the production of antibodies. If we were to use a production system covered by any of these patents, we may then
need to obtain a license should one be available. Under these circumstances, our failure to obtain a license at all or on commercially reasonable terms could impede commercialization of one or more of
our products in any territories in which these patent claims were in force.

Genentech
owns a U.S. patent that issued in June 1998 relating to inhibiting the growth of tumor cells that involves an antibody that binds to an epidermal growth factor receptor,
or an anti-EGF receptor antibody, in combination with a cytotoxic factor, which is a substance having a toxic effect on cells. ImClone Systems, Inc. owns or is licensed under a U.S.
patent that issued in April 2001, relating to inhibiting the growth of tumor cells that involves an anti-EGF receptor antibody in combination with an anti-neoplastic, or
anti-tumor, agent. A corresponding European patent was published for grant in March 2002 and Abgenix and others are opposing that patent in the European Patent Office. A
corresponding patent has also issued in Canada. We do not believe based on our review that either the Genentech patent or any of the ImClone patents would be successfully asserted against any of our
current or planned activities relating to panitumumab or future commercial sales of panitumumab. If a court determines that the claims of either the Genentech patent or the ImClone patent cover our
activities with panitumumab and are valid, such a decision may require us to obtain a license to Genentech's patent or ImClone's patents, as the case may be, to label and sell panitumumab for certain
combination therapies. Our failure to obtain
a license, or to obtain a license on commercially reasonable terms, could impede our commercialization of panitumumab.

In
2000, the Japan Patent Office granted a patent to Kirin Beer Kabushiki Kaisha, one of our competitors, relating to non-human transgenic mammals. In October 2003,
the United States Patent and Trademark Office issued a corresponding patent to Kirin. Kirin has filed corresponding patent applications in Europe and Australia. Our licensee, Japan Tobacco, has filed
opposition proceedings against the Kirin patent. We cannot predict the outcome of those opposition proceedings, which may take years to be resolved.

Extensive
litigation regarding patents and other intellectual property rights has been common in the biotechnology and pharmaceutical industries. The defense and prosecution of
intellectual property suits, United States Patent and Trademark Office interference proceedings, and related legal and administrative proceedings in the United States and internationally involve
complex legal and factual questions. As a result, such proceedings are costly and time-consuming to pursue and their outcome is uncertain. Litigation may be necessary to:



Our
involvement in any litigation, interference or other administrative proceedings could cause us to incur substantial expense and could significantly divert the efforts of our
technical and management personnel. An adverse determination may subject us to loss of our proprietary position or to significant liabilities, or require us to seek licenses that may not be available
from third parties. An adverse determination in a judicial or administrative proceeding, or a failure to obtain necessary licenses, may restrict or prevent us from manufacturing and selling our
products, if any. Costs associated with these arrangements may be substantial and may include ongoing royalties. Furthermore, we may not be able

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to
obtain the necessary licenses on satisfactory terms, if at all. These outcomes could materially harm our business, financial condition and results of operations.

Risks Related to Our Industry

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

The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. We are aware of several
pharmaceutical and biotechnology companies that are actively engaged in research and development in areas related to antibody therapy. These companies have commenced clinical trials of antibody
therapeutic product candidates or have successfully commercialized antibody therapeutic products for use on their own or in combination therapies. Many of these companies are addressing the same
diseases and disease indications as we or our customers are. Also, we compete with companies that offer antibody generation services to companies that have antigens. These competitors have specific
expertise or technology related to antibody development and introduce new or modified technologies from time to time. These companies include GenPharm, a wholly owned subsidiary of
Medarex, Inc., Medarex's collaborator, Kirin Brewing Co. Ltd.; GenMab A/S; Cambridge Antibody Technology Group plc; Genentech; Protein Design Labs, Inc.; MorphoSys AG; Xenerex
Biosciences Inc., a subsidiary of Avanir Pharmaceuticals; XLT Biopharmaceuticals Ltd.; and Alexion Pharmaceuticals, Inc. Finally, we compete with companies that currently offer
antibody production services, and may compete with companies that currently only manufacture their own antibodies but could offer antibody production services to third parties.

Some
of our competitors have received regulatory approval of or are developing or testing product candidates that may compete directly with our product candidates. ImClone, in
collaborations with Bristol-Meyers Squib Company and Merck KgAa; AstraZeneca, plc; Glaxo; and a collaboration of OSI Pharmaceuticals, Inc., Genentech and Roche have potential antibody and small
molecule product candidates in clinical development that may compete with panitumumab, which is also in clinical trials.

ImClone
and Bristol-Myers Squibb have received approval to market Erbitux, ImClone's antibody product candidate for the treatment of metastatic colorectal cancer, in the United States.
ImClone and Bristol-Myers Squibb have also announced the submission of an application for approval to market Erbitux in Canada. Merck KgAa has announced that it has received approval to market Erbitux
for the treatment of metastatic colorectal cancer in the European Union and that it has received approval to market Erbitux in Switzerland for treatment of metastatic colorectal cancer.

Genentech
has received approval to market Avastin for use with chemotherapy as a first-line treatment for colorectal cancer.

AstraZeneca
has received approval to market Iressa, a small molecule product candidate that may compete with panitumumab, in many markets in the world, including the United States,
Japan, Australia and Canada, for the treatment of advanced non-small cell lung cancer.

Genentech
and OSI completed the submission of an NDA for Tarceva in the United States for the treatment of advanced non-small cell lung cancer.

In
addition, Amgen has received approval to market Sensipar, or cinacalcet HCI, a small molecule product candidate for the treatment of secondary hyperparathyroidism, which may compete
with ABX-PTH.

Many
of these companies and institutions, either alone or together with their customers or collaborators, have substantially greater financial resources and larger research and
development staffs

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than
we do. In addition, many of these competitors, either alone or together with their customers or collaborators, have significantly greater experience than we do in:



Accordingly,
our competitors may succeed in obtaining patent protection, receiving FDA approval or commercializing products before we do. If we commence commercial product sales, we will
be competing against companies with greater marketing and manufacturing capabilities, areas in which we have limited or no experience.

We
also face, and will continue to face, competition from academic institutions, government agencies and research institutions. There are numerous competitors working on products to
treat each of the diseases for which we are seeking to develop therapeutic products. In addition, any product candidate that we successfully develop may compete with existing therapies that have long
histories of safe and effective use. Competition may also arise from:



Developments
by competitors may render our product candidates or technologies obsolete or non-competitive. We face and will continue to face intense competition from other
companies for agreements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions, and for licenses to proprietary technology. These
competitors, either alone or with their customers, may succeed in developing technologies or products that are more effective than ours.

We
also face competition from companies that provide production services. These include contract manufacturers, such as Lonza, Avid Bioservices, Inc., Diosynth Biotechnology, DSM
N.V., Cangene Corporation and Goodwin Biotechnology Inc., and other pharmaceutical and biotechnology companies that manufacture their own product candidates but can make extra capacity
available to collaborators and customers, such as Boehringer Ingelheim GmbH, Biogen Idec Inc., ICOS Corporation, Abbott and Novartis AG.

We face uncertainty over reimbursement and healthcare reform, which, if determined adversely to us, could seriously hinder the market acceptance of our products.

In both domestic and foreign markets, sales of our product candidates will depend in part upon the availability of reimbursement from third-party payors, such as
government health administration authorities, managed care providers and private health insurers. Third-party payors are increasingly challenging the price and examining the cost effectiveness of
medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Adequate third-party reimbursement may not be available
to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. In addition, domestic and foreign governments continue to propose and pass
legislation designed to reduce the cost of healthcare, which could further limit reimbursement for pharmaceuticals. The failure of the government and third-party payors to provide adequate coverage
and reimbursement rates for our product candidates could adversely affect the market acceptance of our products. The failure of our

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products
to receive market acceptance would materially harm our business, financial condition and results of operations.

Other Risks Related to Our Company

The future growth and success of our business will depend on our ability to continue to attract and retain our employees and consultants.

For us to pursue product development, manufacturing, marketing and commercialization plans, we will need to hire additional qualified scientific, manufacturing,
quality control, quality assurance, and key management personnel, including a chief financial officer. We may also need to hire personnel with expertise in clinical testing, government regulation,
marketing, law and finance. Attracting and retaining qualified personnel will be critical to our success. We may not be able to attract and retain personnel on acceptable terms given the competition
for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. In addition, we experienced increased attrition rates in
2003. Further attrition could materially harm our business, financial condition and results of operations.

We
grant stock options as a method of attracting and retaining employees, to motivate performance and to align the interests of management with those of our stockholders. Due to the
decline in the trading price of our common stock during 2001, 2002 and in recent months, a substantial portion of the stock options held by our employees have an exercise price that is higher than the
current trading price of our common stock. We may elect to reprice or otherwise adjust the terms of these stock options, grant additional stock options at the current lower market price, pay higher
cash compensation, or provide some combination of these alternatives to retain and attract qualified employees, but we cannot be sure that any of these actions would be successful. If we issue
additional stock options, this would dilute existing stockholders.

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

We may experience difficulty in the integration of any future acquisition with the operations of our business.

We may from time to time seek to expand our business through corporate acquisitions. Our acquisition of companies and businesses and expansion of operations,
involve risks such as the following:



In
addition, our past and future acquisitions of companies and businesses and expansion of operations may result in dilutive issuances of equity securities, the incurrence of additional
debt, U.S. or foreign tax liabilities, large one-time write-offs and the creation of goodwill or other intangible assets that could result in amortization expense or other
charges to expense. For example, we recorded a one-time charge of $17.2 million in the quarter ended June 30, 2004, as a result of our determination that an impairment of our
acquired technology in the field of catalytic antibodies had occurred and that the estimated value had declined to zero. This technology was acquired in 2001 through the acquisition of Hesed
Biomed, Inc. After assessing the associated patent position and the likelihood of sale or

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license
of the technology to a third party, we further determined that the possibility of generating positive future cash flows from the technology was remote.

We have implemented a stockholder rights plan and are subject to other anti-takeover provisions, which could deter a party from effecting a takeover of us at a
premium to our then-current stock price.

In June 1999, our board of directors adopted a stockholder rights plan, which we amended and restated in November 1999 and May 2002, and
amended in October 2003. The stockholder rights plan and certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of
making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. This could limit the price that certain investors might be willing to
pay in the future for our common stock. Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws allow us to:



In
October 2003, we entered into a collaboration and license agreement with AstraZeneca for the purpose of identifying and developing antibody products for use in oncology
therapeutics. The collaboration agreement includes provisions that would allow AstraZeneca to accelerate its selection of target antigens and, in certain situations, terminate the collaboration
agreement, or specific programs or activities 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 event of a change
in control of us, AstraZeneca could also acquire control over the development programs and various intellectual property rights in respect of antigens that are the subject of the collaboration
agreement. This would result in a reduction in the royalties and milestones to be paid by AstraZeneca to us under the collaboration agreement and the release of AstraZeneca from certain exclusivity
provisions. In addition, certain exclusivity provisions contained in the collaboration agreement would apply to an acquirer of our company and would restrict the acquirer's ability to operate its
business in the oncology field after the acquisition, except with respect to pre-existing development programs. These and other provisions of the collaboration agreement could make our
company less attractive to a potential acquirer, particularly an acquirer that conducts or expects to conduct significant operations in the field of oncology therapeutics.

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

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We face product liability risks and may not be able to obtain adequate insurance, and if we are held liable for an uninsured claim or a claim in excess of our insurance limits,
our business, financial condition and results of operations may be harmed.

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

Our operations involve hazardous materials, and we could be held responsible for any damages caused by such materials.

Our research and manufacturing activities involve the controlled use of hazardous materials. In addition, although we maintain insurance for harm to employees and
to our facilities caused by hazardous materials, we do not insure against any other harm (including harm to the environment) caused by the use of hazardous materials on our premises. We cannot
eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, we may be held liable for any resulting damages, which may exceed
our financial resources and may materially harm our business, financial condition and results of operations.

We do not intend to pay cash dividends on our common stock.

We intend to retain any future earnings to finance the growth and development of our business and we do not plan to pay cash dividends on our common stock in the
foreseeable future.

Our stock price is highly volatile, and you may not be able to sell your shares of our common stock at a price greater than or equal to the price you paid for them.

The market price and trading volume of our common stock are volatile, and we expect such volatility to continue for the foreseeable future. For example, during
the period between June 30, 2003 and June 30, 2004, our common stock closed as high as $18.55 per share and as low as $10.36 per share. This may impact your decision to buy or sell our
common stock. Factors affecting our stock price include:



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If we were deemed to be an investment company, we would become subject to provisions of the Investment Company Act that likely would have a material adverse impact on our
business.

A company is required to register as an investment company under the Investment Company Act of 1940, or the 1940 Act, if, among other things, and subject to
various exceptions:



A
major portion of our assets has been invested in investment grade interest-bearing securities. Such investments could in some circumstances require us to register as an investment
company under the 1940 Act. Registration under the 1940 Act, or a determination that we failed to register when required to do so, could have a material adverse impact on us. We believe that we are
and will remain exempt from the registration requirements, but absent interpretation by the courts or the SEC of the relevant exemption as applied to companies engaged in research and development,
this result cannot be assured. In addition, a change in our allocation of assets on account of 1940 Act concerns could reduce the rate of return on our liquid assets.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk.We are exposed to interest rate sensitivity on our investments in debt securities and our outstanding
fixed rate debt. The objective of our investment activities is to preserve principal, while
at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid, investment grade and government debt securities. Our investments in
debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in short-term securities and our goal is to maintain an
average maturity of approximately one year. In addition, as of June 30, 2004, we had $200.0 million of outstanding 3.5% convertible subordinated notes due in 2007. The fair value of
these convertible subordinated notes may fluctuate with changes in market interest rates, as well as changes in the market price of our common stock. A hypothetical 1.0% per annum decrease in interest
rates would result in an adverse net change in the fair value of our interest rate sensitive assets and liabilities of approximately $2.9 million at June 30, 2004 and December 31,
2003.

Equity Price Risk.We are exposed to equity price risk on strategic investments, such as those we have made in CuraGen and
ImmunoGen. We typically do not attempt to reduce or eliminate our market exposure on these securities. With respect to CuraGen and ImmunoGen, each of whose common stock is publicly traded, the
aggregate market value of our investments in these securities was approximately $18.5 million and $20.7 million as of June 30, 2004 and December 31, 2003, 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 these investments. The trading prices of shares of
CuraGen and ImmunoGen have fluctuated significantly since we purchased these securities. Each

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additional
10% decrease in market value of these securities would result in a decrease in value of approximately $1.9 million and $2.1 million from the fair value of those investments at
June 30, 2004 and December 31, 2003, respectively. Additional price declines could cause us to record additional impairment charges in future periods.

Foreign Currency Risk.A substantial majority of our revenue, expense, and capital purchasing activities are transacted in
U.S. dollars. However, we do enter into transactions in other currencies, primarily the British pound. As of June 30, 2004, we had a contract cancellation obligation to Lonza of approximately
$7.7 million as compared to $22.7 million as of December 31, 2003, which is payable in British pounds. A hypothetical 10% adverse change in exchange rates would result in an
increase in the U.S. dollar value of this obligation of approximately $0.8 million at June 30, 2004 as compared to $2.3 million at December 31, 2003.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on their evaluation of our disclosure controls and procedures, as that term is defined by Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as of the end of the period covered by this report, our chief executive officer and our Senior Director, Finance, have concluded that our disclosure controls and procedures are
effective in ensuring that all material information required to be included in this quarterly report on Form 10-Q has been made known to them in a timely fashion.

Changes in Internal Controls Over Financial Reporting

There has been no change in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Not applicable.

ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Not applicable.

ITEM 3. Defaults upon Senior Securities

Not applicable.

ITEM 4. Submission of Matters to Vote of Security Holders

At our Annual Meeting of Stockholders, held on June 7, 2004, one matter, the election of directors, was voted upon. The following is tabulation of votes
with respect to each nominee:

|                     |  | Votes     
|-------------------- |  | ----------
|
|
|R. Scott Greer       |  | 67,322,597
|M. Kathleen Behrens  |  | 64,542,695
|Raju S. Kucherlapati |  | 65,052,375
|Kenneth B. Lee, Jr.  |  | 64,539,743
|Mark B. Logan        |  | 62,270,717
|Thomas G. Wiggans    |  | 65,048,678
|Raymond M. Withy     |  | 67,261,776

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits and Reports on Form 8-K

|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 Raymond M. Withy, Ph.D. Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        
|31.2   |     | Certification of Barbara Riching Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                
|32.1   |     | Certification of Raymond M. Withy, Ph.D. 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 Barbara Riching 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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We
filed a Form 8-K on April 27, 2004, furnishing under "Item 12. Disclosure of Results of Operations and Financial Condition" a press release we issued on that
date to report our financial results for the quarter ended March 31, 2004.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

Dated:
August 9, 2004

| |  | ABGENIX, INC.(Registrant)                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------
| |  | /s/RAYMOND M. WITHYRaymond M. Withy, Ph.D. President and Chief Executive Officer
(Principal Executive Officer)
| |  | /s/BARBARA RICHINGBarbara Riching Senior Director, Finance
(Principal Financial and Accounting Officer)       

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