**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

 

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

 

**For thequarterly period ended March 31, 2005**

 

**OR**

 

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For thetransition period from                     to                    .**

 

**Commissionfile number:        000-24207**

 

**ABGENIX, INC.**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                     | ** ** | **94-3248826**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (IRS employer  Identification number) |

 
| **6701  Kaiser Drive, Fremont, CA**      | ** ** | **94555**  |
|------------------------------------------|------------|------------|
| (Address of  principal executive office) |       | (Zip Code) |

 

**(510) 608-6500**

(Registrant’s telephonenumber, including area code)

 

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

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act. Yes ýNo o

 

As of April 29, 2005there were 89,708,748 shares of the Registrant’s Common Stock outstanding.

 

 

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**TABLE OF CONTENTS**

 
| **PART I. Financial  Information**                                                                  | ** **                                                                                                |
|----------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
| ** **                                                                                               | ** **                                                                                                |
| **ITEM 1. Financial  Statements**                                                                        | ** **                                                                                                |
| ** **                                                                                               | ** **                                                                                                |
|                                                                                                     | Condensed  Consolidated Balance Sheets at March 31, 2005 and December 31, 2004                  |   |
|                                                                                                     |                                                                                                      |   |
|                                                                                                     | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2005 and 2004 |   |
|                                                                                                     |                                                                                                      |   |
|                                                                                                     | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2005 and 2004 |   |
|                                                                                                     |                                                                                                      |   |
|                                                                                                     | Notes  to Condensed Consolidated Financial Statements                                                     |   |
|                                                                                                     |                                                                                                      |   |
| **ITEM  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations** |                                                                                                      |
| ** **                                                                                               |                                                                                                      |
| **ITEM  3. Quantitative and Qualitative Disclosures about Market Risk**                                  | ** **                                                                                                |
| ** **                                                                                               | ** **                                                                                                |
| **ITEM 4. Controls and  Procedures**                                                                     | ** **                                                                                                |
| ** **                                                                                               | ** **                                                                                                | ** ** |
| **PART II. Other  Information**                                                                     | ** **                                                                                                |
| ** **                                                                                               | ** **                                                                                                | ** ** |
| **ITEM 1. Legal Proceedings**                                                                            | ** **                                                                                                |
| ** **                                                                                               | ** **                                                                                                | ** ** |
| **ITEM  2. Unregistered Sales of Equity Securities and Use of Proceeds**                                 | ** **                                                                                                |
| ** **                                                                                               | ** **                                                                                                | ** ** |
| **ITEM 3.  Defaults upon Senior Securities**                                                             | ** **                                                                                                |
| ** **                                                                                               | ** **                                                                                                | ** ** |
| **ITEM  4. Submission of Matters to a Vote of Security Holders**                                         | ** **                                                                                                |
| ** **                                                                                               | ** **                                                                                                | ** ** |
| **ITEM 5. Other Information**                                                                            | ** **                                                                                                |
| ** **                                                                                               | ** **                                                                                                | ** ** |
| **ITEM 6. Exhibits**                                                                                     | ** **                                                                                                |
| ** **                                                                                               | ** **                                                                                                | ** ** |
| **SIGNATURES**                                                                                           | ** **                                                                                                |
| ** **                                                                                               | ** **                                                                                                | ** ** |
| **CERTIFICATIONS**                                                                                       | ** **                                                                                                |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**ITEM 1.  Financial Statements**

 

**ABGENIX, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(in thousands,except share and per share data)

(unaudited)

 
| ** **                                                                                                                                                                                                             | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                             | ** ** | ** **               | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                                                                                                                             |       |                     |       |                   |       |
| Current  assets:                                                                                                                                                                                                       |       |                     |       |                   |       |
| Cash  and cash equivalents                                                                                                                                                                                             |       | $                        | 68,494     |                   | $          | 148,929 |   |
| Marketable  securities                                                                                                                                                                                                 |       | 332,238                  |       | 267,400                |       |
| Interest  receivable                                                                                                                                                                                                   |       | 2,940                    |       | 2,370                  |       |
| Accounts  receivable, net                                                                                                                                                                                              |       | —                   |       | 5,729                  |       |
| Prepaid  expenses and other current assets                                                                                                                                                                             |       | 10,091                   |       | 11,088                 |       |
| Total  current assets                                                                                                                                                                                                  |       | 413,763                  |       | 435,516                |       |
| Property  and equipment, net                                                                                                                                                                                           |       | 216,919                  |       | 223,004                |       |
| Long-term  investments                                                                                                                                                                                                 |       | 13,611                   |       | 23,300                 |       |
| Goodwill                                                                                                                                                                                                               |       | 34,780                   |       | 34,780                 |       |
| Identified  intangible assets, net                                                                                                                                                                                     |       | 58,569                   |       | 60,010                 |       |
| Deposits  and other assets                                                                                                                                                                                             |       | 35,634                   |       | 36,108                 |       |
|                                                                                                                                                                                                                   |       | $                        | 773,276    |                   | $          | 812,718 |   |
| ** **                                                                                                                                                                                                             |       |                     |       |                   |       |
| **LIABILITIES,  REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY**                                                                                                                                 |       |                     |       |                   |       |
| Current  liabilities:                                                                                                                                                                                                  |       |                     |       |                   |       |
| Accounts  payable                                                                                                                                                                                                      |       | $                        | 5,533      |                   | $          | 6,635 |   |
| Deferred  revenue                                                                                                                                                                                                      |       | 11,386                   |       | 11,692                 |       |
| Accrued  liabilities                                                                                                                                                                                                   |       | 12,630                   |       | 15,281                 |       |
| Accrued  interest payable                                                                                                                                                                                              |       | 1,639                    |       | 1,341                  |       |
| Total  current liabilities                                                                                                                                                                                             |       | 31,188                   |       | 34,949                 |       |
| Deferred  rent                                                                                                                                                                                                         |       | 7,804                    |       | 7,519                  |       |
| Convertible  notes                                                                                                                                                                                                     |       | 463,633                  |       | 463,630                |       |
| Other  long-term liabilities                                                                                                                                                                                           |       | 41,111                   |       | 25,626                 |       |
| Redeemable  convertible preferred stock, $0.0001 par value; 5,000,000 shares authorized                                                                                                                                |       |                     |       |                   |       |
| Series A-1  50,000 shares issued and outstanding at March 31, 2005 and December 31,  2004, respectively; liquidation preference $50,000 at March 31, 2005 and  December 31 2004, respectively |       | 49,869                   |       | 49,869                 |       |
| Commitments                                                                                                                                                                                                            |       |                     |       |                   |       |
| Stockholders’  equity:                                                                                                                                                                                            |       |                     |       |                   |       |
| Common  stock, $0.0001 par value; 220,000,000 shares authorized; 89,435,162 and  89,146,380 shares issued and outstanding at March 31, 2005 and December 31,  2004, respectively                             |       | 9                        |       | 9                      |       |
| Additional  paid-in capital                                                                                                                                                                                            |       | 976,099                  |       | 973,979                |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                         |       | (1,550                   | )          | 9,391                  |       |
| Accumulated  deficit                                                                                                                                                                                                   |       | (794,887                 | )          | (752,254               | )          |
| Total  stockholders’ equity                                                                                                                                                                                       |       | 179,671                  |       | 231,125                |       |
|                                                                                                                                                                                                                   |       | $                        | 773,276    |                   | $          | 812,178 |   |

 

See accompanyingnotes

 

3

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**ABGENIX, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands,except per share data)

(unaudited)

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                               |       |                                  |       |   |   |
| Revenues:                                                                          |       |                                  |       |   |   |
| Contract  revenue                                                                  |       | $                                     | 2,658      |   | $ | 2,890 |   |
| Operating  expenses:                                                               |       |                                  |       |   |   |
| Research  and development                                                          |       | 35,784                                |       | 28,457 |   |
| Manufacturing  start-up costs                                                      |       | 1,977                                 |       | 7,346 |   |
| Amortization  of identified intangible assets, related to research and development |       | 1,441                                 |       | 1,792 |   |
| General  and administrative                                                        |       | 5,703                                 |       | 6,888 |   |
| Total  operating expenses                                                          |       | 44,905                                |       | 44,483 |   |
| Loss  from operations                                                              |       | (42,247                               | )          | (41,593 | ) |
| Other  income (expenses):                                                          |       |                                  |       |   |   |
| Interest  and other income                                                         |       | 2,956                                 |       | 1,670 |   |
| Interest  expense                                                                  |       | (3,342                                | )          | (1,643 | ) |
| Total  other income (expenses)                                                     |       | (386                                  | )          | 27 |   |
| Net  loss                                                                          |       | $                                     | (42,633    | ) | $ | (41,566 | ) |
|                                                                               |       |                                  |       |   |   |
| Basic  and diluted net loss per share                                              |       | $                                     | (0.48      | ) | $ | (0.47 | ) |
|                                                                               |       |                                  |       |   |   |
| Shares  used in computing basic and diluted net loss per share                     |       | 89,253                                |       | 88,307 |   |

 

See accompanyingnotes

 

4

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**ABGENIX, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

(unaudited)

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| **Operating activities**                                                     |       |                                  |       |   |   |
| Net  loss                                                                    |       | $                                     | (42,633    | ) | $ | (41,566 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                  |       |   |   |
| Depreciation                                                                 |       | 7,320                                 |       | 7,799 |   |
| Amortization  of identified intangible assets                                |       | 1,441                                 |       | 1,791 |   |
| Amortization  of debt issuance costs                                         |       | 500                                   |       | 309 |   |
| Stock  options issued to consultants                                         |       | 6                                     |       | — |   |
| Changes  for certain assets and liabilities:                                 |       |                                  |       |   |   |
| Interest  receivable                                                         |       | (570                                  | )          | 963 |   |
| Accounts  receivable                                                         |       | 5,729                                 |       | 1,669 |   |
| Inventories                                                                  |       | —                                |       | (1,796 | ) |
| Prepaid  expenses and other current assets                                   |       | 997                                   |       | 1,474 |   |
| Deposits  and other assets                                                   |       | (41                                   | )          | (15 | ) |
| Accounts  payable                                                            |       | (1,102                                | )          | (2,441 | ) |
| Deferred  revenue                                                            |       | (306                                  | )          | (593 | ) |
| Accrued  liabilities                                                         |       | (2,576                                | )          | 2,627 |   |
| Contract  cancellation obligation                                            |       | —                                |       | (7,109 | ) |
| Accrued  interest payable                                                    |       | 298                                   |       | (1,750 | ) |
| Deferred  rent                                                               |       | 285                                   |       | 394 |   |
| Other  long-term liabilities                                                 |       | 15,485                                |       | — |   |
| Net  cash used in operating activities                                       |       | (15,167                               | )          | (38,244 | ) |
|                                                                         |       |                                  |       |   |   |
| **Investing activities**                                                     |       |                                  |       |   |   |
| Purchases  of marketable securities                                          |       | (74,026                               | )          | (65,810 | ) |
| Maturities  of marketable securities                                         |       | —                                |       | 18,427 |   |
| Sales  of marketable securities                                              |       | 7,954                                 |       | 85,442 |   |
| Purchases  of property and equipment                                         |       | (1,310                                | )          | (2,980 | ) |
| Net  cash (used in) provided by investing activities                         |       | (67,382                               | )          | 35,079 |   |
|                                                                         |       |                                  |       |   |   |
| **Financing activities**                                                     |       |                                  |       |   |   |
| Net  proceeds from issuance of common stock                                  |       | 2,114                                 |       | 413 |   |
| Net  cash provided by financing activities                                   |       | 2,114                                 |       | 413 |   |
| Net  decrease in cash and cash equivalents                                   |       | (80,435                               | )          | (2,752 | ) |
| Cash  and cash equivalents at beginning of period                            |       | 148,929                               |       | 19,141 |   |
| Cash  and cash equivalents at end of period                                  |       | $                                     | 68,494     |   | $ | 16,389 |   |

 

See accompanyingnotes

 

5

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**ABGENIX, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**March 31,2005**

**(unaudited)**

 

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

 

**Basis ofPresentation -**The unaudited condensed consolidated financialstatements of Abgenix, Inc. (the “Company” or “Abgenix”) included hereinhave been prepared pursuant to the rules and regulations of the Securitiesand Exchange Commission.  Certaininformation or footnote disclosure normally included in financial statementsprepared in accordance with generally accepted accounting principles has beencondensed or omitted pursuant to such rules and regulations.  In the opinion of the Company, theaccompanying unaudited condensed consolidated financial statements contain alladjustments, consisting only of normal recurring adjustments, necessary topresent fairly the financial information included therein.  These financial statements should be read inconjunction with the audited financial statements for the year ended December 31,2004****and accompanying notesincluded in the Company’s annual report as filed on Form 10-K with theSecurities and Exchange Commission.  Theresults of operations for the three months ended March 31, 2005 are notnecessarily indicative of the results to be expected for the full year or forany other future period.

 

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

** **

**SFAS No. 123(R), which is effective for theCompany on January 1, 2006, permits public companies to adopt itsrequirements using either the modified prospective or modified retrospectivetransition method.  The Company expectsto use the modified prospective transition method, which requires that compensationcost is recognized for all awards granted, modified or settled after theeffective date as well as for all awards granted to employees prior to theeffective date that remain unvested as of the effective date.**

** **

**As permitted by SFAS No. 123, the Companycurrently accounts for its share-based payments to employees using APB Opinion No. 25’sintrinsic value method and does not recognize compensation costs for itsemployee stock options.  Accordingly, theCompany expects that the adoption of SFAS No. 123(R)’s fair value methodwill have a significant impact on the Company’s result of operations, althoughit will have no impact on the Company’s overall financial position.  The impact of adopting SFAS No. 123(R)cannot be predicted at this time because it will depend on levels ofshare-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods,the impact would approximate the impact of SFAS No. 123 as shown in thetable below under the heading of “Stock-Based Compensation.”**

** **

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

 

6

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**accordance with Securities and Exchange CommissionStaff Accounting Bulletin No. 104, “Revenue Recognition”.  In addition, the Company has followed thefollowing principles in recognizing revenue:**

** **

**•**                  Abgenix enters intorevenue arrangements with multiple deliverables in order to meet its customers’needs.  For example, the arrangements mayinclude a combination of up-front fees, license payments, joint developmentrevenue, research services, milestone payments, future royalties andmanufacturing arrangements.  Multipleelement revenue agreements entered into on or after July 1, 2003 areevaluated under Emerging Issues Task Force No. 00-21, “RevenueArrangements with Multiple Deliverables,” to determine whether the delivereditem has value to the customer on a stand-alone basis and whether objective andreliable evidence of the fair value of the undelivered item exists.  Deliverables in an arrangement that do notmeet the separation criteria in Issue 00-21 must be treated as one unit ofaccounting for purposes of revenue recognition. Generally, the revenue recognition guidance applicable to the lastdeliverable is followed for the combined unit of accounting.

** **

**•**                  Abgenix has jointdevelopment arrangements under which Abgenix and its collaborative partnersshare the costs of developing and commercializing antibody therapeutic productcandidates equally.  In periods whereAbgenix incurs more costs under the arrangement than the collaborative partner,Abgenix records contract revenue for the services rendered.  The amount of this revenue is the excess ofAbgenix costs over the costs of its collaborator.  In periods where the collaborative partnerincurs more costs under the arrangement than Abgenix, Abgenix records expensefor the services received.

** **

**•**                  Research and productlicense fees are generally recognized only after both the license period hascommenced and the technology has been delivered.

** **

**•**                  Option fees for grantingoptions to obtain product licenses to develop a product are recognized when theoption is exercised or when the option period expires, whichever occursfirst.  Option fees are paid in cash, arenon-refundable, and require the Company to reserve rights to the therapeutictarget during the option period for the customer.

** **

**•**                  Fees the Company receivesfor research services the Company performs under its technology out-licensingagreements are generally recognized ratably over the entire period the Companyperforms these services.  Researchservices include process sciences services the Company performs under itsproduction services agreements, such as cell line development.

** **

**•**                  Incentive milestonepayments are recognized as revenue when the specified milestone isachieved.  Incentive milestone paymentsare triggered either by the results of the Company’s research efforts or byevents external to Abgenix, such as regulatory approval to market aproduct.  Incentive milestone paymentsare substantially at risk at the inception of the contract, and the valuesassigned thereto are commensurate with the type of milestone achieved.  The Company has no future performanceobligations related to an incentive milestone that has been achieved.

** **

**•**                  Contract manufacturingfees the Company receives under its production services agreements arerecognized when the manufacture of an antibody product candidate is complete,and the antibody product candidate is released and delivered, as defined in therelevant agreement.

** **

**Stock-BasedCompensation -**The Company accounts for stock-based awards to employees anddirectors using the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees.” Accordingly, the Company does not recognize compensation expensefor employee stock options granted at or above fair market value. For purposes of disclosures pursuant to SFAS No. 123,as amended by SFAS No. 148, the estimated fair value of options isamortized to expense straight-line over the options’ vesting period. The following table illustrates what net losswould have been had the Company accounted for its stock-based awards 

 

7

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underthe provisions of SFAS No. 123. Pro forma amounts may not berepresentative of future periods.

 
| ** **                                                                                                                                                              | ** ** | **Three Months Ended  March 31,**        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                              | ** ** | **(in thousands, except per  share amounts)** | ** ** |
| ** **                                                                                                                                                              | ** ** | ** **                                    | ** ** |
| Net  loss                                                                                                                                                               |       | $                                             | (42,633    | ) | $ | (41,566 | ) |
| 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 |       | (4,464                                        | )          | (12,355 | ) |
| Pro  forma net loss as if the fair value based method had been applied to all  awards                                                                                   |       | $                                             | (47,097    | ) | $ | (53,921 | ) |
|                                                                                                                                                                    |       |                                          |       |   |   |
| Basic  and diluted net loss per share as reported                                                                                                                       |       | $                                             | (0.48      | ) | $ | (0.47 | ) |
|                                                                                                                                                                    |       |                                          |       |   |   |
| Pro  forma basic and diluted loss per share                                                                                                                             |       | $                                             | (0.53      | ) | $ | (0.61 | ) |

 

Thefair value for these options was estimated at the date of grant using aBlack-Scholes option pricing model with the following weighted-averageassumptions for the three months ended March 31, 2005 and 2004:

 
| ** **                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Risk-free  interest rate                                             |       | 4.18                                   | %          | 3.07 | % |
| Dividend  yield                                                      |       | 0.0                                    | %          | 0.0 | % |
| Volatility  factors of the expected market price of our Common Stock |       | 0.55                                   |       | 0.90 |   |
| Weighted-average  expected life of option (years)                    |       | 5.19                                   |       | 5.55 |   |

 

Thesesame assumptions were applied in the determination of the option values relatedto stock options granted to non-employees, except the option life, for whichthe term of the consulting contracts (ranging from 1 to 5 years) was used.For the three months ended March 31 2005, we recorded an expense of $6,000related to non-employee stock options. We did not incur such expense in the three months ended March 31,2004.

 

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

 

**2.****                                      ComprehensiveIncome (Loss)**

 

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

 

8

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| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                       | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                     | ** ** |
| Net  loss                                        |       | $                                      | (42,633    | ) | $ | (41,566 | ) |
| Other  comprehensive loss:                       |       |                                   |       |   |   |
| Unrealized  holding losses arising during period |       | (10,941                                | )          | (1,105 | ) |
|                                             |       |                                   |       |   |   |
| Comprehensive  loss                              |       | $                                      | (53,574    | ) | $ | (42,671 | ) |

 

As of March 31, 2005, theCompany had an investment in equity securities with an unrealized loss ofapproximately $1.1 million.  This unrealizedloss arose during the three-month period ended March 31, 2005 and isconsidered to be temporary.  The Companyhas the intent and ability to hold this security until it recovers its costbasis.  The Company will reassess whetherthe unrealized loss on the equity security is other-than-temporary in eachfuture reporting period.

 

**3.****                                     ****Other Long-Term Liabilities**

 

In 2000,the Company entered into a joint development and commercialization agreementwith Immunex Corporation, a wholly-owned subsidiary of Amgen, Inc., forthe co-development of ABX-EGF, now known as panitumumab, a fully human antibodydirected against epidermal growth factor receptor (EGFr) the Companycreated.  The parties amended thisagreement in October 2003.  Underthe amended agreement, Amgen has decision-making authority for development andcommercialization activities.  As underthe original agreement, the Company is obligated to pay 50% of the developmentand commercialization costs and is entitled to receive 50% of any profits fromsales of panitumumab.  Under the amendedagreement, Amgen is required to make available in 2004 and 2005 up to $60.0million in advances that the Company may use to fund a portion of its share ofdevelopment and commercialization costs for panitumumab after the Company hascontributed $20.0 million toward development costs in 2004.  As of March 31, 2005, the Company has acarrying balance of $41.1 million under this facility consisting of $39.8million in advances and $1.3 million of interest accrued at the contract rateof 12% per annum.  The Company hasnotified Amgen of its intent to draw a cash advance of an additional $3.3million subsequent to March 31, 2005. The amount of any such advances, plus interest, may be repaid out ofprofits resulting from future product sales; however, the Company is generallynot obligated to repay any portion of the outstanding balance if panitumumabdoes not reach commercialization.

 

**4.****                                      SegmentInformation**

 

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

 

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

 
| **Period**                              | ** ** | **Number  of Customers and Percentage of  Contract Revenues for each of the Customers** |
|-----------------------------------------|------------|-----------------------------------------------------------------------------------------|
| Three  months ended March 31, 2005 |       | 3  customers, 31%, 31% and 28%, respectively                                            |
| Three  months ended March 31, 2004 |       | 4  customers, 42%, 16%, 15% and 12%, respectively                                       |

 

9

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

** **

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

 

##### **Overview**

##### ** **

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

 

***Our Business***

 

We are abiopharmaceutical company that is focused on the discovery, development andmanufacture of human therapeutic antibodies for the treatment of a variety ofdiseases. We intend to use our proprietary technologies to build a diversifiedproduct portfolio that we expect to develop and commercialize internally orthrough joint development and commercialization arrangements withpharmaceutical and biotechnology companies.

 

We are co-developing ourmost advanced proprietary product candidate, panitumumab, with ImmunexCorporation, a wholly owned subsidiary of Amgen Inc.  References in this quarterly report to Amgenare both to Amgen and Immunex.  Panitumumabis in pivotal trials, and we have one other product candidate, ABX-PTH, inearly stage clinical trials. In addition, we have entered into a variety ofcontractual arrangements with pharmaceutical, biotechnology and genomicscompanies involving our technologies. We use our closely integrated processsciences and manufacturing capabilities for the manufacture of our ownproprietary product candidates and also offer these services to ourcollaborators and others.

 

We have entered intojoint development arrangements with companies such as Chugai PharmaceuticalsCo., Ltd., U3 Pharma AG, Microscience Limited, Dendreon Corporation, and SoseiCo., Ltd. and intend to enter into additional joint development agreements. Wegenerally expect to self-fund preclinical and certain clinical activities todetermine preliminary safety and efficacy before deciding whether to conductfurther product development internally or enter into joint development andcommercialization agreements. Our strategy is designed to diversify the risksassociated with our research and development spending and to continue to focusour activities on product development and commercialization.

 

We also have a broad collaboration in oncology with AstraZeneca UKLimited. Pursuant to this collaboration we are providing preclinical andclinical research support and process development for therapeutic antibodiesagainst up to 36 targets to be developed by AstraZeneca, and have theopportunity to co-develop therapeutic antibodies against up to 18 additionaltargets with AstraZeneca.  We also mayconduct clinical manufacturing, as well as commercial manufacturing during thefirst five years of commercial sales for products arising out of ourcollaboration.

 

***Our Financial Position and Liquidity***

 

We derive our revenuesfrom our technology out-licensing contracts, our joint development agreements,our target sourcing contracts and our production services contracts.  We expect that substantially all of ourrevenues for the foreseeable future will result from payments under these andsimilar arrangements and our collaboration with AstraZeneca, and that paymentswe receive under these arrangements will continue to be subject to significantfluctuation in both timing and amount.

 

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

 

We have incurred netlosses since we were organized as an independent company, including a net lossof $42.6 million for the three months ended March 31, 2005.  We expect to incur additional losses for theforeseeable future as a result of our research and development costs andmanufacturing start-up costs, including costs associated with conductingpreclinical development and clinical trials, and charges related to purchasesof technology or other assets.                 We expect that the amount of ouroperating losses will fluctuate significantly from quarter to quarter.

 

As of March 31,2005, we had cash, cash equivalents and marketable securities of$400.7 million.  We will continue toassess our cash position, and may repurchase a portion of our outstandingconvertible subordinated notes due 2007, of which $113.7 million wereoutstanding at March 31, 2005.

 

***Summary of Product Development***

 

*Proprietary Product Development*

 

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

 

•                  **Panitumumab** (ABX-EGF). Our leading proprietary antibody therapeutic product candidate ispanitumumab.  Generated using ourtechnology, panitumumab is a fully human antibody therapeutic product candidatedirected against the epidermal growth factor receptor (EGFr) and a candidatefor the potential treatment of a variety of solid tumors. We are co-developingthis candidate with Amgen under a joint development and commercializationagreement described under **Summary ofContractual Arrangements**below. The status of clinical trials of panitumumab is as follows:

 

•                  *Colorectal cancer, single agent therapy withpanitumumab* – In January 2004, Amgen initiated two pivotal studies of panitumumab as third-linemonotherapy in patients with metastatic colorectal cancer, one in the UnitedStates and one outside the United States. The initiation of the U.S. trial followed the receipt of a SpecialProtocol Assessment letter from the U.S. Food and Drug Administration, or FDA,endorsing the design of the trial to support a regulatory submission forpotential accelerated approval. Enrollment in this trial, which began in the first quarter of 2004, isproceeding more slowly than originally anticipated.  The second pivotal study, a randomizedcontrolled study comparing best supportive care with best supportive care andpanitumumab, is being conducted in Europe, Canada and Australia in support ofthe global registration program. Enrollment in this study is complete. In December 2004, the FDA indicated that data from one pivotaltrial, once completed, could be acceptable with additional data from otherpending studies to support a submission for marketing approval in the UnitedStates.

 

Amgen is also conductinga Phase 2 clinical trial evaluating the effect of panitumumab as monotherapy inpatients with metastatic colorectal cancer who have previously failedchemotherapy.  Enrollment in this trial,which was initiated in December 2001, is closed and treatment is ongoing.

 

•                  *Colorectal cancer,combination of panitumumab with chemotherapy* — Amgen is conducting a separate Phase 2 clinical trial evaluating theeffect of panitumumab administered with irinotecan (Camptosar®)-containingregimens as first-line treatment in patients with metastatic colorectal 

 

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cancer.  Enrollment in this trial, which was initiatedin January 2002, is closed and treatment is ongoing.

 

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

 

•                  *Non-small cell lung cancer*— Amgen is conducting a Phase 2 clinicaltrial for panitumumab in advanced non-small cell lung cancer administered withstandard chemotherapy, compared to standard chemotherapy alone.  Enrollment in this trial, which was initiatedin July 2001, is closed and treatment is ongoing.

 

•                  *Renal cell cancer*—We are conducting a Phase 2 clinical trialevaluating the effect of panitumumab as monotherapy in patients with renal cellcancer.  Enrollment in this trial, whichwas initiated in April 2001, is closed and treatment is ongoing.

 

•                  *Various cancers* – We initiated a Phase 1 clinical trial forpanitumumab in various solid tumors in 1999. In 2003, we expanded enrollment to investigate additional panitumumabdose levels and schedules of administration. Enrollment is closed and treatment is complete.

 

•                  Amgen is conducting an additional study toevaluate panitumumab in metastatic colorectal cancer patients with tumorshaving low or undetectable levels of EGFr. This trial was initiated in 2004 and enrollment is ongoing.

 

•                  Further Phase 1 and 2 clinical studiesevaluating panitumumab in different tumor types either as a single agent or incombination with different chemotherapeutic agents and targeting agents havebeen initiated or are expected to be initiated from time to time.  For example, an evaluation of panitumumab incombination with chemotherapy and AMG 706, an Amgen proprietary multi-kinaseinhibitor, is currently ongoing.

 

•                  **ABX-PTH.** Generated using our technology, ABX-PTH is a fully human antibodytherapeutic product candidate directed against parathyroid hormone (PTH) forthe potential treatment of a secondary hyperparathyroidism.  We filed an investigational new drugapplication, or IND, in December 2003 and initiated a Phase 1 clinicaltrial evaluating the safety and pharmacokinetics of ABX-PTH in patients withsecondary hyperparathyroidism in February 2004.  Enrollment is ongoing.

 

*Customer Product Development*

 

Welicense our XenoMouse technology to pharmaceutical, biotechnology and genomicscompanies interested in developing antibody-based products.  Typically, our agreements with our customersprovide for up-front and milestone payments to us upon the occurrence ofcertain events, along with royalty payments to us if the product reaches themarket.  We do not participate in thedevelopment or marketing of these products with our customers.  In addition to our proprietary antibodytherapeutic product candidates in clinical trials, our customers have advancedantibodies generated with XenoMouse technology into the clinical phase asfollows:

 

•                  Pfizer—We generated three XenoMouse-derivedfully human antibody therapeutic product candidates that Pfizer has advancedinto clinical trials, including one that targets cytotoxic Tlymphocyte-associated antigen 4 (CTLA-4) and one that targets the type 1insulin-like growth factor receptor (IGF-1R). The target for the third product candidate has not been disclosed.  Two of the product candidates are currentlyin Phase 1 evaluation and one has advanced to Phase 2 

 

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evaluation.

 

•                  Amgen—We generated a XenoMouse-derived fullyhuman antibody therapeutic product candidate that Amgen has advanced into apivotal trial as AMG162 as a potential treatment for bone loss.  Amgen has advanced an additionalXenoMouse-derived fully human antibody therapeutic product candidate to anundisclosed target to Phase 1 clinical trials.

 

•                  Chiron–We generated a XenoMouse-derived fullyhuman antibody therapeutic product candidate that binds to and neutralizesCD40, a receptor expressed on immune cells. Chiron has advanced this candidate, CHIR-12.12, into a Phase 1 clinicaltrial in patients with B cell malignancies.

 

•                  CuraGen–We generated a XenoMouse-derivedfully human antibody therapeutic product candidate that binds to plateletderived growth factor D (PDGF-D) that CuraGen has advanced to Phase 1 clinicaltrials as CR002 as a potential treatment for inflammatory kidney disease.

 

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

 

***Summary of Contractual Arrangements***

 

*Overview*

 

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

 

*AmgenCollaboration*

 

In 2000, we entered into a joint development and commercializationagreement with Immunex, now a wholly-owned subsidiary of Amgen, for theco-development of ABX-EGF, now known as panitumumab.  We amended this agreement in October 2003.  Under the amended agreement, Amgen has decision-makingauthority for development and commercialization activities and we have theright to co-promote panitumumab.  We areobligated to pay 50% of the development and commercialization costs and we areentitled to receive 50% of any profits from sales of panitumumab.  In addition, Amgen is required to makeavailable in 2004 and 2005 up to $60.0 million in advances that we may use tofund a portion of our share of development and commercialization costs forpanitumumab.  The amount of any suchadvances, plus interest, may be repaid out of profits resulting from futureproduct sales; however, we are generally not obligated to repay any portion ofthe outstanding balance if panitumumab does not reach commercialization. Undera separate agreement with Amgen, we are manufacturing clinical supplies ofpanitumumab for the collaboration and will manufacture commercial supplies forthe first five years after commercial launch, with Amgen’s support andassistance.  The costs of manufacturingclinical and commercial supplies are also shared equally.

 

*AstraZeneca Collaboration*

 

We entered into a collaboration and license agreement with AstraZenecain October 2003 for the discovery, development and commercialization offully human monoclonal antibodies to treat cancer.  This alliance involves the joint discoveryand development of therapeutic antibodies for up to 36 cancer targets to becommercialized exclusively worldwide by AstraZeneca.  We will conduct early stage preclinicalresearch on behalf of AstraZeneca with respect to some or all of these targets,and have initiated research programs for numerous targets.  To date, we and AstraZeneca have selected 17targets for inclusion in the collaboration, including several for which we hadpre-existing preclinical programs.  Forany resulting products, we may receive milestone payments at various stages ofdevelopment and 

 

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royaltieson future product sales.  AstraZeneca maymake milestone payments to us of up to $51 million per candidate that isdeveloped under the agreement, and for any antibody we choose to develop to atarget that is discontinued from the collaboration, we may pay AstraZeneca upto $15 million.  In addition, we mayconduct early clinical trials, process development and clinical manufacturing,as well as commercial manufacturing during the first five years of commercialsales, and would be compensated for those activities at competitive marketrates.  The collaboration also gives usthe right to select and develop an additional pool of antibodies against up to18 targets, which the companies may elect to further develop on an equal costand profit sharing basis.  Subject to anumber of exceptions, we will work exclusively with AstraZeneca to generate anddevelop antibodies for therapeutic use in the field of oncology during athree-year target selection period. These exceptions include, among others, work on antibodies directed atantigens that are or become subject to existing collaborations and antigens thatwe and AstraZeneca decide not to pursue in the collaboration, and certainprocess development and manufacturing services. In connection with this collaboration, AstraZeneca made a $100.0 millioninvestment in Abgenix securities.  Uponthe achievement of certain milestones, we may also require AstraZeneca toinvest up to an additional $60.0 million in our convertible preferred stock.

 

*Joint Development Collaborations*

 

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

 

*Technology Out-Licensing*

 

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

 

*Production Services*

 

We have entered into a limited number of contracts forprocess sciences and manufacturing services. We may offer a variety of processdevelopment, cell banking and clinical and commercial scale manufacturingservices for antibody product candidates to existing and new customers toabsorb production services capacity we are not using for our proprietaryproduct candidates. Pursuant to such arrangements we may receive fees and, insome circumstances, royalties from future product sales. We may continue toassess and enter into such service contracts.

 

**Results of Operations**

 

*Three Months Ended March 31, 2005 and 2004*

 

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*Contract Revenues.*

 

Contractrevenues totaled $2.7 million and $2.9 million, respectively, in the threemonths ended March 31, 2005 and 2004. Because contract revenues depend toa large extent on the success or failure of research and development effortsundertaken by our collaborators and licensees, our period-to-period contractrevenues can fluctuate significantly and are inherently difficult topredict.  There were no revenues recordedunder joint development arrangements for the three months ended March 31,2005 or 2004.

 

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

 

•                  Technology Licensing

 

Werecognized a total of $2.7 million and $2.5 million in the three monthsended March 31, 2005 and 2004, respectively, from licensing ourproprietary technologies. Revenues consisted primarily of the following:

 

Inthe three months ended March 31, 2005 and 2004, we recognized variousfees, such as research license and service fees, product license fees, productdevelopment and research milestone payments and option fees, under agreementsrelated to the licensing of our XenoMouse technology.  These revenues were generated from severalcollaborators, but primarily from Pfizer, Amgen and Genentech in the threemonths ended March 31, 2005 and from Pfizer, PSMA Development Company, LLCand Amgen in the three months ended March 31, 2004.

 

•                  Production Services

 

Werecognized no revenue and approximately $432,000, respectively in the threemonths ended March 31, 2005 and 2004 for production services.  These revenues consisted primarily of processsciences services and were generated from our manufacturing contract withCuraGen.

 

*Research and Development Expenses*.

 

Researchand development expenses were $35.8 million and $28.5 million, respectively, inthe three months ended March 31, 2005 and 2004. The major components ofresearch and development expenses were as follows:

 
| ** **                            | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                            | ** ** | **(in thousands)**                    | ** ** |
| Product  development                  |       | $                                     | 27,402     |   | $ | 19,111 |   |
| Research                              |       | 8,275                                 |       | 8,556 |   |
| In-licensing                          |       | 107                                   |       | 790 |   |
| Total  research and development costs |       | $                                     | 35,784     |   | $ | 28,457 |   |

 

Productdevelopment costs include costs of preclinical development, cell linedevelopment and conducting clinical trials for our proprietary product candidates.  Additionally, product development includescosts related to cell line development activities we perform under ourproduction services contracts.  Theprimary components of product development include the costs of Abgenixpersonnel, drug supply costs, research fees charged by outside contractors,co-development costs, and facility expenses, including depreciation.  In the three months ended March 31,2005, our product development costs increased in comparison to the same periodin 2004, primarily due to a significant increase in the

 

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developmentcosts for the panitumumab program.  To alesser extent the increase was due to an increase in product development costsrelated to ABX-PTH.  Product developmentcosts can vary significantly from period to period depending on the progress ofthe development activities in the period. Overall, we expect costs associated with product development in 2005 tobe higher than 2004 as we and our co-development partner Amgen continue toexpand our development efforts on the panitumumab program.  In addition, we expect product developmentcosts related to ABX-PTH to increase in 2005.

 

Research costs include costs associated with research andtesting of antibodies we generate, whether for ourselves or for our customers,prior to the development stage which begins with the commencement ofpreclinical activities.  Research costsalso include the costs of research relating to proprietary technologies,including enhancements to those technologies. The primary components of research costs include the costs of Abgenixpersonnel, facilities, including depreciation, and lab supplies.  Ourresearch costs in the first quarter of 2005 generally remained at the samelevels as in the same period of 2004.  Weexpect our research costs to increase from the current level during theremainder of 2005 due to increased research activities related to ourproprietary and partner pipelines.

 

In-licensing costs include costs to acquire licenses to develop andcommercialize various technologies and molecules.  In the three months ended March 31,2005, the in-licensing costs decreased as compared to the same period in 2004primarily due to a reduction in costs associated with licensing charges fromarrangements with research institutions and others.  We expect in-licensing costs to decrease in2005 as compared to 2004.

 

Major components of research and development costs for the three monthsended March 31, 2005 and 2004 were as follows:

 

•                  Costsof Abgenix Personnel — Personnel costs primarily include salaries and fringebenefits.  Costs of Abgenix personnel tosupport research and development activities increased 18% in the three monthsended March 31, 2005 as compared to the same period in 2004.  The increasewas primarily due to increased personnel costs for process sciences andpreclinical and clinical research; and increased use of our manufacturingfacility for development activities, including process validation for themanufacture of our conformance lots.

 

•                  Consulting and Outside Contractors — Costs ofconsulting and outside contractors to support research and developmentactivities decreased 55% in the three months ended March 31, 2005 ascompared to the same period in 2004.  Thedecrease was primarily due to a decrease in process and assay developmentexpenses related to panitumumab as well as a decrease in expenses incurred fortoxicology studies.

 

•                  Clinical Research Fees – Clinical researchfees, including clinical investigator site fees, monitoring costs and datamanagement costs, decreased 79% in the three months ended March 31, 2005as compared to the same period in 2004. The decrease was primarily due to the completion of patient enrollmentfor all panitumumab clinical trials that we manage.

 

•                  Drug Supply Costs – Drug supply costsincreased 196% in the three months ended March 31, 2005 as compared to thesame period in 2004.  The increase wasprimarily due to the manufacture of conformance lots for panitumumab inpreparation for a potential submission for marketing approval.

 

•                  Co-development costs – Co-development costs,which were the amount of our reimbursement to Amgen for our share ofpanitumumab development costs under our joint development collaboration,increased 70% in the three months ended March 31, 2005 as compared to thesame period in 2004.  The increase wasrelated to cost sharing for an increased level of activities performed by Amgenassociated with the co-development of panitumumab.

 

•                  Facility and Other Overhead Related Costs –These costs, which primarily consist of depreciation, rent and other facilityrelated costs, increased 27% in the three months ended March 31, 2005 as 

 

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compared to the same period in 2004. The increase was primarily related to increased use of our manufacturingfacility for development activities, including process validation activitiesrelated to the manufacture of panitumumab conformance lots.

 

*Manufacturing Start-Up Costs.*

 

Manufacturing start-up costswere $2.0 million and $7.3 million, respectively, in the three months ended March 31,2005 and 2004, respectively. Manufacturing start-up costs include certain costs associated with ournew manufacturing facility, including depreciation, outside contractor costsand personnel costs for activities such as quality assurance and qualitycontrol.  The decrease in the threemonths ended March 31, 2005 as compared to the same period in 2004 wasprimarily due to the increased use of our manufacturing facility for themanufacture of panitumumab and other development activities, including processvalidation and the manufacture of our conformance lots.  Manufacturing start-up costs will fluctuatefrom period to period depending on the level of these manufacturing anddevelopment activities.

 

*Amortizationof Identified Intangible Assets.*

 

Ouridentified intangible assets consist primarily of existing technology(including patents and certain royalty rights) we acquired through theacquisitions of Hesed Biomed in 2001, Abgenix Biopharma and IntraImmune in2000, and JT America’s interest in Xenotech in 1999.  Amortization of intangible assets totaled$1.4 million in the three months ended March 31, 2005 and $1.8 million inthe three months ended March 31, 2004. The decrease was due to a reduction in intangible assets due to thewrite-off in the second quarter of 2004 of the remaining value of the catalyticantibody technology that we acquired through the acquisition of Hesed Biomed.

 

*General and Administrative Expenses.*

 

Generaland administrative expenses include compensation, professional services,consulting and other expenses related to information systems, legal, financeand an allocation of facility costs. General and administrative expenses totaled $5.7 million and $6.9million in the three months ended March 31, 2005 and 2004,respectively.  The decrease in the firstquarter of 2005 as compared to the same period in 2004 reflected our overallefforts to reduce general and administrative expenses, including temporarypersonnel and legal expenses.  We expectgeneral and administrative expenses in the second quarter of 2005 to becomparable to the first quarter.

 

*Interest and Other Income.*

 

Interestand other income consist primarily of interest from cash, cash equivalents andmarketable securities. Interest and other income increased to $3.0 million inthe three months ended March 31, 2005, compared to $1.7 million in thethree month ended March 31, 2004. The increase was primarily the result of higher interest rates andhigher average cash, marketable securities and cash equivalent balances in thefirst quarter of 2005 as compared to the same period in 2004.

 

*Interest Expense.*

 

Interest expense was primarily related to interest andamortization of issuance costs on our convertible notes and interest on theAmgen credit facility. In the three months ended March 31, 2005, interestexpense increased to $3.3 million, as compared to $1.6 million in the sameperiod in 2004. The increase in the first quarter of 2005 as compared to thesame period in 2004 was primarily due to the interest related to theconvertible senior notes due 2011 and the interest related to the creditfacility with Amgen which was not available for advances in the first quarterof 2004. A portion of the increase was offset by the reduction of interestrelated to the convertible subordinated notes due 2007, as $86.3 millionprincipal amount of these notes was repurchased in December 2004. Interestexpense of $0.3 million and $0.4 million was capitalized in the three monthsended March 31, 2005 and 2004, respectively. In

 

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December 2004, we issued $300.0 million of convertible seniornotes due 2011, which accrue interest at an annual rate of 1.75% payablesemi-annually. Interest expense in the amount of $1.3 million related to theconvertible senior notes due 2011 and $1.0 million related to the convertiblesubordinated notes due 2007 was recorded in the first quarter of 2005. For eachfuture quarterly period, we expect to record approximately $2.3 million ininterest expense related to our convertible notes assuming we do not repurchaseor otherwise retire any additional notes due 2007. We record interest at 12% onthe amounts we draw on our credit facility with Amgen until we repay thebalance in full. In the first quarter of 2005, the amount of interest recordedunder the Amgen arrangement was $0.8 million. The amount of any such advances,plus interest, may be repaid out of profits from future product sales; however,we are generally not obligated to repay any portion of the outstanding balanceif panitumumab does not reach commercialization.

 

**Liquidity and Capital Resources**

 

AtMarch 31, 2005, we had cash, cash equivalents and marketable securities ofapproximately $400.7 million. We invest our cash equivalents and marketablesecurities primarily in highly liquid, interest bearing, investment grade andgovernment securities in order to preserve principal. We have also invested incertain marketable equity securities of ImmunoGen and CuraGen for strategicreasons. These securities had an aggregate fair value of $13.6 million at March 31,2005.  We will continue to assess ourcash position, and may repurchase a portion of our outstanding convertible subordinatednotes due 2007.

 

*Cash Used in Operating Activities.*  Netcash used in operating activities was $15.2 million and $38.2 million in the three months ended March 31, 2005 and2004, respectively. The major components of the changes in cash used in operating activities in thethree months ended March 31, 2005, compared to the same period in 2004, were primarily the following:

 

•                  Anincrease of $15.5 million in our liability to Amgen under our joint developmentcollaboration for panitumumab.  We didnot have any liability under the credit facility with Amgen in the firstquarter of 2004.

 

•                  Apayment of $7.8 million on the Lonza contract cancellation obligation in January 2004.  We had no remaining obligations to Lonza asof December 31, 2004.

 

•                  Anincrease of $4.1 million in customer payments due primarily to the timing ofpayments received under our contracts.

 

•                  Anincrease of $2.3 million in research and development and manufacturing start-upcosts, not including the Lonza contract cancellation charge, amortization ofidentified intangible assets and depreciation related to the development of newproducts.

 

•                  Adecrease of $3.9 million in the change in accounts payable and accruedliabilities, net.

 

*Cash Used in and Provided by Investing Activities.*  Netcash used in investing activities was $67.4 million in the three months ended March 31, 2005,compared to net cash provided by investing activities of $35.1 million in thethree months ended March 31, 2004. Net cash used in and provided by investing activities primarily consisted of the following:

 

•                  Capitalexpenditures of $1.3 million and $3.0 million in the three months ended March 31,2005 and 2004, respectively. The investments reflect primarily investment inconstruction in progress and lab equipment in the first quarter of 2005 andinvestment in construction in progress and equipment for our new manufacturingfacility in the first quarter of 2004.

 

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•                  Purchases,net of sales, of marketable securities of $66.1 million in the firstquarter of 2005, compared to maturities and sales, net of purchases, ofmarketable securities of $38.1 millionin the first quarter of 2004.

 

*Cash Provided by Financing Activities.* During the three months ended March 31, 2005 and 2004, net cashprovided by financing activities was $2.1 million and $0.4 million,respectively, consisting of proceeds of $1.7 million from the issuance ofcommon stock in connection with an extension of a technology licensingagreement by Genentech in the first quarter of 2005 and $0.4 million from theexercise of stock options in each of the first quarter of 2005 and 2004.

 

*Financing Uncertainties Related to Our Business Plan.*  Weplan to continue to make significant expenditures to staff and operate our ownmanufacturing facility and support our research and development activities,including preclinical product development and clinical trials. We also intendto look for opportunities to acquire new technology throughin-licensing, collaborations or acquisitions.  We may spend additional amountsto support new production services contracts.

 

Wecurrently intend to use our available cash on hand to finance these projectsand business developments, but we might also pursue other financing alternatives,such as equity, equity-linked debt or debt financing, a bank line of credit,sale-lease back financing, asset sales, funding by one or more collaborators ora mortgage financing, that may become available to us.  We have filed with the SEC a currentlyeffective shelf registration through which we may offer for sale from time totime up to $250 million in equity or debt securities. Whether we use cash onhand or choose to obtain financing will depend on, among other things, thefuture success of our business, the prevailing interest rate environment andthe condition of financial markets generally.

 

InOctober 2003, we entered into an amendment of our joint development andcommercialization agreement with Amgen for the co-development ofpanitumumab.  Under the agreement, Amgenis obligated to make available in 2004 and 2005 up to $60.0 million in advancesthat we may use to fund a portion of our share of development andcommercialization costs after we have contributed $20.0 million towarddevelopment costs in 2004.  As of March 31,2005, we had a carrying balance of $41.1 million and are expected to draw anadditional $3.3 million under this facility in May 2005.  We expect to continue to make use of thiscredit facility in 2005 up to the $60.0 million limit.

 

Theamounts of the expenditures that will be necessary to execute our business planare subject to numerous uncertainties that may adversely affect our liquidityand capital resources to a significant extent. As of March 31,2005, two of our proprietaryproduct candidates, panitumumab and ABX-PTH were in various stages of clinicaltrials.  The clinical trials ofpanitumumab and ABX-PTH are expected to require significant expenditures in theforeseeable future.  Completion ofclinical trials may take several years or more, but the length of timegenerally varies substantially according to the type, complexity, novelty andintended use of a product candidate. We estimate that clinical trials of thetype we generally conduct are typically completed over the following timelines:

 
| **Clinical Phase** | ** ** | **Estimated  Completion Period** | ** ** |
|--------------------|------------|----------------------------------|------------|
|               |       |                             |       |
| Phase  1           |       | 1-2 Years                        |       |
| Phase  2           |       | 1-2 Years                        |       |
| Phase  3           |       | 2-4 Years                        |       |

 

Completionof clinical trials may take several years or more.  The length of time generally variessubstantially according to the type, complexity, novelty and intended use ofthe product candidate.  The duration andthe cost of clinical trials may vary significantly over the life of a project.

 

Wetest our potential product candidates in numerous preclinical studies toidentify disease indications for which they may be product candidates. We mayconduct multiple clinical trials on our own

 

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orwith our collaborators to cover a variety of indications for each product candidate.As we obtain results from trials, we may elect to discontinue clinical trialsfor certain product candidates or for one or more indications for a givenproduct candidate in order to focus our resources on more promising productcandidates or indications.

 

Animportant element of our business strategy is to pursue the research anddevelopment of a diverse range of product candidates for a variety of diseaseindications. We may enter co-development agreements, similar to ouragreement with Amgen for panitumumab, and may enter into additional jointdevelopment agreements earlier in the development life cycle of productcandidates. We have begun to implement our collaboration strategy throughco-development arrangements with companies such as Chugai, U3, Microscience,Sosei and Dendreon. Our strategyis designed to diversify the risks associated with our research and developmentspending.

 

Ourproprietary product candidates also have not yet achieved FDA regulatoryapproval, which is required before we can market them as therapeutic products.In order to proceed to subsequent clinical trial stages and to ultimatelyachieve regulatory approval, the FDA must conclude that our clinical dataestablish safety and efficacy. The number, size and type of clinical trials weconduct for a particular product candidate are also affected by the policies ofthe FDA and European regulatory agencies regarding the availability of possibleexpedited approval procedures, which we may seek to utilize.  These policies may change from time to time.

 

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

 

Asa result of the uncertainties discussed above, among others, the duration andcompletion costs of our research and development projects are difficult toestimate and are subject to considerable variation. Our inability to completeour research and development projects in a timely manner or our failure toenter into collaborative agreements when appropriate, could significantlyincrease our capital requirements and could adversely impact our liquidity.These uncertainties could force us to seek additional sources of financing fromtime to time in order to continue with our business strategy. Our inability toraise additional capital, or to do so on terms reasonably acceptable to us,would jeopardize the future success of our business.

 

Wealso may be required to make further substantial expenditures if unforeseendifficulties arise in other parts of our business.

 

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

 

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*History of Net Losses.*  Wehave incurred net losses since our organization as an independent company,including in the last five years net losses of $8.8 million in 2000,$60.9 million in 2001, $208.9 million in 2002, $196.4 million in 2003and $187.5 million in 2004, and $42.6 million in the three months ended March 31,2005. As of March 31, 2005, our accumulated deficit was $794.9 million.Our losses to date have resulted principally from:

 

•                  researchand development costs relating to the development of our XenoMouse and XenoMaxtechnologies and antibody therapeutic product candidates;

 

•                  generaland administrative costs relating to our operations;

 

•                  manufacturingstart-up costs relating to our new manufacturing facility includingdepreciation, costs of outside contractors and personnel for quality assuranceand quality control activities;

 

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

 

•                  impairment charges relating totechnology in the field of catalytic antibodies, which includes intellectualproperty that was acquired through the acquisition of Hesed Biomed.

 

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

 

*Net Operating Loss Carryforwards.*  As ofDecember 31, 2004, we had net operating loss carryforwards for federal andstate income tax purposes of approximately $670.0 million and $194.0million, respectively.  Our net operatingloss carryforwards exclude losses incurred prior to our formation in July 1996.Further, we have capitalized the amounts associated with the 1997 patentcross-license and settlement agreement with GenPharm, which we have expensedfor financial statement accounting purposes and we are amortizing those amountsover a period of approximately 15 years for tax purposes. The federal andstate net operating loss and credit carryforwards will expire in the years 2006through 2024, if not utilized. Utilization of the net operating losses andcredits may be subject to a substantial annual limitation due to the “change inownership” provisions of the Internal Revenue Code of 1986 and similar stateprovisions. The annual limitation may result in the expiration of net operatinglosses and credits before utilization.

 

****CriticalAccounting Estimates****

 

Several estimates and judgments involved inthe application of accounting principles impact the financial results that wereport.  We are required to estimate theeffect of matters that are inherently uncertain.  Changes in our estimates or judgments couldmaterially impact our results of operations, financial condition and cash flowsin future years.  We believe our mostcritical accounting estimates include accounting for equity investments,goodwill and intangible assets, income taxes and stock option valuation.

 

***Accounting forEquity Investments***

 

Unrealized holding gains and losses relatedto our marketable equity investments are reported as a component ofstockholders’ equity.  We recognize animpairment charge when the declines in the fair 

 

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values of these investments below their cost basis are deemed to beother-than-temporary.  We considervarious factors in determining whether to recognize an impairment charge,including the length of time and the extent to which the fair value has beenbelow the cost basis, the current financial condition of the investee and ourintent and ability to hold the investment for a period of time sufficient toallow for any anticipated recovery in market value.

 

As of March 31, 2005, one of ourmarketable equity investments, CuraGen, had a fair value of $9.5 million, whilethe cost basis is $10.6 million.  Wereviewed the factors discussed above and considered the unrealized losses to betemporary and that no impairment charge was recorded as of March 31,2005.  However, our ongoing evaluation ofthese factors could result in impairment charges in the future periods, whichcould adversely affect our results of operations.

 

***Accountingfor Goodwill and Intangible Assets***

 

As a result of the adoption of SFAS No. 142,“Goodwill and Other Intangible Assets,” in 2002, we no longer amortize goodwillbut instead review goodwill for impairment on an annual basis, or sooner ifindications of impairment exist. Under our accounting policy, we have adopted thebeginning of the fourth quarter as an annual goodwill impairment test date.  Following this approach, we compare thecarrying values available as of September 30 with the estimated fair valueof the reporting unit to assess if there has been a potential impairment, and,if impairment is indicated, complete the measurement of impairment under theprocedures established by SFAS 142. Because we have determined that we have onereporting unit under SFAS No. 142, our market capitalization is consideredto be a reasonable proxy for the fair value of the reporting unit.  We also consider whether current business and general market conditionssuggest that the fair value of the reporting unit has likely declined below itscarrying value.  As of March 31,2005, no impairment has occurred.

 

If we were to determine in a future period that animpairment of goodwill existed, the impairment measurement procedures couldresult in a charge for the impairment of goodwill.  Furthermore, a change in ourdetermination of reporting units could result in a charge for the impairment ofgoodwill in future periods. A change in the determination of reporting unitscould occur should we reorganize into reporting units such that each unitconstitutes a business for which discrete financial information is availablethat is regularly reviewed by management to evaluate the performance of thatunit. As of March 31, 2005, the carrying value of our goodwill was $34.8million.

 

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

 

As of March 31, 2005, we have determinedthat no changes in circumstances have occurred that would indicate that animpairment of an intangible asset had occurred. If we were to determine in a future period that an impairment of intangibleassets has occurred, the impairment measurement procedures could result in acharge for the impairment of long-lived assets. As of March 31, 2005, the carrying value of our intangible assetswas $58.6 million.

 

***IncomeTaxes***

 

Significant management judgment is requiredin developing our provision for income taxes, including the calculation of taxliabilities, the determination of deferred tax assets and liabilities and anyvaluation allowances that might be required against the deferred taxassets.  Results of operations in eachjurisdiction involve intercompany agreements between our Canadian subsidiaryand Abgenix, Inc.  Such 

 

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agreements could be unfavorably interpreted by the applicable taxingauthorities, causing an increase in the income tax provision and an increase inour net loss.  The assessment of theincome tax implications of this intercompany relationship requires significantmanagement judgment.

 

***StockOption Valuation***

 

The preparation of the notes to ourconsolidated financial statements requires us to estimate the fair value ofstock options granted to employees. While fair value may be readily determinable for awards of stock, marketquotes are not available for long-term, nontransferable stock options becausethese instruments are not traded.  Wecurrently use the Black-Scholes option pricing model to estimate the fair valueof employee stock options.  However, theBlack-Scholes option pricing model was developed for use in estimating the fairvalue of traded options, which have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions, includingthe expected stock price volatility. Because our employee stock options have characteristics significantlydifferent from those of traded options and because changes to the subjectiveinput assumptions can materially affect the fair value estimate, in management’sopinion, the existing models do not provide a reliable single measure of thefair value of our employee stock options. We are currently evaluating our option valuation methodologies andassumptions in lights of evolving accounting standards related to employeestock options.

 

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

 

As of March 31, 2005, future minimumpayments for certain contractual obligations for years subsequent to December 31,2004 were as follows:

 
| ** **                                      | ** ** | **Total**          | ** ** | **Less than  1 year(3)** | ** ** | **1 – 3  years** | ** ** | **4 – 5  years** | ** ** | **After 5  years(1)** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|--------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| **Contractual  Obligations**                    |       |               |       |                     |       |                  |       |                  |       |                  |       |
| Operating  leases                               |       | $                  | 127,355    |                     | $          | 10,446                |       | $                     | 29,151     |                  | $          | 31,213 |   | $ | 56,545 |   |
| Convertible  notes due 2007 & interest |       | 121,547            |       | 1,991                    |       | 119,556               |       | —                |       | —                |       |
| Convertible  notes due 2011 & interest |       | 336,692            |       | 5,250                    |       | 10,500                |       | 10,500                |       | 310,442               |       |
| Convertible  note due 2013                      |       | 50,000             |       | —                   |       | —                |       | —                |       | 50,000                |       |
| Redeemable  convertible preferred stock         |       | 50,000             |       | —                   |       | —                |       | —                |       | 50,000                |       |
| Amgen(2)                                        |       | 41,111             |       | —                   |       | —                |       | —                |       |                  |       |
| Purchase  orders                                |       | 1,472              |       | 1,472                    |       | —                |       | —                |       | —                |       |
| Total                                           |       | $                  | 728,177    |                     | $          | 19,159                |       | $                     | 159,207    |                  | $          | 41,713 |   | $ | 466,987 |   |

 

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(1)   Amounts representtotal of minimum payments for the entire period.

(2)  The $41.1 million long term obligation to Amgen consists of$39.8 million in advances under the credit facility and $1.3 million ofinterest.

(3)  This represents the period of April 1, 2005 through December 31,2005.

 

Wehave a commitment to share equally all development and commercializationcosts for panitumumab pursuant to our development and commercializationagreement with Amgen. As amended in October 2003, that agreement providesthat Amgen will have decision-making authority for development andcommercialization activities and will make available to us in 2004 and 2005 upto $60.0 million in advances that we may use to fund a portion of ourshare of development and commercialization costs for panitumumab after wecontributed $20.0 million toward development costs in 2004.  We began accessing this facility in 2004 and,as of March 31, 2005, we had a carrying balance of $41.1 millionunder this facility consisting of $39.8 million in advances and $1.3million of interest accrued at the contract rate of 12% per annum. We havenotified Amgen of the intent to draw a cash 

 

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advance of anadditional $3.3 million.  The amountof any such advances, plus interest, may be repaid out of profits resultingfrom future product sales and we are generally not obligated to repay anyportion of the loan if panitumumab does not reach commercialization.

 

**Risk Factors That Might Affect Future Results**

 

**Risks Related to our Finances**

 

*We are an early stage company withoutcommercial therapeutic products, and we cannot assure you that we will developsufficient revenues in the future to sustain our business.*

 

You must evaluate us in light of theuncertainties and complexities present in an early stage biopharmaceuticalcompany. Our product candidates are in early stages of development. We willneed to make significant additional investments in research and development,preclinical testing and clinical trials, and in regulatory and sales andmarketing activities, to commercialize current and future product candidates.Our product candidates, if successfully developed and approved for marketing,may not generate sufficient or sustainable revenues to enable us to beprofitable.

 

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

 

We have incurred net losses since we wereorganized as an independent company, including in the last five years netlosses of $8.8 million in 2000, $60.9 million in 2001,$208.9 million in 2002, $196.4 million in 2003 and$187.5 million in 2004, and $42.6 million in the three months ended March 31,2005.  As of March 31, 2005, ouraccumulated deficit was $794.9 million. Our losses to date have resultedprincipally from:

 

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

 

•                  general andadministrative costs relating to our operations;

 

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

 

•                  impairmentcharges related to our strategic investments in CuraGen, ImmunoGen, Inc.,and MDS Proteomics Inc.; and

 

•                  impairmentcharges relating to technology in the field of catalytic antibodies, whichincludes intellectual property that was acquired through the acquisition ofHesed Biomed, Inc.

 

We expect to incur additional losses for theforeseeable future as a result of our research and development costs andmanufacturing start-up costs, including costs associated with conductingpreclinical development and clinical trials, which will continue to besubstantial, and charges related to purchases of technology or other assets. Weintend to invest significantly in our products prior to entering into licensingagreements. This will increase our need for capital and will result in lossesfor at least the next several years. We expect that the amount of operatinglosses will fluctuate significantly from quarter to quarter as a result ofincreases or decreases in our research and development efforts, the executionor termination of licensing, manufacturing and other contractual arrangements,the progress or lack of progress of product development candidates in ourcollaboration with AstraZeneca and the initiation, success or failure ofclinical trials.

 

*We are currently unprofitable and may neverbe profitable, and our future revenues could fluctuate significantly.*

 

Since our founding, we have funded ourresearch and development activities primarily from 

 

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private placements and public offerings of our securities and fromrevenues generated by our licensing and other contractual arrangements.

 

Prior to the potential marketing approval ofpanitumumab, we expect that substantially all of our revenues for theforeseeable future will result from payments under licensing and other contractualarrangements. To date, payments under licensing and other agreements have beenin the form of license fees, milestone payments, reimbursement for research anddevelopment expenses, option fees, and payments for manufacturing services.Payments under our existing and any future customer agreements will be subjectto significant fluctuation in both timing and amount. Our revenues may not beindicative of our future performance or of our ability to continue to achievecontractual milestones. Our revenues and results of operations for any periodmay also not be comparable to the revenues or results of operations for anyother period. Our revenues for any period may not be sufficient to cover ouroperating costs, including the costs of operating our manufacturing plant. Wemay not be able to:

 

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

 

•                                          successfullycomplete preclinical development or clinical trials;

 

•                                          obtainrequired regulatory approvals;

 

•                                          successfullymanufacture or market product candidates; or

 

•                                          generateadditional revenues or profitability.

 

Our failure to achieve any of the above goalswould materially harm our business, financial condition and results ofoperations.

 

*We may require additional financing, and aninability to raise the necessary capital or to do so on acceptable terms wouldthreaten the continued success of our business.*

 

We will continue to expend substantialresources to support research and development and operate our manufacturingfacility, including costs associated with preclinical development and clinicaltrials. In the years ended December 31, 2004, 2003 and 2002, we incurredexpenses of $124.8 million, $98.2 million and $128.5 million,respectively, on research and development. For the three months ended March 31, 2005, we spent $35.8 millionon research and development.  For thethree months ended March 31, 2005, our manufacturing start-up costs were$2.0 million. Regulatory and business factors will require us to expendsubstantial funds in the course of completing required additional development,preclinical testing and clinical trials of, and attaining regulatory approvalsfor, product candidates. The amounts of expenditures that will be necessary toexecute our business plan are subject to numerous uncertainties that mayadversely affect our liquidity and capital resources. Our future liquidity andcapital requirements will depend on many factors, including:

 

•                                          thescope and results of preclinical development and clinical trials;

 

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

 

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

 

•                                          continuedscientific progress in our research and development programs;

 

•                                          thesize and complexity of these programs;

 

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

 

•                                          thecost of conducting commercialization activities and arrangements;

 

•                                          thetime and expense involved in seeking regulatory approvals;

 

•                                          competingtechnological and market developments;

 

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

 

•                                          ourinvestment in, or acquisition of, other companies;

 

•                                          theamount of product or technology in-licensing in which we engage;

 

•                                          theextent and duration of market exclusivity we can command for our products,through patent and regulatory laws; and

 

•                                          otherfactors not within our control.

 

We believe that our current cash balances,cash equivalents, marketable securities, and the cash generated from ourlicensing and other contractual arrangements, will be sufficient to meet ouroperating and capital requirements for at least one year. However, because ofthe uncertainties in our business, including the uncertainties listed above, wecannot assure you that this will be the case. In addition, we may choose toobtain additional financing from time to time. We may choose to raiseadditional funds through public or private equity or debt financing, licensingand other agreements, a bank line of credit, sale-lease back financing,mortgage financing, asset sales or other arrangements. We cannot be sure thatany additional funding, if needed, will be available on terms favorable to usor at all. Furthermore, any additional equity or equity-related financing maybe dilutive to our stockholders, and debt financing, if available, may subjectus to restrictive covenants and significant interest costs. We may also chooseto obtain funding through licensing and other contractual arrangements. Suchagreements may require us to relinquish our rights to certain of ourtechnologies, products or marketing territories. Our failure to raise capitalwhen needed would harm our business, financial condition and results ofoperations.

 

*Our indebtedness may harm our financialcondition and results of operations.*

 

At March 31, 2005, we had approximately$463.6 million of outstanding notes, including $113.7 million of convertiblesubordinated notes due March 15, 2007, $300.0 million of outstandingconvertible senior notes due December 15, 2011 and a $50.0 millionnote held by AstraZeneca.  In addition,at March 31, 2005, we had accrued approximately $41.1 million in long-termliabilities to Amgen pursuant to our co-development agreement.  We may incur additional indebtedness in thefuture. Our level of indebtedness will have several important effects on ourfuture operations, including, without limitation:

 

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

 

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

 

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

 

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

 

•                  to seek additional financing in the debt or equitymarkets;

 

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

 

•                  to sell selected assets;

 

•                  to reduce or delay planned capital expenditures; or

 

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

 

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

 

*Our strategic investments expose us to equityprice risk and our investments in those companies may be deemed impaired, whichwould affect our results of operations.*

 

We are exposed to equity price risk on ourstrategic investments in CuraGen and ImmunoGen and we may elect to makeadditional similar investments in the future. In 1999 and 2000, we purchased anaggregate amount of $80.0 million of the common stock of CuraGen andImmunoGen as strategic investments. Unrealized holding gains and losses on available-for-sale securitiesgenerally are excluded from earnings and reported as a component ofstockholders’ equity.  However, if adecline in the fair value of available-for-sale securities is judged to beother than temporary, the cost basis of the security is written down to fairvalue as a new cost basis and the amount of the write-down is included inearnings as an impairment charge.  In2002, declines in the fair value of the CuraGen and ImmunoGen common stock weredeemed to be other-than-temporary and we recorded impairment charges totaling$67.3 million for the year ended December 31, 2002. The public tradingprices of the shares of both companies have fluctuated significantly since wepurchased them and could continue to do so. As of March 31, 2005, the public trading price of our investment inCuraGen common stock was below our adjusted cost basis; however, we determinedthat the unrealized losses are temporary at this time.  If the public trading prices of these sharescontinue to trade below our adjusted cost basis in future periods, we may incuradditional impairment charges relating to this investment, which couldadversely affect our results of operations. The amount of these charges, if any, will equal our unrealized loss onthese securities as of the end of the relevant periods.  In addition, any decline in the fair value ofour investment in ImmunoGen common stock below our adjusted cost basis infuture periods could cause us to incur additional impairment charges relatingto this investment, which could adversely affect our results ofoperations.  As of March 31, 2005,these investments were recorded at fair value in long-term investments on thebalance sheet, and any net unrealized holding gains and losses are reported asa component of stockholders’ equity.

 

**Risks Related to the Development andCommercialization of our Products**

 

*Our XenoMouse and XenoMax technologies maynot produce safe, efficacious or commercially viable products, which will becritical to our ability to generate revenues from our products.*

 

Our XenoMouse and XenoMax technologies arenew approaches to developing antibodies as products for the treatment ofdiseases and medical disorders.  To date,neither we nor our customers have commercialized any antibody therapeuticproducts based on our technologies. Moreover, we are not aware of anycommercialized, fully human antibody therapeutic products that have beengenerated from any technologies similar to ours. Our antibody therapeuticproduct candidates are still in various stages of

 

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development and many are in an early development stage. We haveinitiated clinical trials with respect to four proprietary fully human antibodytherapeutic product candidates, and our collaborators have initiated clinicaltrials with respect to eight other fully human antibody therapeutic productcandidates generated by XenoMouse technology. We cannot be certain that eitherXenoMouse technology or XenoMax technology will generate antibodies againstevery antigen to which they are exposed in an efficient and timely manner, ifat all. Furthermore, XenoMouse technology and XenoMax technology may not resultin any meaningful benefits to our current or potential customers or in productcandidates that are safe and efficacious for patients. Our failure to generateantibody therapeutic product candidates that lead to the successfulcommercialization of products would materially harm our business, financialcondition and results of operations.

 

*If we do not successfully develop ourproducts, or if they do not achieve commercial success, our business will bematerially harmed.*

 

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

 

•                  delays in product development, clinical testing ormanufacturing;

 

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

 

•                  failure in clinical trials or failure to receiveregulatory approvals;

 

•                  emergence of superior or equivalent productdevelopment technologies or products;

 

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

 

•                  inability to market products due to third-partyproprietary rights;

 

•                  election by our customers not to pursue productdevelopment;

 

•                  failure by our customers to develop productssuccessfully; and

 

•                  failure to achieve market acceptance.

 

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

 

Because of these risks, our research anddevelopment efforts and those of our customers and collaborators may not resultin any commercially viable products. Our failure to successfully complete asignificant portion of these development efforts, to obtain required regulatoryapprovals or to achieve commercial success with any approved products wouldmaterially harm our business, financial condition and results of operations.

 

*Before we commercialize and sell any of ourproduct candidates, we must conduct clinical trials, which are expensive andhave uncertain outcomes.*

 

Conducting clinical trials is a lengthy,time-consuming and expensive process. Before obtaining regulatory approvals forthe commercial sale of any products, we must demonstrate through preclinicaltesting and clinical trials that our product candidates are safe and effectivefor use in humans. We have 

 

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incurred and will continue to incur substantial expense for, and wehave devoted and expect to continue to devote a significant amount of time to,preclinical testing and clinical trials.

 

Completion of clinical trials may takeseveral years or more. The length of time generally varies substantiallyaccording to the type, complexity, novelty and intended use of the productcandidate.

 

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

 

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

 

•                  the length of time required to enroll suitablepatient subjects;

 

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

 

•                  the number of clinical sites included in the trials;

 

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

 

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

 

•                  unforeseen safety issues; and

 

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

 

We have limited experience in conducting andmanaging clinical trials. We rely on third parties, including ourcollaborators, to assist us in managing and monitoring clinical trials. Ourreliance on these third parties may result in delays in completing, or infailure to complete, these trials if the third parties fail to perform underour agreements with them.

 

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

 

Two of our proprietary product candidates,panitumumab and ABX-PTH, are in various stages of clinical trials. We havediscontinued development of three proprietary product candidates, ABX-CBL,ABX-IL8 and ABX-MA1. To date, data obtained from these clinical trials havebeen insufficient to demonstrate safety and efficacy under applicable FDAguidelines. As a result, these data will not support an application forregulatory approval without further clinical trials or further results fromongoing trials. Clinical trials that we conduct or that third parties conducton our behalf may not demonstrate sufficient safety and efficacy to obtain therequisite regulatory approvals for any of our product candidates. We expect tocommence new clinical trials from time to time in the course of our business asour product development work continues. However, regulatory authorities may notpermit us to undertake any additional clinical trials for our productcandidates. In addition, the FDA, other regulatory authorities, our partners,the institutional review boards for clinical trial sites or we may suspend orterminate clinical trials at any time.

 

Our product candidates may fail todemonstrate safety or efficacy in clinical trials. For example, in 2002 wecompleted analysis of a Phase 2b clinical trial of ABX-IL8 in psoriasis,concluded that the results did not warrant continued development in psoriasisand decided not to proceed with studies in other disease 

 

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indications. Similarly, in February 2003, we completed apreliminary analysis of the results from the Phase 2/3 clinical trial ofABX-CBL and concluded that the study did not meet its primary endpoint.Therefore, we and our co-developer, SangStat (now a subsidiary of GenzymeCorporation) do not plan any further development of ABX-CBL. Failures of clinicaltrials of any product candidate could delay the development of other productcandidates or hinder our ability to obtain additional financing. In addition,failures in our clinical trials can lead to additional research and developmentexpenses. Any delays in, or termination of, our clinical trials could impedeour ability to commercialize our product candidates and materially harm ourbusiness, financial condition and results of operations.

 

*Success in early clinical trials may not beindicative of results obtained in subsequent trials.*

 

Results from our early stage clinical trialsand those of our collaborators are based on a limited number of patients andmay, upon review, be revised or negated by authorities or by later stageclinical trials.  Historically, theresults from preclinical testing and early clinical trials have often not beenpredictive of results obtained in later clinical trials.  A number of new drugs and biologics haveshown promising results in clinical trials, but subsequently failed toestablish sufficient safety and efficacy data to obtain necessary regulatoryapprovals.  Data obtained frompreclinical and clinical activities are susceptible to varying interpretations,which may delay, limit or prevent regulatory approval.  In addition, we may encounter regulatorydelays or rejections as a result of many factors, including:  changes in regulatory policy during theperiod of product development; delays in obtaining regulatory approvals to commencea study; lack of efficacy during clinical trials; or unforeseen safety issues.

 

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

 

We have limited experience manufacturingantibody therapeutic product candidates in our manufacturing facility. Weintend to use our manufacturing facility for the manufacture of productcandidates for clinical trials and to support the potential early commerciallaunch of a limited number of products, in each case, in compliance with FDAand European good manufacturing practices. In May 2000, we signed along-term lease for the building that contains this manufacturing facility.Construction has been completed and portions of the facility are operationaland validated. In October 2003, following an inspection by the CaliforniaState Department of Health Services, we received a State Drug ManufacturingLicense. The license permits us to manufacture and ship clinical material fromour manufacturing facility. The total cost of the facility was approximately$150 million. The costs of completing validation of this facility, makingthe remaining portions of the facility operational and qualifying the facilityfor regulatory compliance may be higher than expected. We currently have excessproduction services capacity and this condition may persist for an extendedperiod. However, if the commercial launch of one or more of our productcandidates proves successful, we will likely experience capacity shortages andmay need to use one or more third-party facilities to produce these products insufficient quantities.

 

The process of manufacturing antibodytherapeutic products is complex. While the managers of the facility have gainedextensive manufacturing experience in prior positions with other companies, wehave limited experience in the clinical or commercial scale manufacturing ofour existing product candidates, or any other antibody therapeutic products, inour facility. We will need to hire, train and retain additional qualifiedmanufacturing, quality control and quality assurance personnel. Also, we willneed to manufacture such antibody therapeutic products in a facility and by anappropriately validated process that comply with FDA, European and otherregulations. Our manufacturing operations will be subject to ongoing, periodicunannounced inspection by the FDA and state agencies to ensure compliance withgood manufacturing practices. If we are unable to manufacture product orproduct candidates in accordance with FDA and European good manufacturingpractices we may not be able to obtain regulatory approval for our products andto supply our clinical trial needs. Any significant manufacturing changes forthe production of our product candidates could result in delays in developmentor regulatory approval or in the reduction or interruption of commercial salesof our product candidates. Our inability to maintain our manufacturingoperations in compliance with applicable regulations within our planned timeand cost parameters could materially harm our business, financial condition andresults of operations.

 

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We also may encounter problems with thefollowing:

 

•                  production yields;

 

•                  quality control and assurance;

 

•                  availability of qualified personnel;

 

•                  availability of raw materials;

 

•                  adequate training of new and existing personnel;

 

•                  on-going compliance with our standard operatingprocedures;

 

•                  on-going compliance with FDA regulations;

 

•                  production costs; and

 

•                  development of advanced manufacturing techniques andprocess controls.

 

In addition, the FDA and other regulatoryauthorities will require us to register any manufacturing facilities in whichour antibody therapeutic products are manufactured. These facilities will besubject to periodic and unannounced inspections to confirm compliance with FDAgood manufacturing practices or other equivalent regulations. The FDA orforeign regulatory bodies will not grant pre-market approval of our productcandidates, including panitumumab, if our facilities cannot pass a pre-licenseinspection.  Therefore, both the filingand approval of a Biologic License Application, or BLA for panitumumab could bedelayed if we are unable to meet the relevant pre-license requirements and orif our facilities do not pass a pre-license inspection.  In complying with these regulations andforeign regulatory requirements, we will be obligated to expend time, money andeffort in production, record keeping and quality control in an effort to ensurethat our product candidates meet applicable specifications and otherrequirements. Our failure to maintain regulatory compliance would materiallyharm our business, financial condition and results of operations.

 

*We may rely on third-party manufacturers, andwe may have difficulty conducting clinical trials or commercializing productcandidates if a manufacturer does not perform in accordance with ourexpectations.*

 

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

 

Third-party manufacturers may encounter difficultiesin scaling up production, including problems involving production yields,quality control and assurance, shortage of qualified personnel, shortage ofcapacity, compliance with FDA and other applicable regulations, productioncosts, and development of advanced manufacturing techniques and processcontrols. They may not perform as agreed or may not remain in the contractmanufacturing business for the time required by us to successfully produce andmarket our product candidates. Also, third-party manufacturers may havedifficulty maintaining compliance with FDA good manufacturing practices orequivalent regulations, or having their facilities pass a pre-licenseinspection. Any failure of third-party manufacturers to deliver the requiredquantities of our product candidates for clinical use on a timely basis and atcommercially reasonable prices, and our failure to find 

 

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replacement manufacturers or successfully implement our ownmanufacturing capabilities, would materially harm our business, financialcondition and results of operations.

 

*The successful growth of revenues from ourmanufacturing services depends to a large extent on our ability to find thirdparties who agree to use our services and our ability to provide those servicessuccessfully.*

 

We intend to enhance our contract revenues byentering into agreements to provide antibody production services to thirdparties. Potential third parties include our existing collaborators, as well asother pharmaceutical and biotechnology companies, technology companies,academic institutions and other entities. We must enter into these agreementsto successfully develop this aspect of our business. To date, we have enteredinto only a few production services agreements and we cannot assure you that wewill be able to enter into additional agreements.

 

We may not be able to secure manufacturingagreements on favorable terms. If we do obtain such agreements, we mayencounter difficulties in performing as agreed. We may encounter difficultiesin scaling up production, including problems involving production yields,quality control and assurance, shortage of qualified personnel, training ofpersonnel, compliance with FDA good manufacturing practices and otherapplicable regulations, production costs, and development of advancedmanufacturing techniques and process controls. The failure to deliver requiredquantities of product on a timely basis and at commercially reasonable pricescould materially harm our business, financial condition and results ofoperations.

 

*The successful growth of our business dependsto a large extent on our ability to find third-party collaborators to developand commercialize many of our product candidates.*

 

Our strategy for the development andcommercialization of antibody therapeutic products depends, in large part, uponthe formation of collaboration agreements with third parties. Potential thirdparties include pharmaceutical and biotechnology companies, technologycompanies, academic institutions and other entities. We must enter into theseagreements to successfully develop and commercialize product candidates. Theseagreements are necessary in order for us to:

 

•                  access proprietary antigens for which we cangenerate fully human antibody products;

 

•                  fund research, preclinical development, clinicaltrials and manufacturing;

 

•                  seek and obtain regulatory approvals; and

 

•                  successfully commercialize existing and futureproduct candidates.

 

Our ability to continue our current collaborationsand to enter into additional third party collaborations is dependent in largepart on our ability to successfully demonstrate that our XenoMouse technologyis an attractive method of developing antibody therapeutic products.  We have generated only a limited number offully human antibody therapeutic product candidates pursuant to ourcollaboration agreements that have advanced to the clinical stage.  Our failure to maintain our existingcollaboration agreements or to enter into additional agreements couldmaterially 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 numberof risks.  These agreements may not be onterms that prove favorable to us, and we typically afford our collaboratorssignificant discretion in electing whether to pursue any of the plannedactivities. Licensing and other contractual arrangements may require us torelinquish our rights to certain of our technologies, products or marketingterritories.  To the extent we agree towork exclusively with one collaborator in a given therapeutic area, ouropportunities to collaborate with other entities could be curtailed.  For example, our collaboration with AstraZenecafor the identification and development of therapeutic antibodies in oncologycontains exclusivity provisions that significantly restrict our ability, 

 

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during a three-year target selection period, to enter into arrangementswith third parties in the field of oncology as well as our ability to conductresearch and development activities in that field.  To the extent that our collaboration withAstraZeneca is not successful, our ability to develop antibodies for use inoncology applications through other collaborations will be severelycurtailed.  Our collaboration withAstraZeneca also limits our ability to develop such antibodies through our ownindependent development.

 

We cannot control the amount or timing ofresources our collaborators may devote to a collaboration, and collaboratorsmay not perform their obligations as expected. Additionally, businesscombinations or significant changes in a collaborator’s business strategy mayadversely affect a collaborator’s willingness or ability to complete itsobligations under the arrangement. Even if we fulfill our obligations under anagreement, typically our collaborators can terminate the agreement at any timefollowing proper written notice. The termination or breach of agreements by ourcollaborators, or the failure of our collaborators to complete theirobligations in a timely manner, could materially harm our business, financialcondition and results of operations. If we are not able to establish furthercollaboration agreements or any or all of our existing agreements areterminated, we may be required to seek new collaborators or to undertakeproduct development and commercialization at our own expense. Such anundertaking may:

 

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

 

•                  significantly increase our capital requirements; and

 

•                  place additional strain on our management’s time.

 

Existing or potential collaborators maypursue alternative technologies, including those of our competitors, or enterinto other transactions that could make a collaboration with us less attractiveto them. For example, if an existing collaborator purchases a company that isone of our competitors, that company could be less willing to continue itscollaboration with us.  Moreover,disputes may arise with respect to the ownership of rights to any technology orproducts developed with any current or future collaborator. Lengthy negotiationswith potential new collaborators or disagreements between us and ourcollaborators may lead to delays in or termination of the research, developmentor commercialization of product candidates or result in time-consuming andexpensive litigation or arbitration. The decision by our collaborators topursue alternative technologies or the failure of our collaborators to developor commercialize successfully any product candidate to which they have obtainedrights from us could materially harm our business, financial condition andresults of operations.

 

*We are subject to extensive governmentregulation, which will require us to spend significant amounts of money, and wemay not be able to obtain regulatory approvals, which are required for us toconduct clinical testing and commercialize our products.*

 

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

 

Securing FDA approval requires the submissionof extensive preclinical and clinical data, manufacturing data and supportinginformation to the FDA for each indication to establish the product candidate’ssafety and efficacy.  The generation ofdata supporting the approval process takes many years, requires the expenditureof substantial resources, and may involve post-marketing surveillance and 

 

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requirements for post-marketing studies.  As we conduct clinical trials for a givenproduct candidate, we may decide or the FDA may require us to make changes inour plans and protocols. Such changes may relate to, for example, changes inthe standard of care for a particular disease indication, comparability ofefficacy and toxicity of materials where a change in materials is proposed, orcompetitive developments foreclosing the availability of expedited approvalprocedures.  We may be required tosupport proposed changes with additional preclinical or clinical testing, whichcould delay the expected time line for concluding clinical trials.  The approval of a product candidate maydepend on the acceptability to the FDA of data from clinical trials conductedoutside the United States. Regulatory requirements are subject to frequentchange. Delays in obtaining regulatory approvals may:

 

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

 

•                  impose costly procedures on us or our customers;

 

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

 

•                  adversely affect our receipt of revenues orroyalties.

 

Our product candidates may not be approved ormay be approved with limitations or for indications that differ from those weinitially target. Even if marketing approval from the FDA is received, the FDAmay impose post-marketing requirements, such as:

 

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

 

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

 

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

 

The discovery of previously unknown problemswith our future products may result in restrictions of the products, includingwithdrawal from manufacture. Additionally, certain material changes affectingan approved product such as manufacturing changes or additional labeling claimsare subject to further FDA review and approval. The FDA may revisit and changeits prior determination with regard to the safety or efficacy of our productsand withdraw any required approvals after we obtain them. Even prior to anyformal regulatory action requiring labeling changes or affecting manufacturing,we could voluntarily decide to cease the distribution and sale or recall any ofour future products if concerns about their safety and efficacy develop.

 

In their regulation of advertising, the FDAand the Federal Trade Commission (“FTC”) may issue correspondence alleging thatparticular advertising or promotional practices are false, misleading ordeceptive. The FDA or FTC may impose a wide array of sanctions on companies forsuch advertising practices. Additionally, physicians may prescribepharmaceutical or biologic products for uses that are not described in aproduct’s labeling or differ from those tested by us and approved by the FDA.While such “off-label” uses are common and the FDA does not regulate physicians’choice of treatments, the FDA does restrict a manufacturer’s communications onthe subject of “off-label” use. Companies cannot promote FDA-approvedpharmaceutical or biologic products for off-label uses. If our advertising orpromotional activities fail to comply with the FDA’s or FTC’s regulations orguidelines, we may be subject to warnings from, or enforcement action by, theFDA or FTC.

 

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If we fail to comply with applicable FDA andother regulatory requirements at any stage during the regulatory process, we orour third-party manufacturers may be subject to sanctions, including:

 

•                  delays;

 

•                  warning letters;

 

•                  fines;

 

•                  clinical holds;

 

•                  product recalls or seizures;

 

•                  changes to advertising;

 

•                  injunctions;

 

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

 

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

 

•                  civil penalties;

 

•                  withdrawals of previously approved marketingapplications; and

 

•                  criminal prosecutions.

 

In many instances we expect to rely on ourcustomers and co-developers to file INDs and generally direct the regulatoryapproval process for products derived from our technologies.  These customers and co-developers may not beable to or may choose not to conduct clinical testing or obtain necessaryapprovals from the FDA or other regulatory authorities for any productcandidates.  If they fail to obtainrequired governmental approvals, we will experience delays in or be precludedfrom marketing or realizing the commercial benefits from the marketing ofproducts derived from our technologies. In addition, our failure to obtain the required approvals would precludethe commercial use of our products.  Anysuch delays and limitations may materially harm our business, financialcondition and results of operations.

 

*If we are unable to manufacture our productcandidates in compliance with current good manufacturing practicesrequirements, we will not be able to commercialize our product candidates.*

 

We are required to comply with the applicableFDA current good manufacturing practice, or “cGMP” regulations and otherregulatory requirements. Good manufacturing practice regulations includerequirements relating to quality control and quality assurance as well as thecorresponding maintenance of records and documentation. Manufacturingfacilities, including our facility, must pass a pre-license inspection by theFDA before initiating commercial manufacturing of any product. The FDA enforcespost-marketing regulatory requirements such as cGMP requirements, throughperiodic unannounced inspections. We do not know whether we will pass anyfuture FDA inspections. Failure to pass an inspection could disrupt, delay orshut down our manufacturing operations. In addition, cGMP requirements are constantly evolving and new ordifferent requirements may apply in the future. Manufacturing facilities in California, including our facility, are alsosubject to the licensing requirements of and inspection by the State ofCalifornia Department of Health Services. In October 2003, following an inspection, we received a DrugManufacturing License from the State of California.  The license, which must be renewed annually,permits us to manufacture and ship clinical material.  We are responsible for manufacturing clinicaland, for the first five years after launch, commercial supplies for panitumumabwith Amgen’s support and assistance.  Wemay not be able to comply with applicable cGMP requirements and otherregulatory requirements.  Our 

 

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failure to comply with these requirements could delay or prevent theapproval of our product candidates and would materially harm our business,financial condition and results of operations.

 

*If our products do not gain market acceptanceamong the medical community, our revenues would greatly decline and might notbe sufficient to support our operations.*

 

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

 

•                  establishment and demonstration of clinical efficacyand safety;

 

•                  cost-effectiveness of our product candidates;

 

•                  their potential advantage over alternative treatmentmethods;

 

•                  reimbursement policies of government and third-partypayors; and

 

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

 

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

 

*We do not have marketing and salesexperience, which may require us to rely on others to market and sell ourproducts and may make it more challenging for us to commercialize our productcandidates.*

 

Although we have been marketing our XenoMousetechnology to potential customers and collaborators for several years, we donot have marketing, sales or distribution experience or capability with respectto our therapeutic product candidates. We intend to enter into arrangements with third parties to market andsell most of our therapeutic product candidates when we commercializethem.  For example, pursuant to ouramended joint development agreement for panitumumab, Amgen has decision-makingauthority for development and commercialization activities relating to anyproducts developed under the collaboration, although we have the right toco-promote any products.  Should weexercise this right to co-promote, it will take significant resources todevelop the appropriate sales capabilities and there can be no assurance thatwe will be able to do this successfully. We may not be able to enter into additional marketing and sales arrangementswith others on acceptable terms, if at all. To the extent that we enter into marketing and sales arrangements withother companies, our revenues, if any, will depend on the efforts ofothers.  These efforts may not besuccessful.  If we are unable to enterinto third-party arrangements, we will need to develop a marketing and salesforce, which may need to be substantial in size, in order to achieve commercialsuccess for any product candidate approved by the FDA.  We may not successfully develop marketing andsales capabilities or have sufficient resources to do so.  If we do develop such capabilities, we 

 

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will compete with other companies that have experienced and well-fundedmarketing and sales operations. Our failure to enter into successful marketingarrangements with third parties and our inability to conduct such activitiesourselves would materially harm our business, financial condition and resultsof operations.

 

**Risks Related to Intellectual Property**

 

*Our ability to protect our intellectualproperty 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 abilityto:

 

•                  obtain patents;

 

•                  protect trade secrets;

 

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

 

•                  prevent others from infringing our proprietaryrights.

 

We will be able to protect our proprietaryrights from unauthorized use by third parties only to the extent that ourproprietary rights are covered by valid and enforceable patents or areeffectively maintained as trade secrets. We attempt to protect our proprietaryposition by filing U.S. and foreign patent applications related to ourproprietary technology, inventions and improvements that are important to thedevelopment of our business. However, the patent position of biopharmaceuticalcompanies involves complex legal and factual questions, and, therefore, we cannotpredict with certainty whether our patent applications will be approved or anyresulting 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 anyprotection against competitors. Our pending patent applications, those we mayfile in the future, or those we may license from third parties, may not resultin patents being issued. Also, patent rights may not provide us with adequateproprietary protection or competitive advantages against competitors withsimilar technologies. The laws of certain foreign countries do not protect ourintellectual property rights to the same extent as do the laws of the UnitedStates.

 

In addition to patents, we rely on tradesecrets and proprietary know-how. We seek protection, in part, throughconfidentiality and proprietary information agreements. These agreements maynot provide meaningful protection for our technology or adequate remedies inthe event of unauthorized use or disclosure of confidential and proprietaryinformation, and, in addition, the parties may breach such agreements. Also,our trade secrets may otherwise become known to, or be independently developedby, our competitors. Furthermore, others may independently develop similartechnologies or duplicate any technology that we have developed.

 

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

 

Parties have conducted research for manyyears in the antibody and transgenic animal fields. The term “transgenic”, whenapplied to an animal, such as a mouse, refers to an animal that has chromosomesinto which human genes have been incorporated. This research has resulted in asubstantial number of issued patents and an even larger number of pendingpatent applications. The publication of discoveries in the scientific or patentliterature frequently occurs substantially later than the date on which theunderlying discoveries were made. Our commercial success depends significantlyon our ability to operate without infringing the patents and other proprietaryrights of third parties. Our technologies may unintentionally infringe thepatents or violate other proprietary rights of third parties. Such infringementor violation may 

 

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prevent us and our customers from pursuing product development orcommercialization. Such a result could materially harm our business, financialcondition and results of operations.

 

Extensive litigation regarding patents andother intellectual property rights has been common in the biotechnology andpharmaceutical industries. The defense and prosecution of intellectual propertysuits, United States Patent and Trademark Office interference proceedings, andrelated legal and administrative proceedings in the United States andinternationally involve complex legal and factual questions. As a result, suchproceedings are costly and time-consuming to pursue and their outcome isuncertain. Litigation may be necessary to:

 

•                  enforce patents that we own or license;

 

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

 

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

 

Our involvement in any litigation,interference or other administrative proceedings could cause us to incursubstantial expense and could significantly divert the efforts of our technicaland management personnel. An adverse determination may subject us to loss ofour proprietary position or to significant liabilities, or require us to seeklicenses that may not be available from third parties. An adverse determinationin a judicial or administrative proceeding, or a failure to obtain necessarylicenses, may restrict or prevent us from manufacturing and selling ourproducts, if any. Costs associated with these arrangements may be substantialand may include ongoing royalties. Furthermore, we may not be able to obtainthe necessary licenses on satisfactory terms, if at all. These outcomes couldmaterially harm our business, financial condition and results of operations.

 

**Risks Related to Our Industry**

 

*We face intense competition and rapidtechnological change, and if we fail to develop products that keep pace withnew technologies and that gain market acceptance, our product candidates ortechnologies could become obsolete.*

 

The biotechnology and pharmaceuticalindustries are highly competitive and subject to significant and rapidtechnological change.  We facecompetition in several different forms. Our antibody generation activities currently face competition fromseveral companies and technologies.  Inaddition, the product candidates that we or our customers are developing alsoface competition.  Finally, we competewith companies that currently offer antibody production services, and maycompete with companies that currently only manufacture their own antibodies butcould offer antibody production services to third parties.

 

 We areaware of several pharmaceutical and biotechnology companies that are activelyengaged in research and development in areas related to antibody therapy.  Many of these companies have commencedclinical trials of antibody therapeutic product candidates or have successfullycommercialized antibody therapeutic products for use on their own or incombination therapies. Many of these companies are addressing the same diseasesand disease indications as we or our customers are.

 

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

 

Many of these companies and institutions,either alone or together with their customers or collaborators, havesubstantially greater financial resources and larger research and developmentstaffs than we do. In addition, many of these competitors, either alone ortogether with their customers or collaborators, have significantly greaterexperience than we do in:

 

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•                  developing products;

 

•                  undertaking preclinical testing and human clinicaltrials;

 

•                  obtaining FDA and other regulatory approvals ofproducts; and

 

•                  manufacturing and marketing products.

 

Accordingly, our competitors may succeed inobtaining patent protection, receiving FDA approval or commercializing productsbefore we do. If we commence commercial product sales, we will be competingagainst companies with greater marketing and manufacturing capabilities, areasin which we have limited or no experience.

 

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

 

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

 

•                  new small molecules; or

 

•                  other classes of therapeutic agents.

 

Developments by competitors may render ourproduct candidates or technologies obsolete or non-competitive. We face andwill continue to face intense competition from other companies for agreementswith pharmaceutical and biotechnology companies, for establishing relationshipswith academic and research institutions, and for licenses to proprietarytechnology. These competitors, either alone or with their customers, maysucceed in developing technologies or products that are more effective thanours.

 

We also face competition from companies thatprovide production services. These include contract manufacturers, such asLonza, Avid Bioservices, Inc., Diosynth Biotechnology, DSM N.V., CangeneCorporation and Goodwin Biotechnology Inc., and other pharmaceutical andbiotechnology companies that manufacture their own product candidates but canmake extra capacity available to collaborators and customers, such asBoehringer Ingelheim GmbH, Biogen Idec Inc., ICOS Corporation, Abbott andNovartis AG.

 

*We face uncertainty over reimbursement andhealthcare reform, which, if determined adversely to us, could seriously hinderthe market acceptance of our products.*

 

In both domestic and foreign markets, salesof our product candidates will depend in part upon the availability ofreimbursement from third-party payors, such as government health administrationauthorities, managed care providers and private health insurers.  Third-party payors are increasinglychallenging the price and examining the cost effectiveness of medical productsand services. In addition, significant uncertainty exists as to thereimbursement status of newly approved healthcare products.  Adequate third-party reimbursement may not beavailable to enable us to maintain price levels sufficient to realize anappropriate return on our investment in product development.  In addition, domestic and foreign governmentscontinue to propose and pass legislation designed to reduce the cost ofhealthcare, which could further limit reimbursement for pharmaceuticals.  The failure of government and third-partypayors to provide adequate coverage and reimbursement rates for our productcandidates could adversely affect the market acceptance of our products.  The failure of our products to receive marketacceptance would materially harm our business, financial condition and resultsof operations.

 

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*We may experience pressure to lower theprices of any prescription pharmaceutical products we are able to obtainapproval for because of new and/or proposed federal legislation.*

 

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

 

**Other Risks Related to Our Company**

 

*The future growth and success of our businesswill depend on our ability to continue to attract and retain our employees andconsultants.*

 

For us to pursue product development,manufacturing, marketing and commercialization plans, we will need to hireadditional qualified scientific, manufacturing, quality control, qualityassurance, and key management personnel, including a vice president of qualityand a vice president of process science. We may also need to hire personnelwith expertise in clinical testing, government regulation, marketing, law andfinance. Attracting and retaining qualified personnel will be critical to oursuccess. We may not be able to attract and retain personnel on acceptable termsgiven the competition for such personnel among biotechnology, pharmaceuticaland healthcare companies, universities and non-profit research institutions.The inability to attract and retain qualified personnel could materially harmour business, financial condition and results of operations.

 

We grant stock options as a method ofattracting and retaining employees, to motivate performance and to align theinterests of management with those of our stockholders. Due to fluctuations inthe trading price of our common stock in recent years, a substantial portion ofthe stock options held by our employees have an exercise price that is higherthan the current trading price of our common stock. We may elect to grantadditional stock options at the current lower market price, pay higher cashcompensation, or provide some combination of these alternatives to retain andattract qualified employees, but we cannot be sure that any of these actionswould be successful.  At our annualmeeting, stockholders will have the opportunity to approve a new incentivestock plan.  The proposed incentive stockplan would allow us to continue to compensate our employees with stock optionsand to utilize additional forms of equity awards.  If this proposal is not approved, we may havedifficulty attracting and retaining qualified personnel.  However, the issuance of additional stockoptions may be dilutive to existing stockholders.  In addition, the expensing of stock optionsand other stock-based awards may increase any net losses or decrease any netincome recorded in any given period and could affect the price that investorsmight be willing to pay in the future for shares of our common stock.

 

As a result of these factors, we may havedifficulty attracting and retaining qualified personnel, which could materiallyharm our business, financial condition and results of operations.

 

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

 

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

 

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

 

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

 

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

 

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

 

In addition, our past and future acquisitionsof companies and businesses and expansion of operations may result in dilutiveissuances of equity securities, the incurrence of additional debt, U.S. orforeign tax liabilities, large one-time write-offs and the creation of goodwillor other intangible assets that could result in amortization expense or othercharges 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 ourdetermination that an impairment of our acquired technology in the field ofcatalytic antibodies had occurred and that the estimated value had declined tozero. This technology was acquired in 2001 through the acquisition of HesedBiomed, Inc. After assessing the associated patent position and thelikelihood of sale or license of the technology to a third party, we furtherdetermined that the possibility of generating positive future cash flows fromthe technology was remote. We continue to evaluate our internal programs andassets. Further changes in our plans or strategy could result in additionalone-time charges.

 

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

 

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

 

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

 

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

 

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

 

•                  eliminate cumulative voting in the election ofdirectors.

 

In October 2003, we entered into acollaboration and license agreement with AstraZeneca for the purpose ofidentifying and developing antibody products for use in oncology therapeutics.The collaboration agreement includes provisions that would allow AstraZeneca toaccelerate its selection of target antigens and, in certain situations,terminate the collaboration agreement, or specific programs or activitiesconducted under it, in the event of a change in control in us, particularly ifwe were acquired by a competitor of AstraZeneca. In the event of a change incontrol of us, AstraZeneca could also acquire control over the developmentprograms and various intellectual property rights in respect of antigens thatare the subject of the collaboration agreement. This would result in areduction in the royalties and milestones to be paid by 

 

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AstraZeneca to us under the collaboration agreement and the release ofAstraZeneca from certain exclusivity provisions. In addition, certainexclusivity provisions contained in the collaboration agreement would apply toan acquirer of our company and would restrict the acquirer’s ability to operateits business in the oncology field after the acquisition, except with respectto pre-existing development programs. These and other provisions of thecollaboration agreement could make our company less attractive to a potentialacquirer, particularly an acquirer that conducts or expects to conductsignificant operations in the field of oncology therapeutics.

 

We are also subject to certain provisions ofDelaware law which could also delay or make more difficult a merger, tenderoffer or proxy contest involving us. In particular, Section 203 of theDelaware General Corporation Law prohibits a Delaware corporation from engagingin any business combination with any interested stockholder for a period ofthree years unless the transaction meets certain conditions. The stockholder rightsplan, the possible issuance of preferred stock, the procedures required fordirector nominations and stockholder proposals, our collaboration agreementwith AstraZeneca and Delaware law could have the effect of delaying, deferringor preventing a change in control of us, including, without limitation,discouraging a proxy contest or making more difficult the acquisition of asubstantial block of our common stock. The provisions also could limit theprice that investors might be willing to pay in the future for shares of ourcommon stock.

 

*We face product liability risks and may notbe able to obtain adequate insurance, and if we are held liable for anuninsured 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, orof any products manufactured in our facility, in clinical trials, and the saleof any approved products, may expose us to liability claims resulting from suchuse or sale. Consumers, healthcare providers, pharmaceutical companies orothers selling such products might make claims of this kind. We may experiencefinancial losses in the future due to product liability claims. We haveobtained limited product liability insurance coverage for our clinical trialsand production services activities, under which the coverage limits are$15.0 million per occurrence and $15.0 million in the aggregate. Wemay not be able to maintain insurance coverage at a reasonable cost or insufficient amounts to protect us against losses. If third parties bring asuccessful product liability claim or series of claims against us for uninsuredliabilities or in excess of insured liabilities, our business, financialcondition 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 activitiesinvolve the controlled use of hazardous materials. In addition, although wemaintain insurance for harm to employees and to our facilities caused byhazardous materials, we do not insure against any other harm (including harm tothe environment) caused by the use of hazardous materials on our premises. Wecannot eliminate the risk of accidental contamination or injury from thesematerials. In the event of an accident or environmental discharge, we may beheld liable for any resulting damages, which may exceed our financial resourcesand may materially harm our business, financial condition and results ofoperations.

 

*We do not intend to pay cash dividends on ourcommon stock.*

 

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

 

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

 

The marketprice and trading volume of our common stock are volatile, and we expect suchvolatility to continue for the foreseeable future. For example, during theperiod between March 31, 2004 and

 

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March 31, 2005, our common stock closed as high as $18.55 per shareand as low as $7.00 per share.  This mayimpact your decision to buy or sell our common stock. Factors affecting ourstock price include:

 

•                                          ourfinancial results;

 

•                                          fluctuationsin our operating results;

 

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

 

•                                          publishedreports by securities analysts;

 

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

 

•                                          governmentregulation;

 

•                                          changesin reimbursement policies;

 

•                                          developmentsin patent or other proprietary rights;

 

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

 

•                                          developmentsin our relationship with customers;

 

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

 

•                                          generalmarket conditions.

 

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

##### ** **

*Interest Rate Risk.*  Weare exposed to interest rate sensitivity on our investments in debt securitiesand our outstanding fixed rate debt. Theobjective of our investment activities is to preserve principal, while at thesame time maximizing yields without significantly increasing risk. To achievethis objective, we invest in highly liquid, investment grade and governmentdebt securities. Our investments in debt securities are subject to interestrate 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 averagematurity of approximately one year. In addition, as of March 31,2005, we had $113.7 million of outstanding 3.5% convertible subordinated notesdue in 2007, and  $300.0 million ofoutstanding 1.75% convertible senior notes due in 2011. The fair value of theseconvertible notes may fluctuate with changes in market interest rates, as wellas changes in the market price of our common stock.  Ahypothetical 1.0% per annum decrease in interest rates would result in anadverse net change in the fair value of our interest rate sensitive assets andliabilities of approximately $18.7million and $16.6 million at March 31, 2005 and December 31, 2004,respectively.

 

*Equity Price Risk.*  Weare exposed to equity price risk on strategic investments, such as those wehave made in CuraGen and ImmunoGen. We typically do not attempt to reduce oreliminate our market exposure on these securities. With respect to CuraGen andImmunoGen, each of whose common stock is publicly traded, the aggregate marketvalue of our investments in these securities was approximately $13.6million and $23.3 million as of March 31, 2005 and December 31, 2004,respectively. Due to decreases in the market prices of the shares of CuraGenand ImmunoGen, we recorded impairment charges of $67.3 million in 2002 relatedto these investments. The trading prices of 

 

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shares of CuraGen and ImmunoGen have fluctuated significantly since wepurchased these securities. Each additional 10% decrease in market value ofthese securities would result in a decrease in value of approximately $1.4million and $2.3 million from the fair value of those investments at March 31,2005 and December 31, 2004, respectively. Additional price declines could cause us to record additional impairmentcharges in future periods.

 

# **Item 4. Controls and Procedures**

#  

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

#### ** **

Basedon their evaluation of our disclosure controls and procedures, as that term isdefined by Rule 13a-15(e) promulgated under the Securities ExchangeAct of 1934, as of the end of the period covered by this report, our chiefexecutive officer and our chief financial officer have concluded that ourdisclosure controls and procedures are effective in ensuring that all materialinformation required to be included in this quarterly report on Form 10-Qhas been made known to them in a timely fashion.

 

**Changes in Internal ControlsOver Financial Reporting**

 

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

 

**PART II.  OTHER INFORMATION**

 

#### **ITEM 1. Legal Proceedings**

#### ** **

Not applicable.

 

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

#### ** **

Not applicable.

 

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

#### ** **

Not applicable.

 

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

#### ** **

Notapplicable.

 

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

#### ** **

On May 9, 2005, the Company and C.Geoffrey Davis, Ph.D., entered into a letter agreement in connection with Dr. Davis’sdecision to transition from a full-time to part-time employee status.  As of July 1, 2005, Dr. Davis willresign his position as Chief Scientific Officer and will provide services tothe Company on a part-time basis as Senior Vice President, TechnologyAssessment.  From July 1, 2005through December 31, 2005, Dr. Davis will receive a prorated monthlysalary of $11,541.66 and company paid benefits. During this period, Dr. Davis will, among other things, assist intransitioning his responsibilities and in assessing technical and scientificopportunities for the Company.

 

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** **

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

** **
| **Number** | ** ** | **Description**                                                                                                                                             |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                        |
| 3.1(1)     |       | Amended and Restated Certificate of Incorporation of Abgenix, as  currently in effect.                                                                      |
| 3.2(2)     |       | Amended and Restated Bylaws of Abgenix, as currently in effect.                                                                                             |
| 10.69      |       | Separation Agreement, dated March 18, 2005, between Abgenix, Inc.  and Patrick Murphy.                                                            |
| 10.70      |       | Letter Agreement, dated May 9, 2005, between Abgenix, Inc. and C.  Geoffrey Davis.                                                                          |
| 31.1       |       | Certification of William R. Ringo Pursuant to Rule 13a-14(a), as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.              |
| 31.2       |       | Certification of H. Ward Wolff Pursuant to Rule 13a-14(a), as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                 |
| 32.1       |       | Certification of William R. Ringo Pursuant to 18 U.S.C. Section 1350,  as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2       |       | Certification of H. Ward Wolff Pursuant to 18 U.S.C. Section 1350,  as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    |

 

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(1)                                  Incorporated by reference to the same exhibitfiled with Abgenix’s Annual Report on Form 10-K for the year ended December 31,2002.

 

(2)                                  Incorporated by reference to the same exhibitfiled with Abgenix’s Annual Report on Form 10-K for the year ended December 31,2001.

 

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**SIGNATURES**

 

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

 

 

Dated: May 10,2005

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

 

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