**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark one)**                                    |
|---------------------------------------------------|
|                                              |
| **ý**                                        | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                              |   |
| **For the  quarterly period ended June 30, 2005** |
|                                              |   |
| **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**

 

**ABGENIX,INC.**

(Exactname of registrant as specified in its charter)

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

 

**(510) 608-6500**

(Registrant’stelephone number, including area code)

 

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

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act. Yes ýNo o

 

As of July 29,2005, there were 89,834,537 shares of the Registrant’s Common Stockoutstanding.

 

 

----

 

**TABLE OFCONTENTS**

** **
| ** **                                                                                              | **Page No.**                                                                                                |
|---------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------|
|                                                                                                    |                                                                                                        |
| **PART I. Financial Information**                                                                       | ** **                                                                                                  |
| ** **                                                                                              | ** **                                                                                                  |
| **ITEM 1. Financial Statements**                                                                        | ** **                                                                                                  |
| ** **                                                                                              | ** **                                                                                                  |
|                                                                                                    | Condensed  Consolidated Balance Sheets at June 30, 2005 and December 31, 2004                               | 3 |
|                                                                                                    |                                                                                                        |   |
|                                                                                                    | Condensed Consolidated  Statements of Operations for the three and six months ended June 30, 2005 and  2004 | 4 |
|                                                                                                    |                                                                                                        |   |
|                                                                                                    | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2005  and 2004           | 5 |
|                                                                                                    |                                                                                                        |   |
|                                                                                                    | Notes  to Condensed Consolidated Financial Statements                                                       | 6 |
|                                                                                                    |                                                                                                        |
| **ITEM 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 13                                                                                                          |
| ** **                                                                                              |                                                                                                        |
| **ITEM 3. Quantitative  and Qualitative Disclosures about Market Risk**                                 | 51                                                                                                          |
| ** **                                                                                              |                                                                                                        |
| **ITEM 4. Controls  and Procedures**                                                                    | 51                                                                                                          |
| ** **                                                                                              |                                                                                                        |
| **PART II. Other  Information**                                                                         | ** **                                                                                                  |
| ** **                                                                                              | ** **                                                                                                  |
| **ITEM 1. Legal  Proceedings**                                                                          | 52                                                                                                          |
| ** **                                                                                              |                                                                                                        |
| **ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds**                                | 52                                                                                                          |
| ** **                                                                                              |                                                                                                        |
| **ITEM 3.  Defaults upon Senior Securities**                                                            | 52                                                                                                          |
| ** **                                                                                              |                                                                                                        |
| **ITEM 4.  Submission of Matters to a Vote of Security Holders**                                        | 52                                                                                                          |
| ** **                                                                                              |                                                                                                        |
| **ITEM 5. Other  Information**                                                                          | 53                                                                                                          |
| ** **                                                                                              |                                                                                                        |
| **ITEM 6. Exhibits**                                                                                    | 53                                                                                                          |
| ** **                                                                                              |                                                                                                        |
| **SIGNATURES**                                                                                          | 54                                                                                                          |

 

2

----

 

**PARTI.  FINANCIAL INFORMATION**

 

**ITEM 1.  Financial Statements**

 

**ABGENIX, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(in thousands, exceptshare and per share data)

(unaudited)

 
| ** **                                                                                                                                                                      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
|                                                                                                                                                                            |       |               |       |                   |       |
| **ASSETS**                                                                                                                                                                      |       |               |       |                   |       |
| Current assets:                                                                                                                                                                 |       |               |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                      |       | $                  | 45,869     |                   | $          | 148,929 |   |
| Marketable  securities                                                                                                                                                          |       | 332,134            |       | 267,400                |       |
| Interest  receivable                                                                                                                                                            |       | 3,094              |       | 2,370                  |       |
| Accounts  receivable, net                                                                                                                                                       |       | 357                |       | 5,729                  |       |
| Prepaid expenses  and other current assets                                                                                                                                      |       | 8,725              |       | 11,088                 |       |
| Total current  assets                                                                                                                                                           |       | 390,179            |       | 435,516                |       |
| Property and equipment,  net                                                                                                                                                    |       | 204,535            |       | 223,004                |       |
| Long-term  investments                                                                                                                                                          |       | 16,287             |       | 23,300                 |       |
| Goodwill                                                                                                                                                                        |       | 34,780             |       | 34,780                 |       |
| Identified  intangible assets, net                                                                                                                                              |       | 32,128             |       | 60,010                 |       |
| Deposits and  other assets                                                                                                                                                      |       | 35,073             |       | 36,108                 |       |
|                                                                                                                                                                            |       | $                  | 712,982    |                   | $          | 812,718 |   |
|                                                                                                                                                                            |       |               |       |                   |       |
| **LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED  STOCK AND STOCKHOLDERS’ EQUITY**                                                                                          |       |               |       |                   |       |
| Current  liabilities:                                                                                                                                                           |       |               |       |                   |       |
| Accounts payable                                                                                                                                                                |       | $                  | 5,461      |                   | $          | 6,635 |   |
| Deferred revenue                                                                                                                                                                |       | 8,900              |       | 11,692                 |       |
| Accrued  liabilities                                                                                                                                                            |       | 14,240             |       | 16,622                 |       |
| Accrued  restructuring charges                                                                                                                                                  |       | 3,637              |       | —                 |       |
| Total current  liabilities                                                                                                                                                      |       | 32,238             |       | 34,949                 |       |
| Deferred rent                                                                                                                                                                   |       | 7,354              |       | 7,519                  |       |
| Convertible  notes                                                                                                                                                              |       | 463,636            |       | 463,630                |       |
| Non-current  portion of accrued restructuring charges                                                                                                                           |       | 5,576              |       | —                 |       |
| Other long-term  liabilities                                                                                                                                                    |       | 52,813             |       | 25,626                 |       |
| Redeemable  convertible preferred stock, $0.0001 par value; 5,000,000 shares authorized;  Series A-1 50,000 shares issued and outstanding; liquidation preference  $50,000      |       | 49,869             |       | 49,869                 |       |
| Commitments                                                                                                                                                                     |       |               |       |                   |       |
| Stockholders’  equity:                                                                                                                                                     |       |               |       |                   |       |
| Common stock,  $0.0001 par value; 220,000,000 shares authorized; 89,782,695 and 89,146,380  shares issued and outstanding at June 30, 2005 and December 31, 2004,  respectively |       | 9                  |       | 9                      |       |
| Additional  paid-in capital                                                                                                                                                     |       | 978,637            |       | 973,979                |       |
| Accumulated  other comprehensive income                                                                                                                                         |       | 1,854              |       | 9,391                  |       |
| Accumulated  deficit                                                                                                                                                            |       | (879,004           | )          | (752,254               | )          |
| Total  stockholders’ equity                                                                                                                                                |       | 101,496            |       | 231,125                |       |
|                                                                                                                                                                            |       | $                  | 712,982    |                   | $          | 812,718 |   |

 

See accompanying notes

 

3

----

 

**ABGENIX, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except pershare data)

(unaudited)

 
| ** **                                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Revenues:                                                                          |       |                             |       |                           |       |   |   |   |   |
| Contract revenue                                                                   |       | $                                | 3,403      |                           | $          | 4,189 |   | $ | 6,061 |   | $ | 7,079 |   |
| Contract  manufacturing revenue                                                    |       | —                           |       | 1,325                          |       | — |   | 1,325 |   |
| Total revenues                                                                     |       | 3,403                            |       | 5,514                          |       | 6,061 |   | 8,404 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                                                               |       |                             |       |                           |       |   |   |   |   |
| Cost of goods  manufactured                                                        |       | —                           |       | 1,857                          |       | — |   | 1,857 |   |
| Research and  development                                                          |       | 35,545                           |       | 36,148                         |       | 71,329 |   | 64,605 |   |
| Manufacturing  start-up costs                                                      |       | 4,807                            |       | 2,790                          |       | 6,784 |   | 10,136 |   |
| Amortization of  identified intangible assets, related to research and development |       | 1,441                            |       | 1,791                          |       | 2,882 |   | 3,583 |   |
| General and  administrative                                                        |       | 5,264                            |       | 6,477                          |       | 10,967 |   | 13,365 |   |
| Impairment of  identified intangible assets                                        |       | 25,000                           |       | 17,241                         |       | 25,000 |   | 17,241 |   |
| Restructuring  and other                                                           |       | 14,740                           |       | —                         |       | 14,740 |   | — |   |
| Total operating  expenses                                                          |       | 86,797                           |       | 66,304                         |       | 131,702 |   | 110,787 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Loss from  operations                                                              |       | (83,394                          | )          | (60,790                        | )          | (125,641 | ) | (102,383 | ) |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Other income  (expenses):                                                          |       |                             |       |                           |       |   |   |   |   |
| Interest and  other income, net                                                    |       | 3,002                            |       | 1,814                          |       | 5,958 |   | 3,484 |   |
| Interest expense                                                                   |       | (3,725                           | )          | (1,647                         | )          | (7,067 | ) | (3,290 | ) |
| Total other  income (expenses)                                                     |       | (723                             | )          | 167                            |       | (1,109 | ) | 194 |   |
| Net loss                                                                           |       | $                                | (84,117    | )                              | $          | (60,623 | ) | $ | (126,750 | ) | $ | (102,189 | ) |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Basic and  diluted net loss per share                                              |       | $                                | (0.94      | )                              | $          | (0.68 | ) | $ | (1.42 | ) | $ | (1.15 | ) |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Shares used in  computing basic and diluted net loss per share                     |       | 89,658                           |       | 88,673                         |       | 89,456 |   | 88,490 |   |

 

See accompanying notes

 

4

----

 

**ABGENIX, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

(unaudited)

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| **Operating  activities**                                                    |       |                          |       |   |   |
| Net loss                                                                     |       | $                             | (126,750   | ) | $ | (102,189 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                          |       |   |   |
| Non-cash portion  of restructuring and other                                 |       | 5,527                         |       | — |   |
| Depreciation                                                                 |       | 14,600                        |       | 15,422 |   |
| Amortization of  identified intangible assets                                |       | 2,882                         |       | 3,583 |   |
| Impairment of  identified intangible assets                                  |       | 25,000                        |       | 17,241 |   |
| Amortization of  debt issuance costs                                         |       | 1,004                         |       | 624 |   |
| Other                                                                        |       | 117                           |       | (2 | ) |
| Changes for  certain assets and liabilities:                                 |       |                          |       |   |   |
| Interest  receivable                                                         |       | (724                          | )          | 795 |   |
| Accounts  receivable                                                         |       | 5,372                         |       | 398 |   |
| Inventories                                                                  |       | —                        |       | (370 | ) |
| Prepaid expenses  and other current assets                                   |       | 2,311                         |       | 3,772 |   |
| Deposits and  other assets                                                   |       | 43                            |       | (50 | ) |
| Accounts payable                                                             |       | (1,174                        | )          | (803 | ) |
| Deferred revenue                                                             |       | (2,792                        | )          | (2,777 | ) |
| Accrued  liabilities                                                         |       | (1,778                        | )          | 82 |   |
| Accrued  restructuring charges                                               |       | 9,213                         |       | — |   |
| Contract  cancellation obligation                                            |       | —                        |       | (15,045 | ) |
| Deferred rent                                                                |       | 504                           |       | 725 |   |
| Other long-term  liabilities                                                 |       | 27,187                        |       | 3,051 |   |
| Net cash used in  operating activities                                       |       | (39,458                       | )          | (75,543 | ) |
|                                                                         |       |                          |       |   |   |
| **Investing  activities**                                                    |       |                          |       |   |   |
| Purchases of  marketable securities                                          |       | (102,720                      | )          | (110,878 | ) |
| Maturities of  marketable securities                                         |       | 22,292                        |       | 37,210 |   |
| Sales of  marketable securities                                              |       | 15,164                        |       | 140,911 |   |
| Purchases of  property and equipment                                         |       | (2,264                        | )          | (4,573 | ) |
| Sale of  equipment                                                           |       | —                        |       | 3 |   |
| Net cash (used  in) provided by investing activities                         |       | (67,528                       | )          | 62,673 |   |
|                                                                         |       |                          |       |   |   |
| **Financing  activities**                                                    |       |                          |       |   |   |
| Net proceeds  from issuance of common stock                                  |       | 3,926                         |       | 3,238 |   |
| Net cash  provided by financing activities                                   |       | 3,926                         |       | 3,238 |   |
| Net decrease in  cash and cash equivalents                                   |       | (103,060                      | )          | (9,632 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 148,929                       |       | 19,141 |   |
| Cash and cash  equivalents at end of period                                  |       | $                             | 45,869     |   | $ | 9,509 |   |

 

See accompanying notes

 

5

----

 

**ABGENIX, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**June 30,2005**

**(unaudited)**

 

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

 

**Basis ofPresentation**-****The unaudited condensed consolidated financial statementsof Abgenix, Inc. (the “Company” or “Abgenix”) included herein have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information orfootnote disclosure normally included in financial statements prepared in accordancewith U.S. generally accepted accounting principles has been condensed oromitted pursuant to such rules and regulations. In the opinion of the Company, the accompanying unaudited condensedconsolidated financial statements contain all adjustments, consisting only ofnormal recurring adjustments, necessary to present fairly the financialinformation included therein.  Thesefinancial statements should be read in conjunction with the audited financialstatements for the year ended December 31, 2004****and accompanying notes included in the Company’s annualreport as filed on Form 10-K with the Securities and Exchange Commission.  The results of operations for the threemonths and six months ended June 30, 2005 are not necessarily indicative of theresults to be expected for the full year or for any other future period.

 

**Recent Accounting Pronouncements** - In December 2004, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards (SFAS) No. 123(R), “Share-Based Payment”, which is a revision of SFASNo. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires that all share-based payments to employees,including grants of employee stock options, be recognized in the financialstatements based on their fair values. Pro forma disclosure previously permitted under SFAS No. 123 will nolonger be an alternative.  SFAS No.123(R) does not change the accounting guidance for share-based paymenttransactions with parties other than employees provided in SFAS No. 123 asoriginally issued and EITF Issue No. 96-18, “Accounting for Equity InstrumentsThat Are Issued to Other Than Employees for Acquiring, or in Conjunction withSelling, Goods or Services.”

** **

**SFAS No.123(R), which is effective for the Company on January 1, 2006, permits publiccompanies to adopt its requirements using either the modified prospective ormodified retrospective transition method. The Company expects to use the modified prospective transition method,which requires that compensation cost is recognized for all awards granted,modified or settled after the effective date as well as for all awards grantedto employees prior to the effective date that remain unvested as of theeffective date.**

** **

**Aspermitted by SFAS No. 123, the Company currently accounts for its share-basedpayments to employees using APB Opinion No. 25’s intrinsic value method anddoes not recognize compensation costs for its employee stock options.  Accordingly, the Company expects that theadoption of the SFAS No. 123(R) fair value method will have a significantimpact on the Company’s results of operations, although it will have no impacton the Company’s overall financial position. The impact of adopting SFAS No. 123(R) cannot be predicted at this timebecause it will depend on levels of share-based payments granted in thefuture.  However, had the Company adoptedSFAS No. 123(R) in prior periods, the impact would approximate the impact ofSFAS No. 123 as shown in the table below under the heading of “Stock-BasedCompensation.”**

** **

**Revenue Recognition** – The Company receivespayments from customers for license, option, service and milestone fees, aswell as for contract manufacturing the Company performs.  These payments, which are generallynon-refundable, are recognized as revenue or reported as deferred revenue untilthey meet the criteria for revenue recognition. The Company recognizes revenue when (1) persuasive evidence of thearrangement exists; (2) delivery has occurred or services have been rendered;(3) the price is fixed or determinable and (4) the collectibility is reasonablyassured, in accordance with

 

6

----

 

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

** **

**•**      Abgenix enters intorevenue arrangements with multiple deliverables in order to meet its customer’sneeds.  For example, the arrangements mayinclude a combination of up-front fees, license payments, research services,milestone payments, future royalties and manufacturing arrangements.  Multiple element revenue agreements enteredinto on or after July 1, 2003 are evaluated under Emerging Issues Task ForceNo. 00-21, “Revenue Arrangements with Multiple Deliverables,” to determinewhether the delivered item has value to the customer on a stand-alone basis andwhether objective and reliable evidence of the fair value of the undelivereditem exists.  Deliverables in anarrangement that do not meet the separation criteria in Issue 00-21 must betreated as one unit of accounting for purposes of revenue recognition.  Generally, the revenue recognition guidanceapplicable to the last deliverable is followed for the combined unit ofaccounting.

** **

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

** **

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

** **

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

** **

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

** **

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

 

**Stock-BasedCompensation**-****TheCompany accounts for stock-based awards to employees and directors using theintrinsic value method in accordance with Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees.”  Accordingly, the Company does not recognizecompensation expense for employee stock options granted at or above fair marketvalue. For purposes of disclosures pursuant to SFAS No. 123, as amended by SFASNo. 148, the estimated fair value of options is amortized to expensestraight-line over the options’ vesting period. The following table illustrates what net loss would have been had theCompany accounted for its stock-based awards under the provisions of SFASNo. 123. Pro forma amounts may not be representative of future periods.

 

7

----

 
| ** **                                                                                                                                                              | ** ** | **Three Months Ended**                        | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                              | ** ** | **June 30,**                                  | ** ** | **June 30,**         | ** ** |
| ** **                                                                                                                                                              | ** ** | **2005**                                      | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                                                    |       | **(in  thousands, except per share amounts)** |       |
|                                                                                                                                                                    |       |                                          |       |                 |       |   |   |   |   |
| Net loss                                                                                                                                                                |       | $                                             | (84,117    | )                    | $          | (60,623 | ) | $ | (126,750 | ) | $ | (102,189 | ) |
| Stock-based  employee compensation costs included in the determination of net loss                                                                                      |       | 615                                           |       | —               |       | 615 |   | — |   |
| Stock-based  employee compensation costs that would have been included in the  determination of net loss if the fair value based method had been applied to  all awards |       | (4,469                                        | )          | (12,055              | )          | (8,933 | ) | (24,410 | ) |
| Pro forma net  loss as if the fair value based method had been applied to all awards                                                                                    |       | $                                             | (87,971    | )                    | $          | (72,678 | ) | $ | (135,068 | ) | $ | (126,599 | ) |
|                                                                                                                                                                    |       |                                          |       |                 |       |   |   |   |   |
| Basic and  diluted net loss per share as reported                                                                                                                       |       | $                                             | (0.94      | )                    | $          | (0.68 | ) | $ | (1.42 | ) | $ | (1.15 | ) |
|                                                                                                                                                                    |       |                                          |       |                 |       |   |   |   |   |
| Pro forma basic  and diluted loss per share                                                                                                                             |       | $                                             | (0.98      | )                    | $          | (0.82 | ) | $ | (1.51 | ) | $ | (1.43 | ) |

 

                Thefair value for these options was estimated at the date of grant using aBlack-Scholes option pricing model with the following weighted-averageassumptions for the three and six months ended June 30, 2005 and 2004:

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                           | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                                                           | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate                                             |       | 3.72                   | %          | 4.03                 | %          | 4.11 | % | 3.26 | % |
| Dividend yield                                                       |       | 0.00                   | %          | 0.00                 | %          | 0.00 | % | 0.00 | % |
| Volatility  factors of the expected market price of our Common Stock |       | 0.55                   |       | 0.90                 |       | 0.55 |   | 0.90 |   |
| Weighted-average  expected life of option (years)                    |       | 4.75                   |       | 5.67                 |       | 5.12 |   | 5.57 |   |

 

These same assumptions above were also applied in thedetermination of the option values related to stock options granted tonon-employees, except that the term of the consulting contracts (ranging fromsix months to five years) was used for the expected life of theoption.  For the three months ended June30, 2005, the Company recorded an expense of $102,000 related to non-employeestock options, of which $96,000 was included in manufacturing start-up costsand $6,000 in general and administrative expenses.  For the six months ended June 30, 2005, theCompany recorded an expense of $108,000 related to non-employee stock options,of which $96,000 was included in manufacturing start-up costs and $12,000 ingeneral and administrative expenses.  TheCompany did not incur such expense in the three and six months ended June 30,2004.

 

For the three and six months ended June 30, 2005, theCompany also recorded a stock-based compensation expense of $615,000 related toemployees that were affected by the restructuring plan described in Note 4below, and this stock-based compensation expense was included in restructuringand other expenses.

 

**RestructuringCharges** – The Company records costs and liabilitiesassociated with exit and disposal activities, as defined in SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities,” at fair value in theperiod the liability is incurred.  SFASNo. 146 requires that the estimated future cash flows to be used in the fairvalue calculation be discounted using a credit-adjusted risk-free interest rateand that such interest rate shall have a maturity date that approximates theexpected timing of future cash flows. Future cash flows related to lease obligations shall include

 

8

----

 

the effect of sublease rental income and other lease operatingexpenses.  In periods subsequent toinitial measurement, changes to a liability are measured using the samecredit-adjusted risk-free rate that was applied in the initial period.  In the quarter ended June 30, 2005, theCompany recorded costs and liabilities in accordance with SFAS No.146 for exitactivities related to a restructuring plan described in Note 4 below.  The Company will evaluate and adjust theliability on a quarterly basis as appropriate for changes in subleaseassumptions due to changes in market conditions.

 

**                NetLoss Per Share**- Basic net loss per share is calculated based on theweighted-average number of shares outstanding during the period. The impact ofcommon stock options, warrants and shares issuable upon the conversion of theconvertible notes and the redeemable convertible preferred stock was excludedfrom the computation of diluted net loss per share, as their effect isantidilutive for the periods presented.

 

**Reclassification–**Certain prior year’s balances have been reclassified toconform to the current period’s presentation.

 

**2.****             ComprehensiveLoss**

 

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

** **
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                               | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                                               | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                 |       | $                      | (84,117    | )                    | $          | (60,623 | ) | $ | (126,750 | ) | $ | (102,189 | ) |
| Other  comprehensive income (loss):                      |       |                   |       |                 |       |   |   |   |   |
| Unrealized  holding gains (losses) arising during period |       | 3,405                  |       | (2,880               | )          | (7,537 | ) | (3,985 | ) |
| Comprehensive  loss                                      |       | $                      | (80,712    | )                    | $          | (63,503 | ) | $ | (134,287 | ) | $ | (106,174 | ) |

 

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

 

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

 

In the quarterended June 30, 2005, management also determined that an impairment of theCompany’s acquired technology in the field of intrabodies (antibodies that canaccess intracellular targets) had occurred and that the estimated value haddeclined to zero.  This technology, whichincludes intellectual property, was acquired in 2000 through the acquisition ofIntraImmune, Inc.  The Company decided todiscontinue the development of the intrabody program and performed anassessment of the associated patent position and the likelihood of sale orlicense of the technology to a third party. The

 

9

----

 

Company determined thatthe possibility of generating positive future cash flows from the technologywas remote.  As a result, the Companyrecorded an impairment charge of $1.9 million in the second quarter of 2005.

 

In the quarterended June 30, 2004, management had determined that an impairment of theCompany’s acquired technology in the field of catalytic antibodies had occurredand that the estimated value had declined to zero.  This technology, which includes intellectualproperty, was acquired in 2001 through the acquisition of Hesed Biomed,Inc.  The Company decided to focus itsresources on other research and development projects and wind down itscatalytic antibody program. Additionally, after assessing the associated patent position and thelikelihood of sale or license of the technology to a third party, managementfurther determined in the quarter ended June 30, 2004 that the possibility ofgenerating positive future cash flows from the technology was remote.  As a result of this determination, theCompany recorded an impairment charge of $17.2 million in the second quarter of2004.  Intangible assets held and usedmust be tested for impairment when events or changes in circumstances indicatethat its carrying amount may not be recoverable.  As of December 31, 2004, the Companydetermined that no changes in circumstances had occurred that would indicatethat a further impairment of an intangible asset had occurred.

 

Identifiedintangible assets as of June 30, 2005 and December 31, 2004 consisted of thefollowing (in thousands):

 
| ** **                                | ** ** | **Gross  Assets** | ** ** | **Accumulated Amortization** | ** ** | **Net Book  Value** | ** ** |
|-------------------------------------------|------------|-------------------|------------|------------------------------|------------|---------------------|------------|
| **As of  June 30, 2005:**                 |       |              |       |                         |       |                |       |
| Acquisition-related  developed technology |       | $                 | 48,590     |                         | $          | (17,083             | )          | $ | 31,507 |   |
| Other intangible  assets                  |       | 824               |       | (203                         | )          | 621                 |       |
|                                      |       | $                 | 49,414     |                         | $          | (17,286             | )          | $ | 32,128 |   |
|                                      |       |              |       |                         |       |                |       |
| **As of  December 31, 2004:**             |       |              |       |                         |       |                |       |
| Acquisition-related  developed technology |       | $                 | 85,142     |                         | $          | (26,264             | )          | $ | 58,878 |   |
| Other intangible  assets                  |       | 1,442             |       | (310                         | )          | 1,132               |       |
|                                      |       | $                 | 86,584     |                         | $          | (26,574             | )          | $ | 60,010 |   |

 

Amortizationof acquisition-related intangible assets was approximately $1.4 million and$2.8 million, respectively, for the three and six months ended June 30, 2005,and $1.8 million and $3.6 million, respectively, for the three and six monthsended June 30, 2004.

 

Amortizationof other intangible assets was $22,000 and $45,000, respectively, for each ofthe three and six months ended June 30, 2005 and 2004.

 

Estimatedamortization expense related to identified intangible assets for the six-monthperiod from July 1, 2005 to December 31, 2005 and for each of the fiscal yearsthereafter is as follows (in thousands):

 
| ** **          | ** ** | **Periods Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|---------------------------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **2005**                        | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Acquisition-related |       | $                               | 1,666      |       | $          | 3,332      |       | $ | 3,332 |   | $ | 3,332 |   | $ | 3,332 |   | $ | 16,513 |   | $ | 31,507 |   |
| Other               |       | $                               | 25         |       | $          | 51         |       | $ | 51 |   | $ | 51 |   | $ | 51 |   | $ | 392 |   | $ | 621 |   |

 

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

 

In June 2005, the Company implemented arestructuring plan in which the Company decided to consolidate its research andpre-clinical activities into the Company’s facility located in Burnaby, BritishColumbia, and reduce its workforce by approximately 15%.  As a result of the reduction in workforce andan evaluation of its future needs, the Company determined that it would notoccupy and would sublease, to the

 

10

----

 

extent possible, certain of its researchfacilities.  The restructuring plan wasdesigned to focus resources on the Company’s development pipeline andparticularly the potential commercial opportunity of its lead productcandidate, panitumumab.

 

In connection with the restructuring plan, theCompany recorded in the second quarter of 2005 total restructuring charges of$14.7 million, including $2.7 million of one-time termination benefits, $6.5million of lease obligations and $5.6 million for the impairment of leaseholdimprovements, equipment and other assets. The one-time termination benefits primarily consisted of severance payand non-cash, stock-based compensation expense. The substantial majority of the severance pay is expected to be paid infull by the end of 2005.

 

Restructuring charges included lease obligations of$6.5 million, which represented the fair value of future lease commitmentcosts, net of projected sublease rental income, for the research facilitiesthat the Company decided not to occupy as a result of the restructuringplan.  The estimated future cash flowsused in the fair value calculation are based on certain estimates andassumptions by management, including the projected sublease rental income, theamount of time the space will be unoccupied prior to sublease and the length ofany subleases.  The Company has leaseobligations related to the facilities subject to its restructuring activitieswhich extend to the year 2014. Management will review the sublease assumptions on a quarterly basis,until the outcome is finalized. Accordingly, management may modify these estimates to reflect anychanges in circumstances in future periods.

 

The Company’s decision to consolidate its researchfacilities was deemed to be an impairment indicator for its equipment andleasehold improvements underSFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  As a result of performing an impairmentevaluation, the Company recorded an impairment charge of $5.6 million to adjustthe carrying value of the related long-lived assets to their estimated fairvalues.  The majority of the impairmentcharge was related to leasehold improvements and the fair value of theseleasehold improvements was estimated based upon anticipated future cash flowsassociated with the related facilities, discounted at an interest ratecommensurate with the risks involved.  Aportion of the impairment charge was also related to certain lab and computerequipment and furniture and fixtures that currently do not have any anticipatedfuture use due to the restructuring plan.

 

Activitiesrelated to the consolidation of the Company’s research facilities under therestructuring plan are expected to continue for the remainder of 2005.  The Company may incur additional costs forthe transfer or disposal of equipment, facility remediation and employeerelocation expenses.  These costs will berecorded in the period in which they are incurred in accordance with SFAS No.146.

 

Thefollowing table is a summary of restructuring activities in the second quarterof 2005 and the liability balance as of June 30, 2005 (in thousands):

 
| ** **                                                | ** ** | **Charges to** | ** **           | **Non-Cash** | ** ** | **Balance at**    | ** ** |
|-----------------------------------------------------------|------------|----------------|----------------------|--------------|------------|-------------------|------------|
| ** **                                                | ** ** | **Operations** | ** **           | **Charges**  | ** ** | **June 30, 2005** | ** ** |
|                                                      |       |           |                 |         |       |              |       |
| Termination  benefits, including stock-based compensation |       | $              | 2,694                |         | $          | (615              | )          | $ | 2,079 |   |
| Lease  obligations, net                                   |       | 6,464          |                 | 670          |       | 7,134             |       |
| Impairment of  property and equipment                     |       | 5,582          |                 | (5,582       | )          | —            |       |
|                                                      |       | $              | 14,740               |         | $          | (5,527            | )          | $ | 9,213 |   |
|                                                      |       |           |                 |         |       |              |       |
|                                                      |       |           | Classified as:       |         |       |              |
|                                                      |       |           | Short-term liability |         | $          | 3,637             |       |
|                                                      |       |           | Long-term liability  |         | 5,576      |              |
|                                                      |       |           |                 |         |       | $                 | 9,213      |   |
|                                                           |            |                |                      |              |            |                   |            |  |  |  |  |

 

11

----

 

**5.****            ****Other Long-Term Liabilities**

 

In2000, the Company entered into a joint development and commercializationagreement with Immunex Corporation, a wholly-owned subsidiary of Amgen, Inc.,for the co-development of ABX-EGF, now known as panitumumab, a fully humanantibody created by the Company and directed against epidermal growth factorreceptor (EGFr).  The parties amended thisagreement in October 2003.  Under theamended agreement, Amgen has decision-making authority for development andcommercialization activities.  As underthe original agreement, the Company is obligated to pay 50% of the developmentand commercialization costs and is entitled to receive 50% of any profits fromsales of panitumumab.  Under the amendedagreement, Amgen is required to make available in 2004 and 2005 up to $60.0million in advances that the Company may use to fund a portion of its share ofdevelopment and commercialization costs for panitumumab after the Company hascontributed $20.0 million toward development costs in 2004.  As of June 30, 2005, the Company had acarrying balance of $52.8 million under this facility consisting of $50.3 millionin advances and $2.5 million of interest accrued at the contract rate of 12%per annum.  The Company has notifiedAmgen of its intent to draw a cash advance of an additional $2.7 millionsubsequent to June 30, 2005.  The amountof any such advances, plus interest, may be repaid out of profits resultingfrom future product sales; however, the Company is generally not obligated torepay any portion of the outstanding balance if panitumumab does not reachcommercialization.

 

**6.****             SegmentInformation**

 

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

 

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

 
| **Period**                       | ** ** | **Number of Customers and Percentage of  Contract Revenues for each of the Customers** |
|----------------------------------|------------|----------------------------------------------------------------------------------------|
| Three months ended June 30, 2005 |       | 3 customers, 51%, 21% and 16%, respectively                                            |
| Six months ended June 30, 2005   |       | 4 customers, 42%, 25%, 13% and 10%, respectively                                       |
| Three months ended June 30, 2004 |       | 3 customers, 42%, 26% and 24%, respectively                                            |
| Six months ended June 30, 2004   |       | 3 customers, 33%, 30% and 20%, respectively                                            |

 

12

----

 

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

 

*The following Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontains forward*-*looking statements based upon current expectations that involve risksand 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 identifyforward*-*looking statements. Ouractual results and the timing of certain events could differ materially fromthose anticipated in these forward*-*lookingstatements as a result of certain factors, including those set forth below andunder the heading “Risk Factors that Might Affect Future Results”.  In this quarterly report on Form 10-Q,references to “Abgenix,” we,” “us,” and “our” are to Abgenix, Inc. and itssubsidiaries.*

 

##### **Overview**

 

The followingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations is intended to help the reader understand our company.

 

***Our Business***

 

We are a biopharmaceutical company that is focused onthe discovery, development and manufacture of human therapeutic antibodies forthe treatment of a variety of diseases. We intend to use our proprietary technologies to build a diversifiedproduct portfolio that we expect to develop and commercialize internally orthrough joint development and commercialization arrangements withpharmaceutical and biotechnology companies.

 

We are co-developing our most advanced proprietaryproduct candidate, panitumumab, with Immunex Corporation, a wholly ownedsubsidiary of Amgen Inc.  References inthis quarterly report to Amgen are both to Amgen and Immunex.  Panitumumab is in pivotal trials, and we haveanother product candidate, ABX-10241, in early stage clinical trials.  In addition, we have entered into a varietyof contractual arrangements with multiple pharmaceutical, biotechnology andgenomics companies to jointly develop and commercialize products or to enablethese companies to use our XenoMouse® technology in the development of theirproducts.  We may also use our XenoMax®technology on our customer’s behalf.  Sixof our licensing partners, Pfizer, Inc., Amgen, Chiron Corporation,CuraGen Corporation, Human Genome Sciences, Inc. and Agensys, Inc., haveinitiated clinical trials or submitted regulatory applications for such trialsfor antibodies generated from XenoMouse animals.  We also use our closely integrated processsciences and manufacturing capabilities for the manufacture of our ownproprietary product candidates and also offer these services to ourcollaborators and others.

 

We have entered into joint development arrangementswith companies such as Chugai Pharmaceuticals Co., Ltd., U3 Pharma AG andDendreon Corporation, and may enter into additional joint developmentagreements.  We generally expect toself-fund preclinical and certain clinical activities to determine preliminarysafety and efficacy before deciding whether to conduct further productdevelopment internally or enter into joint development and commercializationagreements.  Our strategy is designed todiversify the risks associated with our research and development spending andto continue to focus our activities on product development andcommercialization.

 

We also have abroad collaboration in oncology with AstraZeneca UK Limited.  Pursuant to this collaboration we areproviding preclinical and clinical research support and process development fortherapeutic antibodies against up to 36 targets to be developed by AstraZeneca,and have the opportunity to co-develop therapeutic antibodies against up to 18additional targets with AstraZeneca.  Wealso may conduct clinical manufacturing, as well as commercial manufacturingduring the first five years of commercial sales for products arising out of ourcollaboration.

 

13

----

 

***Our Financial Position and Liquidity***

 

We derive our revenues from our technology out-licensingcontracts and our production services contracts.  We expect that unless and untilcommercialization of panitumumab occurs, substantially all of our revenues forthe foreseeable future will result from payments under these and similararrangements, our joint development arrangements and our collaboration withAstraZeneca, and payments we receive under these arrangements will continue tobe subject to significant fluctuation in both timing and amount.

 

We have incurred and expect to continue to incursubstantial expenses in connection with our product development activities,both under contractual arrangements with third parties and related to ourindependent research and development efforts. Regulatory and business factors will require us to expend substantialfunds in the course of completing required additional research, preclinical testingand clinical trials of, and attaining regulatory approvals for, productcandidates.  The amounts of theexpenditures that will be necessary to execute our business plan are subject tonumerous uncertainties that may adversely affect our liquidity and capitalresources.

 

We have incurred net losses since we were organized asan independent company, including a net loss of $126.8 million for the sixmonths ended June 30, 2005.  We expect toincur additional losses for the foreseeable future as a result of our researchand development costs, including costs associated with conducting preclinicaldevelopment and clinical trials, manufacturing start-up costs and costsassociated with preparations for the potential commercialization ofpanitumumab, including costs associated with co-promotion and other commercialactivities, and charges related to purchases of technology or otherassets.  We expect that the amount of ouroperating losses will fluctuate significantly from quarter to quarter.

 

As of June 30, 2005, we had cash, cash equivalents andmarketable securities of $378.0 million. We will continue to assess our cash position, and may repurchase aportion of our outstanding convertible subordinated notes due 2007, of which$113.7 million were outstanding at June 30, 2005.

 

***Summary of Product Development***

 

*ProprietaryProduct Development*

 

Two of ourantibody therapeutic product candidates are in clinical trials.  The following is an overview of theseprograms.

 

•      **Panitumumab** (ABX-EGF).  Our leading proprietary antibody therapeuticproduct candidate is panitumumab. Generated using our technology, panitumumab is a fully human antibodytherapeutic product candidate directed against the human epidermal growthfactor receptor (EGFr) and a candidate for the potential treatment of a varietyof solid tumors. We are co-developing panitumumab with Amgen under a jointdevelopment and commercialization agreement described under **Summary of Contractual Arrangements**below.  The status of clinical trials of panitumumabis as follows:

 

•      *Colorectal cancer, single agent therapy withpanitumumab: Pivotal studies* – In January 2004, Amgen initiated twopivotal studies of panitumumab as monotherapy in patients with metastaticcolorectal cancer refractory to standard irinotecan (Camptosar®)- andoxaliplatin (Eloxatin®)-containing chemotherapy treatment, one in the UnitedStates and one outside the United States. The initiation of the U.S. trial followed the receipt of a SpecialProtocol Assessment letter from the U.S. Food and Drug Administration, or FDA,endorsing the design of the trial to support a regulatory submission forpotential accelerated approval. Enrollment in this trial, which began in the first quarter of 2004, isproceeding more slowly than originally anticipated.  The second pivotal study, a randomized controlledstudy comparing best supportive care with best supportive care and panitumumab,is being conducted in Europe, Canada and Australia in support of the globalregistration program.  Enrollment in thisstudy is complete and the cut-off point for data

 

14

----

 

collection has been reached.  We do not expect to receive the results ofthe analysis of this data before the end of the third quarter of 2005.  In December 2004, the FDA indicated that datafrom one pivotal trial, once completed, could be acceptable with additionaldata from other pending studies to support a submission for marketing approvalin the United States.  The FDA hasgranted fast track designation for panitumumab for patients with metastaticcolorectal cancer who have failed standard irinotecan- andoxaliplatin-containing chemotherapy treatment. Fast track designation allows the FDA to accept, on a rolling basis,portions of a marketing application for review prior to the completion of thefinal registrational package.

 

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

 

•      *Colorectal cancer, combination of panitumumab withchemotherapy* — Amgen is conducting a separate Phase 2 clinical trialevaluating the effect of panitumumab administered with irinotecan containingregimens as first-line treatment in patients with metastatic colorectalcancer.  Enrollment in this trial, whichwas initiated in January 2002, is closed and treatment is ongoing.

 

•      *Colorectal cancer, combination of panitumumab withchemotherapy and other targeted therapy* – In April 2005, we andAmgen announced the initiation of a randomized Phase 3 study in the first linetreatment of patients with metastatic colorectal cancer, the “PanitumumabAdvanced Colorectal Cancer Evaluation,” or PACCE study.  This study evaluates the effect ofchemotherapy consisting of oxaliplatin- or irinotecan-containing regimens andbevacizumab (Avastin®), with or without panitumumab.  Enrollment in this study is ongoing.

 

•      *Non-small cell lung cancer*— Amgen isconducting a Phase 2 clinical trial for panitumumab in the first line treatmentof advanced non-small cell lung cancer administered with standard chemotherapy,compared to standard chemotherapy alone. Enrollment in this trial, which was initiated in July 2001, isclosed and treatment is ongoing.  Arecently completed primary analysis of this study revealed that when comparedwith chemotherapy alone, the panitumumab combination did not improve time todisease progression, the study’s primary efficacy endpoint.  Secondary efficacy endpoints of the study,tumor response rate and overall survival, were not met.  The combination of panitumumab and standardchemotherapy was generally well tolerated. Further analysis of the data is ongoing.

 

•      *Renal cell cancer*—We are conducting aPhase 2 clinical trial evaluating the effect of panitumumab as monotherapy inpatients with renal cell cancer. Enrollment in this trial, which was initiated in April 2001, is closedand treatment is ongoing.

 

•      *Various cancers* — We initiated a Phase 1clinical trial for panitumumab in various solid tumors in 1999.  In 2003, we expanded enrollment toinvestigate additional panitumumab dose levels and schedules ofadministration.  Enrollment is closed andtreatment is complete.  Data from thisdose and schedule study were presented at ASCO in May 2005 and showed thatpanitumumab was generally well tolerated at weekly, every other week and everythird week dosing regimens.

 

•      *Further development* – Additional Phase 1and 2 clinical studies evaluating panitumumab in different tumor types eitheras a single agent or in combination with different chemotherapeutic

 

15

----

 

agents and targeting agents, have been initiated orare expected to be initiated from time to time. For example, an evaluation of panitumumab in combination withchemotherapy and AMG 706, an Amgen proprietary multi-kinase inhibitor, iscurrently ongoing.

 

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

 

*CustomerProduct Development*

 

We license ourXenoMouse technology to pharmaceutical, biotechnology and genomics companiesinterested in developing antibody-based products.  Typically, our agreements with our customersprovide for up-front and, upon the occurrence of certain events, milestonepayments to us, along with royalty payments to us if the product reaches themarket.  We do not participate in thedevelopment or marketing of these product candidates.  Our customers have advanced nine antibodiesgenerated with XenoMouse technology into the clinical phase as follows:

 

•      Pfizer—Wegenerated three XenoMouse-derived fully human antibody therapeutic productcandidates that Pfizer has advanced into clinical trials, including one thattargets cytotoxic T lymphocyte-associated antigen 4 (CTLA-4) and one thattargets the type 1 insulin-like growth factor receptor (IGF-1R).  The target for the third product candidatehas not been disclosed.  Two of theproduct candidates are currently in Phase 1 evaluation and one has advanced toPhase 2 evaluation.

 

•      Amgen—Wegenerated a XenoMouse-derived fully human antibody therapeutic productcandidate that Amgen has advanced into a pivotal trial as AMG 162 as apotential treatment for bone loss.  Amgenhas advanced an additional XenoMouse-derived fully human antibody therapeuticproduct candidate to an undisclosed target to Phase 1 clinical trials.

 

•      Chiron–Wegenerated a XenoMouse-derived fully human antibody therapeutic productcandidate that binds to and neutralizes CD40, a receptor expressed on immunecells.  Chiron has advanced thiscandidate, CHIR-12.12, into a Phase 1 clinical trial in patients with B cellmalignancies.

 

•      CuraGen–Wegenerated a XenoMouse-derived fully human antibody therapeutic productcandidate that binds to platelet derived growth factor D (PDGF-D) that CuraGenhas advanced to Phase 1 clinical trials as CR002 as a potential treatment forinflammatory kidney disease.

 

•      HumanGenome Sciences—CCR5 mAb is a XenoMouse-derived fully human antibodytherapeutic product candidate that binds to the chemokine receptor CCR5 thatallows entry of the HIV-1 virus into immune cells.  Human Genome Sciences has initiated a Phase 1clinical trial of CCR5 mAb in patients infected with HIV-1.

 

•      Agensys–AGS-PSCA is a XenoMouse-derived fully human antibody therapeutic productcandidate that selectively binds to prostate stem cell antigen (PSCA).  Agensys has filed an IND to initiate a Phase1 clinical trial of this candidate in patients with advanced prostate cancer.

 

16

----

 

***Summary of Contractual Arrangements***

 

*Overview*

 

We have entered into a variety of contractualarrangements to use our XenoMouse and XenoMax technologies to generate and/ordevelop fully human antibodies against numerous antigens or to manufacturefully human antibodies.  The following isa summary of these relationships.

 

*Amgen Collaboration*

 

In 2000, we entered intoa joint development and commercialization agreement with Immunex, now awholly-owned subsidiary of Amgen, for the co-development of ABX-EGF, now knownas panitumumab.  We amended this agreementin October 2003.  Under the amendedagreement, Amgen has decision-making authority for development andcommercialization activities and we have the right to co-promote panitumumab inthe United States.  We have decided topursue the co-promotion of panitumumab with Amgen in the United States.  We are obligated to pay 50% of thedevelopment and commercialization costs and we are entitled to receive 50% ofany profits from sales of panitumumab. In addition, Amgen is required to make available in 2004 and 2005 up to$60.0 million in advances that we may use to fund a portion of our share ofdevelopment and commercialization costs for panitumumab.  The amount of any such advances, plusinterest, may be repaid out of profits resulting from future product sales;however, we are generally not obligated to repay any portion of the outstandingbalance if panitumumab does not reach commercialization. Under a separateagreement with Amgen, we are manufacturing clinical supplies of panitumumab forthe collaboration and will manufacture commercial supplies for the first fiveyears after commercial launch, with Amgen’s support and assistance.  The costs of manufacturing clinical andcommercial supplies are also shared equally.

 

*AstraZeneca Collaboration*

 

We entered into acollaboration and license agreement with AstraZeneca in October 2003 for thediscovery, development and commercialization of fully human monoclonalantibodies to treat cancer.  Thisalliance involves the joint discovery and development of therapeutic antibodiesfor up to 36 cancer targets to be commercialized worldwide by AstraZenecaexclusively.  We will conduct early stagepreclinical research on behalf of AstraZeneca with respect to some or all ofthese targets, and have initiated research programs for numerous targets.  To date, we and AstraZeneca have selected 22targets for inclusion in the collaboration, including several for which we hadpre-existing preclinical programs.  Forany resulting products, we may receive milestone payments at various stages ofdevelopment and royalties on future product sales.  AstraZeneca may make milestone payments to usof up to $51 million per candidate that is developed under the agreement, andfor any antibody we choose to develop to a target that is discontinued from thecollaboration, we may pay AstraZeneca up to $15 million.  In addition, we may conduct early clinicaltrials, process development and clinical manufacturing, as well as commercialmanufacturing during the first five years of commercial sales, and would becompensated for those activities at competitive market rates.  The collaboration also gives us the right toselect and develop an additional pool of antibodies against up to 18 targets,which the companies may elect to further codevelop on an equal cost and profitsharing basis.  Subject to a number ofexceptions, we will work exclusively with AstraZeneca to generate and developantibodies for therapeutic use in the field of oncology during a three-yeartarget selection period.  Theseexceptions include, among others, work on antibodies directed at antigens thatare or become subject to existing collaborations and antigens that we andAstraZeneca decide not to pursue in the collaboration, and certain processdevelopment and manufacturing services. In connection with this collaboration, AstraZeneca made a $100.0 millioninvestment in Abgenix securities.  Uponthe achievement of certain milestones, we may also require AstraZeneca toinvest up to an additional $60.0 million in our convertible preferred stock.

 

17

----

 

*Joint Development Collaborations*

 

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

 

*Technology Out-Licensing*

 

We have licensed our XenoMouse technology to thirdparties for the purpose of generating antibody product candidates to one ormore specific antigens provided by the customer.  We may also use our XenoMax technology on thecustomer’s behalf.  Pursuant to thesecontracts, we and our customers intend to generate antibodies for developmentas product candidates for the treatment of cancer, inflammation, autoimmunediseases, cardiovascular disease, neurological diseases, metabolic diseases andinfectious diseases, and other diseases. The customer generally has an option for a period of time to acquire aproduct license for any antibody identified using XenoMouse technology that thecustomer wishes to develop and commercialize. The financial terms of theseagreements may include license fees, option fees and milestone payments paid tous by the customers. Based on our agreements, these payments and fees wouldaverage from approximately $7.0 million to $10.0 million per antigen ifour customer takes the antibody into development and ultimately tocommercialization.  Generally, underthese agreements, our collaborators are responsible for the costs of productdevelopment, manufacturing and commercialization.  Additionally, these license agreementsentitle us to receive royalties on any future product sales by the customer.

 

*Production Services*

 

We have entered into a limitednumber of contracts for process sciences and manufacturing services.  We may offer a variety of processdevelopment, cell banking and clinical and commercial scale manufacturingservices for antibody product candidates to existing and new customers toabsorb production services capacity we are not using for our proprietaryproduct candidates.  Pursuant to sucharrangements we may receive fees and, in some circumstances, royalties fromfuture product sales.  We continue toassess opportunities and may enter into additional production servicecontracts.

 

**Results of Operations**

 

*Three Months and Six Months EndedJune 30, 2005 and 2004*

 

*                ContractRevenues.*

 

                Contractrevenues totaled $3.4 million and $6.1 million, respectively, in the three andsix months ended June 30, 2005, compared to $4.2 million and $7.1 million,respectively, in the comparable 2004 periods. Because contract revenues dependto a large extent on the success or failure of research and development effortsundertaken by our collaborators and licensees, our period-to-period contractrevenues can fluctuate significantly and are inherently difficult to predict.

 

The primary components of contract revenues for bothperiods were as follows:

 

•      TechnologyLicensing

 

We recognized a total of $3.4 million and $6.1million, respectively, in the three and six months ended June 30, 2005,compared to $3.6 million and $6.0 million, respectively, in the comparable 2004periods, from licensing our proprietary technologies. Revenues in these

 

18

----

 

periods consisted primarily of various fees, such asresearch license and service fees, product license fees, product developmentand research milestone payments and option fees, under agreements related tothe licensing of our XenoMouse technology. These revenues were generated from several collaborators, but primarilyfrom Pfizer, Amgen and Genentech in the three and six months ended June 30,2005 and from Abbott, Pfizer, and CuraGen in the three and six months endedJune 30, 2004.

 

•      ProductionServices

 

We recognized no revenue in the three and six monthsended June 30, 2005 and approximately $0.6 million and $1.1 million,respectively, in the three and six months ended June 30, 2004 for production services.  These revenues consisted primarily of processsciences services and were generated from a customer under a productionservices agreement.

 

*Contract Manufacturing Revenues.*

 

Inthe three and six months ended June 30, 2005, we did not recognize any revenuesfrom manufacturing services.  Contractmanufacturing revenues totaled $1.3 million in the three and six months endedJune 30, 2004 and were related to the manufacture of an antibody product for acustomer under a production services agreement.

 

*Costof Goods Manufactured.*

 

Costsincurred by the Company for contract manufacturing pursuant to productionservice contracts are reported as cost of goods manufactured.  In the three and six months ended June 30,2005, we did not manufacture any products under a production services agreementand, therefore, did not incur any cost of goods manufactured.  In the three and six months ended June 30,2004, we incurred $1.9 million in cost of goods manufactured associated withmanufacturing an antibody product for a customer under a production servicesagreement.  Cost of goods manufacturedincluded material, direct labor, outside testing and overhead costs associatedwith manufacturing an antibody product for a customer under a productionservices agreement.

 

*Researchand Development Expenses.*

 

Research and developmentexpenses were $35.5 million and $71.3 million, respectively, in the three andsix months ended June 30, 2005, compared to $36.1 million and $64.6million, respectively, in the same periods in 2004. The major components ofresearch and developmentexpenses were as follows (in thousands):

 
| ** **           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Product  development |       | $                                | 27,946     |                           | $          | 26,087 |   | $ | 55,448 |   | $ | 45,365 |   |
| Research             |       | 7,599                            |       | 10,061                         |       | 15,881 |   | 19,240 |   |
| Total                |       | $                                | 35,545     |                           | $          | 36,148 |   | $ | 71,329 |   | $ | 64,605 |   |

 

Product development costs include costs of preclinicaldevelopment, cell line development and conducting clinical trials for ourproprietary product candidates.  Product developmentcosts relate both to programs we are developing jointly with collaboratorspursuant to joint development arrangements and to 

 

19

----

 

programs that we aredeveloping independently.  The costs ofour joint development programs represented the majority of our productdevelopment costs in both the three and six months ended June 30, 2005.  Product development costs also include costsrelated to cell line development in connection with production servicesarrangements.  Typically, our jointdevelopment arrangements provide that we and our collaborator share the costsof development and commercialization.  Webear the entire cost of programs we are developing independently.  In the three and six months ended June 30,2005, our product development costs increased in comparison to the same periodsin 2004, primarily due to a significant increase in costs associated with ourjoint development programs, the substantial majority of which was related tothe panitumumab program.  To a lesserextent, the increase was due to an increase in product development costsrelated to one of our independent programs, ABX-10241.  The increases were partially offset by adecrease in product development costs in 2005 related to cell line developmentactivities we performed under a production services contract.  

 

The increase in productdevelopment costs for the panitumumab program in 2005 from 2004 was primarilyattributed to an increase in the amount we reimbursed our joint developmentpartner, Amgen.  Under the jointdevelopment and commercialization agreement with Amgen, we are obligated to pay50% of the total development and commercialization costs of panitumumab.  We reimburse Amgen when we incur less than50% of the total development costs incurred by both parties in the givenperiod.  In a period where we incur morethan 50% of the total development costs, we would record such excess amount,which would be reimbursed to us by Amgen, as a reduction of our productdevelopment costs.  In the threeand six months ended June 30, 2005, the amount of our reimbursement to Amgenwas $6.7 million and $12.4 million, respectively, compared to $3.1 million and$6.4 million, respectively, in the same periods in 2004.  Theincrease in our reimbursements to Amgen in 2005 from 2004 reflected an increasein development activities performed by Amgen for panitumumab.  Partially offsetting the increase in productdevelopment costs for panitumumab was a decrease in clinical research fees in2005 from 2004 due to the completion of patient enrollment for all panitumumabclinical trials that we manage.  Clinicalresearch fees consist of clinical investigator site fees, monitoring costs anddata management costs.  

 

Product development costsfor ABX-10241 increased by $0.6 million and $1.6 million, respectively, for thethree and six months ended June 30, 2005, compared to the same periods in2004.  The increase in 2005 from 2004 wasprimarily due to increased spending in clinical research fees for the singledose Phase 1 clinical trial, of which patient enrollment is ongoing, and inpreparation for a multiple dose Phase 1 study, of which patient screening hasbeen initiated.  

 

Product development costscan vary significantly from period to period depending on the progress of thedevelopment activities in the period. Overall, we expect costs associated with product development in 2005 tobe higher than 2004 as we and Amgen continue to expand our development effortson the panitumumab program.  In addition,we expect product development costs related to ABX-10241 to increase in 2005compared to 2004.  

 

Research costs include costsassociated with research and testing of antibodies we generate, whether forourselves or for our customers, prior to the development stage which beginswith the commencement of preclinical activities.  Research costs also include the costs ofresearch relating to proprietary technologies, including enhancements to thosetechnologies.  The decrease in researchcosts in 2005 compared to 2004 was primarily due to a reduction in costsassociated with licensing charges from arrangements with research institutionsand others, as well as decreased spending in lab supplies and reduceddepreciation expense.  

 

*ManufacturingStart-Up Costs.*

 

Manufacturing start-up costs were $4.8 million and$6.8 million, respectively, in the three and six months ended June 30, 2005,compared to $2.8 million and $10.1 million, respectively, in the same periodsin 2004.  Manufacturing start-up costsinclude certain costs associated with our new manufacturing facility, includingdepreciation, outside contractor costs and personnel costs for activities

 

20

----

 

such as qualityassurance and quality control.  The increasein the three months ended June 30, 2005 as compared to the same period in 2004was primarily due to an increase in personnel in production services inpreparing for the possible submission of Biologic License Application, or BLA,for panitumumab.  The decrease in the sixmonths ended June 30, 2005 as compared to the same period in 2004 was primarilydue to the increased use of our manufacturing facility for the manufacture ofpanitumumab and other development activities, including process validation andthe manufacture of our conformance lots. Manufacturing start-up costs will fluctuate from period to perioddepending on the level of these manufacturing and development activities.

 

*Amortization of IdentifiedIntangible Assets.*

 

Our identifiedintangible assets consist primarily of existing technology (including patentsand certain royalty rights) we acquired through the acquisitions of HesedBiomed in 2001, Abgenix Biopharma Inc., formerly known as ImmGenicsPharmaceuticals, Inc., and IntraImmune in 2000, and JT America’s interest inXenotech in 1999.  Amortization ofintangible assets totaled $1.4 million and $2.9 million, respectively, in thethree and six months ended June 30, 2005, compared to $1.8 million and $3.6million, respectively, in the same periods in 2004.  The decrease in 2005 from 2004 was due to areduction in intangible assets due to the write-off in the second quarter of2004 of the remaining value of the catalytic antibody technology that we acquiredthrough the acquisition of Hesed Biomed. We expect the amortization of intangible assets to further decrease infuture periods as we recorded impairment charges for certain intangible assetsin the second quarter of 2005.

 

*Generaland Administrative Expenses.*

 

General andadministrative expenses include compensation, professional services, consultingand other expenses related to information systems, legal, finance and anallocation of facility costs.  Generaland administrative expenses totaled $5.3 million and $11.0 million,respectively, in the three and six months ended June 30, 2005, compared to $6.5million and $13.4 million, respectively, in the same periods in 2004.  The decrease in 2005 from 2004 was primarilydue to a reduction in legal, consulting and temporary personnel expenses.

 

*Impairmentof Intangible Assets.*

 

Impairment of intangible assets totaled $25.0 million in the three andsix months ended June 30, 2005, compared to $17.2 million in the same periodsin 2004.

 

In the quarter ended June30, 2005, we determined that animpairment of our Selected Lymphocyte Antibody Method (SLAM) technology hadoccurred and that the estimated fair value had declined to $2.0 million.  This technology, which includes intellectualproperty, was acquired in 2000 through the acquisition of Abgenix Biopharma,Inc., formerly known as ImmGenics Pharmaceuticals, Inc.  In the second quarter of 2005, we completed astrategic review process, which included an assessment of our technologies.  After assessing the SLAM technology, wedetermined that our use of the SLAM technology had declined and would continueto decline substantially because of significant improvements in the use ofother technologies and processes. Because of this impairment indicator, we tested the SLAM technology forrecoverability and found that the undiscounted future cash flows estimated tobe generated from the use of the SLAM technology were less than the carryingvalue of the SLAM technology.  As aresult, we determined that an impairment of the SLAM technology had occurredand recorded an impairment charge of $23.1 million in the second quarter of2005 to adjust the carrying value of SLAM technology to its estimated fairvalue, which is based on the estimated discounted future cash flows to begenerated from the SLAM technology.

 

Also in the quarter endedJune 30, 2005, we determined that an impairment of the acquired technology inthe field of intrabodies (antibodies that can access intracellular targets) hadoccurred and that the estimated value had declined to zero.  This technology, which includes intellectualproperty, was

 

21

----

 

acquired in 2000 through the acquisition ofIntraImmune, Inc.  We decided todiscontinue the development of the intrabody program and performed an assessmentof the associated patent position and the likelihood of sale or license of thetechnology to a third party.  Wedetermined that the possibility of generating positive future cash flows fromthe technology was remote.  As a result,we recorded an impairment charge of $1.9 million in the second quarter of 2005.

 

During the quarter ended June 30, 2004, we haddetermined that an impairment of the Company’s acquired technology in the fieldof catalytic antibodies had occurred and that the estimated value had declinedto zero.  This technology, which includesintellectual property, was acquired in 2001 through the acquisition of HesedBiomed, Inc.  We decided to focus ourresources on other research and development projects and wind down ourcatalytic antibody program. Additionally, after assessing the associated patent position and thelikelihood of sale or license of the technology to a third party, we furtherdetermined in the three months ended June 30, 2004 that the possibility ofgenerating positive future cash flows from the technology was remote.  As a result of this determination, werecorded an impairment charge of $17.2 million in the quarter ended June 30,2004.

 

*Restructuringand Other.*

 

In June 2005, we implemented a restructuring plan inwhich we decided to consolidate our research and pre-clinical activities intothe facility located in Burnaby, British Columbia, and reduce our workforce byapproximately 15%.  As a result of thereduction in workforce and an evaluation of our future needs, we determinedthat we would not occupy and would sublease, to the extent possible, certain ofour research facilities.  Therestructuring plan was designed to focus resources on our development pipelineand particularly the potential commercial opportunity of our lead productcandidate, panitumumab.

 

In connection with the restructuring plan, werecorded in the second quarter of 2005 total restructuring charges of $14.7million, including $2.7 million of one-time termination benefits, $6.5 millionof lease obligations and $5.6 million for the impairment of leaseholdimprovements, equipment and other assets. The one-time termination benefits primarily consisted of severance payand non-cash, stock-based compensation expense. The substantial majority of the severance pay is expected to be paid infull by the end of 2005.

 

The $6.5 million of lease obligations representedthe fair value of future lease commitment costs, net of projected subleaserental income, for the research facilities that we decided not to occupy as aresult of the restructuring plan. Additionally, we recordedan impairment charge of $5.6 million to adjust the carrying value of therelated long-lived assets to their estimated fair values based on ourimpairment evaluation in connection with the restructuring.  The majority of the impairment charge wasrelated to leasehold improvements, and the fair value of these leaseholdimprovements was estimated based upon anticipated future cash flows associatedwith the related facilities, discounted at an interest rate commensurate withthe risks involved.  A portion of theimpairment charge was also related to certain lab and computer equipment andfurniture and fixtures that currently do not have any anticipated future usedue to the restructuring plan.

 

Activitiesrelated to the consolidation of our research facilities under the restructuringplan are expected to continue for the remainder of 2005.  We may incur additional costs for thetransfer or disposal of equipment, facility remediation and employee relocationexpenses.  These costs will be recordedin the period in which they are incurred in accordance with SFAS No. 146.

 

As a result of the restructuring, we expect thatcertain research and development expenses, including compensation, facilitiesand depreciation of property and equipment, will be lower than the current rateof spending starting in the third quarter of 2005.  Compared to the amounts incurred in the firsthalf of 2005, we expect these expenses to decrease by approximately $5 millionin total in the second half of 2005. However, we also expect that the decrease in these expenses will beoffset by an anticipated increase in product development expenses for theremainder of 2005, in particular joint development expenses as discussed above.

 

22

----

 

*Interestand Other Income, Net.*

 

Interest and other income, net, consist primarily ofinterest from cash, cash equivalents and marketable securities. Interest andother income, net, increased to $3.0 million and $6.0 million, respectively, inthe three and six months ended June 30, 2005, compared to $1.8 million and $3.5million, respectively, in the same periods in 2004.  The increase was primarily the result of higherinterest rates and higher average balance of cash, cash equivalents andmarketable securities in the first six months of 2005 as compared to the sameperiod in 2004.

 

*InterestExpense.*

 

Interest expense was primarily related to interest andamortization of issuance costs on our convertible notes and interest on theAmgen credit facility.  In the three andsix months ended June 30, 2005, interest expense increased to $3.7 million and$7.1 million, respectively, as compared to $1.6 million and $3.3 million,respectively, in the same periods in 2004. The increase in the three and six months ended June 30, 2005 as comparedto the same periods in 2004 was primarily due to the interest related to theconvertible senior notes due 2011 and the interest related to the creditfacility with Amgen which was not available for advances in the first sixmonths of 2004.  A portion of theincrease was offset by the reduction of interest related to the convertiblesubordinated notes due 2007, as $86.3 million principal amount of these noteswas repurchased in December 2004. Interest expense of $0.3 and $0.5 million, respectively, was capitalizedin the three and six months ended June 30, 2005, compared to $0.4 million and$0.8 million, respectively, in the same periods in 2004.  In December 2004, we issued $300.0 million ofconvertible senior notes due 2011, which accrue interest at an annual rate of1.75% payable semi-annually.  In thethree and six months ended June 30, 2005, we recorded an interest expense of$1.3 million and $2.6 million, respectively, related to the convertible seniornotes due 2011 and an interest expense of $1.0 million and $2.0 million,respectively, related to the convertible subordinated notes due 2007.  For each future quarterly period through March2007, we expect to record approximately $2.3 million in interest expenserelated to our convertible notes, assuming that the outstanding principalamount remains unchanged at $113.8 million. We record interest at 12% on the amounts we draw on our credit facilitywith Amgen until we repay the balance in full. In the three and six months ended June 30, 2005, the amount of interestrecorded under the Amgen arrangement was $1.2 million and $2.0 million,respectively.  The amount of any suchadvances, plus interest, may be repaid out of profits from future productsales; however, we are generally not obligated to repay any portion of theoutstanding balance if panitumumab does not reach commercialization.

#### ** **

#### **Liquidity and CapitalResources**

 

At June 30, 2005,we had cash, cash equivalents and marketable securities of approximately $378.0million. We invest our cash equivalents and marketable securities primarily inhighly liquid, interest bearing, investment grade and government securities inorder to preserve principal.  We havealso invested in certain marketable equity securities of ImmunoGen and CuraGenfor strategic reasons.  These securitieshad an aggregate fair value of $16.3 million at June 30, 2005.  We will continue to assess our cash position,and may repurchase a portion of our outstanding convertible subordinated notesdue 2007. 

 

*CashUsed in Operating Activities.* Net cash used in operating activities was $39.5 million and $75.5million in the six months ended June30, 2005 and 2004, respectively.  Themajor components of the changes in cash used in operating activities in the sixmonths ended June 30, 2005, compared to the same period in 2004, were primarilythe following:

 

•      Anincrease of $24.1 million in our liability to Amgen under our joint developmentcollaboration for panitumumab.

 

23

----

 

•      Paymentsof approximately $14.0 million on the Lonza contract cancellation obligation inthe first six months of 2004.  Thisobligation was settled in the third quarter of 2004.

 

•      Anincrease of $3.9 million in research and development and manufacturing start-upcosts, not including the Lonza contract cancellation charge, amortization ofidentified intangible assets and depreciation related to the development of newproducts.

 

•      Anincrease of $2.6 million in customer payments due primarily to the timing ofpayments received under our contracts.

 

•      Adecrease of $2.2 million in the change in accounts payable and accruedliabilities, net.

 

*CashUsed in and Provided by Investing Activities.*  Net cash used in investing activities was$67.5 million in the six monthsended June 30, 2005, compared to net cash provided by investing activities of$62.7 million in the six months ended June 30, 2004.  Net cash used in and provided by investingactivities primarily consisted of the following:

 

•      Capitalexpenditures of $2.3 million and $4.6 million in the six months ended June 30,2005 and 2004, respectively.  Capitalexpenditures in both 2005 and 2004 primarily consisted of investments inconstruction in progress and equipment for our manufacturing facility andinvestments in lab equipment and software.

 

•      Purchases,net of maturities and sales, of marketable securities of $65.3 million in thesix months ended June 30, 2005, compared to maturities and sales, net ofpurchases, of marketable securities of $67.2 million in the six months endedJune 30, 2004.

 

*CashProvided by Financing Activities.*  During the six months ended June 30, 2005 and2004, net cash provided by financing activities was $3.9 million and $3.2million, respectively, consisting of the following:

 

•      $1.7million from the issuance of common stock in connection with an extension of atechnology licensing agreement by Genentech in the first quarter of 2005.

 

•      $2.2million and $3.2 million from the issuance of common stock upon the exercise ofstock options and under our employee stock purchase plan in the first sixmonths of 2005 and 2004, respectively.

 

*FinancingUncertainties Related to Our Business Plan.*  We plan to continue to make significantexpenditures to staff and operate our own manufacturing facility and supportour research and development activities, including preclinical productdevelopment and clinical trials. We also intend to look for opportunities toacquire new technology through in-licensing, collaborations or acquisitions.  We may spend additional amounts to supportnew production services contracts.

 

We currently intend to use our available cash on handto finance these projects and business developments, but we might also pursueother financing alternatives, such as equity, equity-linked debt or debtfinancing, a bank line of credit, sale-lease back financing, asset sales,funding by one or more collaborators or a mortgage financing, that may becomeavailable to us.  We have filed with the Securitiesand Exchange Commission a currently effective shelf registration through whichwe may offer for sale from time to time up to $250 million in equity or debtsecurities. Whether we use cash on hand or choose to obtain financing willdepend on, among other things, the future success of our business, theprevailing interest rate environment and the condition of financial marketsgenerally.

 

24

----

 

In October 2003, we entered into an amendment of ourjoint development and commercialization agreement with Amgen for theco-development of panitumumab.  Under theagreement, Amgen is obligated to make available in 2004 and 2005 up to $60.0million in advances that we may use to fund a portion of our share ofdevelopment and commercialization costs after we have contributed $20.0 milliontoward development costs in 2004.  As ofJune 30, 2005, we had a carrying balance of $52.8 million, which consisted of$50.3 million in advances and $2.5 million of accrued interest, and expect todraw an additional $2.7 million under this facility in August 2005.  We expect to continue to make use of thiscredit facility in 2005 up to the $60.0 million limit.

 

The amounts of the expenditures that will be necessaryto execute our business plan are subject to numerous uncertainties that mayadversely affect our liquidity and capital resources to a significant extent.As of June 30, 2005, two of our proprietary product candidates, panitumumab andABX-10241 were in various stages of clinical trials.  The clinical trials of panitumumab andABX-10241 are expected to require significant expenditures in the foreseeablefuture.  Completion of clinical trialsmay take several years or more, but the length of time generally variessubstantially according to the type, complexity, novelty and intended use of aproduct candidate. We estimate that clinical trials of the type we generallyconduct are typically completed over the following timelines:

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

 

Completion of clinicaltrials 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.  The duration and the cost of clinical trialsmay vary significantly over the life of a project.

 

We test our potential product candidates in numerouspreclinical studies to identify disease indications for possible therapeuticapplication. We may conduct multiple clinical trials on our own or with ourcollaborators to cover a variety of indications for each product candidate. Aswe obtain results from trials, we may elect to discontinue clinical trials forcertain product candidates or for one or more indications for a given productcandidate in order to focus our resources on more promising product candidatesor indications.

 

An importantelement of our business strategy is to pursue the research and development of adiverse range of product candidates for a variety of disease indications. Wemay enter joint development agreements, similar to our agreement with Amgen forpanitumumab, and may enter into additional joint development agreements earlierin the development life cycle of product candidates. We have begun to implementour collaboration strategy through co-development arrangements with companiessuch as Chugai, U3, Microscience, Sosei and Dendreon. Our strategy is designedto diversify the risks associated with our research and development spending.

 

Our proprietary productcandidates also have not yet achieved FDA regulatory approval, which isrequired before we can market them as therapeutic products. In order to proceedto subsequent clinical trial stages and to ultimately achieve regulatoryapproval, the FDA must conclude that our clinical data establish safety andefficacy. The number, size and type of clinical trials we conduct for aparticular product candidate are also affected by the policies of the FDA andEuropean regulatory agencies regarding the availability of possible expeditedapproval procedures, which we may seek to utilize.  These policies may change from time to time.

 

Furthermore, our businessstrategy includes the option of entering into arrangements with third partiesto collaborate in the development and commercialization of our products. In theevent that third

 

25

----

 

parties take overthe clinical trial process for one of our product candidates, the estimatedcompletion date would largely be under the control of that third party ratherthan us. We cannot forecast with any degree of certainty which proprietaryproducts or indications, if any, will be subject to future collaborativearrangements, in whole or in part, or the extent to which third parties maycontrol clinical trials pursuant to such arrangements, and how sucharrangements would affect our capital requirements.

 

As a result of theuncertainties discussed above, among others, the duration and completion costsof our research and development projects are difficult to estimate and aresubject to considerable variation. Our inability to complete our research anddevelopment projects in a timely manner or our failure to enter intocollaborative agreements when appropriate, could significantly increase ourcapital requirements and could adversely impact our liquidity. Theseuncertainties could force us to seek additional sources of financing from timeto time in order to continue with our business strategy. Our inability to raiseadditional capital, or to do so on terms reasonably acceptable to us, wouldjeopardize the future success of our business.

 

We also may be requiredto make further substantial expenditures if unforeseen difficulties arise inother parts of our business.

 

We believe thatour current cash balances, cash equivalents, marketable securities, and thecash generated from our licensing and other agreements will be sufficient tomeet our operating and capital requirements for at least one year. However,because of the uncertainties in our business discussed above, among others, wecannot assure you that this will be the case. In addition, we may choose to, orprevailing business conditions may require us to, obtain additional financingfrom time to time. We may choose to raise additional funds through public orprivate financing, licensing and other agreements or other arrangements. Wecannot be sure that any additional funding, if needed, will be available onterms favorable to us or at all. Furthermore, any additional equity orequity-related financing may be dilutive to our stockholders, and debtfinancing, if available, may subject us to restrictive covenants. We may alsochoose to obtain funding through collaborations, licensing and othercontractual arrangements. Such agreements may require us to relinquish ourrights to certain of our technologies, products or marketing territories. Ourfailure to raise capital when needed would harm our business, financialcondition and results of operations.

 

*Historyof Net Losses.*  We haveincurred net losses since our organization as an independent company, includingin the last five years net losses of $8.8 million in 2000,$60.9 million in 2001, $208.9 million in 2002, $196.4 million in 2003and $187.5 million in 2004, and $126.8 million in the six months ended June 30,2005.  As of June 30, 2005, ouraccumulated deficit was $879.0 million. Our losses to date have resultedprincipally from:

 

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

 

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

 

•      generaland administrative costs relating to our operations;

 

•      impairment charges relatingto our strategic investments in CuraGen, ImmunoGen and MDS Proteomics; and

 

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

 

26

----

 

We expect to incuradditional losses for the foreseeable future as a result of our research anddevelopment costs, including costs associated with conducting preclinicaldevelopment and clinical trials, which will continue to be substantial, chargesrelated to purchases of technology or other assets, and costs associated withestablishing and operating our manufacturing facilities. We intend to investsignificantly in our products prior to entering into licensing agreements. Thiswill increase our need for capital and will result in losses for at least thenext several years. We expect that the amount of operating losses willfluctuate significantly from quarter to quarter as a result of increases ordecreases in our research and development efforts, the execution or terminationof licensing and other agreements, and the initiation, and success or failure,of clinical trials.

 

*NetOperating Loss Carryforwards.* As of December 31, 2004, we had net operating loss carryforwards forfederal and state income tax purposes of approximately $670.0 million and$194.0 million, respectively.  Our netoperating loss carryforwards exclude losses incurred prior to our formation inJuly 1996. Further, we have capitalized the amounts associated with the1997 patent cross-license and settlement agreement with GenPharm, which we haveexpensed for financial statement accounting purposes and we are amortizingthose amounts over a period of approximately 15 years for tax purposes.The federal and state net operating loss and credit carryforwards will expirein the years 2006 through 2024, if not utilized. Utilization of the netoperating losses and credits may be subject to a substantial annual limitationdue to the “change in ownership” provisions of the Internal Revenue Code of1986 and similar state provisions. The annual limitation may result in theexpiration of net operating losses and credits before utilization.

 

****Critical AccountingEstimates****

 

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

 

***Revenue Recognition***

 

We derive our contract revenue from license, option,service and milestone fees received from customers. Services include thoseperformed under our technology out-licensing and production servicesagreements.  As described below, withinthe framework of generally accepted accounting principles, significantmanagement judgments and estimates must be made and applied in connection withthe revenue recognized in any accounting period. If our management madedifferent judgments or utilized different estimates, material differences couldresult in the amount and timing of our revenue in any period.

 

We enter into revenue arrangements with multipledeliverables in order to meet our customer’s needs. For example, thearrangements may include a combination of up-front fees, license payments, researchand development services, milestone payments, future royalties, andmanufacturing arrangements.  Multipleelement revenue agreements entered into on or after July 1, 2003 are evaluatedunder Emerging Issues Task Force No. 00-21, “Revenue Arrangements with MultipleDeliverables,” or EITF 00-21, to determine whether the delivered item has valueto the customer on a stand-alone basis and whether objective and reliableevidence of the fair value of the undelivered item exists.  Deliverables in an arrangement that do notmeet the separation criteria in EITF 00-21 must be treated as one unit ofaccounting for purposes of revenue recognition. Generally, the revenue recognition guidance applicable to the finaldeliverable is followed for the combined unit of accounting.  For certain arrangements, the period of timeover which certain deliverables will be provided is not contractually defined.Accordingly, management is required to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanyingnotes.  For example, during the three andsix months ended

 

27

----

 

June 30, 2005, werecognized revenue of approximately $83,000 and $198,000, respectively, relatedto arrangements for which the period of time over which the research will beperformed was not contractually defined. For these arrangements, we are amortizing up-front fees over the 15- to20-month period of time defined in the research plan established by us and ourcustomer.  As of June 30, 2005,approximately $47,000 remained in deferred revenue related to thesearrangements.  In addition, during thethree and six months ended June 30, 2005, we recognized revenue ofapproximately $174,000 and $349,000, respectively, related to an arrangementfor which the period of time of continuing obligation is dependent upon thetiming of product commercialization.  Thelength of time necessary to complete preclinical and clinical testing, and toobtain marketing approval to commercialize a product, varies substantiallyaccording to the type, complexity, novelty and intended use of the productcandidate, and many factors may delay commercialization.  If the date of the product commercializationis delayed by one year, the amount of revenue recognized in 2005 would beapproximately $0.6 million, as opposed to $0.7 million under our currentestimate.  As of June 30, 2005, approximately$3.8 million remained in deferred revenue related to this arrangement.  To date, there has not been a change in anestimate or assumption in the past that had a material impact on revenuerecognition.

 

***Accounting forEquity Investments***

 

Unrealized holding gains and losses related to our marketable equityinvestments are reported as a component of stockholders’ equity.  We recognize an impairment charge when thedeclines in the fair values of these investments below their cost basis aredeemed to be other-than-temporary.  Weconsider various factors in determining whether to recognize an impairmentcharge, including the length of time and the extent to which the fair value hasbeen below the cost basis, the current financial condition of the investee andour intent and ability to hold the investment for a period of time sufficientto allow for any anticipated recovery in market value.

 

***Accounting forGoodwill and Identified Intangible Assets***

 

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

 

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

 

Under SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” identified intangible assets held and used must be testedfor impairment when events or changes in circumstances indicate that itscarrying amount may not be recoverable. The carrying amount is determined to be not recoverable when the sum ofthe undiscounted future cash flows expected to result from the use and eventualdisposition of the asset is less than the carrying amount. Factors that areconsidered important in determining whether impairment might exist include asignificant change in the

 

28

----

 

manner in which an asset is being used, a significant adverse change inlegal factors or the business climate that could affect the value of an asset,including an adverse action or assessment by a regulator, or a currentexpectation that, more likely that not, an asset will be sold or otherwisedisposed of before the end of its previously estimated useful life.  If it is determined that an impairmentindicator exists and the asset is not recoverable, an impairment charge isrecognized for the excess of the carrying amount over the fair value of theasset.

 

In the second quarter of 2005, we determined that impairment indicatorsexisted with respect to our SLAM and intrabody technologies.  We then estimated the undiscounted futurecash flows from the use of the SLAM technology and found that the carryingvalue was not recoverable.  Becauseneither quoted market prices or comparables were available, we estimated thefair value of the SLAM technology based on the net present value of its futurecash flows, or $2.0 million.  As aresult, we recorded an impairment charge of $23.1 million.  Future cash flows associated with the SLAMtechnology are estimated based on future cost savings from using the SLAMtechnology.  Significant assumptions usedin this estimate include the number of programs that would use the SLAMtechnology, cost savings per each program, the life of the SLAM technology, thediscount rate and the income tax effect. If one or more of these assumptions changes significantly in a futureperiod and it is determined at that time that the carrying value of the SLAMtechnology is not recoverable, further impairment charge may berecognized.  Because future cash flowsestimated to be generated from the intrabody technology were determined to beremote, the fair value was determined to be zero and the remaining carryingvalue of $1.9 million was written off.

 

In the second quarter of 2004, we determined that an impairment of ourcatalytic antibody technology had occurred. Because future cash flows estimated to be generated from the catalyticantibody technology were determined to be remote, the fair value was determinedto be zero, and the remaining carrying value of $17.2 million was written off.

 

If we were to determine in a future period that an impairment ofintangible assets has occurred, the impairment measurement procedures couldresult in a charge for the impairment of long-lived assets.  As of June 30, 2005, the carrying valueof our identified intangible assets was $32.1 million, consisting primarily ofthe XenoMouse technology.

 

***RestructuringCharges***

 

In June 2005,we implemented a restructuring plan in which we decided to consolidate ourresearch and pre-clinical activities into our facility located in Burnaby,British Columbia, and reduce our workforce by approximately 15%.  As a result of the reduction in workforce andan evaluation of our future needs, we determined that we would not occupy andwould sublease, to the extent possible, certain of our research facilities.  The restructuring plan was designed to focusresources on our development pipeline and particularly the potential commercialopportunity of our lead product candidate, panitumumab.

 

Inaccordance with SFAS No. 146, we recorded in the second quarter of 2005restructuring charges of $14.7 million in total, including$2.7 million of one-time termination benefits, $6.5 million of leaseobligations and $5.6 million for impairment of leasehold improvements and otherassets.  Lease obligations of $6.5million represented the fair value of future lease commitment costs, net ofprojected sublease rental income, for the research facilities that we decidednot to occupy as a result of the restructuring. The estimated future cash flows used in the fair value calculation arebased on certain estimates and assumptions by management, including theprojected sublease rental income, the amount of time the space will beunoccupied prior to sublease and the length of any subleases.

 

It is possible that our estimates and assumptions maychange in the future, resulting in adjustments to the estimated subleaseincome, and the effect of any adjustments could be significant.  If the sublease rental rates would differfrom our assumptions by approximately 10% in either direction, the liabilityrelated to lease obligations as of June 30, 2005 would be increased anddecreased by

 

29

----

 

approximately $0.6million and $1.0 million, respectively. If our estimated sublease timetable were delayed by six months, it wouldresult in an additional liability of approximately $0.7 million, or more, ifthere were a further delay.  We willreview our estimates and assumptions on a quarterly basis, until the outcome isfinalized, and modify these estimates as necessary to reflect any changes incircumstances.

 

***Income Taxes***

 

Significant management judgment is required in developing our provisionfor income taxes, including the calculation of tax liabilities, thedetermination of deferred tax assets and liabilities and any valuationallowances that might be required against the deferred tax assets.  Results of operations in each jurisdictioninvolve intercompany agreements between us and our Canadian subsidiary.  Such agreements could be unfavorablyinterpreted by the applicable taxing authorities, causing an increase in theincome tax provision and a negative impact on our results of operations.  The assessment of the income tax implicationsof this intercompany relationship requires significant management judgment.

 

***Stock OptionValuation***

 

The preparation of the notes to our consolidated financial statementsrequires us to estimate the fair value of stock options granted toemployees.  While fair value may bereadily determinable for awards of stock, market quotes are not available forlong-term, nontransferable stock options because these instruments are nottraded.  We currently use theBlack-Scholes option pricing model to estimate the fair value of employee stockoptions.  However, the Black-Scholesoption pricing model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions, includingthe expected stock price volatility. Because our employee stock options have characteristics significantlydifferent from those of traded options and because changes to the subjectiveinput assumptions can materially affect the fair value estimate, in management’sopinion, the existing models do not provide a reliable single measure of thefair value of our employee stock options. We are currently evaluating our option valuation methodologies andassumptions in light of SFAS No. 123(R), which we are required to adopt onJanuary 1, 2006.

 

****Contractual Obligations and CommercialCommitments****

 

As of June 30, 2005, future minimum payments forcertain contractual obligations for years subsequent to December 31, 2004were as follows (in thousands):

 
| ** **                                      | ** ** | **Total** | ** ** | **Less than  1 year****(1)** | ** ** | **1 – 3  years** | ** ** | **4 – 5  years** | ** ** | **After 5  years(2)** | ** ** |
|-------------------------------------------------|------------|-----------|------------|------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| Operating leases(3)                             |       | $         | 123,890    |                         | $          | 6,981                 |       | $                     | 29,151     |                  | $          | 31,213 |   | $ | 56,545 |   |
| Convertible notes due 2007 &  interest |       | 121,713   |       | 1,991                        |       | 119,722               |       | —                |       | —                |       |
| Convertible notes due 2011 &  interest |       | 334,067   |       | 2,625                        |       | 10,500                |       | 10,500                |       | 310,442               |       |
| Convertible note due 2013                       |       | 50,000    |       | —                       |       | —                |       | —                |       | 50,000                |       |
| Redeemable convertible preferred stock          |       | 50,000    |       | —                       |       | —                |       | —                |       | 50,000                |       |
| Amgen(4)                                        |       | 52,813    |       | —                       |       | —                |       | —                |       | —                |       |
| Purchase orders                                 |       | 1,452     |       | 1,452                        |       | —                |       | —                |       | —                |       |
| Total                                           |       | $         | 733,935    |                         | $          | 13,049                |       | $                     | 159,373    |                  | $          | 41,713 |   | $ | 466,987 |   |

 

----

| (1)    | This represents the period of July 1,  2005 through December 31, 2005.                                                                                                                                                                                                                                                                                                               |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    | Amounts represent total minimum payments  for the entire period.                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (3)    | Amounts include approximately $23.2 million  of operating lease payments related to facilities in connection with the  restructuring plan implemented in the second quarter of 2005. The discounted  operating lease payments, net of estimated sublease rental income, related to  these facilities were included as a liability on our consolidated balance  sheet as of June 30, 2005. |

 

30

----

 
| (4) | The $52.8 million long-term obligation to  Amgen consists of $50.3 million in advances under the credit facility and  $2.5 million of accrued interest. The timing of future minimum payments is  uncertain as this obligation may be repaid out of profits resulting from  future product sales. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

We have a commitment to share equally alldevelopment and commercialization costs for panitumumab pursuant to ourdevelopment and commercialization agreement with Amgen. As amended in October 2003,that agreement provides that Amgen will have decision-making authority fordevelopment and commercialization activities and will make available to us in2004 and 2005 up to $60.0 million in advances that we may use to fund aportion of our share of development and commercialization costs for panitumumabafter we contributed $20.0 million toward development costs in 2004.  We began accessing this facility in 2004 and,as of June 30, 2005, we had a carrying balance of $52.8 million under thisfacility consisting of $50.3 million in advances and $2.5 million of interestaccrued at the contract rate of 12% per annum. We have notified Amgen of theintent to draw a cash advance of an additional $2.7 million.  The amount of any such advances, plusinterest, may be repaid out of profits resulting from future product sales andwe are generally not obligated to repay any portion of the loan if panitumumabdoes not reach commercialization.

 

**Risk Factors That Might Affect Future Results**

 

**Risks Related to our Finances**

 

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

 

You must evaluate us in light of the uncertainties and complexitiespresent in an early stage biopharmaceutical company. With the exception ofpanitumumab, all of our product candidates are in early stages of development.We will need to make significant additional investments in research anddevelopment, preclinical testing and clinical trials, and in regulatory andsales and marketing activities, to commercialize current and future productcandidates. Our product candidates, if successfully developed and approved formarketing, may not generate sufficient or sustainable revenues to enable us tobe profitable.

 

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

 

We have incurred net losses since we were organized as an independentcompany, including in the last five years net losses of $8.8 million in2000, $60.9 million in 2001, $208.9 million in 2002,$196.4 million in 2003 and $187.5 million in 2004, and $126.8 millionin the six months ended June 30, 2005. As of June 30, 2005, our accumulated deficit was $879.0 million.Our losses to date have resulted principally from:

 

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

 

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

 

•                  generaland administrative costs relating to our operations;

 

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

 

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

 

31

----

 

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

 

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

 

Since our founding, we have funded our research and developmentactivities primarily from private placements and public offerings of oursecurities and from revenues generated by our licensing and other contractualarrangements.

 

Prior to any marketing approval of panitumumab, we expect thatsubstantially all of our revenues for the foreseeable future will result frompayments under licensing and other contractual arrangements. To date, paymentsunder licensing and other agreements have been in the form of license fees,milestone payments, reimbursement for research and development expenses, optionfees, and payments for manufacturing services. Payments under our existing andany future customer agreements will be subject to significant fluctuation in bothtiming and amount. Our revenues may not be indicative of our future performanceor of our ability to continue to achieve contractual milestones. Our revenuesand results of operations for any period may also not be comparable to therevenues or results of operations for any other period. Our revenues for anyperiod may not be sufficient to cover our operating costs, including the costsof operating our manufacturing plant. We may not be able to:

 

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

 

•                  successfullycomplete preclinical development or clinical trials;

 

•                  obtainrequired regulatory approvals;

 

•                  successfullymanufacture or market product candidates; or

 

•                  generateadditional revenues or profitability.

 

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

 

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

 

We will continue to expend substantial resources to support researchand development and operate our manufacturing facility, including costsassociated with preclinical development and clinical trials. In the years endedDecember 31, 2004, 2003 and 2002, we incurred expenses of$124.8 million, $98.2 million and $128.5 million, respectively,on research and development.  For the sixmonths ended June 30, 2005, we spent $71.3 million on research anddevelopment.  For the six months ended June 30,2005, our manufacturing start-up costs were $6.8 million. Regulatory andbusiness factors will require us

 

32

----

 

to expend substantial funds in the course of completing required additionaldevelopment, preclinical testing and clinical trials of, and attainingregulatory approvals for, product candidates. The amounts of expenditures thatwill be necessary to execute our business plan are subject to numerousuncertainties that may adversely affect our liquidity and capital resources.Our future liquidity and capital requirements will depend on many factors,including:

 

•                  thescope and results of preclinical development and clinical trials;

 

•                  the retention ofexisting and establishment of further co-development, licensing, manufacturingand other agreements, if any;

 

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

 

•                  continuedscientific progress in our research and development programs;

 

•                  thesize and complexity of these programs;

 

•                  the cost ofoperating our manufacturing facility, validating our processes and complyingwith good manufacturing practice regulations;

 

•                  thecost of conducting commercialization activities and arrangements;

 

•                  thetime and expense involved in seeking regulatory approvals;

 

•                  competingtechnological and market developments;

 

•                  the time andexpense of filing and prosecuting patent applications, and enforcing anddefending against patent claims;

 

•                  ourinvestment in, or acquisition of, other companies;

 

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

 

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

 

•                  other factorsnot within our control.

 

We believe that our current cash balances, cash equivalents, marketablesecurities, and the cash generated from our licensing and other contractualarrangements, will be sufficient to meet our operating and capital requirementsfor at least one year. However, because of the uncertainties in our business,including the uncertainties listed above, we cannot assure you that this willbe the case. In addition, we may choose to obtain additional financing fromtime to time. We may choose to raise additional funds through public or privateequity or debt financing, licensing and other agreements, a bank line ofcredit, sale-lease back financing, mortgage financing, asset sales or otherarrangements. We cannot be sure that any additional funding, if needed, will beavailable on terms favorable to us or at all. Furthermore, any additionalequity or equity-related financing may be dilutive to our stockholders, anddebt financing, if available, may subject us to restrictive covenants andsignificant interest costs. We may also choose to obtain funding throughlicensing and other contractual arrangements. Such agreements may require us torelinquish our rights to certain of our technologies, products or marketingterritories. Our failure to raise

 

33

----

 

capital when needed would harm our business, financial condition andresults of operations.

 

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

 

At June 30, 2005, we had approximately$463.6 million of outstanding notes, including $113.7 million of convertiblesubordinated notes due March 15, 2007, $300.0 million of outstandingconvertible senior notes due December 15, 2011 and a $50.0 millionnote held by AstraZeneca.  In addition,at June 30, 2005, we had accrued approximately $52.8 million in long-termliabilities to Amgen pursuant to our co-development agreement.  We may incur additional indebtedness in thefuture. Our level of indebtedness will have several important effects on ourfuture operations, including, without limitation:

 

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

 

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

 

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

 

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

 

•                  to seek additional financing in the debt or equitymarkets;

 

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

 

•                  to sell selected assets;

 

•                  to reduce or delay planned capital expenditures; or

 

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

 

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

 

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

 

We are exposed to equity price risk on our strategic investments inCuraGen and ImmunoGen and we may elect to make additional similar investmentsin the future. In 1999 and 2000, we purchased an aggregate amount of$80.0 million of the common stock of CuraGen and ImmunoGen as strategicinvestments.  Unrealized holding gainsand losses on available-for-sale securities generally are excluded fromearnings and reported as a component of stockholders’ equity.  However, if a decline in the fair value ofavailable-for-sale securities is judged to be other than temporary, the costbasis of the security is written down to fair value as a new cost basis and theamount of the write-down is included in earnings as an impairment charge.  In 2002, declines in the fair value of theCuraGen and ImmunoGen common stock were deemed to be other-than-temporary andwe recorded impairment charges totaling $67.3 million for the year ended December 31,2002. The public trading prices of the shares of both companies have fluctuatedsignificantly since we purchased them and could continue to do so.  If the public trading prices

 

34

----

 

of these shares trade below our adjusted cost basis in future periods,we may incur additional impairment charges relating to these investments, whichcould adversely affect our results of operations.  The amount of these charges, if any, willequal our unrealized loss on these securities as of the end of the relevantperiods.  As of June 30, 2005, theseinvestments were recorded at fair value in long-term investments on the balancesheet, and any net unrealized holding gains and losses are reported as acomponent of stockholders’ equity.

 

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

 

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

 

Our XenoMouse and XenoMax technologies arenew approaches to developing antibodies as products for the treatment ofdiseases and medical disorders.  To date,neither we nor our customers have commercialized any antibody therapeuticproducts based on our technologies. Moreover, we are not aware of anycommercialized, fully human antibody therapeutic products that have beengenerated from any technologies similar to ours. Our antibody therapeuticproduct candidates are still in various stages of development and many are inan early development stage. We have initiated clinical trials with respect tofour proprietary fully human antibody therapeutic product candidates, and ourcollaborators have initiated clinical trials with respect to nine other fullyhuman antibody therapeutic product candidates generated by XenoMousetechnology. We cannot be certain that our technologies will generate antibodiesagainst every antigen to which they are exposed in an efficient and timelymanner, if at all. Furthermore, our technologies may not result in anymeaningful benefits to our current or potential customers or in productcandidates that are safe and efficacious for patients. Our failure to generateantibody therapeutic product candidates that lead to the successfulcommercialization of products would materially harm our business, financialcondition and results of operations.

 

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

 

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

 

•                  delays in product development, clinical testing ormanufacturing;

 

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

 

•                  failure in clinical trials or failure to receiveregulatory approvals;

 

•                  emergence of superior or equivalent productdevelopment technologies or products;

 

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

 

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

 

•                  election by our customers not to pursue productdevelopment;

 

•                  failure by our customers to develop productssuccessfully; and

 

•                  failure to achieve market acceptance.

 

35

----

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

•                  the length of time required to enroll suitablepatient subjects;

 

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

 

•                  the number of clinical sites included in the trials;

 

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

 

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

 

•                  unforeseen safety issues; and

 

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

 

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

 

In addition, we have ongoing researchprojects that may lead to product candidates, but we have not submitted INDs,nor begun clinical trials for these projects. Our ability to file additionalINDs, and to build

 

36

----

 

diversity and scale in our product portfolio, depends to a significantextent on our ability to identify additional potential product candidatesthrough our preclinical research and to conduct preclinical researchefficiently. Our preclinical or clinical development efforts may not besuccessfully completed, we may not file further INDs and clinical trials maynot commence as planned.

 

Two of our proprietary product candidates,panitumumab and ABX-10241, are in various stages of clinical trials. We havediscontinued development of three proprietary product candidates, ABX-CBL,ABX-IL8 and ABX-MA1. To date, data obtained from these clinical trials havebeen insufficient to demonstrate safety and efficacy under applicable FDAguidelines. As a result, these data will not support an application for regulatoryapproval without further clinical trials or further results from ongoingtrials. Clinical trials that we conduct or that third parties conduct on ourbehalf may not demonstrate sufficient safety and efficacy to obtain therequisite regulatory approvals for any of our product candidates. We expect tocommence new clinical trials from time to time in the course of our business asour product development work continues. However, regulatory authorities may notpermit us to undertake any additional clinical trials for our productcandidates. In addition, the FDA, other regulatory authorities, our partners,the institutional review boards for clinical trial sites or we may suspend orterminate clinical trials at any time.

 

Our product candidates may fail to demonstratesafety or efficacy in clinical trials. For example, in 2002 we completedanalysis of a Phase 2b clinical trial of ABX-IL8 in psoriasis, concluded thatthe results did not warrant continued development in psoriasis and decided notto proceed with studies in other disease indications. Similarly, in February 2003,we completed a preliminary analysis of the results from the Phase 2/3clinical trial of ABX-CBL and concluded that the study did not meet its primaryendpoint. Therefore, we and our co-developer, SangStat (now a subsidiary ofGenzyme Corporation) do not plan any further development of ABX-CBL. Failuresof clinical trials of any product candidate could delay the development ofother product candidates or hinder our ability to obtain additional financing.In addition, failures in our clinical trials can lead to additional researchand development expenses. Any delays in, or termination of, our clinical trialscould impede our ability to commercialize our product candidates and materiallyharm our business, financial condition and results of operations.

 

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

 

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

 

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

 

We have limited experience manufacturingantibody therapeutic product candidates in our manufacturing facility. Weintend to use our manufacturing facility for the manufacture of productcandidates for clinical trials and to support the potential early commerciallaunch of a limited number of products, in each case, in compliance with FDAand European good manufacturing practices. We have yet to manufacture acommercial product in our facility. In May 2000, we signed a long-termlease for the building that contains this manufacturing facility. Constructionhas been completed and the facility is operational, although portions of thefacility are still to be validated. In October 2003, following aninspection by the California State Department of Health Services, we received aState Drug Manufacturing License. The license permits us to manufacture andship clinical material from our manufacturing facility.

 

37

----

 

The total cost of the facility was approximately $150 million. Thecosts of completing validation of this facility and qualifying the facility forregulatory compliance may be higher than expected. We currently have excessproduction services capacity and this condition may persist for an extendedperiod. However, if the commercial launch of one or more of our productcandidates proves successful, we will likely experience capacity shortages andmay need to use one or more third-party facilities to produce these products insufficient quantities.

 

The process of manufacturing antibodytherapeutic products is complex. While the managers of the facility have gainedextensive manufacturing experience in prior positions with other companies, wehave limited experience in the clinical or commercial scale manufacturing ofour existing product candidates, or any other antibody therapeutic products, inour facility. We will need to hire, train and retain additional qualifiedmanufacturing, quality control and quality assurance personnel. Also, we willneed to manufacture such antibody therapeutic products in a facility and by anappropriately validated process that comply with FDA, European and otherregulations. Our manufacturing operations will be subject to ongoing, periodicunannounced inspections by the FDA, European and other foreign regulatoryagencies and state regulatory agencies to ensure compliance with goodmanufacturing practices and applicable health and safety regulations. If we areunable to manufacture product or product candidates in accordance with FDA andEuropean good manufacturing practices we may not be able to obtain regulatoryapproval for our products . Any significant manufacturing changes for theproduction of our product candidates could result in delays in development orregulatory approval or in the reduction or interruption of commercial sales ofour product candidates. Our inability to manufacture clinical or commercialsupplies or to maintain our manufacturing operations in compliance withapplicable regulations within our planned time and cost parameters couldmaterially harm our business, financial condition and results of operations.

 

We also may encounter problems with thefollowing:

 

•                  production yields;

 

•                  quality control and assurance;

 

•                  availability of qualified personnel;

 

•                  availability of raw materials;

 

•                  adequate training of new and existing personnel;

 

•                  on-going compliance with our standard operatingprocedures;

 

•                  on-going compliance with FDA and other healthauthority regulations;

 

•                  production costs; and

 

•                  development of advanced manufacturing techniques andprocess controls.

 

In addition, the FDA and other regulatoryauthorities will require us to register any manufacturing facilities in whichour antibody therapeutic products are manufactured. These facilities will besubject to periodic and unannounced inspections to confirm compliance with FDAgood manufacturing practices or other equivalent regulations. The FDA orforeign regulatory bodies will not grant pre-market approval of our product candidates,including panitumumab, if our facilities cannot pass a pre-licenseinspection.  Therefore, both the filingand approval of a Biologic License Application, or BLA, for panitumumab couldbe delayed if we are unable to meet the relevant pre-license requirements andor if our facilities and operating systems do not pass a pre-licenseinspection.  In complying with FDAregulations and foreign regulatory requirements, we will be obligated to expendtime, money and effort in production, record keeping and quality control in aneffort to ensure that our product candidates meet applicable specifications

 

38

----

 

and other requirements. Our failure to maintain regulatory compliancewould materially harm our business, financial condition and results ofoperations.

 

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

 

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

 

Third-party manufacturers may encounterdifficulties in scaling up production, including problems involving productionyields, quality control and assurance, shortage of qualified personnel,shortage of capacity, compliance with FDA and other applicable regulations,production costs, and development of advanced manufacturing techniques andprocess controls. They may not perform as agreed or may not remain in thecontract manufacturing business for the time required by us to successfullyproduce and market our product candidates. Also, third-party manufacturers mayhave difficulty maintaining compliance with FDA good manufacturing practices orequivalent regulations, or having their facilities pass a pre-license orroutine inspection. Any failure of third-party manufacturers to deliver therequired quantities of our product candidates for clinical use on a timelybasis and at commercially reasonable prices, and our failure to findreplacement manufacturers or successfully implement our own manufacturingcapabilities, would materially harm our business, financial condition andresults of operations.

 

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

 

We intend to enhance our contract revenues byentering into agreements to provide antibody production services to third parties.Potential third parties include our existing collaborators, as well as otherpharmaceutical and biotechnology companies, technology companies, academicinstitutions and other entities. We must enter into these agreements tosuccessfully develop this aspect of our business. To date, we have entered intoonly a few production services agreements and we cannot assure you that we willbe able to enter into additional agreements.

 

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

 

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

 

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

 

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

 

39

----

 

•                  fund research, preclinical development, clinicaltrials and manufacturing;

 

•                  seek and obtain regulatory approvals; and

 

•                  successfully commercialize existing and futureproduct candidates.

 

Our ability to continue our currentcollaborations and to enter into additional third party collaborations isdependent in large part on our ability to successfully demonstrate that ourXenoMouse technology is an attractive method of developing antibody therapeuticproducts.  We have generated only alimited number of fully human antibody therapeutic product candidates pursuantto our collaboration agreements that have advanced to the clinical stage.  Our failure to maintain our existingcollaboration agreements or to enter into additional agreements couldmaterially harm our business, financial condition and results of operations.

 

Our dependence on licensing, collaboration,manufacturing and other agreements with third parties subjects us to a numberof risks.  These agreements may not be onterms that prove favorable to us, and we typically afford our collaboratorssignificant discretion in electing whether to pursue any of the plannedactivities. Licensing and other contractual arrangements may require us torelinquish our rights to certain of our technologies, products or marketingterritories.  To the extent we agree towork exclusively with one collaborator in a given therapeutic area, ouropportunities to collaborate with other entities could be curtailed.  For example, our collaboration withAstraZeneca for the identification and development of therapeutic antibodies inoncology contains exclusivity provisions that significantly restrict ourability, during a three-year target selection period, to enter intoarrangements with third parties in the field of oncology as well as our abilityto conduct research and development activities in that field.  To the extent that our collaboration withAstraZeneca is not successful, our ability to develop antibodies for use inoncology applications through other collaborations will be severelycurtailed.  Our collaboration withAstraZeneca also limits our ability to develop such antibodies through our ownindependent development.

 

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

 

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

 

•                  significantly increase our capital requirements; and

 

•                  place additional strain on our management’s time.

 

Existing or potential collaborators maypursue alternative technologies, including those of our competitors, or enterinto other transactions that could make a collaboration with us less attractiveto them. For example, if an existing collaborator purchases a company that isone of our competitors, that company could be less willing to continue itscollaboration with us.  Moreover,disputes may arise with respect to the ownership of rights to any technology orproducts developed with any current or future collaborator. Lengthynegotiations with potential new collaborators or disagreements between us andour collaborators may lead to delays in or termination of the research,development or commercialization of product

 

40

----

 

candidates or result in time-consuming and expensive litigation orarbitration. The decision by our collaborators to pursue alternativetechnologies or the failure of our collaborators to develop or commercializesuccessfully any product candidate to which they have obtained rights from uscould materially harm our business, financial condition and results ofoperations.

 

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

 

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

 

Securing FDA approval requires the submissionof extensive preclinical and clinical data, manufacturing data and supportinginformation to the FDA for each indication to establish the product candidate’ssafety and efficacy.  The generation ofdata supporting the approval process takes many years, requires the expenditureof substantial resources, and may involve post-marketing surveillance andrequirements for post-marketing studies. As we conduct clinical trials for a given product candidate, we maydecide or the FDA may require us to make changes in our plans and protocols.Such changes may relate to, for example, changes in the standard of care for aparticular disease indication, comparability of efficacy and toxicity ofmaterials where a change in materials is proposed, or competitive developmentsforeclosing the availability of expedited approval procedures.  We may be required to support proposedchanges with additional preclinical or clinical testing, which could delay theexpected time line for concluding clinical trials.  The approval of a product candidate maydepend on the acceptability to the FDA of data from clinical trials conductedoutside the United States. Regulatory requirements are subject to frequentchange. Delays in obtaining regulatory approvals may:

 

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

 

•                  impose costly procedures on us or our customers;

 

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

 

•                  adversely affect our receipt of revenues orroyalties.

 

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

 

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

 

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

 

41

----

 

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

 

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

 

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

 

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

 

•                  delays;

 

•                  warning letters;

 

•                  fines;

 

•                  clinical holds;

 

•                  consent decrees;

 

•                  product recalls or seizures;

 

•                  changes to advertising;

 

•                  injunctions;

 

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

 

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

 

•                  civil penalties;

 

•                  withdrawals of previously approved marketingapplications; and

 

•                  criminal prosecutions.

 

42

----

 

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

 

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

 

We are required to comply with the applicableFDA current good manufacturing practice, or “cGMP” regulations and therequirements of other regulatory authorities. Good manufacturing practiceregulations include requirements relating to quality control and qualityassurance as well as the corresponding maintenance of records anddocumentation. Manufacturing facilities, including our facility, must pass apre-license inspection by the FDA before initiating commercial manufacturing ofany product. The FDA enforces post-marketing regulatory requirements such ascGMP requirements, through periodic unannounced inspections. We do not knowwhether we will pass any future FDA inspections. Failure to pass an inspectioncould disrupt, delay or shut down our manufacturing operations.  In addition, cGMP requirements are constantlyevolving and new or different requirements may apply in the future.  Manufacturing facilities in California,including our facility, are also subject to the licensing requirements of andinspection by the State of California Department of Health Services.  In October 2003, following aninspection, we received a Drug Manufacturing License from the State ofCalifornia.  The license, which must berenewed annually, permits us to manufacture and ship clinical material.  We are responsible for manufacturing clinicaland, for the first five years after launch, commercial supplies for panitumumabwith Amgen’s support and assistance.  Wemay not be able to comply with applicable cGMP requirements and otherregulatory requirements.  Our failure tocomply with these requirements could delay or prevent the approval of ourproduct candidates and would materially harm our business, financial conditionand results of operations.

 

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

 

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

 

•                  establishment and demonstration of clinical efficacyand safety;

 

•                  cost-effectiveness of our product candidates;

 

•                  their potential advantage over alternative treatmentmethods;

 

•                  reimbursement policies of government and third-partypayors; and

 

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

 

Physicians will not recommend therapies usingour products until such time as clinical data or other factors demonstrate thesafety and efficacy of such procedures as compared to conventional drug andother treatments. Even if we establish the clinical safety and efficacy oftherapies using our antibody product

 

43

----

 

candidates, physicians may elect not to recommend the therapies for anynumber of other reasons, including whether the mode of administration of ourantibody products is effective for certain indications. Antibody products,including our product candidates as they would be used for certain diseaseindications, are typically administered by infusion or injection, whichrequires substantial cost and inconvenience to patients. Our productcandidates, if successfully developed, will compete with a number of drugs andtherapies manufactured and marketed by major pharmaceutical and otherbiotechnology companies. Our products may also compete with new productscurrently under development by others. Physicians, patients, third-party payersand the medical community may not accept or utilize any product candidates thatwe or our customers develop. The failure of our products to achieve significantmarket acceptance would materially harm our business, financial condition andresults of operations.

 

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

 

Although we have been marketing our XenoMousetechnology to potential customers and collaborators for several years, we donot have marketing, sales or distribution experience or capability with respectto our therapeutic product candidates. We intend to enter into arrangements with third parties to market andsell most of our therapeutic product candidates when we commercializethem.  For example, pursuant to ouramended joint development agreement for panitumumab, Amgen has decision-makingauthority for development and commercialization activities relating to anyproducts developed under the collaboration, and we have the right to co-promoteany products.  Should this productcandidate proceed to commercialization, it will take significant resources todevelop the appropriate sales capabilities and there can be no assurance thatwe will be able to do this successfully. We may not be able to enter into additional marketing and salesarrangements with others on acceptable terms, if at all.  To the extent that we enter into marketingand sales arrangements with other companies, our revenues, if any, will dependon the efforts of others.  These effortsmay not be successful.  If we are unableto enter into third-party arrangements, we will need to develop a marketing andsales force, which may need to be substantial in size, in order to achievecommercial success for any product candidate approved by the FDA.  We may not successfully develop marketing andsales capabilities or have sufficient resources to do so.  If we do develop such capabilities, we willcompete with other companies that have experienced and well-funded marketingand sales operations. Our failure to enter into successful marketingarrangements with third parties and our inability to conduct such activitiesourselves would materially harm our business, financial condition and resultsof operations.

 

**Risks Related to Intellectual Property**

 

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

 

Our success depends in part on our abilityto:

 

•                  obtain patents;

 

•                  protect trade secrets;

 

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

 

•                  prevent others from infringing our proprietaryrights.

 

We will be able to protect our proprietaryrights from unauthorized use by third parties only to the extent that ourproprietary rights are covered by valid and enforceable patents or are effectivelymaintained as trade secrets. We attempt to protect our proprietary position byfiling U.S. and foreign patent applications related to our proprietarytechnology, inventions and improvements that are important to the developmentof our business. However, the patent position of biopharmaceutical companiesinvolves complex legal and

 

44

----

 

factual questions, and, therefore, we cannot predict with certaintywhether our patent applications will be approved or any resulting patents willbe enforced. In addition, third parties may challenge, seek to invalidate orcircumvent any of our patents, once they are issued. Thus, any patents that weown 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 wemay license from third parties, may not result in patents being issued. Also,patent rights may not provide us with adequate proprietary protection orcompetitive advantages against competitors with similar technologies. The lawsof certain foreign countries do not protect our intellectual property rights tothe same extent as do the laws of the United States.

 

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

 

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

 

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

 

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

 

•                  enforce patents that we own or license;

 

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

 

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

 

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

 

45

----

 

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

#### ** **

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

 

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

 

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

 

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

 

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

 

•                  developing products;

 

•                  undertaking preclinical testing and human clinicaltrials;

 

•                  obtaining FDA and other regulatory approvals ofproducts; and

 

•                  manufacturing and marketing products.

 

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

 

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

 

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

 

•                  new small molecules; or

 

46

----

 

•                  other classes of therapeutic agents.

 

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

 

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

 

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

 

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

 

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

 

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

 

47

----

 

**Other Risks Related to Our Company**

 

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

 

In June 2005, we announced a restructuring plan,which includes a reduction in headcount. The planning and implementation of ourrestructuring has placed, and may continue to place a strain on our managerial,operational and other resources. The restructuring may negatively affect ouremployee turnover, recruiting and retention, and may not enable us to reduceour costs to the extent expected.

 

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

 

For us to pursue our product development,manufacturing, marketing and commercialization plans, we will need to hireadditional qualified scientific, manufacturing, quality control, qualityassurance, sales, marketing and key management personnel. We may also need tohire personnel with expertise in clinical testing, government regulation, lawand finance. Attracting and retaining qualified personnel will be critical toour success. We may not be able to attract and retain personnel on acceptableterms given the competition for such personnel among biotechnology,pharmaceutical and healthcare companies, universities and non-profit researchinstitutions. The inability to attract and retain qualified personnel couldmaterially harm our business, financial condition and results of operations.

 

We grant stock options as a method ofattracting and retaining employees, to motivate performance and to align theinterests of management with those of our stockholders. Due to fluctuations inthe trading price of our common stock in recent years, a substantial portion ofthe stock options held by our employees have an exercise price that is higherthan the current trading price of our common stock. We may elect to grantadditional stock options at the current lower market price, pay higher cashcompensation, or provide some combination of these alternatives to retain andattract qualified employees, but we cannot be sure that any of these actionswould be successful.  In addition, theissuance of additional stock options may be dilutive to existingstockholders.  While we will continue toutilize our existing equity compensation plans to compensate employees, we mayhave difficulty attracting and retaining qualified personnel if we are unableto obtain stockholder approval for any new plan as may be required to keepequity compensation available.  Inaddition, the expensing of stock options and other stock-based awards, whichwill be required commencing on January 1, 2006, will increase any netlosses or decrease any net income recorded in any given period and could affectthe price that investors might be willing to pay in the future for shares ofour common stock.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

48

----

 

In addition, our past and future acquisitionsof companies and businesses and expansion of operations may result in dilutiveissuances of equity securities, the incurrence of additional debt, U.S. orforeign tax liabilities, large one-time write-offs and the creation of goodwillor other intangible assets that could result in amortization expense or othercharges to expense. For example, we have recorded impairment charges of $23.1million and $1.9 million in the quarter ended June 30, 2005 and$17.2 million in the quarter ended June 30, 2004, related totechnologies acquired through our acquisitions, respectively, of AbgenixBiopharma and IntraImmune in 2000 and Hesed Biomed in 2001.

 

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

 

In June 1999, our board of directorsadopted a stockholder rights plan, which we amended and restated in November 1999and May 2002, and amended in October 2003. The stockholder rightsplan and certain provisions of our amended and restated certificate ofincorporation and amended and restated bylaws may have the effect of making itmore difficult for a third party to acquire, or of discouraging a third partyfrom attempting to acquire, control of us. This could affect the price thatcertain investors might be willing to pay in the future for our common stock.Certain provisions of our amended and restated certificate of incorporation andamended and restated bylaws allow us to:

 

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

 

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

 

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

 

•                  eliminate cumulative voting in the election ofdirectors.

 

In October 2003, we entered into acollaboration and license agreement with AstraZeneca for the purpose ofidentifying and developing antibody products for use in oncology therapeutics.The collaboration agreement includes provisions that would allow AstraZeneca toaccelerate its selection of target antigens and, in certain situations,terminate the collaboration agreement, or specific programs or activitiesconducted under it, in the event of a change in control in us, particularly ifwe were acquired by a competitor of AstraZeneca. In the event of a change incontrol of us, AstraZeneca could also acquire control over the developmentprograms and various intellectual property rights in respect of antigens thatare the subject of the collaboration agreement. This would result in areduction in the royalties and milestones to be paid by AstraZeneca to us underthe collaboration agreement and the release of AstraZeneca from certainexclusivity provisions. In addition, certain exclusivity provisions containedin the collaboration agreement would apply to an acquirer of our company andwould restrict the acquirer’s ability to operate its business in the oncologyfield after the acquisition, except with respect to pre-existing developmentprograms. These and other provisions of the collaboration agreement could makeour company less attractive to a potential acquirer, particularly an acquirerthat conducts or expects to conduct significant operations in the field ofoncology therapeutics.

 

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

 

49

----

 

*We face product liability risks and may notbe able to obtain adequate insurance, and if we are held liable for anuninsured claim or a claim in excess of our insurance limits, our business,financial condition and results of operations may be harmed.*

 

The use of any of our product candidates, orof any products manufactured in our facility, in clinical trials, and the saleof any approved products, may expose us to liability claims resulting from suchuse or sale. Consumers, healthcare providers, pharmaceutical companies orothers selling such products might make claims of this kind. We may experiencefinancial losses in the future due to product liability claims. We haveobtained limited product liability insurance coverage for our clinical trialsand production services activities, under which the coverage limits are $15.0 millionper occurrence and $15.0 million in the aggregate. We may not be able tomaintain insurance coverage at a reasonable cost or in sufficient amounts toprotect us against losses. If third parties bring a successful productliability claim or series of claims against us for uninsured liabilities or inexcess of insured liabilities, our business, financial condition and results ofoperations may be materially harmed.

 

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

 

Our research and manufacturing activitiesinvolve the controlled use of hazardous materials. In addition, although wemaintain insurance for harm to employees and to our facilities caused byhazardous materials, we do not insure against any other harm (including harm tothe environment) caused by the use of hazardous materials on our premises. Wecannot eliminate the risk of accidental contamination or injury from thesematerials. In the event of an accident or environmental discharge, we may beheld liable for any resulting damages, which may exceed our financial resourcesand may materially harm our business, financial condition and results ofoperations.

 

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

 

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

 

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

 

The market price and trading volume of ourcommon stock are volatile, and we expect such volatility to continue for theforeseeable future. For example, during the period between June 30, 2004and June 30, 2005, our common stock closed as high as $11.36 per share andas low as $6.54 per share.  This mayimpact your decision to buy or sell our common stock. Factors affecting ourstock price include:

 

•                  ourfinancial results;

 

•                  fluctuationsin our operating results;

 

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

 

•                  publishedreports by securities analysts;

 

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

 

•                  governmentregulation;

 

50

----

 

•                  changesin reimbursement policies;

 

•                  developmentsin patent or other proprietary rights;

 

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

 

•                  developmentsin our relationship with customers;

 

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

 

•                  generalmarket conditions.

 

##### **Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk**

##### ** **

*Interest Rate Risk.*  Weare exposed to interest rate sensitivity on our investments in debt securitiesand our outstanding fixed rate debt. Theobjective of our investment activities is to preserve principal, while at thesame time maximizing yields without significantly increasing risk. To achievethis objective, we invest in highly liquid, investment grade and governmentdebt securities. Our investments in debt securities are subject to interestrate risk. To minimize the exposure due to an adverse shift in interest rates,we invest in short-term securities and our goal is to maintain an averagematurity of approximately one year. In addition, as of June 30,2005, we had $113.7 million of outstanding 3.5% convertible subordinated notesdue in 2007, and $300.0 million of outstanding 1.75% convertible senior notesdue in 2011. The fair value of these convertible notes may fluctuate withchanges in market interest rates, as well as changes in the market price of ourcommon stock.  A hypothetical 1.0% per annum decrease in interest rates would resultin an adverse net change in the fair value of our interest ratesensitive assets and liabilities ofapproximately $18.2 million and $16.6 million at June 30, 2005 and December 31,2004, respectively.

 

*Equity Price Risk.*  Weare exposed to equity price risk on strategic investments, such as those wehave made in CuraGen and ImmunoGen. We typically do not attempt to reduce oreliminate our market exposure on these securities. With respect to CuraGen andImmunoGen, each of whose common stock is publicly traded, the aggregate marketvalue of our investments in these securities was approximately $16.3million and $23.3 million as of June 30, 2005 and December 31, 2004,respectively. Due to decreases in the market prices of the shares of CuraGenand ImmunoGen, we recorded impairment charges of $67.3 million in 2002 relatedto these investments. The trading prices of shares of CuraGen and ImmunoGenhave fluctuated significantly since we purchased these securities. Eachadditional 10% decrease in market value of these securities would result in adecrease in value of approximately $1.6 million and $2.3 million from the fairvalue of those investments at June 30, 2005 and December 31, 2004,respectively.  Additional price declinescould cause us to record additional impairment charges in future periods.

 

# **Item 4. Controls and Procedures**

 

#### **Evaluation of DisclosureControls and Procedures**

 

Based on their evaluation of our disclosurecontrols and procedures, as that term is defined by Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as of the end of the period coveredby this report, our chief executive officer and our chief financial officerhave concluded that our disclosure controls and procedures are effective inensuring that all material information required to be included in thisquarterly report on Form 10-Q has been made known to them in a timelyfashion.

 

51

----

 

**Changes in InternalControls Over Financial Reporting**

 

There has been nochange in our internal control over financial reporting during our last fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II.  OTHER INFORMATION**

 

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

 

Not applicable.

 

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

#### ** **

Notapplicable.

 

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

 

Not applicable.

 

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

 

Our Annual Meeting of Stockholders was held on June 13, 2005 atour principal executive offices at 6701 Kaiser Drive, Fremont, California 94555.  A total of 65,508,818 shares of the Company’sissued and outstanding common stock entitled to vote at the Annual Meeting,representing 72% of the voting power of the Company, was present in person orby proxy at the Annual Meeting.  Matterssubmitted to stockholders at the Annual Meeting and the voting results thereofwere as follows.

 

*****Election of Directors*****

 

Each of R. Scott Greer, M. Kathleen Behrens, Ph.D., Raju S.Kucherlapati, Ph.D., Kenneth B. Lee, Jr., Mark B. Logan, William R. Ringoand Thomas G. Wiggans, was re-elected to serve on the Company’s Board ofDirectors, having each received not less than 90% of the votes cast.  The following is a breakdown of the votingresults:

 
| **Director**                 | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|------------------------------|------------|---------------|------------|--------------------|------------|
| R. Scott Greer               |       | 64,024,220    |       | 1,484,598          |       |
| M. Kathleen  Behrens, Ph.D.  |       | 64,341,732    |       | 1,167,086          |       |
| Raju S.  Kucherlapati, Ph.D. |       | 59,246,623    |       | 6,262,195          |       |
| Kenneth B.  Lee, Jr.    |       | 64,289,816    |       | 1,219,002          |       |
| Mark B. Logan                |       | 59,391,891    |       | 6,116,927          |       |
| William R. Ringo             |       | 64,340,607    |       | 1,168,211          |       |
| Thomas G. Wiggans            |       | 59,364,503    |       | 6,144,315          |       |

 

*****Ratification of the Selection the IndependentRegistered Public Accounting Firm for the 2005 Fiscal Year*****

 

Our stockholders ratified the selection of Ernst & Young, LLPas the Company’s independent registered public accounting firm for the yearending December 31, 2005.  Thefollowing is a breakdown of the voting results:

 

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|---------------|------------|-------------------|------------|-----------------|------------|----------------------|------------|
| 64,636,489    |       | 846,836           |       | 25,493          |       | 0                    |       |

 

52

----

 

*****Approval of the 2005 Incentive Stock Plan*****

 

Because less than a majority of the voting power present at the meetingvoted in favor of the proposal, our stockholders did not approve the adoptionof the Abgenix, Inc. 2005 Incentive Stock Plan.  The number of votes required to adopt thisplan was 32,754,410.  The following is abreakdown of the voting results:

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|---------------|------------|-------------------|------------|-----------------|------------|----------------------|------------|
| 31,338,491    |       | 9,985,211         |       | 890,872         |       | 23,294,244           |       |

 

#### **ITEM 5. Other Information**

#### ** **

Notapplicable.

 

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

** **
| **Number** | ** ** | **Description**                                                                                                                                              |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                         |
| 3.1(1)     |       | Amended  and Restated Certificate of Incorporation of Abgenix, as currently in effect.                                                                       |
| 3.2(2)     |       | Amended  and Restated Bylaws of Abgenix, as currently in effect.                                                                                             |
| 10.70(3)   |       | Letter  Agreement dated May 9, 2005, between Abgenix, Inc. and C. Geoffrey  Davis.                                                                      |
| 31.1       |       | Certification  of William R. Ringo Pursuant to Rule 13a-14(a), as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.              |
| 31.2       |       | Certification  of H. Ward Wolff Pursuant to Rule 13a-14(a), as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                 |
| 32.1       |       | Certification  of William R. Ringo Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2       |       | Certification  of H. Ward Wolff Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    |

 

----

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

 

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

 

(3)                                  Incorporated by reference to the same exhibitfiled with Abgenix’s Quarterly Report on Form 10-Q for the quarter ended March 31,2005.

 

53

----

 

**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 theundersigned thereunto duly authorized.

 

Dated: August 9, 2005

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

 

54

----

 

**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                              |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                         |
| 3.1(1)     |       | Amended  and Restated Certificate of Incorporation of Abgenix, as currently in effect.                                                                       |
| 3.2(2)     |       | Amended  and Restated Bylaws of Abgenix, as currently in effect.                                                                                             |
| 10.70(3)   |       | Letter  Agreement dated May 9, 2005, between Abgenix, Inc. and C. Geoffrey  Davis.                                                                      |
| 31.1       |       | Certification  of William R. Ringo Pursuant to Rule 13a-14(a), as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.              |
| 31.2       |       | Certification  of H. Ward Wolff Pursuant to Rule 13a-14(a), as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                 |
| 32.1       |       | Certification  of William R. Ringo Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2       |       | Certification  of H. Ward Wolff Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    |

 

----

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

 

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

 

(3)                                  Incorporated by reference to the same exhibitfiled with Abgenix’s Quarterly Report on Form 10-Q for the quarter ended March 31,2005.

 

----