**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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FORM 10-K

**ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2004**

**CommissionFile No. 0-19312**

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MEDAREX, INC.

(Exact name of registrantas specified in its charter)

| **New Jersey**                            | **22-2822175**                        |
|-------------------------------------------|---------------------------------------|
| (State of  Incorporation)                 | (I.R.S. Employer  Identification No.) |
| **707 State Road, Princeton, New Jersey** | **08540**                             |
| (Address of  principal executive offices) | (Zip Code)                            |

 

**Registrant’s telephone number,including area code:**(609) 430-2880

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Securitiesregistered pursuant to Section 12(b) of the Act: None

**Securities registered pursuant to Section 12(g) ofthe Act:**

| Title of Class                  | ** ** | **Name of Each Exchange on Which Registered**               |
|---------------------------------|------------|-------------------------------------------------------------|
| Common Stock  ($0.01 par value) |       | The Nasdaq Stock  Market, Inc. under  symbol MEDX |

 

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.    x

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

The aggregate market valueof the voting stock held by non-affiliates of the Registrant was approximately$540.8 million as of June 30, 2004, based upon the closing sale priceon the NASDAQ National Market reported for such date. The determination ofaffiliate status for the purposes of this calculation is not necessarily aconclusive determination for other purposes. The calculation excludesapproximately 5,089,221 shares held by directors, officers and shareholderswhose ownership exceeded 5% of the Registrant’s outstanding Common Stock as of June 30,2004. Exclusion of these shares should not be construed to indicate that suchperson controls, is controlled by or is under common control with theRegistrant.

As of February 28,2005, the registrant had outstanding 110,529,979 shares of Common Stock, $0.01par value (“Common Stock”), which is registrant’s only class of Common Stock.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the registrant’s definitive Proxy Statement for the Annual Meeting ofShareholders to be held on May 19, 2005 (the “Proxy Statement”) areincorporated by reference in Parts II and III of this Report. Other documentsincorporated by reference in this report are listed in the Exhibit Index.

 

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**MEDAREX, INC.TABLE OF CONTENTSFORM 10-K**
|                   | ** ** | **Page**                                                                                        | ** ** |
|-------------------|------------|-------------------------------------------------------------------------------------------------|------------|
|              |       |                                                                                            |       |
| **PART I**   |       |                                                                                            |       |
| Item  1.          |       | Business                                                                                        |       | 1 |   |
| Item  2.          |       | Properties                                                                                      |       | 51 |   |
| Item  3.          |       | Legal  Proceedings                                                                              |       | 51 |   |
| Item  4.          |       | Submission  of Matters to a Vote of Security Holders                                            |       | 51 |   |
| **PART II**  |       |                                                                                            |       |
| Item  5.          |       | Market  for Registrant’s Common Equity and Related Shareholder Matters                     |       | 52 |   |
| Item  6.          |       | Selected  Consolidated Financial Data                                                           |       | 53 |   |
| Item  7.          |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations     |       | 54 |   |
| Item  7A.         |       | Quantitative  and Qualitative Disclosures about Market Risks                                    |       | 73 |   |
| Item 8.           |       | Consolidated Financial  Statements and Supplementary Data                                       |       | F-1 |   |
| Item 9.           |       | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosures          |       | 74 |   |
| Item 9A.          |       | Controls and Procedures                                                                         |       | 74 |   |
| **PART III** |       |                                                                                            |       |
| Item 10.          |       | Directors and Executive  Officers of the Registrant                                             |       | 76 |   |
| Item 11.          |       | Executive Compensation                                                                          |       | 76 |   |
| Item 12.          |       | Security Ownership of  Certain Beneficial Owners and Management and Related Shareholder Matters |       | 76 |   |
| Item 13.          |       | Certain Relationships and  Related Transactions                                                 |       | 76 |   |
| Item 14.          |       | Principal Accountant Fees  and Services                                                         |       | 76 |   |
| **PART IV**  |       |                                                                                            |       |
| Item 15.          |       | Exhibits, Financial  Statement Schedules and Reports on Form 8-K                           |       | 77 |   |
|              |       | Signatures                                                                                      |       | 82 |   |
|              |       | Certifications                                                                                  |       |   |   |

 

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**PART I**

In this Annual Report, “Medarex” or the “company,” “we,”“us” and “our” refer to Medarex, Inc., and our wholly owned subsidiaries.This Annual Report contains forward-looking statements that involve risk anduncertainties. Our actual results may differ significantly from the resultsdiscussed in the forward-looking statements. Factors that might cause such adifference include, but are not limited to, those discussed in “Risk Factors,” “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and “Business”as well as those discussed elsewhere in this Annual Report. Actual events orresults may differ materially from those discussed in this Annual Report.

Medarex®, HuMAb-Mouse®,GenPharm®, KM-Mouse®, UltiMAb® and UltiMAb Human Antibody Development System®are registered trademarks of Medarex, Inc. Ultra-Potent ToxinTM is atrademark of Medarex, Inc. All other company names, registered trademarks,trademarks and service marks included in this Annual Report are trademarks,registered trademarks, service marks or trade names of their respective owners.

**Item 1**.                        Business

**Overview**

We are a biopharmaceutical company focused on thediscovery, development and potential commercialization of fully humanantibody-based therapeutic products. We believe that our UltiMAb Human AntibodyDevelopment System® enables us to rapidly create and develop such products fora wide range of diseases, including cancer, inflammation, autoimmune disordersand other life-threatening and debilitating diseases.

Currently, 22 antibody products generated from ourUltiMAb Human Antibody Development System are in human clinical trials(1). Eightof these products are in Phase II or Phase III clinical trials. The 22antibodies are designed to treat a wide range of diseases, such as cancer,rheumatoid arthritis and other inflammatory, autoimmune and infectious diseases.The most advanced of these products is MDX-010 (Phase III, Phase II and Phase Iclinical trials), which we are developing jointly with Bristol-Myers SquibbCompany, or BMS, for the treatment of metastatic melanoma and other cancers. Fourof these antibody products are fully owned by Medarex and its affiliates:MDX-060 for lymphomas (Phase II clinical trial), MDX-070 for prostate cancer(Phase II clinical trial), MDX-214 for cancer (Phase I/II clinical trial) andMDX-1307 for genitourinary and breast cancers (Phase I clinical trial). We aredeveloping MDX-066 (Phase I clinical trial) jointly with The MassachusettsBiologic Laboratories of the University of Massachusetts Medical School, orMBL, for the treatment of *Clostridium difficile*associated diarrhea. Another antibody, MDX-018 (Phase I/II clinical trial), isbeing jointly developed with Genmab A/S for autoimmune disease, and threeadditional antibodies are being developed separately by Genmab: HuMaxTM-CD4(Phase II clinical trials) for T-cell lymphomas, HuMax-EGFr (Phase I/IIclinical trial) for head and neck cancer and HuMax-CD20 (Phase I/II clinicaltrial) for lymphomas. Genmab and Amgen, Inc. are developing AMG 714 (PhaseII clinical trial) for rheumatoid arthritis. Additionally, other licensingpartners, including Novartis Pharma AG, Eli Lilly and Company, and Centocor, Inc.(a subsidiary of Johnson & Johnson), are developing a total of tenantibody products, for inflammatory and/or autoimmune diseases and cancer, thatare currently in clinical trials. Human Genome Sciences, Inc. has alsoannounced the initiation of a Phase I trial of one anticancer antibody productdeveloped pursuant to a licensing agreement with our partner Kirin Brewery Co.,Ltd. We and our partners also have a number of UltiMAb® product candidates inpreclinical development.

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(1)          Information regardingthe clinical status of third-party antibody products is based on publiclyavailable information.

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In November 2004, we announced a worldwide collaborationwith BMS to develop and commercialize MDX-010, an antibody product targetingthe CTLA-4 receptor, that wasdeveloped by us using our UltiMAb Human Antibody Development System. The BMScollaboration also includes MDX-1379, an investigational gp100 melanoma peptidevaccine, which will be developed for potential use in combination with MDX-010in melanoma. MDX-010 in combination with the MDX-1379 tumor vaccine iscurrently in Phase III clinical development for the treatment of metastaticmelanoma under a Special Protocol Assessment, or SPA, agreement with the U.S.Food and Drug Administration, or FDA, and has been granted Fast Track status bythe FDA for the treatment of high risk Stage II, Stage III and Stage IVmelanoma. We received an initial cash payment from BMS of $50.0 million, ofwhich $25.0 million was for the purchase of our common stock at a small premiumto the market price at the time we entered into the collaboration. We and BMShave agreed to jointly continue the investigation and the development ofMDX-010 in additional tumor types and have jointly committed to an initialmulti-year budget of approximately $192.0 million to fund such development. BMSwill be responsible for 65% of all development costs related to clinical trialsintended to support regulatory approval in both the U.S. and Europe, with theremaining 35% of the development costs to be paid by us. The parties will shareequally the costs of any clinical trials of products intended solely forregulatory approval in the U.S., and BMS will be fully responsible for alldevelopment costs that relate solely to regulatory approval in Europe and otherparts of the world. Under the terms of the collaboration, we could receive upto an additional $205.0 million pursuant to the collaboration if all regulatorymilestones are met, and up to $275.0 million in sales-related milestones. Wewill have an option to co-promote and share profits with BMS in the U.S. basedon a 45:55 percentage split. BMS will receive an exclusive license to MDX-010outside of the U.S. and pay us royalties on commercial sales.

In September 2004, we entered into a series ofagreements with Pfizer, Inc. The first agreement amended our existingcollaborative research and license and royalty agreements with Pfizer toprovide for the discovery and development of up to 50 antibody products overten years. Under this amendment, we have the potential to receive researchfunding, license fees and milestone payments (if certain development milestonesare met), as well as royalties on any commercial sales of the products. Thesecond and third agreements were a sublicense from us to Pfizer and across-license of certain patents and patent applications, in each case, solelyrelating to our respective anti-CTLA-4 antibody programs. Under these licenses,we have the potential to receive milestones and royalty payments based uponcommercial sales of any Pfizer anti-CTLA-4 antibody product. In contrast, wehave no future payment obligations to Pfizer in connection with any anti-CTLA-4product we may develop. The fourth agreement was a stock purchase agreementalso related to the anti-CTLA-4 programs. Pursuant to certain of theseagreements, Pfizer made a total initial cash payment to us of $110.0 million,of which $30.0 million was for the purchase of our common stock at a smallpremium to market price at the time we entered into the collaboration.

As of March 1, 2005, we have more than 50partnerships with pharmaceutical and biotechnology companies to jointly developand commercialize products or to enable other companies to use our proprietarytechnology in their development of new therapeutic products. These companiesinclude industry leaders such as Abbott Laboratories, Amgen, Centocor, EliLilly, Human Genome Sciences, MedImmune, Inc., Novartis, Novo Nordisk A/Sand Schering AG.

In addition to our UltiMAbHuman Antibody Development System, we have considerable experience inpreclinical and clinical development as well as in manufacturing antibodies forclinical trials. Our existing manufacturing facility in Annandale, New Jerseycurrently has the capacity to undertake multiple antibody projects concurrentlyfor clinical development purposes, meeting our near-term production demands. Wehave assembled a team of experienced scientific, production, clinical andregulatory personnel to facilitate the discovery and development ofantibody-based products for us and for our partners. We intend to add sales andmarketing and additional manufacturing capabilities as needed.

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**Products in Development**

The following tablesummarizes potential therapeutic indications and development stages for ourproduct candidates and those of our partners (based on publicly availableinformation), and is followed by brief descriptions of each specific program:

***Phase III and PhaseII Product Candidates in Clinical Development***
| **PRODUCT**              | ** ** | ** **                                                | ** ** | **INDICATION** | ** ** | **CLINICAL STATUS**                   | ** ** | **PARTNER** |
|--------------------------|------------|-----------------------------------------------------------|------------|----------------|------------|--------------------------------------------|------------|-------------|
| MDX-010 + MDX-1379  |       | Melanoma                                                  |       | Phase III      |       | Co-developing with BMS*                    |
| MDX-010                  |       | Melanoma,  Prostate, Breast, Renal Cell Cancer and Others |       | Phase II       |       | Co-developing with BMS*                    |
| MDX-060                  |       | Lymphoma                                                  |       | Phase II       |       | Wholly-owned                               |
| MDX-070                  |       | Prostate cancer                                           |       | Phase II       |       | Wholly-owned                               |
| CNTO 148                 |       | Inflammatory diseases                                     |       | Phase II       |       | Centocor** ̈**                         |
| CNTO 1275                |       | Inflammatory diseases                                     |       | Phase II       |       | Centocor** ̈**                         |
| HuMax-CD4                |       | T-cell lymphomas                                          |       | Phase II       |       | Genmab‡                               |
| AMG 714                  |       | Rheumatoid arthritis                                      |       | Phase II       |       | Genmab (under agreement  with Amgen)‡ |
| Amgen Antibody-1         |       | Undisclosed disease                                       |       | Phase II       |       | Amgen** ̈**                            |
| Pfizer CP-675,206        |       | Melanoma  and Others                                      |       | Phase  II      |       | Pfizer§                               |

 

***PhaseI/II Product Candidates in Clinical Development***
| **PRODUCT** | ** ** | ** **            | ** ** | **INDICATION** | ** ** | **CLINICAL STATUS**       | ** ** | **PARTNER** |
|-------------|------------|-----------------------|------------|----------------|------------|--------------------------------|------------|-------------|
| MDX-214     |       | Cancer                |       | Phase I/II     |       | Wholly-owned                   |
| MDX-018     |       | Inflammatory  disease |       | Phase I/II     |       | Co-developing with Genmab |
| HuMax-EGFr  |       | Head and neck  cancer |       | Phase I/II     |       | Genmab‡                   |
| HuMax-CD20  |       | Lymphoma              |       | Phase I/II     |       | Genmab‡                   |

 

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*                    We have theoption to co-promote and share profits in the U.S. We expect to receivemilestone payments as these product candidates move toward product approval,and royalties on product sales outside the U.S., should commercializationoccur.

** ̈**               Weexpect to receive milestone payments, as these product candidates move throughclinical trials, and royalties on product sales, should commercializationoccur.

‡                     We received an equity interest in Genmabin exchange for a license of our proprietary antibody technology. We are notentitled to license fees, milestone payments or royalties from the license ofthis product candidate.

§                  We expect toreceive milestone payments and royalty payments on product sales, shouldcommercialization occur.

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***Phase I andSelected Preclinical Product Candidates***
| **PRODUCT**              | ** ** | ** **                                           | ** ** | **INDICATION** | ** ** | **CLINICAL STATUS**       | ** ** | **PARTNER** |
|--------------------------|------------|------------------------------------------------------|------------|----------------|------------|--------------------------------|------------|-------------|
| MDX-1307                 |       | Cancer                                               |       | Phase I        |       | Wholly-owned†             |
| MDX-066                  | * *   | *C.  difficile*                                      |       | Phase I        |       | Co-developing with MBL         |
| CNTO 95                  |       | Cancer                                               |       | Phase I        |       | Centocor** ̈**             |
| Novartis Antibody-1 |       | Autoimmune  disease                                  |       | Phase I        |       | Novartis Pharma** ̈**      |
| Novartis Antibody-2 |       | Autoimmune  disease                                  |       | Phase I        |       | Novartis Pharma** ̈**      |
| Amgen Antibody-2         |       | Undisclosed disease                                  |       | Phase I        |       | Amgen** ̈**                |
| Amgen Antibody-3         |       | Undisclosed disease                                  |       | Phase I        |       | Amgen** ̈**                |
| FG-3019                  |       | Idiopathic pulmonary  fibrosis; Diabetic nephropathy |       | Phase I        |       | FibroGen** ̈**             |
| HGS-TR2J                 |       | Cancer                                               |       | Phase I        |       | Kirin Brewery Co., Ltd.§  |
| Lilly Antibody           |       | Undisclosed disease                                  |       | Phase I        |       | Eli Lilly** ̈**            |
| MDX-1100                 |       | Inflammation                                         |       | Preclinical    |       | Wholly-owned                   |
| MDX-1103                 |       | Lupus                                                |       | Preclinical    |       | MedImmune*                     |
| MDX-1333                 |       | Lupus                                                |       | Preclinical    |       | MedImmune*                     |
| MDX-1303                 |       | Anthrax infection                                    |       | Preclinical    |       | Co-developing with PharmAthene |

 

***PhaseIII and Phase II Product Candidates in Clinical Development***

**MDX-010 (Anti-CTLA-4 Antibody)***—*Melanoma; Prostate Cancer; Breast Cancer; Renal CellCancer and Others.*   MDX-010 is a fully human antibodythat targets an immune receptor known as CTLA-4. This receptor, which isa protein found on the surface of T-cells, has been shown to diminish ordown-regulate the immune response to tumors or infectious agents. By using afully human antibody to block the activity of CTLA-4, we believe thatpatients’ immune systems may be able to mount a stronger immune responseagainst foreign pathogens and cancers. We initially focused on the use of thisantibody for the treatment of melanoma and prostate cancer and have expandedclinical studies into other indications such as breast cancer, renal cellcancer and HIV. We have also expanded the MDX-010 clinical program toinclude combination studies with chemotherapy, immunotherapy and vaccines. EffectiveJanuary 2005, we are collaborating with BMS to develop and potentiallycommercialize MDX-010 for melanoma and additional disease indications. BMSis responsible for all development outside the U.S. and Europe. For a more detaileddescription of our collaboration with BMS, see the section herein entitled “OurHuman Antibody Partnering Business—BMS.”

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†                    Weare in the process of a possible initial public offering of a portion of thecommon stock of our wholly-owned subsidiary Celldex Therapeutics, Inc., orCelldex. As part of this transaction, in April 2004, we assigned our rights tothis product candidate, including the associated IND, to Celldex. In the eventthis offering is completed, we will not be entitled to license fees ormilestone payments with respect to this product. We may be entitled to receiveroyalty payments on any commercial sales.

** ̈**               Weexpect to receive milestone payments, as these product candidates move throughclinical trials, and royalties on product sales, should commercializationoccur.

§                    Weexpect to receive royalties on product sales, should commercialization occur.

*                    We have theoption to co-promote and share profits in the U.S. We expect to receivemilestone payments as these product candidates move toward product approval,and royalties on product sales outside the U.S., should commercializationoccur.

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We or BMS are currently conducting the following humanclinical trials for this product under our collaboration:

*Melanoma:  *Weare conducting a number of clinical studies investigating MDX-010 for thetreatment of melanoma. Under a SPA agreement with the FDA, a Phase III trial ofMDX-010 in combination with MDX-1379 (a melanoma peptide vaccinebased on gp100) commenced enrollment in September 2004. Approximately 750patients with previously treated Stage III and Stage IV metastatic melanoma areexpected to be enrolled in 75-100 centers worldwide. The patients arerandomized to receive one of three regimens on a 3:1:1 basis, with 450 patientsreceiving a MDX-010/MDX-1379 combination, 150 patients receivingMDX-1379 alone and 150 patients receiving MDX-010 alone. Allpatients receiving MDX-010 will receive a dose of three mg/kg every threeweeks for up to four doses. Best objective response rate (complete and partialresponses) will be used as the basis for an expected initial Biologics LicenseApplication, or BLA, submission. Secondary endpoints of disease progression andsurvival data will continue to be collected from patients being followed in thePhase III trial. Treatment assignment will be blinded, with oversight by anindependent Data Monitoring Committee, or DMC.

We initiated the Phase III clinical trial based ondata from a Phase II clinical trial in which 41 patients with metastaticmelanoma  were treated with one of two doseregimens of MDX-010 in combination with MDX-1379. As of January 5,2005, of the 14 patients treated in the high-dose treatment cohort, twopatients experienced complete responses ongoing for over 28 months, and onepatient experienced a partial response ongoing for over 32 months. Of the 27patients treated in the low-dose treatment cohort, three patients experiencedpartial responses, two of which have had ongoing responses of approximately twoyears. Median survival after diagnosis of metastatic melanoma is six to ninemonths.

In June 2004, the FDAgranted orphan drug designation to MDX-010 for the treatment of high riskStage II, Stage III and Stage IV melanoma, and in October 2004, grantedFast Track status to the development program for MDX-010 in combinationwith MDX-1379 for this indication. Orphan drug designation is granted toproducts that treat rare diseases or conditions that affect fewer than 200,000people in the U.S. and provides eligibility for a special seven-year period ofmarket exclusivity after marketing approval, potential tax credits forresearch, grant funding for research and development, possibly reduced filingfees for marketing applications, and assistance with the review of clinicaltrial protocols. Under the FDA Modernization Act of 1997, designation as a FastTrack product means that the FDA has determined that a new drug or biologic isintended for the treatment of a serious or life-threatening condition anddemonstrates the potential to address unmet medical needs for such condition,and that the FDA will facilitate and expedite the development and review of theapplication for the approval of such product.

*Multi-dose Studies:  *Aspart of our joint MDX-010 clinical development program with BMS, multiplePhase II studies of MDX-010 in melanoma are underway. These studies aredesigned to evaluate tumor and immune responses in patients treated with MDX-010at higher doses.

*ProstateCancer:  *An ongoing Phase II prostate cancer trial isdesigned to study MDX-010 as a single agent and in combination withTaxotere® (docetaxel) and is expected to enroll up to 40 chemotherapy naïvepatients with hormone refractory prostate cancer, or HRPC.

*Breast Cancer:  *Anongoing multi-center, open-label Phase II breast cancer trial is expected toenroll up to 33 patients with metastatic breast cancer. The study is intendedto evaluate tumor and immune responses.

*RenalCell Cancer:  *A Phase II renal cell cancer clinicaltrial is underway. The trial is designed to study MDX-010 as a singleagent and is expected to enroll up to 103 patients with renal cell cancer.

*OtherCancers:  *MDX-010 is under investigation for avariety of cancer indications and exploratory clinical studies are alsounderway for MDX-010 in colorectal cancer, non-Hodgkin’s lymphoma andovarian cancer.

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*HIV Viremia:  *Amulti-center, open-label Phase I clinical trial is underway to enroll up to 18patients with HIV who have an extensive treatment history but whose virus is nolonger suppressed by highly active antiretroviral therapy, or HAART. In thetrial, MDX-010 has been found to have a favorable safety profile and tobe well-tolerated in patients infected with HIV. This trial was expanded in 2004to evaluate safety, tolerability and clinical efficacy.

*AdditionalCombination Studies:  *As part of our joint MDX-010clinical development program with BMS, separate clinical trials of MDX-010in combination with various agents are currently underway. In addition to thePhase III trial of MDX-010 in combination with the MDX-1379melanoma vaccine, there are Phase II clinical trials of MDX-010 incombination with IL-2 and in combination with DTIC dacarbazinechemotherapy for melanoma. There is also a Phase I clinical trial of MDX-010in previously vaccinated metastatic melanoma and ovarian cancer patients and aseparate Phase I clinical trial of MDX-010 in combination with CellGenesys’ GVAX® prostate cancer vaccine.

*Adverse Events:  *Generally,our clinical trials, including our MDX-010 trials, are conducted inpatients with serious life-threatening diseases for whom conventionaltreatments have been unsuccessful or for whom no conventional treatment exists,and in some cases, our product is used in combination with approved therapiesthat themselves have significant adverse event profiles. The most common eventsexperienced in trials of MDX-010, which were anticipated and consistentwith an immune-based mechanism of action due to MDX-010 mediated CTLA-4blockade, now termed Autoimmune Breakthrough Events (ABEs), were diarrhea,rash, reduced pituitary function, colitis and increased liver enzymes. Otherthan a very small number of fatalities, which may or may not be attributable toour product candidates, almost all ABEs resolved with treatment.

**MDX-060(Anti-CD30 Antibody)**—*Lymphoma.  *MDX-060is a fully human antibody that targets CD30, which is a marker for activatedlymphocytes and is present on the malignant cells of Hodgkin’s disease, or HD,and anaplastic large cell lymphoma, or ALCL, as well as other CD30-positivecancers. Through its ability to target CD30 expressing tumor cells, we believethat MDX-060 may facilitate the elimination of such cells by the humanimmune system.

In December 2004, weannounced findings from an ongoing Phase I and II clinical trial of MDX-060in 56 patients with relapsed or refractory HD, ALCL or other CD30-positivelymphomas which indicated that MDX-060 demonstrated clinical activity,including two complete responses and four partial responses. In addition,stable disease was observed in 18 patients. All patients had failed multipleprior treatments and most had failed bone marrow transplantation. One episodeof a possible serious drug-related adverse event (elevated liver transaminaselevels, grade III) was reported in a patient with a history of Graft versusHost Disease, which resolved with steroid treatment. No maximum tolerated dosehas been identified. The Phase II trial has been expanded to further explorethe activity profile of MDX-060. In October 2004, the FDA grantedorphan drug designation to MDX-060 for the treatment of Hodgkin’sdisease.

**MDX-070(Anti-PSMA Antibody)***—ProstateCancer*.   MDX-070 is a fully human antibody that targetsProstate Specific Membrane Antigen, or PSMA. PSMA is a cell surface marker thatis preferentially expressed on malignant prostate tissues and also on bloodvessels in other tumors. In June 2004, we initiated a multi-dose,dose-escalation Phase II clinical study of MDX-070 in patients withhormone refractory prostate cancer, following Phase I clinical trial findingsthat MDX-070 was well-tolerated.

**CNTO 148 (Anti-TNF**a**Antibody)**** ̈**—*Inflammatory Diseases*.   In September 2002,Centocor reported that it was developing CTNO 148, a high affinity, fully humanantibody for inflammatory diseases, including Crohn’s disease, rheumatoidarthritis and uveitis. According to publicly available information, CTNO-148,also known as golimumab, is in full development (Phase II).

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 ̈     We expect to receive milestone payments, as theseproduct candidates move through clinical trials, and royalties onproduct sales, should commercializationoccur.

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**CNTO 1275 (Anti-IL-12Antibody)**** ̈**—*Inflammatory Diseases.*   In September 2002,Centocor reported that it was developing CNTO 1275, a high affinity, fullyhuman antibody for the treatment of inflammatory diseases such as moderate tosevere psoriasis and multiple sclerosis. According to publicly 

**HuMax-CD4(Anti-CD4 Antibody)‡***—T-cellLymphomas.             *Genmabis developing HuMax-CD4 (also known as zanolimumab), a fully human antibodythat targets the CD4 receptor on cells known as T-cells, which are believed tobe involved in promoting autoimmune disease. Genmab has reported thatpreclinical and clinical studies suggest that an antibody that targets CD4 maybe useful for the treatment of cutaneous T-cell lymphomas, or CTCL. In February 2005,Genmab announced updated Phase II duration of response data in CTCL.

In March 2004, Genmabannounced that HuMax-CD4 had received Fast Track status by the FDA for patientswith CTCL. In April, 2004, HuMax-CD4 was designated an orphan drug for thetreatment of CTCL by the European Agency for the Evaluation of MedicinalProducts and, in August 2004, by the FDA. Also, in August 2004,Genmab announced the initiation of a Phase II study of HuMax-CD4  in refractory or relapsed non-cutaneousT-cell lymphoma.

**AMG 714(Anti-IL-15 Antibody)**‡*—RheumatoidArthritis.*   AMG 714, formerly known as HuMax-IL15, is afully human antibody being developed under an agreement between Genmab andAmgen against Interleukin-15 (IL-15), an immune system signalingmolecule that appears early in the cascade of events that ultimately lead toinflammatory disease. According to Amgen, interim data from Phase II clinicaltrials for rheumatoid arthritis are suggestive of a clinical effect in thiscondition. The Phase II trials are expected to be completed in 2005.

**Amgen Antibody-1**** ̈***—Undiscloseddisease*.   We are awareof one antibody product candidate derived from our technology being developedby Amgen that is in Phase II clinical trials for an undisclosed indication.

**Pfizer CP-675,206(Anti-CTLA-4 Antibody)****§***—**Melanoma*.   Pfizeris developing CP-675,206, a fully human antibody for the treatment ofmelanoma. Enrollment is currently underway for a Phase II clinical trial. Thisproduct candidate was not generated using our UltiMAb technology.

***Phase I/II ProductCandidates in Clinical Development***

**MDX-214(Anti-EGFr/CD89 Antibody)**—*Cancer.*   MDX-214is a fusion protein consisting of human epidermal growth factor, or EGF,genetically linked to a fully human antibody fragment that targets CD89, atrigger molecule expressed on immune effector cells. Through the use of EGF,the natural ligand to the epidermal growth factor receptor, or EGFr, MDX-214is believed to have the ability to direct CD89 positive effector cells toEGFr-overexpressing tumor cells, potentially facilitating the interaction ofthe immune system with the cancer. A Phase I/II clinical trial is underway forthe treatment of cancers that overexpress EGFr. The study is expected to enrollup to 48 patients with refractory or relapsed EGFr-expressing cancers,including cancers of the head and neck, breast, colon, prostate, lung and ovary.

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** ̈**               Weexpect to receive milestone payments, as these product candidates move throughclinical trials, and royalties on product sales, should commercializationoccur.

‡       We received an equity interest in Genmab in exchange for alicense of our proprietary antibody technology. We are not entitled to licensefees, milestone payments or royalties from the license of this productcandidate.

§      Weexpect to receive milestone payments and royalty payments on product sales, shouldcommercialization occur.

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**MDX-018 (Anti-inflammatoryAntibody)**—*InflammatoryDisease.  *MDX-018, also known as HuMax-Inflam, is afully human antibody that we are co-developing with Genmab. In December 2004,we and Genmab announced safety and efficacy results from an ongoing Phase I/IIEuropean clinical trial of MDX-018 in patients suffering from anundisclosed autoimmune disease. In a pooled analysis of all dose groups aftereight weeks, a statistically significant mean reduction in disease activity of56% was seen. Neither of the serious adverse events reported (one event ofsyncope and one event of acute myocardial infarction) was determined by theinvestigator to be related to the antibody.

**HuMax-EGFr(Anti-EGFr Antibody)**‡—*Head,  Neck and Other Cancers.*   Accordingto Genmab, HuMax-EGFr, a fully human antibody targeting EGFr, a receptormolecule that has been found in excess on many tumor cells, is underdevelopment for the treatment of carcinoma of the head and neck. In December 2004,Genmab reported partial and stable disease data for a Phase I/II clinical trialfor the treatment of head and neck cancer with HuMax-EGFr.

**HuMax-CD20 (Anti-CD20 Antibody)‡**—*Lymphoma*.   Genmab is developingHuMax-CD20, a fully human antibody targeting CD20, a molecule found on B cells.Two Phase I/II clinical trials using HuMax-CD20 in patients withnon-Hodgkin’s lymphoma, or NHL, and chronic lymphocytic leukemia, or CLL, areongoing. In December 2004, Genmab reported interim complete and partialresponse data in patients with NHL. Also in December 2004, Genmabannounced that this product candidate has been granted Fast Track designationby the FDA for the treatment of CLL and that the FDA had accepted anInvestigational New Drug Application, or IND, for a Phase I/II dose escalationtrial for HuMax-CD20 in patients with active rheumatoid arthritis who havefailed one treatment with one or more disease modifying anti-rheumatic drugs.

***Phase I andSelected Preclinical Product Candidates***

We and our partners haveactive early clinical and preclinical development programs that we anticipatemay lead to the identification of new antibody product candidates and novelcombinations with antibodies currently in development. We expect thesedevelopment efforts to lead to additional clinical candidates in both the nearand long term. Our programs and those of our partners include, among others,the following:

**MDX-1307(Anti-Mannose Receptor/hCG-ß Antibody)†**—*Colorectal, Pancreatic and/or Bladder Cancers.*   MDX-1307(also known as ßHCG-VAC) is afusion protein composed of a mannose receptor-specific human antibodyconjugated to the beta chain of human chorionic gonadotropin, or ßhCG. This therapeutic cancer vaccineis designed to induce antibody and cytotoxic T-cell responses directed atcancer cells in patients with ßhCG-expressing tumors. In February 2004,the FDA accepted our IND application to initiate a dose-escalation, multi-dosePhase I study. This ongoing study is expected to enroll up to 18 patients withmetastatic or locally advanced colorectal, pancreatic or bladder cancers. In September 2004,investigators at the Duke Comprehensive Cancer Center working with us wereawarded a two-year $500,000 grant from the Avon Foundation and the NationalCancer Institute to initiate a Phase I clinical trial with MDX-1307/ßHCG-VAC for the treatment of breastcancer. We have submitted the protocol for this study to the FDA and expect tobegin enrolling patients in 2005.

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‡                    Wereceived an equity interest in Genmab in exchange for a license of ourproprietary antibody technology. We are not entitled to license fees, milestonepayments or royalties from the license of this product candidate.

†                     Weare in the process of a possible initial public offering of a portion of thecommon stock of Celldex. As part of this transaction, in April 2004, weassigned our rights to this product candidate, including the associated IND, toCelldex. In the event this offering is completed, we will not be entitled tolicense fees or milestone payments with respect to this product. We may beentitled to receive royalty payments on any product sales, shouldcommercialization occur.

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**MDX-066 (Anti-Toxin A Antibody)**—*Clostridium difficile Associated Diarrhea.*   MDX-066 (also known asCDA-1) is a fully human antibody thatwe are co-developing with the Massachusetts Biologic Laboratories of theUniversity of Massachusetts Medical School, or MBL. MDX-066 is designed to target Toxin A, atoxin produced by the bacterium *Clostridiumdifficile*, which is associated with a serious and sometimesdeadly form of diarrhea called *Clostridium difficile*associated diarrhea, or CDAD. Preclinical studiessuggest that MDX-066 may neutralize the effects of Toxin A, the toxinassociated with CDAD. We and MBL have initiated a dose-escalation Phase I trialwhich is expected to enroll up to 30 healthy volunteers. The participants willbe monitored for any adverse side effects, and their blood will be tested tomeasure the concentration of the antibody in their systems.

**CNTO 95 (Anti-integrin receptorsAntibody)**** ̈***—Cancer.*   In December 2003, weannounced that Centocor had commenced a dose escalation Phase I trial of CTNO95, a high affinity, fully human antibody targeting the integrin receptors (avß3and avß5) that are implicated in tumor-inducedangiogenesis. Angiogenesis is the formation of new blood vessels and isbelieved to play an important role in tumor growth and metastasis.

**FG-3019 (Anti-CTGF)**** ̈**—*IdiopathicPulmonary Fibrosis and Diabetic Nephropathy.*   FibroGen hasreported that it has completed a Phase I clinical trial of a fully humanantibody therapeutic in patients with idiopathic pulmonary fibrosis and expectsto initiate a Phase II clinical trial in 2005. The product candidate isFibroGen’s lead anti-CTGF (connective tissue growth factor) therapeuticantibody, also known as FG-3019. According to publicly available sources,FG-3019 is also in a Phase Ib clinical trial in type 1 and type 2diabetic patients with early-stage kidney disease.

**MDX-1100 (Anti-IP-10Antibody)**—*InflammatoryDiseases.*   We are developing MDX-1100, a fully humanantibody product candidate that targets IP-10 (also known as CXCL10), achemokine expressed in association with multiple inflammatory diseaseindications such as rheumatoid arthritis, inflammatory bowel disease andmultiple sclerosis. We expect to file an IND application with the FDA in thefirst half of 2005 for a Phase I trial of MDX-1100 in patients withinflammatory bowel disease. We acquired full rights to MDX-1100 as partof our acquisition of Ability Biomedical Corporation in August 2004.

**MDX-1333and MDX-1103 (Anti-Type 1 IFN Antibodies)***—*Systemic Lupus Erythematosus.*   MDX-1333and MDX-1103 are fully human antibodies that target two differentcomponents of the Type 1 IFN pathway, which is believed to be involved withsystemic lupus erythematosus, or SLE, disease activity. MDX-1333 is anantibody that we believe blocks the receptor of Type 1 IFN, and MDX-1103is an antibody that we believe blocks multiple Type 1 IFN subtypes. In November 2004,we announced a collaboration with MedImmune, whereby MedImmune will beresponsible for continued development of these antibodies. Prior to theinitiation of a pivotal trial, we may elect to co-develop and co-promote inreturn for a profit-share in the U.S. We understand that MedImmune expects to file an IND with respect tothese antibodies before the end of 2006.

**MDX-1303 (Anti-Anthrax Antibody)**—*Bacillus anthracis Infection.  *MDX-1303,also known as ValortimTM, is a fully human antibody in preclinical developmentthat we are co-developing with PharmAthene. MDX-1303 is designed toprotect against inhalation anthrax by targeting a protein component of lethaltoxins produced by the *Bacillus anthracis*bacteriumknown as the anthrax 

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** ̈**               Weexpect to receive milestone payments, as these product candidates move throughclinical trials, and royalties on product sales, should commercializationoccur.

*                    Weexpect to receive milestone payments as these products move toward productapproval, and royalties on product sales outside the U.S., shouldcommercialization occur.

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protective antigen.****Inpreclinical studies, MDX-1303 both protected against infection, and, whenadministered some time after exposure, it induced recovery and survival inanimals exposed to lethal doses of inhalation anthrax spores. An INDapplication could be submitted as early as 2005 to commence a Phase I doseescalation clinical trial evaluating the safety, tolerability andpharmacokinetics of MDX-1303 in healthy adults. In 2004, we received twogrants from a division of the National Institutes of Health, or NIH, for up to$7.2 million over three years to support our research and development of MDX-1303.

**Other Product Candidates.  **Weare aware of a number of other antibody product candidates derived from ourUltiMab technology for which our partners have commenced Phase I clinicaltrials, including two Novartis antibodies for the treatment of autoimmunedisease, two Amgen antibodies for undisclosed indications, an anti-TRAIL-R2antibody (HGS-TR2J) being developed by Human Genome Sciences pursuant to alicense with Kirin, and Eli Lilly’s antibody for an undisclosed indication. Noadditional information has been made public regarding any of these Phase Iclinical trials.

In April 2003, we andDiatos SA entered into an agreement in which Diatos licensed from us theexclusive European rights to develop and commercialize a potential new cancertreatment, Super-Leu-Dox. This product consists of doxorubicinconjugated to a proprietary prodrug peptide. Preclinical studies have suggestedthat when prodrug molecules reach the vicinity of a tumor, the peptide iscleaved off by enzymes that are released by the cancer cells, freeing thecytotoxic compounds. The unconjugated compound is believed to then act as ananti-cancer agent, exerting its cytotoxic effects locally on the cancer cells.

**Our Human AntibodyPartnering Business**

As of March 1, 2005,we have more than 50 partnerships with pharmaceutical and biotechnologycompanies to jointly develop and commercialize products or to enable othercompanies to use our UltiMab Human Antibody Development System in theirdevelopment and commercialization of new therapeutic and, in some cases,diagnostic products. We expect that a significant portion of our operatingrevenues over the next few years will come from licensing fees and milestonepayments from our existing and future partners.

***BMS***

In November 2004, we announced a collaborationand co-promotion agreement and a related securities purchase agreement with BMS.This collaboration became effective in January 2005. Under the terms ofthe collaboration, we and BMS have each granted the other certain intellectualproperty licenses and product rights on a worldwide basis in order to enable usto collaborate in research and development of certain therapeuticantibody-based products for the treatment of cancer and other diseases, and, inthe event that further development work is successful, to commercialize anyresulting products. In particular, the collaboration includes a grant by us toBMS of a license to commercialize MDX-010, a fully human antibody productcandidate developed using our UltiMAb Human Antibody Development System, thatis antagonistic to cytotoxic T-lymphocyte antigen 4 (CTLA-4). MDX-010 iscurrently under investigation for the treatment of a broad range of cancers andother diseases. The collaboration also includes the grant by us to BMS of asub-license to MDX-1379, a gp100 melanoma peptide vaccine licensed by us fromthe U.S. Public Health Service, for use with MDX-010 for the treatment ofmetastatic melanoma. The FDA has granted orphan drug designation for MDX-010for the treatment of Stage IIc, Stage III and Stage IV melanoma, and we and BMSare currently conducting a Phase III clinical trial with MDX-010 and MDX-1379combination therapy in Stage III and Stage IV metastatic melanoma patients,under a SPA agreement with the FDA, at multiple sites within the U.S. Thisprogram has been granted Fast Track status by the FDA.

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As part of thecollaboration, we and BMS have committed to an initial multi-year budget ofapproximately $192.0 million to fund the development of MDX-010 as a potentialtreatment for a broad range of cancers. BMS will be responsible for 65% of alldevelopment costs related to clinical trials intended to support regulatoryapproval in both the U.S. and Europe, with the remaining 35% to be paid by us.The parties will share equally the costs of any clinical trials of productsintended solely for regulatory approval in the U.S., and BMS will be fullyresponsible for all development costs that relate solely to regulatory approvalin Europe and other parts of the world.

Under the terms of thecollaboration, we could receive up to $205.0 million from BMS if all regulatorymilestones are met, plus up to an additional $275.0 million in sales-relatedmilestones. We will also have the option to co-promote any products in theU.S., and, if we elect to exercise this option and have participated in thefunding of the applicable Phase III clinical trial(s), we will receive 45% ofany profits from commercial sales. In the event we choose not to exercise ourco-promotion rights, BMS will have exclusive commercial rights in the U.S. andwill pay us royalties on commercial sales. Outside the U.S., BMS will haveexclusive commercial rights and will pay us royalties on commercial sales.

Pursuant to theseagreements, BMS made an initial cash payment to us on January 21, 2005 of$25.0 million. In addition, BMS purchased a total of 2,879,223 unregisteredshares of our common stock at a purchase price equal to $8.6829 per share foran aggregate purchase price of $25.0 million. These shares were issued in aprivate placement pursuant to the exemption from registration provided by Section 4(2) ofthe Securities Act of 1933, as amended. The purchase price represented a smallpremium to the market price on the date we entered into the collaboration. BMShas agreed to a two-year lock-up period with respect to any sales of suchstock. We have no future obligation to register such stock.

Unless terminated earlier,the BMS collaboration will continue for as long as development and/orcommercialization of any collaborative products continue. BMS, however, mayterminate the collaboration on a country-by-country basis at any time and,under certain conditions, on a product-by-product basis, resulting in thereturn of all rights to us with respect to such country and/or product. Inaddition, BMS may terminate our co-promotion rights in the U.S. in the eventthat we fail to satisfy certain performance criteria. We may terminate theBMS collaboration in the event of certain specified material breaches byBMS (in which case product rights would revert to us), and we may terminate BMS’sco-promotion rights in the event that BMS fails to satisfy certainperformance criteria.

***MedImmune***

In November 2004, we entered into a collaborationwith MedImmune to develop antibodies targeting interferon-alpha and the Type Iinterferon receptor 1. The collaboration will initially focus on two fullyhuman antibodies, MDX-1103 and MDX-1333, that are currently in preclinicaldevelopment by us for the treatment of autoimmune diseases, such as systemiclupus erythematosus, SLE, or lupus. We understandthat MedImmune expectsto file INDs on these two antibodies with the FDA before the end of 2006.

Under the terms of thecollaboration with MedImmune, we received an upfront payment of $15.0 millionand will receive potential milestone payments for product candidates placedinto clinical development. MedImmune will be fully responsible for alldevelopment costs up to the point of initiating pivotal trials of any productcandidates. At that point, we have a choice for each potential productcandidate. We can elect to enter into a profit sharing arrangement in the U.S. Ifwe choose profit sharing, we will pay our proportionate share of the futuredevelopment costs and reimburse MedImmune for a proportionate share ofMedImmune’s previous development costs plus interest. If we elect to enter intothe profit sharing arrangement, we will also have the option to enter into aco-promotion relationship with MedImmune in the U.S. In the alternative, we canelect to forego any further funding for the product candidates and MedImmunewill be fully responsible for all costs of development and commercialization. Inthat case, we will be entitled to milestone payments and substantial royaltieson any sales in the U.S. 

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Regardlessof what we elect to do with respect to the U.S. market, in the rest of theworld we are entitled to milestone payments and royalties on any product sales.

***Our Collaborative Partnerships***

We have continued toincrease our access to novel therapeutic targets by establishing collaborationswith other companies and institutions that have identified potentialtherapeutic targets or have created platforms for the identification of suchtargets. We actively seek opportunities to in-license and/or acquire suchtargets and intend to develop novel therapeutic products by producing fullyhuman antibodies that interact with such targets. As of March 1, 2005, wehad agreements with more than 25 collaborators with whom we plan to jointlydevelop and commercialize human antibody products. Typically, a collaboratorwill provide one or more target antigen(s), and we will generate and developantibodies against the antigen(s) using our UltiMAb Human AntibodyDevelopment System. We and our collaborators typically agree to share equallythe costs of clinical development and manufacturing as well as revenues,expenses and profits associated with any products arising under thecollaboration. We believe this allows us to participate in the research anddevelopment of substantially more potential candidates than we could develop onour own if we bore the entire cost of development.

***Our Licensing Partnerships***

Our licensing partners typically obtain licenses toone or more of our antibody generating technologies which allow these partnersto develop and commercialize antibody-based products using our technology. Wecould receive license fees, milestone payments and royalties on product salesin connection with each of these products. Under these licenses, there isusually an initial period during which our licensing partner may elect to enterinto a research license for antibodies to a particular designated target.Subsequently, our partner may elect to obtain a commercial license for one ormore specific monoclonal antibodies. In some cases, once a partner has obtaineda commercial license for monoclonal antibodies to a given target, we can nolonger license our human antibody technology to a different company for thatparticular target. As of March 1, 2005, we had more than 20 licensingpartnerships with partners including industry leaders such as Amgen, Centocor,Pfizer, Eli Lilly, Human Genome Sciences, Abbott Laboratories, Novartis, NovoNordisk and Schering AG.

The financial terms of our licensing partnershipstypically include license fees and a series of milestone payments commencingupon initiation of clinical trials and continuing through to commercialization.These fees and milestones may total up to $7.0 to $10.0 million per antibody ifthe antibody receives approval from the FDA and equivalent foreign agencies. Alicensing partnership may involve multiple antibodies. Under thesepartnerships, we will also receive royalties on any product sales. In somecases, our partners reimburse us for research and development activities weconduct on their behalf. Generally, under the terms of these agreements, ourpartners are responsible for all costs of product development, manufacturingand commercialization of any products.

In September 2004, weentered into a series of agreements with Pfizer. The first agreement, or thePfizer Amendment, amended our existing collaborative research and license androyalty agreements with Pfizer to provide for the discovery and development ofup to 50 antibody products over ten years. The second and third agreements werea sublicense by us to Pfizer and a cross-license, or together, the PfizerLicenses, of certain patents and patent applications solely relating to ourrespective anti-CTLA-4 antibody programs. The fourth agreement was a stockpurchase agreement also related to the anti-CTLA-4 programs. Pursuant tocertain of these agreements, Pfizer made a total initial cash payment to us of$80.0 million and purchased, through its wholly-owned subsidiary PfizerOverseas Pharmaceuticals, a total of 4,827,808 unregistered shares of ourcommon stock at a purchase price equal to $6.21 per share for an aggregatepurchase price of $30.0 million at a small premium to market price at the timewe entered into the collaboration. The shares were issued in a privateplacement pursuant to the exemption from 

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registrationprovided by Section 4(2) of the Securities Act of 1933, as amended. Pfizeralso agreed to a two-year lock-up period with respect to any sales of suchstock. In addition, we have no future obligation to register such stock.

Under the PfizerAmendment, we expect to use our UltiMAb Human Antibody Development System togenerate product candidates to disease-associated targets identified by Pfizer.We will receive standard market rates for performing these antibody-makingservices. The product candidates generated by the collaboration will then betransferred to Pfizer, which will be fully responsible for the worldwidedevelopment and commercialization of such product candidates, including thepayment of all costs and expenses related thereto. We have no future paymentobligations relating to the development and commercialization of these productcandidates. We have the potential to receive research funding, license fees andmilestone payments (if certain development milestones are met), as well asroyalties on any commercial sales of the products.

We and Pfizer haveretained all rights to our respective separate anti-CTLA-4 products. Pursuantto the Pfizer Licenses, which are non-exclusive, we have the potential toreceive milestones and royalty payments based upon commercial sales of anyPfizer anti-CTLA-4 antibody product. In contrast, we have no future paymentobligations to Pfizer in connection with any anti-CTLA-4 product we maydevelop. Both we and Pfizer are independently pursuing the clinical testing of antibodiesto CTLA-4, including our MDX-010 and Pfizer’s CP-675,206, which was notgenerated using our UltiMab technology.

**Kirin and OtherTechnology Licenses**

Effective September 4,2002, we entered into a collaboration and license agreement with Kirin, whichprovides for us to exchange with Kirin certain cross-licenses for each other’stechnology for the development and commercialization of human antibodyproducts. Pursuant to a letter of intent that was superceded by thecollaboration and license agreement, we and Kirin developed the KM-Mouse, aunique crossbred mouse which combines the traits of our HuMAb-Mouse with Kirin’sTC MouseTM. Under the collaboration and license agreement, we are exchangingcross-licenses with Kirin with respect to the KM-Mouse and otherantibody-generating mice. In addition, certain of the cross-licenses grantedunder the collaboration and license agreement are subject to license, milestoneand royalty payments by one party to the other. We are aware of oneanti-TRAIL-R2 antibody (HGS-TR2J), currently in Phase I clinical trials, whichis being developed by HGS pursuant to a license with Kirin. We expect to receiveroyalties on sales of this product, should commercialization occur.

ThroughDecember 31, 2004, we had not made any milestone payments to Kirin,although approximately $1.9 million has been accrued as of December 31,2004 representing a payment due Kirin asa result of our collaboration with Pfizer, and had made licensing and otherpayments of approximately $0.5 million. Based on a total of two products we aredeveloping which use or we believe may use Kirin technology and that (i) arecurrently in clinical trials, or (ii) we anticipate may enter clinicaltrials through the end of 2006, we may be required to make milestone paymentsto Kirin aggregating up to approximately $8.5 million with respect to suchproducts, or a maximum of approximately $4.25 million per product. Our futuremilestone payment obligations to Kirin may or may not be triggered, and mayvary in size, depending on a number of variables, almost all of which arecurrently unknown, including the following:

·       whetheror not a decision is made to request a license from Kirin;

·       thetype of license requested (research or commercial);

·       thesuccess and timing of development efforts and clinical trials of productcandidates covered by any such licenses;

·       thetype of product developed **(**paymentobligations differ depending on whether a product is an *ex vivo* therapeutic, *in vivo* therapeutic, research reagent ordiagnostic**)**; and

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·       otherfinancial provisions of the Kirin agreement that provide for variations in feelevels and netting of certain payments over specified periods of time that mayimpact the total amount potentially payable to Kirin for any particular licensefee or milestone payment.

Whether we may beobligated to make milestone payments to Kirin in the future is subject to thesuccess of our efforts with respect to products we are developing that utilizethe Kirin technology and, accordingly, is inherently uncertain.

Unless terminated earlier,the collaboration and license agreement expires on December 31, 2014. Thecollaboration and license agreement can be terminated by either party in theevent of a material breach by the other party if the breach is not cured duringa specified cure period. In addition, either party may terminate any commerciallicense with respect to a specific biologic target granted to it by the otherparty under the agreement at any time.

Inaddition to our collaboration with Kirin, we have entered into a number ofother agreements that contain licenses of third-party technology which may beused together with our own platform technologies for the generation,development and/or manufacture of our antibody products. In addition, we haveentered into other third-party agreements that contain licenses associated withantibody products that target specific antigens. Many of these agreementscontain milestone payments that become due with respect to productsusing/targeting the licensed technology/antigen only if and when certainspecified pre-commercialization events occur. Not all of our products currentlyunder development trigger such milestone payments. Through December 31,2004, we had made milestone payments of approximately $0.3 million under these agreements. In addition, under theagreements we currently have in place (other than with Kirin), based on a totalof ****five****products we are developing for which milestones are potentially due and that (i) arenow in clinical trials, or (ii) which we anticipate may enter clinicaltrials before the end of 2006, we may be obligated to make future milestonepayments aggregating up to approximately $22.5 million with respect to such products. In general, potentialmilestone payments for our antibody products may or may not be triggeredunder these licenses, and may vary in size, depending on a number of variables,almost all of which are currently uncertain. Typically, the events that triggerthese payments per product include:

·       Submissionof IND(s) or foreign equivalents;

·       Commencementof Phase I, Phase II and/or Phase III clinical trials or foreign equivalents;

·       Submissionof BLA(s) or foreign equivalents; and

·       Receiptof marketing approval(s) to sell products in a particular country orregion.

In addition, the licensesabove may trigger royalty payments in connection with the commercialization ofcertain of our products. To date, we have not made any royalty payments onsales of our products and believe we are at least a few years away from sellingany products that would require us to make any such royalty payments. Whetherwe will be obligated to make milestone or royalty payments in the future issubject to the success of our product development efforts and, accordingly, isinherently uncertain.

**Significant PartnerRevenue**

Revenuefrom partners representing 10% or more of total revenues for the years ended December 31,2002, 2003 and 2004 is as follows:
| **Partner** | ** ** | ** ** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Genmab      |       |       | 37         | %        |       |     | 48         | %        |       |   | 26 | % |   |
| Pfizer      |       |       | —     |     |       |     | —     |     |       |   | 20 | % |   |
| Amgen       |       |       | 3          | %        |       |     | 15         | %        |       |   | 8 | % |   |
| Lilly       |       |       | 11         | %        |       |     | 7          | %        |       |   | 6 | % |   |
| IDM         |       |       | 36         | %        |       |     | —     |     |       |   | — |   |   |

 

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Further informationregarding revenues from partners is included in Notes 10 through 12 to theConsolidated Financial Statements.

**StrategicInvestments**

***Genmab***

In February 1999, we and a group of unrelatedthird party investors formed Genmab, a Danish biotechnology company, to developand commercialize a portfolio of fully human antibodies derived from ourHuMAb-Mouse technology. Initially, the investor group invested approximatelyDKK 35.4 million or $5.3 million (based on the then current exchange rate of$1.00 = DKK 6.73), and received approximately 44% of Genmab’s share capital. Atthe same time, we contributed a license to our human antibody technology forproducing antibodies to particular targets in exchange for comparableconsideration of approximately 44% of Genmab’s share capital. During Genmab’sinitial 12 months of operation, the investor group invested an additional DKK49.0 million or $7.0 million (based on the then current exchange rate of $1.00= DKK 6.99) for additional equity in Genmab. In connection therewith, weexpanded our license to provide Genmab with broader rights to our humanantibody technology in exchange for further equity, thereby maintaining ourlevel of ownership in Genmab’s share capital. Specifically, in exchange forequity, we granted Genmab 16 fully paid-up commercial licenses for antibodyproducts. In addition, in May 2000, Genmab completed a private placementin which it received approximately DKK 321.0 million or $38.4 million (based onthe then current exchange rate of $1.00 = DKK 8.35) from the originalinvestor group and additional new investors. In connection therewith, we madean additional cash investment of $18.0 million in order to maintain ourapproximate 44% ownership interest in Genmab. In August 2000, we receivedadditional equity in connection with the Genomics Agreement (as describedbelow) valued at $2.0 million (based upon the recently completed privateplacement), representing payment for the first year which increased our equityinterest in Genmab to approximately 45%.

In August 2000, we entered into a bindingmemorandum of understanding, or the Genomics Agreement, with Genmab, pursuantto which we granted Genmab rights to make available our transgenic mousetechnologies for multi-target (five or more targets) genomics partnerships tocertain pharmaceutical and biotechnology companies whose headquarters arelocated in Europe. Under the terms of the Genomics Agreement, Genmab may makeavailable our human antibody technology (a) for large multi-target (fiveor more targets) partnerships to any Europe-based company except for: (i) certainMedarex partners, including Novartis, Merck KGaA, Schering, Aventis Behring,Immuno-Design Molecules S/A, or IDM, and Scil Biomedicals GmbH; and (ii) anyEuropean based pharmaceutical company with worldwide revenues in excess of $1billion in 1999, provided, however, that Genmab may make available our humanantibody technology to Sanofi/Synthélabo and Boehringer Ingelheim, and (b) fornon-large multi-target (less than five targets) partnerships, to any companyworldwide. We also have the right to participate in Genmab’s large multi-target(five or more targets) partnerships, thereby sharing in certain costs andcommercial benefits. We retain all rights to make available our technology tocompanies headquartered outside of Europe and to all companies for non-largemulti-target (less than five targets) partnerships in Europe. Certain licensefees, milestones and royalties due to us under our previously existingagreement with Genmab were reduced. The Genomics Agreement also provides that,under certain circumstances, we must negotiate in good faith to manufactureantibodies for Genmab’s partnerships. Finally, the Genomics Agreement grantsGenmab certain rights to access technologies acquired by us from each ofBiosite Incorporated and Kirin, respectively.

The Genomics Agreement hasan initial term of five years with a right exercisable by Genmab to extend theterm for an additional two years. For each year of the agreement and during theterm of any extension, we will receive $2.0 million per year from Genmab. AtGenmab’s option, these amounts may be paid in either cash or capital stock.During each of the years ended December 31, 2002, 2003 and 2004, the 

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Companyrecognized $2.0 million of revenue from this agreement. The initial term ofthis agreement expires in August 2005.

In October 2000,Genmab became a publicly listed company on the Copenhagen Stock Exchange. As aresult of raising the equivalent of $187.0 million (based on the then currentexchange rate) and subsequent investments in Genmab by other parties, ourownership interest in Genmab decreased to approximately 32%. In July 2004,Genmab completed a  privateplacement of 5.6 million shares of its stock, resulting in a further reductionin our ownership interest. As of December 31, 2004, our ownership interestin Genmab was approximately 24.7%. We currently account for our investment inGenmab under the equity method of accounting.

***IDM***

During the second half ofthe 1990s, the focus of our business shifted from humanized and murinemonoclonal antibody-based products to fully human antibody development. As aresult, in July 2000, we entered into an agreement with Immuno-DesignMolecules, S.A., or IDM, whereby we licensed to IDM certain of our humanizedand murine antibodies in exchange for equity units in IDM. Under the agreement,IDM acquired worldwide rights to the use of our MDX-210 anti-HER-2product in connection with cell therapy. IDM also acquired the right to receiveroyalty payments from third party sales of MDX-210 in Europe, outside thefield of cell therapy. Additionally, IDM acquired certain rights in all fieldsto additional products which we are not actively developing at this time.

As a result of thistransaction, we recorded a gain from the transfer of this technology ofapproximately $40.5 million (based upon an independent valuation) as non-cashcontract revenue over a two year period ending in September 2002 forfinancial reporting purposes (see Note 12 to the Consolidated FinancialStatements). In October 2000, we participated in a private placement ofequity interests in IDM and purchased additional equity of approximately $5.2million. Our current equity position in IDM is approximately 8%. In the eventthat we exercise certain warrants held by us to purchase convertible orredeemable bonds of IDM and such bonds are converted or redeemed, our equityposition in IDM would be approximately 23%, based on the shares of IDMcurrently outstanding. These warrants are exercisable between September 2002and September 2010, and such bonds may be converted or redeemed within sixmonths of such exercise.

***Celldex***

We are in the process of apossible initial public offering of a portion of the common stock of ourwholly-owned subsidiary Celldex Therapeutics, Inc. As part of this transaction,we have assigned or licensed to Celldex certain intellectual property relatedto our vaccine technology, including the rights to MDX-1307, one of ourproduct candidates for the treatment of cancer, as well as the IND associatedwith this product which became effective in February 2004. If the offeringis completed, we anticipate that we will continue to hold approximately 70% ofthe outstanding shares of common stock of Celldex. We cannot assure you thatthis transaction will be consummated.

In January 2005,Celldex entered into an asset purchase agreement to acquire substantially allof the assets of Alteris Therapeutics, Inc., a Pennsylvania based privatebiotechnology company. Through its strategic acquisition of the Alteris assets,Celldex will acquire the following assets:

·       Anexclusive worldwide non-royalty bearing, fully paid-up license to the patentscovering a validated proprietary cancer antigen EGFRvIII for use in vaccine andimmunization approaches to prevent, inhibit and treat tumor formation andprogression;

·       Theexclusive rights to commercialize ALT-110, a therapeutic cancer vaccinebased on the EGFRvIII cancer antigen that is currently being studied by anumber of academic institutions in an investigator-initiated Phase II clinicaltrial for brain cancer and an investigator-initiated Phase I clinical trial forvarious other cancers; and

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·       Anexclusive worldwide fee and royalty bearing license to the patent applicationscovering the Rapid Identification of Alternative Splicing system, or RIAS, atarget discovery platform technology.

The acquisition of theAlteris assets is subject to the completion of Celldex’s initial publicoffering and certain other standard closing conditions. A majority of theAlteris stockholders have agreed to vote in favor of the acquisition, subjectto their fiduciary obligations.

**Our Human AntibodyTechnology**

***The UltiMAb Technology Platform***

Antibodies are natural proteins produced in the humanbody by B cells and serve as an important defense against disease. Human Bcells produce millions of different types of antibodies, all with varyingshapes that cause them to attach to and, as a result, neutralize differentdisease targets. For example, certain antibodies seek out and attach toviruses, bacteria and diseased cells, making them susceptible for destructionby the human immune system. Others attach to specific disease targets and blocktheir interaction with other molecules.

Our solution to making antibodies with fully humanprotein sequences is to use transgenic strains of mice in which mouse antibodygene expression is suppressed and effectively replaced with human antibody geneexpression. Because our mice contain genes encoding human antibodies, webelieve the antibodies we generate are more likely to have favorable safetyprofiles and be eliminated less rapidly from the human body, potentiallyreducing the frequency and amount of dosing required to affect disease targets.Additionally, our fully human antibodies do not require any humanization, aprocess that at times has proven to be challenging and time consuming, and canresult in antibodies with lowered binding affinities for their respectivetargets. Our human antibody technology includes (i) our HuMAb-Mousetechnology, (ii) Kirin’s TC Mouse technology, and (iii) the KM-Mousetechnology, a crossbred mouse that combines the characteristics of ourHuMAb-Mouse with those of the TC Mouse. In total these technologies constituteour UltiMAb Human Antibody Development System.

Our HuMAb-Mouse technologyrefers to transgenic mice in which the mouse genes for creating antibodies havebeen disrupted and functionally replaced by human antibody genes. OurHuMAb-Mouse transgenic strains contain key gene sequences from unrearrangedhuman antibody genes that code for both the heavy and light chains of humanantibodies. Because genes determine what proteins are made, our transgenic micemake human antibody proteins. We have thus created mice that have the abilityto make fully human monoclonal antibodies. This result avoids the need tohumanize murine monoclonal antibodies, and because the human genes in ourHuMAb-Mouse are stable, they are passed on to offspring of the mice. Mice can,therefore, be bred indefinitely at relatively low cost and without additionalgenetic engineering. Our HuMAb-Mouse can generate fully human antibodies withaffinities in the picomolar range, as high as 1012.

Through our collaboration with Kirin, we have accessto the Kirin TC Mouse, which contains complete sets of the variable andconstant genes found in the corresponding natural human immunoglobulin loci,including all heavy chain classes that encode all isotypes (IgG1-4, IgA1-2,IgD, IgM and IgE). The TC Mouse also has the ability to make fully humanmonoclonal antibodies. Together with Kirin, we have developed the KM-Mouse, acrossbred mouse that combines the characteristics of our HuMAb-Mouse with thoseof Kirin’s TC Mouse, retaining the capability to produce all human antibodyisotypes with an immune response we believe previously unseen in any humanantibody producing mouse system.

To further enhance ourability to create products from genomics research, we have also coupled theUltiMAb Human Antibody Development System with other technologies, such as ourproprietary toxin 

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technologyfor creating antibody toxin conjugates, some of which we acquired from CorixaCorporation in 2002. Our toxin program includes small molecules known asduocarmycins, which have been designed to overcome multi-drug resistance. Webelieve this program provides us with a platform for generating cytotoxic drugsthat specifically target various cancers.

***The UltiMAb Advantage***

Our unique technology platform constitutes what webelieve to be the most complete technology solution available in themarketplace for generating fully human antibodies and enables us to produceantibodies that we believe set the industry standard in that they are (i) 100%human, (ii) of a very high affinity, and (iii) can be produced andmanufactured relatively quickly and efficiently.

We believe that ourhuman antibody technologies offer the following advantages over other antibodytechnologies:

·       *Fully Human Antibodies*.   Unlikehumanization techniques, our UltiMAb Human Antibody Development Systemgenerates antibodies with 100% human protein sequences, which we believe willpermit the development of products with a favorable safety profile.Additionally, we believe fully human antibody-based products are likely to beeliminated less rapidly from the human body, potentially reducing the frequencyand amount of dosing.

·       *High Affinity Antibodies.  *Our humanantibody technology takes advantage of the human body’s natural affinitymaturation process (whereby antibodies evolve over time to have higher affinityto targets), creating antibodies that can have affinities up to 1,000 timeshigher than the chimeric or humanized antibodies now approved for sale in theU.S.. Our high affinity antibodies have been generated against a wide range oftarget antigens. Our human antibodies are produced without the need for anysubsequent engineering to make them more human—a process that at times hasproven to be challenging and time consuming. Thus, we reduce the risk that anantibody’s structure and function will be altered between the time of theselection of the initial antibody and the time the final version of theantibody is placed into production.

·       *Rapid Development Capabilities.  *Bycombining our technology for creating fully human antibodies with our in-housedevelopment and clinical supply manufacturing expertise, we believe that we canrapidly progress from immunization to the clinic.

·       *Diverse Selection of Antibodies Responding to ManyDisease Targets.  *We believe that our technology has thepotential to generate high affinity human antibodies of all isotypes andsubclasses that recognize more antigen structures. In addition, we have beenable to create large panels of monoclonal antibodies to many potentiallymedically relevant antigens. For a given antigen target, the ability to selecta product candidate from a pool of multiple antibodies could be important inselecting the optimal antibody product candidate for development.

·       *Flexibility for Our Partners.  *Ourhuman antibody technology can be used either in our laboratories or in thelaboratories of our partners. This provides our partners with the flexibilityto incorporate our technology into their research and development programs orto contract with us to produce the antibodies.

·       *Greater Certainty of Intellectual Property Rights.  *Weare not aware of any licenses required to create fully human antibodies usingour UltiMAb technology platform to a target owned by the user except underpatents currently owned or licensed by us. In contrast, various entities holdpatents that may cover the chimerization or humanization of monoclonalantibodies. In addition, several companies and academic institutions havedeveloped phage libraries for the creation of monoclonal antibodies, and anumber of companies and academic research centers have received patents thatmay apply to the creation of phage-derived monoclonal antibodies.

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**Our Research,Development and Manufacturing of Human Antibodies**

Our product development efforts are supported by ourexperience in both generating and developing numerous human antibodies and inmanufacturing clinical supply materials. We believe this experience, togetherwith increased access to novel therapeutic targets, will allow us to rapidlygenerate and develop a large, diverse pipeline of fully human antibodyproducts. We intend to develop some of these product candidates for our ownaccount and some in collaboration with other companies, leveraging theirrespective research and development resources.

Our antibody generation resources include highlytrained teams of scientists in our research facilities located in Milpitas andSunnyvale, California, as well as in Annandale and Bloomsbury, New Jersey, thatwork with our UltiMAb Human Antibody Development System to generate antibodiesfor our own development and for our partners. These scientists are experiencedin molecular biology, protein chemistry, animal biology, pharmacology,toxicology and process science/formulation. Other development resources includein-house medical professionals with product development expertise in oncology,infectious diseases, rheumatology, immunology and pulmonology, and consultingarrangements with leading academic researchers.

In addition to our experience in generatingantibodies, we have considerable experience in clinical development andclinical supply antibody manufacturing. To facilitate the development andcommercialization of antibody-based products for us and for our partners, wehave assembled a team of experienced scientific, production and regulatorypersonnel. This team operates in Bloomsbury, New Jersey, and in our clinicaltrial material manufacturing facility in Annandale, New Jersey.

Our Bloomsbury, New Jersey, research and developmentfacility is situated on approximately 135 acres of land and currently containsspace for approximately 165,000 square feet of laboratory and office space. Wecompleted a renovation of these facilities in 2004 and currently useapproximately 100,000 square feet in these facilities, accommodatingapproximately 225 employees engaged in antibody research, development andmanufacturing.

We lease approximately45,000 square feet of laboratory, clinical trial production and office space inAnnandale, New Jersey, where we manufacture antibody products for use inclinical development and clinical trials conducted by us and by certain of ourpartners. Our Annandale facility currently has the capacity to develop up to 15new antibody projects per year and operates in all respects in accordance withcurrent good manufacturing practices, or cGMP, regulatory requirements for themanufacturing of clinical trial materials. We believe that our existingfacility in Annandale is adequate for the production of materials for clinicaltrials of our products and for providing the support we offer to our partnersin connection with our human antibody technology in the near-term. We arecurrently negotiating with third-party manufacturers to establish clinical andcommercial supply contracts necessary for our future production requirements.In September 2003, we entered into a clinical supply agreement with LonzaGroup Ltd. with respect to MDX-010 and MDX-060, and, together withour partner BMS, we are pursuing ongoing discussions with respect to terms of acommercial supply agreement for MDX-010. We do not currently have thecapability to manufacture our products under development in large commercialquantities and have no experience in commercial-scale manufacturing.

**Our Cross LicenseAgreement With Abgenix**

In 1994, prior to ouracquisition of GenPharm International, Inc., Abgenix, Inc. andrelated entities brought a lawsuit against GenPharm relating to intellectualproperty issues involved in creating transgenic mice capable of generating fullyhuman antibodies. GenPharm filed counterclaims, and the litigation was settledin March 1997 upon the execution of a patent cross-license and settlementagreement. Under the terms of this agreement, GenPharm granted a license, on anon-exclusive basis, to certain patents, patent applications, third partylicenses and inventions pertaining to the development and use of certain 

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transgenicrodents, including mice, that produce fully human antibodies. In exchange forthis license, GenPharm received payments in 1997, and after our acquisition ofGenPharm, we received payments, including interest, from Abgenix and itsrelated parties, which totaled approximately $38.6 million. Neither Abgenix norany of its related entities have any further payment obligations to us underthe agreement. Neither we nor GenPharm were required to make any payments toAbgenix or any related entity under the terms of the agreement. The agreementalso provides us with a non-exclusive license to certain intellectual propertyheld by Abgenix.

**IntellectualProperty**

Proprietary protection for our products, processes andknow-how is important to our business. Our policy is to file patentapplications to protect technology, inventions, and improvements that weconsider important to the development of our business. We also rely upon tradesecrets, know-how and continuing technological innovation to develop andmaintain our competitive position. We plan to aggressively prosecute and defendour patents and proprietary technology.

Currently, we hold a total of 60 issued patents in theU.S., and over 140 issued patents in foreign countries with respect to ourHuMAb-Mouse technology and products, our bispecific molecule technology andproducts, and to our other technology and products.

Of these, 16 of our issued patents and allowed patentapplications in the U.S. and 26 of our issued patents in foreign countries,including European countries, Japan, Korea, New Zealand and Australia, amongothers, relate to various aspects of our HuMAb-Mouse technology and products.These patents, almost all of which are in the same patent family, claim thetransgene, the transgenic mouse, methods of obtaining high affinity antibodies,and compositions of matter for high affinity antibodies, among others. Thesepatents have expiration dates beginning in 2008. We also have more than 150related pending U.S. and foreign patent applications directed to variousaspects of our HuMAb-Mouse technology and products. These include patentapplications describing several of our particular human antibody productcandidates, such as our anti-PSMA, anti-CTLA-4 and anti-CD30 productcandidates.

Additionally, we hold exclusive and non-exclusivelicenses to various pertinent technologies relating to our HuMAb-Mousetechnology. For example, these technologies include microinjection of transgeneDNA, homologous recombination, chromosome transfer, yeast artificial chromosometransgene technology and other relevant technologies. We also hold an exclusivesub-license to intellectual property created at the University of Californiarelating to aspects of our anti-CTLA-4 antibody product and have licensesfrom BMS and Pfizer concerning other intellectual property related to ouranti-CTLA-4 product. We have a license from the U.S. Public Health Servicewith respect to MDX-1379. We have a license from medac GmbH relating tocertain aspects of our anti-CD30 antibody product. We have been assigned patentrights from Northwest Biotherapeutics, Inc. relating to aspects of ouranti-PSMA antibody product and have a non-exclusive license from MillenniumPharmaceuticals, Inc. relating to aspects of our anti-PSMA antibodyproduct. We have been assigned patent rights relating to our anti-interferonalpha receptor antibody product by Nufarm, B.V., Medisup International N.V.,Pharma Pacific Pty. Ltd and Laboratorie European de Biotechnologie. We haveacquired patent rights relating to our anti-IP-10 antibody productthrough our acquisition of Ability Biomedical. In addition, we have acquiredpatent rights from Corixa relating to tumor-activated prodrugs and Ultra-PotentToxins.

We own registrations forthe following trademarks in the listed jurisdications: Medarex® in the U.S.,the European Union, Canada, Australia and Switzerland; HuMAb-Mouse®, KM-Mouse®,UltiMAb Human Antibody Development System®, and Putting the Immune System toWork® in the U.S. and European Union; GenPharm® and Trans-Phage Technology® inthe U.S.; and UltiMAb® in the European Union.

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**Regulatory Issues**

***General***

The production,distribution and marketing of products employing our technology, and ourresearch and development activities, are subject to extensive governmentalregulation in the U.S. and in other countries. In the U.S., our products areregulated both as drugs and as biological products and are subject to theFederal Food, Drug, and Cosmetic Act, as amended, the Public Health ServiceAct, also as amended, and the regulations promulgated under these statutes, aswell as to other federal, state, and local statutes and regulations. These laws,and similar laws outside the U.S., govern the clinical and non-clinicaltesting, manufacture, safety, effectiveness, approval, labeling, distribution,sale, import, export, storage, record keeping, reporting, advertising andpromotion of our products. Product development and approval within thisregulatory framework, if successful, will take many years and involve theexpenditure of substantial resources. Violations of regulatory requirements atany stage may result in various adverse consequences, including FDA’s and otherhealth authorities’ delay in approving or refusal to approve a product.Violations of regulatory requirements also may result in enforcement actions,including withdrawal of approval, labeling restrictions, seizure of products,fines, injunctions and/or civil or criminal penalties.

The following paragraphsprovide further information on certain legal and regulatory issues with aparticular potential to affect our operations or the future marketing ofproducts employing our technology.

*Research,Development, and Product Approval Process.  *Theresearch, development, and approval process in the U.S. and elsewhere isintensive and rigorous, and generally takes many years. The typical processrequired by the FDA before a therapeutic drug or biological product may bemarketed in the U.S. includes:

·       submissionto the FDA of an application for an IND, which must become effective beforehuman clinical trials may commence;

·       preliminaryhuman clinical studies to evaluate the drug or biologic and its manner of use;adequate and well-controlled human clinical trials to establish (i) for adrug, whether it is safe and effective for its intended uses, and (ii) fora biological product, whether it is also pure and potent;

·       FDAreview of whether the facility in which the drug or biologic is manufactured,processed, packed or held meets standards designed to assure the product’scontinued quality; and

·       submissionof an appropriate product application to the FDA, and approval of theapplication by the FDA.

During preclinicaltesting, studies are performed with respect to the chemical and physicalproperties of candidate formulations, and are subject to good laboratorypractices requirements. Biological testing is typically done in animal modelsto demonstrate the activity of the compound against the targeted disease orcondition and to assess the apparent effects of the new product candidate onvarious organ systems, as well as its relative therapeutic effectiveness andsafety. An IND must be submitted to the FDA and become effective before studiesin humans may commence.

Clinical trial programs inhumans generally follow a three-phase process. Typically, Phase I studies areconducted in small numbers of healthy volunteers or, on occasion, in patientsafflicted with the target disease, to determine the metabolic andpharmacological action of the product candidate in humans, the side effectsassociated with increasing doses, and, if possible, to gain early evidence ofeffectiveness. In Phase II, studies are generally conducted in larger groups ofpatients having the target disease or condition in order to validate theclinical endpoint, and to obtain preliminary data on the effectiveness of theproduct candidate and optimal dosing. This phase also helps determine furtherthe safety profile of the product candidate. In Phase III, large-scale clinicaltrials are generally conducted in hundreds of patients having 

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thetarget disease or condition to provide sufficient data for the statisticalproof of effectiveness and safety of the product candidate as required by U.S.and foreign regulatory agencies.

In the case of productsfor cancer and certain other life-threatening diseases, the initial humantesting may be done in patients with the disease rather than in healthyvolunteers. Because these patients are already afflicted with the targetdisease or condition, it is possible that such studies will provide resultstraditionally obtained in Phase II studies. These studies are often referred toas “Phase I/II” studies. Notwithstanding the foregoing, even if patients participatein initial human testing and a Phase I/II study carried out, the sponsor isstill responsible for obtaining all the data usually obtained in both Phase Iand Phase II studies.

Before proceeding with astudy, sponsors may seek a written agreement from the FDA regarding the design,size, and conduct of a clinical trial. This is known as a Special ProtocolAssessment, or SPA. We and BMS are developing MDX-010 in combination withMDX-1379 under an SPA for the treatment of certain severe types of melanoma. Amongother things, SPAs can cover clinical studies for pivotal trials whose datawill form the primary basis to establish a product’s efficacy. Where the FDAagrees to an SPA, the agreement may not be changed by either the sponsor or theFDA except if the sponsor and the FDA agree to a change, or a senior FDAofficial determines that a substantial scientific issue essential todetermining the safety or effectiveness of the product was identified after thetesting began. SPAs thus help establish up-front agreement with the FDA aboutthe adequacy of the design of a clinical trial to support a regulatoryapproval, but the agreement is not binding if new circumstances arise. There isno guarantee that a study will ultimately be adequate to support an approvaleven if the study is subject to an SPA.

U.S. law requires thatstudies conducted to support approval for product marketing be “adequate andwell controlled.” In general, this means that either a placebo or a productalready approved for the treatment of the disease or condition under study mustbe used as a reference control. Studies must also be conducted in compliancewith good clinical practice, or GCP, requirements, and informed consent must beobtained from all study subjects.

The clinical trial processfor a new compound can take 10 years or more to complete, and there can be noassurance that the data collected will be in compliance with GCP requirements,will demonstrate that the product is safe or effective, or, in the case of abiologic product, pure and potent as well, or will provide sufficient data tosupport FDA approval of the product. The FDA may prevent clinical trials frombeginning or may place clinical trials on hold at any point in this process if,among other reasons, it concludes that clinical subjects are being exposed toan unacceptable health risk. Trials may also be prevented from beginning or maybe terminated by institutional (in most cases, hospital) review boards, whomust review and approve all research involving human subjects. Side effects oradverse events that are reported during clinical trials can delay, impede, orprevent marketing authorization. Similarly, adverse events that are reportedafter marketing authorization can result in additional limitations being placedon a product’s use and, potentially, withdrawal of the product from the market.Any adverse event, either before or after marketing authorization, can resultin product liability claims against the company.

During the course of, andfollowing the completion of clinical trials, the data are analyzed to determinewhether the trials successfully demonstrated safety and effectiveness, andwhether a product approval application may be submitted. In the U.S., if theproduct is regulated as a drug, a New Drug Application, or NDA, must besubmitted and approved before commercial marketing may begin. If the product,such as an antibody, is regulated as a biologic, a Biologic LicenseApplication, or BLA, must be submitted and approved before commercial marketingmay begin. The FDA Center for Drug Evaluation and Research, or CDER, hasresponsibility for the review and approval of drugs, and also hasresponsibility for the review and approval of certain therapeutic biologicssuch as antibodies, cytokines, growth factors, enzymes, interferons and certainproteins. The FDA Center for Biologics Evaluation and Research, or CBER, hasresponsibility for other biologics, including vaccines. Based on thisdistribution of 

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responsibility,we expect that most of our products will be reviewed by CDER. The NDA or BLAmust include a substantial amount of data and other information concerning thesafety and effectiveness (and, in the case of a biologic, purity and potency)of the compound from laboratory, animal and human clinical testing, as well asdata and information on manufacturing, product stability, and proposed productlabeling.

Each domestic and foreignbiopharmaceutical manufacturing establishment, including any contractmanufacturers we may decide to use, must be listed in the NDA or BLA and mustbe registered with the FDA. The application will not be approved until the FDAconducts a manufacturing inspection, approves the applicable manufacturingprocess for the drug or biological product, and determines that the facility isin compliance with current good manufacturing practice, or cGMP, requirements.If the manufacturing facilities and processes fail to pass the FDA inspection,we will not receive approval to market these products.

Under the PrescriptionDrug User Fee Act, as amended, the FDA receives fees for reviewing a BLA or NDAand supplements thereto, as well as annual fees for commercial manufacturingestablishments and for approved products. These fees can be significant. TheNDA or BLA review fee alone can exceed $0.67 million, although certain limiteddeferrals, waivers and reductions may be available.

Under applicable laws andFDA regulations, each NDA or BLA submitted for FDA approval is usually reviewedfor administrative completeness and reviewability within 45 to 60 daysfollowing submission of the application. If deemed complete, the FDA will “file”the NDA or BLA, thereby triggering substantive review of the application. TheFDA can refuse to file any NDA or BLA that it deems incomplete or not properlyreviewable. If the FDA refuses to file an application, the FDA will retain 25%of the user fee as a penalty. The FDA has established performance goals for thereview of NDAs and BLAs—six months for priority applications and 10 months forregular applications. However, the FDA is not legally required to complete itsreview within these periods and these performance goals may change over time.Moreover, the outcome of the review, even if generally favorable, typically isnot an actual approval but an “action letter” that describes additional workthat must be done before the application can be approved. The FDA’s review ofan application may involve review and recommendations by an independent FDAadvisory committee. Even if the FDA approves a product, it may limit theapproved therapeutic uses for the product as described in the product labeling,require that warning statements be included in the product labeling, requirethat additional studies be conducted following approval as a condition of theapproval, impose restrictions and conditions on product distribution,prescribing or dispensing in the form of a risk management plan, or otherwiselimit the scope of any approval.

Significant legal andregulatory requirements also apply after FDA approval to market under an NDA orBLA. These include, among other things, requirements related to adverse eventand other reporting, product advertising and promotion, and ongoing adherenceto cGMPs, as well as the need to submit appropriate new or supplementalapplications and obtain FDA approval for certain changes to the approvedproduct, product labeling or manufacturing process. The FDA also enforces therequirements of the Prescription Drug Marketing Act, or PDMA, which, amongother things, imposes various requirements in connection with the distributionof product samples to physicians.

The regulatory frameworkapplicable to the production, distribution, marketing, sale and/orreimbursement of our products may change significantly from the currentdescriptions provided herein in the time that it may take for any of ourproducts to reach a point at which an NDA or BLA is approved.

Overall research,development and approval times depend on a number of factors, including theperiod of review at the FDA, the number of questions posed by the FDA duringreview, how long it takes to respond to the FDA questions, the severity orlife-threatening nature of the disease in question, the availability ofalternative treatments, the availability of clinical investigators and eligiblepatients, the rate of enrollment of patients in clinical trials and the risksand benefits demonstrated in the clinical trials.

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*Treatment IND Status.  *TreatmentINDs are used to make new drugs and biologic products available to desperatelyill patients as early in the drug development process as possible, beforegeneral marketing is approved and begins. The FDA may allow an investigationaldrug to be used under a treatment IND if there is preliminary evidence of thedrug’s efficacy and the drug is intended to treat a serious or life-threateningdisease for which no comparable or satisfactory alternative therapy exists. Weor our collaborative partners may be able to recover some of the costs ofproduction, manufacture, research, development and handling prior to marketapproval if patients are allowed to be charged for the product used in suchstudies. There are specific conditions that must be met before a sponsor maycharge for an investigational product, including notifying the FDA in writingin advance. The FDA may notify the sponsor that it is not authorized to chargefor the product.

*Drugs and Biologics for Serious orLife-Threatening Illnesses.  *The Federal Food, Drug andCosmetic Act, as amended, and FDA regulations provide certain mechanisms forthe accelerated “Fast Track” approval of products intended to treat serious orlife-threatening illnesses which have been studied for safety and effectivenessand which demonstrate the potential to address unmet medical needs. Theprocedures permit early consultation and commitment from the FDA regarding thepreclinical and clinical studies necessary to gain marketing approval.Provisions of this regulatory framework also permit, in certain cases, NDAs orBLAs to be approved on the basis of valid surrogate markers of producteffectiveness, thus accelerating the normal approval process. MDX-010 incombination with MDX-1379 has been granted Fast Track status for thetreatment of high risk Stage II, Stage III and Stage IV melanoma. Genmab’sHuMax-CD4 has been granted Fast Track status for the treatment of CTCL. Certainother products employing our human antibody technology might also qualify forthis accelerated regulatory procedure. However, we cannot make assurances thatthe FDA will agree, and, even if the FDA agrees that these products qualify foraccelerated approval procedures, the FDA may deny approval of our drugs or mayrequire that additional studies be required before approval. The FDA would alsolikely require us to perform post-approval, or Phase IV, studies as a conditionof such early approval. In addition, the FDA may impose restrictions ondistribution and/or promotion in connection with any accelerated approval, andmay withdraw approval if post-approval studies do not confirm the intendedclinical benefit or safety of the product. Special rules would also applyto the submission to FDA of advertising and promotional materials prior to use.

*Orphan Drugs.  *Underthe Orphan Drug Act, special incentives exist for companies to develop productsfor rare diseases or conditions, which are defined to include those diseases orconditions that affect fewer than 200,000 people in the U.S. Companies may requestthat FDA grant a drug orphan designation prior to approval. Products designatedas orphan drugs are eligible for special grant funding for research anddevelopment, FDA assistance with the review of clinical trial protocols,potential tax credits for research, reduced filing fees for marketingapplications, and a special seven-year period of market exclusivity aftermarketing approval. Orphan drug exclusivity prevents FDA approval ofapplications by others for the same drug and the designated orphan disease orcondition. FDA may approve a subsequent application from another person if FDAdetermines that the application is for a different drug or different use, or ifFDA determines that the subsequent product is clinically superior, or that theholder of the initial orphan drug approval cannot assure the availability ofsufficient quantities of the drug to meet the public’s need. A grant of anorphan designation is not a guarantee that a product will be approved. If asponsor receives orphan drug exclusivity upon approval, there can be noassurance that the exclusivity will prevent another entity from receivingapproval for the same or a similar drug for the same or other uses.

***Other U.S. Regulatory Requirements***

In the U.S., the research, manufacturing, distribution,sale, and promotion of drug and biological products are potentially subject toregulation by various federal, state and local authorities in addition to 

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the FDA, including theCenters for Medicare and Medicaid Services (formerly the Health Care FinancingAdministration), other divisions of the U.S. Department of Health and HumanServices (e.g., the Office of Inspector General), the U.S. Department ofJustice and individual U.S. Attorney offices within the Department of Justice,and state and local governments. For example, sales, marketing andscientific/educational grant programs must comply with the Medicare-MedicaidAnti-Fraud and Abuse Act, as amended, the False Claims Act, also as amended,the privacy provisions of the Health Insurance Portability and AccountabilityAct, or HIPAA, and similar state laws. Pricing and rebate programs must complywith the Medicaid rebate requirements of the Omnibus Budget Reconciliation Actof 1990, as amended, and the Veterans Health Care Act of 1992, as amended. Ifproducts are made available to authorized users of the Federal Supply Scheduleof the General Services Administration, additional laws and requirements apply.All of these activities are also potentially subject to federal and stateconsumer protection and unfair competition laws.

Moreover, we are now, andmay become subject to, additional federal, state and local laws, regulationsand policies relating to safe working conditions, laboratory practices, theexperimental use of animals, and/or the use, storage, handling, transportationand disposal of human tissue, waste and hazardous substances, includingradioactive and toxic materials and infectious disease agents used inconjunction with our research work.

***Foreign Regulatory Requirements***

We and our collaborativepartners are subject to widely varying foreign regulations, which may be quitedifferent from those of the FDA, governing clinical trials, productregistration and approval, and pharmaceutical sales. Whether or not FDAapproval has been obtained, we must obtain a separate approval for a product bythe comparable regulatory authorities of foreign countries prior to thecommencement of product marketing in these countries. In certain countries,regulatory authorities also establish pricing and reimbursement criteria. Theapproval process varies from country to country, and the time may be longer orshorter than that required for FDA approval. In addition, under current U.S.law, there are significant restrictions on the export of products not approvedby the FDA, depending on the country involved and the status of the product inthat country.

***Reimbursement and Pricing Controls***

Inmany of the markets where we or our collaborative partners would commercializea product following regulatory approval, the prices of pharmaceutical productsare subject to direct price controls (by law) and to drug reimbursementprograms with varying price control mechanisms. Public and private health care payors control costs and influence drugpricing through a variety of mechanisms, including through negotiatingdiscounts with the manufacturers and through the use of tiered formularies andother mechanisms that provide preferential access to certain drugs over otherswithin a therapeutic class. Payors also set other criteria to govern the usesof a drug that will be deemed medically appropriate and therefore reimbursed orotherwise covered. In particular, many public and private health care payorslimit reimbursement and coverage to the uses of a drug that are either approvedby the FDA or that are supported by other appropriate evidence (for example,published medical literature) and appear in a recognized drug compendium. Drugcompendia are publications that summarize the available medical evidence forparticular drug products and identify which uses of a drug are supported or notsupported by the available evidence, whether or not such uses have beenapproved by the FDA. For example, in the case of Medicare coverage forphysician-administered oncology drugs, the Omnibus Budget Reconciliation Act of1993, or OBRA ‘93, with certain exceptions, prohibits Medicare carriers fromrefusing to cover unapproved uses of an FDA-approved drug if the unapproved useis supported by one or more citations in the American Hospital FormularyService Drug Information, the American Medical Association Drug 

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Evaluations,or the U.S. Pharmacopoeia Drug Information. Another commonly cited compendium,for example under Medicaid, is the DRUGDEX Information System.

**Competition**

We face competition in several different forms. Ourhuman antibody generation activities currently face competition from severalcompanies and from other technologies. In addition, the actual products beingdeveloped by us or by our partners also face actual and potential competition.

The development of biotechnology and pharmaceuticalproducts is a highly competitive business subject to rapid technologicalchange. We know of many pharmaceutical and biotechnology companies conductingresearch or development on therapeutic monoclonal antibody products. Many ofthese companies have commenced clinical trials with, and several havesuccessfully commercialized, antibody products. Some of these companies arealso pursuing product development efforts for the same disease areas or againstthe same biological targets as we or our partners are pursuing.

We face competition from many companies that providethe services of generating monoclonal antibodies for antibody-basedtherapeutics. One competitor with respect to our human antibody technology isAbgenix. As a result of the cross-licensing agreement with GenPharm (our whollyowned subsidiary since 1997), Abgenix offers to potential partners the use ofits transgenic mouse known as XenoMouseTM to generate fully human monoclonalantibodies. In addition, we have entered into agreements with each of Kirin andGenmab, respectively, which grant these companies licenses to our proprietarytransgenic mouse technology platform, enabling them to compete with us inoffering antibody generation and development services in certain markets.Certain of our other partners who have licensed our transgenic mouse technologyalso could compete with us with respect to the development of certainantibodies. Other companies are also developing, or have developed technologiesfor generating human or partially human antibodies. For example, XenerexBiosciences (a subsidiary of Avanir Pharmaceuticals) and XTL BiopharmaceuticalsLtd. each have developed technology that, according to Xenerex and XTL, willallow them to generate fully human monoclonal antibodies in functionallymodified mice. Several companies are developing, or have developed,technologies not involving animal immunization that result in libraries composedof numerous human antibody sequences. For example, phage and yeast displaytechnology is being used by companies such as Cambridge Antibody TechnologyGroup plc, or CAT, Dyax Corp., Genetastix Corporation and MorphoSys AG todevelop therapeutic products comprising human antibody sequences. Companiessuch as Johnson & Johnson, MedImmune, Amgen, Biogen Idec, Inc.,Novartis, Genentech, Inc., Protein Design Labs, Inc., AbbottLaboratories and Wyeth have generated therapeutic antibody-based products thatare currently in development or on the market and are derived from recombinantDNA that comprise human antibody sequences. Numerous additional companies aredeveloping therapeutic products comprising human antibody components.

We are aware of several pharmaceutical andbiotechnology companies actively engaged in research and development ofantibody-based products that have commenced clinical trials with, or havesuccessfully commercialized, antibody products. Some of these companies, suchas Pfizer, ImClone Systems Incorporated, Johnson & Johnson, Wyeth,Amgen, Abbott, UCB Pharma, Biogen Idec, Abgenix, CAT, MorphoSys AG, Tanox, Inc.,Genentech, Human Genome Sciences, Millennium and Protein Design Labs areaddressing diseases and disease indications that are being targeted by us andcertain of our partners. For example, Pfizer is developing CP-675,206, anantibody to CTLA-4, in potential competition with our product candidate,MDX-010. Several of these companies are also licensees of our transgenicmouse technology. Many of these companies and institutions, either alone ortogether with their partners, have substantially greater financial resourcesand larger research and development divisions than we have. In addition, manyof these competitors, either alone or together with their partners, havesubstantially greater experience than us in developing pharmaceutical products,undertaking preclinical testing and human clinical trials, obtaining FDA andother regulatory approvals of such products and the manufacturing and 

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marketing of suchproducts. Accordingly, our competitors may succeed in obtaining patentprotection, receiving FDA or European Union marketing approval andcommercializing products more rapidly than us.

Other technologies canalso be applied to the treatment of the diseases that we or our partners arepursuing. For example, immunoconjugates—monoclonal antibodies linked to toxinsor radioactive isotopes—are being developed by others. In addition, theapplication of recombinant DNA technology to develop potential productsconsisting of proteins (such as growth factors, hormones, enzymes, receptorfragments and fusion proteins, or cytokines) that do not occur normally in thebody, or occur only in small amounts, has been underway for some time. Includedin this group are interleukins such as IL-2 and IL-11, interferonsalpha, beta and gamma, colony stimulating factors such as G-CSF and GM-CSF,clotting factors, growth hormones, erythropoeitin, DNAse, tPA,glucocerebrosidase, PDGF, and a number of other biological response modifiers.Continuing development of new chemical entities and other drugs by largepharmaceutical companies also carries with it the potential for discovery ofagents for treating disease indications targeted by drugs that we or ourpartners are developing.

**Marketing**

Our potential products may be marketed and sold inseveral possible ways, depending on the product, including: solely by us,jointly by us and our collaborative partners, or solely by or on behalf of ourlicensing partners. Marketing and sales rights with respect to MDX-010are subject to the terms of our collaboration with BMS. We believe that a smallsales force could successfully introduce and detail certain of our potentialproducts that have concentrated marketplaces. Other products, however, mayrequire a larger sales force. Currently, we have no sales force. We may developour own internal sales force for these products if they proceed tocommercialization.

We acknowledge that thesuccessful marketing of some of our potential products is beyond thecapabilities of all but the largest pharmaceutical organizations. For thisreason, we along with our collaborative partners may license to majorpharmaceutical companies individual products serving large markets or thosethat will be widely distributed and/or detailed geographically, if the productsare approved by the FDA. Our collaboration with BMS is an example of this kindof relationship.

**Employees**

As of December 31,2004, we employed 435 regular, full and part-time employees, of whomapproximately 363 are engaged in research and development activities. There are72 employees involved in business development, legal, finance and otheradministrative functions. None of our employees is covered by a collectivebargaining agreement. We have entered into employment contracts with certain ofour executive officers. Our success will depend in large part upon our abilityto attract and retain employees. We face competition for employees from othercompanies, research and academic institutions, government agencies and otherorganizations. We believe we maintain good relations with our employees.

**AvailableInformation**

We were incorporated in the State of New Jersey on July 8,1987. Our principal executive offices are located at 707 State Road, Princeton,New Jersey 08540. Our telephone number is (609) 430-2880.

We file annual, quarterly and current reports, proxystatements and other information with the Securities and Exchange Commission,or SEC. You may read and copy our reports, proxy statements and otherinformation at the SEC’s public reference room at Room 1024, 450 FifthStreet N.W., Washington, D.C. 20549. You can request copies of thesedocuments by writing to the SEC and paying a fee for the copying cost. Pleasecall the SEC at 1-800-SEC-0330 for more information about theoperation of the public reference room. Our SEC filings are also available atthe SEC’s web site at *www.sec.gov*. In

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addition, you can read andcopy our SEC filings at the office of the National Association of SecuritiesDealers, Inc. at 1735 K Street N.W., Washington, D.C. 20006.

You may obtain a free copyof our annual reports on Form 10-K, quarterly reports on Form 10-Qand current reports on Form 8-K and amendments to those reports onthe day of filing with the SEC on our website on the World Wide Web atwww.medarex.com, by contacting the Investor Relations Department at ourcorporate offices by calling (609) 430-2880 or by sending an e-mailmessage to *information@medarex.com*. You can directrequests for literature to the information request section on our website.

**FORWARD LOOKINGINFORMATION AND RISK FACTORSTHAT MAY AFFECT FUTURE RESULTS**

ThisAnnual Report contains forward-looking statements within the meaning ofSections 27A and 21E of the Securities Exchange Act of 1934, as amended,including statements regarding our expectations, beliefs, intentions, orstrategies regarding the future. Statements preceded by, followed by or thatotherwise include the words “believes”, “expects”, “anticipates”, “intends”, “estimates”,“plans”, “forecasts”, “is likely to”, “projected” and similar expressions orfuture conditional verbs such as “should”, “would”, “may”, and “could” aregenerally forward-looking in nature and not historical facts.**Forward-looking statements include, withoutlimitation, statements in this section, and in the sections entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” “Business”and elsewhere in this Annual Report regarding, among other things, uncertaintiesrelating to our technology; history of operating losses and anticipation offuture losses; uncertainty of product development; need for additional capitaland uncertainty of change; uncertainty of patent and proprietary rights;management of growth, and risks of acquiring new technologies; uncertaintiesrelated to clinical trials; government regulation and uncertainty of obtainingregulatory approval; dependence on key personnel; dependence on researchcollaborators and scientific advisors; uncertainty of health care reformmeasures and third-party reimbursement and risk of product liability. Allforward-looking statements included in this Annual Report are based oninformation available to us as of the date hereof, and we do not assume anyobligation to update any such forward-looking statements. Our actual resultsmay differ materially from the results discussed in the forward-lookingstatements. Among the factors that could cause actual results to differmaterially are the factors detailed below. Accordingly, in addition to theother information in this Annual Report, the following factors should beconsidered carefully. References to our products, business, financial resultsor financial condition should be considered to refer to us and our subsidiariesunless the context otherwise requires.

**Our productcandidates have not been and may not ever be approved for sale and/orcommercialized, and many are in early stages of development.**

Our human antibody technology is a new approach to thegeneration of antibody-based therapeutic products. Active product candidatesemploying our human antibody technology have not moved beyond clinicaldevelopment. Based on public disclosures, regulatory applications, includingINDs, have been submitted to the FDA or comparable foreign authorities, for 22product candidates derived from our UltiMAb platform. To date, neither we norour partners have any product candidates employing our human antibodytechnology that have been approved for sale by the FDA or comparable foreign authoritiesand/or commercialized. In addition, we are not aware of any commercializedfully human monoclonal antibody therapeutic products that have been generatedfrom any technologies similar to ours. Product candidates employing our humanantibody technology may not advance beyond clinical development or demonstrateclinical safety and effectiveness.

Our human antibodytechnology may not generate antibodies against all the antigens to which it isexposed in an efficient and timely manner, if at all. If our human antibodytechnology fails to generate 

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antibodyproduct candidates, or if we or our partners do not succeed in the developmentof products employing our antibody technology, those product candidates may notbe approved or commercialized and our business, financial condition and resultsof operations may be materially harmed.

**Successfuldevelopment of our products is uncertain. To date, no revenues have beengenerated from the commercial sale of our products and our products may notgenerate revenues in the future.**

Our development of current and future productcandidates is subject to the risks of failure inherent in the development ofnew pharmaceutical products and products based on new technologies. These risksinclude:

·       delaysin product development, clinical testing or manufacturing;

·       unplannedexpenditures in product development, clinical testing or manufacturing;

·       failurein clinical trials or failure to receive regulatory approvals;

·       emergenceof superior or equivalent products;

·       inabilityto manufacture on our own, or through others, product candidates on acommercial scale;

·       inabilityto market products due to third-party proprietary rights;

·       electionby our partners not to pursue product development;

·       failureby our partners to develop products successfully; and

·       failureto achieve market acceptance.

In certain instances, we have experienced delays inour product development and clinical testing as a result of slower thananticipated patient recruitment. In a number of instances, we have terminatedthe development of certain products in the early stages of human clinicaltesting due to a lack of effectiveness. In addition, we determined not tocontinue the development of one late-stage product candidate due to both a lackof effectiveness and unforeseen safety issues that arose in clinical testing.This product did not employ our core fully human antibody technology.

Because of these risks, our research and developmentefforts or those of our partners may not result in any commercially viableproducts. If a significant portion of these development efforts are notsuccessfully completed, required regulatory approvals are not obtained or anyapproved products are not commercially successful, our business, financialcondition and results of operations may be materially harmed.

Becausewe and our partners have not begun commercial sales of our products, ourrevenue and profit potential are unproven and our limited operating historymakes it difficult for an investor to evaluate our business and prospects. Ourtechnology may not result in any meaningful benefits to our current orpotential partners. No revenues have been generated from the commercial sale ofour products, and our products may not generate revenues in the future.Further, due to our limited operating history, we have difficulty accuratelyforecasting our revenue. Our business and prospects should be considered inlight of the heightened risks and unexpected expenses and problems we may faceas a company in an early stage of development in a new and rapidly evolvingindustry.

**We have incurred large operating losses and weanticipate that these losses will continue.**

We have incurred largeoperating losses and we anticipate that these losses will continue for theforeseeable future. In particular, as of December 31, 2004, we had anaccumulated deficit of approximately $599.4 million. Our net loss was $186.5million for the year ended December 31, 2004. Our losses have resultedprincipally from:

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·       researchand development costs relating to the development of our technology andantibody product candidates;

·       costsassociated with the establishment of our laboratory and manufacturingfacilities and manufacturing of products; and

·       generaland administrative costs relating to our operations.

We intend tocontinue to make significant investments in:

·       researchand development;

·       preclinicaltesting and clinical trials;

·       establishingnew collaborations; and

·       newtechnologies.

In addition, we may be obligated to make milestonepayments on certain of our products as they progress through the clinical trialprocess.

We do not know when or if we or our partners willcomplete any pending or future product development efforts, receive regulatoryapproval or successfully commercialize any approved products.

We maycontinue to incur substantial operating losses even if our revenues increase.As a result, we cannot predict the extent of future losses or the time requiredfor us to achieve profitability, if at all.

**Our operatingresults may vary significantly from period-to-period, which may result in adecrease in the price of our securities.**

Our future revenuesand operating results are expected to vary significantly from period-to-perioddue to a number of factors. Many of these factors are outside of our control.These factors include:

·       thetiming of the commencement, completion or termination of partnershipagreements;

·       theintroduction of new products and services by us, our partners or ourcompetitors;

·       delaysin, or termination of, preclinical testing and clinical trials;

·       changesin regulatory requirements for clinical trials;

·       costsand expenses associated with preclinical testing and clinical trials;

·       thetiming of regulatory approvals, if any;

·       salesand marketing expenses; and

·       theamount and timing of operating costs and capital expenditures relating to theexpansion of our business operations and facilities.

Period-to-period comparisons of our results ofoperations may not be relied upon as an indication of future performance.

It is possible that in some future periods, ouroperating results may be below expectations of analysts and investors. If thishappens, the price of our securities may decrease.

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**We may needsubstantial additional funding. We may not be able to obtain sufficient fundsto grow our business or continue our operations.**

We will continue toexpend substantial resources for research and development, including costsassociated with developing our antibody technology and conducting preclinicaltesting and clinical trials. Our future capital requirements will depend on anumber of factors, including, by way of example:

·       thesize and complexity of research and development programs;

·       thescope and results of preclinical testing and clinical trials;

·       theretention of existing and establishment of further partnerships, if any;

·       continuedscientific progress in our research and development programs;

·       thetime and expense involved in seeking regulatory approvals;

·       competingtechnological and market developments;

·       thetime and expense of filing and prosecuting patent applications and enforcingpatent claims; and

·       thecost of establishing manufacturing capabilities, conducting commercializationactivities and arrangements and in-licensing products.

We believe our currentsources of liquidity will be sufficient to meet our near term operating, debtservice and capital requirements for at least the next 24 months. To the extentour 2.25% convertible senior notes due in 2011 are converted into shares of ourcommon stock on or before their maturity date, we will have use of that portionof the principal amount of the notes to fund our on-going operations. In anyevent, we may require additional financing within this time frame and may raisefunds through public or private financings, line of credit arrangements,collaborative relationships and/or other methods. The use of cash on hand orother financial alternatives will depend on several factors including, but notlimited to, the future success of our products in clinical development, theprevailing interest rate environment, and access to the capital markets. We maybe unable to raise sufficient funds to complete development of any of ourproduct candidates, to continue operations or to repay our debt obligations atmaturity. As a result, we may face delay, reduction or elimination of researchand development programs or preclinical or clinical trials, in which case ourbusiness, financial condition or results of operations may be materiallyharmed.

**We have asignificant amount of debt and may have insufficient cash to satisfy our debtservice obligations. In addition, the amount of our debt could impede ouroperations and flexibility.**

We have $150.0 million in aggregate principal amountof our 2.25% convertible senior notes outstanding, which, unless converted toshares of our common stock or redeemed, will mature in 2011. Our ability tomake payments on these notes and our other obligations will depend on ourfuture operating performance and ability to generate cash and may also dependon our ability to obtain additional debt or equity financing. Generally, duringthe last five years, our operating cash flows were negative and insufficient tocover our fixed charges. Our ability to generate sufficient operating cash flowto service our indebtedness, including the notes, and fund our operatingrequirements will depend on our ability, alone or with others, to successfullydevelop, manufacture, and obtain required regulatory approvals and market ourproduct candidates, as well as other factors, including general economic,financial, competitive, legislative and regulatory conditions, some of whichare beyond our control. If we are unable to generate sufficient operating cashflow to service our indebtedness and fund our operating requirements, we mayneed to obtain additional debt or equity financing to do so, which may not beavailable to us on satisfactory terms or at all. In addition, if newindebtedness is incurred, the risks relating to our ability to service ourindebtedness that we face could intensify.

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Even if we are ableto meet our debt service obligations, the amount of debt we have couldadversely affect us in a number of ways, including by:

·       limitingour ability to obtain any necessary financing in the future for working capital,capital expenditures, debt service requirements or other purposes;

·       limitingour flexibility in planning for, or reacting to, changes in our business;

·       placingus at a competitive disadvantage relative to our competitors who have lowerlevels of debt;

·       makingus more vulnerable to a downturn in our business or the economy generally; and

·       requiringus to use a substantial portion of our cash to pay principal and interest onour debt, instead of applying those funds to other purposes such as working capitaland capital expenditures.

**Clinical trialsrequired for our product candidates are expensive and time-consuming, and theiroutcome is uncertain.**

In order to obtain FDA approval to market a new drugproduct, we or our partners must demonstrate proof of safety and efficacy inhumans. To meet these requirements, we or our partners will have to conductextensive preclinical testing and “adequate and well-controlled” clinicaltrials. Conducting clinical trials is a lengthy, time-consuming and expensiveprocess. The length of time may vary substantially according to the type,complexity, novelty and intended use of the product candidate, and often can beseveral years or more per trial. Delays associated with products for which weare directly conducting preclinical or clinical trials may cause us to incuradditional operating expenses. Moreover, we will continue to be affected bydelays associated with the preclinical testing and clinical trials of certainproduct candidates conducted by our partners over which we have no control. Thecommencement and rate of completion of clinical trials may be delayed by manyfactors, including, for example:

·       theinability to manufacture sufficient quantities of qualified materials undercurrent good manufacturing practices, or cGMPs, for use in clinical trials;

·       theneed or desire to modify our manufacturing processes;

·       slowerthan expected rates of patient recruitment;

·       theinability to adequately observe patients after treatment;

·       changesin regulatory requirements for clinical trials;

·       thelack of effectiveness during the clinical trials;

·       unforeseensafety issues;

·       delays,suspension, or termination of the clinical trials due to the institutionalreview board responsible for overseeing the study at a particular study site;and

·       governmentor regulatory delays or “clinical holds” requiring suspension or termination ofthe trials.

Even if we obtain positive results from preclinical orclinical trials, we may not achieve the same success in future trials. Clinicaltrials may not demonstrate statistically sufficient safety and effectiveness toobtain the requisite regulatory approvals for product candidates employing ourhuman antibody technology. In a number of instances, we have terminated thedevelopment of certain products in the early stages of human clinical testingdue to a lack of effectiveness. In addition, we have determined not to continuethe development of one late-stage product candidate due to both a lack ofeffectiveness and 

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unforeseen safety issuesthat arose in clinical testing. This product did not employ our core fullyhuman antibody technology.

Generally, our clinical trials, including our melanomatrials, are conducted in patients with serious life-threatening diseases forwhom conventional treatments have been unsuccessful or for whom no conventionaltreatment exists, and in some cases, our product is used in combination withapproved therapies that themselves have significant adverse event profiles.During the course of treatment, these patients could suffer adverse medicalevents or die for reasons that may or may not be related to our products. Themost common adverse events associated with our trials of MDX-010 haveconsisted of flu-like symptoms such as fever, chills and nausea. These eventswere expected and generally responded to standard medical therapy. In addition,some patients have experienced anticipated drug-related ABEs, such as diarrhea,rash, reduced pituitary function, colitis and increased liver enzymes, rangingfrom mild in most cases to severe in a very small number of instances. Otherthan a very small number of fatalities, which may or may not be attributable toour product candidate, most ABEs resolved with treatment. We cannot assure youthat additional safety issues will not arise with respect to our products inthe future.

To date, we haveexperienced slower than expected rates of patient recruitment in certain of ourclinical trials. As a result, in certain instances, we have experienced delaysin our product development and clinical testing. In addition, data obtainedfrom clinical trials of our products to date have been insufficient todemonstrate safety and efficacy under applicable FDA guidelines. As a result,these data will not support an application for regulatory approval withoutfurther clinical trials. Clinical trials that we conduct or that third-partiesconduct on our behalf may not demonstrate sufficient safety and efficacy toobtain the requisite regulatory approvals for any of our product candidates. Weexpect to commence new clinical trials from time to time in the course of ourbusiness as our product development work continues. The failure of clinicaltrials to demonstrate safety and effectiveness for our desired indicationscould harm the development of that product candidate as well as other productcandidates. Any change in, or termination of, our clinical trials couldmaterially harm our business, financial condition and results of operations.

**Success in earlyclinical trials may not be indicative of results obtained in later trials.**

Results of our early clinical trials and those of ourpartners using our human antibody technology are based on a limited number ofpatients and may, upon review, be revised or negated by authorities or by laterstage clinical results. Historically, the results from preclinical testing andearly clinical trials have often not been predictive of results obtained inlater clinical trials. A number of new drugs and biologics have shown promisingresults in initial clinical trials, but subsequently failed to establishsufficient safety and effectiveness data to obtain necessary regulatoryapprovals. Data obtained from preclinical and clinical activities are subjectto varying interpretations, which may delay, limit or prevent regulatoryapproval.

In addition, regulatorydelays or rejections may be encountered as a result of many factors, includingchanges in regulatory policy during the period of product development. Forexample, the FDA has moved several product categories previously regulated bythe agency’s Center for Biologics Evaluation and Research, or CBER, to theagency’s Center for Drug Evaluation and Research, or CDER. These productcategories include antibodies as well as cytokines, growth factors, enzymes,interferons and certain proteins. FDA has also recently announced a plannedreorganization within CDER to create a new consolidated office for the reviewof oncology therapies. Oncology therapies are currently reviewed by differentoffices within CDER. The effect that these reorganizations at the FDA will haveon clinical trials and product approval outcomes or timing is uncertain, butcould cause delays or other currently unforeseeable effects.

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**Product candidatesemploying our antibody technology may fail to gain market acceptance.**

Even if clinicaltrials demonstrate the safety, effectiveness, potency and purity of productsdeveloped by us or our partners using our technology and all regulatoryapprovals have been obtained, product candidates employing our antibodytechnology may not gain market acceptance among physicians, patients,third-party payors and the medical community. For example, the current deliverysystems for antibody-based therapeutic products are intravenous andsubcutaneous injection, which are generally less well received by patients thantablet or capsule delivery. The degree of market acceptance of any productcandidates employing our technology will depend on a number of factors,including, for example:

·       establishmentand demonstration of clinical efficacy, potency and safety, especially ascompared to conventional treatments;

·       cost-effectiveness;

·       alternativetreatment methods;

·       reimbursementpolicies of government and third-party payors; and

·       marketingand distribution support for our product candidates.

In addition, many of our activities involve geneticengineering in animals and animal testing, controversial subjects which havereceived adverse publicity from animal rights activists and various otherinterest groups. Such adverse publicity could decrease market acceptance ofproducts employing our technology.

If products employing ourtechnology do not achieve significant market acceptance, our business,financial condition and results of operations may be materially harmed.

**The successfulcommercialization of our antibody products will depend on obtaining coverageand reimbursement for use of these products from third-party payors.**

Sales of pharmaceutical products largely depend on thereimbursement of patients’ medical expenses by government health care programsand private health insurers. Without the financial support of the governmentsor third-party payors, the market for products employing our human antibodytechnology will be limited. These 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. We may need toconduct post-marketing studies in order to demonstrate the cost-effectivenessof our products. Such studies may require us to dedicate a significant amountof resources. Our project candidates may not be considered cost-effective.Third-party payors may not reimburse sales of products employing our human antibodytechnology, or enable us or our partners to sell them at profitable prices.

Third-party payors controlhealth care costs by limiting both coverage and the level of reimbursement fornew health care products. In the future, the U.S. government may instituteprice controls and further limits on Medicare and Medicaid spending.Internationally, medical reimbursement systems vary with differing degrees ofregulation. Pricing controls and reimbursement limitations could affect thepayments we receive from sales of products generated using our human antibodytechnology. These variations could harm our ability and the ability of ourpartners to sell products generated using our human antibody technology incommercially acceptable quantities at profitable prices.

**We may experiencepressure to lower the prices of any prescription pharmaceutical products we areable to obtain approval for because of new and/or proposed federal legislation.**

Federal legislation,enacted in December 2003, has added an outpatient prescription drugbenefit to Medicare, effective January 2006. In the interim, Congress hasestablished a discount drug card program 

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forMedicare beneficiaries. Both benefits will be provided primarily throughprivate entities, which will attempt to negotiate price concessions frompharmaceutical manufacturers. These negotiations may increase pressures tolower prices. While the new law specifically prohibits the U.S. government frominterfering in price negotiations between manufacturers and Medicare drug plansponsors, some members of Congress are pursuing legislation that would permitthe U.S. government to use its enormous purchasing power to demand discountsfrom pharmaceutical companies, thereby creating *de facto*price controls on prescription drugs. In addition, the new law containstriggers for Congressional consideration of cost containment measures forMedicare in the event Medicare cost increases exceed a certain level. Thesecost containment measures could include some sorts of limitations on prescriptiondrug prices. The new legislation also modified the methodology used forreimbursement of physician administered and certain other drugs already coveredunder Medicare Part B. This new methodology would likely apply to certainof our products if and when commercialized. Experience with new reimbursementmethodology is limited, and could be subject to change in the future. Ourresults of operations could be materially harmed by the different features ofthe Medicare prescription drug coverage legislation, by the potential effect ofsuch legislation on amounts that private insurers will pay for our products andby other healthcare reforms that may be enacted or adopted in the future.

**We may faceincreased competition from products imported from Canada or other countries.**

Any products we are able to commercialize may besubject to competition from lower priced versions of such products andcompeting products from Canada, Mexico, and other countries where there aregovernment price controls or other market dynamics that make the products lowerpriced. The ability of patients and other customers to obtain these lowerpriced imports has grown significantly as a result of the Internet, anexpansion of pharmacies in Canada and elsewhere targeted to American purchasers,the increase in U.S.-based businesses affiliated with Canadian pharmaciesmarketing to American purchasers, and other factors. Many of these foreignimports are illegal under current law. However, the volume of imports is nowsignificant due to the limited enforcement resources of the FDA and the U.S.Customs Service, and the pressure in the current political environment topermit the imports as a mechanism for expanding access to lower pricedmedicines.

In addition, in December 2003, federal legislationwas enacted to change U.S. import laws and expand the ability to import lowerpriced versions of our and competing products from Canada, where there aregovernment price controls. These changes to the import laws will not takeeffect unless and until the Secretary of Health and Human Services certifiesthat the changes will lead to substantial savings for consumers and will notcreate a public health safety issue. The previous Secretary of Health and HumanServices determined that there was not a basis to make such a certification atthis time. However, it is possible that a subsequent Secretary could make thecertification in the future. In addition, legislative proposals have been madeto implement the changes to the import laws without any certification, and tobroaden permissible imports in other ways. Even if the changes to the importlaws do not take effect, and other changes are not enacted, imports from Canadaand elsewhere may continue to increase due to market and political forces, andthe limited enforcement resources of the FDA, the Customs Service, and othergovernment agencies. For example, state and local governments have suggestedthat they may import drugs from Canada for employees covered by state healthplans or others, and some have already put such plans in place.

The importation of foreignproducts could adversely affect our profitability. This potential impact couldbecome more significant in the future, and the impact could be even greater ifthere is a further change in the law or if state or local governments takefurther steps to import products from abroad.

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**Our manufacturingfacilities may not continue to meet regulatory requirements and have limitedcapacity.**

Before approving a new drug or biologic product, theFDA requires that the facilities at which the product will be manufactured arein compliance with current good manufacturing practices, or cGMP requirements.To be successful, our therapeutic products must be manufactured for developmentand, following approval, in commercial quantities, in compliance withregulatory requirements and at acceptable costs. While we believe our currentfacilities are adequate for the limited production of product candidates forclinical trials, our facilities are not adequate to produce sufficientquantities of any products for commercial sale.

If we are unable to establish and maintain amanufacturing facility or secure third-party manufacturing capacity within ourplanned time and cost parameters, the development and sales of our products andour financial performance may be materially harmed.

We may alsoencounter problems with the following:

·       productionyields;

·       qualitycontrol and assurance;

·       shortagesof qualified personnel;

·       compliancewith FDA regulations, including the demonstration of purity and potency;

·       changesin FDA requirements;

·       productioncosts; and/or

·       developmentof advanced manufacturing techniques and process controls.

We are aware of only a limited number of companies ona worldwide basis that operate manufacturing facilities in which our productcandidates can be manufactured under cGMP regulations, a requirement for allpharmaceutical products. We are currently pursuing late-stage clinical andcommercial supply agreements with cGMP-compliant third-party manufacturers withavailable capacity to meet our internal production timetables. We have enteredinto clinical supply agreements with Lonza Group Ltd. with respect to MDX-010and MDX-060, and, together with our partner BMS, we are pursuing ongoingdiscussions with respect to terms of a commercial supply agreement for MDX-010.We do not currently have the capability to manufacture our products underdevelopment in large commercial quantities and have no experience incommercial-scale manufacturing. It would take a substantial period of time fora contract facility that has not been producing antibodies to begin producingantibodies under cGMP regulations. We cannot make assurances that we will beable to contract with such companies for clinical and/or commercial supply onacceptable terms or in a timely manner, if at all. Moreover, even if we areable to enter into clinical and/or commercial supply manufacturing arrangementswith cGMP-compliant third-party manufacturers, we cannot assure you that suchmanufacturers will be able to produce products that are substantiallyequivalent to the product candidates that we have produced in our ownfacilities and used in our clinical trials. If such companies are not able toproduce products that are substantially equivalent to our product candidates,the progress of our clinical trials and/or commercialization of our productsmay be delayed and our business, financial condition and results of operationsmay be materially harmed.

In addition, we and anythird-party manufacturer will be required to register manufacturing facilitieswith the FDA and other regulatory authorities. The facilities will be subjectto inspections confirming compliance with cGMP or other regulations. If we orany of our third-party manufacturers fail to maintain regulatory compliance,the FDA can impose regulatory sanctions including, among other things, refusalto approve a pending application for a new drug product or biologic product, orrevocation of a pre-existing approval. As a result, our business, financialcondition and results of operations may be materially harmed.

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**We are, in part, dependent on our partners’willingness and/or ability to devote resources to the development of productcandidates or otherwise support our business as contemplated in our partnershipagreements.**

We depend, in part, on ourpartners to support our business, including the development of productsgenerated through the use of our antibody technology. In particular, under theterms of our collaboration and co-promotion agreement with BMS, we have granteda license to commercialize our lead product candidate, MDX-010, to BMS for thetreatment of a broad range of cancers. We have also granted to BMS asub-license to MDX-1379 for use in combination with MDX-010 for the treatmentof metastatic melanoma. The successful development and commercialization ofMDX-010 is dependent, in large part, on the actions of BMS, which are outsideof our control. The failure of BMS to act in accordance with its obligationsunder the collaboration and co-promotion agreement may cause us to incursubstantial additional costs in order to develop and commercialize MDX-010,which could have a material adverse effect on our business.

Wecurrently, or in the future may, rely on our partners to:

·       accessproprietary antigens for the development of product candidates;

·       accessskills and information that we do not possess;

·       fundour research and development activities;

·       manufactureproducts;

·       fundand conduct preclinical testing and clinical trials;

·       seekand obtain regulatory approvals for product candidates; and/or

·       commercializeand market future products.

Ourdependence on our partners subjects us to a number of risks, including:

·       ourpartners have significant discretion whether to pursue planned activities;

·       wecannot control the quantity and nature of the resources our partners may devoteto product candidates;

·       ourpartners may not develop products generated using our antibody technology asexpected; and

·       businesscombinations or significant changes in a partner’s business strategy mayadversely affect that partner’s willingness or ability to continue to pursuethese product candidates.

If we do not realize thecontemplated benefits from our partners, our business, financial condition andresults of operations may be materially harmed.

**Our existing partnerships may be terminated, and wemay not be able to establish additional partnerships.**

Ourlicensing partners generally have the right to terminate our partnerships atany time. Our ability to continue our current partnerships and to enter intoadditional partnerships is dependent in large part on our ability tosuccessfully demonstrate that our UltiMAb technology is an attractive method ofdeveloping fully human antibody therapeutic products. Existing or potentialpartners may pursue alternative technologies, including those of ourcompetitors, or enter into other transactions that could make a collaborationwith us less attractive to them. For example, if an existing partner purchasesor is purchased by a company that is one of our competitors, that company couldbe less willing to continue its collaboration with us. In addition, a companythat has a strategy of purchasing companies rather than entering intopartnership arrangements might have less incentive to enter into acollaboration agreement with us. Moreover, disputes may arise with respect tothe ownership of rights to any technology or products 

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developed with any current or future partner. Lengthynegotiations with potential new partners or disagreements between us and ourpartners may lead to delays or termination in the research, development orcommercialization of product candidates. If we are not able to establishadditional partnerships on terms that are favorable to us or if a significantnumber of our existing partnerships are terminated and we cannot replace them,we may be required to increase our internal product development andcommercialization efforts. This would likely:

·       limitthe number of product candidates that we will be able to develop andcommercialize;

·       significantlyincrease our need for capital; and/or

·       placeadditional strain on management’s time.

Any of the above maymaterially harm our business, financial condition and results of operations.

**Due to the size of our equity interest in Genmab, wemust include a portion of its income and losses in our financial statements.**

Due to the size of ourequity interest in Genmab, we are currently required to account for ourinterest in Genmab under the equity method of accounting, which provides thatwe must include a portion of Genmab’s income and losses equal to our percentageequity interest in Genmab in our consolidated financial statements. For theyears ended December 31, 2002, 2003 and 2004, our share of Genmab’s losseswere approximately $19.6 million (excluding the $31.0 million impairment chargediscussed below), $15.0 million and $19.8 million, respectively. As such, thecurrent value of our equity interest in Genmab as determined by the equitymethod of accounting is $1.6 million, which we expect to be reduced to zero inthe first quarter of 2005 and, accordingly, recognition of our share of Genmab’snet losses will be suspended.

**Our strategic investments in our partners whosesecurities are publicly traded expose us to equity price risk and, in addition,investments in our partners may be deemed impaired, which would affect ourresults of operations.**

We have a number ofstrategic investments which expose us to equity price risk. These investmentsmay become impaired which would adversely affect our results of operations.

We are exposed to equityprice risk on our strategic investments in our publicly-traded partners,including Genmab and Amgen, Inc., and as part of our business strategy, wemay choose to make additional similar investments in public companies in thefuture. As these investments are the result of strategic alliances with ourcollaborative partners, we typically do not attempt to reduce or eliminate ourmarket exposure of these types of strategic investments. Under SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities,” theseinvestments are designated as available-for-sale and are reported at fair valueon our consolidated balance sheet. Unrealized holding gains and losses onavailable-for-sale securities are generally excluded from earnings and reportedwithin other comprehensive income which is a separate component of shareholders’equity. Under our accounting policy, marketable equity securities are generallyconsidered to be impaired if their fair value is less than our cost basis insuch securities for more than six months, or some other period in light of theparticular facts and circumstances surrounding the investment. If a decline inthe fair value of available-for-sale securities is considered to be other thantemporary, the cost basis of the security is written down to fair value as anew cost basis and the amount of the write-down is included in earnings as animpairment charge. For the year ended December 31, 2002, we recordedimpairment charges of approximately $40.5 million (of which approximately $31.0million related to Genmab) on our strategic investments in publicly tradedcompanies. During the year ended December 31, 2003, no impairment chargeswere recorded related to the value of our investments in publicly tradedcompanies. For the year ended December 31, 2004, we recorded impairmentcharges of $0.2 million on investments in partners whose securities arepublicly traded. If we 

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deemthese investments to be further impaired at the end of any future reportingperiod, we may incur additional impairment charges on these investments.

In addition, we haveinvestments in several of our partners whose securities are not publiclytraded, such as IDM. The value of our investments in these companies areinherently more difficult to estimate than our investments in publicly tradedcompanies. We estimate the value of these investments by using informationacquired from industry trends, the management of these companies, financialstatements, and other external sources. Specifically, our determination of anypotential impairment of the value of privately held securities includes ananalysis of the following for each company on a periodic basis: review ofinterim and year-end financial statements, cash position and overall rate ofcash used to support operations, the progress and development of technology andproduct platform, the per share value of subsequent financing and potentialstrategic alternatives. Based on the information acquired through thesesources, we record an investment impairment charge when we believe aninvestment has experienced a decline in value that is considered to be otherthan temporary. For the years ended December 31, 2002, 2003 and 2004, werecorded impairment charges of approximately $2.4 million, $1.4 million and$7.1 million, respectively, on our investments in privately-held companies. Approximately$7.0 million of the 2004 impairment charge related to IDM. Future adversechanges in market conditions or adverse changes in operating results of thesecompanies may also require an impairment charge in the future.

**We are dependent on our key personnel.**

We are highly dependent onthe members of our scientific and management staff. If we are not able toretain any of these persons, our business may suffer. In particular, we dependon the services of Donald L. Drakeman, J.D., Ph.D., our President and ChiefExecutive Officer; Nils Lonberg, Ph.D., our Senior Vice President andScientific Director; and Geoffrey M. Nichol, M.D., MBA., our Senior VicePresident, Product Development. We maintain a key man life insurance policy forDr. Drakeman in the amount of $2.0 million and maintain key man lifeinsurance policies in the amount of $1.0 million for each of Dr. Lonbergand Dr. Nichol. We have entered into employment agreements with Dr. Drakemanand all of our other executive officers, which expire in January, 2007.Thereafter, all of these agreements are automatically renewed for successiveone (1) year terms unless we or the employee elect not to renew.

For us to pursue productdevelopment, marketing and commercialization plans, we will need to hireadditional qualified scientific personnel to perform research and development.We will also need to hire personnel with expertise in clinical testing,government regulation, manufacturing, sales and marketing, relevant law andfinance. 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. If we are not able to attract and retain qualified personnel, ourbusiness, financial condition and results of operations may be materiallyharmed.

**We depend on patents and proprietary rights.**

Oursuccess depends in part on our ability to:

·       applyfor, obtain, protect and enforce patents;

·       protecttrade secrets;

·       operatewithout infringing upon the proprietary rights of others; and

·       in-licensecertain technologies.

We will be able to protectour proprietary rights from unauthorized use by third parties only to theextent that our proprietary rights are covered by valid and enforceable patentsor are effectively maintained as trade secrets. We protect our proprietaryposition by filing U.S. and foreign patent applications related to our proprietarytechnology, inventions and improvements that are important to the 

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developmentof our business. While a number of patents have been issued in the U.S. andEurope relating to our human antibody technology, we may not be able to obtainpatent protection in other countries. Our pending patent applications, those wemay file in the future, or those we may license from third parties, may notresult in patents being issued or enforceable. The patent position ofbiotechnology companies involves complex legal and factual questions and,therefore, enforceability cannot be predicted with certainty. Patents, ifissued, may be challenged, invalidated or circumvented. Thus, any patents thatwe own or license from third parties may not provide sufficient protectionagainst competitors. Also, patent rights may not provide us with proprietaryprotection or competitive advantages against competitors with similartechnology. Furthermore, others may independently develop similar technologiesor duplicate any technology that we have developed. The laws of foreigncountries may not protect our intellectual property rights to the same extentas do the laws of the U.S.

In addition to patents, werely on trade secrets and proprietary know-how. We seek protection, in part,through confidentiality and proprietary information agreements. Theseagreements may not provide protection or adequate remedies in the event ofunauthorized use or disclosure of confidential and proprietary information, orbreach of these agreements. Furthermore, our trade secrets may otherwise becomeknown to, or be independently developed by, our competitors.

Our commercial successdepends significantly on our ability to operate without infringing the patentsand other proprietary rights of third parties. In the event that ourtechnologies may infringe on the patents or violate other proprietary rights ofthird parties, we and our partners may be prevented from pursuing productdevelopment, manufacturing or commercialization. Such a result may materially harmour business, financial condition and results of operations.

**Third parties may allege our products infringe theirpatents or may challenge the validity of our patents and other intellectualproperty rights, resulting in litigation or other time-consuming and expensiveproceedings which could deprive us of valuable products and/or rights.**

If we become involved inany intellectual property litigation, interference or other judicial oradministrative proceedings, we will incur substantial expense and the effortsof our technical and management personnel will be diverted. An adversedetermination may subject us to significant liabilities or require us to seeklicenses that may not be available from third parties on commercially favorableterms, if at all. Therefore, we and our partners may be restricted or preventedfrom manufacturing and selling products employing our human antibodytechnology, which would harm our business.

Even though we havereceived patents pertaining to the HuMAb-Mouse technology, this does not meanthat we and our licensees of HuMAb-Mouse technology will have exclusive rightsto antibodies against all targets that are made using this technology, or thatwe or our licensees will have the right to make, develop, use or sell suchantibodies.

Our patents covering theHuMAb-Mouse technology include patents that cover particular human antibodies.These patents do not cover all human antibodies.

Our patents may notprotect against the importation of products, such as antibodies, made usingHuMAb-Mouse technology.

Moreover, other partiescould have blocking patent rights to products made using HuMAb-Mousetechnology, such as antibodies, and their production and uses, for instancebecause of a proprietary position covering the antibody or the antibody’starget. For example, we are aware of certain U.S. and European patents held bythird parties relating to particular targets for their human monoclonalantibodies, to human monoclonal antibodies against various targets andbispecific products, and the manufacture and use of such products. We are alsoaware of certain U.S. and foreign patents and patent applications held by thirdparties relating to anti-CD4 antibodies, such as HuMax-CD4, anti-CD30antibodies, such as MDX-060, anti-EGFr antibodies, such as HuMax-EGFr,anti-PSMA antibodies, such 

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asMDX-070, anti-Type 1 IFN antibodies, such as MDX-1103, and antibody-antigenconjugates, such as MDX-1307/bHCG-VAC, as well as other antibody products underdevelopment by us.

We are also aware of aU.S. patent owned by Genentech, relating to the production of recombinantantibodies in host cells. We currently produce certain of our products and ourpartners’ products using recombinant antibodies from host cells and may chooseto produce additional products in this manner. If any of our antibody productsare produced in the manner claimed in this patent, then we may need to obtain alicense, should one be available. We have a license to this patent fromGenentech for our anti-CTLA-4 product candidate (MDX-010) but currently do nothave licenses for any of our other antibody product candidates. If we desire alicense for any of our other antibody product candidates and are unable toobtain a license on commercially reasonable terms or at all, we may berestricted in our ability to make recombinant antibodies using Genentech’stechniques. In addition to the Genentech patent, we are also aware of certainU.S. patents held by third parties relating to antibody expression inparticular types of host cells, including CHO cells, which may be relevant toour current or future manufacturing techniques.

If our antibody products(or those antibody products of our partners using our human antibodytechnology) or their commercial use or production meet all of the requirementsof any of the claims of the aforementioned patents, or patents that may issuefrom the aforementioned patent applications, then we or our partners may need alicense to one or more of these patents. Further, we are aware of a number ofother third party patent applications that, if granted, with claims ascurrently drafted, may cover our and our partners’ current or plannedactivities. We intend to seek licenses to such patents when, in our judgment,such licenses are needed. If any licenses are required, there can be noassurance that we will be able to obtain any such license on commerciallyfavorable terms, if at all, and if these licenses are not obtained, we might beprevented from using certain of our technologies for the generation of ourrecombinant human antibody products. Our failure to obtain a license to anytechnology that we may require may materially harm our business, financialcondition and results of operations. We cannot assure you that our productsand/or actions in developing or selling human antibody products will notinfringe such patents.

In general, our patentprotection may not prevent others from developing competitive products usingour technology or other technologies. Similarly, others may obtain patents thatcould limit our ability and the ability of our partners to use, import,manufacture, market or sell products or impair our competitive position and thecompetitive position of our partners.

We do not have exclusiveaccess to the patents underlying the HuMAb-Mouse. In March 1997, prior toour acquisition of GenPharm, GenPharm entered into a cross-license andsettlement agreement with Abgenix, Cell Genesys, Inc., Xenotech, L.P. andJapan Tobacco, Inc., pursuant to which Abgenix and these entities paid usa total of approximately $38.6 million in exchange for a non-exclusive licenseto certain patents, patent applications, third-party licenses and inventionspertaining to the development and use of certain transgenic rodents, includingmice, that produce fully human antibodies that are integral to our products andbusiness. These patents, licenses and inventions form the basis of ourHuMAb-Mouse technology. Our business may suffer from the competition of theseentities, as well as if any of these entities breach the cross-license and settlementagreement.

We are not the exclusiveowner of the technology underlying the KM-Mouse. Effective September 4,2002, we entered into a collaboration and license agreement with Kirin, whichprovides for us to exchange certain cross-licenses for each other’s technologyfor the development and commercialization of human antibody products made usingthe HuMAb-Mouse, the KM-Mouse and certain other antibody-generating mice. Kirinhas certain rights to distribute and use such mice throughout the world. Our businessmay suffer as a consequence of competition from Kirin or if the collaborationand license agreement were breached or terminated for any reason.

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**We have had and may continue to face product liabilityclaims related to the use or misuse of products developed by us or ourpartners.**

The administration ofdrugs to humans, in clinical trials or after commercialization, may expose usto product liability claims. Consumers, healthcare producers or persons sellingproducts based on our technology may be able to bring claims against us basedon the use of our products in clinical trials and the sale of products based onour technology. Product liability claims may be expensive to defend and mayresult in large judgments against us. We have obtained limited productliability coverage for our clinical trials, under which coverage limits are $10million per occurrence and $10 million in the aggregate. Although we believethese coverage limits are adequate, we cannot be certain that the insurancepolicies will be sufficient to cover all claims that may be made against us. Weintend to increase our coverage limits as we progress into additionallate-stage clinical trials and to expand our insurance coverage to include thesale of commercial products if we obtain marketing approval for products indevelopment. Product liability insurance is expensive, difficult to obtain andmay not be available in the future on acceptable terms.

In November 1998, wevoluntarily suspended clinical trials for one of our products after somepatients experienced serious adverse events, or SAEs. This product did notemploy our core fully human antibody technology and we have determined not topursue further development of this product. As a result of these SAEs, wereceived a small number of claims, of which five resulted in lawsuits beingfiled. All of these lawsuits have been settled for insubstantial amounts. Wecannot make assurances that additional claims will not be filed against usrelating to these SAEs or arising out of any other clinical trial we haveconducted or will conduct in the future.

Generally, our clinicaltrials, including our melanoma trials, are conducted in patients with seriouslife-threatening diseases for whom conventional treatments have beenunsuccessful or for whom no conventional treatment exists, and in some cases,our product is used in combination with approved therapies that themselves havesignificant adverse event profiles. During the course of treatment, thesepatients could suffer adverse medical events or die for reasons that may or maynot be related to our products. The most common adverse events associated withour melanoma trials have consisted of flu-like symptoms such as fever, chillsand nausea. These events were expected and generally responded to standardmedical therapy. In addition, some patients have experienced anticipateddrug-related autoimmune adverse events, such as diarrhea, rash, reducedpituitary function, colitis and increased liver enzymes, ranging from mild inmost cases to severe in a very small number of instances. Almost all of theseadverse events responded to medical therapy. In a very small number ofinstances, fatalities have occurred during the course of these trials—suchfatalities may or may not be attributable to our product. Any of these eventscould result in a product liability claim. Any such claims against us,regardless of their merit, could result in significant awards against us, whichcould materially harm our business, financial condition and results ofoperations.

**We face intense competition and rapid technologicalchange.**

The development ofbiotechnology and pharmaceutical products is a highly competitive businesssubject to significant and rapid technological change. We face competition inseveral different forms. First, our human antibody generation activitiescurrently face competition from several competitors with similar technology toours as well as distinctly different technologies. The actual products beingdeveloped by us or by our partners also face actual and potential competition.Developments by our competitors may render our human antibody technologyobsolete or non-competitive.

We are aware of severalpharmaceutical and biotechnology companies that are actively engaged inresearch and development in areas related to antibody therapeutics. Some ofthese companies have commenced clinical trials of antibody products or havesuccessfully commercialized antibody products. Many of these companies areaddressing the same diseases and disease indications as we and our partners.Also, we compete with companies that offer antibody generation services toother companies that have 

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diseaserelated target antigens. These competitors have specific expertise ortechnology related to monoclonal antibody development. We compete directly withAbgenix, with respect to the generation of fully human antibodies fromtransgenic mice. In addition, we have entered into agreements with each ofKirin and Genmab, respectively, that grant these companies licenses to ourproprietary transgenic mouse technology platform, enabling them to compete withus in offering antibody generation and development services in certain markets.We have also entered into license agreements with Pfizer which enable it tocompete with us in the generation and development of antibodies to CTLA-4.Xenerex Biosciences and XTL Biopharmaceutical, Ltd. have developed technologythat, according to Xenerex and XTL, will allow them to generate fully humanmonoclonal antibodies in functionally modified mice. Numerous additionalcompanies are developing therapeutic products comprising human antibodycomponents. Furthermore, several companies are developing, or have developed,technologies that do not involve immunization of animals for creatingantibodies comprising human antibody sequences. For example, phage and yeastdisplay technology is being used by companies, such as Cambridge AntibodyTechnology Group plc, Dyax Corp., Genetastix Corporation and MorphoSys AG todevelop therapeutic products comprising human antibody sequences. Companiessuch as Johnson & Johnson, MedImmune, Amgen, Biogen Idec Inc.,Novartis, Genentech, Protein Design Labs, Inc., Wyeth, Abbott Laboratoriesand Corixa have generated therapeutic products that are currently indevelopment or on the market and that are derived from recombinant DNA thatcomprise human antibody components.

Other technologies canalso be applied to the treatment of the diseases that we or our partners arepursuing. For example, immunoconjugates—monoclonal antibodies linked to toxinsor radioactive isotopes—are being developed by others. In addition, theapplication of recombinant DNA technology to develop potential productsconsisting of proteins (such as growth factors, hormones, enzymes, receptorfragments and fusion proteins, or cytokines) that do not occur normally in thebody, or occur only in small amounts, has been underway for some time. Includedin this group are interleukins such as IL-2 and IL-11, interferons alpha, betaand gamma, colony stimulating factors such as G-CSF and GM-CSF, clottingfactors, growth hormones, erythropoeitin, DNAse, tPA, glucocerebrosidase, PDGF,and a number of other similar biological agents. Continuing development of newchemical entities and other drugs by large pharmaceutical companies carrieswith it the potential for discovery of agents for treating disease indicationsalso targeted by drugs that we or our partners are developing.

Someof our competitors have received regulatory approval or are developing ortesting product candidates that compete directly with product candidatesemploying our antibody technology. Many of these companies and institutions,either alone or together with their partners, have substantially greaterfinancial resources and larger research and development staffs than we or someof our partners do. In addition, many of these competitors have significantlygreater experience than we do in:

·       developingproducts;

·       undertakingpreclinical testing and clinical trials;

·       obtainingFDA and other regulatory approvals of products; and

·       manufacturingand marketing products.

Accordingly, ourcompetitors may obtain patent protection, receive FDA approval or commercializeproducts before we or our partners do. If we or our partners commencecommercial product sales, we or our partners will be competing againstcompanies with greater marketing and manufacturing capabilities, areas in whichwe and certain of our partners have limited or no experience.

We also face intensecompetition from other pharmaceutical and biotechnology companies to establishpartnerships, as well as relationships with academic and research institutions,and to license proprietary technology from these institutions. Thesecompetitors, either alone or with their partners, may succeed in developing orlicensing technologies or products that are more effective than ours.

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**We are subject to extensive and costly governmentregulation.**

Product candidatesemploying our human antibody technology are subject to extensive and rigorousdomestic government regulation including regulation by the FDA, the Centers forMedicare and Medicaid Services, other divisions of the U.S. Department ofHealth and Human Services, the U.S. Department of Justice, state and localgovernments and their respective foreign equivalents. The FDA regulates theresearch, development, preclinical and clinical testing, manufacture, safety,effectiveness, record-keeping, reporting, labeling, storage, approval,advertising, promotion, sale, distribution, import, and export ofbiopharmaceutical products. The FDA regulates human antibodies as biologics,subject to a Biologic License Application, or BLA, under the Public HealthService Act, as amended. If products employing our human antibody technologyare marketed abroad, they will also be subject to extensive regulation byforeign governments, whether or not we have obtained FDA approval for a givenproduct and its uses. Such foreign regulation may be equally or more demandingthan corresponding U.S. regulation.

Governmentregulation substantially increases the cost and risk of researching,developing, manufacturing, and selling our products. The regulatory review andapproval process, which includes preclinical testing and clinical trials ofeach product candidate, is lengthy, expensive and uncertain. We or our partnersmust obtain and maintain regulatory authorization to conduct clinical trials.We or our partners must obtain regulatory approval for each product we intendto market, and the manufacturing facilities used for the products must be inspectedand meet legal requirements. Securing regulatory approval requires thesubmission of extensive preclinical and clinical data and other supportinginformation for each proposed therapeutic indication in order to establish theproduct’s safety, efficacy, potency and purity for each intended use. Thedevelopment and approval process takes many years, requires substantialresources, and may never lead to the approval of a product. Failure to obtainregulatory approvals, or delays in obtaining regulatory approvals may:

·       adverselyaffect the successful commercialization of any drugs that we or our partnersdevelop;

·       imposeadditional costs on us or our partners;

·       diminishany competitive advantages that we or our partners may attain; and

·       adverselyaffect our receipt of revenues or royalties.

Evenif we are able to obtain regulatory approval for a particular product, theapproval may limit the indicated uses for the product, may otherwise limit ourability to promote, sell, and distribute the product, may require that weconduct costly post-marketing surveillance, and/or may require that we conductongoing post-marketing studies. Material changes to an approved product, suchas, for example, manufacturing changes or revised labeling, may require furtherregulatory review and approval. Once obtained, any approvals may be withdrawn,including, for example, if there is a later discovery of previously unknownproblems with the product, such as a previously unknown safety issue. If we,our partners or our contract manufacturers fail to comply with applicableregulatory requirements at any stage during the regulatory process, suchnoncompliance could result in, among other things:

·       delaysin the approval of applications or supplements to approved applications;

·       refusalof a regulatory authority, including the FDA, to review pending market approvalapplications or supplements to approved applications;

·       warningletters;

·       fines;

·       importand/or export restrictions;

·       productrecalls or seizures;

·       injunctions;

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·       totalor partial suspension of production;

·       civilpenalties;

·       withdrawalsof previously approved marketing applications or licenses;

·       recommendationsby the FDA or other regulatory authorities against governmental contracts; and

·       criminalprosecutions.

In certain cases, weexpect to rely on our partners to file Investigational New Drug applications,or INDs, with the FDA and to direct the regulatory approval process forproducts employing our human antibody technology. Our partners may not be ableto conduct clinical testing or obtain necessary approvals from the FDA or otherregulatory authorities for their product candidates employing our humanantibody technology. If they fail to obtain required governmental approvals,our partners will be delayed or precluded from marketing these products. As aresult, commercial use of products employing our technology will not occur andour business, financial condition and results of operations may be materiallyharmed.

**We do not have, and may never obtain, the regulatoryapprovals we need to market our product candidates.**

Following completion ofclinical trials, the results are evaluated and, depending on the outcome,submitted to the FDA in the form of a BLA, or a New Drug Application, or NDA,in order to obtain FDA approval of the product and authorization to commencecommercial marketing. In responding to a BLA or NDA, the FDA may requireadditional testing or information, may require that the product labeling bemodified, may impose post-approval study or reporting requirements or otherrestrictions on product distribution, or may deny the application. The timingof final FDA review and action varies greatly, but can take years in some casesand often involves the input of an FDA advisory committee of outside experts.Product sales in the U.S. may commence only when a BLA or NDA is approved.

To date, we have notapplied for or received the regulatory approvals required for the commercialsale of any of our products in the U.S. or in any foreign jurisdiction. None ofour product candidates has been determined to be safe and effective, and wehave not submitted an NDA or BLA to the FDA or an equivalent application to anyforeign regulatory authorities for any of our product candidates. We have onlylimited experience in filing and pursuing applications necessary to obtainregulatory approval. As a result, it is possible that none of our productcandidates will be approved for marketing.

Product candidates thatappear promising in the early phases of development, such as in early humanclinical trials, may fail to reach the market for a number of reasons, such asthe product candidate did not demonstrate acceptable clinical trial resultseven though it demonstrated positive preclinical trial results; the productcandidate was not effective in treating the specified disease or condition; theproduct candidate had harmful side effects on humans or presented unacceptablesafety risks; the governing regulatory authorities (such as the FDA) deniedapproval to the product candidate altogether or denied a commercially importantindicated use; the product candidate was not economical for us to manufacture;and/or the product candidate was not cost effective in light of alternativetherapies. We cannot guarantee that we will ever be able to producecommercially successful products.

**If we or our manufacturing partners do not comply withcurrent good manufacturing practices requirements, we will not be able tocommercialize our product candidates.**

We will depend on our ownmanufacturing facilities and on those of our partners and other third partiesto manufacture products generated through the use of our human antibodytechnology. Before commercializing a new drug, manufacturers must demonstratecompliance with the applicable current good manufacturing practices, or cGMP,requirements which include quality control and quality assurance 

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requirementsas well as the maintenance of extensive records and documentation.Manufacturing facilities are subject to ongoing periodic inspection by the FDAand corresponding foreign and state authorities, including unannouncedinspections, and must be licensed before they can be used in commercialmanufacturing for products generated through the use of our technology. Inaddition, cGMP requirements are constantly evolving, and new or differentrequirements may apply in the future. We, our partners or third party contractmanufacturers may not be able to comply with the applicable regulations. Afterregulatory approvals are obtained, the subsequent discovery of previouslyunknown problems, or the failure to maintain compliance with existing or newregulatory requirements, may result in restrictions on the marketing of aproduct, withdrawal of the product from the market, seizures, the shutdown ofmanufacturing facilities, injunctions, monetary fines and/or civil or criminalsanctions.

**Even if approved, our products will be subject toextensive post-approval regulation.**

Once a product isapproved, numerous post-approval requirements apply. Among other things, theholder of an approved BLA or NDA is subject to periodic and other FDAmonitoring and reporting obligations, including obligations to monitor andreport adverse events and instances of the failure of a product to meet thespecifications in the BLA or NDA. Application holders must also submitadvertising and other promotional material to the FDA and report on ongoingclinical trials.

Advertising andpromotional materials must comply with FDA rules in addition to otherpotentially applicable federal and state laws. The distribution of productsamples to physicians must comply with the requirements of the PrescriptionDrug Marketing Act. Manufacturing facilities remain subject to FDA inspectionand must continue to adhere to FDA’s current good manufacturing practicerequirements. Application holders must obtain FDA approval for product,manufacturing, and labeling changes, depending on the nature of the change.Sales, marketing, and scientific/educational grant programs must comply withthe Medicare-Medicaid Anti-Fraud and Abuse Act, as amended, the False ClaimsAct, also as amended, and similar state laws. Pricing and rebate programs mustcomply with the Medicaid rebate requirements of the Omnibus BudgetReconciliation Act of 1990, as amended, and the Veteran’s Health Care Act of1992, as amended. If products are made available to authorized users of theFederal Supply Schedule of the General Services Administration, additional lawsand requirements apply. All of these activities are also potentially subject tofederal and state consumer protection and unfair competition laws.

Depending on thecircumstances, failure to meet these post-approval requirements can result incriminal prosecution, fines or other penalties, injunctions, recall or seizureof products, total or partial suspension of production, denial or withdrawal ofpre-marketing product approvals, or refusal to allow us to enter into supplycontracts, including government contracts. In addition, even if we comply withFDA and other requirements, new information regarding the safety oreffectiveness of a product could lead the FDA to modify or withdraw a productapproval.

**If we are able to obtain approvals for our products,the law or FDA policy could change and expose us to competition from “generic”or “follow-on” versions of our products.**

Under current U.S. law andFDA policy, generic versions of conventional chemical drug compounds, sometimesreferred to as small molecule compounds, may be approved through an abbreviatedapproval process. In general terms, the generic applicant references anapproved innovator product for which full clinical data demonstrating safetyand effectiveness exist for the approved conditions of use. The genericapplicant in turn need only demonstrate that its product has the same activeingredient(s), dosage form, strength, route of administration, and conditionsof use (labeling) as the referenced innovator drug, and that the genericproduct is absorbed in the body at the same rate and to the same extent as thereferenced innovator drug (this is known as bioequivalence). In addition, thegeneric application must contain information regarding the manufacturingprocesses and facilities that will be used to ensure product quality, and mustcontain certifications to patents listed with the FDA for the referencedinnovator drug.

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There is no suchabbreviated approval process under current law for biological products approvedunder the Public Health Service Act through a BLA, such as monoclonalantibodies, cytokines, growth factors, enzymes, interferons and certain otherproteins. However, various proposals have been made to establish an abbreviatedapproval process to permit approval of generic or follow-on versions of thesetypes of biological products. The proposals include proposals for legislation,and proposals for FDA to extend its existing authority to this area. Forexample, some have proposed that FDA allow a generic or follow-on copy ofcertain therapeutic biologics to be approved under the Public Health ServiceAct or under an existing mechanism known as a 505(b)(2) application. A505(b)(2) application is a form of a New Drug Application, or NDA, wherethe applicant does not have a right to reference some of the data being reliedupon for approval. Under current regulations, 505(b)(2) applications canbe used where the applicant is relying in part on published literature or onfindings of safety or effectiveness in another company’s NDA.

505(b)(2) has notbeen used to date for therapeutic biologic products. In addition, the use of505(b)(2) applications even for conventional chemical drug products is thesubject of an ongoing legal challenge. It is thus not clear what the permitteduse of a 505(b)(2) application might be in the future for biologicsproducts, or whether any other proposals on generic or follow-on biologics willbe adopted. However, if the law is changed or if FDA somehow extends itsexisting authority in new ways, and third parties are permitted to obtainapprovals of versions of our products through an abbreviated approvalmechanism, and without conducting full clinical studies of their own, it couldadversely effect our business. Such products would be significantly less costlythan ours to bring to market, and could lead to the existence of multiple lowerpriced competitive products. This would substantially limit our ability toobtain a return on the investments we have made in those products.

**Our operations involve hazardous materials and aresubject to environmental, health and safety controls and regulations.**

As a biopharmaceuticalcompany, we are subject to environmental, health and safety laws andregulations, including those governing the use of hazardous materials. The costof compliance with environmental, health and safety regulations may be substantial.Our business activities involve the controlled use of hazardous materials andwe cannot 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.

**Our stock price may be volatile.**

Therehas been significant volatility in the market prices of biotechnology companies’securities. Various factors and events may have a significant impact on themarket price of our common stock. These factors include, by way of example:

·       fluctuationsin our operating results;

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

·       publishedreports by securities analysts;

·       progresswith clinical trials;

·       governmentalregulation;

·       developmentsin patent or other proprietary rights;

·       developmentsin our relationship with collaborative partners;

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·       publicconcern as to the safety and effectiveness of our products; and

·       generalmarket conditions.

During the two-year periodended December 31, 2004, the sale prices of our common stock rangedbetween $2.69 and $11.55. The trading price of our common stock has been, andcould continue to be, subject to wide fluctuations in response to these orother factors, including the sale or attempted sale of a large amount of ourcommon stock into the market. Broad market fluctuations may also adverselyaffect the market price of our common stock.

**We have obligations to issue shares of our commonstock in the future, which may have a dilutive effect on the shares of ourcommon stock currently outstanding.**

As of February 28,2005, we had 14,394,964 shares of common stock reserved for issuance pursuantto options and other stock based awards which had been granted under our stockoption plans having a weighted average exercise price of $7.88 per share and wehad reserved 886,313 shares of common stock for issuance pursuant to futuregrants of options under our stock option plans. We have filed registrationstatements on Form S-8 under the Securities Act covering all of theseshares. Shares issued pursuant to these plans, other than shares issued toaffiliates, will be freely tradable in the open market. Shares held byaffiliates may be sold pursuant to the requirements of Rule 144.

In addition, as of thatdate, there were 102,915 shares reserved for issuance pursuant to a deferredcompensation plan. The shares reserved for the deferred compensation plan willbe issued in various amounts over various periods of time during the next threeyears. We have filed a registration statement on Form S-8 under theSecurities Act covering those shares. Shares issued pursuant to this plan,other than shares issued to affiliates, will be freely tradable in the openmarket. Shares held by affiliates may be sold pursuant to the requirements of Rule 144.

As of February 28,2005, we had reserved 1,000,978 shares of common stock for issuance pursuant toour 2002 Employee Stock Purchase Plan. We have filed a registration statementon Form S-8 under the Securities Act covering all of those shares. Allshares issued under this plan, other than shares issued to affiliates, will befreely tradable on the open market. Shares held by affiliates may be soldpursuant to the requirements of Rule 144.

The exercise of all or aportion of the outstanding options may result in a significant increase in thenumber of shares of our common stock that will be subject to trading on theNASDAQ National Market and the issuance and sale of the shares of our commonstock upon the exercise thereof may have an adverse effect on the price of ourcommon stock.

As of February 28,2005, we had 10,936,935 shares of common stock reserved for the issuancepursuant to the conversion of the $150.0 million aggregate principal amount ofour outstanding 2.25% Convertible Senior Notes due May 15, 2011. Holdersof these notes may convert their notes into shares of common stock at any timeprior to maturity or redemption by us at a conversion rate of 72.9129 sharesper each $1,000 principal amount of the notes ($13.72 per share), subject toadjustment.

**Future sales of our common stock or other securitiescould cause the market price of our common stock to decline.**

As of February 28,2005, we had 110,529,979 shares of common stock outstanding, of which 9,374,318are restricted securities as that term is defined in Rule 144 under theSecurities Act. Under certain circumstances, these restricted securities may besold without registration pursuant to such rule. We are unable to predict theeffect that sales made under Rule 144 or pursuant to any registration mayhave on the market price of our common stock. The sale of a significant numberof additional securities, or even the possibility thereof, may lower the marketprice of our common stock.

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We have filed aregistration statement on Form S-3 under the Securities Act relating to3,791,346 shares of common stock that may be offered by one of ourshareholders. These shares of common stock are freely tradable withoutrestriction or further registration under the Securities Act except for sharesheld by our affiliates, which will be subject to resale limitations of Rule 144.

Inaddition, we have filed a shelf registration statement on Form S-3 underthe Securities Act relating to the sale of up to $294.59 million of any of thefollowing securities:

·       debtsecurities;

·       preferredstock;

·       commonstock; or

·       warrantsto purchase debt securities, preferred stock or common stock.

We have also filed aregistration statement on Form S-3 under the Securities Act that relatesto the sale by certain selling securityholders of up to 7,214,345 shares of ourcommon stock which were issued upon the conversion of our $125.0 million 4.25%Convertible Senior Notes due August 15, 2010 in connection with theprovisional redemption of such notes in January 2005. These shares ofcommon stock are freely tradable without restriction or further registrationunder the Securities Act except for shares held by our affiliates, which willbe subject to the resale limitations of Rule 144.****We also have filed a registrationstatement on Form S-3 under the Securities Act that relates to the sale bycertain selling securityholders of up to 3,272,091 shares of our common stockwhich were issued on the conversion of all of our $21.986 million 4.25%Convertible Senior Notes due August 15, 2010, in connection with theprovisional redemption of such notes in January 2005. These shares ofcommon stock are freely tradable without restriction or further registrationunder the Securities Act except for shares held by our affiliates, which willbe subject to the resale limitations of Rule 144. In connection therewith,we have agreed to use our best efforts to keep these registration statementscontinuously effective until the earliest of (i) the sale of alloutstanding registrable securities registered under the registrationstatements; (ii) the expiration of the period referred to in Rule 144(k) ofthe Securities Act with respect to the notes held by non-affiliates of us; (iii) allthe registrable securities have ceased to be outstanding (whether as a resultof repurchase or otherwise); and (iv) two years after the respectiveeffective dates of these registration statements.

We have filed aregistration statement on Form S-3 under the Securities Act relating toour $150.0 million 2.25% Convertible Senior Notes due May 15, 2011, and upto 10,936,935 shares of our common stock which may be issued upon conversion ofthe notes. The notes and the shares of common stock are freely tradable withoutrestriction or further registration under the Securities Act except for sharesheld by our affiliates, which will be subject to the resale limitations of Rule 144.

We have filed aregistration statement on Form S-4 under the Securities Act to registershares of our common stock having a maximum aggregate offering price of $12.0million. Such shares are freely tradable without restriction or furtherregistration under the Securities Act. On August 5, 2004 we issued 731,823shares of such common stock, valued at approximately $4.3 million to satisfy aportion of the purchase price in connection with the acquisition of AbilityBiomedical Corporation. This registration statement on Form S-4 under theSecurities Act remains available for the sale of up to $7.7 million of ourcommon stock.

**Upon the occurrence of certain change of controlevents of our company, we are required to offer to repurchase all of our debt,which may adversely affect our business and the price of our common stock.**

Upon the occurrence ofcertain change of control events of our company, we are required to offer torepurchase all of our outstanding 2.25% Convertible Senior Notes due May 11,2011. As of February 28, 2005, $150.0 million aggregate principal amountof these notes was outstanding. In each instance, we may pay the repurchaseprice in cash or, at our option, in common stock. These change of controlevents 

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include,without limitation, (i) the acquisition by any third party of at least 50%of our common stock; or (ii) our merger or consolidation with or into anyother person, any merger or consolidation of another person into us or our saleor other disposal of all or substantially all of our assets, except in certainlimited circumstances provided in the indentures relating to the notes. Suchrepurchase rights may be triggered at a time at which we do not have sufficientfunds available to pay the repurchase price in cash or determine that paymentin cash is otherwise inadvisable. In such event, the issuance of a significantnumber of additional shares of common stock in payment of the repurchase pricemay lower the market price of our common stock.

**Our restated certificate of incorporation, amended andrestated by-laws, shareholder rights plan and New Jersey law contain provisionsthat could delay or prevent an acquisition of our company even if theacquisition would be beneficial to our shareholders, and as a result, ourmanagement may be come entrenched and hard to replace.**

In May 2001, ourboard of directors adopted a shareholder rights plan. The shareholder rightsplan provides for a dividend of one preferred share purchase right on eachoutstanding share of our common stock. Each right entitles shareholders to buy1/1000th of a share of our Series A junior participating preferred stockat an exercise price of $150.00. Each right will become exercisable followingthe tenth day after a person or group announces an acquisition of 20% or moreof our common stock. We will be entitled to redeem the rights at $0.001 perright at any time on or before the close of business on the tenth day followingacquisition by a person or group of 20% or more of our common stock.

The shareholderrights plan and certain provisions of our restated certificate of incorporationand amended and restated by-laws may have the effect of making it moredifficult for a third party to acquire, or of discouraging a third party fromattempting to acquire, control of us. This could limit the price that certaininvestors might be willing to pay in the future for our common stock. Theprovisions of our restated certificate of incorporation and amended andrestated by-laws include:

·       aclassified board of directors;

·       arequirement that special meetings of shareholders be called only by our boardof directors, chairman of the board, chief executive officer or president;

·       advancenotice requirements for shareholder proposals and nominations;

·       limitationson the ability of shareholders to amend, alter or repeal our by-laws; and

·       theauthority of the board of directors to issue, without shareholder approval,preferred stock with such terms as the board of directors may determine.

We are also afforded the protectionsof the New Jersey Shareholders Protection Act. This New Jersey statute containsprovisions that impose restrictions on shareholder action to acquire control ofour company. The effect of the provisions of our shareholder rights plan,restated certificate of incorporation and amended and restated by-laws and NewJersey law may discourage third parties from acquiring control of our company.In addition, these measures may result in the entrenchment of our managementand may prevent or frustrate any attempt by shareholders to replace or removeour current management.

**We do not intend to pay cash dividends on our commonstock in the foreseeable future.**

We intend to retain anyfuture earnings to finance the growth and development of our business, and wedo not plan to pay cash dividends on our common stock in the foreseeablefuture.

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**Legislative and regulatory actions, NASDAQ rules andpotential new accounting pronouncements may impact our future financialposition or results of operations.**

Compliance with changingregulation of corporate governance and public disclosure may result inadditional expenses. Changing laws, regulations and standards relating tocorporate governance and public disclosure, including the Sarbanes-Oxley Act of2002, new SEC regulations and NASDAQ National Market rules, are creatinguncertainty with respect to, among other things, the enforcement of these newstandards and the potential effect thereof for companies such as ours.Investments required to comply with changes in SEC, NASDAQ and accounting rules mayresult in increased general and administrative expenses and a diversion ofmanagement time and attention from revenue-generating activities to complianceactivities.

Future changes infinancial accounting standards may cause adverse, unexpected revenuefluctuations and affect our financial position or results of operations. Newpronouncements and varying interpretations of pronouncements have occurred withfrequency and may occur in the future and we may make changes in our accountingpolicies in the future.

**Item 2**.                        Properties

The following is adescription of our owned and leased properties:

**Leased/OwnedProperties**
| **Location**            | ** ** | ** ** | ** ** | **Leased/Owned** | ** ** | **Square Feet** | ** ** | **Use** | ** ** | **Lease Expiration  Date**      | ** ** |
|-------------------------|------------|------------|------------|------------------|------------|----------------------|------------|---------|------------|--------------------------------------|------------|
| Annandale, New  Jersey  |       |       | Leased     |             |       |                 | 45,000     |    |       | Laboratory, Office              |       |   | 2008 |   |   |
| Bloomsbury, New  Jersey |       |       | Owned      |             |       |                 | 165,000    |    |       | Laboratory,  Office                  |       |   | N/A |   |   |
| Milpitas,  California   |       |       | Owned      |             |       |                 | 60,000     |    |       | Laboratory,  Office                  |       |   | N/A |   |   |
| Sunnyvale,  California  |       |       | Leased     |             |       |                 | 37,000     |    |       | Laboratory,  Office                  |       |   | 2009 |   |   |
| Princeton, New Jersey   |       |       | Leased     |             |       |                 | 20,000     |    |       | Corporate Headquarters,  Office |       |   | 2006 |   |   |

 

We believe that ourexisting owned and leased facilities are adequate for the production ofmaterials for clinical trials of our current products and for providing theservices we currently offer to our partners in connection with our humanantibody technology.

**Item 3**.                        LegalProceedings

In the ordinary course ofour business, we are at times subject to various legal proceedings. We do notbelieve that any of our current legal proceedings, individually or in theaggregate, will have a material adverse effect on our operations or financialcondition.

**Item 4**.                        Submissionof Matters to a Vote of Security Holders

There were no matters submitted to a vote of securityholders during the last quarter of the year ended December 31, 2004,through the solicitation of proxies or otherwise.

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**PART II**

**Item 5**.                        Marketfor Registrant’s Common Equity and Related Shareholder Matters

Ourcommon stock is traded on the NASDAQ National Market under the symbol “MEDX.”The following table sets forth, during the periods indicated, the high and lowsales prices per share of our common stock, as reported on the NASDAQ NationalMarket:
| ** **                             | ** ** | **Common Stock  Price** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **High**                     | ** ** | **Low** | ** ** |
| **Year  ended December 31, 2003** |       |                         |       |   |   |
| First Quarter                          |       | $                            | 4.36       |   | $ | 2.69 |   |
| Second Quarter                         |       | $                            | 7.35       |   | $ | 3.15 |   |
| Third Quarter                          |       | $                            | 7.67       |   | $ | 4.48 |   |
| Fourth Quarter                         |       | $                            | 7.56       |   | $ | 5.78 |   |
| **Year  ended December 31, 2004** |       |                         |       |   |   |
| First Quarter                          |       | $                            | 9.93       |   | $ | 6.28 |   |
| Second Quarter                         |       | $                            | 11.13      |   | $ | 6.51 |   |
| Third Quarter                          |       | $                            | 8.41       |   | $ | 4.37 |   |
| Fourth Quarter                         |       | $                            | 11.55      |   | $ | 7.06 |   |

 

The number of shares of our common stock outstandingas of February 28, 2005 was 110,529,979. As of February 28, 2005,there were approximately 600 record holders of our common stock. As of March 22,2004, the record date for our last Annual Meeting of Shareholders held on May 19,2004, there were approximately 600 record holders of common stock (whichincludes individual holders) and approximately 32,447 beneficial shareholdersof our common stock.

We currently expect toretain our future earnings, if any, for use in the operation and expansion ofour business and do not anticipate paying any cash dividends in the foreseeablefuture.

***Securities Authorized for Issuance Under EquityCompensation Plans***

The information requiredherein will be reported in our definitive Proxy Statement for the AnnualMeeting of Shareholders which we expect will be filed on or before April 29,2005, and is incorporated herein by reference.

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**Item 6**.                        SelectedConsolidated Financial Data
| ** **                                                                | ** ** | **For the Year Ended December 31,**                    | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2000**                                                                        | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                                | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| **Statement of Operations Data:**                                         |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Revenues:                                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Sales                                                                     |       | $                                                                               | 264        |   | $ | 191 |   | $ | 176 |   | $ | 25 |   | $ | — |   |
| Contract and license revenues                                             |       | 19,619                                                                          |       | 37,140 |   | 24,552 |   | 5,833 |   | 9,119 |   |
| Sales, contract and license revenues from Genmab                          |       | 2,574                                                                           |       | 4,973 |   | 14,751 |   | 5,316 |   | 3,355 |   |
| Total revenues                                                            |       | 22,457                                                                          |       | 42,304 |   | 39,479 |   | 11,174 |   | 12,474 |   |
| Costs and expenses:                                                       |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Cost of sales                                                             |       | 1,189                                                                           |       | 642 |   | 8,327 |   | 3 |   | — |   |
| Research and development                                                  |       | 33,942                                                                          |       | 38,626 |   | 82,626 |   | 95,459 |   | 122,007 |   |
| General and administrative                                                |       | 18,142                                                                          |       | 19,344 |   | 22,852 |   | 21,727 |   | 24,314 |   |
| Write-off of facility costs                                               |       | —                                                                          |       | — |   | 11,294 |   | — |   | — |   |
| Acquisition of in-process technology                                      |       | —                                                                          |       | — |   | 16,312 |   | 6,500 |   | 5,455 |   |
| Total costs and expenses                                                  |       | 53,273                                                                          |       | 58,612 |   | 141,411 |   | 123,689 |   | 151,776 |   |
| Operating loss                                                            |       | (30,816                                                                         | )          | (16,308 | ) | (101,932 | ) | (112,515 | ) | (139,302 | ) |
| Equity in net loss of affiliate                                           |       | (353                                                                            | )          | (7,334 | ) | (50,625 | ) | (14,997 | ) | (19,791 | ) |
| Interest and dividend income                                              |       | 21,158                                                                          |       | 24,728 |   | 18,495 |   | 12,342 |   | 7,145 |   |
| Impairment loss on investments in partners                                |       | —                                                                          |       | — |   | (11,886 | ) | (1,400 | ) | (7,309 | ) |
| Additional (payments) receipts related to asset  acquisition         |       | —                                                                          |       | — |   | (2,425 | ) | (31 | ) | 16 |   |
| Interest expense                                                          |       | (3                                                                              | )          | (4,615 | ) | (9,065 | ) | (11,777 | ) | (12,845 | ) |
| Debt conversion expense                                                   |       | —                                                                          |       | — |   | — |   | — |   | (10,151 | ) |
| Net loss on extinguishment of debt                                        |       | —                                                                          |       | — |   | — |   | — |   | (4,241 | ) |
| Gain on disposition of Genmab stock                                       |       | —                                                                          |       | 1,442 |   | — |   | — |   | — |   |
| Loss before provision (benefit) for income taxes                          |       | (10,014                                                                         | )          | (2,087 | ) | (157,438 | ) | (128,378 | ) | (186,478 | ) |
| Provision (benefit) for income taxes                                      |       | (13,075                                                                         | )          | 600 |   | 103 |   | 69 |   | 31 |   |
| Income (loss) before cumulative effect of change in  accounting principle |       | 3,061                                                                           |       | (2,687 | ) | (157,541 | ) | (128,447 | ) | (186,509 | ) |
| Cumulative effect of change in accounting principle                       |       | —                                                                          |       | — |   | — |   | (830 | ) | — |   |
| Net income (loss)                                                         |       | $                                                                               | 3,061      |   | $ | (2,687 | ) | $ | (157,541 | ) | $ | (129,277 | ) | $ | (186,509 | ) |
| Basic and diluted net  income (loss) per share(1):                        |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of change in  accounting principle |       | $                                                                               | 0.04       |   | $ | (0.04 | ) | $ | (2.09 | ) | $ | (1.64 | ) | $ | (2.29 | ) |
| Cumulative effect of change in accounting principle                       |       | —                                                                          |       | — |   | — |   | (0.01 | ) | — |   |
| Net income (loss)                                                         |       | $                                                                               | 0.04       |   | $ | (0.04 | ) | $ | (2.09 | ) | $ | (1.65 | ) | $ | (2.29 | ) |
| Weighted average common  shares outstanding(1)                            |       |                                                                            |       |   |   |   |   |   |   |   |   |
| —basic                                                               |       | 71,532                                                                          |       | 73,937 |   | 75,231 |   | 78,314 |   | 81,494 |   |
| —diluted                                                             |       | 73,232                                                                          |       | 73,937 |   | 75,231 |   | 78,314 |   | 81,494 |   |

 
| ** **                                       | ** ** | **December 31,**                | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **2000**                             | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(Dollars in thousands)** | ** ** |
| **Balance Sheet Data:**                          |       |                                 |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and marketable securities |       | $                                    | 343,603    |   | $ | 466,952 |   | $ | 350,046 |   | $ | 358,458 |   | $ | 374,507 |   |
| Working capital                                  |       | 329,807                              |       | 447,326 |   | 339,480 |   | 350,437 |   | 341,110 |   |
| Total assets                                     |       | 558,107                              |       | 720,427 |   | 549,051 |   | 557,726 |   | 549,345 |   |
| Long term obligations                            |       | —                               |       | 175,000 |   | 175,000 |   | 300,000 |   | 296,986 |   |
| Cash dividends declared per common share         |       | —                               |       | — |   | — |   | — |   | — |   |
| Accumulated deficit                              |       | (123,375                             | )          | (126,062 | ) | (283,603 | ) | (412,880 | ) | (599,389 | ) |
| Total  shareholders’ equity                 |       | 485,289                              |       | 482,562 |   | 352,143 |   | 234,011 |   | 107,389 |   |
|                                                  |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)    Computed on the basis described in Note 2 to theConsolidated Financial Statements.

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**Item 7**.                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*Certain statements made in this Annual Report on Form 10-Kare “forward-looking statements” that are subject to risks and uncertaintiesthat may cause our actual results, performance or achievements to be materiallydifferent from any future results, performance or achievements expressed orimplied by these forward-looking statements. Forward-looking statements includeinformation concerning our future financial performance, business strategy,plans, goals and objectives. Statements preceded by, followed by or thatotherwise include the words “believes”, “expects”, “anticipates”, “intends”, “estimates”,“plans”, “forecasts”, “is likely to”, “projected” and similar expressions orfuture conditional verbs such as “should”, “would”, “may”, and “could” aregenerally forward-looking in nature and not historical facts. You should notplace undue reliance on any such forward-looking statements as such statementsspeak only as of the date on which they are made, and we might not update themto reflect changes that occur after the date they are made.*

**Overview**

We are a biopharmaceutical company focused on thediscovery, development and potential commercialization of fully humanantibody-based therapeutic products. We believe that our UltiMAb Human AntibodyDevelopment System® enables us to rapidly create and develop such products fora wide range of diseases, including cancer, inflammation, autoimmune disordersand other life-threatening and debilitating diseases.

Currently, 22 antibody products generated from ourUltiMAb Human Antibody Development System are in human clinical trials. Theseantibodies are designed to treat a wide range of diseases, such as cancer,rheumatoid arthritis and other inflammatory, autoimmune and infectious diseases.The most advanced of these products is MDX-010 (currently in Phase III, PhaseII and Phase I clinical trials), which we are developing jointly withBristol-Myers Squibb Company, or BMS, for the treatment of metastatic melanomaand other cancers. Four of these antibody products are fully owned by Medarexand its affiliates: MDX-060 for lymphomas (Phase II clinical trial),MDX-070 for prostate cancer (Phase II clinical trial), MDX-214 for cancer(Phase I/II clinical trial) and MDX-1307 for genitourinary and breast cancers (Phase Iclinical trial). We are also developing MDX-066 (Phase I clinical trial)jointly with The Massachusetts Biologic Laboratories for the treatment of *Clostridium difficile* associated diarrhea. Another antibody,MDX-018 (Phase I/II clinical trial), is being jointly developed with Genmab A/Sfor autoimmune disease, and three are being developed separately by Genmab:HuMaxTM-CD4 (Phase II clinical trials) for T-cell lymphomas, HuMax-EGFr (PhaseI/II clinical trial) for head and neck cancer and HuMax-CD20 (Phase I/IIclinical trial) for lymphomas. Genmab and Amgen, Inc. are developing AMG714 (Phase II clinical trial) for rheumatoid arthritis. Additionally, otherlicensing partners, including Novartis Pharma AG, Eli Lilly and Company, andCentocor, Inc. (a subsidiary of Johnson & Johnson), aredeveloping a total of ten antibody products, for inflammatory and/or autoimmunediseases and cancer, that are currently in early clinical trials. Human GenomeSciences, Inc. has also announced the initiation of a Phase I trial of oneanticancer antibody product developed pursuant to a licensing agreement withour partner Kirin Brewery Co., Ltd. We and our partners also have a number ofUltiMAb® product candidates in preclinical development. The precedinginformation regarding the clinical status of antibody products is based on ourand our partners’ public disclosure and other publicly available information.

Our revenue is principally derived from licensing ourfully human antibody technology to pharmaceutical and biotechnology companies.The terms of these license agreements typically include potential license feesand a series of potential milestone payments commencing upon the initiation ofclinical trials and continuing through commercialization. These payments maytotal $7.0 million to $10.0 million per product if the antibody receivesapproval from the U.S. Food and Drug Administration, or FDA, and equivalentforeign agencies. In general, we are also entitled to receive royalties onproduct sales. Additional revenue may be earned from the sales to, and in somecases, the manufacturing of antibodies for, our partners, as well as fromgovernment grants.

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Our most significant costs on an annual basis areresearch and development expenses and general and administrative expenses.Research and development expenses represent those costs that support theadvancement of our product pipeline and primarily consist of personnel costs,facilities (including depreciation), research and laboratory supplies, fundingof outside research, license and technology access fees, expenses related toantibody manufacturing and clinical trial expenses. We believe that continuedinvestment in research and development is critical to attaining our strategicobjectives. General and administrative expenses consist primarily of personnelexpenses for executive, finance, legal and administrative personnel,professional fees and other general corporate expenses. We may be required toadd personnel in the future and incur additional costs as we expand ourbusiness activities.

We have a history ofoperating losses and may not achieve profitability. As of December 31,2004, we had an accumulated deficit of approximately $599.4 million. Over thenext several years, we expect to incur substantial expenses as we continue toidentify, develop and manufacture our potential products, invest in research,move forward with our product development and prepare to commercialize ourproduct(s). Our commitment of resources to research and the continueddevelopment and potential commercialization of our product candidates willrequire substantial additional funds. Our operating expenses may also increaseas we invest in research or acquire additional technologies, as additionalpotential product candidates are selected for clinical development and as someof our earlier stage product candidates move into later stage clinicaldevelopment. In addition, we may incur significant milestone payment obligationsas our products progress towards commercialization. In the absence ofsubstantial revenues from new corporate collaborations or other sources, wewill incur substantial operating losses and may be required to raise additionalfunds through debt or equity financings or delay, reduce or eliminate certainof our research and development programs.

**Critical AccountingPolicies**

The methods, estimates andjudgments we use in applying our most critical accounting policies have asignificant impact on the results we report in our consolidated financialstatements. We evaluate our estimates and judgments on an on-going basis. Webase our estimates on historical experience and on assumptions that we believeto be reasonable under the circumstances. Our experience and assumptions formthe basis for our judgments about the carrying value of assets and liabilitiesthat are not readily apparent from other sources. Actual results may vary fromwhat we anticipate and different assumptions or estimates about the futurecould materially change our reported results. We believe the followingaccounting policies are the most critical to us, in that they are important tothe portrayal of our financial statements and they require our most difficult,subjective or complex judgments in the preparation of our consolidatedfinancial statements.

***Revenue Recognition***

We receive paymentsfrom our customers and partners for the sale of antibodies, for licenses to ourproprietary technology, for product development services and from theachievement of product development milestones. These payments are generallynon-refundable and are reported as deferred revenue until they are recognizableas revenue. We follow the following principles in recognizing revenue:

·       Wesell antibodies primarily to partners in the United States and overseas.Revenue from these sales is recognized when the antibodies are shipped.

·       Wereceive research fees from the licensing of our proprietary technologies forresearch and development performed by our customers and partners. Revenue fromthese research fees is recognized generally over the term of the respectivelicense period beginning only after both the license period has begun and thetechnology has been delivered.

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·       Wereceive fees for product development services (including manufacturing) weperform for our customers and partners. These fees are recognized ratably overthe entire period during which the services are performed.

·       Revenuefrom milestone payments is recognized when each milestone is achieved and whencollectibility of such milestone payment is assured. Milestone payments aretriggered either by the results of our research efforts or by the efforts ofour partners and include such events as submission of an Investigational NewDrug Application, or IND, commencement of Phase I, II or III clinicaltrials, submission of a Biologic License Application, or BLA, and approval of aproduct. Milestone payments are substantially at risk at the inception of anagreement. Upon achievement of a milestone event, we have no future performanceobligations relating to that event.

·       Revenue arrangements thatinclude multiple deliverables, are divided into separate units of accounting ifthe deliverables meet certain criteria, including whether the fair value of thedelivered items can be determined and whether there is evidence of fair valueof the undelivered items. In addition, the consideration is allocated among theseparate units of accounting based on their fair values, and the applicablerevenue recognition criteria are considered separately for each of the separateunits of accounting.

***Investments***

Our investment policy calls for investments in fixedincome high grade securities such as U.S. corporate debt securities, U.S.treasury obligations and money market funds for which we believe there is not asignificant risk of loss. Our primary objectives for our investment portfolioare liquidity and safety of principal. Investments are made to achieve thehighest rate of return consistent with these two objectives. However, in thecourse of our business, we have made and may continue to make investments incompanies (both public and private) as part of our strategic collaborations.Investments in companies whose securities are publicly traded (other thanGenmab) are classified as marketable securities on our consolidated balancesheets. The fair market value of investments in our partners whose securitiesare publicly traded represented approximately 1.5% of total marketablesecurities as of December 31, 2003 and approximately 0.9% of totalmarketable securities as of December 31, 2004.

Under SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities,*ourmarketable securities are classified as available-for-sale securities and arecarried at fair value. Marketable securities will include those securities ofdebt and publicly traded equity securities accounted for under the cost method.These securities trade on listed exchanges; therefore, fair value is readilyavailable. These securities are also subject to an impairment charge when webelieve an investment has experienced a decline in value that is other thantemporary. Under our accounting policy, a decline in the value of ourinvestments is deemed to be other than temporary and such investments aregenerally considered to be impaired if their value is less than our cost basisfor more than six (6) months, or some other applicable period in light ofthe facts and circumstances surrounding the investments.

In addition, in connection with our collaborativepartnering business, we sometimes make strategic investments in the securitiesof companies that are privately held. Investments in our partners whose equityis not publicly traded are classified in separate line items in ourconsolidated balance sheet entitled “Investments in IDM” and “Investments in,and advances to, other partners” and were approximately $51.7 million as of December 31,2004. These securities are carried at original investment cost  and adjusted for other than temporary impairment charges, if  any.Because these securities are not listed on a financial exchange, the value ofthese investments is inherently more difficult to estimate than investments inpublic companies. We value these investments by using information acquired fromindustry trends, the management of these companies, financial statements, andother external sources. Specifically, our determination of any potentialimpairment of the value of privately held securities includes an analysis of 

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the following for eachcompany on a periodic basis: review of interim and year-end financialstatements, cash position and overall rate of cash used to support operations,the progress and development of technology and product platform, the per sharevalue of subsequent financings and potential strategic alternatives. Based onthe information acquired through these sources, we record an investmentimpairment charge when we believe an investment has experienced a decline invalue that is other than temporary.

Future adverse changes inmarket conditions or adverse changes in financial condition and/or operatingresults of the companies in which we invest that may not be reflected in aninvestment’s current carrying value may also require an impairment charge inthe future.

***Valuation of Long-Lived and Intangible Assets***

We assess theimpairment of identifiable intangible assets and long-lived assets wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable. Factors we consider important that could trigger an impairmentreview include the following:

·       asignificant underperformance relative to expected historical or projectedfuture operating results;

·       asignificant change in the manner of our use of the acquired asset or thestrategy for our overall business; and/or

·       asignificant negative industry or economic trend.

When we determine that thecarrying value of intangible assets or long-lived assets are not recoverablebased upon the existence of one or more of the above indicators of impairment,we may be required to record impairment charges for these assets that have notbeen previously recorded.

***Acquired In-Process Technology***

In-Process Technologyexpense for significant technology acquisitions is determined based on ananalysis using risk-adjusted cash flows expected to be generated by productsthat may result from in-process technologies which have been acquired. Thisanalysis includes forecasting future cash flows that are expected to resultfrom the progress made on each in-process project prior to the acquisitiondate. Cash flows are estimated by first forecasting, on a product-by-productbasis, net revenues expected from the sales of the first generation of eachin-process project and risk adjusting these revenues to reflect the probabilityof advancing to the next stage of the FDA approval process. The forecast datain the analysis is based on internal product level forecast informationmaintained by us in the ordinary course of business. The inputs used inanalyzing In-Process Technology is based on assumptions, which we believe to bereasonable but which are inherently uncertain and unpredictable. Theseassumptions may be incomplete or inaccurate, and unanticipated events andcircumstances may occur. Appropriate operating expenses are deducted fromforecasted net revenues on a product-by-product basis to establish a forecastof net returns on the completed portion of the in-process technology. Finally,net returns are discounted to a present value using discount rates thatincorporate the weighted average cost of capital relative to the biotechindustry and us as well as product specific risks associated with the acquiredin-process research and development products. The product specific risk factorsinclude the product’s phase of development, type of product candidate underdevelopment, likelihood of regulatory approval, manufacturing processcapability, scientific rationale, preclinical safety and efficacy data, targetproduct profile, and development plan. In addition to the product specific riskfactors, a discount rate is used for the valuation, which represents aconsiderable risk premium to our weighted average cost of capital. Thevaluations used to estimate In-Process Technology require us to use significantestimates and assumptions that if changed, may result in a different valuationfor In-Process Technology.

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**Results ofOperations**

***Years Ended December 31, 2002, 2003 and 2004***

***Contract and License Revenues***

Contract and licenserevenues totaled $24.6 million, $5.8 million and $9.1 million for the yearsended December 31, 2002, 2003 and 2004, respectively. Contract and licenserevenues for 2003 decreased by $18.7 million or 76% as compared to 2002. Thisdecrease relates principally to a decrease in revenue from Immuno-DesignMolecules, S.A., or IDM, of $14.3 million as a result of the completion of therecognition of revenue associated with the transfer of technology to IDM in July 2000,as well as a decrease in revenue of $3.4 million from Eli Lilly and Company.Contract and license revenues for 2004 increased by $3.3 million or 56% ascompared to 2003. This increase relates principally to approximately $2.4million of revenue recognized from our collaboration agreement with Pfizer, Inc.which was executed in September 2004 and approximately $0.6 million ofrevenue from the National Institutes of Health in accordance with a grant wereceived in 2004. Because contract and license revenues depend to a largeextent on the product development efforts of our partners and licensees, ouryear-to-year contract and license revenues can fluctuate significantly and areinherently difficult to predict.

***Sales, Contract and License Revenues from Genmab***

Sales, contract andlicense revenues from Genmab A/S were $14.8 million, $5.3 million and $3.4million for the years ended December 31, 2002, 2003 and 2004,respectively. Sales, contract and license revenues from Genmab for 2003decreased by $9.4 million or 64% as compared to 2002. In 2002 there were salesof MDX-CD4 and MDX-015 totaling $11.4 million in order to support Genmab’sclinical trials. There were no sales of such material to Genmab in 2003 or2004. The 2003 decrease was offset, in part, by increased contract and licenserevenues related principally to an increased number of research licenses andantibody exclusive licenses requested by and granted to Genmab. Sales, contractand license revenues from Genmab for 2004 decreased by $2.0 million or 37% ascompared to 2003. This decrease relates principally to fewer research licensesand antibody exclusive licenses requested by and granted to Genmab.

***Cost of Sales***

Cost of sales were $8.3million, $3 thousand and $0 for the years ended December 31, 2002, 2003and 2004, respectively. Cost of sales in 2003 decreased by $8.3 million, ascompared to 2002. The decrease is the result of no sales of MDX-CD4 and MDX-015to Genmab in 2003 as discussed above.

***Research and Development Expenses***

Research and development expenses for our products indevelopment were $82.6 million, $95.5 million and $122.0 million for the yearsended December 31, 2002, 2003 and 2004, respectively. Research anddevelopment expenses in 2003 increased by $12.8 million, or 16% as compared to2002 and research and development expenses in 2004 increased by $26.5 million,or 28% as compared to 2003. Historically, due to the relatively small number ofour products in clinical trials, we have not accounted for our research anddevelopment expenses on a project-by-project basis and, therefore, we do notprovide a breakdown of such historical information in that format. We have,historically, tracked our costs in the categories discussed below, namely, “research”and “product development” and by the types of costs as outlined below.

Our research costs consist of costs associated withthe breeding, care and continued development of our HuMAb-Mouse and KM-Mouse,as well as costs associated with research and testing of our product candidatesprior to reaching the preclinical stage. Such research costs primarily includepersonnel costs, 

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facilities (including depreciation),research supplies, funding of outside research and license and technologyaccess fees.

Our product development costs consist of costs ofpreclinical development (including manufacturing) and conducting andadministering clinical trials. Such product development costs also includepersonnel costs, facilities (including depreciation), supply expense related toantibody manufacturing and clinical trial expenses.

Thefollowing table sets forth a breakdown of our research and development expensesby those associated with research and those associated with product developmentfor the periods indicated.
| ** **           | ** ** | **Year Ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2004** | ** ** |
| Research             |       | $                                          | 34,659     |   | $ | 37,495 |   | $ | 53,284 |   |
| Product  Development |       | 47,967                                     |       | 57,964 |   | 68,723 |   |
| Total                |       | $                                          | 82,626     |   | $ | 95,459 |   | $ | 122,007 |   |

 

***Research Costs***

Research costs in2003 increased by $2.8 million, or 8% as compared to 2002. Research costs in2004 increased by $15.8 million, or 42% as compared to 2003. The increases inresearch costs primarily relate to the following.

·       Personnelcosts in 2003 were $12.7 million, an increase of $2.6 million or 25% ascompared to 2002. Personnel costs in 2004 were $13.2 million, an increase of$0.5 million or 3% as compared to 2003. The increased personnel costs areprimarily attributable to staff needed to support higher levels of new productdevelopment opportunities, the continued development of our UltiMAb® system,and the performance of contract services for our collaborative partners.Personnel costs include primarily salary, benefits, payroll taxes andrecruiting costs. We expect personnel costs to continue to increase as wecontinue to increase our research activities.

·       An$8.5 million expense representing a liability to Gilead Sciences, Inc. forthe reduction of future royalty obligations relating to certain intellectualproperty rights regarding anti-CTLA-4 product candidates in 2004 for which nocomparable payments were made in 2002 and 2003. The total consideration of $8.5million is being paid to Gilead in eight equal quarterly installments. Thefirst two of these payments were made in 2004. As of December 31, 2004,approximately $6.4 million (six installments) remained due to Gilead under thisobligation (see further discussion under the section herein entitled “*Other Liquidity Matters”*).

·       Facilitycosts in 2003 were $7.5 million, an increase of $2.3 million or 44% as comparedto 2002. Facility costs in 2004 were $8.7 million, an increase of $1.2 millionor 15% as compared to 2003. The increase in facility costs primarily relates tothe substantial investments made in our research facilities in recent years. Asa result, depreciation, utilities, maintenance, property taxes and relatedexpenses increased for 2003, as compared to 2002, and for 2004, as compared to2003. We expect to incur increased facility costs as a result of continuedcapital expansion, renovations and replacements.

·       License and technologyaccess fees in 2003 were $3.1 million, a decrease of $4.1 million or 58% ascompared to 2002. License and technology access fees in 2004 were $6.9 million,an increase of $3.8 million or 125% as compared to 2003. These costs representfees paid to certain partners and research organizations in connection withcertain of our collaboration and license agreements. Included in the 2004 costsare payments to diaDexus, Inc., Pharma Pacific Pty Ltd. and Kirin BreweryCo., Ltd., or Kirin, for licenses to certain technologies. We expect licensefees, including funds paid to certain partners, to increase in the future.

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***Product DevelopmentCosts***

Product developmentcosts in 2003 increased by $10.0 million, or 21% as compared to 2002. Productdevelopment costs increased by $10.8 million in 2004, or 19% as compared to2003. The increases in product development costs primarily relate to thefollowing:

·       Contractmanufacturing costs in 2003 were $0.7 million, an increase of $0.7 million or100% as compared to 2002. Contract manufacturing costs in 2004 were $8.1million, an increase of $7.4 million or 1091% as compared to 2003. The increasein third party contract manufacturing costs primarily represents production andpackaging expenses for a Phase III pivotal trial of MDX-010 in combination withMDX-1379, which began in the third quarter of 2004 and certain MDX-060manufacturing costs. We expect costs to third party manufacturers will increasein the future in order to support the advancement of our clinical pipeline.

·       Personnelcosts in 2003 were $20.6 million, an increase of $2.5 million or 14% ascompared to 2002. Personnel costs in 2004 were $22.9 million, an increase of$2.3 million or 11% as compared to 2003. The increased personnel costs are aresult of the increased staff needed to support more extensive clinical trialactivities primarily for MDX-010. Personnel costs primarily include salary,benefits, payroll taxes and recruiting costs. We expect personnel costs tocontinue to increase as we continue to increase our product developmentactivities and progress our products through clinical trials.

·       Facilitycosts in 2003 were $12.6 million, an increase of $1.8 million or 16% ascompared to 2002. Facility costs in 2004 were $13.1 million, an increase of$0.5 million or 4% as compared to 2003. The increase in facility costsprimarily relates to the substantial investments made in our productdevelopment facilities in recent years. As a result, depreciation, utilities,maintenance, property taxes and related expenses increased for each of 2003 and2004, as compared to prior year periods. We expect to continue to incurincreased facility costs as a result of continued capital expansion,renovations and replacements.

·       Supplycosts in 2003 were $5.7 million, a decrease of $4.3 million or 44% as comparedto 2002. In 2002 we manufactured larger quantities of material for Phase I andPhase II clinical trials for ourselves and our partners resulting in asignificant increase in supply costs. Supply costs in 2004 were $4.6 million, adecrease of $1.1 million or 19% as compared to 2003. In 2003 we completed achange to our method of production which resulted in comparatively lower supplycosts in 2004. Included in these costs are materials and small equipmentassociated with the manufacture of material for clinical trials. We expectthese costs to increase as we continue to expand our product developmentefforts and increase our clinical trial activities.

·       Clinicalresearch fees in 2003 were $4.7 million, an increase of $3.1 million or 190% ascompared to 2002 primarily as a result of an increase in the number of ongoingclinical trials particularly for MDX-010 and MDX-060. Clinical research fees in2004 were also $4.7 million, representing the conclusion of certain Phase IIclinical trials for MDX-010 offset by the initiation of the Phase III clinicaltrial for MDX-010 in combination with MDX-1379 which began in the third quarterof 2004. Clinical research fees include clinical investigator site fees,external trial monitoring costs and data accumulation costs. We expect expensesrelated to clinical trials to increase in the future as we continue to developour therapeutic product pipeline.

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Weexpect product development costs to increase in the future as more of ourproducts enter clinical trials. In addition, we may be obligated to makemilestone payments on certain of our products as they progress through theclinical trial process. Completion of clinical trials may take several years ormore. The length of time varies according to the type, complexity and intendeduse of the product candidate. We estimate that clinical trials of the type wegenerally conduct are typically completed over the following periods:
| **Clinical Phase** | ** ** | ** ** | ** ** | **Estimated Completion  Period** | ** ** |
|-------------------------|------------|------------|------------|---------------------------------------|------------|
| Phase I                 |       |       | 1-2 Years  |                                  |       |
| Phase II                |       |       | 1-2 Years  |                                  |       |
| Phase III               |       |       | 2-4 Years  |                                  |       |

 

The duration andcost of clinical trials may vary significantly over the life of a particularproject as a result of, among other things, the following factors:

·       thelength of time required to recruit qualified patients for clinical trials;

·       theduration of patient dosing and follow-up in light of trial results;

·       thenumber of clinical sites required for trials; and

·       thenumber of patients that ultimately participate.

We continue to explore newcollaborative arrangements that may affect future spending for research anddevelopment. As part of our partnering strategy, a significant portion of theresearch and development expenses incurred in connection with products usingour technology is expected to be borne by our partners. We believe this allowsus to participate in the research and development of substantially morepotential product candidates than we could develop on our own if we bore theentire cost of development. Products using our technology are currently invarious stages of development from preclinical to Phase III. The successfuldevelopment of these product candidates is dependent on many factors, includingamong other things, the efforts of our partners, unforeseen delays in, orexpenditures relating to, preclinical development, clinical testing,manufacturing or regulatory approval, failure to receive market acceptance, theemergence of competitive products and the inability to produce or market ourproducts due to third-party proprietary rights.

***General and Administrative Expenses***

General and administrativeexpenses include compensation, professional services, consulting, travel andfacilities (including depreciation) and other expenses related to legal,business development, finance, information systems and investor relations.General and administrative expenses totaled $22.9 million, $21.7 million and$24.3 million for the years ended December 31, 2002, 2003 and 2004,respectively. General and administrative expenses decreased by $1.1 million in2003, or 5% as compared to 2002. The 2003 decrease was generally attributableto a reduction in legal fees of $2.3 million primarily as a result of thecompletion of the negotiation and execution of our collaboration and licenseagreement with Kirin in 2002, and decreased consulting fees of $0.6 million,partially offset by higher personnel costs of $1.5 million. General andadministrative expenses increased by $2.6 million in 2004, or 12% as comparedto 2003. The 2004 increase is primarily attributable to increased personnelcosts of $1.1 million, and increased legal fees of $1.0 million primarily as aresult of the completion of the negotiation and execution of a series ofagreements with Pfizer and our collaboration and license agreement with BMS in2004. General and administrative expenses are expected to increase in thefuture as our products are developed and we expand our business activities.

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***Write-off of Facility Costs***

Write-off of facilitycosts in 2002 relates to a determination we made to delay indefinitely theplanned construction of a large scale manufacturing facility at our Bloomsbury,New Jersey, location and to pursue late-stage clinical and commercial supplyagreements with third party manufacturers with available capacity to meet ourcurrent internal production timetables. As a result of this decision, werecorded a charge of $11.3 million in 2002, representing the write-off ofdesign, engineering and other pre-construction costs. We believe that ourexisting facility in Annandale, New Jersey, is adequate for the production ofmaterials for clinical trials of our products and for providing support weoffer our partners in connection with our human antibody technology in thenear-term. In September 2003, we entered into a clinical supply agreementwith Lonza Group Ltd. with respect to MDX-010 and MDX-060, and,together with our partner BMS, we are pursuing ongoing discussions with respectto terms of a commercial supply agreement for MDX-010.

***Acquisition of In-Process Technology***

Acquisition of in-process technology for the yearended December 31, 2002, related to our acquisition of certain assets (includingcertain preclinical product candidates and programs related to the research anddevelopment of therapeutic products for the treatment of autoimmune disorders,cancer and infectious diseases) of Corixa Corporation in May 2002. Thetotal cost of the acquisition (including transaction costs), discussed morefully under the section herein entitled “Liquidity and Capital Resources,” was$21.4 million. Based upon an independent third-party valuation, in 2002, $16.3million of the cost of the acquisition was charged to operations as acquisitionof in-process technology.

Acquisition of in-process technology for the yearended December 31, 2003 related to an amended and restated licenseagreement with Kyowa Hakko Kogyo Co. Ltd., or the Kyowa License, that weentered into during the fourth quarter of 2003. Under the terms of the KyowaLicense we received certain intellectual property rights relating to thedevelopment and commercialization of our Ultra-Potent ToxinTM technology. TheKyowa License was the result of a renegotiation of a pre-existing licenseagreement with respect to Ultra-Potent Toxin technology between Kyowa andCorixa, whose license agreement we acquired as part of the May 2002 assetacquisition. Upon the execution of the Kyowa License, we paid Kyowa a total of$4.0 million and also made a final payment to Corixa in the amount of $2.5million.

Acquisition of in-processtechnology for the year ended December 31, 2004 related to our acquisitionof all of the outstanding capital stock not already owned by us of AbilityBiomedical Corporation, a privately held Canadian biotechnology company, in August 2004.The total cost of the acquisition (including transaction costs), discussed morefully under the section herein entitled “Liquidity and Capital Resources,” was$5.7 million, of which approximately $5.5 million of in-process research anddevelopment was determined not to be technologically feasible and had noalternative future uses at the time of acquisition, and, as a result, wascharged to operations as acquisition of in-process technology during 2004.

***Equity in Net Loss of Affiliate***

Equity in net loss of affiliate represents our shareof Genmab’s net loss for the years ended December 31, 2002, 2003 and 2004.Genmab is an affiliated company and is accounted for using the equity method ofaccounting (see Note 12 to the Consolidated Financial Statements). Therecognition of our share of Genmab’s net losses reduces the carrying value, orbasis, of our investment in Genmab. We expect that during the first quarter of2005 the remaining basis of our investment in Genmab will be reduced to zeroand, accordingly, recognition of our share of Genmab’s net losses will besuspended.

Equity in net loss of affiliate was $50.6 million,$15.0 million and $19.8 million for the years ended December 31, 2002,2003 and 2004, respectively. Equity in net loss of affiliate in 2003 decreasedby $35.6 million or 70% as compared to 2002. Included in equity in net loss ofaffiliate for 2002 is in an impairment 

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loss on our investment inGenmab of $31.0 million resulting from an approximate 60% decrease in themarket value of Genmab’s stock following Genmab’s September 24, 2002,press release in which it announced that its HuMax-CD4 product, a fully humanantibody that targets CD4 receptors on cells known as T-cells was found not tobe effective in combination with methotrexate in a Phase II study of 155patients with active rheumatoid arthritis. We recorded the $31.0 millionimpairment charge in the third quarter of 2002 as a result of the decrease inthe market price of the Genmab stock, which was deemed to be other thantemporary at the time. If we deem our investment in Genmab to be furtherimpaired at the end of any future period, we may incur an additional impairmentcharge on this investment. Excluding the impact of the impairment in 2002,equity in net loss of affiliate would have decreased by $4.6 million or 23% ascompared to 2002. This decrease was the result of a decrease in Genmab’s netloss for 2003, primarily as a result of the recognition of $10.5 million ofmilestone revenue by Genmab during 2003.

On July 6, 2004,Genmab completed a private placement of 5.6 million shares of its stock. As aresult of this private placement, our ownership percentage of Genmab was reducedfrom approximately 30.9% to 24.7%. The difference between our proportionateshare of the additional equity raised was approximately $9.7 million and wasaccounted for in accordance with APB Opinion No. 18, *The Equity Method of Accounting for Investment inCommon Stock,*and Staff Accounting Bulletin No. 51, *Accounting for Sales of Stock by a Subsidiary*increasingour investment in Genmab and capital in excess of par value. Equity in net lossof affiliate in 2004 increased by $4.8 million or 32% as compared to 2003. Thisincrease reflects an increase in Genmab’s net loss as a result of its expandedresearch and development efforts offset, in part, by a reduction in ourownership percentage, resulting from the 2004 private placement, and thereforea reduction of our share of Genmab’s net loss for the second half of 2004.

***Interest and Dividend Income***

Interest and dividendincome consists primarily of interest earned from our cash, cash equivalentsand marketable securities. Interest and dividend income was $18.5 million,$12.3 million and $7.1 million for the years ended December 31, 2002, 2003and 2004, respectively. Interest and dividend income in 2003 decreased by $6.2million, or 33% as compared to 2002. The decrease reflects lower returns on ourinvestment portfolio and a reduction in the size of our average cash balancesinvested, which, on average, were also lower during the period. Interest anddividend income in 2004 decreased by $5.2 million, or 42% as compared to 2003.This decrease primarily relates to lower returns on our investment portfolio aswell as increased amortization of premiums on debt securities. We anticipatelower interest and dividend income in the future as we continue to fund ouroperations and capital expenditures from our cash reserves.

***Impairment Loss on Investments in Partners***

In the course of our business we may make investmentsin companies (both public and private) as part of strategic collaborations. Werecorded impairment charges of $9.5 million, $0 and $0.2 million for the yearsended December 31, 2002, 2003 and 2004, respectively related toinvestments in certain of our partners (other than Genmab) whose securities arepublicly traded. The 2002 impairment charge was the result of certaininvestments trading below their original cost basis for more than six months.The 2004 impairment charge was the result of losses on one of these investmentswhich were considered to be other than temporary. If we deem these investmentsto be further impaired at the end of any future period, we may incur additionalimpairment charges on these investments.

In addition, we haveinvestments in several partners whose securities are not publicly traded.Because these securities are not publicly traded, the value of theseinvestments is inherently more difficult to estimate than investments inpublicly traded companies. We recorded impairment charges of $2.4 million, $1.4million and $7.1 million for the years ended December 31, 2002, 2003 and2004, respectively, related to investments in certain of our partners whosesecurities are not publicly traded. The 2004 impairment 

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chargeis primarily comprised of a $7.0 million impairment related to our investmentin IDM. The amount of the IDM impairment charge was calculated as thedifference between the per share price received by IDM in a December 2004private placement of its equity securities and our cost basis. If we deem theseinvestments to be further impaired at the end of any future period, we mayincur additional impairment charges on these investments.

***Additional Payments (Receipts) Related to AssetAcquisitions***

Additional payments(receipts) related to asset acquisition of $2.4 million, $31 thousand and ($16)thousand for the years ended December 31, 2002, 2003 and 2004,respectively, represent net additional purchase payments (receipts) toNorthwest Biotherapeutics, Millennium Pharmaceuticals and Corixa in 2002, toNorthwest Biotherapeutics in 2003 and to Gilead, Pharma Pacific and AbilityBiomedical shareholders in 2004. Pursuant to the terms of our agreements withthese companies, under certain circumstances we were required to pay (or toreceive) an amount equal to the difference between the proceeds received bythese companies from the sale of any shares of our common stock delivered aspayment of any installment of the purchase price of the assets and the totalamount of the purchase price installment due under the agreements.

***Interest Expense***

Interest expense wasprimarily related to interest and amortization of issuance costs on our 4.50%Convertible Subordinated Notes issued in June 2001, or the 4.50% notes,our 4.25% Convertible Senior Notes issued in July 2003, or the 4.25%notes, and our 2.25% Senior Subordinated Notes issuedin May 2004, or the 2.25% notes. Interest expense was $9.1 million, $11.8million and $12.8 million for the years ended December 31, 2002, 2003 and2004, respectively. Interest expense in 2003 increased by $2.7 million, or 30%as compared to 2002 reflecting the addition of approximately five months ofaccrued interest on our 4.25% notes. Interest expense in 2004 increased by $1.1million, or 9% as compared to 2003. The increase reflects a full year ofinterest expense on our 4.25% notes and the addition of approximately sevenmonths of interest expense on our 2.25% notes, offset, in part, by a decreasein interest expense resulting from the redemption, repurchase and cancellationof the 4.50% notes in June and July of 2004. The 2.25% Notes are duein May 2011 and interest is payable semi-annually on May 15 and November 15of each year. We expect interest expense to decrease in the future as a resultof the redemption, repurchase and cancellation of the 4.50% Notes and the January 2005conversion of our 4.25% notes (see further explanation under the section entitled*“OtherLiquidity Matters”*).

***Debt Conversion Expense***

Debt conversion expense of$10.2 million for the year ended December 31, 2004 related to themake-whole payment associated with the December 2004 decision calling forthe redemption of our 4.25% notes. Such amount was accrued as of December 31,2004 and was paid in January 2005 (see further information under thesection entitled *“Cash Provided By Financing Activities”*). There were nocomparable charges for the years ended December 31, 2002 and 2003.

***Net Loss on Extinguishment of Debt***

In connection with a private placement of $150.0million of our 2.25% notes (see further discussion under the section entitled *“Liquidity and CapitalResources”*) we repurchased and redeemed $142.0 million in aggregateprincipal amount of our 4.50% notes for cancellation. As a result of thisrepurchase and cancellation we recorded a loss on the early extinguishment ofdebt of approximately $4.5 million for the year ended December 31, 2004.

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In January 2004, weand certain holders of our 4.50% notes completed an exchange and cancellationof $33.0 million in aggregate principal amount of the 4.50% notes, for theissuance of $21.986 million in aggregate principal of a new series of 4.25%notes and in connection therewith, we recorded a gain of approximately $0.3million for 2004. We calculated the gain in accordance with EITF 96-19, *Debtor’s Accounting for a Modification or Exchange of**Debt Instruments*. EITF 96-19requires that the gain on the early extinguishment of debt be computed usingthe fair value of the newly issued convertible debt which, at the time of thedebt exchange, was trading at a premium to the principal amount of the notes. Weclassified the premium associated with the newly issued 4.25% notes ofapproximately $10.2 million as capital in excess of par value in accordancewith APB 14, *Accounting for Convertible Debtand Debt Issued with Stock Purchase Warrants*.

***Provision for Income Taxes***

Our provision for incometaxes of $0.1 million, $0.1 million and $31 thousand for the years ended December 31,2002, 2003 and 2004, respectively, relates primarily to the New Jerseyalternative minimum tax assessment which became effective in 2002.

***Cumulative Effect of a Change in Accounting Principle***

Cumulative effect of achange in accounting principle for the year ended December 31, 2003 was$0.8 million. Effective January 1, 2003, we changed our method ofaccounting for asset retirement obligations in accordance with SFAS No. 143,*Accounting for Asset Retirement Obligations*.Previously, we were not required to recognize amounts related to assetretirement obligations. Under SFAS No. 143, we now recognize assetretirement obligations in the period in which they are incurred if a reasonableestimate of a fair value can be made. The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset. Theadoption of SFAS No. 143 resulted in an increase in net property,buildings and equipment of approximately $1.4 million, recognition of an assetretirement obligation liability of approximately $2.2 million and a cumulativeeffect of a change in accounting principle of approximately $0.8 million.

**Liquidity andCapital Resources**

We require cash to fund our operations, to makecapital expenditures and strategic investments, and to pay debt service on ourconvertible notes. Since inception, we have financed our operations through thesale of our securities in public and private placements, sales of our productsfor research purposes, development and manufacturing services, technologytransfer and license fees and milestone payments. We expect to continue to fundour cash requirements from these sources in the future. In 2002, 2003, and2004, we received net proceeds of $301.1 million from sales of our equity anddebt securities.

At December 31, 2003and 2004, we had $358.5 million and $374.5 million, respectively, in cash, cashequivalents and marketable securities. We primarily invest our cash equivalentsand marketable securities in highly liquid, interest-bearing, investment gradeand government securities in order to preserve principal.

***Cash Used in Operating Activities***

Cash used in operating activities was $64.0 million,$89.3 million and $6.0 million for the years ended December 31, 2002, 2003and 2004, respectively. This reflects an increase of $25.3 million in 2003 ascompared to 2002 and a decrease of $83.3 million in 2004 as compared to 2003.

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The 2003 increase was primarily due to higher researchand development expenses (approximately $12.8 million) related to thedevelopment of our product pipeline, a decrease in interest and dividend income(approximately $6.2 million) due to lower interest rates as well as loweraverage cash balances and an increase in interest expense (approximately $2.7million) representing the addition of approximately five months of interest onour 4.25% notes which were issued in July 2003. The 2004 decrease isprimarily due to an increase in deferred contract revenue (approximately $99.1million) resulting from the up-front payments associated with collaborationswith each of Pfizer and MedImmune, offset in part, by higher research anddevelopment expenses (approximately $26.5 million). The increase in researchand development expenses resulted primarily from higher personnel costs,expenses related to our facilities, third-party research and contractmanufacturing costs, and the costs of clinical trials. All of these costs werehigher as result of our increased clinical trial and product developmentactivities.

We have incurred and willcontinue to incur significant costs in the area of research and development,including preclinical and clinical trials, as our products are developed. Weplan to spend significant amounts to progress our current products through theclinical trial and commercialization process as well as to develop additionalproduct candidates on our own or with our partners. As our products progress throughthe clinical trial process, we may be obligated to make significant milestonepayments on certain of our products. We also expect to incur future facilitycosts as a result of our continued capital expansion, renovations andreplacements, but at a reduced rate. To a lesser extent, we expect our generaland administrative costs to increase as we expand our administrative andbusiness development activities. Furthermore, we expect our investment incometo decrease as we fund our future operations and capital expenditures from ourcash reserves. We anticipate that our operating expenditures may be partiallyoffset by revenues from partners for license fees, milestone payments, anddevelopment and manufacturing services.

***Cash Provided by (Used in) Investing Activities***

Net cash providedby investing activities was $93.9 million in 2002. Net cash used in investingactivities was $22.6 million in 2003 and $33.8 million in 2004, respectively. Cashwas provided by and used in investing activities primarily as follows:

·       Capitalexpenditures of $43.7 million, $8.9 million and $9.1 million in 2002, 2003 and2004, respectively. Capital spending in 2002 reflects an investment in buildingimprovements related to the expansion of our Milpitas, California, facility aswell as leasehold improvements and the purchase of machinery, equipment andfurniture and fixtures for our Sunnyvale, California, facility, which we leasedin July 2002. The capital expenditures in 2003 and 2004 reflect aninvestment in laboratory automation as well as the addition of machinery andequipment.

·       Netsales of marketable securities were $136.7 million and $3.2 million in 2002 and2003, respectively. The net sales of marketable securities in 2002 wereprimarily to fund operations and capital expenditures. The net sales ofmarketable securities in 2003 were the result of funding operations and capitalexpenditures offset by the net proceeds received ($121.2 million) from the saleof our 4.25% notes in July 2003.

·       Netpurchases of marketable securities in 2004 were $27.9 million. The 2004 netpurchases were the result of the proceeds received from the Pfizercollaboration ($110.0 million), the MedImmune collaboration ($15.0 million) andthe net proceeds ($145.2 million) received for the private placement of our2.25% notes, offset in part, by sales of marketable securities ($242.6 million)to fund operations and capital expenditures as well as to repurchase and redeemour 4.50% notes as discussed further in the section entitled *“Cash Provided by FinancingActivities”*.

We expect 2005 capitalexpenditures to be approximately $15.0 million representing the purchase ofmachinery and scientific equipment and additional investment in lab automation.

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***Cash Provided by Financing Activities***

Cash provided by financing activities was $0.6million, $123.0 million and $31.6 million in 2002, 2003 and 2004, respectively.In 2002, cash provided by financing activities consisted primarily of proceedsreceived from the issuance of stock under our employee stock purchase plan of$0.5 million. In 2003, cash provided by financing activities consistedprimarily of $121.2 million in net proceeds received from the sale of our 4.25%notes in July 2003 and $0.9 million from the issuance of common stockunder our employee stock purchase plan. In 2004, cash provided by financingactivities consisted primarily of $145.2 million in net proceeds received fromthe sale of our 2.25% notes in May 2004 and $31.8 million from sales ofcommon stock primarily to Pfizer ($30.0 million) and the issuance of commonstock under our employee stock purchase plan ($1.1 million), offset in part, bythe repurchase, redemption and cancellation of our 4.50% notes ($144.6million).

In July 2003, we completed a private placementpursuant to Rule 144A of the Securities Act of 1933, as amended of $125million in aggregate principal amount of our 4.25% notes to qualifiedinstitutional investors. The 4.25% notes were initially convertible into sharesof our common stock at the rate of 148.8261 shares per each $1,000 principalamount of notes, which is equivalent to an initial conversion price ofapproximately $6.72 per share, subject to anti-dilution adjustments. Interestwas payable on February 15 and August 15 of each year. The firstinterest payment was made on February 15, 2004.

The 4.25% notes were scheduled to mature on August 15,2010 and were redeemable at our option on or after August 15, 2006, orearlier if the price of our common stock exceeded specified levels. We receivednet proceeds from the private placement of the 4.25% notes of approximately$121.2 million (after deducting the initial purchasers’ discounts and offeringexpenses). As of December 31, 2004, we had purchased U.S. Treasurysecurity strips to collateralize the notes in an amount sufficient to pay thefour interest payments due on the 4.25% notes in 2005 and 2006. Such amount hasbeen classified as segregated securities in the current assets sectionof our December 31, 2004, consolidated balance sheet.

On January 14, 2005, we completed the provisionalredemption of all of our 4.25% notes which was previously announced in December 2004.Holders of all of the outstanding 4.25% notes ($146.986 million) convertedtheir notes into a total of 21,875,353 shares of our common stock prior to theredemption date. In connection with the redemption, we paid approximately $12.5million in cash representing the “make-whole” payment of $10.2 million andaccrued interest of $2.3 million. We accrued the $10.2 million “make-whole”payment in the quarter ended December 31, 2004, at the time the redemptionwas announced.

In January 2004, we and certain holders of our4.50% notes completed an exchange and cancellation of $33.0 million inaggregate principal amount of the 4.50% notes, for the issuance of $21.986million in aggregate principal of a new series of 4.25% notes due August 15,2010. As a result of this exchange and cancellation, our total convertible debtwas reduced by $11.014 million.

In May 2004, we completed a private placementpursuant to Rule 144A of the Securities Act of 1933, as amended, of $150.0million in aggregate principal amount of our 2.25% notes to qualifiedinstitutional investors. The 2.25% notes are initially convertible into sharesof our common stock at the rate of 72.9129 shares per each $1,000 principalamount of notes, which is equivalent to an initial conversion price ofapproximately $13.72 per share, subject to anti-dilution adjustments. Interestis payable on May 15 and November 15 of each year. The first interestpayment was made on November 15, 2004.

The 2.25% notes mature on May 15, 2011 and areredeemable at our option on or after May 20, 2009. Holders of the 2.25%notes may require us to repurchase the notes if we undergo a “change in control”as defined in the indenture. We received net proceeds from the privateplacement of the 2.25% notes of approximately $145.2 million (after deductingthe initial purchasers’ discounts and offering expenses). The costs of issuanceof the 2.25% notes of approximately $4.8 million have been deferred and arebeing amortized over the term of the 2.25% notes. In May 2011, or earlierif we undergo a change in control, we 

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may be required to use asignificant portion of our cash to repay the remaining balance ($150.0 million)of the 2.25% notes. If our cash is not sufficient to meet our obligations underthe 2.25% notes, we would be required to seek additional financing.

In June 2001, weissued $175 million of our 4.50% notes. The 4.50% notes were scheduled tomature on July 1, 2006. Concurrent with the private placement of the 2.25%notes described above, we repurchased approximately $65.6 million in aggregateprincipal amount of our 4.50% notes for cancellation during the second quarterof 2004. On July 1, 2004, we completed the redemption and cancellation ofthe remaining balance of our 4.50% notes of approximately $76.4 million forapproximately $77.7 million plus accrued interest of approximately $1.7million.

***Other Liquidity Matters***

As of December 31, 2004, we had federal netoperating loss (NOL) carryforwards of approximately $426.6 million. These NOLcarryforwards will expire in the years 2005-2024 (as more fully described inNote 5 to the consolidated financial statements), if not utilized. During 2000we determined that an ownership change under Section 382 of the InternalRevenue Code of 1986, as amended, occurred during 1998. The effect of thisownership change was the imposition of a $3.2 million annual limitation on theuse of NOL carryforwards attributable to periods before the change. This annuallimitation will result in the expiration of some NOL carryforward creditsbefore utilization. At December 31, 2004 the amount of NOL subject to thelimitation was $43.8 million and the amount not subject to limitation was$382.8 million.

In connection with our merger with Essex MedicalProducts in 1987, we are committed to pay to Essex Chemical Corporation, orEssex, 20% of our net after-tax income until a total of $1.0 million has beenpaid, contingent upon the occurrence of certain events. As the result of ournet income in 2000 we accrued $0.7 million payable to Essex, which remainsaccrued at December 31, 2004. At our option, this obligation may besatisfied by the payment of shares of our common stock having a fair marketvalue equal to the amount owed, provided such shares are registered for salewith the Securities and Exchange Commission.

Our wholly-owned subsidiary Celldex Therapeutics, Inc.has filed a registration statement with the Securities and Exchange Commissionrelated to a proposed initial public offering of a portion of its common stock.As part of this transaction, we have assigned or licensed to Celldex certainintellectual property related to our vaccine technology, including the rightsto MDX-1307, one of our product candidates for the treatment of cancer, as wellas the IND associated with this product which became effective in February 2004.If the initial public offering is completed, we anticipate that we willcontinue to hold approximately 70% of the outstanding shares of common stock ofCelldex. We cannot assure you that this transaction will be consummated.

In July 2004, we entered into an amendment to acollaboration and license agreement with Gilead, referred to herein as theGilead Amendment. Under the terms of the Gilead Amendment, we agreed to payGilead a total of $8.5 million in eight equal quarterly installments of $1.063million, payable at our election, in cash, registered shares of our commonstock or a combination thereof, in exchange for (i) a reduction of certainfuture royalty payment obligations payable by us to Gilead, and (ii) anexpansion of the scope of certain licenses from Gilead to us relating tocertain intellectual property rights regarding anti-CTLA-4 products. The firstof these payments was paid on August 2, 2004 through the issuance of185,622 shares of our common stock to Gilead. The second payment was made on October 1,2004 in cash. The third payment was made on January 3, 2005 in cash. Thefive remaining payments will be made on a quarterly basis, commencing on April 1,2005 and ending on April 3, 2006. If we decide to make a quarterlyinstallment payment in shares of our common stock, the number of shares ofcommon stock subject to issuance for any installment will be determined bydividing (x) $1.063 million (less any cash paid in connection with theinstallment) by (y) the average of the closing sales prices of our commonstock for 

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each of the trading daysduring the five-trading-day period ending on (and including) the trading daythat is two trading days immediately prior to the applicable date of issuanceas publicly reported by NASDAQ. In the event that, during the 60-day periodfollowing the applicable date of issuance of such common stock, Gilead sellsall of the shares of our common stock delivered as part of an installmentpayment under the Gilead License and the proceeds of such sale are less than$1.063 million (less any cash paid in connection with such installment), wemust pay the difference to Gilead in cash. If such sale proceeds exceed $1.063million (less any cash paid in connection with such installment), Gilead mustpay us 50% of any such excess in cash. In the event that, during any such60-day period, Gilead does not sell all of the shares of our common stockcomprising the installment, there will be no such adjustment. In August 2004, we paid Gilead approximately$0.1 million representing the difference between the proceeds received byGilead upon the sale of the 185,622 shares of common stock and the initialpayment of $1.063 million.

In August 2004, we completed the acquisition ofall of the outstanding capital stock not already owned by us of AbilityBiomedical. Pursuant to this transaction, we acquired Ability Biomedical’sintellectual property related to IP-10, a protein believed to be associatedwith a variety of immune disorders, including multiple sclerosis, rheumatoidarthritis, inflammatory bowel disease, chronic obstructive pulmonary diseaseand type I diabetes.

Under the terms of the share purchase agreement withAbility Biomedical, we made cash payments totaling approximately $606 thousandand issued a total of 731,823 shares of our common stock valued atapproximately $4.3 million in exchange for all of Ability Biomedical’s issuedand outstanding stock not already owned by us. During the 60-day periodfollowing an issuance of shares of our common stock to the Ability Biomedicalshareholders in connection with the acquisition, certain of such shareholderssold all of the shares issued to them for an amount less than the amount due tothem under the share purchase agreement while certain other shareholders soldshares issued to them for an amount greater than the amount due them under theshare purchase agreement. In accordance with the share purchase agreement, wereceived approximately $0.1 million representing 50% of the difference betweenthe actual proceeds received and the amount due under the share purchaseagreement.

Upon achievement of certain development milestoneswith respect to our anti-IP-10 antibody program, but no later than September 4,2007, we may be required to pay the former shareholders of Ability Biomedicalan additional amount of approximately $3.68 million in cash and/or common stocksubject to fluctuations in currency exchange rates. In lieu of such additionalpayment, we also have the option to revert to the original joint collaborationagreement with the former shareholders of Ability Biomedical whereby each partywould be responsible for 50% of the costs associated with the anti-IP-10 antibody.

In September 2004, we entered into a series ofagreements with Pfizer. The first agreement amended our existing collaborativeresearch and license and royalty agreements with Pfizer to provide for thediscovery and development of up to 50 antibody products over ten years. Thesecond and third agreements were a sublicense from us to Pfizer and across-license of certain patents and patent applications, in each case solelyrelating to our respective anti-CTLA-4 antibody programs. The fourth agreementwas a stock purchase agreement also related to the anti-CTLA-4 programs. Pursuantto certain of these agreements, Pfizer made a total initial cash payment to usof $80.0 million and purchased 4,827,808 shares of our common stock at apurchase price equal to $6.21 per share for an aggregate purchase price of$30.0 million. These shares were issued in a private placement and the pershare price represented a premium to market price at the time we entered intothe collaboration.

In November 2004, we announced a collaborationand co-promotion agreement and a related securities purchase agreement with BMS.This collaboration became effective in January 2005. Under the terms ofthe collaboration, we and BMS have each granted the other certain intellectualproperty licenses and product rights on a worldwide basis in order to enable usto collaborate in research and development 

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of certain therapeuticantibody-based products for the treatment of cancer and other diseases, and, inthe event that further development work is successful, to commercialize anyresulting products. In particular, the collaboration includes a grant by us toBMS of a license to commercialize MDX-010, a fully human antibody productdeveloped using our UltiMAb Human Antibody Development System, that isantagonistic to CTLA-4. MDX-010 is currently under investigation for thetreatment of a broad range of cancers and other diseases. The collaborationalso includes the grant by us to BMS of a sub-license to MDX-1379, a gp100peptide vaccine licensed by us from the U.S. Public Health Service, for usewith MDX-010 for the treatment of metastatic melanoma. We and BMS are currentlyconducting a Phase III clinical trial with MDX-010 and MDX-1379 combinationtherapy in Stage III and Stage IV metastatic melanoma patients at multiplesites within the U.S.

As part of the collaboration, we and BMS havecommitted to an initial multi-year budget of approximately $192.0 million tofund the development of MDX-010 as a potential treatment for a broad range ofcancers. BMS will be responsible for 65% of all development costs related toclinical trials intended to support regulatory approval in both the U.S. andEurope, with the remaining 35% to be paid by us. We and BMS will share equallythe costs of any clinical trials of products intended solely for regulatoryapproval in the U.S., and BMS will be fully responsible for all developmentcosts that relate solely to regulatory approval in Europe and other parts ofthe world.

Under the terms of the collaboration, we could receiveup to $205.0 million from BMS if all regulatory milestones are met, plus up toan additional $275.0 million in sales-related milestones. We will also have theoption to co-promote any products in the U.S., and, if we elect to exercisethis option and have participated in the funding of the applicable Phase IIclinical trial(s), we will receive 45% of any profits from commercial sales. Inthe event we choose not to exercise our co-promotion rights, BMS will haveexclusive commercial rights in the U.S. and will pay us royalties on commercialsales. Outside the U.S., BMS will have exclusive commercial rights and will payus royalties on commercial sales.

Pursuant to theseagreements, BMS made an initial cash payment to us on January 21, 2005 of$25.0 million. In addition, BMS purchased a total of 2,879,223 unregisteredshares of our common stock at a purchase price equal to $8.6829 per share foran aggregate purchase price of $25.0 million. These shares were issued in aprivate placement pursuant to the exemption from registration provided by Section 4(2) ofthe Securities Act of 1933. The purchase price represented a premium to themarket price on the date we entered into the collaboration. BMS has agreed to atwo-year lock-up period with respect to any sales of such stock. We have nofuture obligation to register such stock.

***Contractual Obligations***

Ourmaterial contractual obligations under lease, debt and research fundingagreements for the next five years, and thereafter, as of December 31,2004, are as follows:
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Less Than  1 Year**           | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | **(in thousands)**                   | ** ** |
| **Contractual  Obligations(1)**     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible  notes(2)               |       |                                      | $          | — |   |   | $ | — |   |   | $ | — |   |   | $ | 296,986 |   | $ | 296,986 |   |
| Research funding                    |       |                                      | 3,542      |   |   | 6,185 |   |   | 2,435 |   |   | 93 |   | 12,255 |   |
| Operating leases  and other         |       |                                      | 3,250      |   |   | 5,059 |   |   | 2,831 |   |   | — |   | 11,140 |   |
| Total contractual cash  obligations |       |                                      | $          | 6,792 |   |   | $ | 11,244 |   |   | $ | 5,266 |   |   | $ | 297,079 |   | $ | 320,381 |   |
|                                     |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Thistable does not include (a) any milestone payments which may become payableto third parties under research collaborations or license agreements as thetiming and likelihood of such payments are not known, (b) any royaltypayments to third parties as the amounts of such payments, timing and/or 

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the likelihood of suchpayments are not known, (c) amounts, if any, that may be committed in thefuture to construct additional facilities, (d) contracts that areentered into in the ordinary course of business which are not material in theaggregate in any period presented above  and (e) anyobligations related to the collaboration with BMS which becameeffective in January 2005.

(2)          Ourconvertible notes may be converted to common stock prior to the maturity dateand, therefore, may not require the use of our capital resources. In January 2005,we completed the redemption of all of our 4.25% notes which was previouslyannounced in December 2004. Holders of all of the outstanding 4.25% notes($146.986 million) converted their notes into a total of 21,875,353 shares ofour common stock prior to the redemption date. The aggregate amount ofconvertible notes outstanding in this table does not reflect the redemption ofthe 4.25% notes.

***Financial Uncertainties Related to Potential FutureMilestone Payments***

Effective September 4, 2002, we entered into acollaboration and license agreement with Kirin, which provides for us toexchange with Kirin certain cross-licenses for each other’s technology for thedevelopment and commercialization of human antibody products. Pursuant to aletter of intent that was superceded by the collaboration and licenseagreement, we and Kirin developed the KM-Mouse, a unique crossbred mouse thatcombines the traits of our HuMAb-Mouse with Kirin’s TC MouseTM. Under the collaborationand license agreement, we are exchanging cross-licenses with Kirin with respectto the KM-Mouse and other antibody-generating mice. In addition, certainof the cross-licenses granted under the Collaboration and License Agreement aresubject to license, milestone and royalty payments by one party to the other.

Through December 31,2004, we have not made any milestone payments to Kirin although approximately$1.9 million has been accrued as of December 31, 2004 representing apayment due Kirin as a result of our collaboration with Pfizer. Based on atotal of two products we are developing which use or, we believe may use, Kirintechnology that (i) are currently in clinical trials, or (ii) weanticipate may enter clinical trials through the end of 2005, we may berequired to make milestone payments to Kirin aggregating up to approximately$8.5 million with respect to such products, or a maximum of approximately $4.25million per product. Our future milestone payment obligations to Kirin may ormay not be triggered, and may vary in size, depending on a number of variables,almost all of which are currently unknown, including the following:

·       whetheror not a decision is made to request a license from Kirin;

·       thetype of license requested (research or commercial);

·       thesuccess and timing of development efforts and clinical trials of productcandidates covered by any such licenses;

·       thetype of product developed, **(**paymentobligations differ depending on whether a product is an *ex vivo* therapeutic, *in vivo* therapeutic, research reagent ordiagnostic**)**; and

·       otherfinancial provisions of the Kirin agreement that provide for variations in feelevels and netting of certain payments over specified periods of time that mayimpact the total amount potentially payable to Kirin for any particular licensefee or milestone payment.

We have alsoentered into a number of other agreements that contain licenses of third-partytechnology which may be used together with our own platform technologies forthe generation, development and/or manufacture of our antibody products. Inaddition, we have entered into other third-party agreements that containlicenses associated with antibody products that target specific antigens. Manyof these agreements contain milestones payments that are due with respect toproducts using/targeting the licensed technology/antigen only if and whencertain specified pre-commercialization 

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eventsoccur. Not all of our products currently under development trigger suchmilestone payments. Through December 31, 2004, we had made milestone payments of approximately $0.3 millionunder these agreements. In addition, under theagreements we currently have in place (other than with Kirin), based on a totalof  fiveproducts we are developing for which milestones are potentially due and that (i) arenow in clinical trials, or (ii) which we anticipate may enter clinicaltrials before the end of 2006, we may be obligated to make future milestonepayments aggregating up to approximately $22.5 million with respect to suchproducts. In general, potential milestone payments for our antibody productsmay or may not be triggered under these licenses, and may vary in size,depending on a number of variables, almost all of which are currentlyuncertain. Typically, the events that trigger these payments per productinclude:

·       submissionof IND(s) or foreign equivalents;

·       commencementof Phase I, Phase II and/or Phase III clinical trials or foreign equivalents;

·       submissionof BLA(s) or foreign equivalents; and

·       receiptof marketing approval(s) to sell products in a particular country or region.

In addition, the licensesabove may trigger royalty payments in connection with the commercialization ofcertain of our products. To date, we have not made any royalty payments onsales of our products and believe we are at least a few years away from sellingany products that would require us to make any such royalty payments. Whetherwe will be obligated to make milestone or royalty payments in the future issubject to the success of our product development efforts and, accordingly, isinherently uncertain.

***Future Liquidity Resources***

Our current sources ofliquidity are our cash, cash equivalents and marketable securities, interestand dividends earned on such cash, cash equivalents and marketable securities,contract and licensing revenue and sales of our products for research. Webelieve that such sources of liquidity will be sufficient to meet ouroperating, debt service, and capital requirements for at least the next 24months. To the extent our 2.25% notes are converted into shares of our common stockon or before their maturity date, we will have use of that portion of theprincipal amount of the notes to fund our on-going operations. In any event, wemay require additional financing within this time frame and may raise fundsthrough public or private financings, line of credit arrangements,collaborative relationships and/or other methods. The use of cash on hand orother financial alternatives will depend on several factors including, but notlimited to, the future success of our products in clinical development, theprevailing interest rate environment, and access to the capital markets. Wecannot assure you that we will be able to raise such additional funds. We maybe unable to raise sufficient funds to complete development of any of ourproduct candidates or to continue operations. As a result, we may face delay,reduction or elimination of research and development programs or preclinical orclinical trials, in which case our business, financial condition or results ofoperations may be materially harmed.

***Recently Issued Accounting Pronouncements***

In December 2004, theFASB issued Statement No. 123 (revised 2004), *Share-Based Payment,* which is a revision of Statement No. 123,*Accounting for Stock-Based Compensation.*Statement123(R) supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees,* and amendsStatement No. 95, *Statement of CashFlows.*Statement 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values. Historically, in accordancewith SFAS 123 and SFAS 148, *Accountingfor Stock-Based Compensation*—*Transitionand Disclosure*, we had elected to follow the disclosure onlyprovisions of Statement No. 123 and, accordingly, continue to account forshare based compensation under the recognition and measurement principles ofAPB Opinion No. 25 and related interpretations. Under APB 25, when stockoptions are issued with an 

72

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exerciseprice equal to the market price of the underlying stock price on the date ofgrant, no compensation expense is recognized in the financial statements, andcompensation expense in only disclosed in the footnotes to the financialstatements. We will be required to adopt Statement No. 123(R) nolater than the quarter beginning July 1, 2005. We are currently in the process ofevaluating the option valuation methods and adoption transition alternativesavailable under Statement 123(R).Although we have not yetdetermined the impact of Statement123(R),  it may besignificant to ourconsolidated results of operations.

**Item 7A**.                Quantitativeand Qualitative Disclosures about Market Risks

We do not use derivative financial instruments in ourinvestment portfolio. We regularly invest excess operating cash in depositswith major financial institutions, money market funds, notes issued by the U.S.Government, as well as fixed income investments and U.S. bond funds both ofwhich can be readily purchased or sold using established markets. We believethat the market risk arising from our holdings of these financial instrumentsis minimal. We do not have exposure to market risks associated with changes ininterest rates as we have no variable interest rate debt outstanding. We do notbelieve we have any material exposure to market risks associated with interestrates, however, we may experience reinvestment risk as fixed income securitiesmature and are reinvested in securities bearing lower interest rates.

We may be exposed to exchange conversion differencesin translating the foreign results of our investment in Genmab to U.S. dollars.Depending upon the relative strengthening or weakening of the U.S. dollar, theconversion difference could be significant.

73

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**Item 8.**                        ConsolidatedFinancial Statements and Supplementary Data

**Indexto Consolidated Financial Statements**
|                                                                                                                                                                                                    | ** ** | ** ** | **Page** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|----------|------------|
| **Medarex, Inc.**                                                                                                                                                                             |       |       |
| Report of Independent  Registered Public Accounting Firm                                                                                                                                           |       | F-2        |     |
| Consolidated Balance Sheets as of December 31, 2003  and 2004                                                                                                                                 |       | F-3        |     |
| Consolidated Statements of  Operations for the years ended December 31, 2002, 2003 and 2004                                                                                                   |       | F-4        |     |
| Consolidated Statements of Changes in Shareholders’  Equity for the years ended December 31, 2002, 2003 and 2004                                                                         |       | F-5        |     |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2002, 2003 and 2004                                                                                                   |       | F-6        |     |
| Notes  to Consolidated Financial Statements                                                                                                                                                        |       | F-7        |     |
| **Genmab  A/S (A development stage company)**                                                                                                                                                      |       |       |     |
| Report  of Independent Registered Public Accounting Firm                                                                                                                                           |       | F-33       |     |
| Consolidated  Statements of Operations for the twelve months ended December 31, 2004,  2003   and 2002 and the total since inception                                                          |       | F-34       |     |
| Consolidated  Balance Sheets as of December 31, 2004 and 2003                                                                                                                                 |       | F-35       |     |
| Consolidated Statements of  Shareholders’ Equity for the years ended December 31, 2004, 2003 and  2002 and for the period from inception (June 11, 1998) to  December 31, 2004 |       | F-37       |     |
| Consolidated  Statements of Cash Flows for the twelve months ended December 31, 2004,  2003   and 2002 and the total since inception                                                          |       | F-41       |     |
| Notes to  Consolidated Financial Statements                                                                                                                                                        |       | F-42       |     |

 

 

F-1

----

 

**Report of Independent Registered Public AccountingFirm**

The Board of Directors andShareholders

Medarex, Inc.

We have audited the accompanying consolidated balancesheets of Medarex, Inc. and subsidiaries as of December 31, 2003 and2004, and the related consolidated statements of operations, shareholders’equity and cash flows for each of the three years in the period ended December 31,2004. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits. We did not audit the financial statements ofGenmab A/S, a corporation in which Medarex has a 25% interest, which represents2.0% and 0.3% of total assets as of December 31, 2003 and 2004, respectively,and equity in net loss of affiliate which constitutes 32% in 2002, 12% in 2003and 10% in 2004 of pre-tax loss. Those statements were audited by otherauditors whose report has been furnished to us and our opinion, insofar as itrelates to the amounts included for Genmab A/S, is based solely on the reportof other auditors.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits and the report of other auditors provide areasonable basis for our opinion.

In our opinion based on our audits and the report ofother auditors, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of Medarex, Inc.and subsidiaries at December 31, 2003 and 2004, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2004 in conformity with U.S. generallyaccepted accounting principles.

Asdiscussed in Note 2 to the consolidated financial statements, effective January1, 2003, the Company adopted Statement of Financial Accounting Standards No.143,  “Accountingfor Asset Retirement Obligations.”

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Medarex, Inc.’sinternal control over financial reporting as of December 31, 2004, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission, and ourreport dated March 15, 2005expressed an unqualified opinion thereon.
|                       | /s/ ERNST &  YOUNG LLP |
|-----------------------|--------------------------------------|
| MetroPark, New Jersey |
| March 15, 2005   |

 

F-2

----

**MEDAREX, INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, except share data)**
| ** **                                                                                                                                                                                                                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                 | ** ** | **2003**              | ** ** | **2004** | ** ** |
| *ASSETS*                                                                                                                                                                                                                                   |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                                            |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                  |       | $                     | 72,998     |   | $ | 64,843 |   |
| Marketable securities                                                                                                                                                                                                                      |       | 285,460               |       | 309,664 |   |
| Segregated securities                                                                                                                                                                                                                      |       | 5,617                 |       | 12,301 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                  |       | 6,244                 |       | 6,708 |   |
| Total current assets                                                                                                                                                                                                                       |       | 370,319               |       | 393,516 |   |
| Property,  buildings and equipment:                                                                                                                                                                                                        |       |                  |       |   |   |
| Land                                                                                                                                                                                                                                       |       | 6,624                 |       | 6,795 |   |
| Buildings and leasehold improvements                                                                                                                                                                                                       |       | 74,764                |       | 77,995 |   |
| Machinery and equipment                                                                                                                                                                                                                    |       | 37,006                |       | 43,077 |   |
| Furniture and fixtures                                                                                                                                                                                                                     |       | 4,081                 |       | 4,290 |   |
| Construction in progress                                                                                                                                                                                                                   |       | 4,384                 |       | 2,821 |   |
|                                                                                                                                                                                                                                       |       | 126,859               |       | 134,978 |   |
| Less accumulated depreciation and amortization                                                                                                                                                                                             |       | (31,494               | )          | (45,098 | ) |
|                                                                                                                                                                                                                                       |       | 95,365                |       | 89,880 |   |
| Investment in Genmab                                                                                                                                                                                                                       |       | 10,976                |       | 1,657 |   |
| Investment in IDM                                                                                                                                                                                                                          |       | 48,199                |       | 41,206 |   |
| Investments in,  and advances to, other partners                                                                                                                                                                                           |       | 11,182                |       | 10,482 |   |
| Segregated securities                                                                                                                                                                                                                      |       | 11,579                |       | 1,700 |   |
| Other assets                                                                                                                                                                                                                               |       | 10,106                |       | 10,904 |   |
| Total assets                                                                                                                                                                                                                               |       | $                     | 557,726    |   | $ | 549,345 |   |
| *LIABILITIES  AND SHAREHOLDERS’ EQUITY*                                                                                                                                                                                               |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                                                                       |       |                  |       |   |   |
| Trade accounts payable                                                                                                                                                                                                                     |       | $                     | 2,197      |   | $ | 4,998 |   |
| Accrued liabilities                                                                                                                                                                                                                        |       | 13,878                |       | 32,148 |   |
| Deferred contract revenue—current                                                                                                                                                                                                     |       | 3,807                 |       | 15,260 |   |
| Total current liabilities                                                                                                                                                                                                                  |       | 19,882                |       | 52,406 |   |
| Deferred contract  revenue—long-term                                                                                                                                                                                                  |       | 661                   |       | 86,691 |   |
| Other long-term  liabilities                                                                                                                                                                                                               |       | 3,172                 |       | 5,873 |   |
| 4.25% Convertible  senior notes due August 15, 2010                                                                                                                                                                                   |       | 125,000               |       | 146,986 |   |
| 2.25% Convertible  senior notes due May 15, 2011                                                                                                                                                                                      |       | —                |       | 150,000 |   |
| 4.50% Convertible  subordinated notes due July 1, 2006                                                                                                                                                                                |       | 175,000               |       | — |   |
| Commitments and contingencies                                                                                                                                                                                                              |       | —                |       | — |   |
| Shareholders’ equity:                                                                                                                                                                                                                 |       |                  |       |   |   |
| Preferred stock, $1.00 par value, 2,000,000 shares  authorized; none issued and outstanding                                                                                                                                                |       | —                |       | — |   |
| Common stock, $.01 par value; 200,000,000 shares  authorized; 79,501,080 shares issued and 79,007,564 outstanding at December 31, 2003 and 85,865,333  shares issued and 85,673,693 shares outstanding at December 31, 2004 |       | 795                   |       | 859 |   |
| Capital in excess of par value                                                                                                                                                                                                             |       | 639,784               |       | 699,380 |   |
| Treasury stock, at cost 493,516 shares in 2003 and  191,640 shares in 2004                                                                                                                                                                 |       | (1,242                | )          | (482 | ) |
| Deferred compensation                                                                                                                                                                                                                      |       | 994                   |       | 372 |   |
| Accumulated other comprehensive income                                                                                                                                                                                                     |       | 6,560                 |       | 6,649 |   |
| Accumulated deficit                                                                                                                                                                                                                        |       | (412,880              | )          | (599,389 | ) |
| Total shareholders’ equity                                                                                                                                                                                                            |       | 234,011               |       | 107,389 |   |
| Total liabilities and shareholders’ equity                                                                                                                                                                                            |       | $                     | 557,726    |   | $ | 549,345 |   |

 

See notes to these consolidated financial statements.

F-3

----

**MEDAREX, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS(In thousands, except per share data)**
| ** **                                                       | ** ** | **For the Year Ended** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | **December 31,**                 | ** ** |
| ** **                                                       | ** ** | **2002**                              | ** ** | **2003** | ** ** | **2004** | ** ** |
| Sales                                                            |       | $                                     | 176        |   | $ | 25 |   | $ | — |   |
| Contract and  license revenues                                   |       | 24,552                                |       | 5,833 |   | 9,119 |   |
| Sales, contract  and license revenues from Genmab                |       | 14,751                                |       | 5,316 |   | 3,355 |   |
| Total revenues                                                   |       | 39,479                                |       | 11,174 |   | 12,474 |   |
| Costs and  expenses:                                             |       |                                  |       |   |   |   |   |
| Cost of sales                                                    |       | 8,327                                 |       | 3 |   | — |   |
| Research and development                                         |       | 82,626                                |       | 95,459 |   | 122,007 |   |
| General and administrative                                       |       | 22,852                                |       | 21,727 |   | 24,314 |   |
| Write-off of facility costs                                      |       | 11,294                                |       | — |   | — |   |
| Acquisition of in-process technology                             |       | 16,312                                |       | 6,500 |   | 5,455 |   |
| Total costs and expenses                                         |       | 141,411                               |       | 123,689 |   | 151,776 |   |
| Operating loss                                                   |       | (101,932                              | )          | (112,515 | ) | (139,302 | ) |
| Equity in net loss of affiliate                                  |       | (50,625                               | )          | (14,997 | ) | (19,791 | ) |
| Interest and  dividend income                                    |       | 18,495                                |       | 12,342 |   | 7,145 |   |
| Impairment loss  on investments in partners                      |       | (11,886                               | )          | (1,400 | ) | (7,309 | ) |
| Additional  (payments) receipts related to asset acquisitions    |       | (2,425                                | )          | (31 | ) | 16 |   |
| Interest expense                                                 |       | (9,065                                | )          | (11,777 | ) | (12,845 | ) |
| Debt conversion  expense                                         |       | —                                |       | — |   | (10,151 | ) |
| Net loss on  extinguishment of debt                              |       | —                                |       | — |   | (4,241 | ) |
| Pre tax loss                                                     |       | (157,438                              | )          | (128,378 | ) | (186,478 | ) |
| Provision for  income taxes                                      |       | 103                                   |       | 69 |   | 31 |   |
| Loss before cumulative effect of change in  accounting principle |       | (157,541                              | )          | (128,447 | ) | (186,509 | ) |
| Cumulative effect  of change in accounting principle             |       | —                                |       | (830 | ) | — |   |
| Net loss                                                         |       | $                                     | (157,541   | ) | $ | (129,277 | ) | $ | (186,509 | ) |
| Basic and diluted net  loss per share:                           |       |                                  |       |   |   |   |   |
| Loss before cumulative effect of change in  accounting principle |       | $                                     | (2.09      | ) | $ | (1.64 | ) | $ | (2.29 | ) |
| Cumulative effect of change in accounting principle              |       | —                                |       | (0.01 | ) | — |   |
| Net loss                                                         |       | $                                     | (2.09      | ) | $ | (1.65 | ) | $ | (2.29 | ) |
| Weighted average number of common shares outstanding             |       |                                  |       |   |   |   |   |
| —basic and diluted                                          |       | 75,231                                |       | 78,314 |   | 81,494 |   |

 

See notes to these consolidated financial statements.

F-4

----

**MEDAREX, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(Dollars in thousands)**
| ** **                                                                               | ** ** | ** **                 | ** ** | ** **  | ** ** | ** **                                 | ** ** | ** **                 | ** ** | **Accumulated**        | ** ** | ** **                 | ** ** | ** **                            | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------|------------|--------------------------------------------|------------|----------------------------|------------|------------------------|------------|----------------------------|------------|---------------------------------------|------------|
| ** **                                                                               | ** ** | **Common stock**      | ** ** | **Capital** | ** ** | **Treasury Stock**                    | ** ** | ** **                 | ** ** | **other**              | ** ** | ** **                 | ** ** | **Total**                             | ** ** |
| ** **                                                                               | ** ** | **Number  of shares** | ** ** | **Amount**  | ** ** | **in excess  of par value** | ** ** | **Number of  shares** | ** ** | ** Amount ** | ** ** | **Deferred  Compensation** | ** ** | **comprehensive  income (loss)** | ** ** | **Accumulated  deficit** | ** ** | **shareholders’  equity** | ** ** |
| Balance at  December 31, 2001                                                       |       | 74,005,466                 |       |        | $          | 740                                        |       |                       |       | $                      | 608,226    |                       |       | (1,129,226                            | )          |   | $ | (2,840 | ) |   |   | $ | 2,188 |   |   |   | $ | 310 |   |   |   | $ | (126,062 | ) |   |   | $ | 482,562 |   |   |
| Issuance of common stock  for exercise of options and grant of restricted shares         |       | 160,800                    |       |        | 2          |                                       |       |                       | 859        |                   |       |                       |       |                                  |       |   |   |   | (27 | ) |   |   |   |   |   |   |   |   |   |   | 834 |   |   |
| Withdrawal from executive  deferred compensation plan                                    |       |                       |       |        |       |                                       |       |                       | 11         |                   |       | 333,834                    |       |                                  | 839        |   |   |   | (850 | ) |   |   |   |   |   |   |   |   |   |   | — |   |   |
| Issuance of common stock  for asset acquisition and license agreements, net              |       | 3,412,128                  |       |        | 34         |                                       |       |                       | 20,691     |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 20,725 |   |   |
| Issuance of common stock  under the employee stock purchase plan                         |       | 146,982                    |       |        | 1          |                                       |       |                       | 492        |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 493 |   |   |
| Net loss                                                                                 |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   | (157,541 | ) |   |   | (157,541 | ) |   |
| Other  comprehensive income (loss)—                                                 |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| foreign currency  translation adjustment                                                 |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   | (1,262 | ) |   |   |   |   |   |   | (1,262 | ) |   |
| unrealized gain on  securities                                                           |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   | 6,332 |   |   |   |   |   |   |   | 6,332 |   |   |
| Comprehensive loss                                                                       |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (152,471 | ) |   |
| Balance at  December 31, 2002                                                       |       | 77,725,376                 |       |        | 777        |                                       |       |                       | 630,279    |                   |       | (795,392                   | )          |                                  | (2,001     | ) |   |   | 1,311 |   |   |   | 5,380 |   |   |   | (283,603 | ) |   |   | 352,143 |   |   |
| Issuance of common stock  for exercise of options and grant of restricted shares         |       | 441,397                    |       |        | 4          |                                       |       |                       | 1,467      |                   |       |                       |       |                                  |       |   |   |   | 442 |   |   |   |   |   |   |   |   |   |   |   | 1,913 |   |   |
| Withdrawal from executive  deferred compensation plan                                    |       |                       |       |        |       |                                       |       |                       |       |                   |       | 301,876                    |       |                                  | 759        |   |   |   | (759 | ) |   |   |   |   |   |   |   |   |   |   | — |   |   |
| Issuance of common stock  for asset acquisition and license agreements, net              |       | 1,158,352                  |       |        | 12         |                                       |       |                       | 7,088      |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 7,100 |   |   |
| Issuance of common stock  under the employee stock purchase plan                         |       | 175,955                    |       |        | 2          |                                       |       |                       | 950        |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 952 |   |   |
| Net loss                                                                                 |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   | (129,277 | ) |   |   | (129,277 | ) |   |
| Other  comprehensive income (loss)—                                                 |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| foreign currency  translation adjustment                                                 |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   | 2,766 |   |   |   |   |   |   |   | 2,766 |   |   |
| unrealized loss on  securities                                                           |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   | (1,586 | ) |   |   |   |   |   |   | (1,586 | ) |   |
| Comprehensive loss                                                                       |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (128,097 | ) |   |
| Balance at  December 31, 2003                                                       |       | 79,501,080                 |       |        | 795        |                                       |       |                       | 639,784    |                   |       | (493,516                   | )          |                                  | (1,242     | ) |   |   | 994 |   |   |   | 6,560 |   |   |   | (412,880 | ) |   |   | 234,011 |   |   |
| Issuance of common stock  for exercise of options and grant of restricted shares         |       | 201,450                    |       |        | 2          |                                       |       |                       | 869        |                   |       |                       |       |                                  |       |   |   |   | 138 |   |   |   |   |   |   |   |   |   |   |   | 1,009 |   |   |
| Stock based  compensation—Celldex                                                   |       |                       |       |        |       |                                       |       |                       | 254        |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 254 |   |   |
| Issuance of vested  restricted stock units under deferred compensation plan              |       |                       |       |        |       |                                       |       |                       | 722        |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 722 |   |   |
| Withdrawal from executive  deferred compensation plan                                    |       |                       |       |        |       |                                       |       |                       |       |                   |       | 301,876                    |       |                                  | 760        |   |   |   | (760 | ) |   |   |   |   |   |   |   |   |   |   | — |   |   |
| Issuance of common stock  as partial consideration for acquisition of Ability Biomedical |       | 731,823                    |       |        | 7          |                                       |       |                       | 4,274      |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,281 |   |   |
| Issuance of common stock  in connection with license agreements, net                     |       | 426,547                    |       |        | 5          |                                       |       |                       | 2,556      |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 2,561 |   |   |
| Issuance of common stock  under the employee stock purchase plan                         |       | 176,625                    |       |        | 2          |                                       |       |                       | 1,067      |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,069 |   |   |
| Issuance of common stock  in connection with Pfizer collaboration                        |       | 4,827,808                  |       |        | 48         |                                       |       |                       | 29,952     |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 30,000 |   |   |
| Premium associated with  convertible notes exchange                                      |       |                       |       |        |       |                                       |       |                       | 10,154     |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 10,154 |   |   |
| Appreciation of equity  method investee                                                  |       |                       |       |        |       |                                       |       |                       | 9,748      |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 9,748 |   |   |
| Net loss                                                                                 |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   | (186,509 | ) |   |   | (186,509 | ) |   |
| Other comprehensive income (loss)—                                                  |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| foreign currency  translation adjustment                                                 |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   | 724 |   |   |   |   |   |   |   | 724 |   |   |
| unrealized loss on  securities                                                           |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   | (635 | ) |   |   |   |   |   |   | (635 | ) |   |
| Comprehensive loss                                                                       |       |                       |       |        |       |                                       |       |                       |       |                   |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (186,420 | ) |   |
| Balance at  December 31, 2004                                                       |       | 85,865,333                 |       |        | $          | 859                                        |       |                       |       | $                      | 699,380    |                       |       | (191,640                              | )          |   | $ | (482 | ) |   |   | $ | 372 |   |   |   | $ | 6,649 |   |   |   | $ | (599,389 | ) |   |   | $ | 107,389 |   |   |

 

See notes to theseconsolidated financial statements.

F-5

 

----

**MEDAREX, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFCASH FLOWS(In thousands)**
| ** **                                                                   | ** ** | **For the Year Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**                 | ** ** |
| ** **                                                                   | ** ** | **2002**                              | ** ** | **2003** | ** ** | **2004** | ** ** |
| Operating activities:                                                        |       | *** ***                          |       |   |   |   |   |
| Net loss                                                                     |       | $                                     | (157,541   | ) | $ | (129,277 | ) | $ | (186,509 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       | *** ***                          |       |   |   |   |   |
| Cumulative effect of  change in accounting principle                         |       | —                                |       | 830 |   | — |   |
| Depreciation                                                                 |       | 7,859                                 |       | 10,650 |   | 12,020 |   |
| Amortization                                                                 |       | 3,084                                 |       | 4,613 |   | 8,914 |   |
| Loss on sale of equipment                                                    |       | —                                |       | — |   | 105 |   |
| Stock options and awards  to employees                                       |       | 631                                   |       | 773 |   | 1,203 |   |
| Stock options and  warrants to non-employees                                 |       | (8                                    | )          | — |   | — |   |
| Non cash revenue—IDM                                                    |       | (14,332                               | )          | — |   | — |   |
| Non cash revenue—Genmab                                                 |       | —                                |       | (834 | ) | (1,166 | ) |
| Licenses fees paid with  stock                                               |       | 1,500                                 |       | — |   | 2,560 |   |
| Write-off of facility costs                                                  |       | 11,294                                |       | — |   | — |   |
| Write-off of in-process  technology                                          |       | 14,157                                |       | 6,100 |   | 5,455 |   |
| Equity in net loss of  Genmab                                                |       | 50,625                                |       | 14,997 |   | 19,791 |   |
| Impairment loss on  investments in partners                                  |       | 11,886                                |       | 1,400 |   | 7,309 |   |
| Gain on exchange of  convertible debt                                        |       | —                                |       | — |   | (325 | ) |
| Loss on redemption  convertible debt                                         |       | —                                |       | — |   | 4,566 |   |
| Gain on sale of partners’  stock                                        |       | —                                |       | (1,530 | ) | (1,664 | ) |
| Deferred income taxes                                                        |       | 250                                   |       | — |   | — |   |
| Changes in operating assets and liabilities                                  |       | *** ***                          |       |   |   |   |   |
| Other current assets                                                         |       | 11,393                                |       | 3,799 |   | (458 | ) |
| Trade accounts payable                                                       |       | (453                                  | )          | (489 | ) | 2,801 |   |
| Accrued liabilities                                                          |       | (985                                  | )          | 214 |   | 20,769 |   |
| Deferred contract revenue                                                    |       | (3,329                                | )          | (497 | ) | 98,649 |   |
| Net cash used in  operating activities                                       |       | (63,969                               | )          | (89,251 | ) | (5,980 | ) |
| Investing activities:                                                        |       | *** ***                          |       |   |   |   |   |
| Purchase of property and equipment                                           |       | (43,691                               | )          | (8,890 | ) | (9,074 | ) |
| Proceeds from sale of  land and equipment                                    |       | 906                                   |       | — |   | 600 |   |
| Increase in investments  and advances to affiliates and partners             |       | —                                |       | (1,000 | ) | (581 | ) |
| Decrease (increase) in  segregated cash                                      |       | —                                |       | (15,896 | ) | 3,195 |   |
| Purchase of marketable  securities                                           |       | (2,500                                | )          | (121,191 | ) | (270,500 | ) |
| Sales and maturities of  marketable securities                               |       | 139,205                               |       | 124,407 |   | 242,573 |   |
| Net cash provided by  (used in) investing activities                         |       | 93,920                                |       | (22,570 | ) | (33,787 | ) |
| Financing activities:                                                        |       | *** ***                          |       |   |   |   |   |
| Cash received from sales  of securities and exercise of stock options, net   |       | 680                                   |       | 2,091 |   | 31,850 |   |
| Proceeds from sale of  convertible subordinated notes, net                   |       | —                                |       | 121,239 |   | 145,217 |   |
| Repurchase of 4.50%  convertible notes                                       |       | —                                |       | — |   | (144,585 | ) |
| Deferred offering costs—Celldex                                         |       | —                                |       | — |   | (692 | ) |
| Debt exchange costs                                                          |       | —                                |       | — |   | (100 | ) |
| Principal payments under  debt obligations                                   |       | (88                                   | )          | (323 | ) | (78 | ) |
| Net cash provided by  financing activities                                   |       | 592                                   |       | 123,007 |   | 31,612 |   |
| Net increase (decrease)  in cash and cash equivalents                        |       | 30,543                                |       | 11,186 |   | (8,155 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 31,269                                |       | 61,812 |   | 72,998 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                     | 61,812     |   | $ | 72,998 |   | $ | 64,843 |   |
| Non-cash investing and financing activities:                                 |       | *** ***                          |       |   |   |   |   |
| Issuance of common stock  for intangible assets                              |       | $                                     | 20,725     |   | $ | 7,100 |   | $ | — |   |
| Supplemental disclosures of cash flow information                            |       | *** ***                          |       |   |   |   |   |
| Cash paid during period for:                                                 |       | *** ***                          |       |   |   |   |   |
| Income taxes                                                                 |       | $                                     | 25         |   | $ | 108 |   | $ | 3 |   |
| Interest                                                                     |       | $                                     | 7,985      |   | $ | 11,841 |   | $ | 10,789 |   |

 

See notes to these consolidated financial statements.

F-6

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

**1.   Organization and Description of Business**

Medarex, Inc. (“Medarex” or the “Company”),incorporated in July 1987, is a biopharmaceutical company developingtherapeutic products for cancer, inflammation, autoimmune disorders and otherlife-threatening and debilitating diseases based on its proprietary technology.The Company’s therapeutic products are currently under development and willneed the approval of the U.S. Food and Drug Administration (“FDA”) prior tocommercial distribution in the United States.

The Company has six wholly-owned subsidiaries: MedarexEurope B.V.; Houston Biotechnology Incorporated (“HBI”); GenPharm International, Inc.(“GenPharm”); Medarex Belgium, S.A.; Medarex Canada; and Celldex Therapeutics, Inc.(“Celldex”) As of December 31, 2004, the Company has significantinvestments in Genmab A/S (“Genmab”) (see Note 11) and Immuno-DesignedMolecules S.A. (“IDM”) (see Note 12). The Company’s operations constitute onebusiness segment. All significant intercompany balances and transactions havebeen eliminated in consolidation.

Celldex has filed aregistration statement with the Securities and Exchange Commission related to aproposed initial public offering of a portion of its common stock. The Companyhas assigned or licensed to Celldex certain intellectual property related tothe Company’s vaccine technology, including the rights to MDX-1307, one of theCompany’s product candidates for the treatment of cancer, as well as theInvestigational New Drug Application, or IND, associated with this productwhich became effective in February 2004. If the initial public offering iscompleted, the Company anticipates that it would continue to hold approximately70% of the outstanding shares of common stock of Celldex.

**2.   SignificantAccounting Policies**

***Cash Equivalents***

The Company considers allhighly liquid investments with an original maturity of three months or lesswhen purchased to be cash equivalents. The Company invests its cash in depositswith major financial institutions, money market funds and notes issued by theU. S. government.

***Marketable Securities and Long-Term Non-MarketableInvestments***

Marketable securities consist of fixed incomeinvestments with a maturity of greater than three months and other highly liquidinvestments that can be readily purchased or sold using established markets.Under SFAS No. 115, “Accounting for Certain Investments in Debt and EquitySecurities,” these investments are classified as available-for-sale and arereported at fair value on the Company’s consolidated balance sheet. Unrealizedholding gains and losses are reported within accumulated other comprehensiveincome as a separate component of shareholders’ equity. Under the Company’saccounting policy, a decline in the fair value of marketable securities isdeemed to be “other than temporary” and such marketable securities aregenerally considered to be impaired if their fair value is less than theCompany’s cost basis for more than six months, or some other period in light ofthe particular facts and circumstances surrounding the investment. If a declinein the fair value of a marketable security below the Company’s cost basis isdetermined to be other than temporary, such marketable security is written downto its estimated fair value as a new cost basis and the amount of thewrite-down is included in earnings as an impairment charge.

F-7

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

In addition, the Company has investments in several ofits partners whose securities are not publicly traded. These investments are accounted for underthe cost basis. Because these securities are not publiclytraded, the Company values these investments by using information acquired fromindustry trends, the management of these companies, financial statements, andother external sources. Specifically, the Company’s determination of anypotential impairment of the value of privately held securities includes ananalysis of the following for each company on a periodic basis: review ofinterim and year-end financial statements, cash position and overall rate ofcash used to support operations, the progress and development of technology andproduct platform, the per share value of subsequent financings, and potentialstrategic alternatives. Based on the information acquired through thesesources, the Company records an investment impairment charge when it believesan investment has experienced a decline in value that is considered to be otherthan temporary.

The Company recordedinvestment impairment charges of $9.5 million, $0 and $0.2 million related toinvestments in partners whose securities are publicly traded for the yearsended December 31, 2002, 2003 and 2004, respectively. In addition, theCompany recorded investment impairment charges of $2.4 million, $1.4 millionand $7.1 million in partners whose securities are privately held for the yearsended December 31, 2002, 2003 and 2004, respectively.

***Segregated Securities***

Segregated securities primarily represent U.S.treasury security strips which collateralize interest payments related to theCompany’s 4.25% convertible senior notes due August 15, 2010.

***Financial Instruments***

The fair values of cashand cash equivalents, marketable securities, accounts payable, accruedliabilities and convertible subordinated notes payable are not materiallydifferent from their carrying amounts as of December 31, 2003 and 2004.Receivables from partners are concentrated primarily in the pharmaceutical andbiotechnology industries. Although the Company’s partners are concentratedprimarily within these two industries, management considers the likelihood ofmaterial credit risk as remote.

***Property, Buildings and Equipment***

Property, buildings andequipment are stated at cost. Depreciation is determined using straight-linemethods over the estimated useful lives of the various asset classes. Usefullives for buildings and building improvements, furniture and fixtures andmachinery and equipment principally range from fifteen to thirty years, fiveyears and three to five years, respectively. Leasehold improvements areamortized over the estimated useful lives of the assets or the initial leaseterms, whichever is shorter.

***Impairment of Long-Lived Assets***

Long-lived assets andcertain identifiable intangible assets to be held and used are reviewed forimpairment when events or changes in circumstances indicate that the carryingamount of such assets may not be recoverable. Determination of recoverabilityis based on an estimate of undiscounted future cash 

F-8

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

flowsresulting from the use of the asset and its eventual disposition. In the eventthat such cash flows are not expected to be sufficient to recover the carryingamount of the assets, the assets are written down to their estimated fairvalues. Long-lived assets and certain identifiable intangible assets to bedisposed of are reported at the lower of carrying amount or fair value lesscost to sell.

***Transactions in Equity Method Investee Stock***

At the time an equitymethod investee sells its stock to unrelated parties at a price in excess ofits book value, the Company’s net investment in that equity method investeeincreases proportionately to its equity basis in the equity method investee. Ifat that time the equity method investee is a newly-formed start-up, a researchand development or a development stage company, the Company’s proportionateshare of the equity method investees’ equity resulting from the additionalequity raised is accounted for as an increase to capital in excess of par valueunder Accounting Principles Board (“APB”) Opinion No. 18 and StaffAccounting Bulletin (“SAB”) No. 51.

***Foreign Currency Translation***

Investments in foreignaffiliates accounted for under the equity method have been translated into U.S.dollars in accordance with the Financial Accounting Standards Board (“FASB”)Statement No. 52, *Foreign CurrencyTranslation*. All asset and liability accounts have been translatedusing the exchange rates in effect at the balance sheet date. Income statementamounts have been translated using the average exchange rate for the year. Thegains and losses resulting from the changes in exchange rates from year to yearhave been reported in other comprehensive income (loss). As of December 31,2004, the accumulated unrealized foreign exchange translation gain included inother comprehensive income was approximately $5.5 million.

***Revenue Recognition***

The Companyreceives payments from customers and partners from the sale of antibodies, forlicenses to its proprietary technology for product development, for servicesand from the achievement of product development milestones. These payments aregenerally non-refundable and are reported as deferred revenue until they arerecognizable as revenue. The Company follows the following principles inrecognizing revenue:

·       TheCompany sells antibodies primarily to partners in the United States andoverseas. Revenue from these sales is recognized when the antibodies areshipped.

·       Feesreceived from the licensing of the Company’s proprietary technologies forresearch and development performed by its customers and partners is recognizedgenerally over the term of the respective license period beginning after boththe license period has begun and the technology has been delivered.

·       Feesreceived for product development services are recognized ratably over theperiod during which the services are performed.

·       Milestonepayments are recognized as revenue upon the achievement of mutually agreedmilestones, provided that (i) the milestone event is substantive and itsachievement is not 

F-9

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

reasonably assured at theinception of the agreement, and (ii) there are no continuing performanceobligations associated with the milestone payment.

·       Revenue arrangements thatinclude multiple deliverables, are divided into separate units of accounting ifthe deliverables meet certain criteria, including whether the fair value of thedelivered items can be determined and whether there is evidence of fair valueof the undelivered items. In addition, the consideration is allocated among theseparate units of accounting based on their fair values, and the applicable revenuerecognition criteria are considered separately for each of the separate unitsof accounting.

***Research and Development***

Research and developmentcosts are expensed as incurred and primarily consist of personnel costs,facilities (including depreciation), research and laboratory supplies, fundingof outside research, license and technology access fees, expenses related toantibody manufacturing and clinical trial expenses. Costs to acquiretechnologies that are utilized in research and development that have noalternative future use are expensed as incurred.

***Use of Estimates***

The preparation of thefinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

***Stock-Based Compensation***

At December 31,2004, the Company has twelve stock option plans, which are described more fullyin Note 8. The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees,* and relatedInterpretations. The following table illustratesthe effect on net loss per share if the Company had applied the fair valuerecognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*,to stock-based employee compensation.
| ** **                                                                                  | ** ** | **Year ended December 31** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2002**                                  | ** ** | **2003** | ** ** | **2004** | ** ** |
| Net loss, as  reported                                                                      |       | $                                         | (157,541   | ) | $ | (129,277 | ) | $ | (186,509 | ) |
| Add: Non-cash  employee compensation                                                        |       | 631                                       |       | 773 |   | 1,203 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value method |       | (11,876                                   | )          | (11,303 | ) | (14,797 | ) |
| Pro forma net  loss                                                                         |       | $                                         | (168,786   | ) | $ | (139,807 | ) | $ | (200,103 | ) |
| Loss per share:                                                                             |       |                                      |       |   |   |   |   |
| Basic and diluted, as reported                                                              |       | $                                         | (2.09      | ) | $ | (1.65 | ) | $ | (2.29 | ) |
| Basic and  diluted, pro forma                                                               |       | $                                         | (2.24      | ) | $ | (1.79 | ) | $ | (2.46 | ) |

 

F-10

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

Thefair value of each option grant is estimated on the date of grant using theBlack Scholes option-pricing model with the following assumptions:
| ** **                       | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected dividend  yield         |       | 0        | %          | 0        | %          | 0        | %          |
| Expected stock  price volatility |       | 76.7     | %          | 64.0     | %          | 55.0     | %          |
| Risk-free  interest rate         |       | 3.5      | %          | 2.75     | %          | 3.60     | %          |
| Expected life of options         |       | 5 years  |       | 5 years  |       | 5 years  |       |

 

***Income Taxes***

The Company uses the assetand liability method to account for income taxes, including the recognition ofdeferred tax assets and deferred tax liabilities for the anticipated future taxconsequences attributable to differences between financial statements amountsand their respective tax bases. The Company reviews its deferred tax assets forrecovery. A valuation allowance is established when the Company believes thatit is more likely than not that its deferred tax assets will not be realized. Changesin valuation allowances from period to period are included in the Company’s taxprovision in the period of change.

***Reclassifications***

Certain prior yearbalances have been reclassified to conform with the current year presentation.

***Net Loss Per Share***

Basic and diluted net lossper share are calculated in accordance with SFAS No. 128, *Earnings Per Share*. Basic net loss pershare is based upon the number of weighted average shares of common stockoutstanding. Diluted net loss per share is based upon the weighted averagenumber of shares of common stock and dilutive potential shares of common stockoutstanding. Potential shares of common stock result from the assumed exerciseof outstanding stock options, which are included under the treasury stockmethod. Potentially dilutive securities have been excluded from the computationof diluted net loss per share for all years presented, as their effect isantidilutive.

***Asset Retirement Obligations***

Effective January 1, 2003, the Company changedits method of accounting for asset retirement obligations in accordance withSFAS No. 143, *Accounting for AssetRetirement Obligations*. Previously, the Company was not required torecognize amounts related to asset retirement obligations. Under SFAS No. 143,the Company now recognizes asset retirement obligations in the period in whichthey are incurred if a reasonable estimate of a fair value can be made. Theassociated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset.

The adoption of SFAS No. 143resulted in an increase in net property, buildings and equipment ofapproximately $1.4 million, recognition of an asset retirement obligationliability of approximately $2.2 million and a cumulative effect of a change inaccounting principle of approximately $0.8 million. 

F-11

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

Adoptionof SFAS No. 143 had no material impact on net loss before the cumulativeeffect of adoption in the year ended December 31, 2003 nor would it havehad a material impact on a pro forma basis in 2002 assuming an adoption of SFASNo. 143 at such time.

***Impact of Recently Issued Accounting Pronouncements***

In December 2004, theFASB issued Statement No. 123 (revised 2004), *Share-Based Payment*, which is a revision of Statement No. 123,*Accounting for Stock-Based Compensation*.Statement 123(R) supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and amendsStatement No. 95, *Statement of CashFlows.*Statement 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values. Historically, in accordancewith SFAS 123 and SFAS 148, *Accountingfor Stock-Based Compensation*—*Transitionand Disclosure*, Medarex had elected to follow the disclosure onlyprovisions of Statement No. 123 and, accordingly, continues to account forshare based compensation under the recognition and measurement principles ofAPB Opinion No. 25 and related interpretations. Under APB 25, when stockoptions are issued with an exercise price equal to the market price of theunderlying stock price on the date of grant, no compensation expense isrecognized in the financial statements, and compensation expense in onlydisclosed in the footnotes to the financial statements. Medarex will berequired to adopt Statement No. 123(R) no later than the quarterbeginning July 1, 2005. Medarexis currently in the process of evaluating the option valuation methods andadoption transition alternatives available under Statement 123(R).Althoughthe Company has not yet determined the impact of Statement 123(R),  it may be significant toits consolidated results of operations.

**3.   Available for Sale Investments**

Availablefor sale investments consist of the following as of December 31:
| ** **                                                       | ** ** | **2003** | ** ** | **2004**             | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------------------|------------|
| ** **                                                       | ** ** | **Cost** | ** ** | **Unrealized  Gain** | ** ** | **Unrealized  Loss** | ** ** | **Estimated  Fair Value** | ** ** | **Cost** | ** ** | **Unrealized  Gain** | ** ** | **Unrealized  Loss** | ** ** | **Estimated  Fair Value** | ** ** |
| Money market funds  (included in cash and cash equivalents) |       | $        | 64,459     |                 |       | $ | — |   |   |   | $ | — |   |   | $ | 64,459 |   | $ | 57,984 |   |   | $ | 1 |   |   |   | $ | (2 | ) |   | $ | 57,983 |   |
| U.S. Treasury  Obligations                                       |       | 18,175   |       |                 | 27         |   |   |   | (109 | ) |   | 18,093 |   | 32,746 |   |   | 2 |   |   |   | (201 | ) |   | 32,547 |   |
| U.S. Corporate  Debt Securities                                  |       | 264,029  |       |                 | 761        |   |   |   | (1,687 | ) |   | 263,103 |   | 275,131 |   |   | 23 |   |   |   | (1,267 | ) |   | 273,887 |   |
| Equity Securities                                                |       | 1,509    |       |                 | 2,755      |   |   |   | — |   |   | 4,264 |   | 674 |   |   | 2,556 |   |   |   | — |   |   | 3,230 |   |
|                                                             |       | $        | 348,172    |                 |       | $ | 3,543 |   |   |   | $ | (1,796 | ) |   | $ | 349,919 |   | $ | 366,535 |   |   | $ | 2,582 |   |   |   | $ | (1,470 | ) |   | $ | 367,647 |   |

 

F-12

----

**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

TheCompany’s available for sale investments have the following maturities at December 31,2004:
| Due in one year  or less                  |   | $      | 268,371 |   |
|-------------------------------------------|--------|--------|---------|--------|
| Due after one  year, less than five years |   | 99,276 |    |
| Due after five years                      |   | — |    |

 

For the years ended December 31, 2002, 2003 and2004, realized gains totaled $1.8 million, $2.1 million and $2.3 million,respectively, and realized losses totaled $0, $0.1 million and $0,respectively. The cost of securities sold is based on the specificidentification method.

Unrealizedloss positions for which other-than-temporary impairments have not beenrecognized at December 31, 2004, is summarized as follows:
| ** **             | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
|------------------------|------------|-----------------|------------|----------------------|------------|
| Less than one  year    |       | $               | 290,323    |                 |       | $ | (1,305 | ) |   |
| Greater than one  year |       | 21,279          |       |                 | (165       | ) |   |
|                   |       | $               | 311,602    |                 |       | $ | (1,470 | ) |   |

 

Unrealized losses in theportfolio relate to various debt securities including U.S. treasuryobligations, asset backed securities and corporate bonds. For these securities,the unrealized losses were primarily due to increases in interest rates. Thegross unrealized losses in the portfolio of investments represent less than onepercent of the total fair value of the portfolio. The Company has concludedthat unrealized losses in its investment securities are notother-than-temporary and the Company has the ability to hold securities tomaturity date.

**4.   Balance Sheet Detail**

Othercurrent assets consist of the following as of December 31:
| ** **                         | ** ** | **2003** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Interest and  dividends receivable |       | $        | 2,422      |     | $          | 2,198 |   |
| Employee  receivables              |       | 512      |       | 488      |       |
| Prepaid insurance                  |       | 1,745    |       | 2,011    |       |
| Receivables from  partners         |       | 190      |       | 915      |       |
| Other                              |       | 1,375    |       | 1,096    |       |
|                               |       | $        | 6,244      |     | $          | 6,708 |   |

 

F-13

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

Otherassets consist of the following as of December 31:
| ** **                            | ** ** | **2003** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Deferred debt  issuance costs, net    |       | $        | 6,502      |     | $          | 7,477 |   |
| Patents, net                          |       | 3,276    |       | 1,995    |       |
| Acquired  workforce, net              |       | 328      |       | 454      |       |
| Deferred offering  costs—Celldex |       | —   |       | 978      |       |
|                                  |       | $        | 10,106     |     | $          | 10,904 |   |

 

Accruedliabilities consist of the following as of December 31:
| ** **                                   | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Accrued  convertible debt redemption expense |       | $        | —     |     | $          | 10,151 |   |
| Accrued  construction and equipment costs    |       | 817      |       | 330      |       |
| Accrued interest                             |       | 2,317    |       | 2,793    |       |
| Accrued  compensation                        |       | 5,746    |       | 5,902    |       |
| Accrued contract  manufacturing              |       | —   |       | 1,984    |       |
| Accrued license  and royalty fees            |       | —   |       | 6,313    |       |
| Accrued  professional fees                   |       | 980      |       | 1,280    |       |
| Due to Essex  Chemical Corp.                 |       | 667      |       | 667      |       |
| Accrued clinical  trial expenses             |       | 699      |       | 928      |       |
| Other                                        |       | 2,652    |       | 1,800    |       |
|                                         |       | $        | 13,878     |     | $          | 32,148 |   |

 

**5.   Taxes**

Theprovision (benefit) for income taxes is as follows:
| ** **    | ** ** | **Year ended December 31**    | ** ** |
|---------------|------------|----------------------------------------------|------------|
| ** **    | ** ** | **   2002   ** | ** ** | **  2003  ** | ** ** | **  2004  ** | ** ** |
| Federal       |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Current       |       |                                         | $          | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Deferred      |       |                                         | —     |   |   |   | — |   |   |   | — |   |   |
| Total federal |       |                                         | —     |   |   |   | — |   |   |   | — |   |   |
| State         |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Current       |       |                                         | 103        |   |   |   | 34 |   |   |   | 21 |   |   |
| Deferred      |       |                                         | —     |   |   |   | — |   |   |   | — |   |   |
| Total state   |       |                                         | 103        |   |   |   | 34 |   |   |   | 21 |   |   |
| Foreign       |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Current       |       |                                         | —     |   |   |   | 35 |   |   |   | 10 |   |   |
| Deferred      |       |                                         | —     |   |   |   | — |   |   |   | — |   |   |
| Total foreign |       |                                         | —     |   |   |   | 35 |   |   |   | 10 |   |   |
| Total         |       |                                         | $          | 103 |   |   |   | $ | 69 |   |   |   | $ | 31 |   |   |

 

F-14

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

The current foreign tax provision relates to foreignwithholding taxes. The current state tax provision is attributable to the NewJersey alternate minimum tax assessment which became effective in 2002.

Areconciliation of the provision for income taxes and the amount computed byapplying the federal income rate of 34% to loss before provision for income taxis as follows:
| ** **                                            | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                            | ** ** | **2002**                                  | ** ** | **2003** | ** ** | **2004** | ** ** |
| Computed at  statutory rate                           |       | $                                         | (53,529    | ) | $ | (43,649 | ) | $ | (63,403 | ) |
| State income  taxes, net of federal tax effect        |       | 68                                        |       | (7,733 | ) | (10,832 | ) |
| In-process  technology                                |       | —                                    |       | — |   | 1,836 |   |
| Loss of foreign  subsidiary                           |       | 56                                        |       | 24 |   | 64 |   |
| Foreign  withholding taxes                            |       | —                                    |       | 23 |   | 7 |   |
| Research and development credit  carryforward benefit |       | —                                    |       | (2,876 | ) | (2,922 | ) |
| Other                                                 |       | —                                    |       | 74 |   | 54 |   |
| Other change in  deferred tax valuation reserve       |       | 53,508                                    |       | 54,206 |   | 75,227 |   |
|                                                  |       | $                                         | 103        |   | $ | 69 |   | $ | 31 |   |

 

Thecomponents of deferred tax assets and liabilities consist of the following asof December 31:
| ** **                                             | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                  |       |     |       |     |       |
| Net operating loss carryforwards                       |       | $        | 113,718    |     | $          | 165,789 |   |
| Accrued compensation                                   |       | 271      |       | 1,196    |       |
| Research and development  capitalized for tax purposes |       | 4,217    |       | 4,217    |       |
| Deferred revenue                                       |       | 1,293    |       | 116      |       |
| Research credits                                       |       | 8,449    |       | 10,505   |       |
| Impairment loss on investments                         |       | 15,463   |       | 25,615   |       |
| License fees capitalized for tax purposes              |       | 1,049    |       | 6,117    |       |
| In-process  technology capitalized for tax  purposes   |       | 9,533    |       | 9,671    |       |
| Accrued debt “make-whole” payment            |       | —   |       | 4,059    |       |
| Accrued royalty                                        |       | —   |       | 814      |       |
| Cumulative effect—asset retirement obligation     |       | 332      |       | 332      |       |
| Other                                                  |       | 919      |       | 856      |       |
|                                                   |       | 155,244  |       | 229,287  |       |
| Deferred tax asset valuation allowance                 |       | (154,225 | )          | (229,287 | )          |
|                                                   |       | 1,019    |       | —   |       |
| Net deferred tax liabilities:                          |       |     |       |     |       |
| Unrealized gain                                        |       | 157      |       | —   |       |
| Fixed assets and amortization                          |       | 862      |       | —   |       |
|                                                   |       | 1,019    |       | —   |       |
| Net deferred tax  assets                               |       | $        | —     |     | $          | — |   |

 

F-15

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

At December 31, 2004, approximately $18.0 millionof gross deferred tax assets related to net operating loss (“NOL”)carryforwards representing tax benefits associated with the exercise ofnon-qualified stock options and the disqualifying disposition of stock acquiredwith incentive stock options. Such benefits, when realized, are credited toadditional paid-in capital.

At December 31, 2004, the Company had federal NOLcarryforwards of approximately $426.6 million. The NOL carryforwards expire in2006 ($0.9 million), 2007 ($4.0 million), 2008 ($5.5 million), 2009 ($7.6million), 2010 ($6.4 million), 2011 ($7.0 million), 2012 ($9.6 million), 2018($20.9 million), 2019 ($3.0 million), 2020 ($13.5 million), 2021 ($19.2million), 2022 ($87.6 million), 2023 ($109.8 million) and 2024 ($131.6million). The Company determined that an ownership change under Section 382of the Internal Revenue Code of 1986, as amended, occurred during 1998. Theeffect of the ownership change is the imposition of a $3.2 million annual limitationon the use of NOL carryforwards attributable to periods before the change. At December 31,2004, the amount of NOL subject to the limitation was $43.8 million and theamount not subject to limitation was $382.8 million.

The Company had federal research tax creditcarryforwards at December 31, 2004 of approximately $9.6 million whichexpire between 2005 and 2024. As a result of the 1998 ownership change under Section 382,the use of approximately $1.4 million of these carryforwards is subject to limitation.

At December 31, 2004**,**the Company had state NOL carryforwardsof approximately $258.3 million. These NOL carryforwards will expire in varyingamounts between 2006 and 2013.

**6.   Convertible Notes**

***4.50% Convertible Subordinated Notes***

On June 26, 2001, the Company completed a publicoffering of $175.0 million of 4.50% Convertible Subordinated Notes due 2006(the “4.50% Notes”). The 4.50% Notes were convertible into shares of commonstock at a ratio of 34.6789 shares per each $1,000 principal amount of thenotes ($28.84 per share), subject to adjustment, and were scheduled to maturein July 2006. The Company received net proceeds from the public offeringof approximately $169.1 million.

The Company was obligatedto pay interest on the 4.50% Notes on January 1 and July 1 of eachyear. Interest paid per $1,000 principal amount of 4.50% Notes for the periodfrom issue date to January 1, 2002 was approximately $23,125. Interestpayable per $1,000 principal amount of notes for each subsequent interestperiod was $22.50. Interest is calculated on the basis of a 360-day yearconsisting of twelve 30-day months. The 4.50% Notes were either repurchased andcancelled or redeemed and cancelled in 2004 (See Note 7).

***4.25% Convertible Senior Notes***

On July 23, 2003, the Company completed a privateplacement pursuant to Rule 144A of the Securities Act of 1933, as amended,of $125.0 million of 4.25% Convertible Senior Notes due August 15, 2010(the “4.25% Notes”) to qualified institutional investors. The 4.25% Notes wereinitially convertible into shares of the Company’s common stock at the rate of148.8261 per each $1,000 principal amount of notes, which is equivalent to aninitial conversion price of approximately $6.72 per share, subject to anti-

F-16

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

dilution adjustments. As ofDecember 31, 2004, the Company had a total of 21,875,353 shares of commonstock reserved for issuance pursuant to the conversion of all of its 4.25%Notes.

In January 2004, the Company and certain holdersof its 4.50% Notes completed an exchange and cancellation of $33.0 millionprincipal amount of the 4.50% Notes for the issuance of $21.986 million inaggregate principal of a new series of the Company’s 4.25% Notes, in a limitednumber of transactions. As a result of this exchange and cancellation, the Company’stotal convertible debt was reduced by $11.014 million. In addition, the Companyrecorded a gain on the early extinguishment of debt of approximately $0.3million in connection with the exchange and cancellation. Such gain is includedwithin net loss on the extinguishment of debt for the year ended December 31,2004 in the Company’s consolidated statement of operations.

The Company paid interest on the 4.25% Notes on February 15and August 15 of 2004. Interest payable per $1,000 principal amount of the4.25% Notes for the period from the issue date to February 15, 2004 wasapproximately $23.85. Interest payable per $1,000 amount of the 4.25% Notes forthe August 15, 2004 interest payment was $21.25.

The Company received net proceeds from the privateplacement of the 4.25% Notes of approximately $121.3 million (after deductingthe initial purchasers’ discounts and offering expenses). As of December 31,2004, the Company had purchased U.S. Treasury security strips to collateralizethe notes in an amount sufficient to pay the four interest payments on the4.25% Notes due in 2005 and 2006. Such amount has been classified as segregatedsecurities in the current assetssection of the Company’s December 31, 2004 consolidated balance sheet. Thecosts of issuance of the 4.25% Notes of approximately $3.8 million have beendeferred and are being amortized over the term of the 4.25% Notes. Theamortization of these costs are reflected in interest expense.

The 4.25% Notes are senior unsecured obligations andrank equal in right of payment with the Company’s existing and future unsecuredand unsubordinated indebtedness. The 4.25% Notes are effectively subordinatedto any future secured indebtedness to the extent of the value of the assetssecuring such indebtedness. The indenture under which the 4.25% Notes wereissued does not restrict the Company from incurring additional senior or otherindebtedness and other liabilities, including secured indebtedness.

Prior to August 15, 2006, the Company may redeemsome or all of the 4.25% Notes at any time at a redemption price equal to 100%of the principal amount of the notes to be redeemed plus accrued and unpaidinterest to the redemption date and the “make-whole” payment described below,if the closing price of the Company’s common stock has exceeded 150% of theconversion price then in effect for at least 20 trading days within a period of30 consecutive trading days ending on the trading day before the date ofmailing of the provisional redemption notice. Upon any such provisionalredemption, the Company will make an additional “make-whole” payment equal to$130.10 per $1,000 principal amount of the 4.25% Notes redeemed, less theamount of any interest actually paid and any interest accrued and unpaid onthese notes before the provisional redemption date. The Company may make suchadditional payment, at its option, in cash or shares or a combination thereof.Payments made in shares of the Company’s common stock will be valued at 95% ofthe average of the closing sale prices of the Company’s common stock for 

F-17

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

the five consecutivetrading days ending on the third trading day immediately prior to theprovisional redemption date.

In December 2004, theCompany announced that it was calling for the redemption on January 14,2004 of all of its outstanding 4.25% Notes. The total principal amount of the4.25% Notes called for redemption was $146.986 million (see Note 21). In connection with the redemption, the Companyaccrued approximately $12.5 million as of December 31, 2004, representing the “make-whole”payment of $10.2 million as well as accrued interest of $2.3 million.

***2.25% Convertible Senior Notes***

On May 3, 2004, the Company completed a privateplacement pursuant to Rule 144A of the Securities Act of 1933, as amended,of $150.0 million of 2.25% Convertible Senior Notes due May 15, 2011 (the “2.25%Notes”) to qualified institutional investors. The 2.25% Notes are initiallyconvertible into shares of the Company’s common stock at the rate of 72.9129per each $1,000 principal amount of the 2.25% Notes, which is equivalent to aninitial conversion price of approximately $13.72 per share, subject toanti-dilution adjustments.

The Company pays interest on the 2.25% Notes on May 15and November 15 of each year beginning on November 15, 2004. Interestpayable per $1,000 principal amount of the 2.25% Notes for the period fromissue date to November 15, 2004 was approximately $12.00. Interest payableper $1,000 amount of the 2.25% Notes for each subsequent interest payment is$11.25.

The Company received net proceeds from the privateplacement of the 2.25% Notes of approximately $145.2 million (after deductingthe initial purchasers’ discounts and offering expenses).

On or after May 20, 2009, the Company may redeemthe 2.25% Notes, in whole or in part, at its option at a redemption priceexpressed as a percentage of principal amount, of 100.6% for the period betweenMay 20, 2009 and May 15, 2010 and 100.3% for the 12 month periodbeginning on May 15, 2010.

The holders of the 2.25%Notes have the option, subject to certain conditions, to require the Company torepurchase the notes in the event of a “change in control”, as defined in theindenture at a price equal to 100% of the principal amount of the notes plusaccrued and unpaid interest to the date of repurchase. The Company may pay therepurchase price in cash or, at the Company’s option, in shares of its commonstock. Payments made in shares of the Company’s common stock will be valued at95% of the average of the closing sales prices of the Company’s common stockfor the five trading days immediately preceding the third trading day prior tothe repurchase date.

**7.   DebtRepurchase and Cancellation**

During 2004 the Company repurchased, redeemed andcancelled the entire outstanding principal amount of its 4.50% Notes ($142.0million).

The total chargeassociated with the Company’s repurchase, redemption and cancellation of its4.50% Notes for the year ended December 31, 2004 was $4.5 million.

F-18

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

**8.   Stock Options**

The Company has twelve Stock Option Plans (the “Plans”).The purchase price of stock options under the Plans is determined by theCompensation and Organization Committee of the Board of Directors of theCompany (the “Committee”). The term is fixed by the Committee, but no incentivestock option is exercisable after 10 years from the date of grant. Stockoptions generally vest over a four year period. At December 31, 2004, atotal of 1,062,333 shares were available for future grants under the Plans.

In January 2003, the Company’s Board of Directorsapproved a stock option exchange program. Under this program, “eligibleemployees” and “eligible officers” were given the opportunity to cancel one ormore stock options previously granted to them in exchange for new stock optionsto be granted at least six months and one day from the date the old options arecancelled (the “grant date”), provided that the individual is still employed bythe Company on such date. “Eligible employees” refers to current Companyemployees who are not executive officers and who hold options to purchase theCompany’s stock with an exercise price of $10 or more. “Eligible officers”refers to executive officers (excluding the President and Chief ExecutiveOfficer and the former Executive Vice President) who hold options to purchasethe Company’s stock with an exercise price of $25 or more. Members of theCompany’s Board of Director’s were not eligible to participate in the program.The participation deadline for the program was March 7, 2003. “EligibleEmployees” and “Eligible Officers” elected to exchange a total of 2,309,401shares of common stock underlying eligible options. The number of sharessubject to the new options was determined based on the old options’ exerciseprice. Specifically, if the exercise price of the old options was between$10.00 and $24.99 per share, then the exchange ratio was equal to 0.67 of ashare. If the exercise price of the old options was $25.00 per share or higher,then the exchange ratio was equal to 0.50 of a share. The Company issued 1,313,919replacement options with an exercise price of $6.33 on September 8, 2003.

A summary of the Company’sstock option activity and related information for the years ended December 31,2002, 2003 and 2004 is as follows:
| ** **                                                      | ** ** | **2002**         | ** ** | **2003**           | ** ** | **2004**         | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|--------------------|------------|------------------|------------|
| ** **                                                      | ** ** | ** **       | ** ** | **Weighted ** | ** ** | ** **       | ** ** | **Weighted ** | ** ** | ** ** | ** ** | **Weighted ** | ** ** |
| ** **                                                      | ** ** | **Common ** | ** ** | **Average **  | ** ** | **Common ** | ** ** | **Average ** | ** ** | **Common  ** | ** ** | **Average ** | ** ** |
| ** **                                                      | ** ** | **Stock **  | ** ** | **Exercise ** | ** ** | **Stock **  | ** ** | **Exercise ** | ** ** | **Stock** | ** ** | **Exercise ** | ** ** |
| ** **                                                      | ** ** | **Options**      | ** ** | **Price**          | ** ** | **Options**      | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** |
| Outstanding at  beginning of year                               |       | 6,765,191        |       |               | $          | 17.21            |       |   | 9,935,072 |   |   | $ | 13.64 |   |   | 11,629,594 |   |   | $ | 8.32 |   |   |
| Granted                                                         |       | 3,663,900        |       |               | 7.25       |             |       | 5,018,019 |   |   | 6.43 |   |   | 3,141,325 |   |   | 5.80 |   |   |
| Exercised                                                       |       | (163,300         | )          |               | 5.64       |             |       | (451,897 | ) |   | 2.52 |   |   | (201,450 | ) |   | (3.88 | ) |   |
| Canceled                                                        |       | (330,719         | )          |               | 20.42      |             |       | (2,871,600 | ) |   | 24.25 |   |   | (324,282 | ) |   | (7.53 | ) |   |
| Outstanding at  end of year                                     |       | 9,935,072        |       |               | 13.64      |             |       | 11,629,594 |   |   | 8.32 |   |   | 14,245,187 |   |   | 7.84 |   |   |
| Exercisable at  end of year                                     |       | 6,271,172        |       |               | 17.38      |             |       | 5,093,394 |   |   | 10.04 |   |   | 7,372,351 |   |   | 9.21 |   |   |
| Weighted average fair  value of options granted during the year |       |             |       |               | $          | 4.69             |       |   |   |   |   | $ | 3.63 |   |   |   |   |   | $ | 2.99 |   |   |

 

F-19

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

Stockoptions outstanding at December 31, 2004 are summarized as follows:
| ** **                                 | ** ** | **Outstanding ** | ** ** | **Weighted Average**       | ** ** | **Weighted**              | ** ** | **Exercisable**         | ** ** | **Weighted**                    | ** ** |
|--------------------------------------------|------------|-----------------------|------------|---------------------------------|------------|---------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **Options at**   | ** ** | **Remaining**                   | ** ** | **Average**               | ** ** | **Options at**     | ** ** | **Average**                     | ** ** |
| **Range of Exercise Price** | ** ** | ** **            | ** ** | **December 31, 2004** | ** ** | **Contractual Life** | ** ** | **Exercise Price** | ** ** | **December 31, 2004** | ** ** | **Exercise Price** | ** ** |
| $  1.47  to $  5.61    |       |                  | 5,186,285  |                            |       |                      | 7.28       |                    |       |                            | $          | 4.55 |   |   |   | 1,994,529 |   |   |   | $ | 3.03 |   |   |
| $  5.70  to $  6.37    |       |                  | 3,659,516  |                            |       |                      | 7.96       |                    |       |                            | $          | 6.34 |   |   |   | 2,658,236 |   |   |   | $ | 6.31 |   |   |
| $  6.46  to $12.50               |       |                  | 3,596,112  |                            |       |                      | 8.78       |                    |       |                            | $          | 6.99 |   |   |   | 1,134,239 |   |   |   | $ | 7.14 |   |   |
| $12.90 to $53.41                           |       |                  | 1,803,274  |                            |       |                      | 6.41       |                    |       |                            | $          | 22.09 |   |   |   | 1,585,347 |   |   |   | $ | 23.32 |   |   |
|                                       |       |                  | 14,245,187 |                            |       |                      |       |                    |       |                            |       |   |   |   | 7,372,351 |   |   |   |   |   |   |
|                                            |            |                       |            |                                 |            |                           |            |                         |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**9.   Deferred Compensation Plans**

***Executive Deferred Compensation Plan***

Effective March 31, 1999, the Company institutedan executive deferred compensation plan to permit certain individuals to deferthe gain on the exercise of stock options to a specified future period. In June 1999,six individuals deferred the gain on the exercise of options to purchase1,205,000 shares of the Company’s common stock. The Company’s executivedeferred compensation plan does not permit diversification and must be settledby the delivery of 1,181,042 shares of the Company’s stock over various periodsof time ranging from 12 to 60 months, which began in May 2002.Accordingly, changes in the fair value of the amount owed to the individualsare not recognized.

As of January 1, 2002, one individual hadwithdrawn early from this plan reducing the balance in treasury stock by 75,774shares and reducing the deferred compensation by $0.2 million. During 2002,another individual elected to withdrawal early from this plan reducing thebalance in treasury stock by 37,841 shares and reducing deferred compensationby $0.1 million. In addition, the remaining four individuals who had previouslyelected to have shares distributed received distributions further reducing thebalance in treasury stock by 295,993 shares and deferred compensation by $0.7million. During 2003 and 2004, there were further distributions from this planreducing the balance in treasury stock by 301,876 shares each year and reducingdeferred compensation by $0.8 million and $0.8 million, respectively.

As of December 31,2004, a total of 157,800 shares of common stock remain to be distributed.

***Deferred Compensation Programs***

The Company maintains twodeferred compensation programs under its 2001 Stock Option Plan. Under thedeferred compensation programs, each of the Company’s executive officerselected to have a portion of their 2003 and 2004 bonuses, which were otherwisepayable in cash, converted to restricted stock units representing shares of theCompany’s common stock. Participants in the deferred compensation programscould elect to defer up to 50% of their respective bonuses. The number ofrestricted stock units awarded upon such conversion was determined by dividing (i) theamount of the bonus to be converted by (ii) the fair market value of theCompany’s common stock on the grant date. Participants in the deferredcompensation programs elected to defer receipt of the common stock portion oftheir bonuses until the earlier of three years from the grant date or theparticipant’s termination from the Company. The bonus portion deferred by eachof the participants is matched by the Company and 25% of the match vested as of

F-20

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

therespective grant dates. So long as a participant remains employed by theCompany, an additional 25% of the Company’s matching contribution vests on eachanniversary of the respective grant dates for the next three years. Allbenefits under the deferred compensation programs are distributed in a singlepayment and will be paid exclusively in the form of shares of the Company’scommon stock. The Company’s matching contribution was approximately $0.1million and $0.3 million for the years ended December 31, 2003 and 2004,respectively.

**10.   Collaboration Agreements**

***Kirin***

Effective September 4, 2002, the Company enteredinto a Collaboration and License Agreement with Kirin which provides for theexchange by Kirin and the Company of certain cross-licenses for each other’stechnology for the development and commercialization of human antibodyproducts. The Collaboration and License Agreement supercedes the binding letterof intent. Pursuant to the letter of intent, the Company and Kirin developedthe KM-Mouse®, a unique crossbred mouse which combines the traits of theCompany’s HuMAb-Mouse® with Kirin’s TC MouseTM. Under the Collaboration andLicense Agreement, the Company and Kirin are exchanging cross-licenses withrespect to the KM-Mouse and other antibody-generating mice. In addition, eachof the cross-licenses granted under the Collaboration and License Agreement aresubject to certain license, milestone and royalty payments by each party to theother.

Through December 31,2004, the Company has not made any milestone payments to Kirin althoughapproximately $1.9 million has been accrued as of December 31, 2004representing a payment due Kirin as a result of the Company’s collaborationwith Pfizer. Based on a total of two products the Company is developing, whichuse or the Company believes may use Kirin technology and that (i) arecurrently in clinical trials, or (ii) the Company anticipates may enterclinical trials through the end of 2006, the Company may be required to makemilestone payments to Kirin aggregating up to approximately $8.5 million withrespect to such products, or a maximum of approximately $4.25 million perproduct. The Company’s future milestone payment obligations to Kirin may or maynot be triggered, and may vary in size, depending on a number of variables,almost all of which are currently unknown, including the following:

·       whetheror not a decision is made to request a license from Kirin;

·       thetype of license requested (research or commercial);

·       thesuccess and timing of development efforts and clinical trials of productcandidates covered by any such licenses;

·       thetype of product developed, **(**paymentobligations differ depending on whether a product is an *ex vivo* therapeutic, *in vivo* therapeutic, research reagent ordiagnostic**)**; and

·       otherfinancial provisions of the Kirin agreement that provide for variations in feelevels and netting of certain payments over specified periods of time that mayimpact the total amount potentially payable to Kirin for any particular licensefee or milestone payment.

F-21

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

Whether the Company may be obligated to make milestonepayments to Kirin in the future is subject to the success of its efforts withrespect to products the Company is developing that utilize the Kirin technologyand, accordingly, is inherently uncertain.

Unless terminated earlier,the Collaboration and License Agreement expires on December 31, 2014. TheCollaboration and License Agreement can be terminated by either party in theevent of a material breach by the other party if the breach is not cured duringa specified cure period. In addition, either party may terminate any commerciallicense with respect to a specific biologic target granted to it by the otherparty under the agreement at any time.

***Pfizer***

In September 2004, the Company entered into aseries of agreements with Pfizer, Inc. The first agreement amended theCompany’s existing collaborative research and license and royalty agreementswith Pfizer to provide for the discovery and development of up to 50 antibodyproducts over ten years. The second and third agreements were a sublicense fromthe Company to Pfizer and a cross-license of certain patents and patentapplications solely relating to the companies’ respective anti-CTLA-4 antibodyprograms. The fourth agreement was a stock purchase agreement also related tothe anti-CTLA-4 programs. Pursuant to certain of these agreements, Pfizer madea total initial cash payment to the Company of $80.0 million and purchased4,827,808 unregistered shares of the Company’s common stock at a purchase priceequal to $6.21 per share for an aggregate purchase price of $30.0 million. Thepurchase price represented a small premium to market price atthe time the Company entered into the collaboration.

The Company accounts for revenue arrangements thatinclude multiple deliverables in accordance with Emerging Issues Task Force No. 00-21,*Accounting for Revenue Arrangements withMultiple Arrangements*(EITF 00-21). EITF 00-21 addresses how todetermine whether an arrangement involving multiple deliverables contains morethan one unit of accounting. In applying the guidance, revenue arrangementswith multiple deliverables can only be considered as separate units ofaccounting if: a) the delivered item has value to the customer on a standalonebasis, b) there is objective and reliable evidence of the fair value of theundelivered items and c) if the right of return exists, delivery of theundelivered items is considered probable and substantially in the control ofthe vendor. If these criteria are not met, the revenue elements must beconsidered a single unit of accounting for purposes of revenue recognition.

The Company has concludedthat because the Pfizer collaboration contains multiple deliverables (licensesto technology and research services) EITF 00-21 applies. The Company considersthe arrangement with Pfizer to be a single unit of accounting under EITF 00-21for purposes of recognizing the initial $80.0 million payment.

***MedImmune***

In November 2004, the Company entered into anexclusive license and collaboration agreement with MedImmune, Inc. todevelop antibodies targeting interferon-alpha and the type I interferonreceptor 1. The collaboration initially focuses on two fully human antibodies,MDX-1103 and MDX-1333, that are currently in preclinical development by theCompany for the treatment of autoimmune diseases.

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

Under the terms of theagreement, the Company received a payment of $15.0 million from MedImmune andhas the ability to receive potential milestone payments for product candidatesdeveloped by the collaboration that enter into clinical development. MedImmuneis fully responsible for all development costs up to the point of initiatingpivotal trials of any product candidates. At that point, the Company has achoice for each potential product candidates. The Company can elect to enterinto a profit sharing arrangement in the United States whereby the Company willpay its proportionate share of the future development costs and reimburseMedImmune for a proportionate share of MedImmune’s previous development costsplus interest. In addition, the Company would also have the option to enterinto a co-promotion relationship with MedImmune in the United States for eachsuch product. In the alternative, the Company can elect to forego any furtherfunding for the product candidates, and MedImmune will be responsible for allcosts of development and commercialization. In that case, the Company will beentitled to milestone payments and substantial royalties on any sales in theUnited States. The Company is also entitled to milestone payments andsubstantial royalties on any product sales in the rest of the world.

***Gilead***

In July 2004, theCompany entered into an amendment to a Collaboration and License Agreement withGilead Sciences, Inc. (the successor in interest to NeXstarPharmaceuticals, Inc.), referred to herein as the Gilead Amendment. Underthe terms of the Gilead Amendment, the Company agreed to pay Gilead a total of$8.5 million in eight equal quarterly installments of $1.063 million, payableat the Company’s election, in cash, registered shares of its common stock or acombination thereof, in exchange for (i) a reduction of certain futureroyalty payment obligations, payable by the Company to Gilead, and (ii) anexpansion of the scope of certain licenses from Gilead to the Company relatingto certain intellectual property rights regarding anti-CTLA-4 products. Thefirst of these payments was paid on August 2, 2004 through the issuance of185,622 shares of the Company’s common stock to Gilead. The second payment wasmade on October 1, 2004 in cash. The third payment was made on January 3,2005 in cash. The five remaining payments will be made on a quarterly basis,commencing on April 1, 2005 and ending on April 3, 2006. If theCompany decides to make a quarterly installment payment in shares of its commonstock, the number of shares of common stock subject to issuance for anyinstallment will be determined by dividing (x) $1.063 million (less anycash paid in connection with the installment) by (y) the average of theclosing sales prices of the Company’s common stock for each of the trading daysduring the five-trading-day period ending on (and including) the trading daythat is two trading days immediately prior to the applicable date of issuanceas publicly reported by NASDAQ. In the event that, during the 60-day periodfollowing the applicable date of issuance of such common stock, Gilead sellsall of the shares of the Company’s common stock delivered as part of aninstallment payment under the Gilead License and the proceeds of such sale areless than $1.063 million (less any cash paid in connection with suchinstallment), the Company must pay the difference to Gilead in cash. If suchsale proceeds exceed $1.063 million (less any cash paid in connection with suchinstallment), Gilead must pay the Company 50% of any such excess in cash. Inthe event that, during any such 60-day period, Gilead does not sell all of theshares of the Company’s common stock comprising the installment, there will beno such adjustment. In August 2004,the Company paid Gilead approximately $0.1 million representing the differencebetween the proceeds received by Gilead upon the sale of the 185,622 shares ofcommon stock and the initial payment of $1.063 million.

F-23

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

**11.   Transactions with Genmab**

In August 2000, the Company entered into abinding memorandum of understanding, or the Genomics Agreement, with Genmab,pursuant to which the Company granted Genmab rights to market its transgenicmouse technologies for multi-target (five or more targets) genomicspartnerships to certain pharmaceutical and biotechnology companies whoseheadquarters are located in Europe. Under the terms of the Genomics Agreement,Genmab may market the Company’s human antibody technology (a) for largemulti-target (five or more targets) partnerships to any Europe-based company except for: (i) certainMedarex partners, including Novartis, Merck KGaA, Schering, Aventis Behring,Immuno-Design Molecules S/A, or IDM, and Scil Biomedicals GmbH; and (ii) anyEuropean based pharmaceutical company with worldwide revenues in excess of $1billion in 1999, provided, however, that Genmab may market the Company’s humanantibody technology to Sanofi/Synthélabo and Boehringer Ingelheim, and (b) fornon-large multi-target (less than five targets) partnerships, to any companyworldwide. The Company also has the right to participate in Genmab’s largemulti-target (five or more targets) partnerships, thereby sharing in certaincosts and commercial benefits. The Company retains all rights to market itstechnology to companies headquartered outside of Europe and to all companiesfor non-large multi-target (less than five targets) partnerships in Europe.Certain license fees, milestones and royalties due to the Company under itspreviously existing agreement with Genmab were reduced. The Genomics Agreementalso provides that, under certain circumstances, the Company must negotiate ingood faith to manufacture antibodies for Genmab’s partnerships. Finally, theGenomics Agreement grants Genmab certain rights to access technologies acquiredby the Company from Biosite Incorporated and Kirin.

The Genomics Agreement has an initial term of fiveyears (expiring in August 2005) witha right exercisable by Genmab to extend the term for an additional two years.For each year of the agreement and during the term of any extension, theCompany will receive $2.0 million per year from Genmab. At Genmab’s option,these amounts may be paid in either cash or capital stock. During each of theyears ended December 31, 2002, 2003 and 2004, the Company recognized $2.0million of revenue from this agreement.

As of January 1, 2002, the Company ownedapproximately 31.6% of the outstanding stock of Genmab. In June 2002,Genmab announced that one of its corporate partners had purchased shares ofGenmab stock in connection with an antibody collaboration. As a result of thistransaction, the Company’s ownership percentage was reduced to approximately31.3%.

In September 2002, Genmab issued a press releasein which it announced that its HuMax-CD4 product, a fully human antibody thattargets the CD4 receptor on cells known as T-cells, was found not to beeffective in combination with methotrexate in a Phase II study of 155 patientswith active rheumatoid arthritis. Following this press release, the marketvalue of Genmab’s stock decreased by approximately 60%, and accordingly, theCompany recorded an impairment charge of $31.0 million, which was deemed to beother than temporary at the time. The impairment charge of $31.0 million isincluded in equity in net loss of affiliate in the Company’s consolidatedstatement of operations for the year ended December 31, 2002.

In July 2003, the Company received 246,914 sharesof Genmab stock valued at $2.0 million representing payment for the fourth offive annual payments under the August 2000 Genomics Agreement 

F-24

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

between the Company andGenmab (described above). The Company’s ownership percentage in Genmabincreased to approximately 32.0% as a result of the receipt of the 246,914shares of Genmab stock.

In July 2004 Genmab completed a private placementof 5.6 million shares of its stock. As a result of this private placement, theCompany’s ownership percentage of Genmab was reduced to approximately 24.7%.The difference between the Company’s proportionate share of the additionalequity raised was approximately $9.7 million and was accounted for inaccordance with APB Opinion No.18, *TheEquity Method of Accounting for Investment in Common Stock*, andStaff Accounting Bulletin No. 51, *Accountingfor Sales of Stock by a Subsidiary.* This transaction is reflected asan increase to capital in excess of par value in the Company’s consolidatedfinancial statements as of and for the year ended December 31, 2004.

The Chairman of the Company’s board of directors isalso on the board of directors of Genmab. In addition, the President and ChiefExecutive Officer of the Company, who is also a member of the board ofdirectors of the Company, and the President and Chief Executive Officer ofGenmab are husband and wife. The President and Chief Executive Officer ofGenmab and the Chief Scientific Officer of Genmab have consulting agreementswith the Company. No services were rendered under these consulting agreementsfor the years ended December 31, 2002, 2003 and 2004.

As of December 31, 2004, the market value of theCompany’s investment in Genmab was approximately $134.8 million.

Summaryfinancial information for Genmab is as follows as of and for the years ended December 31,2002, 2003 and 2004:
| ** **               | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current Assets           |       | $        | 199,648    |     | $          | 178,596  |       | $ | 217,582 |   |
| Non Current  Assets      |       | 23,890   |       | 19,487   |       | 15,044   |       |
| Current  Liabilities     |       | 22,649   |       | 12,606   |       | 12,796   |       |
| Non Current  Liabilities |       | 3,328    |       | 3,117    |       | 3,833    |       |
| Revenue                  |       | —   |       | 10,500   |       | 750      |       |
| Gross Profit             |       | —   |       | 10,500   |       | 750      |       |
| Net Loss                 |       | (62,053  | )          | (47,613  | )          | (70,787  | )          |
|                          |            |          |            |          |            |          |            |  |  |  |

 

**12.   Transactions with IDM**

In July 2000, the Company entered into anagreement with IDM whereby the Company licensed to IDM certain of itstechnologies in exchange for equity units in IDM. As a result of thistransaction, the Company realized a gain from the transfer of its technology ofapproximately $40.5 million (based upon an independent valuation). Inaccordance with SAB No. 104, *RevenueRecognition in Financial Statements*, the Company recognized the$40.5 million gain as revenue over a two-year period ending in September 2002for financial statement reporting purposes. The Company recognized $14.3million, $0 and $0, as non-cash revenue from this transaction during the yearsended December 31, 2002, 2003 and 2004, respectively. For tax reportingpurposes, the entire gain on the transfer of technology was taxable to theCompany at the time the transaction closed in 2000.

F-25

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

In December 2004, IDM completed a privateplacement of its equity securities at a per share price which was less than theCompany’s cost basis in IDM. As a result, the Company recorded  a non-cash investment impairment charge ofapproximately $7.0 million during the fourth quarter of 2004. If the Companydeems its investment in IDM to be further impaired at the end of any futureperiod, the Company may incur additional non-cash investment impairment chargeson this investment.

The Company currently accounts for its interest in IDMunder the cost method. The Company’s equity ownership in IDM is approximately8% as of December 31, 2004. With the closing of the agreement in September 2000,the Company was issued 7,528 Class B shares and 192,278 units, each unitcomprising one Class B share and 19 warrants allowing each to purchase oneconvertible or redeemable bond into one Class B share. If the warrants areexercised and converted or redeemed, the Company would own an additional3,653,282 Class B shares of IDM, which would give the Company an equityinterest in IDM of approximately 23%. The warrants are exercisable between September 2002and September 2010, for bonds that in turn are convertible into orredeemable in Class B shares six months after the exercise.

One of the members of theCompany’s Board of Directors acts as the Company’s representative on the boardof directors of IDM.

**13.   Commitments and contingencies**

The Company is obligated under non-cancelableoperating leases for laboratory, production and office space in New Jersey andCalifornia. These leases expire on various dates between March 2006 and July 2009.The Company is also obligated under certain research and license agreements. Asummary of the Company’s commitments as of December 31, 2004 is asfollows:
| ** **       | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Operating leases |       | $        | 3,250      |     | $          | 2,607    |       | $        | 2,452      |     | $          | 2,141    |       | $ | 690 |   | $ | — |   |
| Research funding |       | 7,793    |       | 5,218    |       | 3,093    |       | 2,343    |       | 93       |       | 93       |       |
| Total            |       | $        | 11,043     |     | $          | 7,825    |       | $        | 5,545      |     | $          | 4,484    |       | $ | 783 |   | $ | 93 |   |

 

The Company incurred rent expense of $4.0 million in2002, $3.5 million in 2003 and $3.9 million in 2004.

The Company has secured a bank letter of creditpursuant to the requirements of its Annandale, New Jersey lease. This letter ofcredit in the amount of $1.3 million is fully cash collateralized and the cashis categorized as segregated securities in the balance sheet.

The Company hasentered into a number of other agreements that contain in-licenses ofthird-party technology (other than Kirin—see Note 10) which may be usedtogether with the Company’s own platform technologies for the generation,development and/or manufacture of its antibody products. In addition, theCompany has entered into other third-party agreements that contain in-licensesassociated with antibody products that target specific antigens. Many of theseagreements contain milestones payments that are due with respect to productsusing/targeting the licensed technology/antigen only if and when certainspecified pre-commercialization events occur. Not all of the Company’s productscurrently under development trigger such milestone payments. Through December 31,2004, the Company had made milestone payments under theseagreements of approximately $0.3million. In addition, under the agreements the 

F-26

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

Companycurrently has in place (other than with Kirin), based on a total of five products the Company is developing for which milestones arepotentially due and that (i) are now in clinical trials, or (ii) whichthe Company anticipates may enter clinical trials before the end of 2006, theCompany may be obligated to make future milestone payments aggregating up toapproximately $22.5 million with respect to such products. In general, potentialmilestone payments for antibody products may or may not be triggered underthese licenses, and may vary in size, depending on a number of variables,almost all of which are currently uncertain. Typically, the events that triggerthese milestone payments per product include:

·       submissionof IND(s) or foreign equivalents;

·       commencementof Phase I, Phase II and/or Phase III clinical trials or foreign equivalents;

·       submissionof BLA(s) or foreign equivalents; and

·       receiptof marketing approval(s) to sell products in a particular country orregion.

In addition, the licenses above may trigger royaltypayments in connection with the commercialization of certain of the Company’sproducts. Whether the Company will be obligated to make milestone or royaltypayments in the future is subject to the success of its product developmentefforts and, accordingly, is inherently uncertain.

The Company has a contingent commitment to pay $1.0million to Essex Chemical Corporation (“Essex”) without interest ininstallments equal to 20% of net after tax earnings of the Company in futureyears. The Company’s contingent commitment, as amended, to pay up to $1.0million out of future earnings may be satisfied, at the Company’s option,through the payment of cash or shares of the Company’s common stock having afair market value equal to the amount owed, provided that such shares areregistered with the Securities and Exchange Commission. The Company accrued$0.7 million related to this liability during 2000, which remains accrued at December 31,2004.

In the ordinary course ofits business, the Company is at times subject to various legal proceedings. TheCompany does not believe that any of its current legal proceedings, individuallyor in the aggregate, will have a material adverse effect on its operations orfinancial condition.

**14.   Segment Information**

The Company is an integrated monoclonal antibody-basedcompany with antibody discovery, development and clinical manufacturingcapabilities. The operations of the Company and its wholly-owned subsidiariesconstitute one business segment.

Revenuefrom partners representing 10% or more of total revenues for the years ended December 31,2002, 2003 and 2004 is as follows:
| **Partners** | ** ** | ** ** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Genmab       |       |       | 37         | %        |       |     | 48         | %        |       |   | 26 | % |   |
| Pfizer       |       |       | —     |     |       |     | —     |     |       |   | 20 | % |   |
| Amgen        |       |       | 3          | %        |       |     | 15         | %        |       |   | 8 | % |   |
| Lilly        |       |       | 11         | %        |       |     | 7          | %        |       |   | 6 | % |   |
| IDM          |       |       | 36         | %        |       |     | —     |     |       |   | — |   |   |

 

F-27

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

No other single partneraccounted for more than 10% of the Company’s total revenues for the years endedDecember 31, 2002, 2003 and 2004, respectively.

**15.   Employee Savings Plan**

The Company maintains a401(k) savings plan. Employees may contribute up to 15% of their annualsalaries. The Company may make matching contributions of up to 4% of aparticipant’s annual salary. During 2002, 2003 and 2004, the Company madecontributions to the plan totaling $0.4 million, $0.6 million and $0.6 million,respectively.

**16.   Asset Acquisition**

In May 2002, the Company and its newly createdsubsidiary Medarex Belgium, S.A. entered into an Asset Purchase Agreement withCorixa Corporation, Coulter Pharmaceutical, Inc., a wholly ownedsubsidiary of Corixa Corporation, and Corixa Belgium S.A., a wholly-ownedsubsidiary of Corixa Corporation (collectively referred to as “Corixa”). Underthe terms of the Asset Purchase Agreement, the Company acquired certainselected assets and business operations of Corixa, including certain preclinicalproduct candidates and programs related to the research and development oftherapeutic products for the treatment of autoimmune diseases, cancer andinfectious diseases. In addition, the Company retained approximately 30 Corixaemployees related to such product candidates and programs.

Under the terms of the Asset Purchase Agreement, theCompany acquired the assets for $21.0 million (excluding transaction costs of$0.4 million). A total of 3,086,075 shares of common stock with a fair value of$19.25 million were issued to Corixa along with cash of $1.75 million aspayment for the $21.0 million purchase price. In the event that, during anymonth during the six-month period following the closing of the transaction,Corixa sold all of the shares of the common stock delivered as payment for thepreceding monthly installment and the proceeds of such sale were less than $3.5million, the Company was required to pay the difference to Corixa in cash. TheCompany paid Corixa approximately $2.3 million representing the differencebetween the proceeds received by Corixa from the sale of the Company’s commonstock and the total amount due under the six monthly installments. Such amountis included as a charge to earnings in the Company’s consolidated statement ofoperations for the year ended December 31, 2002.

The Company also purchased from Corixa certainequipment and laboratory supplies for $2.5 million, of which approximately $2.1million was capitalized with the remaining $0.4 million charged to expense.

Thecost of the asset acquisition in 2002 was $21.4 million, of which $0.4 millionrepresented transaction costs. This amount has been allocated as follows basedupon an independent third party valuation using the income approach:
| In-process  technology |   | $     | 16,312 |   |
|------------------------|--------|-------|--------|--------|
| Patents                |   | 4,388 |   |
| Acquired  workforce    |   | 705   |   |
|                   |   | $     | 21,405 |   |

 

F-28

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

The $16.3 million of in-process research anddevelopment, which was charged to operations in 2002, was determined not to betechnologically feasible and had no alternative future uses. Patents andacquired workforce are being amortized over useful lives of five years andthree years, respectively.

The value of the acquired in-process research anddevelopment was determined by estimating the related probability-adjusted netcash flows, which were then discounted to a present value using a rate of 25%.The discount rate was based on the Company’s estimated weighted average cost ofcapital taking into account the risk associated with the technologies acquired.The projected cash flows from such projects were based on estimated revenuesand operating profits related to such projects considering the state ofdevelopment of each of technologies acquired, the time and resources needed todevelop the technologies, the estimated life of each potential commercializedproduct and associated risks including the inherent difficulties anduncertainties in developing a drug compound including obtaining FDA and otherregulatory approvals.

In October 2003, the Company entered into anAmended and Restated License Agreement with Kyowa Hakko Kogyo Co., Ltd., (the “KyowaLicense”). Under the terms of the Kyowa License, the Company received certainintellectual property rights relating to the development and commercializationof our Ultra-Potent ToxinTM technology. As partial consideration for theserights, the Company paid Kyowa a total of $4.0 million, $3.6 million of whichwas paid through the issuance of 552,020 shares of our common stock with thebalance of $0.4 million paid in cash, representing applicable withholdingtaxes.

The Kyowa License was the result of the renegotiationof a pre-existing license agreement with respect to Ultra-Potent Toxintechnology between Kyowa Hakko and Corixa which license agreement the Companyacquired as part of the purchase of certain assets of Corixa in May 2002.Under the terms of the Corixa Asset Purchase Agreement, upon the execution ofthe Kyowa License, the Company was required to make a final payment to Corixaof $2.5 million, which was paid through the issuance of 353,807 shares of theCompany’s common stock. The Company has no further obligation to Corixa inconnection with the Asset Purchase Agreement.

The total amount of thepayments to Kyowa Hakko and Corixa in 2003 of $6.5 million was charged tooperations as in-process research and development.

**17.   Acquisitionof Ability Biomedical Corporation**

On August 5, 2004, the Company completed theacquisition of all of the outstanding capital stock not already owned by theCompany of Ability Biomedical Corporation, a privately held Canadianbiotechnology company. Pursuant to such acquisition, the Company acquiredAbility Biomedical’s intellectual property related to IP-10, a protein believedto be associated with a variety of immune disorders, including multiplesclerosis, rheumatoid arthritis, inflammatory bowel disease, chronicobstructive pulmonary disease and type I diabetes.

The purchase price consisted of 731,823 shares ofMedarex common stock (valued at approximately $4.3 million), cash payments ofapproximately $0.6 million and transaction costs of approximately $0.2 million.In addition, the Company had owned shares of Ability Biomedical prior to theacquisition, which were valued at approximately $0.6 million, therefore thetotal cost of the acquisition was $5.7 million. During the 60-day period followingthe issuance of shares of the Company’s common stock to the Ability Biomedicalshareholders in connection with the acquisition, certain shareholders sold allof the shares 

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

issued to them for anamount less than the amount due to them under the share purchase agreementwhile certain other shareholders sold shares issued to them for an amountgreater than the amount due them under the share purchase agreement. Inaccordance with the share purchase agreement, the Company receivedapproximately $0.1 million representing 50% of the difference between theactual proceeds received and the amount due under the share purchase agreement.Such amount is included within “additional (payments) receipts related to assetacquisitions” in the Company’s consolidated statement of operations for theyear ended December 31, 2004.

Upon achievement of certain development milestoneswith respect to the Company’s anti-IP-10 antibody program, but no later than September 4,2007, the Company may be required to pay the former shareholders of AbilityBiomedical an additional amount of approximately $3.65 million in cash and/orcommon stock subject to fluctuations in currency exchange rates. In lieu ofsuch additional payment, the Company also has the option to revert to theoriginal joint collaboration agreement with the former shareholders of AbilityBiomedical whereby each party would be responsible for 50% of the costsassociated with the anti-IP-10 antibody.

The total cost of theacquisition was $5.7 million. This amount has been allocated as follows:
| In-process  technology                            |   | $   | 5.4    |   |
|---------------------------------------------------|--------|-----|--------|--------|
| Net assets  (primarily cash and cash equivalents) |   | 0.3 |   |
|                                              |   | $   | 5.7    |   |

The assets and liabilities assumed have been recordedat their estimated fair market values at the date of acquisition. Sincetechnological feasibility of the in-process research and development costs havenot yet been established and the technology had no alternative future use atthe acquisition date, the in-process research and development costs of $5.4million were immediately written-off and included in the results of operationsfor the year ended December 31, 2004.

**18.   Write-off of Facility Costs**

During the second quarterof 2002, the Company made a determination to delay indefinitely the plannedconstruction of a large-scale manufacturing facility at its Bloomsbury, NewJersey, location and, instead, to pursue late-stage clinical and commercialsupply agreements with third party manufacturers with available capacity tomeet the Company’s current internal production timetables. As a result of thisdecision, the Company recorded a charge of approximately $11.3 million in thesecond quarter of 2002, representing the write-off of design, engineering andother pre-construction costs. In September 2003, the Company entered intoa clinical supply agreement with Lonza Group Ltd. with respect to MDX-010, anddiscussions are ongoing with respect to terms of a commercial supply agreement.

**19.   Employee Stock Purchase Plan**

In May 2002, theCompany adopted an Employee Stock Purchase Plan (the “ESPP”) which currentlyauthorizes the issuance of 1,500,000 shares of its common stock pursuant topurchase rights granted to eligible employees of the Company. The ESPP providesa means by which employees purchase common stock of the Company through payrolldeductions of up to 10% of their base compensation. At the end of each of twopurchase periods during the calendar year, the Company uses accumulated payrolldeductions 

F-30

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

topurchase, on behalf of participating employees, shares of common stock at aprice equal to the lower of 85% of the fair market value of a share of commonstock (i) on July 1, 2004 or (ii) at the end of each six monthpurchase period. The purchase periods under the ESPP end on June 30 and December 31of each year. Generally all employees, including executive officers, who workat least 20 hours per week and five months per year may participate in theESPP. Employees who are deemed to own greater than 5% of the combined votingpower of all classes of stock of the Company are not eligible for participationin the ESPP. During the years ended December 31, 2002, 2003 and 2004,146,982, 175,955 and 176,625 shares of common stock were issued under the ESPPresulting in net proceeds to the Company of $0.5 million, $1.0 million and $1.1million, respectively.

**20.   QuarterlyFinancial Information—Unaudited**

Thefollowing is a summary of the quarterly results of operations for the yearsended December 31, 2003 and 2004:
| **2003**                                | ** ** | ** ** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|
| Sales                                   |       | $          | 25         |               | $          | —            |       |                   | $          | —                |       |      |       | $ | — |   |   | $ | 25 |   |
| Contract and  license revenues          |       | 3,939      |       | 2,251              |       |              | 2,260      |                   |       |                  | 2,699      |      |       | 11,149 |   |
| Total revenue                           |       | 3,964      |       | 2,251              |       |              | 2,260      |                   |       |                  | 2,699      |      |       | 11,174 |   |
| Cost of sales                           |       | 3          |       | —             |       |              | —     |                   |       |                  | —     |      |       | 3 |   |
| Loss before  provision for income taxes |       | (28,765    | )          | (29,111            | )          |              | (33,267    | )                      |       |                  | (37,235    | )         |       | (128,378 | ) |
| Net loss                                |       | (29,623    | )          | (29,125            | )          |              | (33,270    | )                      |       |                  | (37,259    | )         |       | (129,277 | ) |
| Basic and diluted  net loss per share   |       | $          | (0.38      | )                  | $          | (0.37             | )          |                   | $          | (0.43                 | )          |      |       | $ | (0.47 | ) |   | $ | (1.65 | ) |

 
| **2004**                                | ** ** | ** ** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|
| Sales                                   |       | $          | —     |               | $          | —            |       |                   | $          | —                |       |      |       | $ | — |   |   | $ | — |   |
| Contract and  license revenues          |       | 1,929      |       | 1,910              |       |              | 3,682      |                   |       |                  | 4,953      |      |       | 12,474 |   |
| Total revenue                           |       | 1,929      |       | 1,910              |       |              | 3,682      |                   |       |                  | 4,953      |      |       | 12,474 |   |
| Cost of sales                           |       | —     |       | —             |       |              | —     |                   |       |                  | —     |      |       | — |   |
| Loss before  provision for income taxes |       | (30,954    | )          | (43,550            | )          |              | (54,825    | )                      |       |                  | (57,149    | )         |       | (186,478 | ) |
| Net loss                                |       | (30,960    | )          | (43,553            | )          |              | (55,007    | )                      |       |                  | (56,989    | )         |       | (186,509 | ) |
| Basic and diluted net  loss per share   |       | $          | (0.39      | )                  | $          | (0.55             | )          |                   | $          | (0.68                 | )          |      |       | $ | (0.66 | ) |   | $ | (2.29 | ) |

 

**21.   Subsequent Events**

***Bristol-Myers Squibb Collaboration***

In January 2005, the Company announced theclosing of a collaboration and co-promotion agreement and a related securitiespurchase agreement with Bristol-Myers Squibb Company, or BMS, pursuant to whichthe Company and BMS have each granted the other certain intellectual propertylicenses and product rights on a worldwide basis in order to enable the partiesto collaborate in research and development of certain therapeuticantibody-based products for the treatment of cancer and other diseases, and, inthe event that further development work is successful, to commercialize anyresulting products. In particular, the collaboration includes a grant by theCompany to BMS of a license to commercialize MDX-010, a fully humanantibody product developed using the Company’s UltiMAb Human AntibodyDevelopment System, that is antagonistic to cytotoxic T-lymphocyte antigen 4(CTLA-4). 

F-31

----

**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2002, 2003 and 2004 (Dollars in thousands, unless otherwise indicated, except share data)**

MDX-010 is currentlyunder investigation for the treatment of a broad range of cancers and otherdiseases. The collaboration also includes the grant by the Company to BMS of alicense to MDX-1379, a gp100 peptide vaccine, for use with MDX-010for the treatment of metastatic melanoma.

As part of the collaboration, the two companies havecommitted to an initial multi-year budget of approximately $192.0 million tofund their development of MDX-010 as a potential treatment for a broadrange of cancers. BMS will be responsible for 65% of all development costsrelated to clinical trials intended to support regulatory approval in both theUnited States and Europe, with the remaining 35% to be paid by the Company. Theparties will share equally the costs of any clinical trials of productsintended solely for regulatory approval in the United States, and BMS will befully responsible for all development efforts that relate solely to regulatoryapproval in Europe and other parts of the world.

Under the terms of the collaboration, the Companycould receive up to $205.0 million from BMS if all regulatory milestones aremet, plus up to an additional $275.0 million in sales-related milestones. TheCompany will also have the option to co-promote any products in the UnitedStates, and, if the Company elects to exercise this option and has participatedin the funding of the applicable Phase III clinical trial(s), the Company willreceive 45% of any profits from commercial sales. In the event the Companychooses not to exercise its co-promotion rights, BMS will have exclusivecommercial rights in the United States and will pay the Company royalties onany commercial sales. Outside the United States, BMS will have exclusivecommercial rights and will pay the Company royalties on any commercial sales.

Pursuant to theseagreements, BMS made an initial cash payment to the Company of $25.0 million.In addition, BMS purchased a total of 2,879,223 unregistered shares of theCompany’s common stock at a purchase price equal to $8.6829 per share for anaggregate purchase price of $25.0 million. The purchase price represented a small premium to the market price onthe date the Company entered into the collaboration.

***Redemption of 4.25% Notes***

In January 2005, the Company completed theprovisional redemption of all of its outstanding 4.25% Notes which waspreviously announced in December 2004. Holders of all of the outstanding4.25% Notes ($146.986 million) converted their notes into a total of 21,875,353shares of the Company’s common stock prior to the redemption date. Inconnection with the redemption, the Company paid approximately $12.5 million incash primarily representing the “make-whole” payment of $10.2 million describedin Note 6 as well as accrued interest of $2.3 million. The Company accrued the$10.2 million “make-whole” payment in the quarter ended December 31, 2004,at the time the redemption was announced. In connection with this transaction,unamortized debt issuance costs of approximately $3.2 million were reclassifiedto capital in excess of par value.

F-32

----

 

**Report**of Independent Registered Public Accounting Firm

To the Board of Directorsand Shareholders of Genmab A/S:

In ouropinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations,shareholders’ equity and cash flows present fairly, in all material respects,the financial position of Genmab A/S and its subsidiaries (a development stagecompany) at December 31, 2004 and 2003, and the results of theiroperations and their cash flows for each of the three years ended and,cumulatively, for the period from June 11, 1998 (date of inception) to December 31,2004 in conformity with accounting principles generally accepted in the UnitedStates of America. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of thesestatements in accordance with standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.
| PricewaterhouseCoopers                     |
|--------------------------------------------|
| Statsautoriseret Revisionsinteressentskab  |
| Copenhagen, Denmark, February 8, 2005 |
| /s/ JENS RØDER                        |   |
| State Authorized Public Accountant         |

 

F-33

----

 

**Genmab A/S (Adevelopment stage company)Consolidated Statements of Operations**
| ** **                                                                                     | ** ** | **Note**   | ** ** | **12 months  ended  December 31,  2004** | ** ** | **12 months  ended  December 31,  2004** | ** ** | **12 months  ended  December 31,  2003** | ** ** | **12 months  ended  December 31,  2002** | ** ** | **Total since  inception** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                     | ** ** | ** ** | ** ** | **DKK’000**                                   | ** ** | **USD’000**                                   | ** ** | **DKK’000**                                   | ** ** | **DKK’000**                                   | ** ** | **DKK’000**                | ** ** |
| ** **                                                                                     | ** ** | ** ** | ** ** | ** **                                         | ** ** | **(Unaudited)**                                    | ** ** | ** **                                         | ** ** | ** **                                         | ** ** | ** **                      | ** ** |
| Revenues                                                                                       |       |       |       |                                               |       | 4,101                                              |       | 750                                                |       | 68,326                                             |       | —                          |       | 72,427 |   |
| Costs and  expenses:                                                                           |       |       |       |                                               |       |                                               |       |                                               |       |                                               |       |                            |       |   |   |
| Research and development costs                                                            |       |       | 8          |                                               |       | 373,330                                            |       | 68,280                                             |       | 345,983                                            |       | 396,234                         |       | 1,389,123 |   |
| General and administrative expenses                                                            |       |       | 8          |                                               |       | 72,044                                             |       | 13,177                                             |       | 64,552                                             |       | 86,847                          |       | 302,686 |   |
| Impairment loss on manufacturing facility                                                      |       |       | 6          |                                               |       | —                                             |       | —                                             |       | —                                             |       | 42,907                          |       | 42,907 |   |
| Total costs and expenses                                                                       |       |       |       |                                               |       | 445,374                                            |       | 81,457                                             |       | 410,535                                            |       | 525,988                         |       | 1,734,716 |   |
| **Operating loss**                                                                             | ** ** |       |       |                                               | ** ** | **(441,273**                                       | **)**      | **(80,707**                                        | **)**      | **(342,209**                                       | **)**      | **(525,988**                    | **)**      | **(1,662,289** | **)** |
| Interest income                                                                                |       |       |       |                                               |       | 38,625                                             |       | 7,064                                              |       | 36,362                                             |       | 70,424                          |       | 265,689 |   |
| Interest expenses                                                                              |       |       |       |                                               |       | (1,802                                             | )          | (330                                               | )          | (2,047                                             | )          | (2,184                          | )          | (10,280 | ) |
| Other expense,  net                                                                            |       |       | 3          |                                               |       | (17,597                                            | )          | (3,218                                             | )          | (2,449                                             | )          | (19,338                         | )          | (31,867 | ) |
| **Loss before provision for income taxes**                                                     | ** ** |       |       |                                               | ** ** | **(422,047**                                       | **)**      | **(77,191**                                        | **)**      | **(310,343**                                       | **)**      | **(477,086**                    | **)**      | **(1,438,747** | **)** |
| Provision  (benefit) for income taxes                                                          |       |       | 4          |                                               |       | —                                             |       | —                                             |       | (66                                                | )          | 326                             |       | 265 |   |
| **Net loss**                                                                                   | ** ** |       |       |                                               | ** ** | **(422,047**                                       | **)**      | **(77,191**                                        | **)**      | **(310,277**                                       | **)**      | **(477,412**                    | **)**      | **(1,439,012** | **)** |
| **Basic and diluted net loss per share (in  DKK/USD)**                                         | ** ** |       |       |                                               | ** ** | **(15.9**                                          | **)**      | **(2.9**                                           | **)**      | **(13.6**                                          | **)**      | **(21.4**                       | **)**      | ** ** | ** ** |
| **Weighted  average number of shares outstanding during the year—basic and diluted** | ** ** |       |       |                                               | ** ** | **26,470,014**                                     | ** ** | **26,470,014**                                     | ** ** | **22,830,818**                                     | ** ** | **22,336,150**                  | ** ** | ** ** | ** ** |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-34

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**Genmab A/S (Adevelopment stage company)Consolidated Balance Sheets**
| ** **                                                                                                                                  | ** ** | **Note**   | ** ** | **December 31,  2004** | ** ** | **December 31,  2004** | ** **    | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-----------------------------|---------------|-----------------------------|------------|
| ** **                                                                                                                                  | ** ** | ** ** | ** ** | **DKK’000**            | ** ** | **USD’000**            | ** **    | **DKK’000**            | ** ** |
| ** **                                                                                                                                  | ** ** | ** ** | ** ** | **(Unaudited)**             | ** ** |
| **ASSETS**                                                                                                                                  |       |       |       |                        |       |                        |          |                        |       |   |   |   |   |   |   |   |   |
| **Current  assets:**                                                                                                                        |       |       |       |                        |       |                        |          |                        |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents  (Includes restricted cash of DKK 27,727 thousand at December 31, 2004  and DKK 11,269 at December 31, 2003) |       |       |       |                        |       |                        | 419,566       |                        |       |   | 76,737 |   |   |   | 308,916 |   |   |
| Marketable securities                                                                                                                       |       |       | 5          |                        |       |                        | 738,862       |                        |       |   | 135,135 |   |   |   | 726,860 |   |   |
| Other current assets                                                                                                                        |       |       |       |                        |       |                        | 31,224        |                        |       |   | 5,710 |   |   |   | 28,227 |   |   |
| **Total current assets**                                                                                                                    | ** ** |       |       |                        | ** ** | ** **                  | **1,189,652** |                        | ** ** | ** ** | **217,582** |   | ** ** | ** ** | **1,064,003** |   |   |
| **Non-current  assets:**                                                                                                                    |       |       |       |                        |       |                        |          |                        |       |   |   |   |   |   |   |   |   |
| Plant and equipment, net                                                                                                                    |       |       | 6          |                        |       |                        | 57,353        |                        |       |   | 10,489 |   |   |   | 73,160 |   |   |
| Other securities and equity interests                                                                                                       |       |       | 9          |                        |       |                        | 5,726         |                        |       |   | 1,047 |   |   |   | 5,726 |   |   |
| Licenses and rights                                                                                                                         |       |       | 7          |                        |       |                        | 10,725        |                        |       |   | 1,962 |   |   |   | 33,773 |   |   |
| Deposits and other assets, net                                                                                                              |       |       |       |                        |       |                        | 8,452         |                        |       |   | 1,546 |   |   |   | 3,446 |   |   |
| **Total non-current assets**                                                                                                                | ** ** |       |       |                        | ** ** | ** **                  | **82,256**    |                        | ** ** | ** ** | **15,044** |   | ** ** | ** ** | **116,105** |   |   |
| **Total  Assets**                                                                                                                           | ** ** |       |       |                        | ** ** | ** **                  | **1,271,908** |                        | ** ** | ** ** | **232,626** |   | ** ** | ** ** | **1,180,108** |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-35

----

**Genmab A/S (Adevelopment stage company)Consolidated Balance Sheets**
| ** **                                                                                                                                                                            | ** ** | **Note**   | ** ** | **December 31,  2004** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|-------------|
| ** **                                                                                                                                                                            | ** ** | ** ** | ** ** | **DKK’000**            | ** ** | **USD’000**            | ** ** | **DKK’000**            | ** **  |
| ** **                                                                                                                                                                            | ** ** | ** ** | ** ** | **(Unaudited)**             | ** ** |
| **LIABILITIES AND SHAREHOLDERS'  EQUITY**                                                                                                                                             |       |       |       |                        |       |                        |       |                        |        |   |   |   |   |
| **Liabilities:**                                                                                                                                                                      |       |       |       |                        |       |                        |       |                        |        |   |   |   |   |
| **Current  liabilities:**                                                                                                                                                             |       |       |       |                        |       |                        |       |                        |        |   |   |   |   |
| Trade accounts payable                                                                                                                                                                |       |       |       |                        |       | 15,768                      |       |                        | 2,884       |   |   | 24,033 |   |
| Accrued liabilities                                                                                                                                                                   |       |       |       |                        |       | 46,150                      |       |                        | 8,441       |   |   | 34,009 |   |
| Short-term portion of payable technology rights                                                                                                                                       |       |       | 10         |                        |       | —                      |       |                        | —      |   |   | 11,495 |   |
| Short-term portion of lease liabilities                                                                                                                                               |       |       | 16         |                        |       | 8,044                       |       |                        | 1,471       |   |   | 5,569 |   |
| **Total current liabilities**                                                                                                                                                         | ** ** |       |       |                        | ** ** | **69,962**                  | ** ** | ** **                  | **12,796**  |   | ** ** | **75,106** | ** ** |
| **Long-term  liabilities:**                                                                                                                                                           |       |       |       |                        |       |                        |       |                        |        |   |   |   |   |
| Long-term portion of lease liabilities                                                                                                                                                |       |       | 16         |                        |       | 20,960                      |       |                        | 3,833       |   |   | 18,568 |   |
| **Total Liabilities**                                                                                                                                                                 | ** ** |       |       |                        | ** ** | **90,922**                  | ** ** | ** **                  | **16,629**  |   | ** ** | **93,674** | ** ** |
| **Commitment and contingencies**                                                                                                                                                      |       |       | 16         |                        |       |                        |       |                        |        |   |   |   |   |
| **Shareholders'  Equity:**                                                                                                                                                            |       |       |       |                        |       |                        |       |                        |        |   |   |   |   |
| Common stock, DKK1.00 par value, 29,752,363 shares  authorized, issued and outstanding at December 31, 2004, and 22,980,534 at  December 31, 2003 and 22,716,620 at December 31, 2002 |       |       | 11         |                        |       | 29,752                      |       |                        | 5,442       |   |   | 22,981 |   |
| Share Premium                                                                                                                                                                         |       |       |       |                        |       | 2,596,981                   |       |                        | 474,976     |   |   | 2,093,750 |   |
| Deficit accumulated during development stage                                                                                                                                          |       |       |       |                        |       | (1,439,012                  | )          |                        | (263,189    | ) |   | (1,016,965 | ) |
| Accumulated other comprehensive income                                                                                                                                                |       |       |       |                        |       | (6,735                      | )          |                        | (1,232      | ) |   | (13,332 | ) |
| **Total Shareholders' Equity**                                                                                                                                                        | ** ** |       |       |                        | ** ** | **1,180,986**               | ** ** | ** **                  | **215,997** |   | ** ** | **1,086,434** | ** ** |
| **Total  Liabilities and Shareholders' Equity**                                                                                                                                       | ** ** |       |       |                        | ** ** | **1,271,908**               | ** ** | ** **                  | **232,626** |   | ** ** | **1,180,108** | ** ** |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-36

----

 

**Genmab A/S (A development stage company)Consolidated Statements ofShareholders’ EquityFor the year ended December 31, 2004**
| ** **                                                | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **         | ** ** | **Deficit**                                 | ** ** | ** **                 | ** **     | **Accumulated other  comprehensive income** | ** ** | ** **                               | ** **                                | ** **                     | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|--------------------|------------|---------------------------------------------|------------|----------------------------|----------------|-------------------------------------------------------|------------|------------------------------------------|-------------------------------------------|--------------------------------|------------|
| ** **                                                | ** ** | **Number  of shares** | ** ** | **Share  Capital** | ** ** | **Share  Premium** | ** ** | **accumulated  during  development  stage** | ** ** | **Unearned  compensation** | ** **     | **Unrealized  gains/  (losses) on  securities**  | ** ** | **Cumulative  translation  adjustments** | ** **                                | **Shareholders’  equity** | ** ** | **Shareholders’  equity** | ** ** |
| ** **                                                | ** ** | ** **                 | ** ** | **DKK’000**   | ** ** | **DKK’000**   | ** ** | **DKK’000**                            | ** ** | **DKK’000**           | ** **     | **DKK’000**                                      | ** ** | **DKK’000**                         | ** **                                | **DKK’000**               | ** ** | **USD’000** | ** ** |
| ** **                                                | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                                  | ** ** | ** **                 | ** **     | ** **                                            | ** ** | ** **                               | ** **                                | ** **                     | ** ** | **(Unaudited)** | ** ** |
| **December 31, 2003**                                | ** ** | **22,980,534**             | ** ** |               | **22,981** | ** **         |       | **2,093,750**                               | ** ** |                       | **(1,016,965** | **)**                                                 |       |                                     | **      0** | ** **                     |       |   | **(18,099** | **)** |   |   | **4,767** | ** ** |   |   | **1,086,434** | ** ** |   |   | **198,704** | ** ** |   |
| Issuance of shares for cash                          |       | 5,623,000                  |       |               | 5,623      | ** **         |       | 472,332                                     |       |                       |           | ** **                                            |       |                                     | ** **                                | ** **                     |       |   |   | ** ** |   |   |   | ** ** |   |   | 477,955 | ** ** |   |   | 87,416 | ** ** |   |
| Expenses related to share issues                          |       |                       |       |               |       | ** **         |       | (32,342                                     | )          |                       |           | ** **                                            |       |                                     | ** **                                | ** **                     |       |   |   | ** ** |   |   |   | ** ** |   |   | (32,342 | ) |   |   | (5,914 | ) |   |
| Exercise of warrants                                      |       | 1,148,829                  |       |               | 1,148      | ** **         |       | 63,241                                      |       |                       |           | ** **                                            |       |                                     | ** **                                | ** **                     |       |   |   | ** ** |   |   |   | ** ** |   |   | 64,389 | ** ** |   |   | 11,776 | ** ** |   |
| Loss for the period                                       |       |                       |       |               |       | ** **         |       |                                        |       |                       | (422,047       | )                                                     |       |                                     | ** **                                | ** **                     |       |   |   | ** ** |   |   |   | ** ** |   |   | (422,047 | ) |   |   | (77,191 | ) |   |
| Other  comprehensive income:                              |       |                       |       |               |       | ** **         |       |                                        |       |                       |           | ** **                                            |       |                                     | ** **                                | ** **                     |       |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Translations gains                                        |       |                       |       |               |       | ** **         |       |                                        |       |                       |           | ** **                                            |       |                                     | ** **                                | ** **                     |       |   |   | ** ** |   |   | (238 | ) |   |   | (238 | ) |   |   | (44 | ) |   |
| Unrealized gain on marketable  securities                 |       |                       |       |               |       | ** **         |       |                                        |       |                       |           | ** **                                            |       |                                     | ** **                                | ** **                     |       |   | 2,236 | ** ** |   |   |   | ** ** |   |   | 2,236 | ** ** |   |   | 409 | ** ** |   |
| Unrealized  exchange rate  gain on marketable  securities |       |                       |       |               |       | ** **         |       |                                        |       |                       |           | ** **                                            |       |                                     | ** **                                | ** **                     |       |   | 4,599 | ** ** |   |   |   | ** ** |   |   | 4,599 | ** ** |   |   | 841 | ** ** |   |
| Comprehensive loss                                        |       |                       |       |               |       | ** **         |       |                                        |       |                       |           | ** **                                            |       |                                     | ** **                                | ** **                     |       |   |   | ** ** |   |   |   | ** ** |   |   | (415,450 | ) |   |   | (75,985 | ) |   |
| **December 31, 2004**                                |       | **29,752,363**             | ** ** |               | **29,752** | ** **         |       | **2,596,981**                               | ** ** |                       | **(1,439,012** | **)**                                                 |       |                                     | **0**                                     | ** **                     |       |   | **(11,264** | **)** |   |   | **4,529** | ** ** |   |   | **1,180,986** | ** ** |   |   | **215,997** | ** ** |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-37

----

 

**Genmab A/S (Adevelopment stage company)Consolidated Statements of Shareholders’ EquityFor the year ended December 31, 2003**
| ** **                                              | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **         | ** ** | **Deficit**                                 | ** ** | ** **                 | ** **     | **Accumulated other  comprehensive income** | ** ** | ** **                               | ** **                                |
|---------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|--------------------|------------|---------------------------------------------|------------|----------------------------|----------------|-------------------------------------------------------|------------|------------------------------------------|-------------------------------------------|
| ** **                                              | ** ** | **Number of  shares** | ** ** | **Share  Capital** | ** ** | **Share  Premium** | ** ** | **accumulated  during  development  stage** | ** ** | **Unearned  compensation** | ** **     | **Unrealized  gains/  (losses) on  securities**  | ** ** | **Cumulative  translation  adjustments** | ** **                                | **Shareholders’  equity** | ** ** |
| ** **                                              | ** ** | ** **                 | ** ** | **DKK’000**   | ** ** | **DKK’000**   | ** ** | **DKK’000**                            | ** ** | **DKK’000**           | ** **     | **DKK’000**                                      | ** ** | **DKK’000**                         | ** **                                | **DKK’000** | ** ** |
| **December 31, 2002**                              | ** ** | **22,716,620**             | ** ** |               | **22,717** | ** **         |       | **2,079,994**                               | ** ** |                       | **(706,688**   | **)**                                                 |       |                                     | **      0** | ** ** |   |   | **(1,262** | **)** |   |   | **4,408** | ** ** |   |   | **1,399,169** | ** ** |   |
| Issuance of shares by debt conversion              |       | 246,914                    |       |               | 247        | ** **         |       | 12,716                                      |       |                       | ** **     | ** **                                            |       |                                     | ** **                                | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   | 12,963 | ** ** |   |
| Expenses related to share issues                        |       |                       |       |               |       | ** **         |       | 256                                         |       |                       | ** **     | ** **                                            |       |                                     | ** **                                | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   | 256 | ** ** |   |
| Exercise of warrants                                    |       | 17,000                     |       |               | 17         | ** **         |       | 784                                         |       |                       | ** **     | ** **                                            |       |                                     | ** **                                | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   | 801 | ** ** |   |
| Loss for the period                                     |       |                       |       |               |       | ** **         |       |                                        |       |                       | (310,277       | )                                                     |       |                                     | ** **                                | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   | (310,277 | ) |   |
| Other comprehensive  income:                            |       |                       |       |               |       | ** **         |       |                                        |       |                       | ** **     | ** **                                            |       |                                     | ** **                                | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Translations gains                                      |       |                       |       |               |       | ** **         |       |                                        |       |                       | ** **     | ** **                                            |       |                                     | ** **                                | ** ** |   |   |   | ** ** |   |   | 359 | ** ** |   |   | 359 | ** ** |   |
| Unrealized loss on marketable securities           |       |                       |       |               |       | ** **         |       |                                        |       |                       | ** **     | ** **                                            |       |                                     | ** **                                | ** ** |   |   | (6,774 | ) |   |   |   | ** ** |   |   | (6,774 | ) |   |
| Unrealized exchange rate loss on marketable  securities |       |                       |       |               |       | ** **         |       |                                        |       |                       | ** **     | ** **                                            |       |                                     | ** **                                | ** ** |   |   | (10,063 | ) |   |   |   | ** ** |   |   | (10,063 | ) |   |
| Comprehensive loss                                      |       |                       |       |               |       | ** **         |       |                                        |       |                       | ** **     | ** **                                            |       |                                     | ** **                                | ** ** |   |   |   |   |   |   |   | ** ** |   |   | (326,755 | ) |   |
| **December 31,  2003**                             |       | **22,980,534**             | ** ** |               | **22,981** | ** **         |       | **2,093,750**                               | ** ** |                       | **(1,016,965** | ** **                                            |       |                                     | **0**                                     | ** ** |   |   | **(18,099** | **)** |   |   | **4,767** | ** ** |   |   | **1,086,434** |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-38

----

 

**Genmab A/S (Adevelopment stage company)Consolidated Statements of Shareholders’ EquityFor the year ended December 31, 2002**
| ** **                                              | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **         | ** ** | **Deficit**                                 | ** ** | ** **                 | ** **   | **Accumulated other  comprehensive income** | ** ** | ** **                               | ** **  |
|---------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|--------------------|------------|---------------------------------------------|------------|----------------------------|--------------|-------------------------------------------------------|------------|------------------------------------------|-------------|
| ** **                                              | ** ** | **Number of  shares** | ** ** | **Share  Capital** | ** ** | **Share  Premium** | ** ** | **accumulated  during  development  stage** | ** ** | **Unearned  compensation** | ** **   | **Unrealized  gains/  (losses) on  securities**  | ** ** | **Cumulative  translation  adjustments** | ** **  | **Shareholders’  equity** | ** ** |
| ** **                                              | ** ** | ** **                 | ** ** | **DKK’000**   | ** ** | **DKK’000**   | ** ** | **DKK’000**                            | ** ** | **DKK’000**           | ** **   | **DKK’000**                                      | ** ** | **DKK’000**                         | ** **  | **DKK’000** | ** ** |
| **December 31, 2001**                              | ** ** | **21,812,020**             | ** ** |               | **21,812** | ** **         |       | **1,931,797**                               | ** ** |                       | **(229,276** | **)**                                                 |       |                                     | **(13,062** | **)** |   |   | **655** | ** ** |   |   | **4** | ** ** |   |   | **1,711,930** | ** ** |   |
| Issuance of shares for cash                             |       | 880,100                    |       |               | 880        | ** **         |       | 157,537                                     |       |                       |         | ** **                                            |       |                                     |        | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   | 158,417 | ** ** |   |
| Expenses related to share issues                        |       |                       |       |               |       | ** **         |       | (2,923                                      | )          |                       |         | ** **                                            |       |                                     |        | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   | (2,923 | ) |   |
| Exercise of warrants                                    |       | 24,500                     |       |               | 25         | ** **         |       | 1,330                                       |       |                       |         | ** **                                            |       |                                     |        | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   | 1,355 | ** ** |   |
| Adjustment of value of warrants granted                 |       |                       |       |               |       | ** **         |       | (7,747                                      | )          |                       |         | ** **                                            |       |                                     | 7,747       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   | — | ** ** |   |
| Expense recognized for warrants granted                 |       |                       |       |               |       | ** **         |       |                                        |       |                       |         | ** **                                            |       |                                     | 5,315       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   | 5,315 | ** ** |   |
| Loss for the period                                     |       |                       |       |               |       | ** **         |       |                                        |       |                       | (477,412     | )                                                     |       |                                     |        | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   | (477,412 | ) |   |
| Other  comprehensive income:                            |       |                       |       |               |       | ** **         |       |                                        |       |                       |         | ** **                                            |       |                                     |        | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Translations gains                                      |       |                       |       |               |       | ** **         |       |                                        |       |                       |         | ** **                                            |       |                                     |        | ** ** |   |   |   | ** ** |   |   | 4,404 | ** ** |   |   | 4,404 | ** ** |   |
| Unrealized loss on marketable securities           |       |                       |       |               |       | ** **         |       |                                        |       |                       |         | ** **                                            |       |                                     |        | ** ** |   |   | (1,063 | ) |   |   |   | ** ** |   |   | (1,063 | ) |   |
| Unrealized exchange rate loss on marketable  securities |       |                       |       |               |       | ** **         |       |                                        |       |                       |         | ** **                                            |       |                                     |        | ** ** |   |   | (854 | ) |   |   |   | ** ** |   |   | (854 | ) |   |
| Comprehensive loss                                      |       |                       |       |               |       | ** **         |       |                                        |       |                       |         | ** **                                            |       |                                     |        | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   | (474,925 | ) |   |
| **December 31,  2002**                             | ** ** | **22,716,620**             | ** ** |               | **22,717** | ** **         |       | **2,079,994**                               | ** ** |                       | **(706,688** | **)**                                                 |       |                                     | **0**       | ** ** |   |   | **(1,262** | **)** |   |   | **4,408** | ** ** |   |   | **1,399,169** |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-39

----

 

**Genmab A/S (Adevelopment stage company)Consolidated Statements of Shareholders’ EquityFor the period from inception (June 11, 1998) to December 31, 2004**
| ** **                                                                                      | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **         | ** ** | **Deficit  accumulated**       | ** **     | ** **                 | ** ** | **Accumulated other  comprehensive income** | ** ** | ** **                               | ** ** | ** **                    | ** **  |
|-------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|--------------------|------------|--------------------------------|----------------|----------------------------|------------|-------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                                                      | ** ** | **Number of  shares** | ** ** | **Share  Capital** | ** ** | **Share  Premium** | ** ** | **during  development  stage** | ** **     | **Unearned  compensation** | ** ** | **Unrealized  gains/(losses)  on securities**    | ** ** | **Cumulative  translation  adjustments** | ** ** | **Shareholder’  equity** | ** **  | **Shareholders’  equity** | ** ** |
| ** **                                                                                      | ** ** | ** **                 | ** ** | **DKK’000**   | ** ** | **DKK’000**   | ** ** | **DKK’000**               | ** **     | **DKK’000**           | ** ** | **DKK’000**                                      | ** ** | **DKK’000**                         | ** ** | **DKK’000**              | ** **  | **USD’000** | ** ** |
| ** **                                                                                      | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **         | ** ** | ** **                     | ** **     | ** **                 | ** ** | ** **                                            | ** ** | ** **                               | ** ** | ** **                    | ** **  | **(Unaudited)** | ** ** |
| **June 11,  1998**                                                                         | ** ** | **125,000**                | ** ** | **125**            | ** ** | **0**              | ** ** |                           | **0**          | ** **                 |       |                                                  | **0**      | ** **                               |       |                          | **0**       | ** ** |   |   | **0** | ** ** |   |   | **125** |   |   |   | **23** |   |   |
| Issuance of shares  for cash                                                                    |       | 7,518,566                  |       | 7,519              |       | 1,035,654          |       |                           |           | ** **                 |       |                                                  |       | ** **                               |       |                          |        | ** ** |   |   |   | ** ** |   |   | 1,043,173 |   |   |   | 190,792 |   |   |
| Issuance of shares  for licenses                                                                |       | 437,596                    |       | 438                |       | 94,515             |       |                           |           | ** **                 |       |                                                  |       | ** **                               |       |                          |        | ** ** |   |   |   | ** ** |   |   | 94,953 |   |   |   | 17,366 |   |   |
| Issuance of shares  by debt conversion                                                          |       | 246,914                    |       | 247                |       | 12,716             |       |                           |           | ** **                 |       |                                                  |       | ** **                               |       |                          |        | ** ** |   |   |   | ** ** |   |   | 12,963 |   |   |   | 2,371 |   |   |
| Exercise of  warrants                                                                           |       | 1,193,469                  |       | 1,192              |       | 66,375             |       |                           |           | ** **                 |       |                                                  |       | ** **                               |       |                          |        | ** ** |   |   |   | ** ** |   |   | 67,567 |   |   |   | 12,358 |   |   |
| Expenses and  foreign currency fluctuations related to share issues                             |       |                       |       |               |       | (38,901            | )          |                           |           | ** **                 |       |                                                  |       | ** **                               |       |                          |        | ** ** |   |   |   | ** ** |   |   | (38,901 | ) |   |   | (7,115 | ) |   |
| Issuance of bonus  shares                                                                       |       | 14,230,818                 |       | 14,231             |       | (14,231            | )          |                           |           | ** **                 |       |                                                  |       | ** **                               |       |                          |        | ** ** |   |   |   | ** ** |   |   | — |   |   |   | — |   |   |
| Issuance of shares  at initial public offering                                                  |       | 6,000,000                  |       | 6,000              |       | 1,553,689          |       |                           |           | ** **                 |       |                                                  |       | ** **                               |       |                          |        | ** ** |   |   |   | ** ** |   |   | 1,559,689 |   |   |   | 285,260 |   |   |
| Expenses related  to initial public offering                                                    |       |                       |       |               |       | (138,546           | )          |                           |           | ** **                 |       |                                                  |       | ** **                               |       |                          |        | ** ** |   |   |   | ** ** |   |   | (138,546 | ) |   |   | (25,339 | ) |   |
| Adjustment of  value of warrants granted                                                        |       |                       |       |               |       | 20,040             |       |                           |           | ** **                 |       |                                                  | (20,040    | )                                        |       |                          |        | ** ** |   |   |   | ** ** |   |   | — |   |   |   | — |   |   |
| Expense recognized  for warrants granted                                                        |       |                       |       |               |       |               |       |                           |           | ** **                 |       |                                                  | 20,040     |                                     |       |                          |        | ** ** |   |   |   | ** ** |   |   | 20,040 |   |   |   | 3,665 |   |   |
| Transaction  entered into by principal shareholder on company’s behalf                     |       |                       |       |               |       | 5,670              |       |                           |           | ** **                 |       |                                                  | (5,670     | )                                        |       |                          |        | ** ** |   |   |   | ** ** |   |   | — |   |   |   | — |   |   |
| Expensed portion  of transaction entered into by principal shareholder on company’s behalf |       |                       |       |               |       |               |       |                           |           | ** **                 |       |                                                  | 5,670      |                                     |       |                          |        | ** ** |   |   |   | ** ** |   |   | 5,670 |   |   |   | 1,037 |   |   |
| Loss for the  period                                                                            |       |                       |       |               |       |               |       |                           | (1,439,012     | )                          |       |                                                  |       |                                     |       |                          |        | ** ** |   |   |   | ** ** |   |   | (1,439,012 | ) |   |   | (263,189 | ) |   |
| Other comprehensive  income:                                                                    |       |                       |       |               |       |               |       |                           |           | ** **                 |       |                                                  |       |                                     |       |                          |        | ** ** |   |   |   | ** ** |   |   |   |   |   |   |   |   |   |
| Translation gains                                                                               |       |                       |       |               |       |               |       |                           |           | ** **                 |       |                                                  |       |                                     |       |                          |        | ** ** |   |   | 4,529 | ** ** |   |   | 4,529 |   |   |   | 828 |   |   |
| Unrealized loss on  marketable securities                                                       |       |                       |       |               |       |               |       |                           |           | ** **                 |       |                                                  |       |                                     |       |                          | (3,506      | ) |   |   |   | ** ** |   |   | (3,506 | ) |   |   | (641 | ) |   |
| Unrealized  exchange  rate loss on  marketable securities                                       |       |                       |       |               |       |               |       |                           |           | ** **                 |       |                                                  |       |                                     |       |                          | (7,758      | ) |   |   |   | ** ** |   |   | (7,758 | ) |   |   | (1,419 | ) |   |
| Comprehensive loss                                                                              |       |                       |       |               |       |               |       |                           |           | ** **                 |       |                                                  |       | ** **                               |       |                          |        |   |   |   |   | ** ** |   |   | (1,445,747 | ) |   |   | (264,421 | ) |   |
| **December 31,  2004**                                                                     | ** ** | **29,752,363**             | ** ** | **29,752**         | ** ** | **2,596,981**      | ** ** |                           | **(1,439,012** | **)**                      |       |                                                  | **0**      | ** **                               |       |                          | **(11,264** | **)** |   |   | **4,529** | ** ** |   |   | **1,180,986** |   |   |   | **215,997** |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-40

----

 

**Genmab A/S (A development stage company)Consolidated Statements of Cash Flows**
| ** **                                                                        | ** ** | **12 months ended  December 31,  2004** | ** **   | **12 months ended  December 31,  2004** | ** ** | **12 months ended  December 31,  2003** | ** **  | **12 months ended  December 31,  2002** | ** ** | **Total since  inception** | ** **   |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|--------------|--------------------------------------------------------|------------|--------------------------------------------------------|-------------|--------------------------------------------------------|------------|---------------------------------|--------------|
| ** **                                                                        | ** ** | **DKK’000**                                       | ** **   | **USD’000**                                       | ** ** | **DKK’000**                                       | ** **  | **DKK’000**                                       | ** ** | **DKK’000**                | ** **   |
| ** **                                                                        | ** ** | ** **                                             | ** **   | **(Unaudited)**                                        | ** ** | ** **                                             | ** **  | ** **                                             | ** ** | ** **                      | ** **   |
| **Operating activities:**                                                         | ** ** |                                                   | ** **   | ** **                                             |       |                                                   | ** **  | ** **                                             |       |                            | ** **   | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Net loss                                                                          |       |                                                   | (422,047     | )                                                      |       |                                                   | (77,191     | )                                                      |       |                            | (310,277     | ) |   |   | (477,412 | ) |   | (1,439,012 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                                                   |         |                                                   |       |                                                   |        |                                                   |       |                            |         |   |   |   |   |   |   |   |   |
| Depreciation                                                                      |       |                                                   | 30,615       |                                                   |       |                                                   | 5,599       |                                                   |       |                            | 32,843       |   |   |   | 16,971 |   |   | 85,046 |   |
| Amortization                                                                      |       |                                                   | 23,048       |                                                   |       |                                                   | 4,215       |                                                   |       |                            | 30,827       |   |   |   | 30,497 |   |   | 141,759 |   |
| Impairment loss                                                                   |       |                                                   | —       |                                                   |       |                                                   | —      |                                                   |       |                            | —       |   |   |   | 42,170 |   |   | 42,170 |   |
| Non-cash interest  expense reversed                                               |       |                                                   | 432          |                                                   |       |                                                   | 79          |                                                   |       |                            | 5,661        |   |   |   | 8,564 |   |   | 33,131 |   |
| Non-cash interest  income and non-cash other expense reversed                     |       |                                                   | 12,164       |                                                   |       |                                                   | 2,225       |                                                   |       |                            | (18,300      | ) |   |   | (9,871 | ) |   | (30,361 | ) |
| Expensed  value of warrants granted                                               |       |                                                   | —       |                                                   |       |                                                   | —      |                                                   |       |                            | —       |   |   |   | 5,315 |   |   | 20,040 |   |
| Other non-cash  transactions                                                      |       |                                                   | (1,243       | )                                                      |       |                                                   | (227        | )                                                      |       |                            | (402         | ) |   |   | (384 | ) |   | 3,641 |   |
| Paid technology rights                                                            |       |                                                   | (12,228      | )                                                      |       |                                                   | (2,236      | )                                                      |       |                            | (13,865      | ) |   |   | — |   |   | (43,005 | ) |
| Changes in operating assets and liabilities, net of  acquisition:                 |       |                                                   |         |                                                   |       |                                                   |        |                                                   |       |                            |         |   |   |   |   |   |   |   |   |
| Other current  assets                                                             |       |                                                   | 278          |                                                   |       |                                                   | 51          |                                                   |       |                            | 33,179       |   |   |   | 1,379 |   |   | (291 | ) |
| Trade accounts  payable                                                           |       |                                                   | (8,106       | )                                                      |       |                                                   | (1,483      | )                                                      |       |                            | (48,317      | ) |   |   | 51,234 |   |   | 23,086 |   |
| Accrued  liabilities                                                              |       |                                                   | 10,101       |                                                   |       |                                                   | 1,848       |                                                   |       |                            | (14,951      | ) |   |   | 23,628 |   |   | 43,910 |   |
| **Net Cash  used in operating activities**                                        | ** ** |                                                   | **(366,986** | )                                                      |       |                                                   | **(67,120** | )                                                      |       |                            | **(303,602** | ) |   |   | **(307,909** | ) |   | **(1,119,886** | ) |
| **Investing activities:**                                                         |       |                                                   |         |                                                   |       |                                                   |        |                                                   |       |                            |         |   |   |   |   |   |   |   |   |
| Deposits on  leasehold                                                            |       |                                                   | (712         | )                                                      |       |                                                   | (129        | )                                                      |       |                            | 1,238        |   |   |   | (407 | ) |   | (4,158 | ) |
| Purchase of plant  and  equipment, net                                            |       |                                                   | (7,878       | )                                                      |       |                                                   | (1,441      | )                                                      |       |                            | (13,123      | ) |   |   | (86,865 | ) |   | (163,235 | ) |
| Investments in  other securities and equity interests, net                        |       |                                                   | —       |                                                   |       |                                                   | —      |                                                   |       |                            | 1,743        |   |   |   | (1,839 | ) |   | (30,012 | ) |
| Non-current  receivables                                                          |       |                                                   | (5,947       | )                                                      |       |                                                   | (1,088      | )                                                      |       |                            | —       |   |   |   | — |   |   | (5,947 | ) |
| Purchase of  marketable securities                                           |       |                                                   | (1,163,346   | )                                                      |       |                                                   | (212,771    | )                                                      |       |                            | (1,676,845   | ) |   |   | (5,037,176 | ) |   | (12,573,072 | ) |
| Sales of  marketable securities                                                   |       |                                                   | 1,152,106    |                                                   |       |                                                   | 210,715     |                                                   |       |                            | 2,050,130    |   |   |   | 5,364,432 |   |   | 11,833,985 |   |
| **Net cash  provided by (used in) investing activities**                          | ** ** |                                                   | **(25,777**  | )                                                      |       |                                                   | **(4,714**  | )                                                      |       |                            | **363,143**  |   |   |   | **238,145** |   |   | **(942,439** | ) |
| **Financing activities:**                                                         |       |                                                   |         |                                                   |       |                                                   |        |                                                   |       |                            |         |   |   |   |   |   |   |   |   |
| Increase in  restricted cash                                                      |       |                                                   | (16,458      | )                                                      |       |                                                   | (3,010      | )                                                      |       |                            | (11,269      | ) |   |   | — |   |   | (27,727 | ) |
| Cash received from  sales of stock, net                                      |       |                                                   | 445,613      |                                                   |       |                                                   | 81,501      |                                                   |       |                            | 256          |   |   |   | 155,494 |   |   | 2,425,541 |   |
| Warrants exercised                                                                |       |                                                   | 64,389       |                                                   |       |                                                   | 11,776      |                                                   |       |                            | 801          |   |   |   | 1,355 |   |   | 67,567 |   |
| Paid installments  on lease liabilities                                           |       |                                                   | (6,589       | )                                                      |       |                                                   | (1,205      | )                                                      |       |                            | (4,628       | ) |   |   | — |   |   | (11,217 | ) |
| **Net cash  provided by (used in) financing activities**                          | ** ** |                                                   | **486,955**  |                                                   |       |                                                   | **89,062**  |                                                   |       |                            | **(14,840**  | ) |   |   | **156,849** |   |   | **2,454,164** |   |
| **Net  increase (decrease) in cash and cash equivalents**                         | ** ** |                                                   | **94,192**   |                                                   |       |                                                   | **17,228**  |                                                   |       |                            | **44,701**   |   |   |   | **87,085** |   |   | **391,839** |   |
| Cash and cash  equivalents at the beginning of period                             |       |                                                   | 297,647      |                                                   |       |                                                   | 54,438      |                                                   |       |                            | 252,946      |   |   |   | 165,861 |   |   | — |   |
| **Cash and  cash equivalents at  the end of period**                              | ** ** |                                                   | **391,839**  |                                                   |       |                                                   | **71,666**  |                                                   |       |                            | **297,647**  |   |   |   | **252,946** |   |   | **391,839** |   |
| Supplemental schedule of non-cash contributions:                                  |       |                                                   |         |                                                   |       |                                                   |        |                                                   |       |                            |         |   |   |   |   |   |   |   |   |
| Acquisitions of  licenses and rights                                         |       |                                                   | —       |                                                   |       |                                                   | —      |                                                   |       |                            | —       |   |   |   | — |   |   | 57,532 |   |
| Liabilities  assumed                                                              |       |                                                   | (19,744      | )                                                      |       |                                                   | (3,611      | )                                                      |       |                            | (15,370      | ) |   |   | (13,395 | ) |   | (106,041 | ) |
| Assets acquired                                                                   |       |                                                   | 19,744       |                                                   |       |                                                   | 3,611       |                                                   |       |                            | 15,370       |   |   |   | 13,395 |   |   | 143,461 |   |
| Shares issued for  licenses and rights contributed                           |       |                                                   | —       | ** **                                             |       |                                                   | —      | ** **                                             |       |                            | —       | ** ** |   |   | — | ** ** |   | (94,952 | ) |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-41

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements**

**1.**   AccountingPolicies

**Basis of Presentation**

The financial statementsof Genmab A/S (the “company”) are reported in Danish Kroner (DKK) and areprepared in accordance with Generally Accepted Accounting Principles in TheUnited States (US GAAP). The accounting policies are unchanged from prioryears.

**Currencies**

The company’s financial statements are published inDanish Kroner. Solely for the convenience of the reader, the financialstatements contain a conversion of certain DKK amounts into US Dollars (USD) atspecified rates. This conversion has been made at the exchange rate in effectat the balance sheet date. These converted amounts should not be construed asrepresentations that the DKK amounts actually represent such USD amounts orcould be converted into USD at the rates indicated or at any other rate.

Unless otherwiseindicated, translations herein of financial information into USD have been madeusing the Danish Central Bank spot rate on December 31, 2004, which wasUSD 1.00 = DKK 5.4676.

**Consolidated Financial Statements**

The consolidated financial statements comprise theparent company, Genmab A/S, and subsidiaries in which Genmab A/S controls morethan 50% of the voting rights or otherwise has a controlling interest. Theconsolidated financial statements (Genmab Consolidated) consist of Genmab A/S,Genmab B.V., Genmab, Inc. and Genmab, Ltd., and they are prepared based onthe parent company’s and subsidiaries’ financial statements by aggregation ofsimilar financial statement items.

The financial statementsused for the consolidation have been prepared using the accounting policies ofthe group. For the consolidation, intercompany income and expenses,intercompany accounts and gains and losses on transactions between theconsolidated entities are eliminated. In the consolidated financial statements,the book value of the equity interests in the consolidated subsidiaries iseliminated with the parent company’s share of the subsidiaries’ equity andincorporated in the shareholders’ equity.

**Foreign Currency Transactions**

The company holds certaincash and cash equivalents as well as short-term investments denominated inforeign currencies, which are remeasured into DKK at the exchange rateprevailing at the balance sheet date. Receivables, debt and other items inother foreign currencies, which are not settled at the balance sheet date, areremeasured at the exchange rate prevailing at the balance sheet date. Duringthe year, transactions in foreign currencies are translated at the exchangerates prevailing on the date of transaction. The resulting realized gains andlosses are reported as other income in the statement of operations.

**Foreign Currency Translations**

When translating financialstatements of foreign subsidiaries that prepare financial statements incurrencies other than the Danish Kroner, the income statements are translatedat the average exchange rate for the year, while all items in the balancesheets are translated using the exchange rate prevailing at the balance sheetdate. Translation adjustments are included in accumulated other comprehensiveincome in shareholders’ equity.

F-42

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**1.**   AccountingPolicies (Continued)

**Revenues**

Revenues comprise milestone payments and other incomefrom research and development agreements. Revenue is recognized when it isprobable that future economic benefits will flow to the company and thesebenefits can be measured reliably. Further, revenue recognition requires thatall significant risks and rewards of ownership of the goods or servicesincluded in the transaction have been transferred to the buyer.

As of January 1,2003, the Group adopted EITF 00-21, “Revenue Arrangements with MultipleDeliverables” (EITF 00-21), which addresses how to account for arrangementsthat involve the delivery or performance of multiple products, services and/orrights to use assets. EITF 00-21 requires revenue arrangements with multipledeliverables to be divided into separate units of accounting if thedeliverables in the arrangement meet certain criteria. Arrangementconsideration must then be allocated among the separate units of accountingbased on their relative fair values. EITF 00-21 also supersedes certainguidance set forth in SAB 101. In 2003, we also adopted SAB 104, “RevenueRecognition” (SAB 104), which revises or rescinds certain interpretive guidanceregarding SAB 101 that was in conflict with the provisions of EITF 00-21.

**Research and Development Costs**

Research and developmentcosts include salaries and related compensation expenses, license fees, productioncosts, amortization of licenses and rights, and depreciation of plant andequipment, to the extent such costs are related to the group’s research anddevelopment activities. Costs are expensed in the period to which they relate.

**Generaland Administrative Expenses**

General and administrativeexpenses consist primarily of salaries and related compensation expenses,office facilities, travel and other expenses relating to general management,financial, administrative and business development activities, includingdepreciation of plant and equipment, to the extent such costs are related tothe group’s general and administrative activities. Costs are expensed in theperiod to which they relate.

**Interest Income and Expenses**

Interest income includesinterest received as well as imputed interest on zero coupon securities.Interest expenses include interest paid as well as imputed interest on payabletechnology rights.

**Other Expense, Net**

Other income, net includesrealized gains and losses on marketable securities as well as realized exchangerate adjustments. Unrealized gains and losses on marketable securities are recordedas accumulated other comprehensive income in shareholders’ equity.

F-43

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**1.**   AccountingPolicies (Continued)

**Stock-BasedCompensation**

The company applies the intrinsic value method whenaccounting for stock-based compensation of employees and, in addition,discloses the pro forma effects on net loss and net loss per share had theestimated fair value of the warrants granted to employees been expensed. Forfixed awards granted to employees, the intrinsic value of the award isrecognized as an expense using a straight-line method over the vesting period.The estimated fair value of warrants granted to non-employees is expensed whenthe service is performed.

If thecompany had elected to recognize compensation expense based on the fair valueof the warrants granted at the grant date, net loss and net loss per sharewould have been increased to the pro forma amounts indicated in the tablebelow.
| ** **                                                                                                | ** ** | **12 months  ended  December 31,  2004** | ** ** | **12 months  ended  December 31,  2004** | ** ** | **12 months  ended  December 31,  2003** | ** ** | **12 months  ended  December 31,  2002** | ** ** | **Total since  inception** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                | ** ** | **DKK’000**                                   | ** ** | **USD’000**                                   | ** ** | **DKK’000**                                   | ** ** | **DKK’000**                                   | ** ** | **DKK’000**                | ** ** |
| ** **                                                                                                | ** ** | ** **                                         | ** ** | **(Unaudited)**                                    | ** ** | ** **                                         | ** ** | ** **                                         | ** ** | ** **                      | ** ** |
| Net loss, as  reported                                                                                    |       |                                               | (422,047   | )                                                  |       |                                               | (77,191    | )                                                  |       |                            | (310,277   | ) |   |   | (477,412 | ) |   | (1,439,012 | ) |
| Total stock-based  employee compensation expense determined under fair value based method for  all awards |       |                                               | (45,315    | )                                                  |       |                                               | (8,288     | )                                                  |       |                            | (43,004    | ) |   |   | (33,625 | ) |   | (139,799 | ) |
| Stock-based  employee compensation expense included in reported net loss                                  |       |                                               | —     |                                               |       |                                               | —     |                                               |       |                            | —     |   |   |   | 4,668 |   |   | 7,451 |   |
| Pro forma net  loss                                                                                       |       |                                               | (467,362   | )                                                  |       |                                               | (85,479    | )                                                  |       |                            | (353,281   | ) |   |   | (506,369 | ) |   | (1,571,360 | ) |
| Net loss per share, basic and diluted (in DKK/USD)                                                        |       |                                               | (15.9      | )                                                  |       |                                               | (2.9       | )                                                  |       |                            | (13.6      | ) |   |   | (21.4 | ) |   |   |   |
| Pro forma net  loss per share, basic and diluted (in DKK/USD)                                             |       |                                               | (17.7      | )                                                  |       |                                               | (3.2       | )                                                  |       |                            | (15.5      | ) |   |   | (22.7 | ) |   |   |   |

 

Thefair value of each warrant grant is estimated on the date of the grant usingthe Black Scholes pricing model with the following assumptions.
| ** **                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected dividend  yield                                  |       | 0        | %          | 0        | %          |
| Expected stock  price volatility                          |       | 44       | %          | 54       | %          |
| Risk-free  interest rate                                  |       | 3.25     | %          | 3.73     | %          |
| Expected life of  warrants—preceeding warrant scheme |       | 4 years  |       | 4 years  |       |
| Expected life of  warrants—current warrant scheme    |       | 6 years  |       | —   |       |

 

The expected stock price volatility has beendetermined as the historical volatility of the company’s stock price for thelatest 12 months prior to the balance sheet date.

F-44

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**1.**   AccountingPolicies (Continued)

**Stock-Based Compensation (Continued)**

The risk-free interestrate is determined as the interest rate on central government securities(bullet issues) with a maturity of 5 years.

**Income Taxes**

Income taxes are accountedfor using the liability method which requires the recognition of deferred taxassets or liabilities for temporary differences between the financial reportingand tax bases of the company’s assets and liabilities and for tax losscarry-forwards at current statutory rates in effect for the years in which thedifferences are expected to reverse. Deferred tax assets are evaluated andreduced to the amount expected to be realized. Deferred tax liabilities and assetsare stated at the current tax rate of 30%.

**Net Loss per Share**

Basic net loss per share is calculated by dividing netloss for the year by the weighted average number of ordinary shares outstandingduring the period.

Diluted net loss per share is computed using theweighted average number of ordinary shares and dilutive share equivalentsoutstanding during the period. Since Genmabrecorded a loss during the periods presented, the diluted net loss per share isthe same as basic, as any potentially dilutive securities would reduce the netloss per share from continuing operations.

The weighted average number of common shares outstandingused to calculate diluted net loss per share was 26,470,014, 22,830,818 and22,336,150 for the years ended December 31, 2004, 2003 and 2002,respectively. The amount of potentially dilutive warrants excluded from thediluted net loss per share calculation, since they were anti-dilutive, is asfollows:
| Year ended  December 31, 2004 |   | 4,031,046 |   |
|------------------------------------|--------|-----------|--------|
| Year ended  December 31, 2003 |   | 4,455,450 |   |
| Year ended  December 31, 2002 |   | 4,236,575 |   |

 

**Cash and Cash Equivalents**

Time deposits and noteswith a maturity of three months or less at the date of deposit/investment areconsidered to be cash equivalents. Certaincash deposits are restricted for use as they are pledged as collateral for theGroup’s lease obligations.

**Marketable Securities**

Marketable securities consist of investments insecurities with a maturity of greater than three months at the time ofpurchase. The company invests its cash in deposits with major financial institutions,money market funds, corporate bonds and DKK denominated notes issued by theDanish Government and USD denominated notes issued by the US Government. Theinvestments can be readily purchased and sold using established markets. Whensold, the cost of marketablesecurities is recorded based on the first-in-first-out principleincluding imputed interest on zero coupon-securities.

F-45

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**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**1.**   AccountingPolicies (Continued)

**Marketable Securities (Continued)**

The company’s investmentsare characterized as available-for-sale marketable securities and carried attheir market value, with unrealized gains and losses (including unrealizedexchange rate gains and losses) reported as part of accumulated othercomprehensive income.

**Plant and Equipment**

Plant and equipment are recorded at cost and includeoffice equipment, furniture, fixtures and leasehold improvements. Depreciationis computed using the straight-line method over the estimated useful liveswhich range from three to five years.

Leasehold improvements are amortized using thestraight-line method over the useful life of the asset or the related leaseterm, whichever is shorter.

Items costing less than DKK 10,800 are expensed in theyear of acquisition. Depreciation as well as profit and loss in connection withthe replacement of tangible fixed assets, are expensed as research and development costs or general andadministrative expenses, as appropriate.

Costs associated with thedesign and building of laboratory facilities are capitalized until completion.Upon completion, costs will be depreciated over the facility’s expected usefullife.

**Leasing**

Lease contracts, which in all material respects transferthe significant risks and rewards associated with the ownership of the asset tothe lessee, are classified as finance leases and recognized in the balancesheet at the inception of the lease term at the lower of the fair value of theasset or the net present value of the future minimum lease payments. Aliability equaling the asset is recognized in the balance sheet. Each leasepayment is separated between a finance charge, recorded as interest expense,and a reduction of the outstanding liability. Assets under finance leases aredepreciated in the same manner as owned assets and are subject to regularreviews for impairment.

Lease contracts, where thelessor retains the significant risks and rewards associated with the ownershipof the asset, are classified as operating leases. Lease payments underoperating leases are recognized in the statement of operations ratably over thelease term.

**OtherSecurities and Equity Interests**

Other securities and equity interests, acquired forlong-term strategic holding, are considered non-current assets. Theseinvestments are accounted for in accordance with SFAS 115, “Accounting forCertain Investments in Debt and Equity Securities.”

Other securities andequity interests are measured at fair value at the balance sheet date. The fairvalue for listed shares is the listed market price and, for interests innon-listed companies, the fair value is the net sales price. If the net salesprice cannot be reliably determined for interests in non-listed companies, theassets are measured at cost. Realized and unrealized gains and losses arerecognized in the income statement as financial items.

F-46

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**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**1.**   AccountingPolicies (Continued)

**Licenses and Rights**

Licenses and rights, whichinclude technology licenses and licenses to targets, are recorded at cost,including the net present value for any remaining payments. The net presentvalue of the remaining payments is included as a liability in the balance sheetand allocated to short-term and long-term payable technology rights. Thelicenses are amortized using the straight-line method over an estimated usefullife of five years.

**Impairment of Long-lived Assets**

In addition to amortizinglicenses and rights and depreciating plant and equipment, managementperiodically reviews long-lived assets whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. If factors indicate that an asset should be evaluated for possibleimpairment, management compares the estimated undiscounted future cash flowsfrom the asset or group of related assets to its carrying amount. If thecarrying amount of the asset is greater than the undiscounted future cashflows, an impairment loss would be recognized. An impairment loss would becomputed as the excess of the carrying amount of the asset over the estimatedfair value of the asset (calculated based on discounting estimated future cashflows).

**Use of Estimates**

The consolidated financialstatements are prepared in conformity with accounting principles generallyaccepted in the United States. In preparing these financial statements,management is required to make estimates and assumptions that affect amountsreported in the financial statements and accompanying notes. As a result,actual results could differ from reported results.

**Segment Information**

The group is managed andoperated as one business unit in order to create and develop human antibodiesfor the treatment of life-threatening and debilitating diseases. The entiregroup is managed by a single management team reporting to the Chief ExecutiveOfficer. No separate lines of business or separate business entities have beenidentified with respect to any of the product candidates or geographicalmarkets.

**New Accounting Pronouncements**

In January 2003, the Financial AccountingStandards Board (“FASB”) issued FASB Interpretation 46 (FIN 46), “Consolidationof Variable Interest Entities, an Interpretation of ARB 51”. FIN 46 requirescertain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest, or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. In December 2003, theFASB issued FIN 46R, a revision to FIN 46. FIN 46R requires that all publicentities must apply FIN 46 to all legal entities in existence prior to January 31,2003, to the first reporting period ended after March 15, 2004. For allnew legal entities formed after January 31, 2003, the provisions of theInterpretation must be adopted immediately upon formation. The adoption of FIN46 did not have an impact on the company’s financial position, cash flows orresults of operation.

F-47

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**1.**   AccountingPolicies (Continued)

**New Accounting Pronouncements (Continued)**

In May 2003, the FASB issued Statement ofFinancial Accounting Standard No. 150 (SFAS 150), “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity”,which established standards for how an issuer of financial instruments shouldclassify and measure certain financial instruments with characteristics of bothliabilities and equity. It requires that an issuer classify a financialinstrument that is within its scope as a liability (or in some circumstances,as an asset). If there is a conditional or unconditional duty of responsibilityof the issuer to transfer assets or to issue equity shares to satisfy theinstrument. SFAS 150 is effective for financial instruments entered into ormodified after May 31, 2003, and otherwise is effective at the beginningof the first interim period beginning after June 15, 2003. The adoption ofSFAS 150 did not have an effect on the company’s financial position, cash flowsor results of operations.

In May 2003, the Emerging Issues Task Force (“EITF”)reached a consensus on Issue No. 01-08, “Determining Whether an ArrangementContains a Lease”. This Issue provides guidance as to whether a contractcontains a lease that should be accounted for under FASB Statement No. 13.The EITF requires that companies review all agreements concerning plant,property and equipment to determine whether it contains a lease because thecontract a) explicitly or implicitly specifies the plant, property andequipment to be used to satisfy the contract, b) provides the counterparty withthe right to operate, access or direct others to operate the plant, propertyand equipment with at least a minor amount of the output, and c) facts andcircumstances indicate that it is remote that one or more parties other thanthe purchaser will take more than a minor amount of the output that will be producedor generated during the term of the arrangement. The consensus in this Issueshould be applied to a) arrangements agreed to or committed to, if earlier,after the beginning of an entity’s next reporting period beginning after May 28,2003, b) arrangements modified after the beginning of an entity’s nextreporting period beginning after May 28, 2003, and c) arrangementsacquired in business combinations initiated after the beginning of an entity’snext reporting period beginning after May 28, 2003. The adoption of thisEITF did not have an impact on the company’s financial position, cash flows orresults of operations.

In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 123(R) (“SFAS 123R”), “Share-BasedPayment”, which is effective for public companies in periods beginning after June 15,2005. This statement addresses the accounting for transactions in which anenterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS 123R eliminates the ability toaccount for share-based compensation transactions using APB 25, and generallyrequires instead that such transactions be accounted for using a fair-valuebased method. Companies are required to recognize an expense for compensationcost related to share-based payment arrangements including stock options andemployee stock purchase plans. We are currently evaluating option valuationmethodologies and assumptions in light of SFAS 123R related to employee stockoptions. Current estimates of option values using the Black-Scholes method (asdisclosed) may not be indicative of results from valuation methodologiesultimately adopted in the final rules.

In December 2004, theFASB issued Statement of Financial Accounting Standards No. 153 (“SFAS 153”),“Exchanges of Non-monetary Assets”, which is effective for non-monetary assetexchanges occurring in fiscal periods beginning after December 2004. Thisstatement amends the guidance in 

F-48

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**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**1.**   AccountingPolicies (Continued)

**New Accounting Pronouncements (Continued)**

APB OpinionNo. 29, Accounting for Non-monetary Transactions, to eliminate theexception for non-monetary exchanges of similar productive assets and replacesit with a general exception for exchanges of non-monetary assets that do nothave commercial substance. A non-monetary exchange has commercial substance ifthe future cash flows of the entity are expected to change significantly as aresult of the exchange. We do not expect the adoption of SFAS 153 to have aneffect on the company’s financial position, cash flows or results ofoperations.

**2.**   Organizationand Business

Genmab is a biotechnology company that creates anddevelops human antibodies for the treatment of life-threatening anddebilitating diseases. Genmab has numerous products in development to treatvarious cancers, infectious diseases, and autoimmune and inflammatoryconditions. We intend to continue expanding our portfolio with new therapeuticproducts. Genmab has established multiple partnerships with other biotechnologyand pharmaceutical companies to gain access to disease targets and developnovel human antibodies. Its activities have consisted primarily of pre-clinicaland clinical development of therapeutic antibody products.

The company was founded in 1999 by GenPharmInternational, Inc, a wholly-owned subsidiary of Medarex, Inc., throughthe purchase of a shell company that was formed in June 1998, but had notconducted any business activities.

The company has three wholly-owned subsidiaries:Genmab B.V. which was incorporated in The Netherlands in 2000 and focuses onthe discovery and development of antibodies; Genmab, Inc. which started inJuly 2001 and is mainly focused on conducting clinical trials in the USand Canada on behalf of the Genmab group; and Genmab Ltd., an empty shellcompany that was formed in the United Kingdom in 2001. This entity is currentlynot active. Genmab A/S also holds equity interests in two strategic partners.

In 2003, Genmab recognizedits first revenue since inception, DKK 68 million in milestone payments fromour partner, Amgen. However, since the company has only recognized limitedrevenue, it is still considered a development stage company in accordance withSFAS No. 7, “Accounting and Reporting by Development Stage Enterprises.”There are no assurances of significant future revenues from its research anddevelopment activities as there is a high degree of risk and uncertainty. Theability of the company to successfully develop, manufacture and market itsproprietary products is dependent upon many factors. These factors couldinclude, but are not limited to, the need for additional financing, thereliance on collaborative arrangements for research and development, marketingand product commercialization and the ability to develop or obtainmanufacturing, sales and marketing capabilities. Additional factors couldinclude maintaining patents and proprietary technologies, technological changeand risk of obsolescence, development of products, competition, governmentregulations and regulatory approval, and product liability exposure. As aresult of the aforementioned factors and related uncertainties, there can be noassurance of the company’s future success.

F-49

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**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**3.**   OtherExpense, net
| ** **                                                | ** ** | **12 months  ended  December 31,  2004** | ** **  | **12 months  ended  December 31,  2004** | ** ** | **12 months  ended  December 31,  2003** | ** ** | **12 months  ended  December 31,  2002** | ** ** | **Total since  inception** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|-------------|----------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **DKK’000**                                   | ** **  | **USD’000**                                   | ** ** | **DKK’000**                                   | ** ** | **DKK’000**                                   | ** ** | **DKK’000**                | ** ** |
| ** **                                                | ** ** | ** **                                         | ** **  | **(Unaudited)**                                    | ** ** | ** **                                         | ** ** | ** **                                         | ** ** | ** **                      | ** ** |
| Realized gains on  securities                             |       |                                               | 12,853      | ** **                                         |       |                                               | 2,351      | ** **                                         |       |                            | 13,996     | ** ** |   |   | 13,369 | ** ** |   | 44,897 |   |
| Exchange rate  gains                                      |       |                                               | 17,103      | ** **                                         |       |                                               | 3,128      | ** **                                         |       |                            | 33,349     | ** ** |   |   | 16,581 | ** ** |   | 112,572 |   |
| Realized loss on  securities                              |       |                                               | (21,512     | )                                                  |       |                                               | (3,934     | )                                                  |       |                            | (1,660     | ) |   |   | (14,059 | ) |   | (36,726 | ) |
| Impairment loss on other securities and equity  interests |       |                                               | —      | ** **                                         |       |                                               | —     | ** **                                         |       |                            | (4,525     | ) |   |   | (5,858 | **)** |   | (24,610 | ) |
| Exchange rate  losses                                     |       |                                               | (26,041     | )                                                  |       |                                               | (4,763     | )                                                  |       |                            | (43,609    | ) |   |   | (29,371 | ) |   | (128,000 | ) |
| ** **                                                | ** ** | ** **                                         | **(17,597** | **)**                                              | ** ** | ** **                                         | **(3,218** | **)**                                              | ** ** | ** **                      | **(2,449** | **)** | ** ** | ** ** | **(19,338** | **)** | ** ** | **(31,867** | **)** |

 

**4.**   IncomeTaxes

Theprovision for income taxes for the twelve-month period ended December 31,2004, 2003 and 2002 is DKK 0, DKK 0, and DKK 200 thousand, respectively. In2003, the company recognized DKK 66 thousand as refunded taxes expensed andpaid in prior years. The tax expense for 2002 includes calculated tax for 2002of DKK 200 thousand and DKK 126 thousand related to prior years. Areconciliation of the provision for income taxes and the amount computed byapplying the applicable tax rate of 30% to income before tax is as follows:
| ** **                                                    | ** ** | **12 months  ended  December 31,  2004** | ** ** | **12 months  ended  December 31,  2004** | ** ** | **12 months  ended  December 31,  2003** | ** ** | **12 months  ended  December 31,  2002** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                    | ** ** | **DKK’000**                                   | ** ** | **USD’000**                                   | ** ** | **DKK’000**                                   | ** ** | **DKK’000**                                   | ** ** |
| ** **                                                    | ** ** | ** **                                         | ** ** | **(Unaudited)**                                    | ** ** | ** **                                         | ** ** | ** **                                         | ** ** |
| Income taxes at statutory  rate                               |       |                                               | (126,614   | )                                                  |       |                                               | (23,157    | )                                                  |       |   | (93,103 | **)** |   |   | (143,126 | ) |   |
| Permanent differences                                         |       |                                               | 172        |                                               |       |                                               | 31         |                                               |       |   | 1,710 | ** ** |   |   | 2,267 |   |   |
| Permanent differences  related to expensed warrants           |       |                                               | —     |                                               |       |                                               | —     |                                               |       |   | — | ** ** |   |   | 1,595 |   |   |
| Change in valuation  allowance to unrealized gains and losses |       |                                               | 2,050      |                                               |       |                                               | 375        |                                               |       |   | (5,051 | **)** |   |   | 575 |   |   |
| Other changes                                                 |       |                                               | (4,994     | )                                                  |       |                                               | (913       | )                                                  |       |   | (45 | **)** |   |   | (2,035 | ) |   |
| Change in tax rate                                            |       |                                               | —     |                                               |       |                                               | —     |                                               |       |   | — | ** ** |   |   | (89 | ) |   |
| Expired tax losses                                            |       |                                               | 3,088      |                                               |       |                                               | 565        |                                               |       |   | — | ** ** |   |   | — |   |   |
| Adjustment to prior  years’ deferred tax                 |       |                                               | —     |                                               |       |                                               | —     |                                               |       |   | — | ** ** |   |   | (2,737 | ) |   |
| Other changes in  deferred tax valuation allowance            |       |                                               | 126,298    |                                               |       |                                               | 23,099     |                                               |       |   | 96,423 | ** ** |   |   | 143,876 |   |   |
| **Provision for income taxes**                                | ** ** | ** **                                         | **0**      |                                               | ** ** | ** **                                         | **0**      |                                               | ** ** | ** ** | **(66** | **)** | ** ** | ** ** | **326** |   |   |

 

At December 31, 2004, the parent company had nettax loss carry-forwards of approximately DKK 1,379,360 thousand for incometax purposes of which DKK 189,253 thousand expires in 2005 and 2006. DKK1,190,107 thousand can be carried forward without limitation. In addition, theparent company had deductible temporary differences of approximately DKK 41,397thousand.

F-50

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**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**4.**   Income Taxes(Continued)

For local tax purposes, the subsidiaries had net taxloss carry-forwards and deductible temporary differences totaling DKK 9,443thousand.

Significant components ofthe deferred tax assets are as follows:
| ** **                             | ** ** | **December 31,  2004** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **DKK’000**            | ** ** | **USD’000**            | ** ** | **DKK’000**            | ** ** | **DKK’000**            | ** ** |
| ** **                             | ** ** | ** **                  | ** ** | **(Unaudited)**             | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Tax deductible losses                  |       |                        | 1,386,099  |                        |       |                        | 253,511    |                        |       |   | 970,886 |   |   |   | 662,335 |   |   |
| Licenses and rights                    |       |                        | 35,411     |                        |       |                        | 6,477      |                        |       |   | 35,431 |   |   |   | 27,672 |   |   |
| Property and equipment                 |       |                        | 2,685      |                        |       |                        | 491        |                        |       |   | (1,733 | ) |   |   | (5,509 | ) |   |
| Other securities and  equity interests |       |                        | 4,525      |                        |       |                        | 828        |                        |       |   | 4,525 |   |   |   | — |   |   |
| Other temporary  differences           |       |                        | 1,480      |                        |       |                        | 271        |                        |       |   | 97 |   |   |   | 3,298 |   |   |
| Accumulated temporary  differences     |       |                        | 1,430,200  |                        |       |                        | 261,578    |                        |       |   | 1,009,206 |   |   |   | 687,796 |   |   |
| Deferred tax asset,  calculated at 30% |       |                        | 429,060    |                        |       |                        | 78,473     |                        |       |   | 302,762 |   |   |   | 206,339 |   |   |
| Valuation allowance                    |       |                        | (429,060   | )                           |       |                        | (78,473    | )                           |       |   | (302,762 | ) |   |   | (206,339 | ) |   |
|                                   |       |                        | 0          |                        |       |                        | 0          |                        |       |   | 0 |   |   |   | 0 |   |   |

 

For financial reportingpurposes, the value of the net deferred tax asset has been reduced to zero dueto uncertainties with respect to the company’s and the Group’s ability togenerate sufficient taxable income in the future.

**5.**   MarketableSecurities

Allmarketable securities are classified as available-for-sale and are reported atfair value. The company’s portfolio of marketable securities has an averageduration of less than two years and no securities have more than four yearsremaining to maturity. The company has classified all investments as short-termsince it has the intent and ability to sell and redeem them within a year.
| ** **                                                 | ** ** | **December 31,  2004** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                 | ** ** | **DKK’000**            | ** ** | **USD’000**            | ** ** | **DKK’000**            | ** ** |
| ** **                                                 | ** ** | ** **                  | ** ** | **(Unaudited)**             | ** ** | ** **                  | ** ** |
| Cost at the end of the  period                             |       |                        | 749,159    |                        |       |                        | 137,018    |   |   |   | 744,584 |   |   |
| Unamortized cost                                           |       |                        | 885        |                        |       |                        | 162        |   |   |   | 293 |   |   |
| Total amortized costs at  the end of the period            |       |                        | 750,044    |                        |       |                        | 137,180    |   |   |   | 744,877 |   |   |
| Unrealized loss at the  end of the period                  |       |                        | (3,647     | )                           |       |                        | (667       | ) |   |   | (5,883 | ) |   |
| Unrealized foreign  exchange loss at the end of the period |       |                        | (7,535     | )                           |       |                        | (1,378     | ) |   |   | (12,134 | ) |   |
| **Net book value**                                         |       |                        | 738,862    |                        |       |                        | 135,135    |   |   |   | 726,860 |   |   |

 

F-51

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**5.**   MarketableSecurities (Continued)

**Specification of Portfolio as of December 31,2004**
| ** **                             | ** ** | **Cost**         | ** ** | **Cost**         | ** **  | **Market  Value** | ** ** | **Market  Value** | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|-------------|-------------------|------------|-------------------|------------|
| ** **                             | ** ** | **DKK’000** | ** ** | **USD’000** | ** **  | **DKK’000**  | ** ** | **USD’000**  | ** ** |
| ** **                             | ** ** | ** **       | ** ** | **(Unaudited)**  | ** **  | ** **        | ** ** | **(Unaudited)**   | ** ** |
| Kingdom of  Denmark bonds              |       | 455,187          |       |             | 83,252      |              |       | 454,520           |       |   | 83,130 |   |   |
| Other Danish  securities               |       | 238,057          |       |             | 43,539      |              |       | 236,637           |       |   | 43,280 |   |   |
|                                   |       | 693,244          |       |             | 126,791     |              |       | 691,157           |       |   | 126,410 |   |   |
| US Government and Federal Agency Notes |       | 28,714           |       |             | 5,252       |              |       | 25,006            |       |   | 4,573 |   |   |
| US Corporate  Notes                    |       | 28,086           |       |             | 5,137       |              |       | 22,699            |       |   | 4,152 |   |   |
|                                   |       | 56,800           |       |             | 10,389      |              |       | 47,705            |       |   | 8,725 |   |   |
| **Total securities**                   | ** ** | **750,044**      |       | ** **       | **137,180** |              | ** ** | **738,862**       | ** ** | ** ** | **135,135** |   |   |

 

**Scheduledmaturities per December 31, 2004**
| ** **                        | ** ** | **Cost**         | ** ** | **Cost**         | ** **  | **Market  Value** | ** ** | **Market  Value** | ** ** |
|-----------------------------------|------------|------------------|------------|------------------|-------------|-------------------|------------|-------------------|------------|
| ** **                        | ** ** | **DKK’000** | ** ** | **USD’000** | ** **  | **DKK’000**  | ** ** | **USD’000**  | ** ** |
| ** **                        | ** ** | ** **       | ** ** | **(Unaudited)**  | ** **  | ** **        | ** ** | **(Unaudited)**   | ** ** |
| Maturity within one year          |       | 151,930          |       |             | 27,787      |              |       | 144,028           |       |   | 26,342 |   |   |
| Maturity from one  to three years |       | 598,114          |       |             | 109,393     |              |       | 594,834           |       |   | 108,793 |   |   |
| **Total securities**              |       | **750,044**      |       |             | **137,180** |              |       | **738,862**       |       |   | **135,135** |   |   |

 

**Specificationof Portfolio as of December 31, 2003**
| ** **                             | ** ** | **Cost**         | ** ** | **Cost**         | ** **  | **Market  Value** | ** ** | **Market  Value** | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|-------------|-------------------|------------|-------------------|------------|
| ** **                             | ** ** | **DKK’000** | ** ** | **USD’000** | ** **  | **DKK’000**  | ** ** | **USD’000**  | ** ** |
| ** **                             | ** ** | ** **       | ** ** | **(Unaudited)**  | ** **  | ** **        | ** ** | **(Unaudited)**   | ** ** |
| Kingdom of  Denmark bonds              |       | 437,075          |       |             | 79,939      |              |       | 432,062           |       |   | 79,022 |   |   |
| Other Danish  securities               |       | 213,023          |       |             | 38,961      |              |       | 214,094           |       |   | 39,157 |   |   |
|                                   |       | 650,098          |       |             | 118,900     |              |       | 646,156           |       |   | 118,179 |   |   |
| US Government and Federal Agency Notes |       | 54,184           |       |             | 9,910       |              |       | 46,412            |       |   | 8,489 |   |   |
| US Corporate  Notes                    |       | 40,302           |       |             | 7,371       |              |       | 34,292            |       |   | 6,272 |   |   |
|                                   |       | 94,486           |       |             | 17,281      |              |       | 80,704            |       |   | 14,761 |   |   |
| **Total  securities**                  | ** ** | **744,584**      | ** ** | ** **       | **136,181** |              | ** ** | **726,860**       | ** ** | ** ** | **132,940** |   |   |

 

F-52

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**5.**   MarketableSecurities (Continued)

**Scheduled maturities per December 31, 2003**
| ** **                       | ** ** | **Cost**         | ** ** | **Cost**         | ** **  | **Market  Value** | ** ** | **Market  Value** | ** ** |
|----------------------------------|------------|------------------|------------|------------------|-------------|-------------------|------------|-------------------|------------|
| ** **                       | ** ** | **DKK’000** | ** ** | **USD’000** | ** **  | **DKK’000**  | ** ** | **USD’000**  | ** ** |
| ** **                       | ** ** | ** **       | ** ** | **(Unaudited)**  | ** **  | ** **        | ** ** | **(Unaudited)**   | ** ** |
| Maturity within one year         |       | 129,802          |       |             | 23,740      |              |       | 122,469           |       |   | 22,399 |   |   |
| Maturity from one  to four years |       | 614,782          |       |             | 112,441     |              |       | 604,391           |       |   | 110,540 |   |   |
| **Total securities**             |       | **744,584**      |       |             | **136,181** |              |       | **726,860**       |       |   | **132,939** |   |   |

 

**6.**   Plant and Equipment, net
| ** **                                                                               | ** ** | **December 31,  2004** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **DKK’000**            | ** ** | **USD’000**            | ** ** | **DKK’000**            | ** ** |
| ** **                                                                               | ** ** | **(Unaudited)**             | ** ** |
| Machinery and  other equipment                                                           |       |                        | 68,193     |                        |       |                        | 12,472     |   |   |   | 84,222 |   |   |
| Fixed assets  under construction                                                         |       |                        | 47,781     |                        |       |                        | 8,739      |   |   |   | 47,176 |   |   |
| Leasehold  improvements                                                                  |       |                        | 32,684     |                        |       |                        | 5,978      |   |   |   | 30,195 |   |   |
| Cost at the end  of the period                                                           |       |                        | 148,658    |                        |       |                        | 27,189     |   |   |   | 161,593 |   |   |
| Accumulated  depreciation at the end of the period                                       |       |                        | (49,135    | )                           |       |                        | (8,987     | ) |   |   | (46,263 | ) |   |
| Accumulated  impairment loss on fixed assets under construction at the end of the period |       |                        | (42,170    | )                           |       |                        | (7,713     | ) |   |   | (42,170 | ) |   |
| **Net  book value**                                                                      | ** ** | ** **                  | **57,353** |                        | ** ** | ** **                  | **10,489** |   | ** ** | ** ** | **73,160** |   |   |
| Net book value of assets under finance lease  included above                             |       |                        | 28,357     |                        |       |                        | 5,186      |   |   |   | 23,448 |   |   |

 

**7.**   Licenses and Rights, net
| ** **                                         | ** ** | **December 31,  2004** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **DKK’000**            | ** ** | **USD’000**            | ** ** | **DKK’000**            | ** ** |
| ** **                                         | ** ** | **(Unaudited)**             | ** ** |
| Cost at the end  of the period                     |       |                        | 152,484    |                        |       |                        | 27,889     |   |   |   | 152,484 |   |   |
| Accumulated  amortization at the end of the period |       |                        | (141,759   | )                           |       |                        | (25,927    | ) |   |   | (118,711 | ) |   |
| **Net  book value**                                | ** ** | ** **                  | **10,725** |                        | ** ** | ** **                  | **1,962**  |   | ** ** | ** ** | **33,773** |   |   |

 

F-53

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**8.**   Depreciation and Amortization
| ** **                                                     | ** ** | **12 months ended  December 31,  2004** | ** ** | **12 months ended  December 31,  2004** | ** ** | **12 months ended  December 31,  2003** | ** ** | **12 months ended  December 31,  2002** | ** ** | **Total since  inception** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **DKK’000**                                       | ** ** | **USD’000**                                       | ** ** | **DKK’000**                                       | ** ** | **DKK’000**                                       | ** ** | **DKK’000**                | ** ** |
| ** **                                                     | ** ** | ** **                                             | ** ** | **(Unaudited)**                                        | ** ** | ** **                                             | ** ** | ** **                                             | ** ** | ** **                      | ** ** |
| Licenses and  rights (amortized)                               |       |                                                   | 23,048     |                                                   |       |                                                   | 4,215      |                                                   |       |                            | 30,827     |   |   |   | 30,497 |   |   |   | 141,759 |   |   |
| Property and  equipment (depreciated)                          |       |                                                   | 30,615     |                                                   |       |                                                   | 5,600      |                                                   |       |                            | 32,843     |   |   |   | 16,971 |   |   |   | 85,045 |   |   |
| ** **                                                     | ** ** | ** **                                             | **53,663** |                                                   | ** ** | ** **                                             | **9,815**  |                                                   | ** ** | ** **                      | **63,670** |   | ** ** | ** ** | **47,468** |   | ** ** | ** ** | **226,804** |   |   |
| Depreciation and  amortization was classified as follows: |       |                                                   |       |                                                   |       |                                                   |       |                                                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Research and  development costs                           |       |                                                   | 47,999     |                                                   |       |                                                   | 8,779      |                                                   |       |                            | 56,888     |   |   |   | 42,996 |   |   |   | 208,804 |   |   |
| General and  administrative expenses                      |       |                                                   | 5,664      |                                                   |       |                                                   | 1,036      |                                                   |       |                            | 6,782      |   |   |   | 4,472 |   |   |   | 18,000 |   |   |
| ** **                                                     | ** ** | ** **                                             | **53,663** |                                                   | ** ** | ** **                                             | **9,815**  |                                                   | ** ** | ** **                      | **63,670** |   | ** ** | ** ** | **47,468** |   | ** ** | ** ** | **226,804** |   |   |

 

**9.**   Other Securities and Equity Interests
| ** **                                            | ** ** | **December 31,  2004** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **DKK’000**            | ** ** | **USD’000**            | ** ** | **DKK’000**            | ** ** |
| ** **                                            | ** ** | **(Unaudited)**             | ** ** |
| Cost at the end  of the period                        |       |                        | 10,251     |                        |       |                        | 1,875      |   |   |   | 10,251 |   |   |
| Accumulated impairment  loss at the end of the period |       |                        | (4,525     | )                           |       |                        | (828       | ) |   |   | (4,525 | ) |   |
| **Net  book value**                                   | ** ** | ** **                  | **5,726**  |                        | ** ** | ** **                  | **1,047**  |   | ** ** | ** ** | **5,726** |   |   |

 

Other securities and equity interests consist ofinvestments in strategic partners of Genmab. As per December 31, 2004,such investments comprise equity shares in Scancell Ltd. and ParadigmTherapeutics Ltd., both privately held British biotech companies.

Until 2003, other securities and equity interests alsoincluded equity shares in Oxford GlycoSciences Plc., a publicly held Britishbiotech company. During 2003, Oxford GlycoSciences was acquired by Celltech andour shares were sold.

As of December 31,2004 and 2003, the company has recorded accumulated impairment losses on theinvestments of DKK 4,525 thousand and DKK 4,525 thousand, respectively, as aresult of significant declines in the value of these investments, which aredetermined to be “other than temporary.”

**10.**   PayableTechnology Rights

In 2000, Genmab enteredinto the Genomics Agreement with Medarex, Inc. See Note 14 for additionaldetails. Under this agreement, Genmab was required to pay USD 2 million annuallyfor four consecutive years beginning on August 26, 2001. The companycalculated the net present value of these payments using an interest rate of5.71% per annum and capitalized this amount as licenses and rights. A 

F-54

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**10.**   PayableTechnology Rights (Continued)

correspondingamount was recorded as a liability in the balance sheet. The company recognizedimputed interest on the outstanding payment. In August 2004, the finalpayment under the Genomics Agreement was paid to Medarex.

**11.**   ShareCapital

In February 1999, Medarex and BankforeningernesErhvervsudviklingsforening Biomedicinsk Udvikling, BI Asset Management FondsmæglerselskabA/S, Lønmodtagernes Dyrtidsfond, A/S Dansk Erhvervsinvestering and Leif HelthCare A/S (the “Bank Invest Group”) entered into an agreement in which the BankInvest Group invested approximately DKK 35.4 million of cash in exchange for anapproximate 45% equity interest in the company. Concurrently, Medarex grantedGenmab a limited number of licenses to develop and commercialize a portfolio ofhuman antibodies derived from its HuMAb-Mouse® Technology and retained anapproximate 45% equity interest through its wholly owned subsidiary GenPharmInternational, Inc.

In May 1999 and March 2000, Medarex and theBank Invest Group made additional contributions to the company in proportion totheir existing equity interests. The Bank Invest Group invested approximatelyDKK 49 million of cash and Medarex granted the company an additional number offully paid licenses along with an unlimited number of royalty bearing licensesto develop additional antibodies. After the March 2000 contributions,Medarex and the Bank Invest Group each owned approximately 45% of Genmab’soutstanding common shares.

In June 2000, Genmab completed a private offeringwhere it received approximately DKK 321 million from Medarex, the Bank InvestGroup and new investors who subscribed to a total of 576,646 new shares. In August 2000,a total of 27,976 new shares were issued to Medarex in connection with theGenomics Agreement and the grant of an option of up to four antibodies obtainedthrough an agreement with Eos Biotechnology. In August 2000, Genmab’sshareholders approved a conversion of all existing classes of shares to oneclass of ordinary shares and a bonus share issuance of nine ordinary shares foreach ordinary share. Following the issuance of the additional shares to Medarexand the bonus shares, the company had 15,812,020 outstanding ordinary shares.

In October 2000, Genmab completed an InitialPublic Offering with a dual listing on the Copenhagen Stock Exchange and theNeuer Markt of the Frankfurt Stock Exchange. The global offering, whichconstituted 6,000,000 new shares equaling approximately 28% of the company’sissued share capital after the listing, consisted of a public offering in bothDenmark and Germany and a concurrent international offer to institutionalinvestors outside the US and a private placement in the US to qualifiedinstitutional buyers under Rule 144A.

In May 2002, Genmab entered into a collaboration agreementwith Roche. Following this agreement, Roche subscribed to 880,100 shares in thecompany in June 2002.

In December 2002, the company delisted from theNeuer Markt of the Frankfurt Stock Exchange. The primary reason for thisdelisting was that trading in this market was limited compared to theadministration costs in connection with the listing.

In July 2003, the company issued 246,914 ordinaryshares to Medarex, pursuant to the Genomics Agreement entered into in August 2000.The shares were issued through GenPharm International, Inc.

F-55

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**11.**   Share Capital(Continued)

In July 2004, the company completed aninternational private placement with issuance of 5,623,000 new ordinary shares,raising gross proceeds to the company of DKK 478 million.

At 31 December 2004,the total number of outstanding shares was 29,752,363. Each share has a nominalvalue of DKK 1 and one vote.

**12.**   Warrants

**Warrant Scheme**

Since inception, Genmab A/S has established warrantschemes, which have the primary objective of giving those who help build thecompany an opportunity to share in the value of the business that they arehelping to create. The warrant schemes are meant to provide an incentive forall Group employees, members of the board of directors and members of theexecutive management as well as certain external consultants with a long-termrelationship with us.

All employees to date have been granted warrants inconnection with their employment.

Warrants are granted by our board of directors inaccordance with authorizations given to it by the company’s shareholders. Themost recent warrant scheme was adopted by the board of directors in August 2004.

Under the terms of the recent warrant schemes,warrants are granted at an exercise price equal to the share price on the grantdate. According to the company’s Articles of Association, the exercise pricecannot be fixed at a lower price than the market price at the grant date.

The warrant schemescontain anti-dilution provisions if changes occur in the company’s sharecapital prior to the warrants being exercised.

**Warrants Granted From August 2004**

Under the current warrantscheme, effective from August 2004, warrants can be exercised from oneyear after the grant date. The warrant holder may as a general rule onlyexercise 25% of the warrants granted per full year of employment or affiliationwith Genmab after the grant date. However, the warrant holder will be entitledto exercise all warrants granted regardless of termination of the relationshipin instances where the employment or consultancy relationship is terminatedwithout the warrant holder having given the company a good reason to do so. Allwarrants lapse at the tenth anniversary of the grant date.

**WarrantsGranted Prior to August 2004**

Half of warrants granted under these warrant schemescan be exercised one year after the grant date with the other half exercisabletwo years after the grant date. The exercise period lasts for three years fromthe date when a warrant first becomes exercisable. If the warrants are notexercised within these periods, they lapse.

The exercise of warrants is not conditional uponcontinued employment or affiliation with Genmab. However, if the warrant holderexercises warrants, then upon the conclusion of employment or affiliation, theholder is obligated to offer to sell a specified percentage of shares issuedback to the company. The sell 

F-56

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**12.**   Warrants(Continued)

backclause is not applicable in the event of  termination  as a result of thecompany’s breach of the employment of affiliation contract. The sell backclause defines the percentage of shares that the holder is required to offer tosell back to the company in accordance with the following schedule:

·       75%of shares if termination occurs in the second year after grant.

·       50%of shares if termination occurs in the third year after grant.

·       25%of shares if termination occurs in the fourth year after grant.

The repurchase price to bepaid for the shares by the company in these instances is the warrant holder’soriginal exercise price. Accordingly, the warrant holder will not be able toprofit on shares sold back to the company.

**Warrant Activity**

In February 1999, the company’s shareholdersauthorized the board of directors to grant 250,000 warrants. In January 2000,the company’s shareholders authorized the board of directors to grant anadditional 600,000 warrants. The number of warrants authorized was increased byan additional 1,257,730 warrants in June 2000 and 2,163,533 in August 2000.In April 2003, the board of directors was authorized to grant anadditional 500,000 warrants by the company’s shareholders and in April 2004,this number of warrants authorized was increased by an additional 1,250,000warrants. Accordingly, as per December 31, 2004, the board of directorshas been authorized to grant a total of 6,021,263 warrants.

The following schedule specifies the warrant grants.The classification of warrant holders has been updated to reflect the currentstatus of the individual warrant holders; i.e. if a non-employee consultant hasbeen granted warrants and subsequently becomes employed by the company, suchperson will be included in the “employees” category. As a result, the updatedtotals of the individual groups may differ from information disclosed inpreviously issued financial statements.

F-57

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**12.**   Warrants(Continued)

A summary of warrantactivity and related information for the company’s warrant compensation plansis as follows:
| ** **                                                                  | ** ** | **12 months  ended  December 31,  2004** | ** **    | **12 months  ended  December 31,  2003** | ** ** | **12 months  ended  December 31,  2002** | ** **    | **12 months  ended  December 31,  2004** | ** ** | **12 months  ended  December 31,  2004** | ** **    | **12 months  ended  December 31,  2003** | ** ** | **12 months  ended  December 31,  2002** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------|---------------|----------------------------------------------------|------------|----------------------------------------------------|---------------|----------------------------------------------------|------------|----------------------------------------------------|---------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Number of  warrants**                       | ** **    | **Number of  warrants**                       | ** ** | **Number of  warrants**                       | ** **    | **Weighted  average  exercise price**         | ** ** | **Weighted  average  exercise price**         | ** **    | **Weighted  average  exercise price**         | ** ** | **Weighted  average  exercise price**         | ** ** |
| ** **                                                                  | ** ** | ** **                                         | ** **    | ** **                                         | ** ** | ** **                                         | ** **    | **DKK**                                            | ** ** | **USD**                                            | ** **    | **DKK**                                            | ** ** | **DKK**                                            | ** ** |
| ** **                                                                  | ** ** | ** **                                         | ** **    | ** **                                         | ** ** | ** **                                         | ** **    | ** **                                         | ** ** | **(Unaudited)**                                    | ** **    | ** **                                         | ** ** | ** **                                         | ** ** |
| Outstanding at the beginning of the period                        |       |                                               | 4,455,450     |                                               |       |                                               | 4,236,575     |                                               |       |                                               | 3,403,300     |                                               |       |                                               | 104.45     |   |   |   | 19.10 |   |   |   | 107.48 |   |   |   | 108.38 |   |   |
| Granted                                                                     |       |                                               | 914,625       |                                               |       |                                               | 235,875       |                                               |       |                                               | 857,775       |                                               |       |                                               | 87.11      |   |   |   | 15.93 |   |   |   | 46.00 |   |   |   | 102.40 |   |   |
| Exercised                                                                   |       |                                               | (1,148,829    | )                                                  |       |                                               | (17,000       | )                                                  |       |                                               | (24,500       | )                                                  |       |                                               | 56.05      |   |   |   | 10.25 |   |   |   | 47.11 |   |   |   | 55.29 |   |   |
| Expired                                                                     |       |                                               | (190,200      | )                                                  |       |                                               | —        |                                               |       |                                               | —        |                                               |       |                                               | 253.38     |   |   |   | 46.34 |   |   |   | — |   |   |   | — |   |   |
| **Outstanding at the end of the period**                          | ** ** | ** **                                         | **4,031,046** |                                               | ** ** | ** **                                         | **4,455,450** |                                               | ** ** | ** **                                         | **4,236,575** |                                               | ** ** | ** **                                         | **107.29** |   | ** ** | ** ** | **19.62** |   | ** ** | ** ** | **104.45** |   | ** ** | ** ** | **107.48** |   |   |
| Warrants available  for future grants at the end of the year |       |                                               | 609,688       |                                               | ** ** | ** **                                         | ** **    |                                               | ** ** | ** **                                         | ** **    |                                               | ** ** | ** **                                         | ** ** |   | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** |   |   |

 

Weightedaverage exercise price of warrants issued in 2004 and 2003:
| ** **                       | ** ** | **12 month  period ended  December 31,  2004** | ** ** | **12 month  period ended  December 31,  2004** | ** ** | **12 month  period ended  December 31,  2003** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                       | ** ** | **DKK**                                                       | ** ** | **USD**                                                       | ** ** | **DKK**                                                       | ** ** |
| ** **                       | ** ** | ** **                                                    | ** ** | **(Unaudited)**                                               | ** ** | ** **                                                    | ** ** |
| Warrants issued  at a discount   |       |                                                          | —     |                                                          |       |                                                          | —     |   |   |   | — |   |   |
| Warrants issued  at market price |       |                                                          | 87.11      |                                                          |       |                                                          | 15.93      |   |   |   | 46.00 |   |   |
| Warrants issued  at a premium    |       |                                                          | —     |                                                          |       |                                                          | —     |   |   |   | — |   |   |

 

Weighted average grantdate fair value of warrants granted in 2004 and 2003:
| ** **                       | ** ** | **12 month  period ended  December 31,  2004** | ** ** | **12 month  period ended  December 31,  2004** | ** ** | **12 month  period ended  December 31,  2003** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                       | ** ** | **DKK**                                                       | ** ** | **USD**                                                       | ** ** | **DKK**                                                       | ** ** |
| ** **                       | ** ** | ** **                                                    | ** ** | **(Unaudited)**                                               | ** ** | ** **                                                    | ** ** |
| Warrants issued  at a discount   |       |                                                          | —     |                                                          |       |                                                          | —     |   |   |   | — |   |   |
| Warrants issued  at market price |       |                                                          | 54.89      |                                                          |       |                                                          | 10.04      |   |   |   | 20.80 |   |   |
| Warrants issued at a  premium    |       |                                                          | —     |                                                          |       |                                                          | —     |   |   |   | — |   |   |

 

F-58

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**12.**   Warrants(Continued)

**Compensation CostsRelating to Warrants**

The cost relating to warrants granted to employees isbased on the intrinsic value of the outstanding warrants at each balance sheetdate. Once the compensation costs have been expensed, they are not reversed,even if the intrinsic value of the warrants decreases. The total costrecognized in the statement of operations for warrants granted to employees wasDKK 0 thousand for the year ended December 31, 2004 compared to DKK 0thousand in 2003 and DKK 4,668 thousand in 2002.

The cost relating to warrants granted as compensationto non-employee consultants is based on the fair value of the outstandingwarrants at each balance sheet date, and is calculated using the Black Scholespricing model. Once the compensation costs have been expensed, they are notreversed, even if the fair value of the warrants decreases. The totalcompensation costs to non-employees for the year ended December 31, 2004were DKK 0 thousand compared to DKK 0 thousand in 2003 and DKK 647 thousand in2002.

Until 2002, the warrant program included a repurchasecondition and, accordingly, the warrants were considered variable. The costrelating to warrants granted to employees was based on the intrinsic value ofthe outstanding warrants at each balance sheet date. Once the compensationcosts had been expensed, they were not reversed, even if the intrinsic value ofthe warrants decreased. In 2002, employees and board members accepted amodification to the existing warrant program. The modification changed therepurchase condition and, accordingly, the outstanding warrants are no longerconsidered variable for accounting purposes. Therefore, the warrants toemployees and the board of directors are not remeasured at each balance sheet date.

The grant of 212,500 warrants made on March 6,2001 was subsequently re-priced by reducing the exercise price from DKK 222 toDKK 148 following the extraordinary board meeting of Genmab on July 30,2001. According to FIN 44, this re-pricing triggers variable accounting underAPB Opinion 25. This means that the ultimate charge recognized for this grantof warrants should be based on the intrinsic value at the point of exercise.Until that time, charges in each fiscal year should be based on the intrinsicvalue of the warrants as measured at the end of that year.

F-59

----

**Genmad A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**12.**   Warrants (Continued)

Theissued and outstanding warrants to shareholders, board members, employees andnon-employee consultants as of December 31, 2004 are summarized as follows:
| ** **                | ** ** | **Warrants outstanding** | ** ** | **Warrants exercisable** | ** ** |
|---------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                | ** ** | ** **                    | ** ** | ** **                    | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                | ** ** | ** **                    | ** ** | ** **                    | ** ** | **average** | ** ** | **Weighted** | ** ** | **Weighted** | ** ** | **Value of** | ** ** | **Value of** | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Weighted** | ** ** |
| ** **                | ** ** | ** **                    | ** ** | **Number of**            | ** ** | **remaining** | ** ** | **average** | ** ** | **average** | ** ** | **outstanding** | ** ** | **outstanding** | ** ** | **Number of** | ** ** | **average** | ** ** | **average** | ** ** |
| ** **                | ** ** | **Warrants exercisable** | ** ** | **warrants**                  | ** ** | **contractual** | ** ** | **exercise** | ** ** | **exercise** | ** ** | **warrants at** | ** ** | **warrants at** | ** ** | **warrants** | ** ** | **exercise** | ** ** | **exercise** | ** ** |
| **Exercise price**   | ** ** | ** **                    | ** ** | **from**                      | ** ** | **outstanding** | ** ** | **life (in years)** | ** ** | **price** | ** ** | **price** | ** ** | **year end** | ** ** | **year end** | ** ** | **exercisable** | ** ** | **price** | ** ** | **price** | ** ** |
| ** **                | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** ** | ** ** | **DKK** | ** ** | **USD** | ** ** | **DKK** | ** ** | **USD** | ** ** | ** ** | ** ** | **DKK** | ** ** | **USD** | ** ** |
| ** **                | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** | ** ** | ** ** | **(Unaudited)** | ** ** |
| Preceding Warrant  Scheme |       |                          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           |            |                               |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| DKK 33.70                        |       |   | September 26, 2003 |   |       |       | 377,395       |   |       |       | 2.28     |   |       |       | 33.70      |   |       |       | 6.16      |   |       |       | 69.35     |   |       |       | 12.68    |   |       |       | 377,395       |   |       |       | 33.70      |   |       |       | 6.16      |   |   |
|----------------------------------|------------|--------|-------------------------|--------|------------|------------|---------------|--------|------------|------------|----------|--------|------------|------------|------------|--------|------------|------------|-----------|--------|------------|------------|-----------|--------|------------|------------|----------|--------|------------|------------|---------------|--------|------------|------------|------------|--------|------------|------------|-----------|--------|--------|
| DKK 37.00                        |       |   | June 25, 2004      |   |       |       | 142,775       |   |       |       | 2.99     |   |       |       | 37.00      |   |       |       | 6.77      |   |       |       | 67.85     |   |       |       | 12.41    |   |       |       | 69,763        |   |       |       | 37.00      |   |       |       | 6.77      |   |   |
| DKK 48.90                        |       |   | February 11, 2001  |   |       |       | 212,250       |   |       |       | 0.13     |   |       |       | 48.90      |   |       |       | 8.94      |   |       |       | 51.31     |   |       |       | 9.38     |   |       |       | 212,250       |   |       |       | 48.90      |   |       |       | 8.94      |   |   |
| DKK 51.50                        |       |   | December 4, 2004   |   |       |       | 7,250         |   |       |       | 3.43     |   |       |       | 51.50      |   |       |       | 9.42      |   |       |       | 58.70     |   |       |       | 10.74    |   |       |       | 3,625         |   |       |       | 51.50      |   |       |       | 9.42      |   |   |
| DKK 59.00                        |       |   | November 11, 2004  |   |       |       | 25,000        |   |       |       | 3.36     |   |       |       | 59.00      |   |       |       | 10.79     |   |       |       | 53.90     |   |       |       | 9.86     |   |       |       | 12,500        |   |       |       | 59.00      |   |       |       | 10.79     |   |   |
| DKK 59.70                        |       |   | June 26, 2001      |   |       |       | 582,751       |   |       |       | 0.56     |   |       |       | 59.70      |   |       |       | 10.92     |   |       |       | 41.93     |   |       |       | 7.67     |   |       |       | 582,751       |   |       |       | 59.70      |   |       |       | 10.92     |   |   |
| DKK 62.50                        |       |   | October 10, 2004   |   |       |       | 57,600        |   |       |       | 3.28     |   |       |       | 62.50      |   |       |       | 11.43     |   |       |       | 51.59     |   |       |       | 9.44     |   |       |       | 28,800        |   |       |       | 62.50      |   |       |       | 11.43     |   |   |
| DKK 86.00                        |       |   | April 1, 2005      |   |       |       | 68,750        |   |       |       | 3.75     |   |       |       | 86.00      |   |       |       | 15.73     |   |       |       | 42.28     |   |       |       | 7.73     |   |       |       | —        |   |       |       | —     |   |       |       | —    |   |   |
| DKK 116.00                       |       |   | December 5, 2002   |   |       |       | 84,000        |   |       |       | 1.43     |   |       |       | 116.00     |   |       |       | 21.22     |   |       |       | 16.56     |   |       |       | 3.03     |   |       |       | 84,000        |   |       |       | 116.00     |   |       |       | 21.22     |   |   |
| DKK 117.50                       |       |   | November 7, 2002   |   |       |       | 254,300       |   |       |       | 1.35     |   |       |       | 117.50     |   |       |       | 21.49     |   |       |       | 15.39     |   |       |       | 2.81     |   |       |       | 254,300       |   |       |       | 117.50     |   |       |       | 21.49     |   |   |
| DKK 139.50                       |       |   | June 28, 2003      |   |       |       | 210,000       |   |       |       | 1.99     |   |       |       | 139.50     |   |       |       | 25.51     |   |       |       | 15.06     |   |       |       | 2.75     |   |       |       | 210,000       |   |       |       | 139.50     |   |       |       | 25.51     |   |   |
| DKK 148.00                       |       |   | March 6, 2002      |   |       |       | 212,500       |   |       |       | 0.68     |   |       |       | 148.00     |   |       |       | 27.07     |   |       |       | 3.82      |   |       |       | 0.70     |   |       |       | 212,500       |   |       |       | 148.00     |   |       |       | 27.07     |   |   |
| DKK 165.00                       |       |   | July 30, 2002      |   |       |       | 563,500       |   |       |       | 1.08     |   |       |       | 165.00     |   |       |       | 30.18     |   |       |       | 4.69      |   |       |       | 0.86     |   |       |       | 563,500       |   |       |       | 165.00     |   |       |       | 30.18     |   |   |
| DKK 183.00                       |       |   | March 20, 2003     |   |       |       | 18,750        |   |       |       | 1.72     |   |       |       | 183.00     |   |       |       | 33.47     |   |       |       | 6.79      |   |       |       | 1.24     |   |       |       | 18,750        |   |       |       | 183.00     |   |       |       | 33.47     |   |   |
| DKK 190.00                       |       |   | February 15, 2003  |   |       |       | 139,100       |   |       |       | 1.63     |   |       |       | 190.00     |   |       |       | 34.75     |   |       |       | 5.66      |   |       |       | 1.03     |   |       |       | 139,100       |   |       |       | 190.00     |   |       |       | 34.75     |   |   |
| DKK 196.00                       |       |   | March 7, 2003      |   |       |       | 75,000        |   |       |       | 1.68     |   |       |       | 196.00     |   |       |       | 35.85     |   |       |       | 5.44      |   |       |       | 1.00     |   |       |       | 75,000        |   |       |       | 196.00     |   |       |       | 35.85     |   |   |
| DKK 300.00                       |       |   | December 6, 2001   |   |       |       | 154,250       |   |       |       | 0.93     |   |       |       | 300.00     |   |       |       | 54.87     |   |       |       | 0.13      |   |       |       | 0.02     |   |       |       | 154,250       |   |       |       | 300.00     |   |       |       | 54.87     |   |   |
| Current Warrant Scheme           |       |   |                    |   |       |       |          |   |       |       |     |   |       |       |       |   |       |       |      |   |       |       |      |   |       |       |     |   |       |       |          |   |       |       |       |   |       |       |
| DKK 86.00                        |       |   | August 3, 2005     |   |       |       | 730,550       |   |       |       | 9.59     |   |       |       | 86.00      |   |       |       | 15.73     |   |       |       | 49.79     |   |       |       | 9.11     |   |       |       | —        |   |       |       | —     |   |       |       | —    |   |   |
| DKK 89.50                        |       |   | September 22, 2005 |   |       |       | 33,575        |   |       |       | 9.73     |   |       |       | 89.50      |   |       |       | 16.37     |   |       |       | 49.10     |   |       |       | 8.98     |   |       |       | —        |   |       |       | —     |   |       |       | —    |   |   |
| DKK 97.00                        |       |   | December 1, 2005   |   |       |       | 81,750        |   |       |       | 9.92     |   |       |       | 97.00      |   |       |       | 17.74     |   |       |       | 47.39     |   |       |       | 8.67     |   |       |       | —        |   |       |       | —     |   |       |       | —    |   |   |
| **DKK 33.70 to DKK 300.00** | ** ** |   |                    |   | ** ** | ** ** | **4,031,046** |   | ** ** | ** ** | **3.10** |   | ** ** | ** ** | **107.29** |   | ** ** | ** ** | **19.62** |   | ** ** | ** ** | **33.24** |   | ** ** | ** ** | **6.08** |   | ** ** | ** ** | **2,998,484** |   | ** ** | ** ** | **115.85** |   | ** ** | ** ** | **21.19** |   |   |

 

 

F-60

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**13.   InternalShareholders**
| ** **                        | ** ** | **Number of  ordinary shares  owned as of  December 31, 2004** | ** **    | **Number of  warrants held as of  December 31, 2004** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------------------------------|---------------|-------------------------------------------------------------------------------------|------------|
| **Board  of directors**           |       |                                                                                         |          |                                                                                |       |   |   |   |   |
| Lisa N. Drakeman                  |       |                                                                                         | 448,540       |                                                                                |       |   | 492,500 |   |   |
| Ernst Schweizer                   |       |                                                                                         | 234,340       |                                                                                |       |   | 74,500 |   |   |
| Irwin Lerner                      |       |                                                                                         | 25,000        |                                                                                |       |   | 40,000 |   |   |
| Michael Widmer                    |       |                                                                                         | —        |                                                                                |       |   | 70,000 |   |   |
| Karsten Havkrog  Pedersen         |       |                                                                                         | —        |                                                                                |       |   | 35,000 |   |   |
| Anders Gersel  Pedersen           |       |                                                                                         | —        |                                                                                |       |   | 35,000 |   |   |
| ** **                        | ** ** | ** **                                                                                   | **707,880**   |                                                                                | ** ** | ** ** | **747,000** |   |   |
| **Management**                    |       |                                                                                         |          |                                                                                |       |   |   |   |   |
| Lisa N. Drakeman,  see above      |       |                                                                                         | —        |                                                                                |       |   | — |   |   |
| Jan van de Winkel                 |       |                                                                                         | 117,500       |                                                                                |       |   | 270,000 |   |   |
| Claus Juan  M&qout;ller-San Pedro |       |                                                                                         | 332,415       |                                                                                |       |   | 142,500 |   |   |
| ** **                        | ** ** | ** **                                                                                   | **449,915**   |                                                                                | ** ** | ** ** | **412,500** |   |   |
| **Total**                         | ** ** | ** **                                                                                   | **1,157,795** |                                                                                | ** ** | ** ** | **1,159,500** |   |   |

 

**14.**   RelatedParty Transactions

**Medarex Inc.**

On December 31, 2004, Medarex, Inc. ownedapproximately 25% of the outstanding shares of the company through its whollyowned subsidiary, GenPharm International, Inc.

During 1999 and 2000, Medarex granted 16 fully paid-upexclusive licenses to the company to use its HuMAb-Mouse and to produce humanmonoclonal antibodies for 16 antigens to be specified by Genmab. Furthermore,Genmab also has the right to access the TC MouseTM technology on commercialterms. In addition, Medarex granted Genmab a non-exclusive license to use theHuMAb technology to produce human monoclonal antibodies for an unlimited numberof antigens, subject to availability and the payment of fees, milestones androyalties. The licenses contributed to Genmab by Medarex have been recorded attheir value on the date of contribution, and are supported by independentvaluation studies. These licenses are amortized using the straight-line methodover an estimated useful life of five years.

In 2000, the company and Medarex entered into amanufacturing agreement under which Medarex will produce antibodies to be usedby the company in the clinical testing phase of product development. Thecompany has also entered into manufacturing agreements with a number of thirdparty suppliers, and accordingly, Medarex is not the company’s sole source forantibody production capacity.

In 2000, Genmab entered into the Genomics Agreement,pursuant to which Medarex granted the company the exclusive rights to marketits transgenic mouse technologies for certain multi-target (five or moretargets) European genomics partnerships. Genmab’s territory includes companieswith European headquarters that have either developed or gained access togenomics or other novel targets. The company may also conduct business with anycompany it may choose for non multi-target (less than five targets) 

F-61

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**14.**   Related PartyTransactions (Continued)

agreements. In exchangefor the rights granted to Genmab by Medarex under the Genomics Agreement, thecompany issued 27,976 shares at a value of DKK 16,702 thousand, equal to USD 2million to Medarex. Beginning in 2001, the Genomics Agreement states that thecompany will pay Medarex USD 2 million per year for four years. In 2001 and2002, Medarex was paid in cash. However, Genmab had the option to pay theseamounts in either cash or by issuance of shares. In 2003 Genmab exercised itsoption to pay the amount of USD 2 million that would otherwise become payablein cash, through the issuance of shares to GenPharm International, Inc. Atotal of 246,914 shares at a price of DKK 52.50 per share were subscribed byGenPharm by conversion of debt in the amount of DKK 12,963 thousand, pursuantto the Genomics Agreement. In 2004, the final payment of USD 2 million was madeto Medarex in cash.

The company has paid Medarex for manufacturingservices, licenses and the reimbursement of administrative expenses. For 2004,2003 and 2002, the company has recorded transactions totalling DKK 7,309thousand, DKK 15,335 thousand, and DKK 105,880 thousand, respectively, inconnection with these agreements.

No significant costs have been reimbursed by Medarexduring the years presented, for costs incurred on their behalf. In part of2002, the company leased from Medarex a limited area of office space inPrinceton, New Jersey, USA. This leasing transaction is not consideredmaterial. In addition to the payable technology rights recorded in 2003 and2002, the company has recorded payables to Medarex of DKK 547 thousand as of December 31,2004, compared to DKK 645 thousand as of December 31, 2003.

The partnering model entered into between Medarex andGenmab in the Genomics Agreement is based on collaboration, cost sharing andshared commercial rights. In a typical collaboration, the target company willcontribute five or more targets to the alliance. Genmab and Medarex willjointly contribute the antibody products to the targets. For each product to bedeveloped the target company will pay half the development costs and Genmab andMedarex together will pay equally the other half. Genmab and Medarex togethermay also make their full repertoire of antibody development capabilitiesavailable to the collaborations, including pre-clinical and clinical researchand manufacturing capacity.

In June 2001, Genmaband Medarex entered into a collaboration agreement to develop HuMax-Inflam.Under the agreement, the parties will share the costs associated with thepre-clinical and clinical development of the product and will share thecommercialization rights and royalties. In 2004, the development activities ledto recognition of net cost reimbursement of DKK 4,480 thousand, which reducedour development expenses. The comparative net cost reimbursement for 2003 wasDKK 5,374 thousand.

**IPC-Nordic A/S**

IPC-Nordic is considered arelated party, as the company is controlled by a member of management ofGenmab. During the past years, Genmab has purchased drug supply distributionservices from IPC-Nordic, as the services were not available elsewhere inDenmark. The fees for the services are determined following an arms lengthprinciple and the total fees paid for such services were DKK 599 thousand in2004 compared to DKK 1,663 thousand in 2003. As per December 31, 2004, thecompany had recorded payables to IPC-Nordic of DKK 16 thousand.

F-62

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**14.**   Related PartyTransactions (Continued)

**The Company’s Board of Directors and its Officers**

One member of the board ofdirectors has rendered additional services to the company during the year forwhich he has received consultancy fees totalling DKK 4,378 thousand.

**15.**   Researchand Development Agreements

**Amgen / Immunex**

In 2001, the companyentered into an agreement with Immunex Corporation (“Immunex”) for the exclusiveworldwide rights to Immunex’s patent estate relating to antibodies towards IL15and IL15r. Immunex retained an option, exercisable after Phase II clinicaltrials have been completed, to commercialize the resulting product. Uponexercise of the option, Immunex would be obligated to pay to the company licensefees, milestone payments as well as be obligated to share future profits withthe company. Immunex would also be responsible for all future developmentcosts. Subsequent to signing this agreement, Immunex was acquired by Amgen, whotook over the rights and obligations under this agreement. In 2003, Amgenexercised its commercialization options for both the HuMax-IL15 antibodyprogram and the IL-15 receptor program ahead of schedule, prior to receivingPhase II clinical data for HuMax-IL15. Amgen is responsible for furtherdevelopment of HuMax-IL15. In connection with the exercise of thecommercialization option in 2003, Amgen expanded its agreement with Genmab toinclude a new antibody program for a different undisclosed disease target.Under the terms of the expanded and amended agreement, if products to all threetargets are successfully commercialized and certain sales levels are achieved,Genmab will be entitled to receive license fees and milestone payments. Genmabis also entitled to royalties on commercial sales instead of the profit sharingdesignated in the original agreement. Positive interim data from the first 110patients treated with AMG 714 (formerly known as HuMax-IL15) in the RA Phase IItrial was presented in October 2004, and it was concluded that AMG 714 waswell tolerated and generated adverse events similar to that of placebo. Amgenplans to enroll a totalof 180 patients in the study.

**Roche**

In 2001 the companyannounced a broad antibody development collaboration with Roche for thecreation and development of human antibody therapeutics products towardstargets identified by Roche. The company is to undertake research anddevelopment activities whereas Roche will undertake commercialization afterfiling of biologics license application. The company will receive certainmilestone and royalty payments depending on the successful development ofproducts. In 2002, the company announced a broad expansion of its collaborationwith Roche for the creation and development of human antibody therapeuticproducts for life-threatening and debilitating diseases. Roche also made anequity investment totalling USD 20 million at a price of DKK 180 per share,equal to net proceeds of DKK 158 million. This expanded program involves anumber of new disease targets from Roche. Genmab expects to initiateapproximately fifteen new projects in the coming years across a number oftherapeutic areas. In January and October 2003, Genmab announced theachievement of the first and second milestones in our expanded collaborationwith Roche having reached the proof of concept stage with two different humanantibodies generated by Genmab. In September 2004, Genmab announced thatwe had established proof of concept for two additional human antibodies andthereby reached two more milestones in our collaboration with Roche. Theseantibodies were each designed to target a different disease area and 

F-63

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**15.**   Research andDevelopment Agreements (Continued)

representedthe third and fourth antibodies in the collaboration to reach this stage. Up tonow, Roche has selected a total of four Genmab antibodies as candidates forclinical development. Under the partnership agreement, we utilize our broadantibody expertise and development capabilities to create human antibodies to awide range of disease targets identified by Roche. Genmab will receivemilestone and royalty payments based on successful products. Under certaincircumstances, Genmab may obtain rights to develop products based on diseasetargets identified by Roche.

**Other**

During 2001, the company entered into a number ofadditional agreements with parties such as Scancell and deCODE to develop newantibody therapeutic products. The collaborations will utilize novel diseasetargets discovered by the partners. The companies will focus on severaltherapeutic areas. The alliances are mainly multi-target alliances based on thecompany’s Genomics Agreement with Medarex and a number of partners have alreadyidentified initial groups of disease targets using genomics or othercapabilities.

In 2002, the company entered into a number of additional agreementswith parties such as Bionomics, Paradigm Therapeutics and ACE BioSciences to developnew antibody therapeutic products. The collaborations will utilize noveldisease targets discovered by the partners. In 2003, Genmab and ACE BioSciencesidentified the first target of the collaboration, and Genmab is now developingan antibody for potential treatment of fungal infection. No material costs haveyet been incurred in connection with these agreements.

In 2003, the company entered into an agreement with thenot-for-profit-organization Sanquin to develop a treatment against hemophilia.In addition, Genmab in-licensed the rights to a human antibody from ConnexGmbH, a privately owned German company currently in administration, and INSERM,the French National Institute for Health and Medical Research. The antibody,HuMax-HepC has potential use in the treatment of Hepatitis C virus reinfection.

In 2004, Genmab licensednew membrane phosphatase from Ganymed Pharmaceuticals AG, a privately heldpharmaceutical company located in Germany. The membrane phosphatase is a newcancer target that is associated with a variety of cancers, including melanoma,breast and lung cancers. Under the terms of the agreement, Ganymed will beentitled to license fees, milestones and royalties on the sale of successfullycommercialized products.

F-64

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**16.**   Commitmentsand Contingencies

**Leases**

TheGroup leases office space under operating leases, which are non-cancelable forvarious periods until 2010. At December 31, 2004, future minimum paymentsunder the office leases were as follows:
| ** ** | ** ** | **DKK’000** | ** ** | **USD’000** | ** ** |
|------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | ** **       | ** ** | **(Unaudited)**  | ** ** |
| 2005       |       |             | 16,973     |             |       |   | 3,104 |   |   |
| 2006       |       |             | 13,460     |             |       |   | 2,462 |   |   |
| 2007       |       |             | 8,992      |             |       |   | 1,645 |   |   |
| 2008       |       |             | 8,992      |             |       |   | 1,645 |   |   |
| 2009       |       |             | 8,992      |             |       |   | 1,645 |   |   |
| Thereafter |       |             | 8,992      |             |       |   | 1,645 |   |   |
| ** ** | ** ** | ** **       | **66,401** |             | ** ** | ** ** | **12,146** |   |   |

 

For the years ended December 31,2004, 2003 and 2002, the Group recorded rent expenses of DKK 17,123 thousand,DKK 12,235 thousand and DKK 12,565 thousand, respectively. The Group hasestablished bank guarantees totaling DKK 3,046 thousand as collateral for theoperating lease arrangements. In addition to the office leases, the Group hasentered into minor agreements with respect to operating leases for cars andoffice equipment. The total commitments under operating leases of cars andoffice equipment amount to DKK 4,173 thousand.

**Finance Leases**

TheGroup has entered into finance lease contracts with respect to cars andlaboratory equipment. The lease liability regarding these contracts has beenrecognized in the balance sheet and covers various periods up to 2009. Theaverage effective interest rate in the Group’s lease arrangements isapproximately 4.1%. Future minimum lease payments under such finance leases andthe net present value as of the end of December 2004 are as follows:
| ** **                               | ** ** | **DKK’000** | ** ** | **USD’000** | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                               | ** ** | ** **       | ** ** | **(Unaudited)**  | ** ** |
| **Minimum  lease payments**              |       |             |       |             |       |   |   |   |   |
| Within 1 year                            |       |             | 8,773      |             |       |   | 1,605 |   |   |
| From 1 to 5 years                        |       |             | 22,210     |             |       |   | 4,062 |   |   |
|                                     |       |             | 30,983     |             |       |   | 5,667 |   |   |
| Future finance charges                   |       |             | (2,112     | )                |       |   | (387 | ) |   |
| **Total**                                |       |             | 28,871     |             |       |   | 5,280 |   |   |
| **Net present value of future payments** |       |             |       |             |       |   |   |   |   |
| Within 1 year                            |       |             | 8,611      |             |       |   | 1,575 |   |   |
| From 1 to 5 years                        |       |             | 20,260     |             |       |   | 3,705 |   |   |
| **Total**                                |       |             | 28,871     |             |       |   | 5,280 |   |   |

 

One of the parent company’sbank accounts has been registered as collateral for a part of the Group’sfinance lease obligations. The balance of this account is included in cash andcash equivalents as per 

F-65

----

**Genmab A/S (A development stage company) Notes to the Consolidated Financial Statements—(Continued)**

**16.**   Commitments andContingencies (Continued)

December 31,2004, at an amount of DKK 18,668 thousand. In addition, the parent company hasestablished a bank guarantee of DKK 6,013 thousand towards a lessor of GenmabB.V.

**Other Purchase Obligations**

TheGroup has entered into a number of agreements which are mainly within the areaof manufacturing services related to the research and development activities.Under the current development plans, the contractual obligation will lead tothe following future payments:
| ** ** | ** ** | **DKK’000** | ** ** | **USD’000** | ** ** |
|------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | ** **       | ** ** | **(Unaudited)**  | ** ** |
| 2005       |       | 91,565           |       |             | 16,747     |   |   |
| 2006       |       | 6,200            |       |             | 1,134      |   |   |
| 2007       |       | 1,500            |       |             | 274        |   |   |
| 2008       |       | 750              |       |             | 137        |   |   |
| 2009       |       | 450              |       |             | 82         |   |   |
| Thereafter |       | 566              |       |             | 104        |   |   |
|       | ** ** | **101,031**      | ** ** | ** **       | **18,478** |   |   |

 

**License Agreements**

The Group is a party to anumber of license agreements. If and when the Group commercializes productsutilizing the licensed technology, royalties will fall due, determined on thesales of such products.

**17.**   SubsequentEvents

No significant events haveoccurred since the balance sheet date which could significantly affect thefinancial statements as of December 31, 2004.

F-66

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**Item9.        Changes in and Disagreementswith Accountants on Accounting and Financial Disclosures**

None.

**Item 9A. Controlsand Procedures**

*Management’sAnnual Report on Internal Control Over Financial Reporting:  *Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)under the Securities Exchange Act of 1934. Our internal control over financialreporting is designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  Ourinternal control over financial reporting includes those policies andprocedures that: (i) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of Medarex; (ii) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that our receiptsand expenditures are being made only in accordance with authorizations of ourmanagement and our directors; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof our assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

Our management assessedthe effectiveness of our internal control over financial reporting as ofDecember 31, 2004. In making this assessment, management used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in Internal Control-Integrated Framework.  Based on its assessment and those criteria,our management has concluded that we maintainedeffective internal control over financial reporting as of December 31, 2004**.**

Our independent auditorshave issued an attestation report on our management’s assessment of Medarex’sinternal control over financial reporting. That report appears on page 75 of this annual report.

*Changesin internal controls:  *Such evaluation did not identifyany significant changes in our internal controls over financial reporting thatoccurred during the quarter ended December 31, 2004 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting**.

74

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Report of Independent Registered Public Accounting Firm

The Boardof Directors and Shareholders

Medarex, Inc.

We have audited management’s assessment, includedin the accompanying Management’s Annual Report on Internal Control OverFinancial Reporting in Item 9A that Medarex, Inc. maintained effectiveinternal control over financial reporting as of December 31, 2004, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria). Medarex, Inc.’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operating effectivenessof internal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that out audit provides a reasonablebasis for our opinion.

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorizedacquisition, use or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment thatMedarex, Inc. maintained effective internal control over financialreporting as of December 31, 2004, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, Medarex, Inc.maintained, in all respects, effective internal control over financialreporting as of December 31, 2004, based on the COSO criteria.

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Medarex, Inc. and subsidiaries as of December 31,2003 and 2004, and the related consolidated statements of operations,shareholders’ equity and cash flows for each of the three years in the periodended December 31, 2004 and our report dated March 15, 2005expresses an unqualified opinion thereon.
|                       | /s/ ERNST & YOUNG LLP |
|-----------------------|-------------------------------------|
| MetroPark, New Jersey |
| March 15, 2005   |

 

75

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**PART III**

**Item 10.      Directorsand Executive Officers of the Registrant**

The information requiredherein will be reported in our definitive Proxy Statement for the AnnualMeeting of Shareholders which we expect will be filed on or before April 29,2005, and is incorporated herein by reference.

**Item 11.      ExecutiveCompensation**

The information requiredherein will be reported in our definitive Proxy Statement for the AnnualMeeting of Shareholders which we expect will be filed on or before April 29,2005, and is incorporated herein by reference.

**Item 12.      SecurityOwnership of Certain Beneficial Owners and Management and Related ShareholderMatters**

The information requiredherein will be reported in our definitive Proxy Statement for the AnnualMeeting of Shareholders which we expect will be filed on or before April 29,2005 and is incorporated herein by reference.

**Item 13.      CertainRelationships and Related Transactions**

The information requiredherein will be reported in our definitive Proxy Statement for the Annual Meetingof Shareholders which we expect will be filed on or before April 29, 2005,and is incorporated herein by reference.

**Item 14.      PrincipalAccountant Fees and Services**

The information required herein will be reported inour definitive Proxy Statement for the Annual Meeting of Shareholders which weexpect will be filed on or before April 29, 2005, and is incorporatedherein by reference.

76

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**PART IV**

**Item15.**                 Exhibits,Financial Statement Schedules and Reports on Form 8-K
| Item   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                      | ** ** | ** ** |
|---------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| (a).1.(a)     |       | Consolidated Financial Statements—**Medarex, Inc.**                                                                                                                                                                                                                                                                                   |
|          |       | Report of Independent Registered Public Accounting  Firm.                                                                                                                                                                                                                                                                                       |
|          |       | Consolidated Balance Sheets as of December 31,  2003 and 2004.                                                                                                                                                                                                                                                                             |
|          |       | Consolidated Statements of Operations for the Years  Ended December 31, 2002, 2003 and 2004.                                                                                                                                                                                                                                               |
|          |       | Consolidated Statements of Shareholders’ Equity for  the Years Ended December 31, 2002, 2003 and 2004.                                                                                                                                                                                                                           |
|          |       | Consolidated Statements of Cash Flows for the Years  Ended December 31, 2002, 2003 and 2004.                                                                                                                                                                                                                                               |
|          |       | Notes to Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                     |
| (a).1.(b)     |       | Consolidated Financial Statements—**Genmab A/S (A development stage company)**                                                                                                                                                                                                                                                             |
|          |       | Report of Independent Registered Public Accounting  Firm.                                                                                                                                                                                                                                                                                       |
|          |       | Consolidated Statements of Operations for the twelve  months ended December 31, 2004, 2003 and 2002.                                                                                                                                                                                                                                       |
|          |       | Consolidated Balance Sheets as of December 31,  2004 and 2003.                                                                                                                                                                                                                                                                             |
|          |       | Consolidated Statements in Shareholders’ Equity for  the years ended December 31, 2004, 2003 and 2002.                                                                                                                                                                                                                                |
|          |       | Consolidated Statements of Cash Flows for the twelve  months ended December 31, 2004, 2003 and 2002.                                                                                                                                                                                                                                       |
|          |       | Notes to Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                     |
| (a).2.        |       | Financial Statement Schedules.                                                                                                                                                                                                                                                                                                                  |
|          |       | All financial statement schedules for which  provision is made in the applicable accounting regulations of the Securities  and Exchange Commission are either not required under the related  instructions or are inapplicable because the required information is included  in the consolidated financial statements or related notes thereto. |
| (a).3.        |       | Exhibits.                                                                                                                                                                                                                                                                                                                                       |
| 2.1(1)        |       | Certificate of Merger, dated June 15, 1989,  including Plan of Merger.                                                                                                                                                                                                                                                                     |
| 2.3(28)       |       | Amended and Restated Agreement and Plan of  Reorganization among the Registrant, Medarex Acquisition Corp. and GenPharm  International, Inc., dated as of May 5, 1997, together with  Exhibits thereto.                                                                                                                               |
| 3.1(56)       |       | Restated Certificate of Incorporation of the  Registrant.                                                                                                                                                                                                                                                                                       |
| 3.2(64)       |       | Amended and Restated By-laws of the Registrant.                                                                                                                                                                                                                                                                                                 |
| 4.1(1)        |       | Form of Specimen of Common Stock Certificate.                                                                                                                                                                                                                                                                                              |
| 10.3(1)       |       | 1991 Employee Stock Option Plan.                                                                                                                                                                                                                                                                                                                |
| 10.29(2)      |       | Employment Agreement between the Registrant and  Dr. Donald L. Drakeman, dated January 5, 2004.                                                                                                                                                                                                                                       |
| 10.30         |       | Employment Agreement between the Registrant and  Dr. Nils Lonberg, dated January 5, 2004.                                                                                                                                                                                                                                        |
| 10.31         |       | Employment Agreement between the Registrant and W.  Bradford Middlekauff, dated January 5, 2004.                                                                                                                                                                                                                                           |
| 10.32         |       | Employment Agreement between the Registrant and  Dr. Geoffrey M. Nichol, dated January 5, 2004.                                                                                                                                                                                                                                       |
| 10.33         |       | Employment Agreement between the Registrant and  Dr. Ronald A. Pepin, dated January 5, 2004.                                                                                                                                                                                                                                          |

77

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| 10.34         |   | Employment Agreement  between the Registrant and Christian S. Schade, dated January 5, 2004.                                                                                                                      |
|---------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.40         |   | Form of Employee Incentive Stock Option  Agreement.                                                                                                                                                               |
| 10.41         |   | Form of Employee Nonqualified Stock Option  Agreement.                                                                                                                                                            |
| 10.42         |   | Form of Non-Employee Director Nonqualified  Stock Option Agreement.                                                                                                                                               |
| 10.51(8)      |   | 1992 Employee Stock Option Plan.                                                                                                                                                                                       |
| 10.52(10)     |   | Lease of Registrant’s Laboratory Facility  (Annandale, New Jersey).                                                                                                                                               |
| 10.53(11)     |   | Amendment to Lease of Registrant’s Laboratory  Facility (Annandale, New Jersey).                                                                                                                                  |
| 10.61(9)      |   | 1995 Stock Option Plan.                                                                                                                                                                                                |
| 10.73(23)**   |   | Release and Settlement Agreement, dated  March 26, 1997, among Cell Genesys, Inc., Abgenix, Inc.,  Xenotech, L.P., Japan Tobacco, Inc. and GenPharm  International, Inc.                      |
| 10.74(24)**   |   | Cross License Agreement, effective as of  March 26, 1997, among Cell Genesys, Inc., Abgenix, Inc.,  Xenotech, L.P., Japan Tobacco, Inc. and GenPharm  International, Inc.                     |
| 10.75(25)**   |   | Interference Settlement Procedure Agreement,  effective as of March 26, 1997, among Cell Genesys, Inc.,  Abgenix, Inc., Xenotech, L.P., Japan Tobacco, Inc. and GenPharm  International, Inc. |
| 10.81(33)     |   | Rights Exchange Agreement dated as of June 10,  1998 between the Registrant and BCC Acquisition I LLC, together with the  exhibits thereto.                                                                       |
| 10.84(36)**   |   | Shareholders Agreement dated February 25, 1999,  among Medarex, Inc., GenPharm International, Inc., BankInvest, BI  Asset Management, Fondsmaeglerselskab A/S and certain other investors.              |
| 10.85(37)**   |   | Evaluation and Commercialization Agreement dated as  of February 25, 1999, among Medarex, Inc., GenPharm  International, Inc. and Genmab.                                                               |
| 10.86(30)     |   | Medarex, Inc. Executive Deferred Savings Plan.                                                                                                                                                                    |
| 10.87(39)     |   | Agreement of Lease dated July 7, 1999, between  McCarthy Associates Limited and the Registrant.                                                                                                                   |
| 10.88(40)     |   | Medarex, Inc. 1997 Stock Option Plan.                                                                                                                                                                             |
| 10.89(41)     |   | Medarex, Inc. 1999 Stock Option Plan.                                                                                                                                                                             |
| 10.99(51)**   |   | Agreement dated December 21, 1999, among the  Registrant, GenPharm, and Immuno-Designed Molecules S.A.                                                                                                            |
| 10.104(57)    |   | Medarex, Inc. 2000 Stock Option Plan.                                                                                                                                                                             |
| 10.105(58)    |   | Medarex, Inc. 2000 Non-Director/Officer  Employee Stock Option Plan.                                                                                                                                              |
| 10.106(59)    |   | Medarex, Inc. 2001 Non-Director/Officer  Employee Stock Option Plan.                                                                                                                                              |
| 10.107(60)    |   | Medarex, Inc. 2001 Stock Option Plan.                                                                                                                                                                             |
| 10.108(61)    |   | Medarex, Inc. 2002 Employee Stock Purchase  Plan.                                                                                                                                                                 |
| 10.109(62)    |   | Medarex, Inc. 2002 New Employee Stock Option  Plan.                                                                                                                                                               |
| 10.110a(65)   |   | Medarex, Inc. 2004 New Employee Stock Option  Plan.                                                                                                                                                               |
| 10.110b(63)** |   | Collaboration and License Agreement, dated  September 4, 2002, between the Registrant, GenPharm  International, Inc. and Kirin Brewery Co., Ltd.                                                             |
| 10.111        |   | Medarex, Inc. 2004 Restricted Stock Unit Award  and Deferred Compensation Program.                                                                                                                                |
| 10.112        |   | Medarex, Inc. Second 2004 Restricted Stock Unit  Award and Deferred Compensation Program.                                                                                                                         |
| 10.113(66)**  |   | License Agreement dated September 15, 2004,  between the Registrant and Pfizer, Inc.                                                                                                                         |
| 10.114(67)**  |   | Cross-License Agreement dated September 15,  2004 between the Registrant and Pfizer, Inc.                                                                                                                    |
| 10.115(68)**  |   | License and Royalty Agreement dated April 4,  2003, between the Registrant and Pfizer, Inc.                                                                                                                  |

78

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| 10.116(69)** |   | Collaborative Research Agreement dated April 4,  2003 between the Registrant and Pfizer, Inc.                                                  |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.117(70)** |   | Amendment No. 1 dated September 15, 2004  between the Registrant and Pfizer, Inc.                                                         |
| 10.118(71)   |   | Securities Purchase Agreement dated  September 15, 2004 between the Registrant and Pfizer, Inc.                                                |
| 10.119(72)** |   | Collaboration and Co-Promotion Agreement dated  November 7, 2004, between the Registrant and Bristol-Myers Squibb  Company.                         |
| 10.120(73)   |   | Securities Purchase Agreement dated November 7,  2004 between the Registrant Bristol-Myers Squibb Company.                                          |
| 21           |   | Subsidiaries of the Registrant.                                                                                                                          |
| 23.1         |   | Consent of Ernst & Young LLP.                                                                                                                   |
| 23.2         |   | Consent of PriceWaterhouseCoopers.                                                                                                                       |
| 31.1         |   | Rule 13a-14(a) Certification of Chief  Executive Officer of the Company in accordance with Section 302 of the  Sarbanes-Oxley Act of 2002 |
| 31.2         |   | Rule 13a-14(a) Certification of Chief  Financial Officer of the Company in accordance with Section 302 of the  Sarbanes-Oxley Act of 2002 |
| 32.1*        |   | Section 1350 Certification of Chief Executive  Officer of the Company in accordance with Section 906 of the  Sarbanes-Oxley Act of 2002        |
| 32.2*        |   | Section 1350 Certification of Chief Financial  Officer of the Company in accordance with Section 906 of the  Sarbanes-Oxley Act of 2002        |

----

(1)          Incorporated byreference to the identically numbered exhibit to the Registrant’s RegistrationStatement on Form S-1 (File No. 33-39956) filed on April 12,1991.

(2)          Incorporated byreference to Exhibit No. 10.1 to the Registrant’s Statement on Form S-3,as Amended (File No. 333-108325) filed on January 30, 2004.

(8)          Incorporated byreference to the identically numbered exhibit to the Registrant’s Annual Reporton Form 10-K filed on March 15, 1993.

(9)          Incorporated byreference to the identically numbered exhibit to the Registrant’s Annual Reporton Form 10-K filed on February 23, 1996.

(10)   Incorporated by reference to theidentically numbered exhibit to the Registrant’s Quarterly Report on Form 10-Qfiled on May 17, 1993.

(11)   Incorporated by reference tothe identically numbered exhibit to the Registrant’s Quarterly Report on Form 10-Qfiled on August 13, 1993.

(23)   Incorporated by reference to Exhibit Number10.44 to Cell Genesys, Inc.’s Annual Report on Form 10-K/Afiled on April 30, 1997.

(24)   Incorporated by reference to Exhibit Number10.45 to Cell Genesys, Inc.’s Annual Report on Form 10-K/Afiled on April 30, 1997.

(25)   Incorporated by reference to Exhibit Number10.46 to Cell Genesys, Inc.’s Annual Report on Form 10-K/Afiled on April 30, 1997.

(28)   Incorporated by reference to Exhibit Number2.1 to the Registrant’s Current Report on Form 8-K filed on June 17,1997.

(30)   Incorporated by reference to Exhibit Number10.82 to the Registrant’s Quarterly Report on Form 10-Q filed on August 13,1999.

79

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(33)   Incorporated by reference tothe identically numbered exhibit to the Registrant’s Current Report on Form 8-Kfiled on June 15, 1998.

(36)   Incorporated by reference to Exhibit Number10.80 to the Registrant’s Current Report on Form 8-K filed on August 11,1999.

(37)   Incorporated by reference to Exhibit Number10.81 to the Registrant’s Current Report on Form 8-K filed on August 11,1999.

(39)   Incorporated by reference to Exhibit Number10.83 to the Registrant’s Quarterly Report on Form 10-Q filed on August 13,1999.

(40)   Incorporated by reference to Exhibit Number10.84 to the Registrant’s Quarterly Report on Form 10-Q filed on August 13,1999.

(41)   Incorporated by reference to Exhibit Number10.85 to the Registrant’s Quarterly Report on Form 10-Q filed on August 13,1999.

(51)   Incorporated by reference to Exhibit Number10.9 to the Registrant’s Current Report on Form 8-K filed on January 26,2000.

(52)   Incorporated by reference to Exhibit Number10.10 to the Registrant’s Current Report on Form 8-K filed on January 26,2000.

(56)   Incorporated by reference to Exhibit Number4(b) to the Registrant’s Registration Statement on Form S-8(File Number 333-39084) filed on June 12, 2000.

(57)   Incorporated by reference to Exhibit Number10.1 to the Registrant’s Registration Statement on Form S-8 (FileNumber 333-39084) filed on June 12, 2000.

(58)   Incorporated by reference to Exhibit No. 10.1to Registrant’s Registration Statement on Form S-8 (File Number 333-55222)filed on February 8, 2001.

(59)   Incorporated by reference to Exhibit No. 10.1to Registrant’s Registration Statement on Form S-8 (File Number 333-55224)filed on February 8, 2001.

(60)   Incorporated by reference to Exhibit No. 10.1to Registrant’s Registration Statement on Form S-8 (File Number 333-72154)filed on October 24, 2001.

(61)   Incorporated by reference to Exhibit No. 10.1to Registrant’s Registration Statement on Form S-8 (File Number 333-91394)filed on June 28, 2002.

(62)   Incorporated by reference to Exhibit No. 10.1to Registrant’s Registration Statement on Form S-8 (File Number 333-101698)filed on December 6, 2002.

(63)   Incorporated by reference to Exhibit No. 10.1to Registrant’s Current Report on Form 8-K filed on September 18,2002.

(64)   Incorporated by reference to Exhibit No. 4.2to Registrant’s Current Report on Form 8-K filed on May 25,2001.

(65)   Incorporated by reference to Exhibit 10.1to Registrant’s Registration Statement on Form S-8 (File Number 333-121387)filed on December 17, 2004.

(66)   Incorporated by reference to Exhibit 99.2to Registrant’s Current Report on Form 8-K filed on November 8,2004.

(67)   Incorporated by reference to Exhibit 99.3to Registrant’s Current Report on Form 8-K filed on November 8,2004.

80

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(68)   Incorporated by reference to Exhibit 99.5to Registrant’s Current Report on Form 8-K filed on November 8,2004.

(69)   Incorporated by reference to Exhibit 99.6to Registrant’s Current Report on Form 8-K filed on November 8,2004.

(70)   Incorporated by reference to Exhibit 99.1to Registrant’s Current Report on Form 8-K filed on November 8,2004.

(71)   Incorporated by reference to Exhibit 99.4to Registrant’s Current Report on Form 8-K filed on November 8,2004.

(72)   Incorporated by reference to Exhibit 99.1to Registrant’s Current Report on Form 8-K filed on January 24,2005.

(73)   Incorporated by reference to Exhibit 99.2to Registrant’s Current Report on Form 8-K filed on January 24,2005.

*                    A signedoriginal of this written statement required by Section 906 has beenprovided to the Company and will be retained by the Company and furnished tothe Securities and Exchange Commission or its staff upon request.

**             Confidentialtreatment has been granted with respect to specified portions of this exhibit.

**(b)   Reportson Form 8-K**

Form 8-K filed on November 8, 2004,relating to a press release regarding a collaboration between the Company andBristol-Myers Squibb Company.

Form 8-K filed on November 8, 2004,relating to a press release of the Company’s financial results for the quarterended September 30, 2004.

Form 8-K filed on November 8, 2004,relating to a confidential treatment request regarding the agreements signedbetween the Company and Pfizer, Inc.

Form 8-K file on November 23, 2004,relating to a press release regarding a collaboration between the Company andMedImmune, Inc.

Form 8-K filed on December 14, 2004,relating to a press release regarding the FTC request for an extension of thereview period of the collaboration with Bristol-Myers Squibb Company.

Form 8-K filed on December 15, 2004,relating to a press release regarding the redemption of the Company’s 4.25%Convertible Senior Notes.

Form 8-K filed on December 23, 2004,relating to an impairment charge with respect to the Company’s investment inIDM S.A.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized on March 16, 2005.
|          | MEDAREX,  INC. |
|----------|----------------|
|     | By:            | /s/ DONALD L. DRAKEMAN |
| * * |           | Donald L. Drakeman |
| * * |           | *President and Chief Executive Officer* |

 

**POWEROF ATTORNEY**

KNOW ALL PERSONS BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Donald L. Drakeman, Director, President and Chief Executive Officer,and Christian S. Schade, Senior Vice President and Chief Financial Officer, andeach of them, his true and lawful attorneys-in-fact and agents, with the fullpower of substitution and resubstitution, for him and in his name, place andstead, in any and all capacities, to sign any amendments to this report, and tofile the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto each saidattorney-in-fact and agent full power and authority to do and perform each andevery act in person, hereby ratifying and confirming all that saidattorney-in-fact and agent, or either of them, or their or his substitute orsubstitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant in thecapacities indicated and on the dates indicated.

**Principal Executive Officer and Director:**
| Director, President and                                                  |                     | /s/ DONALD L. DRAKEMAN                          |   | Date March 16, 2005  |
|--------------------------------------------------------------------------|--------------------------|-------------------------------------------------|--------|---------------------------|
| Chief Executive Officer                                                  |                     | **Donald  L. Drakeman**                         |   |                      |
| **Principal  Financial and**                                             |                     |                                            |   |                      |
| **Accounting Officer**Senior Vice President and  Chief Financial Officer |                     | /s/ CHRISTIAN S. SCHADE                         |   | Date March 16, 2005  |
|                                                                     | **Christian  S. Schade** |                                            |   |
|                                                                     | ** **               |                                            |   |
| **Directors:**                                                           |                     | /s/    IRWIN LERNER         |   |                      |
| ** **                                                               |                     | **Irwin  Lerner**                               |   | Date March 16, 2005  |
| ** **                                                               |                     | **Chairman  of the Board**                      |   |                      |
| ** **                                                               |                     | /s/    MICHAEL A. APPELBAUM |   | Date  March 16, 2005 |
| ** **                                                               |                     | **Michael  A. Appelbaum**                       |   |                      |
| ** **                                                               |                     | /s/    FREDERICK B. CRAVES  |   | Date  March 16, 2005 |
| ** **                                                               |                     | **Frederick  B. Craves**                        |   |                      |
| ** **                                                               |                     | /s/    RONALD J. SALDARINI  |   | Date  March 16, 2005 |
| ** **                                                               |                     | **Ronald  J. Saldarini**                        |   |                      |
| ** **                                                               |                     | /s/    CHARLES R. SCHALLER  |   | Date  March 16, 2005 |
| ** **                                                               |                     | **Charles  R. Schaller**                        |   |                      |
| ** **                                                               |                     | /s/    JULIUS A. VIDA       |   | Date  March 16, 2005 |
| ** **                                                               |                     | **Julius  A. Vida**                             |   |                      |

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