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

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FORM 10-Q

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(Mark One)

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

For the quarterly period ended March 31, 2002

OR

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

For the transition period from  to
.

Commission file number: 000-24207

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

Delaware(State or other jurisdiction of
incorporation or organization)

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

94555(Zip Code)


(510) 608-6500(Registrant's telephone number, including area code)

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

As
of April 30, 2002 there were 87,061,634 shares of the Registrant's Common Stock outstanding.

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TABLE OF CONTENTS

|                              |                                                                                                              |                                                                                       | Page No.
|----------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------- | --------
|PART I. Financial Information |                                                                                                              |                                                                                      
|                              | ITEM 1.                                                                                                      | Financial Statements                                                                  |         
|                              | Condensed Consolidated Balance Sheets at March 31, 2002 and December 31, 2001                                |                                                                                       | 3       
|                              | Condensed Consolidated Statements of Operations for the three months ended March 31, 2002 and March 31, 2001 |                                                                                       | 4       
|                              | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and March 31, 2001 |                                                                                       | 5       
|                              | Notes to Condensed Consolidated Financial Statements                                                         |                                                                                       | 6       
|                              | ITEM 2.                                                                                                      | Management's Discussion and Analysis of Financial Condition and Results of Operations |         
|                              | ITEM 3.                                                                                                      | Quantitative and Qualitative Disclosures about Market Risk                            |         
|PART II. Other Information    |                                                                                                              |                                                                                      
|                              | ITEM 1.                                                                                                      | Legal Proceedings                                                                     |         
|                              | ITEM 2.                                                                                                      | Changes in 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 and Reports on Form 8-K                                                      |         
|SIGNATURES                    |                                                                                                              | 45                                                                                   

2

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

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

|                                     |                                                                                                                                                                               | March 31,
2002             |         | December 31,
2001 |        
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ----------------- | -------
|
|ASSETS                               |                                                                                                                                                                              
|Current assets:                      |                                                                                                                                                                               |                            |         |                   |        
|                                     | Cash and cash equivalents                                                                                                                                                     |                            | $       | 256,842           |        
|                                     | Marketable securities                                                                                                                                                         |                            |         | 404,194           |        
|                                     | Interest receivable                                                                                                                                                           |                            |         | 4,398             |        
|                                     | Accounts receivable, net                                                                                                                                                      |                            |         | 2,931             |        
|                                     | Prepaid expenses and other current assets                                                                                                                                     |                            |         | 18,291            |        
|                                     |                                                                                                                                                                               |                            |         |                   |        
|                                     |                                                                                                                                                                               | Total current assets       |         |                   | 686,656
|Property and equipment, net          |                                                                                                                                                                               |                            | 119,283 |                   |        
|Long-term investments                |                                                                                                                                                                               |                            | 15,039  |                   |        
|Goodwill, net                        |                                                                                                                                                                               |                            | 34,780  |                   |        
|Identified intangible assets, net    |                                                                                                                                                                               |                            | 97,793  |                   |        
|Deposits and other assets            |                                                                                                                                                                               |                            | 29,718  |                   |        
|                                     |                                                                                                                                                                               |                            |         |                   |        
|                                     |                                                                                                                                                                               | $                          | 983,269 |                   | $      
|                                     |                                                                                                                                                                               |                            |         |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                              
|Current liabilities:                 |                                                                                                                                                                               |                            |         |                   |        
|                                     | Accounts payable                                                                                                                                                              |                            | $       | 12,432            |        
|                                     | Deferred revenue                                                                                                                                                              |                            |         | 3,503             |        
|                                     | Accrued liabilities                                                                                                                                                           |                            |         | 14,636            |        
|                                     | Acquisition liabilities                                                                                                                                                       |                            |         | 2,028             |        
|                                     |                                                                                                                                                                               |                            |         |                   |        
|                                     |                                                                                                                                                                               | Total current liabilities  |         |                   | 32,599 
|Deferred rent                        |                                                                                                                                                                               |                            | 2,571   |                   |        
|Convertible subordinated notes       |                                                                                                                                                                               |                            | 200,000 |                   |        
|Commitments                          |                                                                                                                                                                               |                            |         |                   |        
|Stockholders' equity:                |                                                                                                                                                                               |                            |         |                   |        
|                                     | Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued or outstanding                                                                                   |                            |         |                  |        
|                                     | Common stock, $0.0001 par value; 220,000,000 shares authorized; 86,940,086 and 86,835,165 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively |                            |         | 9                 |        
|                                     | Additional paid-in capital                                                                                                                                                    |                            |         | 961,908           |        
|                                     | Accumulated other comprehensive income (loss)                                                                                                                                 |                            |         | 2,082             |        
|                                     | Accumulated deficit                                                                                                                                                           |                            |         | (215,900          | )      
|                                     |                                                                                                                                                                               |                            |         |                   |        
|                                     |                                                                                                                                                                               | Total stockholders' equity |         |                   | 748,099
|                                     |                                                                                                                                                                               |                            |         |                   |        
|                                     |                                                                                                                                                                               | $                          | 983,269 |                   | $      
|                                     |                                                                                                                                                                               |                            |         |                   |        

See
accompanying notes.

3

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

|                                                              |                                                                                   | Three Months Ended March 31, |        
|------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------- | -------
|
|Revenues:                                                     |                                                                                   |                              |        
|                                                              | Contract revenue                                                                  |                              | $      
|                                                              | Interest and other income                                                         |                              |        
|                                                              |                                                                                   |                              |        
|                                                              |                                                                                   | Total revenues               |        
|Costs and expenses:                                           |                                                                                   |                              |        
|                                                              | Research and development                                                          |                              |        
|                                                              | Amortization of goodwill                                                          |                              |        
|                                                              | Amortization of identified intangible assets, related to research and development |                              |        
|                                                              | General and administrative                                                        |                              |        
|                                                              | Impairment of investments                                                         |                              |        
|                                                              | Interest expense                                                                  |                              |        
|                                                              |                                                                                   |                              |        
|                                                              |                                                                                   | Total costs and expenses     |        
|                                                              |                                                                                   |                              |        
|Net loss                                                      |                                                                                   | $                            | (56,451
|                                                              |                                                                                   |                              |        
|Basic and diluted net loss per share                          |                                                                                   | $                            | (0.65  
|                                                              |                                                                                   |                              |        
|Shares used in computing basic and diluted net loss per share |                                                                                   |                              | 86,725 
|                                                              |                                                                                   |                              |        

See
accompanying notes.

4

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

|                                                                            |                                              | Three Months Ended March 31,              |        
|--------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | -------
|
|Operating activities                                                        |                                              |                                           |        
|Net loss                                                                    |                                              | $                                         | (56,451
|Adjustments to reconcile net loss to net cash used in operating activities: |                                              |                                           |        
|                                                                            | Depreciation and other amortization          |                                           |        
|                                                                            | Amortization of goodwill                     |                                           |        
|                                                                            | Amortization of identified intangible assets |                                           |        
|                                                                            | Impairment of investments                    |                                           |        
|                                                                            | Changes for certain assets and liabilities:  |                                           |        
|                                                                            |                                              | Interest receivable                       |        
|                                                                            |                                              | Accounts receivable                       |        
|                                                                            |                                              | Prepaid expenses and other current assets |        
|                                                                            |                                              | Deposits and other assets                 |        
|                                                                            |                                              | Accounts payable                          |        
|                                                                            |                                              | Deferred revenue                          |        
|                                                                            |                                              | Accrued liabilities                       |        
|                                                                            |                                              | Deferred rent                             |        
|                                                                            |                                              |                                           |        
|Net cash used in operating activities                                       |                                              |                                           | (34,692
|                                                                            |                                              |                                           |        
|Investing activities                                                        |                                              |                                           |        
|Purchases of marketable securities                                          |                                              |                                           | (25,755
|Maturities of marketable securities                                         |                                              |                                           | 30,353 
|Sales of marketable securities                                              |                                              |                                           | 27,833 
|Purchases of property and equipment                                         |                                              |                                           | (34,882
|Payments for acquisition liabilities                                        |                                              |                                           | (130   
|                                                                            |                                              |                                           |        
|Net cash provided by (used in) investing activities                         |                                              |                                           | (2,581 
|                                                                            |                                              |                                           |        
|Financing activities                                                        |                                              |                                           |        
|Net proceeds from issuances of common stock                                 |                                              |                                           | 452    
|Net proceeds from issuance of convertible subordinated notes                |                                              |                                           | 194,000
|                                                                            |                                              |                                           |        
|Net cash provided by financing activities                                   |                                              |                                           | 194,452
|                                                                            |                                              |                                           |        
|Net increase in cash and cash equivalents                                   |                                              |                                           | 157,179
|Cash and cash equivalents at beginning of period                            |                                              |                                           | 99,663 
|                                                                            |                                              |                                           |        
|Cash and cash equivalents at end of period                                  |                                              | $                                         | 256,842
|                                                                            |                                              |                                           |        

See
accompanying notes.

5

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ABGENIX, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  March 31, 2002

1.    Basis of Presentation and Summary of Significant Accounting Policies

Basis of PresentationThe unaudited condensed consolidated financial statements of
Abgenix, Inc. (the "Company" or "Abgenix") included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information
or footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31,
2001, and accompanying notes included in the Company's Annual Report as filed on Form 10-K with the Securities and Exchange Commission. The results of operations for the three
months ended March 31, 2002, are not necessarily indicative of the results to be expected for the full year or for any other future period.

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



Net Loss Per ShareBasic earnings per share is calculated based on the weighted average number of shares outstanding during
the period. The impact of common stock options and warrants was

6

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excluded from the computation of diluted earnings per share, as their effect is antidilutive for the periods presented.

Accounting ChangeEffective January 1, 2002, the company completed the adoption of Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after
June 30, 2001, to be accounted for using the purchase method of accounting. As required by SFAS No. 142, the company discontinued amortizing the remaining balances of goodwill as of
January 1, 2002. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a
fair-value-based approach. All other intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." In conjunction with the implementation of SFAS No. 142, the company has completed a goodwill impairment review as of the
beginning of 2002 and found no impairment.

Upon
adoption of the new Business Combination rules, acquired workforce no longer meets the definition of an identified intangible asset. As a result, the net balance of $120,000 has
been reclassified
to goodwill in 2002. During the three months ended March 31, 2002, no goodwill was acquired, impaired or written off.

A
reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization is as follows (in thousands, except per share
amounts):

Three Months Ended
March 31,2002

2001Reported net loss

$
(56,451
)
$
(7,644
)Goodwill and workforce amortization





629Adjusted net loss

$
(56,451
)
$
(7,015
)Reported basic and diluted loss per share

$
(0.65
)
$
(0.09
)Goodwill and workforce amortization





0.01Adjusted basic and diluted loss per share

$
(0.65
)
$
(0.08
)


2.    Comprehensive Income (Loss)

Other comprehensive income (loss) consists of unrealized gains or losses on available-for-sale securities. The components of comprehensive
loss were as follows (in thousands):

March 31,2002

2001(in thousands)Net loss

$
(56,451
)
$
(7,644
)Unrealized losses on securities:Unrealized holding losses arising during period


(21,525
)

(14,831
)Less: reclassification adjustment for losses recognized in net loss


34,653


Decrease (increase) in net unrealized loss on securities


13,128


(14,831
)Comprehensive loss

$
(43,323
)
$
(22,475
)


7

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3.    Identified Intangible Assets

During the three months ended March 31, 2002, no identified intangible assets were acquired, impaired or written off.

Identified
intangible assets as of March 31, 2002 and 2001, consisted of the following:

Gross
Assets

Accumulated
Amortization

Net(in thousands)As of March 31, 2002:Acquisition-related developed technology

$
106,183

$
11,305

$
94,878Other intangible assets


3,016


101


2,915Identified intangible assets

$
109,199

$
11,406

$
97,793As of March 31, 2001:Acquisition-related developed technology

$
85,142

$
4,961

$
80,181Other intangible assets








Identified intangible assets

$
85,142

$
4,961

$
80,181


Amortization
of acquisition-related intangibles was $1.8 million for the three months ended March 31, 2002. Amortization of other intangible assets was $48,000 for the
three months ended March 31, 2002. All of the company's acquired identified intangibles other than goodwill are subject to amortization.

Expected
amortization expense related to identified intangible assets for the nine-month period from April 1, 2002, to December 31, 2002, and each of the fiscal
years thereafter is as follows:

|                                |  | Periods Ending December 31, |       |  |   |      
|------------------------------- |  | --------------------------- | ----- |  | - | -----
|
|
|Acquisition-related intangibles |  | $                           | 5,307 |  | $ | 7,076
|Other intangible assets         |  | $                           | 137   |  | $ | 182  

4.    Convertible Subordinated Notes

In March 2002, the Company issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are
convertible into shares of Abgenix common stock at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5% and the Company is
obligated to pay interest on March 15 and September 15 of each year, beginning on September 15, 2002. The notes will mature on March 15, 2007, and are redeemable at the
Company's option on or after March 20, 2005, or earlier if the price of the Company's common stock exceeds specified levels. In addition, the holders of the notes may require the Company to
repurchase the notes if the Company undergoes a change in control.

5.    Impairment of Investments

In March 2002, the Company recorded an impairment charge of $34.7 million related to the Company's strategic investments in CuraGen Corporation and
ImmunoGen, Inc. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are
designated as available-for-sale and are reported at fair value on the Company's balance sheet. Unrealized holding gains and losses for
available-for-sale securities generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of
available-for-sale securities is judged to be other than temporary, the cost basis of the

8

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security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under the Company's accounting policy,
marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. At March 31,
2002, the Company's investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months. Accordingly, the Company recorded an impairment charge of
$34.7 million in the Company's results of operations, and the new cost basis of these investments now reflects the public trading prices on March 31, 2002. The amount of the charge was
based on the difference between the market price of the securities, as of March 31, 2002, and the Company's original cost basis.

6.    Segment Information

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

Revenues
from two customers represented 77% and 10%, respectively, of contract revenues for the three months ended March 31, 2002. Revenues from three customers represented 41%,
21%, and 19%, respectively, of contract revenues for the three months ended March 31, 2001.

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

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

Overview

We are a biopharmaceutical company that develops and intends to commercialize antibody therapeutic products for the treatment of a variety of disease conditions,
including cancer, inflammatory and autoimmune disorders, transplant-related diseases, cardiovascular disease and infectious diseases. We have proprietary technologies that facilitate rapid generation
of highly specific, antibody therapeutic product candidates that contain fully human protein sequences and that bind to disease targets appropriate for antibody therapy. In this Quarterly Report on
Form 10-Q we refer to these candidates as fully human antibody therapeutic candidates. We developed our XenoMouse® technology, a technology using genetically modified
mice to generate fully human antibodies. We also own a technology that enables the rapid identification of antibodies with desired function and characteristics, referred to as SLAM
technology. In our XenoMax technology, we use SLAM technology to select and isolate antibodies with particular function and characteristics from antibody-producing cells generated by
XenoMouse animals. We believe XenoMax technology enhances our capabilities in product development and flexibility in manufacturing. We intend to use our technologies to build a large and diversified
product portfolio that we expect to develop and commercialize through licensing arrangements with pharmaceutical companies and others, through joint development and through internal product
development programs. We have entered into a variety of contractual arrangements with multiple pharmaceutical, biotechnology and genomics companies involving our XenoMouse technology. Two of our
customers, Pfizer, Inc. and Amgen, Inc., have initiated clinical trials with fully human antibodies generated from XenoMouse animals. In addition, as of March 31, 2002, we had
four proprietary antibody product candidates in clinical trials, one of which we had agreed to co-develop and commercialize with Immunex Corporation and one of which we had agreed to
co-develop and commercialize with SangStat Medical Corporation.

As
of March 31, 2002, we had entered into contracts covering numerous antigen targets with twenty-eight customers to use our XenoMouse technology to generate and/or develop the
resulting fully human antibodies. As of March 31, 2002, we had also entered into one agreement in which we licensed our SLAM technology to one party on a non-exclusive basis for the
purpose of generating and using antibodies other than antibodies derived from XenoMouse technology or other technology that involves the use of non-human animals, and on a
co-exclusive basis for the purpose of antigen discovery. We do not currently intend to license our SLAM technology for use by any other parties. Pursuant to our XenoMouse contracts, we and
our customers intend to generate antibody product candidates for the treatment of cancer, inflammation, autoimmune diseases, transplant rejection, cardiovascular disease, growth factor modulation,
neurological diseases and infectious diseases. We expect that substantially all of our revenues for the foreseeable future will result from payments under these and other contracts. We have also
licensed technology from third-parties for use in conjunction with our proprietary technology. The terms of our contractual arrangements vary, but can generally be categorized as follows:



10

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11

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As
of March 31, 2002, we had four proprietary antibody therapeutic product candidates that were in clinical trials, two of which were being co-developed with
collaborators, as follows:



12

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We
will expend significant capital to conduct clinical trials for our proprietary product candidates, including several Phase I and II clinical trials we plan to initiate in 2002. We
believe that more extensive clinical data will enable us to enter into additional contractual arrangements related to those proprietary product candidates. We expect that this will substantially
increase our capital needs over the next few years and increase our operating losses. However, we believe that we will be able to receive more favorable terms from our contract parties if we have
completed significant development of these products.

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



Results of Operations

Three Months Ended March 31, 2002 and 2001



Contract revenues increased to $11.0 million in the three months ended March 31, 2002, from $4.2 million in the three months ended
March 31, 2001. The primary components of contract revenues for both periods were as follows:



13

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Interest and other income consist primarily of interest from cash, cash equivalents and marketable securities. Interest and other income decreased to
$5.3 million in the three months ended March 31, 2002, compared to $10.3 million in the same period in 2001. The decrease was due to lower interest rates and lower average cash,
marketable securities and cash equivalent balances.



Research and development expenses increased to $29.0 million in the three months ended March 31, 2002 from $16.0 million in the same period
in 2001. Management separates research and development expenditures into amounts related to preclinical research and development, amounts related to clinical development programs and amounts related
to facilities as follows:



14

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We
generally do not track our historical research and development costs by project; rather, we track such costs by the type of cost incurred, including costs in the categories discussed
above: preclinical research and development costs, clinical costs and facility costs. For this reason, we cannot accurately estimate with any degree of certainty our historical costs for any
particular research and development project.



Our identified intangible assets primarily consist of existing technology (including patents and certain royalty rights) that we acquired through the acquisitions
of Hesed Biomed in November 2001, Abgenix Biopharma and IntraImmune in November 2000, and the acquisition of JT America's interest in Xenotech in December 1999. Amortization of
intangible assets increased to $1.8 million in the three months ended March 31, 2002, compared to $1.4 million in the same period ended March 31, 2001. The increase was due
to the amortization of the new technology acquired in our acquisition of Hesed Biomed. Beginning January 1, 2002, upon the adoption of Statement of Financial Accounting Standards

15

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(SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets," we no longer amortize goodwill, but will perform impairment tests annually, or earlier if
indications of impairment exist. We have conducted an initial impairment test on our goodwill and concluded that no impairment charge was required. In the three months ended March 31, 2001, the
amortization of goodwill was $629,000. All other intangible assets will continue to be amortized over their estimated useful lives.



General and administrative expenses include compensation, professional services, consulting and other expenses related to information systems, legal, finance and
human resources and an allocation of facility costs. General and administrative expenses increased to $6.7 million in the three months ended March 31, 2002, compared to
$3.8 million in the same period ended March 31, 2001. The primary reason for the increase in the first quarter of 2002 as compared to the same period in 2001, is the increase in
consulting and personnel expenses related to our information systems, including the implementation of a new enterprise resource planning system. Another significant reason for this increase is the
rise in legal costs to support the increased activities of the Company, including activities related to intellectual property, securities filings and licensing and other contractual matters. We expect
personnel, consulting, professional services and other administrative costs to increase further as we continue to build our organization.



In the three months ended March 31, 2002, we recorded an impairment charge of $34.7 million related to our strategic investments in CuraGen and
ImmunoGen. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as
available-for-sale and are reported at fair value on our balance sheet. Unrealized holding gains and losses for available-for-sale securities generally
are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to be other
than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under our
accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. At
March 31, 2002, our investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months. Accordingly, we recorded an impairment charge of
$34.7 million in our results of operations, and the new cost basis of these investments now reflects the public trading prices on March 31, 2002. The amount of the charge was based on
the difference between the market price of the securities, as of March 31, 2002, and our original cost basis.



Interest expense consists of interest and amortization of issuance costs on our convertible debt, and interest on our equipment leaseline financing. Interest
expense increased to $0.6 million in the three months ended March 31, 2002, compared to $0.3 million in the same period ended March 31, 2001. The increase was primarily due
to our issuance of $200.0 million of convertible debt in March 2002, which accrues interest at an annual rate of 3.5%. For each future quarterly period, we expect to accrue approximately
$1.8 million of interest expense related to our convertible debt until the debt matures, until we redeem or repurchase the debt or until all or part of the debt is converted into shares of our
common stock.

16

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Liquidity and Capital Resources

At March 31, 2002, we had cash, cash equivalents and marketable securities of approximately $661.0 million. In March 2002, we received
proceeds of approximately $193.6 million, net of commissions and estimated offering expenses, from our issuance of $200.0 million of convertible debt. We invest our cash equivalents and
marketable securities primarily in highly liquid, interest bearing, investment grade and government securities in order to preserve principal. We have also invested in certain marketable equity
securities of ImmunoGen and CuraGen for strategic reasons. These securities had a fair value of $45.3 million at March 31, 2002.

Cash Used in Operating Activities.Net cash used in operating activities was $34.7 million and $10.1 million in
the three months ended March 31, 2002 and 2001, respectively. The increase in cash used in operating activities in the three months ended March 31, 2002, compared to the same period in
2001 reflects primarily the following:



Cash Provided by (Used in) Investing Activities.Net cash used in investing activities was $2.6 million in the three
months ended March 31, 2002. Net cash provided by investing activities was $23.8 million in the three months ended March 31, 2001. Cash was provided by and used in investing
activities as follows:



Cash Provided by Financing Activities.During the three months ended March 31, 2002, net cash provided by financing
activities was $194.5 million, consisting of $194.0 million net proceeds from our issuance of convertible subordinated notes, as described below, and $0.5 million proceeds from
the exercise of stock options and the issuance of stock under our employee stock purchase plan. During the three months ended March 31, 2001, net cash provided by financing activities was
$0.8 million, consisting of proceeds from the exercise of stock options and the issuance of stock under our employee stock purchase plan.

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In
March 2002, we issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of our common stock
at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5% and we are obligated to pay interest on March 15 and
September 15 of each year, beginning on September 15, 2002. The notes will mature on March 15, 2007, and are redeemable at our option on or after March 20, 2005, or earlier
if the price of our common stock exceeds specified levels. In addition, the holders of the notes may require us to repurchase the notes if we undergo a change in control. Proceeds from the sale of the
notes, net of commissions payable to the initial purchasers of the notes but before subtracting other offering expenses payable by us, were $194.0 million.

In
March 2000 and February 2001, we obtained stand-by letters of credit for $2.0 million and $3.0 million, respectively, from a commercial bank as
security on our obligations under two facility leases. These were increased in January 2002 to $2.5 and $3.2 million, respectively, in connection with amendments to our facility leases.
In September 2001, we obtained a stand-by letter of credit for 1.0 million Canadian dollars from a commercial bank as security on our obligations under a facility lease in
Canada. The stand-by letters of credit are secured by an investment account, in which we must maintain a $7.0 million
balance. Additionally, in 1997 we leased $2.0 million of our laboratory and office equipment from a financing company. The lease bore interest at approximately 12.5% to 13.0%, and matured in
September 2001.

Financing Uncertainties Related to Our Business Plan.We plan to continue to make significant expenditures to establish our
own manufacturing facility and expand our research and development activities, including pre-clinical product development and clinical trials. We will also continue to look for new
technology suppliers as potential acquisitions or alliance collaborators. Over the next nine months, we estimate that we will spend approximately $96.5 million on leasehold improvements and
equipment for our new manufacturing and research and development facilities. Additionally, during the same period we expect to spend approximately $9.9 million on new computer hardware and
software, including the acquisition of a new enterprise resource planning system. We also plan to spend significant amounts to develop, on a proprietary or co-developed basis, INDs for up
to three product candidates annually, beginning in 2002. We believe that the annual goals of our customers and collaborators for 2002 and beyond may include up to five INDs for additional product
candidates based on our XenoMouse technology. In light of initiatives we have underway to increase significantly the number of drugs we have in development, we also expect that our cash used in
operating activities will be significantly greater in 2002 than in 2001.

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

The
amounts of the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources
to a significant extent. As of March 31, 2002, four of our proprietary product candidates, ABX-CBL, ABX-IL8, ABX-EGF and ABX-MA1, were in various
stages of clinical trials. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type,

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complexity, novelty and intended use of a product candidate. We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

Clinical Phase

Estimated
Completion PeriodPhase I

1 YearPhase II

1-2 YearsPhase III

2-4 Years


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



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

An
important element of our business strategy is to pursue the research and development of a diverse range of product candidates for a variety of disease indications. This strategy is
designed to diversify the risks associated with our research and development spending. As a result, we believe our future capital requirements and our future financial success are not substantially
dependent on any one product candidate. The decision to terminate or wind down our clinical programs for developing ABX-IL8 has reduced the diversity of our product portfolio. We believe that this
effect is temporary, in view
of the number of potential product candidates we have in preclinical development. To the extent, however, that we are unable to maintain a diverse and broad range of product candidates, our dependence
on the success of one or a few product candidates would increase.

Our
proprietary product candidates also have not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products. In order to proceed to
subsequent clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that our clinical data establish safety and efficacy. Historically, the results from preclinical
testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but
subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.

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

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

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



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

History of Net Losses.We have incurred net losses in each of the last six years of operation, including net losses of
$7.1 million in 1996, $35.9 million in 1997, $16.8 million in 1998, $20.5 million in 1999, $8.8 million in 2000, $60.9 million in 2001 and
$56.5 million in the three months ended March 31, 2002. As of March 31, 2002, our accumulated deficit was $215.9 million. Our losses to date have resulted principally from:



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

Net Operating Loss Carryforwards.As of December 31, 2001, we had federal net operating loss carryforwards of
approximately $189.0 million. Our net operating loss carryforwards exclude losses incurred prior to our formation in July 1996. Further, we have capitalized the amounts associated with
the 1997 settlement and cross-license that have been expensed for financial statement accounting purposes and we are amortizing those amounts over a period of approximately 15 years for tax
purposes. The net operating loss and credit carryforwards will expire in the years 2006 through 2021, if not utilized. Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net
operating losses and credits before utilization.

Critical Accounting Policies

The financial results that we report are impacted by the application of a several accounting policies that require us to make subjective and complex judgments. We
are required to estimate the effect of matters that are inherently uncertain. Changes in our estimates or judgments could materially impact our results of operations, financial condition and cash
flows in future years. We believe our most critical accounting policies include revenue recognition, accounting for our marketable equity securities, and the capitalization of clinical trial supplies.
Our accounting practices are discussed in more detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 1 of "Notes to
Consolidated Financial Statements" in our Annual Report on Form 10-K for the year ended December 31, 2001. The discussion below is an update to our disclosure in our Annual
Report on Form 10-K relating to our method of accounting for our marketable securities.

Accounting for Marketable Securities.

We are exposed to equity price risk on our strategic investments in CuraGen and ImmunoGen. As of March 31, 2002, we have a new cost basis of
$36.6 million in CuraGen common stock, which reflects the public trading price on that date of $16.06. We also have a new cost basis of $8.7 million of ImmunoGen common stock, which
reflects the public trading price on that date of $11.07. We typically do not attempt to reduce or eliminate our market exposure on these types of investments. Under SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as available-for-sale and are reported at fair value on our balance
sheet. Unrealized holding gains and losses for available-for-sale securities generally are excluded from earnings and reported as a component of stockholders' equity. However,
if a decline in the fair value of available-for-sale securities is judged to be other than temporary, the cost basis of the

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security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under our accounting policy, marketable equity
securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. At March 31, 2002, our investments
in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months. Accordingly, we recorded an impairment charge of $34.7 million in our results of
operations, and the new cost basis of each of these investments now reflects the public trading prices on March 31, 2002. The amount of the charge was based on the difference between the market
price of the securities, as of March 31, 2002, and our original cost basis. We purchased $15 million of CuraGen common stock in December 1999 at price of $17.90 per share and
$50 million of CuraGen common stock in November 2000 at a price of $34.69 per share. We purchased $15 million of ImmunoGen common stock in September 2000 at a price of
$19.00 per share. The public trading prices of the shares of both companies have fluctuated significantly since we purchased them and could continue to do so. As of May 8, 2002, the public
trading price for the common stock of Curagen and ImmunoGen was $8.771 and $7.99, respectively. If the public trading prices of these shares continue to trade below their new cost basis in future
periods, we may incur additional impairment charges relating to these investments.

Contractual Obligations and Commercial Commitments

As of March 31, 2002, there were no material changes in our contractual obligations or commercial commitments from those disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2001. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and
Capital Resources" in our Annual Report on Form 10-K for the year ended December 31, 2001.

Additional Factors That Might Affect Future Results

Risks Related to our Finances

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

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

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

We have incurred net losses in each of the last six years of operation, including net losses of $7.1 million in 1996, $35.9 million in 1997,
$16.8 million in 1998, $20.5 million in 1999, $8.8 million in 2000, $60.9 million in 2001 and $56.5 million in the three months ended March 31, 2002. As of
March 31, 2002, our accumulated deficit was $215.9 million. Our losses to date have resulted principally from:



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

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

Prior to June 1996, Cell Genesys owned our business and operated it as a separate business unit. Since that time, we have funded our research and
development activities primarily from private placements and public offerings of our securities and from revenues generated by our licensing and contractual agreements.

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



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

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

We will continue to expend substantial resources for the expansion of research and development, including costs associated with conducting
pre-clinical development and clinical trials. In the three months ended March 31, 2002, we spent $29.0 million on research and development. In the years ended
December 31, 2001, 2000 and 1999, we spent $96.2 million, $50.1 million and $21.1 million, respectively, on research and development. Regulatory and business factors will
require us to expend substantial funds in the course of completing required additional development, pre-clinical testing and clinical trials of, and regulatory approvals for, product
candidates. The amounts of the expenditures

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that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. Our future liquidity and capital
requirements will depend on many factors, including:



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

Our strategic investments in two companies expose us to equity price risk and our investments in those companies could be deemed to be further impaired in the future, which
could affect our results of operations.

We are exposed to equity price risk on our strategic investments in CuraGen and ImmunoGen and we may elect to make additional similar investments in the future.
As of March 31, 2002, we have a new cost basis of $36.6 million in CuraGen common stock which reflects the public trading price on that date of $16.06. We also have a new cost basis of
$8.7 million of ImmunoGen common stock which reflects the public trading price on that date of $11.07. We typically do not attempt to reduce or eliminate our market exposure on these types of
investments. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as
available-for-sale and are reported at fair value on our balance sheet. Unrealized holding gains and losses for available-for-sale securities generally
are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to be other
than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under our
accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. At
March 31, 2002, our investments in CuraGen and ImmunoGen common stock had traded below

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their original cost basis for more than six months. Accordingly, we recorded an impairment charge of $34.7 million in our results of operations, and the new cost basis of these investments now
reflects the public trading prices on March 31, 2002. The amount of the charge was based on the difference between the market price of the securities, as of March 31, 2002, and our
original cost basis. We purchased $15 million of CuraGen common stock in December 1999 at price of $17.90 per share and $50 million of CuraGen common stock in November 2000
at a price of $34.69 per share. We purchased $15 million of ImmunoGen common stock in September 2000 at a price of $19.00 per share. The public trading prices of the shares of both
companies have fluctuated significantly since we purchased them and could continue to do so. As of May 8, 2002, the public trading price for the common stock of Curagen and ImmunoGen was $8.771
and $7.99, respectively. If the public trading prices of these shares continue to trade below their new cost basis in future periods, we may incur additional impairment charges relating to these
investments.

Risks Related to the Development and Commercialization of our Products

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

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

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

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



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

In
addition, our recent decision to terminate or wind down our clinical programs for developing ABX-IL8 has reduced the diversity of our product portfolio. We hope to be able to make up
for this loss of diversity through the number of potential new product candidates we have in preclinical development. However, to the extent that we are unable to maintain a broad and diverse range of
product candidates, our success would depend more heavily on one or a few product candidates.

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

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

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

As
of March 31, 2002, four of our proprietary product candidates, ABX-CBL, ABX-IL8, ABX-EGF and ABX-MA1, were in clinical trials.
Patient follow-up for these clinical trials has been limited because these trials have been ongoing for a relatively short period of time. To date, data obtained from these clinical trials
have been insufficient to demonstrate safety and efficacy under applicable Food and Drug Administration, or FDA, guidelines. As a result, these data will not support an application for regulatory
approval without further clinical trials. Clinical trials that we conduct or that third parties conduct on our behalf may not demonstrate sufficient safety and efficacy to obtain the requisite
regulatory approvals for any of our product candidates. We expect to commence new clinical trials from time to time in the course of our business as our product development work continues. However,
regulatory authorities may not permit us to undertake any additional clinical trials for our product candidates.

In
addition, we have ongoing research projects that may lead to product candidates, but we have not submitted INDs nor begun clinical trials for these projects. Our preclinical or
clinical development efforts may not be successfully completed, we may not file further INDs and clinical trials may not commence as planned.

Completion
of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the product
candidate.

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However, we estimate that clinical trials of the type we generally conduct are completed over the following timelines:

Clinical Phase

Estimated
Completion PeriodPhase I

1 YearPhase II

1-2 YearsPhase III

2-4 Years


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



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

Our
product candidates may fail to demonstrate safety or efficacy in clinical trials. For example, in January 2002 and May 2002, respectively, we announced that clinical trials of our
proprietary product candidate ABX-IL8 as treatment for rheumatoid arthritis and psoriasis did not support further clinical studies of that product candidate. This and other potential failures may
delay development of other product candidates and hinder our ability to conduct related preclinical testing and clinical trials. As a result of these failures, we may also be unable to obtain
additional financing. Any delays in, or termination of, our clinical trials could materially harm our business, financial condition and results of operations.

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

To date we have relied on a single contract manufacturer, Lonza Biologics, to produce ABX-CBL, ABX-IL8 and ABX-EGF under good
manufacturing practice regulations, for use in our clinical trials. We may also rely on other contract manufacturers from time to time to produce our product candidates for use in our clinical trials.
For example, Fred Hutchinson Cancer Research Center produces ABX-MA1 for use in our clinical trials. While our Fremont manufacturing facility is expected to be operational by
year-end 2002, thus creating additional capacity, which we will control, we cannot assure you that this facility will open when expected. Even when our new facility in Fremont opens, we
expect to continue to rely on Lonza for at least the next five year for a portion of our manufacturing capacity. In November 2000, we entered into a manufacturing supply agreement with Lonza,
under which Lonza will make available exclusively to us, for a period of five years, a cell culture production suite, with associated purification capacity, within Lonza's facility. The agreement
includes an option to
extend the initial five-year term. The dedicated cell culture production suite is operational and became available to us in the third quarter of 2001. Although we have gained access
through this agreement to production capacity and scheduling flexibility similar to owning the production capability, Lonza retains responsibility for, and control over, staffing and operating the
facility. In July 2001, we entered into an agreement giving us the right to enter into exclusive negotiations with Lonza for an additional manufacturing supply agreement under which Lonza will
make available to us, for a period of up to five years, extendable for an additional two-year period, approximately one quarter of the annual capacity of a cell culture production suite
for large-scale manufacturing of products that is under construction and we currently anticipate that construction of the facility will be completed in the fourth

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quarter of 2004. The exclusive negotiation period has been extended and will expire no earlier than June 30, 2002. We cannot assure you that we will actually reach agreement with Lonza for
this additional capacity. Even if we do reach agreement with Lonza, we cannot assure you that the facility will be completed by the end of 2004 or at all.

Lonza
has a limited number of facilities in which it can produce our product candidates and has limited experience in manufacturing them in quantities sufficient for conducting clinical
trials or for commercialization. We currently rely on Lonza to produce our product candidates under good manufacturing practice regulations, which meet acceptable standards for our clinical trials.

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

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

We are building our own manufacturing facility for the manufacture of products for clinical trials and to support the potential early commercial launch of a
limited number of product candidates, in each case, in compliance with FDA and European good manufacturing practices. In May 2000, we signed a long-term lease for a building to
contain this manufacturing facility. Construction has started and we expect this facility to be operational by year-end 2002. The costs of the facility, including design fees, permits,
validation, leasehold improvements and equipment, will approximate $140 million. Construction of this facility may take longer than expected, and the planned and actual construction costs of
building and qualifying the facility for regulatory compliance may be higher than expected. In addition, if the commercial launch of one or more of our product candidates proves successful, we will
likely need to use one or more third-party facilities to produce these products in sufficient quantities. The process of
manufacturing antibody therapeutic products is complex. We have no experience in the clinical or commercial scale manufacturing of our existing product candidates, or any other antibody therapeutic
products. Also, we will need to manufacture such antibody therapeutic products in a facility and by a process that comply with FDA, European and other regulations. It may take a substantial period of
time to begin producing antibodies in compliance with such regulations. Our manufacturing operations will be subject to ongoing, periodic unannounced inspection by the FDA and state agencies to ensure
compliance with good manufacturing practices. Our inability to establish and maintain a manufacturing facility within our planned time and cost parameters could materially harm the development and
sales of our products and our financial performance.

We
also may encounter problems with the following:



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

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

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

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



Our
ability to continue our current collaborations and to enter into additional third party collaborations is dependent in large part on our ability to successfully demonstrate that our
XenoMouse technology is an attractive method of developing fully human antibody therapeutic products. We have generated only a limited number of fully human antibody therapeutic product candidates
pursuant to our collaboration agreements and only five fully human antibody therapeutic product candidates generated with XenoMouse technology have entered clinical testing. These product candidates
may not result in commercially successful products. Current or future collaboration agreements may not be successful. Our failure to maintain our existing collaboration agreements or to enter into
additional agreements could materially harm our business, financial condition and results of operations.

Our
dependence on licensing and other agreements with third parties subjects us to a number of risks. These agreements may not be on terms that prove favorable to us, and we typically
afford our collaborators significant discretion in electing whether to pursue any of the planned activities. Licensing and other contractual agreements may require us to relinquish our rights to
certain of our technologies, products or marketing territories. We cannot control the amount or timing of resources our collaborators may devote to the product candidates, and collaborators may not
perform their obligations as expected. Additionally, business combinations or significant changes in a collaborator's business strategy may adversely affect a collaborator's willingness or ability to
complete its obligations under the arrangement. Even if we fulfill our obligations under an agreement, typically our

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collaborators can terminate the agreement at any time following proper written notice. The termination or breach of agreements by our collaborators, or the failure of our collaborators to complete
their obligations in a timely manner, could materially harm our business, financial condition and results of operations. If we are not able to establish further collaboration agreements or any or all
of our existing agreements are terminated, we may be required to seek new collaborators or to undertake product development and commercialization at our own expense. Such an undertaking may:



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

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

Our product candidates under development are subject to extensive and rigorous domestic government regulation. The FDA regulates, among other things, the
development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. If we market our products
abroad, they will also be subject to extensive regulation by foreign governments. Neither the FDA nor any other regulatory agency has approved any of our product candidates for sale in the United
States or any foreign market. The regulatory review and approval process, which includes preclinical studies and clinical trials of each product candidate, is lengthy, expensive and uncertain.
Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish the product candidate's safety and
efficacy. The approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance, and may involve ongoing requirements for
post-marketing studies. Regulatory requirements are subject to frequent change. Delays in obtaining regulatory approvals may:



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Certain material changes to an approved product such as manufacturing changes or additional labeling claims are subject to further FDA review and approval. The FDA may withdraw any
required approvals, after we obtain them. We may not maintain compliance with other regulatory requirements. Further, if we fail to comply with applicable FDA and other regulatory requirements at any
stage during the regulatory process, we or our third-party manufacturers may be subject to sanctions, including:



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

We
and our third-party manufacturers also are required to comply with the applicable FDA current good manufacturing practice regulations. Good manufacturing practice regulations include
requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA and
the FDA must approve these facilities before we can use them in commercial manufacturing of our products. We or our third-party manufacturers may not be able to comply with the applicable good
manufacturing practice requirements and other FDA regulatory requirements. The failure of us or our third-party manufacturers to comply with these requirements would materially harm our business,
financial condition and results of operations.

If our products do not gain market acceptance among the medical community, our revenues would greatly decline.

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



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

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

Although we have been marketing our XenoMouse technology to potential customers and collaborators for several years, we do not have marketing, sales or
distribution experience or capability with respect to our therapeutic product candidates. We intend to enter into arrangements with third parties to market and sell most of our therapeutic product
candidates when we commercialize them, which may be as early as 2004. We may not be able to enter into these marketing and sales arrangements with others on acceptable terms, if at all. To the extent
that we enter into marketing and sales arrangements with other companies, our revenues, if any, will depend on the efforts of others. These efforts may not be successful. If we are unable to enter
into third-party arrangements, then we will need to develop a marketing and sales force, which may need to be substantial in size, in order to achieve commercial success for any product candidate
approved by the FDA. We may not successfully develop marketing and sales capabilities or have sufficient resources to do so. If we do develop such capabilities, we will compete with other companies
that have experienced and well-funded marketing and sales operations. Our failure to enter into successful marketing arrangements with third parties and our inability to conduct such
activities ourselves would materially harm our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

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

Our success depends in part on our ability to:



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

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

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

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

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

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

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use manufacturing processes covered by the patents to make our products, we may then need to obtain a license should one be available. Should a license be denied or unavailable on commercially
reasonable terms, we may have difficulties commercializing one or more of our products in any territories in which these claims were in force.

Genentech
owns a U.S. patent that relates to methods of generating recombinant cell lines for the production of antibodies. If we were to use a production system covered by the patents,
we may then need to obtain a license should one be available. Our failure to obtain a license at all or on commercially reasonable terms could impede commercialization of one or more of our products
in any territories in which these claims were in force.

Johnson &
Johnson controls a U.S. patent that relates to methods of generating recombinant cell lines for the production of antibodies. If we were to use a production system
covered by the patents, we may then need to obtain a license should one be available. Our failure to obtain a license at all or on commercially reasonable terms could impede commercialization of one
or more of our products in any territories in which these claims were in force.

Genentech
owns a U.S. patent that issued in June 1998 relating to inhibiting the growth of tumor cells that involves an antibody that binds to an epidermal growth factor receptor,
or an anti-EGF receptor antibody, in combination with a cytotoxic factor, which is a substance having a toxic effect on cells. ImClone Systems, Inc. owns or is licensed under a U.S.
patent that issued in April 2001, relating to inhibiting the growth of tumor cells that involves an anti-EGF receptor antibody in combination with an anti-neoplastic, or
anti-tumor, agent. However, we do not believe based on our review that either the Genentech or ImClone patent would be successfully asserted against any planned commercial sales of
ABX-EGF. We believe that currently all of our activities relating to anti-EGF receptor monoclonal antibodies are within the exemption provided by the U.S. patent laws for uses
reasonably related to obtaining FDA approval of a drug. We do not expect the scope of our product development plans to change in the future prior to filing an application for a biologic license with
the FDA. If a court determines that the claims of either the Genentech patent or the ImClone patent cover our activities with ABX-EGF and are valid, such a decision may require us to
obtain a license to Genentech's or ImClone's patent, as the case may be, to label and sell ABX-EGF for certain combination therapies. Our failure to obtain a license, or to obtain a
license on commercially reasonable terms, could impede our commercialization of ABX-EGF in the United States.

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

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



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

Risks Related to Our Industry

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

The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. We are aware of several
pharmaceutical and biotechnology companies that are actively engaged in research and development in areas related to antibody therapy. These companies have commenced clinical trials of antibody
therapeutic product candidates or have successfully commercialized antibody therapeutic products. Many of these companies are addressing the same diseases and disease indications as we or our
customers are. Also, we compete with companies that offer antibody generation services to companies that have antigens. These competitors have specific expertise or technology related to antibody
development and introduce new or modified technologies from time to time. These companies include GenPharm, Kirin; Genmab A/S; Cambridge Antibody Technology Group plc; Protein Design
Labs, Inc.; MorphoSys AG; Xenerex Biosciences, Inc., a subsidiary of Avanir Pharmaceuticals; and XTL Biopharmaceuticals Ltd.

Some
of our competitors have received regulatory approval of or are developing or testing product candidates that may compete directly with our product candidates. For example, SangStat,
Novartis, Pharmacia and Roche market organ transplant rejection products that may compete with ABX-CBL, which is in clinical trials. In addition, MedImmune, Inc. has a potential
antibody product candidate in clinical trials for graft versus host disease that may compete with ABX-CBL. Furthermore, we are aware that ImClone, AstraZeneca, plc, Glaxo and a
collaboration of OSI Pharmaceuticals, Inc. Genentech and Roche have potential antibody and small molecule product candidates in clinical development that may compete with ABX-EGF,
which is also in clinical trials.

Many
of these companies and institutions, either alone or together with their customers, have substantially greater financial resources and larger research and development staffs than we
do. In addition, many of these competitors, either alone or together with their customers, have significantly greater experience than we do in:



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

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



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

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

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

Other Risks Related to Our Company

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

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



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In
addition, our acquisition of companies and businesses and expansion of operations may result in dilutive issuances of equity securities, the incurrence of additional debt, large
one-time write-offs and the creation of goodwill or other intangible assets that could result in amortization expense or other charges to expense.

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

For us to pursue product development, marketing and commercialization plans, we will need to hire additional qualified scientific personnel to perform research
and development. We will also need to hire personnel with expertise in clinical testing, government regulation, manufacturing, marketing and finance. Attracting and retaining qualified personnel will
be critical to our success. We may not be able to attract and retain personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical and healthcare
companies, universities and non-profit research institutions. Our inability to attract and retain qualified personnel might materially harm our business, financial condition and results of
operations.

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

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



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

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

The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to liability claims resulting from such use or
sale of our products. Consumers, healthcare providers, pharmaceutical companies or others selling such products might make claims of this kind.

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We may experience financial losses in the future due to product liability claims. We have obtained limited product liability insurance coverage for our clinical trials, under which the coverage
limits are $5.0 million per occurrence and $5.0 million in the aggregate. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing
approval for product candidates in development. We may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If third parties bring a
successful product liability claim or series of claims against us for uninsured liabilities or in excess of insured liabilities, our business, financial condition and results of operations may be
materially harmed.

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

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

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

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

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

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

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

The market price and trading volume of our common stock are volatile, and we expect such volatility to continue for the foreseeable future. For example, during
the period between March 31, 2001 and March 31, 2002, our common stock closed as high as $46.15 per share and as low as $18.05 per share. This may impact your decision to buy or sell our
common stock. Factors affecting our stock price include:



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Item 3. Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk.The objective of our investment activities is to preserve principal, while at the same time maximizing
yields without significantly increasing risk. To achieve this objective, we invest in highly liquid, investment grade and government debt securities. Our investments in debt securities are subject to
interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in short-term securities and our goal is to maintain an average maturity of approximately
one year. A hypothetical 1.0% per annum increase in interest rates would result in a decrease in the fair market value of our debt securities of approximately $7.6 million at March 31,
2002, and approximately $5.6 million at December 31, 2001.

Equity Price Risk.We are exposed to equity price risk on strategic investments, such as those we have made in CuraGen and
ImmunoGen. We typically do not attempt to reduce or eliminate our market exposure on these securities. With respect to CuraGen and ImmunoGen, each of whose common stock is publicly traded, if the
market price of these securities decreased by 50%, the total fair value of our equity investments would decrease in value by approximately $22.7 million from the fair value of those investments
as of March 31, 2002, and by approximately $32.0 million from the fair value of those investments as of December 31, 2001. These estimates are not necessarily indicative of future
performance and actual results may differ materially.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Not applicable.

ITEM 2. Changes in Securities and Use of Proceeds

Changes in Securities

On June 2, 1999, our Board of Directors declared a dividend of one right, or Right, to purchase one one-thousandth share of our Series A
Participating Preferred Stock, or Series A Preferred, for each of our outstanding shares of common stock, the Common Shares. On June 14, 1999, we entered into a Preferred Shares Rights
Agreement, or Rights Agreement, with ChaseMellon Shareholder Services, L.L.C., the predecessor to Mellon Investor Services LLC, as Rights Agent, which was amended and restated on November 19,
1999 and on May 9, 2002. The dividend was payable to stockholders of record as of the close of business on the record date, June 14, 1999. As amended, each Right entitles the registered
holder to purchase from us one one-thousandth of a share of Series A Preferred at an exercise price of $175.00, which is referred to as the Purchase Price, subject to automatic
adjustments upon certain events, including stock splits.

The
following summary of the principal terms of the Rights Agreement is a general description only and is subject to the detailed terms and conditions of that agreement, a copy of which
is attached as an exhibit to Amendment No. 2 to our Registration Statement on Form 8-A filed with the Securities and Exchange Commission on May 14, 2002.

Rights Evidenced by Common Share Certificates

The Rights will not be exercisable until the Distribution Date, which is defined below. Certificates for the Rights, or Rights Certificates, will not be sent to
stockholders and the Rights will attach to and trade only together with the Common Shares. Accordingly, Common Share certificates outstanding on the record date will evidence the Rights related
thereto, and Common Share certificates issued after the record date will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date, or earlier redemption or
expiration of the Rights, the surrender or transfer of any certificates for Common Shares, outstanding as of the record date, even without notation or a copy of the Summary of Rights being attached
thereto, also will constitute the transfer of the Rights associated with the Common Shares represented by such certificate.

Distribution Date

The Rights will separate from the Common Shares, Rights Certificates will be issued and the Rights will become exercisable upon the earlier of:
(i) 10 days following a public announcement that a person or group of affiliated or associated persons, referred to as an Acquiring Person, has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding Common Shares, or (ii) 10 business days (or such later date as may be determined by our Board of Directors) following the
commencement or announcement of a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding Common
Shares. The earlier of these dates is referred to as the Distribution Date.

Issuance of Rights Certificates; Expiration of Rights

As soon as practicable following the Distribution Date, separate Rights Certificates will be mailed to holders of record of the Common Shares as of the close of
business on the Distribution Date and the separate Rights Certificates alone will evidence the Rights from and after the Distribution Date. All Common Shares issued, after the Distribution Date will
be issued with Rights. The Rights will

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expire on the earliest of (i) the final expiration date, June 2, 2009, or (ii) redemption or exchange of the Rights as described below.

Initial Exercise of the Rights

Following the Distribution Date, and until one of the further events described below, holders of the Rights will be entitled to receive, upon exercise and the
payment of the Purchase Price, one one-thousandth share of the Series A Preferred.

Right to Buy Common Shares

Unless the Rights are earlier redeemed, in the event that an Acquiring Person becomes the beneficial owner of 15% or more of our Common Shares then outstanding,
each holder of a Right which has not theretofore been exercised (other than Rights beneficially owned by the Acquiring Person, which will thereafter be void) will thereafter have the right to receive,
upon exercise, Common Shares having a value equal to two times the Purchase Price. Our Board of Directors at its option may substitute for a Common Share issuable upon the exercise of Rights under
this provision such number of fractions of shares of Series A Preferred that have a Current Per Share Market Price, as defined in the Rights Agreement, equal to the Current Per Share Market
Price of one Common Share. In addition, in the event that we do not have sufficient Common Shares available for all Rights to be exercised, or our Board of Directors decides that such action is
necessary and not contrary to the interests of Rights holders, we may instead substitute cash, assets or other securities for the Common Shares for which the Rights would have been exercisable under
this provision.

Right to Buy Acquiring Company Stock

Similarly, unless the Rights are earlier redeemed, in the event that, after an Acquiring Person becomes the beneficial owner of 15% or more of our then
outstanding Common Shares, (i) we are acquired in a merger or other business combination transaction, or (ii) 50% or more of our consolidated assets or earning power are sold (other than
in transactions in the ordinary course of business), proper provision must be made so that each holder of a Right which has not theretofore been exercised (other than Rights beneficially owned by the
Acquiring Person, which will thereafter be void) will thereafter have the right to receive, upon exercise, shares of common stock of the acquiring company having a value equal to two times the
Purchase Price.

Exchange Provision

At any time after the acquisition by an Acquiring Person of 15% or more of our outstanding Common Shares and prior to the acquisition by such Acquiring Person of
50% or more of our outstanding Common Shares, the Board of Directors may exchange the Rights (other than Rights owned by the Acquiring Person), in whole or in part, at an exchange ratio of one Common
Share per Right.

Redemption

At any time on or prior to the close of business on the earlier of (i) such time as any party becomes an Acquiring Person, or (ii) the final
expiration date, we may redeem the Rights in whole, but not in part, at a price of $0.01 per Right.

Adjustments to Prevent Dilution

The Purchase Price payable, the number of Rights, and the number of Series A Preferred or Common Shares or other securities or property issuable upon
exercise of the Rights are subject to adjustment from time to time in connection with the dilutive issuances set forth in the Rights

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Agreement. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price.

Cash Paid Instead of Issuing Fractional Shares

No fractional portion less than integral multiples of one Common Share will be issued upon exercise of a Right and, in lieu thereof, an adjustment in cash will be
made based on the market price of the Common Shares on the last trading date prior to the date of exercise.

No Stockholders' Rights Prior to Exercise

Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder (other than any rights resulting from such holder's ownership of
Common Shares), including, without limitation, the right to vote or to receive dividends.

Amendment of Rights Agreement

The terms of the Rights and the Rights Agreement may be amended in any respect without the consent of the Rights holders for so long as the Rights are redeemable;
thereafter, the terms of the Rights and the Rights Agreement may be amended without the consent of the Rights holders in order
to cure any ambiguities or to make changes which do not adversely affect the interests of Rights holders (other than the Acquiring Person).

Rights and Preferences of the Series A Preferred

Each one one-thousandth of a share of Series A Preferred has rights and preferences substantially equivalent to those of one Common Share.

Recent Sales of Unregistered Securities

During the first quarter ended March 31, 2002, we issued the following unregistered securities:



The
offer and sale of securities in the transaction described above was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act and Regulation D promulgated thereunder, as a transaction by an issuer not involving any public offering. The securities were resold by the initial purchasers upon reliance on
Rule 144A and Regulation S. Each initial purchaser made representations that it was an "accredited investor," as defined in Rule 501 promulgated under the Securities Act, and as
to its compliance with Rule 144A and Regulation S. In addition, appropriate legends were affixed to the securities issued in the transaction described above.

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ITEM 3. Defaults upon Senior Securities

Not applicable.

ITEM 4. Submission of Matters to Vote of Security Holders

Not applicable.

ITEM 5. Other Information



On May 1, 2002, Raymond M. Withy, Ph.D., succeeded R. Scott Greer as chief executive officer of the Company pursuant to the succession plan we announced in
November 2001. Mr. Greer remains chairman of the board of directors. Dr. Withy, formerly our president and chief operating officer, is also a member of the board.

ITEM 6. Exhibits and Reports on Form 8-K



|Number |  | Description                                                                                                                                                                                                                                                                                                                                                      
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(1) |  | Amended and Restated Certificate of Incorporation of Abgenix, as currently in effect.                                                                                                                                                                                                                                                                            
|3.2(2) |  | Amended and Restated Bylaws of Abgenix, as currently in effect.                                                                                                                                                                                                                                                                                                  
|4.1(1) |  | Specimen Common Stock Certificate.                                                                                                                                                                                                                                                                                                                               
|4.2    |  | Indenture dated March 4, 2002 between State Street Bank and Trust Company of California, N.A. and Abgenix, Inc.                                                                                                                                                                                                                                                  
|4.3    |  | Registration Rights Agreement dated March 4, 2002 between Credit Suisse First Boston Corporation, Banc of America Securities LLC and Robertson Stephens, Inc. and Abgenix, Inc.                                                                                                                                                                                  
|4.4(3) |  | Amended and Restated Preferred Shares Rights Agreement, between Abgenix, Inc. and Mellon Investor Services LLC, as Rights Agent, dated May 9, 2002.                                                                                                                                                                                                              
|4.5(4) |  | Amended and Restated Abgenix, Inc. 1999 Nonstatutory Stock Option Plan, effective as of January 14, 2002.                                                                                                                                                                                                                                                        
|4.6(4) |  | Abgenix, Inc. Canadian Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                                                             
|10.70  |  | First Amendment, dated August 31, 2001, to the Lease Agreement, dated February 24, 2000, between Ardenwood Corporate Park Associates, a California Limited Partnership, and Abgenix, Inc.                                                                                                                                                                        
|10.71  |  | First Amendment, dated August 31, 2001, to the Lease Agreement, dated May 19, 2000, between Ardenwood Corporate Park Associates, a California Limited Partnership, and Abgenix, Inc.                                                                                                                                                                             
|10.72  |  | Second Amendment, dated November 7, 2001, to the Lease Agreement, dated May 19, 2000, between Ardenwood Corporate Park Associates, a California Limited Partnership, and Abgenix, Inc.                                                                                                                                                                           
|10.73  |  | Amendment No. 1, dated January 22, 2002, to the Lease Agreement, dated July 31, 1996, between John Arrillaga, Trustee, or his Successor Trustee UTA dated 7/20/77 (John Arrillaga Survivors Trust) as amended, and Richard T.
Peery, Trustee, or his Successor Trustee UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended, and Abgenix, Inc.

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|10.74 |  | Lease Agreement dated January 22, 2002 between John Arrillaga, Trustee, or his Successor Trustee UTA dated 7/20/77 (John Arrillaga Survivors Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee UTA
dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended, and Abgenix, Inc.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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We
filed a Form 8-K on February 27, 2002 reporting under Item 5Other Events, the Company's offering and pricing of its convertible subordinated
notes due 2007, and under Item 9Regulation FD Disclosure, certain risk factors contained in the Company's confidential offering memorandum related to the offering of convertible
subordinated notes.

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SIGNATURES

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

Dated:
May 15, 2002

| |  | ABGENIX, INC.(Registrant)                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------
| |  | /s/RAYMOND M. WITHYRaymond M. Withy, Ph.D. Chief Executive Officer
(Principal Executive Officer)                               
| |  | /s/KURT W. LEUTZINGERKurt W. Leutzinger Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

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