**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**

| **x**                                                 |       | **ANNUAL REPORT PURSUANT TO SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| **For the  fiscal year ended December 31, 2005** |
| **o**                                                 | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition persion from _______________ to __________________.**

**CommissionFile No. 0-19312**

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**MEDAREX, INC.**

(Exact name of registrantas specified in its charter)

| **New Jersey**                                    |   | **22-2822175**                        |
|---------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or |   | (I.R.S. Employer  Identification No.) |
| organization)                                     |   |                                  |
| **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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Securities registered pursuant to Section 12(b) ofthe Act: **None**

Securities registeredpursuant to Section 12(g) of the 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 mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.   Yes  x    No  o

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.   Yes  o   No  x

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 a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Act. (check one):

| Large accelerated filer  x |   | Accelerated filer   o |   | Non-accelerated  filer  o |
|---------------------------------|--------|----------------------------|--------|--------------------------------|

 

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

The aggregate market valueof the voting stock held by non-affiliates of the Registrant was approximately$831.5 million as of June 30, 2005, 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 10,808,686 shares held by directors, officers and shareholderswhose ownership exceeded 5% of the Registrant’s outstanding Common Stock as of June 30,2005. 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 28,2006, the registrant had outstanding 111,964,174 shares of Common Stock, $0.01par value (“Common Stock”), which is registrant’s only class of Common Stock.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portionsof the registrant’s definitive Proxy Statement for the Annual Meeting ofShareholders to be held on May 18, 2006 (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 1A.          |       | Risk Factors                                                                                      |       | 28       |       |
| Item 1B.          |       | Unresolved Staff  Comments                                                                        |       | 51       |       |
| 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       |       |
| Item 9B.          |       | Other Information                                                                                 |       | 76       |       |
| **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                                                          |       | 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. Actual events or results may differ materially from thosediscussed in this Annual Report. Factors that might cause such a differenceinclude, but are not limited to, those discussed in the sections entitled “Business,”“Risk Factors” and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” as well as those discussed elsewhere in this AnnualReport.

Medarex®, HuMAb-Mouse® ,GenPharm®, KM-Mouse®, UltiMAb® andUltiMAb Human Antibody Development System® are registeredtrademarks of Medarex, Inc. Ultra-Potent ToxinTM is a trademark of Medarex, Inc.All other company names, registered trademarks, trademarks and service marksincluded in this Annual Report are trademarks, registered trademarks, servicemarks 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 suchproducts for a wide range of diseases, including cancer, inflammation,autoimmune disorders and other life-threatening and debilitating diseases.

Currently, 31antibody product candidates generated from our UltiMAb Human AntibodyDevelopment System are in human clinical trials, or have had regulatoryapplications submitted for such trials(1). In 2006, we expect at least 11 PhaseIII clinical trials to be underway relating to five of the most advancedproduct candidates in which Medarex has an economic interest throughco-promotion/profit sharing rights, royalties and/or equity ownership. Inaddition, our partner Genmab A/S has announced that it expects to initiatemultiple Phase III trials for two additional product candidates in 2006. Fourof the five product candidates currently in Phase III trials weregenerated through the use of our UltiMAb® technology andinclude:

·       ipilimumab(also known as MDX-010), which we are developing jointly withBristol-Myers Squibb Company, or BMS, for the treatment of metastatic melanomaand other cancers;

·       golimumab(also known as CNTO 148) under development by Centocor, Inc. (a subsidiaryof Johnson & Johnson) for the treatment of rheumatoid arthritis,psoriatic arthritis and ankylosing spondylitis;

·       CNTO1275 for the treatment of psoriasis, also under development by Centocor; and

·       zanolimumab(also known as HuMax-CD4TM),being developed by Genmab A/S for the treatment of T-cell lymphoma.

The fifth product candidate currently in Phase III trialsin which we have an economic interest is ticilimumab (also known as CP-675,206),which is being developed by Pfizer, Inc. for the treatment of metastaticmelanoma. We expect to receive double-digit royalties on sales of this product,should commercialization occur.

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

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Medarex is committed to building value by developing adiverse pipeline of antibody products to address the world’s unmet healthcareneeds. In addition to the antibody candidates currently in Phase III trials,multiple product candidates in Phase II, Phase I and preclinical testing arebeing developed by Medarex either alone or jointly with or separately by ourpartners, including Amgen, Inc., BMS, Centocor, Eli Lilly and Company,Genmab, ImClone Systems Incorporated, MedImmune, Inc., Novartis Pharma AG,Novo Nordisk A/S and Schering AG. We believe that through the broad use of ourUltiMAb technology, we are leveraging our efforts and our partners’ efforts tocreate, develop and potentially commercialize innovative treatments for a widerange of diseases.

In addition to our UltiMAb Human Antibody DevelopmentSystem, we have considerable experience in preclinical and clinical developmentas well as in manufacturing antibodies for clinical trials. Our existingmanufacturing facility in Annandale, New Jersey currently has the capacity toundertake multiple antibody projects concurrently for clinical developmentpurposes, meeting our near-term production demands. We have assembled a team ofexperienced scientific, production, clinical and regulatory personnel tofacilitate the discovery and development of antibody-based products for us andfor certain of our partners. We intend to add sales and marketing andadditional manufacturing capabilities as needed.

Our operations constituteone business segment. For additional financial information regarding thereportable segment, see “Results of Operations” in Item 7 and the ConsolidatedFinancial Statements in Item 8 of this Annual Report on Form 10-K.

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**Products in Development**

Thefollowing table summarizes potential therapeutic indications and developmentstages for antibody products in which Medarex has an economic interest,including our product candidates and those of our partners (based on publiclyavailable information), and is followed by brief descriptions of each specificprogram:

***Phase III ProductCandidates in Clinical Development***

| **PRODUCT**              | ** ** | ** **                                                         | ** ** | **INDICATION** | ** ** | **CLINICAL STATUS**                | ** ** | **PARTNER** |
|--------------------------|------------|--------------------------------------------------------------------|------------|----------------|------------|-----------------------------------------|------------|-------------|
| ipilimumab (MDX-010)     |       | Metastatic Melanoma                                                |       | Phase III      |       | Co-developing with BMS(1)               |
| golimumab (CNTO 148)     |       | Rheumatoid Arthritis, Psoriatic Arthritis,  Ankylosing Spondylitis |       | Phase III      |       | Centocor(2)                             |
| CNTO 1275                |       | Psoriasis                                                          |       | Phase III      |       | Centocor(2)                             |
| zanolimumab (HuMax-CD4)  |       | T-cell Lymphoma                                                    |       | Phase III      |       | Genmab (partnered  with Serono S.A.)(3) |
| ticilimumab (CP-675,206) |       | Metastatic Melanoma                                                |       | Phase III      |       | Pfizer(4)                               |

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(1)          Wehave the option to co-promote and share profits in the U.S. We expect toreceive milestone payments as this product candidate moves toward productapproval, and royalties on product sales outside the U.S., shouldcommercialization occur.

(2)          Weexpect to receive milestone payments as this product candidate moves throughclinical trials, and royalties on product sales, should commercializationoccur.

(3)          We received an equityinterest in Genmab in exchange for a license of our proprietary antibodytechnology.  In addition, we expect toreceive milestone payments for activities in Europe and Asia, as well asroyalties on product sales in Europe and Asia that could reach double-digits,should commercialization of zanolimumab occur.

(4)          We expect to receivedouble-digit royalties on product sales, should commercialization occur.

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

| **PRODUCT**          | ** ** | ** **                                                           | ** ** | **INDICATION**       | ** ** | **CLINICAL STATUS**                                         | ** ** | **PARTNER** |
|----------------------|------------|----------------------------------------------------------------------|------------|----------------------|------------|------------------------------------------------------------------|------------|-------------|
| ipilimumab (MDX-010) |       | Metastatic Melanoma, Prostate, Breast, Renal Cell  and Other Cancers |       | Phase II and earlier |       | Co-developing with BMS(1)                                        |
| MDX-066              | * *   | *C. difficile Disease*                                               |       | Phase II             |       | Co-developing  with Massachusetts Biologic Laboratories (MBL)(2) |
| MDX-060              |       | Lymphoma                                                             |       | Phase II             |       | Wholly-owned by  Medarex                                         |
| MDX-070              |       | Prostate Cancer                                                      |       | Phase II             |       | Wholly-owned by  Medarex                                         |
| HuMax®-CD20     |       | Rheumatoid Arthritis, Lymphoma                                       |       | Phase II             |       | Genmab(3)                                                        |
| AMG 714              |       | Rheumatoid Arthritis                                                 |       | Phase II             |       | Genmab (partnered  with Amgen)(3)                                |
| Amgen Antibody-1     |       | Undisclosed Disease                                                  |       | Phase II             |       | Amgen(4)                                                         |

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(1)          We have the option toco-promote and share profits in the U.S. We expect to receive milestonepayments as this product candidate moves toward product approval, and royaltieson product sales outside the U.S., should commercialization occur

(2)          We expect to share certainresearch and development costs associated with this product, as well as profitsor losses associated with its commercialization, on a 50/50 basis.

(3)          We received an equityinterest in Genmab in exchange for a license of our proprietary antibodytechnology.  We are not entitled tolicense fees, milestone payments or royalties from the license of these productcandidates.

(4)          Weexpect to receive milestone payments as this product candidate moves throughclinical trials, and royalties on product sales, should commercializationoccur.

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***Phase I/II  and Phase I Product Candidates in ClinicalDevelopment***

| **PRODUCT**         | ** ** | ** **                                                              | ** ** | **INDICATION** | ** ** | **CLINICAL STATUS**                                           | ** ** | **PARTNER** |
|---------------------|------------|-------------------------------------------------------------------------|------------|----------------|------------|--------------------------------------------------------------------|------------|-------------|
| MDX-214             |       | Cancer                                                                  |       | Phase  I/II    |       | Wholly-owned  by Medarex                                           |
| MDX-018             |       | Inflammatory  Disease                                                   |       | Phase I/II     |       | Co-developing with Genmab(1)                                       |
| HuMax-EGFr          |       | Head and Neck  Cancer                                                   |       | Phase I/II     |       | Genmab(2)                                                          |
| CNTO 95             |       | Cancer                                                                  |       | Phase I/II     |       | Centocor(3)                                                        |
| MDX-1307            |       | Colorectal,  Pancreatic and/or Bladder Cancer                           |       | Phase I        |       | Celldex Therapeutics, Inc.(4)                                 |
| Novartis Antibody-1 |       | Autoimmune Disease                                                      |       | Phase I        |       | Novartis Pharma(3)                                                 |
| Novartis Antibody-2 |       | Autoimmune Disease                                                      |       | Phase I        |       | Novartis Pharma(3)                                                 |
| Amgen Antibody-2    |       | Undisclosed  Disease                                                    |       | Phase I        |       | Amgen(3)                                                           |
| Amgen Antibody-3    |       | Undisclosed  Disease                                                    |       | Phase I        |       | Amgen(3)                                                           |
| FG-3019             |       | Idiopathic  Pulmonary Fibrosis; Diabetic Nephropathy; Pancreatic Cancer |       | Phase I        |       | FibroGen, Inc.(3)                                             |
| HGS-TR2J            |       | Cancer                                                                  |       | Phase I        |       | Kirin Brewery Co., Ltd. (partnered with Human Genome  Sciences)(5) |
| Lilly Antibody      |       | Undisclosed  Disease                                                    |       | Phase I        |       | Eli Lilly(3)                                                       |
| MDX-1100            |       | Ulcerative Colitis                                                      |       | Phase I        |       | Wholly-owned by Medarex                                            |
| MEDI-545            |       | Lupus                                                                   |       | Phase I        |       | MedImmune(6)                                                       |
| MDX-1303            |       | Anthrax Infection                                                       |       | Phase I        |       | Co-developing with PharmAthene, Inc.(7)                       |
| MDX-1388            |       | *C. difficile Disease*                                                  |       | Phase I        |       | Co-developing with  MBL(8)                                         |
| BMS-66513           |       | Cancer                                                                  |       | Phase I        |       | BMS(3)                                                             |
| Roche Antibody      |       | Undisclosed                                                             |       | Phase I        |       | Genmab (partnered with Roche)(2)                                   |
| Undisclosed         |       | Undisclosed                                                             |       | Phase I        |       | Undisclosed                                                        |
| NI-0401             |       | Autoimmune Disease                                                      |       | Phase I        |       | NovImmune, Inc.(3)                                            |
| Undisclosed         |       | Cancer                                                                  |       | Phase  I       |       | ImClone(3)                                                         |

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(1)           Under our collaboration with Genmab onMDX-018, we have the right to 100% of all revenues and profits in Asia. Outside of Asia, we and Genmab share in the revenues and profits on a 50/50basis, subject to certain payments that Genmab owes us with respect tomilestones and royalties on MDX-018.

(2)           We received an equity interest in Genmabin exchange for a license of our proprietary antibody technology.  We are not entitled to license fees,milestone payments or royalties from the license of these product candidates.

(3)           We expect to receive milestone payments asthis product candidate moves through clinical trials, and royalties on productsales, should commercialization occur.

(4)           In April 2004, we assigned our rights tothis product candidate to Celldex, in which we currently have an equityinterest of approximately 60%.  We willnot be entitled to license fees or milestone payments with respect to thisproduct.  We expect to receive royaltieson product sales, should commercialization occur.

(5)           We expect to receive royalties on productsales, should commercialization occur.

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(6)           We have the option to co-promote and shareprofits in the U.S. We expect to receive milestone payments as this productcandidate moves toward product approval, and royalties on product sales outsidethe U.S., should commercialization occur.

(7)           PharmAthene is fully responsible forfunding of research and development activities for MDX-1303 that are notsupported by goverment funds. We expect to share profits associated with thisproduct according to a preagreed allocation percentage.

(8)           We expect to share certain research anddevelopment costs associated with this product, as well as profits or lossesassociated with its commercialization, on a 50/50 basis.

***SelectedPreclinical Product Candidates***

| **PRODUCT** | ** ** | ** ** | ** ** | **INDICATION** | ** ** | **CLINICAL STATUS**                            | ** ** | **PARTNER** |
|-------------|------------|------------|------------|----------------|------------|-----------------------------------------------------|------------|-------------|
| MDX-1333    |       | Lupus      |       | Preclinical    |       | MedImmune(1)                                        |
| MDX-1106    |       | Cancer     |       | Preclinical    |       | Co-developing  with Ono Pharmaceuticals Co. Ltd.(2) |

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(1)          Wehave the option to co-promote and share profits in the U.S. We expect toreceive milestone payments as this product candidate moves toward productapproval, and royalties on product sales outside the U.S., shouldcommercialization occur.

(2)          Wehave the right to develop and commercialize MDX-1106 in North America, and Onohas the right to develop and commercialize MDX-1106 outside of North America,in each case subject to payment of a royalty to the other party on sales insuch territories, should commercialization occur.

***Phase III ProductCandidates in Clinical Development***

**Ipilimumab (Anti-CTLA-4Antibody)****—*Metastatic Melanoma*.**   Ipilimumab(also known as MDX-010) is a fully human antibody that targets thecytotoxic T-lymphocyte antigen 4 immune receptor, known as CTLA-4. Thisreceptor, which is a molecule found on the surface of T-cells, has been shownto diminish or down-regulate the immune response to tumors or infectiousagents. By using a fully human antibody to block the activity of CTLA-4,we believe that patients’ immune systems may be able to mount a stronger immuneresponse against foreign pathogens and cancers. We initially focused on the useof this antibody for the treatment of metastatic melanoma and prostate cancerand have expanded clinical studies into other indications such as breast, renalcell, prostate, ovarian and other cancers. We have also expanded the ipilimumabclinical program to include combination studies with chemotherapy,immunotherapy and vaccines. Effective January 2005, we entered into acollaboration with BMS to develop and potentially commercialize ipilimumab formelanoma and any additional disease indications. A more detailed description ofour collaboration with BMS is included herein under the section entitled “OurHuman Antibody Partnering Business—BMS.”

*Metastatic MelanomaRegistrational Program:**  *We and BMS are pursuing a registrational program ofclinical studies investigating ipilimumab for the treatment of metastaticmelanoma. In addition to an ongoing pivotal vaccine combination study in second-linepatients (i.e., patients who have failed to respond to previous treatment withmelanoma therapies other than ipilimumab) who are HLA-A2 positive, thecomponents of this program also include monotherapy studies in second-linepatients and a dacarbazine, or DTIC, combination study in previously untreatedpatients, each of which is expected to begin enrollment in the first half of2006.

Under a Special ProtocolAssessment agreement, or SPA, with the FDA, a Phase III pivotal trial ofipilimumab in combination with MDX-1379 (a melanoma peptide vaccine basedon gp100) commenced enrollment in September 2004. We expect to enrollapproximately 750 second-line HLA-A2 positive patients with unresectable StageIII or Stage IV melanoma in centers worldwide. The patients are randomized toreceive one of three regimens on a 3:1:1 basis, with approximately 450 patientsreceiving ipilimumab/MDX-1379 combination, approximately 150 patientsreceiving MDX-1379 alone and 

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approximately150 patients receiving ipilimumab alone. All patients receiving ipilimumab willreceive a dose of three mg/kg every three weeks for up to four doses. Bestobjective response rate (complete and partial responses) will be used as thebasis for an initial Biological License Application, or BLA, submission.Secondary endpoints of disease progression and overall survival data willcontinue to be collected from patients being followed in this Phase III trial.Treatment assignment is blinded, with oversight by an independent DataMonitoring Committee, or DMC.

A single-arm monotherapyregistrational study to enroll up to 150 patients with metastatic melanomapreviously-treated with DTIC is expected to begin enrollment in the first halfof 2006. We are seeking an SPA for this study. We are currently working out thefinal SPA details with the FDA, and we and BMS are considering how best toallocate the second-line patients between this study and the ongoing Phase IIItrial to ensure that we complete enrollment for at least one second-line trialthis year. Other supportive Phase II studies using monotherapy in second-linepatients with metastatic melanoma started in November 2005, and January 2006,respectively.

A DTIC combinationregistrational study to enroll up to 500 patients with previously untreatedmetastatic melanoma is also expected to begin enrollment in the first half of2006.

We and BMS continue toevaluate the relative priorities of these studies in light of regulatoryfeedback, new clinical data, enrollment rates and other factors relevant to thetiming of potential BLA filings. 

Our Phase III pivotaltrial of ipilimumab in combination with the MDX-1379 vaccine wasinitiated based on data from a Phase II clinical trial in which 56 patientswith metastatic melanoma were treated with one of two dose regimens ofipilimumab in combination with MDX-1379. As of November 2005, of the29 patients treated in the high-dose treatment cohort, four patientsexperienced anti-tumor responses, with two patients experiencing complete responsesongoing for over 40 months, and one patient experiencing a partial responseongoing for over 43 months. Of the 27 patients treated in the low-dosetreatment cohort, three patients experienced partial responses, two of whichhave had ongoing responses nearing three years. Historically, median survivalafter diagnosis of metastatic melanoma is six to nine months. Our ipilimumabmonotherapy registrational trial is based upon data from completed and ongoingPhase II studies in previously-treated metastatic melanoma and renal cellcancer indicating efficacy as monotherapy and adequate tolerability ofipilimumab at doses up to 10 mg/kg. Our registrational trial of ipilimumab incombination with DTIC is based upon Phase II data in which the combination ofipilimumab and DTIC produced an overall response rate of 17% with an acceptablesafety profile.

In June 2004, the FDAgranted orphan drug designation to ipilimumab for the treatment of high riskStage II, Stage III and Stage IV melanoma, and in March 2005, orphan drugdesignation was granted to MDX-1379 for the treatment of HLA-A2-positivepatients with Stage IIB, Stage IIC, Stage III and Stage IV melanoma. In October 2004,Fast Track status was granted to the development program for ipilimumab incombination with MDX-1379 for the treatment of second-line patients with unresectableStage III or Stage IV melanoma.

Additional human clinicaltrials of ipilimumab are described in the section entitled “Phase II ProductCandidates in Clinical Development” below.

*Adverse Events:*   Ouripilimumab clinical 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. In trials of ipilimumab, the most commondrug-specific adverse events include diarrhea, rash, reduced pituitaryfunction, colitis and increased liver enzymes, ranging from mild in most casesto severe in a very small number of instances. These events wereanticipated and are consistent with an immune-based mechanism of actiondue to ipilimumab-mediated CTLA-4 blockade. Other than a very smallnumber of fatalities not directly related to disease progression, representingless than 1% of over 600 patients treated in all previous trials, which may ormay not be attributable to our product 

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candidates, themajority of adverse events resolved or improved with treatment and withoutfurther significant complications. Through our experience in over 600 patientswho have received ipilimumab, collectively, treatment algorithms have evolvedand are in place to diagnose and manage the adverse events, which arestatistically correlated with clinical response. In addition, Phase II clinicaltrials are underway to explore the prophylactic use of oral non-absorbablesteroids to minimize the gastrointestinal events sometimes associated withipilimumab activity, as well as to explore potential biomarkers that may bepredictive of clinical responses.

**Golimumab (Anti-TNF******a**Antibody)**—*InflammatoryDiseases*.   In May 2005, Centocor reported that it wasdeveloping golimumab (also known as CNTO 148), a high affinity, fully humanantibody that targets TNFa for inflammatorydiseases. According to publicly available information, golimumab is in fiveseparate Phase III clinical trials for active rheumatoid arthritis (threetrials), active psoriatic arthritis (one trial) and ankylosing spondylitis (onetrial). In addition, golimumab is in a Phase II clinical trial for severepersistent asthma.

**CNTO 1275 (Anti-IL-12/IL-23Antibody)****—*Inflammatory Diseases***.   InMay 2005, Centocor reported that it was developing CNTO 1275, a highaffinity, fully human antibody that targets IL-12/IL-23 for the treatment ofinflammatory diseases. According to publicly available information, CNTO 1275is in a Phase III clinical trial for severe plaque-type psoriasis. In addition,CNTO 1275 is in Phase II clinical trials for psoriatic arthritis, multiplesclerosis and Crohn’s disease.

**Zanolimumab (Anti-CD4 Antibody)****—*T-cell Lymphomas***.*  *Genmab and Serono are developingzanolimumab (also known as HuMax-CD4), a fully human antibody that targets theCD4 receptor on cells known as T-cells, which are believed to be involved inpromoting autoimmune disease. In April 2005, Genmab reached an agreementwith the FDA for a SPA agreement for a pivotal Phase III trial for thetreatment of cutaneous T-cell lymphomas, or CTCL, which is currently underway.

In March 2004, Genmabannounced that zanolimumab had been granted Fast Track status by the FDA forpatients with CTCL. Genmab has also disclosed that zanolimumab has receivedorphan drug designation for the treatment of CTCL by the European Agency forthe Evaluation of Medicinal Products in April 2004 and by the FDA in August 2004.

In August 2005,Genmab announced that it had entered into a global development andcommercialization agreement with Serono for zanolimumab under which Genmab willcontinue to conduct, at Serono’s expense, the ongoing pivotal study in CTCL andthe Phase II study in non-cutaneous T-cell lymphoma.

**Ticilimumab (Anti-CTLA 4 Antibody)****—*Metastatic Melanoma.***   Pfizeris developing ticilimumab (also known as CP-675,206), a fully humanantibody generated by using transgenic mouse technology substantially similarto our HuMAb-Mouse® technology. Pfizer’s antibody targets theimmune receptor CTLA-4. According to publicly available information, afirst-line Phase III clinical trial comparing ticilimumab alone to chemotherapyalone for metastatic melanoma was initiated by Pfizer in December 2005.This two-arm, randomized Phase III clinical trial is expected to enroll up to630 patients, with a primary endpoint being overall survival. Secondaryendpoints are said to include durable responses, progression-free survival atsix months, objective tumor responses and duration of such responses and humananti-human antibody, or HAHA, responses.

***Phase II ProductCandidates in Clinical Development***

**Ipilimumab (Anti-CTLA-4Antibody)****—*Metastatic Melanoma;Prostate, Breast, Renal Cell and Other Cancers.***   Aspart of our joint ipilimumab clinical development program with BMS, there aremultiple Phase II and early clinical trials underway or expected to commence inmultiple tumor types, including melanoma, prostate, breast, renal, pancreatic,colorectal, ovarian, lymphoma and others. Some of these studies are designed tosupport our registrational program in melanoma, and other studies are designedto explore the activity of ipilimumab in additional disease indications asmonotherapy and in combination with other cancer therapies.

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**MDX-066 and MDX-1388(Anti-Toxin A and Anti-Toxin B Antibodies)****—*Clostridium difficileAssociated Diarrhea.***   MDX-066 (also known as CDA-1) and MDX-1388are fully human antibodies that we areco-developing with the Massachusetts Biologic Laboratories of the University ofMassachusetts Medical School, or MBL.MDX-066 and MDX-1388 are designed to target Toxin A and Toxin B,respectively, the toxins produced by the bacterium *Clostridium difficile*, which are associated with aserious and sometimes deadly form of diarrhea called *Clostridiumdifficile* associated diarrhea, or CDAD.

In October 2005,we initiated a randomized, placebo-controlled MDX-066 Phase II clinicaltrial for CDAD. The single-dose Phase II clinical trial is expected to enrollup to 150 hospitalized patients with CDAD and is designed to assess the safetyand tolerability of MDX-066 when added to standard of care. MBL filed anIND for the combination of both the anti-Toxin A and B antibodies in 2005. APhase I trial of this combination is underway.

**MDX-060 (Anti-CD30Antibody)****—*Lymphoma.****  *MDX-060 is a fully humanantibody that targets CD30, which is a marker for activated lymphocytes and ispresent on the malignant cells of Hodgkin’s disease, or HD, and anaplasticlarge cell lymphoma, or ALCL, as well as other CD30-expressing cancers.Through its ability to target CD30-expressing tumor cells, we believethat MDX-060 may facilitate the elimination of such cells by the immunesystem. We have observed responses in HD and ALCL in early Phase I and Phase IIclinical trials and have expanded the development program to include threeadditional Phase II clinical trials to further explore the activity profile ofMDX-060 as monotherapy for refractory HD, as a combination therapy withgemcitabine for HD, and as monotherapy in ALCL. In October 2004, the FDAgranted orphan drug designation to MDX-060 for the treatment of HD. In January 2006,orphan drug designation was received for the treatment of CD30-positiveT-cell lymphoma.

**MDX-070 (Anti-PSMAAntibody)****—*Prostate Cancer.***   MDX-070is a fully human antibody that targets Prostate Specific Membrane Antigen, orPSMA. PSMA is a cell surface marker that is preferentially expressed onmalignant prostate tissues and also on blood vessels in other tumors. Interimdata from a multi-dose, dose-escalation Phase II clinical trial of MDX-070in patients with hormone refractory prostate cancer indicated that the antibodywas safe and well-tolerated at all doses tested. We expect to complete dosingand review the data for the disease marker prostate specific antigen, or PSA,response in the Phase II clinical trial in 2006 and potentially expand the MDX-070development program to include a docetaxel combination study and asecond-generation immunoconjugate of the anti-PSMA antibody.

**HuMax-CD20 (Anti-CD20Antibody)****—*Rheumatoid Arthritis,Lymphoma.***   Genmab is developing HuMax-CD20, afully human antibody targeting CD20, a molecule found on B cells. A Phase IIclinical trial is underway for the treatment of rheumatoid arthritis. In March 2006,Genmab reported positive results from this trial. In addition, two Phase I/IIclinical trials using HuMax-CD20 in patients with non-Hodgkin’s lymphoma,or NHL, and chronic lymphocytic leukemia, or CLL, are ongoing. In December 2005,Genmab reported positive results from the Phase I/II clinical trial for CLL. InDecember 2004, Genmab announced that this product candidate was grantedFast Track designation by the FDA for the treatment of CLL. In February 2006,Genmab announced that it expects to initiate two Phase III trials in 2006 ofHuMax-CD20, one in CLL and one in Rituxan® refractoryfollicular lymphoma.

**AMG 714 (Anti-IL-15Antibody)****—*Rheumatoid Arthritis.***   AMG714, formerly known as HuMax-IL15, is a fully human antibody that isbeing developed under an agreement between Genmab and Amgen and that targetsInterleukin-15 (IL-15), an immune system signaling molecule thatappears early in the cascade of events that ultimately leads to inflammatorydisease. According to Genmab, Amgen has reformulated AMG 714 in a differentcell line, and the antibody is undergoing preclinical testing. Amgenanticipates entering a Phase I study with the new formulation in 2006. Inaddition, a Phase II clinical trial for rheumatoid arthritis has been completedand data from this study is expected to be presented in 2006. Amgen has takenresponsibility for further development of AMG 714.

**Amgen Antibody-1****—*Undisclosed Disease.***   Weare aware of one antibody product candidate derived from our technology beingdeveloped by Amgen that is in Phase II clinical trials for an undisclosedindication.

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***Selected PhaseI/II, Phase I  and Preclinical ProductCandidates***

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, thefollowing:

**MDX-214(Anti-EGFr/CD89 Antibody)****—*Cancer.***   Weare developing MDX-214, a fusion protein consisting of human epidermalgrowth factor, or EGF, genetically linked to a fully human antibody fragmentthat targets CD89, a trigger molecule expressed on immune effector cells.Through the use of EGF, the natural ligand to the epidermal growth factorreceptor, or EGFr, MDX-214 is designed to direct CD89 positive effectorcells to EGFr-overexpressing tumor cells, potentially facilitating theinteraction of the immune system with the cancer. An experimental Phase I/IIclinical trial in up to 48 patients is ongoing for the treatment of refractoryor relapsed EGFr-expressing cancers, including cancers of the head and neck,breast, colon, prostate, lung and ovary. Preliminary clinical results to datein this proof-of-concept study suggest that we may not continue furtherdevelopment of this product candidate.

**MDX-018(Anti-inflammation Antibody)****—*Inflammatory Disease****.**  *MDX-018,also known as HuMax-Inflam, is a fully human antibody that we areco-developing with Genmab. In December 2004, we and Genmab announcedsafety and efficacy results from an ongoing Phase I/II European clinical trialof MDX-018 in patients suffering from an undisclosed autoimmune disease.In a pooled analysis of all dose groups after eight weeks, a statisticallysignificant mean reduction in disease activity of 56% was seen. Nodose-limiting toxicity was reported after administration of doses up to eightmg/kg, and it is believed that the maximum tolerated dose was not reached.Genmab and Medarex are continuing to investigate potential development pathsand also the competitive and commercial opportunities for this product.

**HuMax-EGFr (Anti-EGFrAntibody)****—*Head and Neck Cancers.***   Genmabis developing HuMax-EGFr, a fully human antibody targeting EGFr, a receptormolecule that has been found in excess on many types of tumor cells. Accordingto Genmab, HuMax-EGFr is under development in head and neck cancer, and anongoing Phase I/II clinical trial for the treatment of carcinoma of the headand neck has been completed. In January 2006, the FDA granted Fast Trackdesignation to HuMax-EGFr for the treatment of patients with head and neckcancer who have previously failed standard therapies. In February 2006,Genmab announced that it expects to initiate a HuMax-EGFr Phase III trial inhead and neck cancer in 2006.

**CNTO 95 (Anti-integrinreceptors Antibody)****—*Cancer.***   InMay 2005, Centocor announced that it is developing CNTO 95, a highaffinity, fully human antibody targeting the avintegrin receptors that are implicated in tumor-induced angiogenesis.Angiogenesis is the formation of new blood vessels and is believed to play animportant role in tumor growth and metastasis. According to publicly availableinformation, CNTO 95 is in a Phase I/II clinical trial alone and in combinationwith DTIC for advanced melanoma.

**MDX-1307(Anti-Mannose Receptor/ßhCG Antibody)****—*Colorectal, Pancreaticand/or Bladder Cancers.***   Our subsidiary,Celldex, is developing MDX-1307 (also known as ßHCG-VAC), a fusion protein composed of a mannose receptor-specifichuman antibody conjugated to the beta chain of human chorionic gonadotropin, orßhCG. This therapeutic cancervaccine is designed to induce antibody and cytotoxic T-cell responses directedat cancer cells in patients with ßhCG-expressing tumors. An ongoingdose-escalation, multi-dose Phase I clinical trial is expected to enroll up to18 patients with metastatic or locally advanced colorectal, pancreatic orbladder cancers. In September 2004, investigators at the DukeComprehensive Cancer Center working with Celldex were awarded a two-year $0.5million grant from the Avon Foundation and the National Cancer Institute toinitiate a Phase I clinical trial with MDX-1307 for the treatment ofbreast cancer.

**FG-3019 (Anti-CTGF)****—*Idiopathic PulmonaryFibrosis, Diabetic Nephropathy and Pancreatic Cancer.***   FG-3019,being developed by FibroGen,****is a fullyhuman therapeutic antibody that targets CTGF 

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(connective tissuegrowth factor). According to publicly available sources, FG-3019 hascompleted a Phase I clinical trial for idiopathic pulmonary fibrosis and isalso in Phase I clinical trials for the treatment of diabetic nephropathy andpancreatic cancer.

**MDX-1100 (Anti-IP-10Antibody)****—*Inflammatory Diseases.***   Weare developing MDX-1100, a fully human antibody that targets IP-10(also known as CXCL10), a chemokine expressed in association with multipleinflammatory disease indications such as rheumatoid arthritis, inflammatorybowel disease and multiple sclerosis. The multi-center, single-dose,dose-escalation Phase I clinical trial is open to enroll up to 32 patients withulcerative colitis. We acquired full rights to MDX-1100 as part of ouracquisition of Ability Biomedical Corporation in August 2004.

**MEDI-545 and MDX-1333(Anti-Type 1 IFN Antibodies)****—*Systemic LupusErythematosus.***   MedImmune is developing MEDI-545(previously known as MDX-1103) and MDX-1333, fully human antibodiesthat target two different components of the Type 1 IFN pathway, which isbelieved to be involved with systemic lupus erythematosus, or SLE, diseaseactivity. MEDI-545 is an antibody designed to block multiple Type 1 IFNsubtypes, and MDX-1333 is an antibody that is designed to block thereceptor of Type 1 IFN. In November 2004, we announced a collaborationwith MedImmune, whereby MedImmune will be responsible for continued developmentof these antibodies. Prior to the initiation of a pivotal trial, we may electto co-develop and co-promote in return for a profit-share in the U.S. An INDfor MEDI-545 was filed in October 2005.

**MDX-1303(Anti-Anthrax Antibody)****—*Bacillus anthracisInfection.****  *MDX-1303,also known as ValortimTM, is a fully human antibody that we are co-developingwith PharmAthene. MDX-1303 is designed to protect against inhalationanthrax by targeting a protein component of lethal toxins produced by the *Bacillus anthracis*bacterium known as the anthrax protectiveantigen.****In preclinical studies, MDX-1303both protected against infection and, when administered some time afterexposure, induced recovery and survival in animals exposed to lethal doses ofinhalation anthrax spores. A dose-escalation Phase I clinical trial is underwayto evaluate the safety, tolerability and pharmacokinetics of MDX-1303 inhealthy adults.

In 2004, we andPharmAthene received two grants from a division of the National Institutes ofHealth, or NIH, for up to $7.2 million over three years to support our researchand development of MDX-1303. In January 2006, the FDA granted FastTrack status for MDX-1303. Also in January 2006, we and PharmAtheneprocured $2.05 million from the U.S. Department of Defense to support ongoingdevelopment of MDX-1303. In February 2006, orphan drug designationwas received for the treatment of anthrax infection.

**MDX-1106 (Anti-PD-1Antibody)****—*Cancer.****  *MDX-1106 is a fully humanantibody in preclinical development that we are co-developing with OnoPharmaceuticals. MDX-1106 is designed to target PD-1, a receptorexpressed on the surface of activated lymphocytes and is involved in tumorevasion of the immune system responses. We expect to file an IND on thisproduct candidate for cancer in 2006.

**Other Product Candidates.****  **We are aware of a number of other antibody productcandidates derived from our UltiMAb technology for which our partners havecommenced Phase I clinical trials, including two Novartis antibodies for thetreatment of autoimmune disease, two Amgen antibodies for undisclosedindications, an anti-TRAIL-R2 antibody (HGS-TR2J) being developed by HumanGenome Sciences pursuant to a license with Kirin, Eli Lilly’s antibody for anundisclosed indication, BMS-66513 by BMS for cancer, an undisclosedantibody being developed by Roche/Genmab for an undisclosed indication, anotherundisclosed antibody by an undisclosed partner, NI-0401 by NovImmune forautoimmune disease and an antibody for cancer being developed by ImClone. Weare not aware of any additional information that has been made public regardingany of these Phase I clinical trials.

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**Our Human AntibodyPartnering Business**

As of March 1, 2006,we have more than 40 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 January 2005, we announced the closing of acollaboration and co-promotion agreement and a related securities purchaseagreement with BMS. Under the terms of the collaboration, we and BMS have eachgranted the other certain intellectual property licenses and product rights ona worldwide basis in order to enable us to collaborate in the research anddevelopment of certain therapeutic antibody-based product candidates for thetreatment of cancer and other diseases, and, in the event that furtherdevelopment work is successful, to commercialize any resulting products. Inparticular, the collaboration includes a grant by us to BMS of a license tocommercialize ipilimumab (also known as MDX-010), a fully human antibodyproduct candidate developed using our UltiMAb Human Antibody DevelopmentSystem, that is antagonistic to CTLA-4. Ipilimumab is currently underinvestigation for the treatment of a broad range of cancers. The collaborationalso includes the grant by us to BMS of a sub-license to MDX-1379, agp100 peptide vaccine licensed by us from the U.S. Public Health Service, foruse with ipilimumab for the treatment of metastatic melanoma. The FDA hasgranted orphan drug designation for ipilimumab for the treatment of high riskStage II, Stage III and Stage IV melanoma, and we and BMS are currentlyconducting a Phase III clinical trial with ipilimumab and MDX-1379combination therapy in Stage III and Stage IV metastatic melanoma patients,under a SPA agreement with the FDA, at multiple sites worldwide. This programhas been granted Fast Track status by the FDA.

As part of the collaboration, we and BMS havecommitted to an initial multi-year budget of approximately $192.0 million tofund the development of ipilimumab as a potential treatment for a broad rangeof cancers. 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. The parties 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 developmentefforts that relate solely to regulatory approval in Europe and other parts of theworld.

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 IIIclinical trial(s), we will receive 45% of any profits from commercial sales inthe U.S. In the event we choose not to exercise our co-promotion rights, BMSwill have exclusive commercial rights in the U.S. and will pay us royalties oncommercial sales. Outside the U.S., BMS will have exclusive commercial rightsand will pay us royalties on commercial sales.

Pursuant to these agreements, BMS made an initial cashpayment to us on January 21, 2005 of $25.0 million. In addition, BMSpurchased a total of 2,879,223 unregistered shares of our common stock at apurchase price equal to $8.6829 per share for an aggregate purchase price of$25.0 million. These shares were issued in a private placement pursuant to theexemption from registration provided by Section 4(2) of theSecurities Act of 1933, as amended. The purchase price represented a smallpremium to the market price on the date we entered into the collaboration. BMSagreed to a two-year lock-up period with respect to any sales of such stock. Uponexpiration of the lock-up period, such shares may be sold pursuant to theprovisions of Rule 144 under the Securities Act. We have no future obligationto register such stock.

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Unless terminated earlier,the BMS collaboration will continue for as long as development and/orcommercialization of any collaboration 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.

***Pfizer***

In September 2004, we entered into a series ofagreements with Pfizer. The first agreement, or the Pfizer Amendment, amendedour existing collaborative research and license and royalty agreements withPfizer to provide for the discovery and development of up to 50 antibodyproducts over ten years. The second and third agreements were a sublicense byus to Pfizer and a cross-license of certain patents and patent applicationssolely relating to our respective anti-CTLA-4 antibody programs,together, the Pfizer Licenses. The fourth agreement was a stock purchaseagreement also related to the anti-CTLA-4 programs. Pursuant to certainof these agreements, Pfizer made a total initial cash payment to us of $80.0million and purchased, through its wholly-owned subsidiary Pfizer OverseasPharmaceuticals, a total of 4,827,808 unregistered shares of our common stockat a purchase price equal to $6.21 per share for an aggregate purchase price of$30.0 million at a small premium to market price at the time we entered intothe collaboration. The shares were issued in a private placement pursuant tothe exemption from registration provided by Section 4(2) of theSecurities Act of 1933, as amended. Pfizer also agreed to a two-year lock-upperiod with respect to any sales of such stock. Upon expiration of the lock-upperiod, such shares may be sold pursuant to the provisions of Rule 144under the Securities Act. We have no future obligation to register such stock.

Under the Pfizer Amendment, we expect to use ourUltiMAb Human Antibody Development System to generate product candidates todisease-associated targets identified by Pfizer. We will receive standardmarket rates for performing these antibody-making services. The productcandidates generated by the collaboration will then be transferred to Pfizer,which will be fully responsible for the worldwide development andcommercialization of such product candidates, including the payment of allcosts and expenses related thereto. We have no future payment obligationsrelating to the development and commercialization of these product candidates.We have the potential to receive research funding, license fees and milestonepayments (if certain development milestones are met), as well as royalties onany commercial sales of the products.

We and Pfizer haveretained all rights to our respective separate anti-CTLA-4 products.Pursuant to the Pfizer Licenses, which are non-exclusive, we have the potentialto receive milestones and double digit royalty payments based upon commercialsales of any Pfizer anti-CTLA-4 antibody product whether or not suchproduct was generated using our UltiMAb technology. In contrast, we have nofuture payment obligations to Pfizer in connection with any anti-CTLA-4product we may develop. Both we and Pfizer are independently pursuing theclinical testing of antibodies to CTLA-4, including our ipilimumab andPfizer’s ticilimumab (also known as CP-675,206) product candidates, bothof which are currently in Phase III clinical trials for metastatic melanoma.

***Our 50/50 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 

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interactwith such targets. As of March 1, 2006, we had agreements with more than adozen collaborators with whom we plan to jointly develop and commercializehuman antibody products. Typically, a collaborator will provide one or moretarget antigen(s), and we will generate and develop antibodies against theantigen(s) using our UltiMAb Human Antibody Development System. We and ourcollaborators typically agree to share equally the costs of clinicaldevelopment and manufacturing, as well as revenues, expenses and profitsassociated with any products arising under the collaboration. We believe thisallows us to participate in the research and development of substantially morepotential candidates than we could develop on our own if we bore the entirecost of development.

***Our Out-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, 2006, we had more than two dozenlicensing partnerships with various partners including industry leaders such asAbbott Laboratories, Amgen, Centocor, Eli Lilly, Human Genome Sciences,MedImmune, Novartis, Novo Nordisk, Pfizer and Schering AG.

The financial terms of ourlicensing partnerships typically include license fees and a series of milestonepayments commencing upon initiation of clinical trials and continuing throughto commercialization. These fees and milestones may total up to $7.0 to $10.0million per antibody if the antibody receives approval from the FDA orequivalent foreign agencies. A licensing partnership may involve multipleantibodies. Under these partnerships, we will also receive royalties on anyproduct sales. In some cases, our partners reimburse us for research anddevelopment activities we conduct on their behalf. Generally, under the termsof these agreements, our partners are responsible for all costs of productdevelopment, manufacturing and commercialization of any products.

***Our Cross-Licensing and In-Licensing Partnerships***

**Kirin**

In September 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 which combinesthe traits of our HuMAb-Mouse with Kirin’s TC MouseTM. Under the collaboration and licenseagreement, we have exchanged cross-licenses with Kirin with respect to the KM-Mouseand other antibody-generating mice. In addition, certain of the cross-licensesgranted under the collaboration and license agreement are subject to license,milestone and 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 Human Genome Sciences pursuant to a license with Kirin.We expect to receive royalties on sales of this product, shouldcommercialization occur.

Through December 31,2005, we had not made any milestone payments to Kirin, although approximately$2.8 million has been paid to Kirin as of December 31, 2005 representing apayment due Kirin as a result of our collaboration with Pfizer. Based on atotal of three products we are developing which use or we believe may use Kirintechnology and that (i) are currently in clinical trials, or (ii) we 

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anticipatemay enter clinical trials through the end of 2007, we may be required to makemilestone payments to Kirin aggregating up to approximately $12.75 million withrespect to such products, or a maximum of approximately $4.25 million perproduct. Our future milestone payment obligations to Kirin may or may not betriggered, and may vary in size, depending on a number of variables, almost allof 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 product**)**; 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.

Whether we may be obligated to make payments to Kirinin the future is subject to the success of our efforts with respect to productswe are developing that utilize the Kirin technology and, accordingly, isinherently uncertain.

Unless terminated earlier,the collaboration and license agreement with Kirin expires on December 31,2014. The collaboration and license agreement can be terminated by either partyin the event of a material breach by the other party if the breach is not curedduring a specified cure period. In addition, either party may terminate anycommercial license with respect to a specific biologic target granted to it bythe other party under the agreement at any time.

**OtherCross-Licensing and In-Licensing Partnerships**

In addition to ourcollaboration with Kirin, we have entered into a number of other agreementsthat contain in-licenses of third-party technology which may be used togetherwith our own platform technologies for the generation, development and/ormanufacture of our antibody products. We have also entered into otherthird-party agreements that contain licenses associated with antibody productsthat target specific antigens. Many of these agreements contain milestonepayments, which we will be required to pay, that become due with respect toproducts using/targeting the licensed technology/antigen only if and whencertain specified pre-commercialization events occur. Not all of our productscurrently under development trigger such milestone payments. Through December 31,2005, we had made milestone payments of approximately $0.3 million underthese agreements. In addition, under the agreements we currently have in place(other than with Kirin), based on a total of nine products we are developingfor which milestones are potentially due and that (i) are now in clinicaltrials, or (ii) which we anticipate may enter clinical trials before theend of 2007, we may be obligated to make future milestone payments aggregatingup to approximately $59.9 million with respect to such products. In general,potential milestone payments for our antibody products may or may not betriggered under these licenses, and may vary in size, depending on a number ofvariables, almost all of which are currently uncertain. Typically, the eventsthat trigger these 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.

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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 Partner Revenue**

Revenuefrom partners representing 10% or more of total revenues for the years ended December 31,2005, 2004 and 2003 is as follows: 

| **Partners** | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| BMS          |       |       | 34         | %        |       |     | 4          | %        |       |   | — |   |   |
| Pfizer       |       |       | 18         | %        |       |     | 20         | %        |       |   | — |   |   |
| Genmab       |       |       | 8          | %        |       |     | 26         | %        |       |   | 48 | % |   |
| Amgen        |       |       | 1          | %        |       |     | 8          | %        |       |   | 15 | % |   |

 

Further informationregarding revenues from partners is included in Notes 10 and 11 in the Notes tothe Consolidated Financial Statements included in Item 8 of this Annual Reporton Form 10-K.

**Strategic Investments**

***Genmab***

In August 2000, we entered into a bindingmemorandum of understanding, or the Genomics Agreement, with Genmab, a Danishbiotechnology company in which we held, at the time, an equity interest ofapproximately 44%, pursuant to which we granted Genmab rights to make availableour transgenic mouse technologies for multi-target (five or more targets)genomics partnerships to certain pharmaceutical and biotechnology companieswhose headquarters are located in Europe. The Genomics Agreement had an initialterm of five years with a right exercisable by Genmab to extend the term for anadditional two years. The initial term of the agreement expired in August 2005and was not extended. For each year of the agreement, we received $2.0 millionper year from Genmab. At Genmab’s option, these amounts were paid in eithercash or capital stock. During the years ended December 31, 2005, 2004 and2003, we recognized $1.3 million, $2.0 million and $2.0 million, respectively,of revenue from this agreement.

In October 2000, Genmab became a publicly listedcompany on the Copenhagen Stock Exchange. As a result of raising the equivalentof $178.0 million (based on the 8.7695 DKK/USD exchange rate on the listingdate of October 18, 2000) and subsequent investments in Genmab by otherparties, our ownership interest in Genmab decreased to approximately 32%. In July 2004,Genmab completed a private placement of 5.6 million shares of its stock,resulting in a further reduction in our ownership interest to approximately24.7%. In August 2005, Genmab sold approximately 2.5 million shares of itsstock to a corporate partner in connection with a global development andcommercialization agreement. As a result of this sale of stock, our ownershippercentage in Genmab was reduced to approximately 22.2%, where it remained asof December 31, 2005. We accounted for our investment in Genmab under theequity method of accounting through January 31, 2006.

In February 2006,Genmab completed a private placement of 5.75 million shares of its stock. As aresult of this offering, our ownership interest was reduced to approximately18.9%. Beginning February 1, 2006, we expect to account for our investmentin Genmab as a marketable security in accordance with SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities*.

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***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. In August 2005,IDM completed a share exchange with Epimmune Inc., a Delaware corporationtraded on the Nasdaq, whereby IDM shareholders exchanged their IDM shares forshares of Epimmune. Epimmune subsequently changed its name to IDM Pharma, Inc.,or IDM Pharma. As a result of the exchange, we currently hold an approximate19.9% equity position in IDM Pharma. IDM Pharma’s lead product candidate,JunovanTM, has completed Phase III clinical trials for the treatment ofosteosarcoma, a bone cancer affecting adolescents.

***Celldex***

In 2004, we assigned or licensed to CelldexTherapeutics, Inc., our then wholly-owned subsidiary, certain intellectualproperty related to our vaccine technology, including the rights to MDX-1307,one of our product candidates for the treatment of cancer, as well as the INDassociated with this product candidate.

In October 2005, Celldex acquired all of theissued and outstanding shares of capital stock of Lorantis Limited, orLorantis, a privately held biotechnology company based in Cambridge, U.K. andsubstantially all of the assets of Alteris Therapeutics, Inc., or Alteris,a privately held biotechnology company based in Philadelphia, PA. The purchaseprice for the Lorantis capital stock consisted of 6.8 million shares of CelldexClass A common stock, and the purchase price for the Alteris assetsconsisted of 1.2 million shares of Celldex common stock, a cash payment of $1.6million and certain potential milestone and other payments. As a result ofthese transactions, our ownership percentage of Celldex was reduced toapproximately 60%.

At the date of acquisition, in addition to cash ofapproximately $30 million, Lorantis’ assets included a pre-clinical programbased upon the discovery of a fundamental immune mechanism, the Notch signalingpathway, that has been shown in preclinical studies to selectively modulateimmune responses.

Through the acquisition ofAlteris, Celldex obtained exclusive rights to ALT-110, a therapeuticcancer vaccine currently in an investigator-initiated Phase II clinical trialfor the treatment of brain cancer and an investigator-initiated Phase Iclinical trial for the treatment of prostate, gastric, non-small cell lung andovarian cancers. ALT-110 is based on a variant of the epidermal growthfactor receptor known as EGFRvIII. In addition, Celldex acquired several patentapplications from Alteris covering the Rapid Identification of AlternativeSplicing system, or RIAS, a proprietary technology platform for the discoveryof new disease-specific targets.

**Our Human Antibody Technology**

***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 allow 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 replaced with human antibody gene 

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expression. Because ourmice contain genes encoding human antibodies, we believe the antibodies wegenerate are more likely to have favorable safety profiles and be eliminatedless rapidly from the human body, potentially reducing the frequency and amountof dosing required to affect disease targets. Additionally, our fully humanantibodies do not require any humanization, a process that at times has provento be challenging and time consuming, and can result in antibodies with loweredbinding affinities for their respective targets. Our human antibody technologyincludes (i) our HuMAb-Mouse technology, (ii) Kirin’s TC Mousetechnology, and (iii) the KM-Mouse technology, a crossbred mouse thatcombines the characteristics of our HuMAb-Mouse with those of the TC Mouse. Intotal these technologies constitute our UltiMAb Human Antibody DevelopmentSystem.

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 the mice offspring and,therefore, bred indefinitely at relatively low cost and without additionalgenetic engineering. Our HuMAb-Mouse can generate fully human antibodies withaffinities in the picomolar range, or as high as 1012 (molar-1).

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 that we believe is previously unseen in anyhuman antibody 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 Ultra-Potent ToxinTM, or UPT, technology for creating antibodyimmunoconjugates. Our UPT program includes a class of DNA alkylating agents,which have been designed to overcome multi-drug resistance. We believe thisprogram provides us with a platform for generating cytotoxic drugs thatspecifically 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 ourfully human antibody technologies offer the following advantages over otherantibody technologies:

·       *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.

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·       *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 by such engineering.

·       *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 first generation of the antibody 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. In addition, we have been able to create large panels of monoclonalantibodies to many potentially medically relevant antigens. For a given antigentarget, the ability to select a product candidate from a pool of multipleantibodies could be important in selecting the optimal antibody productcandidate 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 antibodies for them.

·       *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.

**OurResearch, 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 access to novel therapeutic targets, will allow us to rapidly generate anddevelop a large, diverse pipeline of fully human antibody products. We intendto develop some of these product candidates for our own account and some incollaboration with other companies, leveraging their respective research anddevelopment 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, process science and formulation development. Other developmentresources include in-house medical professionals with product developmentexpertise in oncology, infectious diseases, rheumatology, immunology andpulmonology, and consulting arrangements 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 and 

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commercialization ofantibody-based products for us and for our partners, we have assembled a teamof experienced scientific, production and regulatory personnel. This teamoperates in Bloomsbury, New Jersey, and in our clinical trial materialmanufacturing production 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 220 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 accordance with current goodmanufacturing practices, or cGMP, regulatory requirements for the manufactureof clinical trial materials. We believe that our existing facility in Annandaleis adequate for the production of materials for clinical trials of our productsand for providing the support we offer to certain of our partners in connectionwith our human antibody technology in the near-term. In September 2003, weentered into a clinical supply agreement with Lonza Group Ltd. with respect toipilimumab and MDX-060. Our partner BMS is responsible for securingcommercial supply arrangements for ipilimumab and is currently in negotiationswith respect to such arrangements. We do not currently have the capability tomanufacture our product candidates under development in large commercialquantities and have no experience in commercial-scale manufacturing.

**OurCross License Agreement 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 generatingfully human antibodies. GenPharm filed counterclaims, and the litigation wassettled in March 1997 upon the execution of a patent cross-license andsettlement agreement. Under the terms of this agreement, GenPharm granted alicense, on a non-exclusive basis, to certain patents, patent applications,third-party licenses and inventions pertaining to the development and use of certaintransgenic rodents, including mice, that produce fully human antibodies. Inexchange for this license, GenPharm received payments in 1997, and after ouracquisition of GenPharm, we received payments, including interest, from Abgenixand its related parties, which totaled approximately $38.6 million. NeitherAbgenix nor any of its related entities have any further payment obligations tous under the agreement. Neither we nor GenPharm were required to make anypayments to Abgenix or any related entity under the terms of the agreement. Theagreement also provides us with a non-exclusive license to certain intellectualproperty held by Abgenix. In December 2005, Abgenix and Amgen announcedtheir execution of a merger agreement which, subject to certain conditions, isexpected to close by the end of April 2006. If the merger is completed,Amgen will gain access to the patents, patent applications, third-partylicenses and inventions licensed to Abgenix under the cross-license agreement.

**Intellectual Property**

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.

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As of December 31, 2005, we hold an ownershipinterest in a total of 58 issued patents in the U.S. and 237**issued patents in foreign countries with respect to ourUltiMAb technology and products, our bispecific molecule technology andproducts, and our other technology and products.

Of these, 14 of our issued patents in the U.S. and 40of our issued patents in foreign countries, including European countries,Japan, Korea, New Zealand and Australia, among others, relate to variousaspects of our UltiMAb technology. These patents, most of which are in the samepatent family, claim the transgene, the transgenic mouse and methods ofobtaining high affinity antibodies, among others. These patents have expirationdates beginning in 2008, although the majority of the key HuMAb-Mousetechnology patents expire beginning in 2011. In addition to our UltiMAbtechnology patents, we have two issued U.S. patents and 11 issued foreignpatents that relate particularly to HuMAb-Mouse products. We also have 38related pending U.S. and foreign patent applications directed to variousaspects of our UltiMAb technology and 198 pending U.S. and foreign patentapplications directed to various aspects of our UltiMAb products. These includepatent applications describing several of our particular human antibody productcandidates, such as our anti-CTLA-4 (ipilimumab), anti-PSMA (MDX-070)and anti-CD30 (MDX-060) product candidates. We have been assigned patentrights from Northwest Biotherapeutics, Inc. relating to aspects of MDX-070.We have been assigned patent rights relating to MEDI-545 and MDX-1333by Nufarm, B.V., Medisup International N.V., Pharma Pacific Pty. Ltd andLaboratorie European de Biotechnologie. We have acquired patent rights relatingto MDX-1100 through our acquisition of Ability Biomedical. In addition,we have acquired patent rights from Corixa Corporation relating totumor-activated prodrugs and Ultra-Potent Toxins.  A U.S. patent to our human anti-CTLA-4antibody products issued in January 2006.

As of December 31, 2005, we had a total of 75U.S. patent applications and 259 foreign patent applications pending.

From time to time, we may decide to selectively divestsome of our patents or pending patent applications as our business evolves. Multipleprovisional U.S. applications may be combined in a single U.S. and/or PCTfiling; provisional U.S. filings expire in favor of a PCT filing which willeventually become national stage filings in the U.S. and other countries; andapplications containing multiple inventions may be filed separately in multipledivisional applications. Thus, these patent and patent application counts willnot always correspond from year to year.

In addition to the patents and patent applications inwhich we hold an ownership interest, we hold exclusive and non-exclusivelicenses to many other patents and applications, including the license to theAbgenix intellectual property mentioned above. For example, these technologiesinclude microinjection of transgene DNA, homologous recombination, chromosometransfer, yeast artificial chromosome transgene technology and other relevanttechnologies. We also hold an exclusive sub-license to intellectual propertycreated at the University of California relating to aspects of ipilimumab andalso have licenses from BMS and Pfizer concerning other intellectual propertyrelated to ipilimumab. 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 MDX-060. We have a non-exclusive license fromMillennium Pharmaceuticals, Inc. relating to aspects of MDX-070.

We own registrations forthe following trademarks in the listed jurisdictions: Medarex® in the U.S., the European Union, Canada,Australia and Switzerland; HuMAb-Mouse® , UltiMAb Human Antibody Development System® in the U.S., Canada and European Union;KM-Mouse® and Putting the Immune System to Work® 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 productsemploying our technology, and our research and development activities, aresubject to extensive governmental regulation in the U.S. and in othercountries. In the U.S., our products are regulated both as drugs and asbiological products and are subject to the Federal Food, Drug, and CosmeticAct, as amended, the Public Health Service Act, as amended, and the regulationspromulgated under these statutes, as well as to other federal, state, and localstatutes and regulations. These laws, and similar laws outside the U.S., governthe clinical and non-clinical testing, manufacture, safety, effectiveness,approval, labeling, distribution, sale, import, export, storage, recordkeeping, reporting, advertising and promotion of our products. Productdevelopment and approval within this regulatory framework, if successful, willtake many years and involve the expenditure of substantial resources.Violations of regulatory requirements at any stage may result in variousadverse consequences, including the FDA’s and other health authorities’ delayin approving or refusal to approve a product. Violations of regulatoryrequirements also may result in enforcement actions, including withdrawal ofapproval, labeling restrictions, seizure of products, fines, injunctions and/orcivil or criminal penalties.

The following paragraphs provide further informationon certain legal and regulatory issues with a particular potential to affectour operations or the future marketing of products employing our technology.

*Research, Development, andProduct Approval Process.**  *The research, development, and approval process inthe U.S. and elsewhere is intensive and rigorous, and generally takes manyyears. The typical process required by the FDA before a therapeutic drug orbiological product may be marketed 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 or a biological product (such as an antibody), whether it is safe andeffective for its intended uses, and (ii) for a 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 preclinical testing, studies are performed withrespect to the chemical and physical properties of candidate formulations, andare subject to good laboratory practices requirements. Biological testing istypically done in animal models to demonstrate the activity of the compoundagainst the targeted disease or condition and to assess the apparent effects ofthe new product candidate on various organ systems, as well as its relativetherapeutic effectiveness and safety. An IND must be submitted to the FDA andbecome effective before studies in humans may commence.

Clinical trial programs in humans generally follow athree-phase process. Typically, Phase I studies are conducted in small numbersof healthy volunteers or, on occasion, in patients afflicted with the targetdisease, to determine the metabolic and pharmacological action of the productcandidate in humans, the side effects associated with increasing doses, and, ifpossible, to gain early evidence of effectiveness. In Phase II, studies aregenerally conducted in larger groups of patients having the target disease orcondition in order to validate clinical endpoints, and to obtain preliminarydata on the effectiveness of the product candidate and optimal dosing. Thisphase also helps determine further the safety profile of the product candidate.In Phase III, large-scale clinical trials are generally conducted in hundredsof patients having 

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the target disease orcondition to provide sufficient data for the statistical proof of effectivenessand safety of the product candidate as required by U.S. and foreign regulatoryagencies.

In the case of products for cancer and certain otherlife-threatening diseases, the initial human testing may be done in patientswith the disease rather than in healthy volunteers. Because these patients arealready afflicted with the target disease or condition, it is possible thatsuch studies will also provide results traditionally obtained in Phase IIstudies. These studies are often referred to as “Phase I/II” studies.Notwithstanding the foregoing, even if patients participate in initial humantesting and a Phase I/II study carried out, the sponsor is still responsiblefor obtaining all the data usually obtained in both Phase I and Phase IIstudies.

Before proceeding with a study, sponsors may seek awritten agreement from the FDA regarding the design, size, and conduct of aclinical trial. This is known as a Special Protocol Assessment, or SPA. 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 a clinical trial design to support a regulatory approval, butthe agreement is not binding if new circumstances arise. There is no guaranteethat a study will ultimately be adequate to support an approval even if thestudy is subject to an SPA.

U.S. law requires that studies conducted to supportapproval for product marketing be “adequate and well controlled.” In general,this means that either a placebo or a product already approved for thetreatment of the disease or condition under study must be used as a referencecontrol. Studies must also be conducted in compliance with good clinicalpractice, or GCP, requirements, and informed consent must be obtained from allstudy subjects.

The clinical trial process for a new compound can take10 years or more to complete. 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 study subjects are being exposed to anunacceptable health risk. Trials may also be prevented from beginning or may beterminated by institutional review boards, who must review and approve allresearch involving human subjects. Side effects or adverse events that arereported during clinical trials can delay, impede, or prevent marketingauthorization. Similarly, adverse events that are reported after marketingauthorization can result in additional limitations being placed on a product’suse and, potentially, withdrawal of the product from the market.

Following the completion of clinical trials, the dataare analyzed to determine whether the trials successfully demonstrated safetyand effectiveness, and whether a product approval application may be submitted.In the U.S., if the product is regulated as a drug, a New Drug Application, orNDA, must be submitted and approved before commercial marketing may begin. Ifthe product, such as an antibody, is regulated as a biologic, a BiologicLicense Application, or BLA, must be submitted and approved before commercialmarketing may begin. The NDA or BLA must include a substantial amount of dataand other information concerning the safety and effectiveness (and, in the caseof a biologic, purity and potency) of the compound from laboratory, animal andhuman clinical testing, as well as data and information on manufacturing,product quality and stability, and proposed product labeling.

Each domestic and foreign biopharmaceuticalmanufacturing establishment, including any contract manufacturers we may decideto use, must be listed in the NDA or BLA and must be registered with the FDA.The application will not be approved until the FDA conducts a manufacturinginspection, approves the applicable manufacturing process for the drug orbiological product, and determines that the facility is in compliance withcurrent good manufacturing practice, or cGMP, requirements.

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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. ForFiscal Year 2006, the NDA or BLA review fee alone is $767,000, although certainlimited deferrals, waivers and reductions may be available.

Each NDA or BLA submittedfor FDA approval is usually reviewed for administrative completeness andreviewability within 45 to 60 days following submission of the application. Ifdeemed complete, the FDA will “file” the NDA or BLA, thereby triggeringsubstantive review of the application. The FDA can refuse to file any NDA orBLA that it deems incomplete or not properly reviewable. The FDA hasestablished performance goals for the review of NDAs and BLAs—six months forpriority applications and 10 months for regular applications. However, the FDAis not legally required to complete its review within these periods and theseperformance goals may change over time. Moreover, the outcome of the review,even if generally favorable, typically is not an actual approval but an “actionletter” that describes additional work that must be done before the applicationcan be approved. The FDA’s review of an application may involve review andrecommendations by an independent FDA advisory committee. Even if the FDAapproves a product, it may limit the approved therapeutic uses for the productas described in the product labeling, require that warning statements beincluded in the product labeling, require that additional studies be conductedfollowing approval as a condition of the approval, impose restrictions andconditions on product distribution, prescribing or dispensing in the form of arisk management plan, or otherwise limit 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 framework applicableto the production, distribution, marketing, sale and/or reimbursement of ourproducts may change significantly from the current descriptions provided hereinin the time that it may take for any of our products to reach a point at whichan 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.

*Drugs and Biologics forSerious or Life-Threatening Illnesses.**  *The Federal Food, Drug and CosmeticAct, as amended, and FDA regulations provide certain mechanisms for theaccelerated “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. Where the FDAapproves a product on the basis of a surrogate marker, it requires the sponsorto perform post-approval, or Phase IV, studies as a condition of approval. Inaddition, the FDA may impose restrictions on distribution and/or promotion inconnection with any accelerated approval, and may withdraw approval if post-approvalstudies do not confirm the intended clinical benefit or safety of the product.Special rules would also apply to the submission to FDA of advertising andpromotional materials prior to use.

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*Orphan Drugs.**  *Under the Orphan Drug Act, special incentives existfor companies to develop products for rare diseases or conditions, which aredefined to include those diseases or conditions that affect fewer than 200,000people in the U.S. Companies may request that the FDA grant a drug orphandesignation prior to approval. Products designated as orphan drugs are eligiblefor special grant funding for research and development, the FDA assistance withthe review of clinical trial protocols, potential tax credits for research,reduced filing fees for marketing applications, and a special seven-year periodof market exclusivity after marketing approval. Orphan drug exclusivityprevents the FDA approval of applications by others for the same drug and thedesignated orphan disease or condition. The FDA may approve a subsequentapplication from another entity if the FDA determines that the application isfor a different drug or different use, or if the FDA determines that thesubsequent product is clinically superior, or that the holder of the initialorphan drug approval cannot assure the availability of sufficient quantities ofthe drug to meet the public’s need. A grant of an orphan designation is not aguarantee that a product will be approved. If a sponsor receives orphan drugexclusivity upon approval, there can be no assurance that the exclusivity willprevent another entity or a similar drug from receiving approval for the sameor other uses.

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

In the U.S., the research,manufacturing, distribution, sale, and promotion of drug and biologicalproducts are potentially subject to regulation by various federal, state andlocal authorities in addition to the FDA, including the Centers for Medicareand Medicaid Services (formerly the Health Care Financing Administration),other divisions of the U.S. Department of Health and Human Services (e.g., theOffice of Inspector General), the U.S. Department of Justice and individualU.S. Attorney offices within the Department of Justice, and state and localgovernments. For example, sales, marketing and scientific/educational grantprograms must comply with the anti-fraud and abuse provisions of the SocialSecurity Act, the False Claims Act, the privacy provisions of the HealthInsurance Portability and Accountability Act, or HIPAA, and similar state laws,each as amended. Pricing and rebate programs must comply with the Medicaidrebate requirements of the Omnibus Budget Reconciliation Act of 1990 and theVeterans Health Care Act of 1992, each as amended. If products are madeavailable to authorized users of the Federal Supply Schedule of the GeneralServices Administration, additional laws and requirements apply. All of theseactivities are also potentially subject to federal and state consumerprotection, unfair competition, and other 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 RegulatoryRequirements***

We and our collaborativepartners are subject to widely varying foreign regulations, which may be quitedifferent from those of the FDA, governing clinical trials, manufacture,product registration 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.

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***Reimbursement andPricing 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 for particulardrug products and identify which uses of a drug are supported or not supportedby the available evidence, whether or not such uses have been approved by theFDA. For example, in the case of Medicare coverage forphysician-administered oncology drugs, the Omnibus Budget Reconciliation Act of1993, with certain exceptions, prohibits Medicare carriers from refusing tocover unapproved uses of an FDA-approved drug if the unapproved use issupported by one or more citations in the American Hospital Formulary ServiceDrug Information, the American Medical Association Drug Evaluations, or theU.S. Pharmacopoeia Drug Information. Another commonly cited compendium, forexample under Medicaid, is the DRUGDEX Information System.

**Competition**

We face competition inseveral different forms. Our human antibody generation activities currentlyface competition from several companies and from other technologies. Inaddition, the actual products being developed by us or by our partners alsoface actual and potential competition.

The development ofbiotechnology and pharmaceutical products is a highly competitive businesssubject to rapid technological change. We know of many pharmaceutical andbiotechnology companies conducting research or development on therapeutic monoclonalantibody products. Many of these companies have commenced clinical trials with,and several have successfully commercialized, antibody products. Some of thesecompanies are also pursuing product development efforts for the same diseaseareas or against the same biological targets as we or our partners arepursuing.

We face competition frommany companies that provide the services of generating monoclonal antibodiesfor antibody-based therapeutics. One competitor with respect to our humanantibody technology is Abgenix. As a result of the cross-license agreement withGenPharm (our wholly owned subsidiary since 1997), Abgenix offers to potentialpartners the use of its transgenic mouse known as XenoMouse® to generate fully human monoclonal antibodies.In December 2005, Abgenix and Amgen announced their execution of a mergeragreement which, subject to certain conditions, is expected to close by the endof April 2006. If the merger is completed, Amgen will gain access to thepatents, patent applications, third-party licenses and inventions licensed toAbgenix under the cross-license agreement.

In addition, we haveentered into agreements with each of Kirin and Genmab, respectively, whichgrant these companies licenses to our proprietary transgenic mouse technologyplatform, enabling them to compete with us in offering antibody generation anddevelopment services in certain markets. Certain of our other partners who havelicensed our transgenic mouse technology also could compete with us withrespect to the development of certain antibodies.

Other companies are alsodeveloping, or have developed technologies for generating human or partiallyhuman antibodies. For example, Xenerex Biosciences (a subsidiary of AvanirPharmaceuticals) and XTL Biopharmaceuticals Ltd. each have developed technologythat, according to Xenerex and XTL, will allow them to generate fully humanmonoclonal antibodies in functionally modified mice. Regeneron 

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claimsto have developed VelocImmuneTM mice, in whichportions of the mouse immune genome have been humanized, generating mice withhumanized immune systems that can generate fully human antibodies.

Several companies aredeveloping, or have developed, technologies not involving animal immunizationthat result in libraries composed of numerous human antibody sequences. Forexample, phage display technology is being used by companies such as CambridgeAntibody Technology Group plc, or CAT, Dyax Corp. and MorphoSys AG to developtherapeutic products comprising human antibody sequences. Companies such asJohnson & Johnson, MedImmune, Amgen, Biogen Idec, Inc., Novartis,Genentech, Inc., PDL BioPharma, Inc., Abbott Laboratories, Wyeth andGlaxoSmithKline have generated therapeutic antibody-based products that arecurrently in development or on the market and are derived from recombinant DNAthat comprise human antibody sequences. Numerous additional companies aredeveloping therapeutic products comprising human antibody components.

We are aware of severalpharmaceutical and biotechnology companies actively engaged in research anddevelopment of antibody-based products that have commenced clinical trials withor have successfully commercialized antibody products. Some of these companies,such as Pfizer, ImClone, Johnson & Johnson, Wyeth, Amgen, Abbott, UCBPharma, Biogen Idec, Abgenix, CAT, MorphoSys AG, Tanox, Inc., Genentech,Human Genome Sciences, Millennium and PDL BioPharma are addressing diseases anddisease indications that are being targeted by us and certain of our partners.For example, Pfizer is developing ticilimumab, an antibody to CTLA-4, inpotential competition with our product candidate, ipilimumab. Ticilimumab iscurrently in Phase III clinical trials, and Pfizer has announced that itexpects to file a BLA on the product in 2007. In addition, we are aware of apatent held by Pfizer to which we may need a license in order to manufacturecommercial supplies of ipilimumab. Several of the foregoing companies are alsolicensees of our transgenic mouse technology. Many of these companies andinstitutions, either alone or together with their partners, have substantiallygreater financial resources and larger research and development divisions thanwe have. In addition, many of these competitors, either alone or together withtheir partners, have substantially greater experience than us in developingpharmaceutical products, undertaking preclinical testing and human clinicaltrials, obtaining FDA and other regulatory approvals of such products and themanufacturing and marketing of such products. Accordingly, our competitors maysucceed in obtaining patent protection, receiving FDA or other foreignequivalent marketing approval and commercializing products more rapidly thanus.

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, as well as by us. Inaddition, the application of recombinant DNA technology to develop potentialproducts consisting of proteins (such as growth factors, hormones, enzymes,cytokines, receptor fragments and fusion proteins, or cytokines) that do notoccur normally in the body, or occur only in small amounts, has been underwayfor some time. Included in this group are interleukins such as IL-2 andIL-11, interferons, 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 bypharmaceutical and other biotechnology companies also carries with it thepotential discovery of agents for treating disease indications targeted bydrugs that we or our partners are developing.

**Marketing**

Our potential products maybe marketed and sold in several possible ways, depending on the product,including: solely by us, jointly by us and our collaborative partners, orsolely by or on behalf of our collaborative or our licensing partners.Marketing and sales rights with respect to ipilimumab are subject to the termsof our collaboration with BMS. We believe that a small sales force couldsuccessfully introduce and detail certain of our potential products that have concentratedmarketplaces. Other products, however, may require a larger sales force.Currently, we have no sales force. We may develop our own internal sales forcefor these products if they proceed to commercialization.

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We acknowledge that thesuccessful marketing of some of our potential products may be 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 31,2005, we employed 461 regular, full and part-time employees, of whomapproximately 405 were engaged in research and development activities. As ofthat date, there were 56 employees involved in business development, legal,finance and other administrative functions. None of our employees is covered bya collective bargaining agreement. We have entered into employment contractswith certain of our executive officers. Our success will depend in large partupon our ability to attract and retain employees. We face competition foremployees from other companies, research and academic institutions, governmentagencies and other organizations. We believe we maintain good relations withour employees.

**AvailableInformation**

We were incorporated inthe State of New Jersey on July 8, 1987. Our principal executive officesare located at 707 State Road, Princeton, New Jersey 08540. Our telephonenumber is (609) 430-2880.

We file annual, quarterlyand current reports, proxy statements and other information with the Securitiesand Exchange Commission, or SEC. You may read and copy our reports, proxystatements and other information at the SEC’s public reference room atRoom 1024, 450 Fifth Street N.W., Washington, D.C. 20549. You canrequest copies of these documents by writing to the SEC and paying a fee forthe copying cost. Please call the SEC at 1-800-SEC-0330 formore information about the operation of the public reference room. Our SECfilings are also available at the SEC’s web site at *www.sec.gov*.In addition, you can read and copy our SEC filings at the office of theNational Association of Securities Dealers, 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 onForm 10-Q and current reports on Form 8-K and amendmentsto those reports on the day of filing with the SEC on our website at *www.medarex.com*, by contacting the Investor RelationsDepartment at our corporate offices by calling (609) 430-2880 or bysending an e-mail message to *information@medarex.com*.You can direct requests for literature to the information request section onour website.

**Item 1A.**   Risk Factors

**ForwardLooking Information**

This Annual Reportcontains forward-looking statements within the meaning of Sections 27A and 21Eof the Securities Exchange Act of 1934, as amended, including statementsregarding our expectations, beliefs, intentions, or strategies regarding thefuture. Statements preceded by, followed by or that otherwise include the words“believes”, “expects”, “anticipates”, “intends”, “estimates”, “plans”, “forecasts”,“is likely to”, “projected” and similar expressions or future conditional verbssuch as “should”, “would”, “may”, and “could” are generally forward-looking innature and not historical facts.**Forward-lookingstatements include, without limitation, statements in this section, and in thesections entitled “Business,” “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and elsewhere in this AnnualReport regarding, among other things, uncertainties relating to our technology;history of operating losses and anticipation of future losses; uncertainty ofproduct development; uncertainty relating to competitive products, need foradditional capital and uncertainty of change; uncertainty of patent andproprietary rights; management of growth, and risks of acquiring newtechnologies; uncertainties related to clinical trials; government regulationand uncertainty of obtaining 

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regulatoryapproval; dependence on key personnel; dependence on research collaborators andscientific advisors; uncertainty of health care reform measures and third-partyreimbursement and risk of product liability. All forward-looking statementsincluded in this Annual Report are based on information available to us as ofthe date hereof, and we do not assume any obligation to update any suchforward-looking statements. Our actual results may differ materially from theresults discussed in the forward-looking statements. Among the factors thatcould cause actual results to differ materially are the factors detailed below.Accordingly, in addition to the other information in this Annual Report, thefollowing factors should be considered carefully. References to our products,business, financial results or financial condition should be considered torefer to us and our subsidiaries unless the context otherwise requires.

**Successfuldevelopment of our products is uncertain.**

Based on publicdisclosures, as of March 1, 2006, regulatory applications, including INDs,have been submitted to the FDA or comparable foreign authorities, for 31product candidates derived from our UltiMAb platform. Active product candidatesemploying our human antibody technology have not moved beyond clinicaldevelopment. Neither we nor our partners have any product candidates employingour human antibody technology that have been approved for sale by the FDA orcomparable foreign authorities and/or commercialized. In addition, we are notaware of any commercialized fully human monoclonal antibody therapeuticproducts that have been generated from any technologies similar to ours.Product candidates employing our human antibody technology may not advancebeyond clinical development or demonstrate clinical safety and effectiveness.

Ourdevelopment of current and future product candidates is subject to the risks offailure and delay inherent in the development of new pharmaceutical productsand products based on new technologies. These risks include:

·       delaysin product development, clinical testing or manufacturing;

·       slowerthan expected patient enrollment;

·       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, wehave experienced delays in our product development and clinical testing as aresult of slower than anticipated patient recruitment. In a number ofinstances, we have terminated the development of certain products in the earlystages of human clinical testing due to a lack of effectiveness.

Because of these risks,our research and development efforts or those of our partners may not result inany commercially viable products. If a significant portion of these developmentefforts are not successfully completed, required regulatory approvals are notobtained or any approved products are not commercially successful, our business,financial condition and results of operations may be materially harmed.

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**Ourrevenue and profit potential are unproven. No revenues have been generated fromthe commercial sale of our products and our products may not generate revenuesin the future.**

Because we and ourpartners have not begun commercial sales of our products, our revenue andprofit potential are unproven which makes it difficult for an investor toevaluate our business and prospects. Our technology may not result in anymeaningful benefits to our current or potential partners. No revenues have beengenerated from the commercial sale of our products, and our products may notgenerate revenues in the future. Our business and prospects should beconsidered in light of the heightened risks and unexpected expenses andproblems we may face as a company in an early stage of development in a rapidlyevolving biopharmaceutical industry.

**Wehave incurred large operating losses and we anticipate that these losses willcontinue.**

Wehave incurred large operating losses and we anticipate that these losses willcontinue for the foreseeable future. In particular, as of December 31,2005, we had an accumulated deficit of approximately $745.4 million. Our netloss was $146.0 million for the year ended December 31, 2005. Our losseshave resulted principally from:

·       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.

Weintend to continue to make significant investments in:

·       researchand development;

·       preclinicaltesting and clinical trials;

·       manufacturingclinical supplies of our antibody products;

·       establishingnew collaborations; and

·       newtechnologies.

In addition, we may beobligated to make milestone payments with respect to certain of our products asthey progress through the clinical trial process.

We do not know when or ifwe or our partners will complete any pending or future product developmentefforts, receive regulatory approval or successfully commercialize any approvedproducts.

We may continue to incursubstantial operating losses even if our revenues increase. As a result, wecannot predict the extent of future losses or the time required for us toachieve profitability, if at all.

**Ouroperating results may vary significantly from period-to-period, which mayresult in a decrease in the price of our securities.**

Ourfuture revenues and operating results are expected to vary significantly fromperiod-to-period due to a number of factors. Many of these factors are outsideof 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;

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·       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-periodcomparisons of our results of operations may not be relied upon as anindication of future performance.

It is possible that insome future periods, our operating results may be below expectations ofanalysts and investors. If this happens, the price of our securities maydecrease.

**Weare at risk of securities class action litigation.**

In the past, securitiesclass action litigation has often been brought against a company following adecline in the market price of its securities. The risk is especially relevantfor us because biotechnology companies have experienced greater than averageprice volatility in recent years. If we faced such litigation, it could resultin substantial costs and a diversion of management’s attention and resources,which could harm our business.

**Wemay need substantial additional funding. We may not be able to obtainsufficient funds to grow our business or continue our operations.**

Wewill continue to expend substantial resources for research and development,including costs associated with developing our antibody technology andconducting preclinical testing and clinical trials. Our future capitalrequirements will depend on a number 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 commercial scale manufacturing capabilities, conductingcommercialization activities and arrangements and in-licensing products.

We believe our currentsources of liquidity will be sufficient to meet our operating, debt service andcapital requirements for at least the next 24 months. To the extent our 2.25%convertible senior notes due in 2011 are converted into shares of our commonstock on 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. 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.

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**Wehave a significant amount of debt and may have insufficient cash to satisfy ourdebt service obligations. In addition, the amount of our debt could impede ouroperations and flexibility.**

We have $150.0 million inaggregate principal amount of our 2.25% convertible senior notes outstanding,which, unless converted to shares of our common stock or redeemed, will maturein 2011. Our ability to make payments on these notes and our other obligationswill depend on our future operating performance and ability to generate cashand may also depend on our ability to obtain additional debt or equityfinancing. Generally, during the last five years, our operating cash flows werenegative and insufficient to cover our fixed charges. Our ability to generatesufficient operating cash flow to service our indebtedness, including thenotes, and fund our operating requirements will depend on our ability, alone orwith others, to successfully develop, manufacture, and obtain requiredregulatory approvals and market our product candidates, as well as otherfactors, including general economic, financial, competitive, legislative andregulatory conditions, some of which are beyond our control. If we are unableto generate sufficient operating cash flow to service our indebtedness and fundour operating requirements, we may need to obtain additional debt or equityfinancing to do so, which may not be available to us on satisfactory terms orat all. In addition, if new indebtedness is incurred, the risks relating to ourability to service our indebtedness that we face could intensify.

Evenif we are able to meet our debt service obligations, the amount of debt we havecould adversely affect us in a number of ways, including by:

·       limitingour ability to obtain any necessary financing in the future for workingcapital, 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

·       requiring us to use asubstantial portion of our cash to pay principal and interest on our debt,instead of applying those funds to other purposes such as working capital andcapital expenditures.

**Clinicaltrials required for our product candidates are expensive and time-consuming,and their outcome is uncertain.**

Inorder to obtain FDA approval to market a new drug product, we or our partnersmust demonstrate proof of safety and efficacy in humans. To meet theserequirements, we or our partners will have to conduct extensive preclinicaltesting and “adequate and well-controlled” clinical trials. Conducting clinicaltrials is a lengthy, time-consuming and expensive process. The length of timemay vary substantially according to the type, complexity, novelty and intendeduse of the product candidate, and often can be several years or more per trial.Delays associated with products for which we are directly conductingpreclinical or clinical trials may cause us to incur additional operatingexpenses. Moreover, we will continue to be affected by delays associated withthe preclinical testing and clinical trials of certain product candidatesconducted by our partners over which we have no control. The commencement andrate of completion of clinical trials may be delayed by many factors,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;

·       modificationof clinical trial protocols;

·       theinability to adequately observe patients after treatment;

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·       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 positiveresults from preclinical or clinical trials, we may not achieve the samesuccess in future trials. Clinical trials may not demonstrate statisticallysufficient safety and effectiveness to obtain the requisite regulatoryapprovals for product candidates employing our human antibody technology. In anumber of instances, we have terminated the development of certain products inthe early stages of human clinical testing due to a lack of effectiveness.

Generally, our clinicaltrials, including our melanoma trials, are conducted in patients with seriousor life-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. Themost common adverse events associated with our trials of ipilimumab haveconsisted of flu-like symptoms such as fever, chills and nausea. Theseevents were expected and generally responded to standard medical therapy. In addition, some patients have experiencedanticipated drug-related immune-mediated events, such as diarrhea, rash,reduced pituitary function, colitis and increased liver enzymes, ranging frommild in most cases to severe in a very small number of instances. Other than avery small number of fatalities, representing less than 1% of over 600 patients treated in all previoustrials, which may or may not be attributable to our product candidate, mostevents resolved with treatment. We cannot assure you that additional safetyissues will not arise with respect to our products in the 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 or mayexperience delays in our product development and clinical testing. 

In addition, we arecurrently working out the final SPA details with the FDA for a single-armmonotherapy registrational study of our ipilimumab product candidate to enroll upto 150 second-line patients with metatastic melanoma previously treated withDTIC. A Phase III pivotal study of ipilimumab in combination with MDX-1379 (a melanomapeptide vaccine based on gp100) commenced enrollment of second-line patients inSeptember 2004 and is currently ongoing. If the SPA for the monotherapy studyis approved by the FDA, we may reallocate patients from the Phase IIIcombination study to the new monotherapy study. Any such reallocations maydelay the development of the combination therapy product candidate.

Data obtained fromclinical trials of our product candidates to date have been insufficient todemonstrate safety and efficacy under applicable FDA criteria. As a result,such 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.

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**Successin early clinical trials may not be indicative of results obtained in latertrials.**

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.

**Productcandidates employing our antibody technology may fail to gain marketacceptance.**

Even if clinicaltrials demonstrate the safety and effectiveness of products developed by us orour partners using our technology and all regulatory approvals have been obtained,product candidates employing our antibody technology may not gain marketacceptance among physicians, patients, third-party payors and the medicalcommunity. For example, the current delivery systems for antibody-basedtherapeutic products are intravenous and subcutaneous injection, which aregenerally less well received by patients than tablet or capsule delivery. Thedegree of market acceptance of any product candidates employing our technologywill depend on a number of factors, including, for example:

·       establishmentand demonstration of clinical efficacy and safety, especially as compared toconventional 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.

**Thesuccessful commercialization of our antibody products will depend on obtainingcoverage and reimbursement for use of these products from third-party payors.**

Sales of pharmaceuticalproducts largely depend on the reimbursement of patients’ medical expenses bygovernment health care programs and private health insurers. Without thefinancial support of the governments or third-party payors, the market forproducts employing our human antibody technology will be limited. These third-partypayors are increasingly challenging the price and examining the costeffectiveness of medical products and services. In addition, significantuncertainty exists as to the reimbursement status of newly approved healthcareproducts. We may need to conduct post-marketing studies in order to demonstratethe cost-effectiveness of our products. Such studies may require us to dedicatea significant amount of resources. Our project candidates may not be consideredcost-effective. Third-party payors may not reimburse sales of productsemploying our human antibody technology, or enable us or our partners to sellthem at profitable prices.

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**Ourmanufacturing facilities may not continue to meet regulatory requirements andhave limited capacity.**

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 with respect to ipilimumab and MDX-060.As part of our collaboration with BMS, we assigned to BMS the clinical supplyagreement with respect to ipilimumab. Our partner BMS is responsible forsecuring commercial supply agreements for ipilimumab and is currently innegotiations with respect to such arrangements. BMS may not be able tosuccessfully consummate such arrangements. We do not currently have thecapability to manufacture our product candidates under development in largecommercial quantities and have no experience in commercial-scale manufacturing.It would take a substantial period of time for a contract facility that has notbeen producing antibodies to begin producing antibodies under cGMP regulations.We cannot make assurances that we will be able to contract with such companiesfor clinical and/or commercial supply on acceptable terms or in a timelymanner, if at all. Moreover, even if we are able to enter into clinical and/orcommercial supply manufacturing arrangements with cGMP-compliant third-partymanufacturers, we cannot assure you that such manufacturers will be able toproduce products that are substantially equivalent to the product candidatesthat we have produced in our own facilities and used in our clinical trials. Ifsuch companies are not able to produce products that are substantiallyequivalent to our product candidates, the progress of our clinical trialsand/or commercialization of our products may be delayed and our business,financial condition and results of operations may 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  or other regulatory authoritiescan impose regulatory sanctions including, among other things, refusal toapprove a pending application for a new drug product or biologic product, 

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orrevocation of a pre-existing approval. As a result, our business, financialcondition and results of operations may be materially harmed.

**Thedevelopment of commercialization of our lead product candidate, ipilimumab, is,in large part, dependent on the actions of BMS, which are outside of our control.**

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, ipilimumab, to BMS forthe treatment of all diseases. We have also granted to BMS a sub-license to MDX-1379for use in combination with ipilimumab for the treatment of metastaticmelanoma. The successful development and commercialization of ipilimumab isdependent, in large part, on the actions of BMS, which are outside of ourcontrol. The failure of BMS to act in accordance with its obligations under thecollaboration and co-promotion agreement may cause us to incur substantialadditional costs in order to develop and commercialize ipilimumab, which couldhave a material adverse effect on our business.

**Weare, in part, dependent on our partners’ willingness and/or ability to devoteresources to the development of product candidates or otherwise support ourbusiness as contemplated in our partnership agreements.**

We currently, or inthe 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.

Our dependence onour 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.

**Ourexisting partnerships may be terminated, and we may not be able to establishadditional partnerships.**

Our licensingpartners generally have the right to terminate our partnerships at any time.Our ability to continue our current partnerships and to enter into additionalpartnerships is dependent in large part on our ability to successfullydemonstrate that our UltiMAb technology is an attractive method of developing 

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fullyhuman antibody therapeutic products. Existing or potential partners may pursuealternative technologies, including those of our competitors, or enter intoother transactions that could make a collaboration with us less attractive tothem. For example, if an existing partner purchases or is purchased by acompany that is one of our competitors, that company could be less willing tocontinue its collaboration with us and may, instead, become one of ourcompetitors. For example, in December 2005, Abgenix and Amgen announcedtheir execution of a merger agreement which, subject to certain conditions, isexpected to close by the end of April 2006. Upon completion of the merger,Amgen will own Abgenix’s XenoMouse technology. As a result, Amgen may be lesswilling to continue its collaboration with us and may, through the use of itsnewly acquired XenoMouse technology, engage in direct competition with us inthe area of generating fully human monoclonal antibodies for antibody-basedtherapeutics. In addition, a company that has a strategy of purchasingcompanies rather than entering into partnership arrangements might have lessincentive to enter into a collaboration agreement with us. Moreover, disputesmay arise with respect to the ownership of rights to any technology or productsdeveloped with any current or future partner. Lengthy negotiations withpotential new partners or disagreements between us and our partners may lead todelays or termination in the research, development or commercialization ofproduct candidates. If we are not able to establish additional partnerships onterms that are favorable to us or if a significant number of our existingpartnerships are terminated and we cannot replace them, we may be required toincrease our internal product development and commercialization efforts. Thiswould 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.

**Dueto the size of our equity interest in Celldex, we must consolidate the resultsof its operations in our financial statements.**

Due to the size of ourequity interest in Celldex, we are currently required to consolidate theoperations of Celldex in our financial statements, which results in theinclusion of their losses in our financial statements. We are unable to predictwhat such losses will be. For the year ended December 31, 2005, our share,net of minority interest, of Celldex’s net loss included in our financialstatements was approximately $12.6 million.

**Ourstrategic equity investments in our partners expose us to equity price riskand, in addition, investments in our partners may be deemed impaired, whichwould affect our results of operations.**

We have a number of strategic investments which exposeus to equity price risk. These investments may become impaired which wouldadversely affect our results of operations.

We are exposed to equity price risk on our strategicinvestments in our publicly-traded partners, and as part of our businessstrategy, we may choose to make additional similar investments in publiccompanies in the future. As these investments are the result of strategicalliances with our collaborative partners, we typically do not attempt to reduceor eliminate our market exposure of these types of strategic investments. UnderSFAS No. 115, “Accounting for Certain Investments in Debt and EquitySecurities,” these investments are designated as available-for-sale and arereported at fair value on our consolidated balance sheet. Unrealized holdinggains and losses on available-for-sale securities are generally excluded fromearnings and reported within other comprehensive income which is a separatecomponent of shareholders’ equity. Under our accounting policy, marketableequity securities are generally considered to be impaired if their fair valueis less than our cost basis in such securities for more than six months, orsome other 

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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. During each of the years ended December 31, 2005 and2003, no impairment charges were recorded related to the value of ourinvestments in publicly traded companies. For the year ended December 31,2004, we recorded impairment charges of $0.2 million on investments in partnerswhose securities are publicly traded. If we deem these investments to befurther impaired at the end of any future reporting period, we may incuradditional impairment charges on these investments.

In addition, we haveinvestments in several of our partners whose securities are not publiclytraded. The value of our investments in these companies are inherently moredifficult to estimate than our investments in publicly traded companies. Weestimate the value of these investments by using information acquired fromindustry trends, management of these companies, financial statements, and otherexternal sources. Specifically, our determination of any potential impairmentof the value of privately held securities includes an analysis of the followingfor each company 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 financing 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 considered to be other than temporary. For the years ended December 31,2005, 2004 and 2003, we recorded impairment charges of approximately $33.3million, $7.1 million and $1.4 million, respectively, on our investments inprivately-held companies. Approximately $7.0 million of the 2004 impairmentcharge related to IDM. Approximately $29.3 million of the 2005 impairmentcharge related to IDM prior to their share exchange with Epimmune. Futureadverse changes in market conditions or adverse changes in operating results ofthese companies may also require an impairment charge in the future.

**Weare dependent on our key personnel.**

We are highly dependent on the members of ourscientific and management staff. If we are not able to retain any of thesepersons, our business may suffer. In particular, we depend on the services ofDonald L. Drakeman, J.D., Ph.D., our President and Chief Executive Officer;Nils Lonberg, Ph.D., our Senior Vice President and Scientific Director; andGeoffrey M. Nichol, M.D., M.B.A., our Senior Vice President, ProductDevelopment. We maintain a key man life insurance policy for Dr. Drakemanin the amount of $2.0 million and maintain key man life insurance policies inthe amount of $1.0 million for each of Dr. Lonberg and Dr. Nichol. Wehave entered into employment agreements with Dr. Drakeman and all of ourother executive officers, which expire in January 2007. Thereafter, all ofthese agreements are automatically renewed for successive one (1) yearterms 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.

**Wedepend on patents and proprietary rights.**

Our success dependsin part on our ability to:

·       applyfor, obtain, protect and enforce patents;

·       protecttrade secrets;

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·       operatewithout infringing upon the proprietary rights of others; and

·       in-licensecertain technologies.

We will be able to protect our proprietary rights fromunauthorized use by third parties only to the extent that our proprietaryrights are covered by valid and enforceable patents or are effectivelymaintained as trade secrets. We protect our proprietary position by filing U.S.and foreign patent applications related to our proprietary technology,inventions and improvements that are important to the development of ourbusiness. Our pending patent applications, those we may file in the future, orthose we may license from third parties, may not result in patents being issuedor enforceable. The patent position of biotechnology intellectual propertyinvolves complex legal and factual questions and, therefore, enforceabilitycannot be predicted with certainty. Patents, if issued, may be challenged,invalidated or circumvented. Thus, any patents that we own or license fromthird parties may not provide sufficient protection against competitors. Also,patent rights may not provide us with proprietary protection or competitiveadvantages against competitors with similar technology. Furthermore, others mayindependently develop similar technologies or duplicate any technology that wehave developed which is not covered by an issued patent. 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. These agreementsmay not provide protection or adequate remedies in the event of unauthorizeduse or disclosure of confidential and proprietary information, or breach ofthese agreements. Furthermore, our trade secrets may otherwise become known to,or be independently developed by, our competitors.

**Thirdparties may allege our products infringe their patents or may challenge thevalidity of our patents and other intellectual property rights, resulting inlitigation or other time-consuming and expensive proceedings which coulddeprive us of valuable products and/or rights.**

Our commercial success depends significantly on ourability to operate without infringing the patents and other proprietary rightsof third parties. In the event that our products or technologies may infringeon the patents or violate other proprietary rights of third parties, we and ourpartners may be prevented from pursuing product development, manufacturing orcommercialization or may be required to pay significant monetary damages tothird parties. Such a result may materially harm our business, financialcondition and results of operations.

If we become involved in any intellectual propertylitigation, interference or other judicial or administrative proceedings, wewill incur substantial expense and the efforts of our technical and managementpersonnel will be diverted. An adverse determination may subject us tosignificant liabilities or require us to seek licenses that may not beavailable from third parties on commercially favorable terms, if at all.Therefore, we and our partners may be restricted or prevented frommanufacturing and selling products that are covered by such intellectualproperty, which would harm our business.

Even though we have issued patents, filed applicationsand received licenses pertaining to the HuMAb-Mouse and the KM-Mousetechnologies, this does not mean that we and our licensees of the HuMAb-Mouseand the KM-Mouse technology will have exclusive rights to antibodies againstall targets that are made using this technology, or that we or our licenseeswill have the right to make, develop, use or sell such antibodies.

Our patents and applications covering the HuMAb-Mouseand the KM-Mouse technology include patents and applications that coverparticular human antibodies. These patents do not cover all human antibodies.

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We do not have exclusive access to the patentsunderlying the HuMAb-Mouse. In March 1997, prior to our acquisition ofGenPharm, GenPharm entered into a cross-license and settlement agreement withAbgenix, Cell Genesys, Inc., Xenotech, L.P. and Japan Tobacco, Inc.,pursuant to which Abgenix and these entities paid GenPharm a total ofapproximately $38.6 million in exchange for a non-exclusive license to certainpatents, patent applications, third-party licenses and inventions pertaining tothe development and use of certain transgenic rodents, including mice, thatproduce fully human antibodies that are integral to our products and business.These patents, patent applications, third party licenses and inventions formthe basis of our HuMAb-Mouse technology. Abgenix has announced a potentialmerger with Amgen which, if completed, will give Amgen access to such patents,patent applications, third party licenses and inventions. Our business maysuffer from the competition of these entities and their licensees andsublicensees.

We are not the exclusive owner of the technologyunderlying the KM-Mouse. Effective September 2002, we entered into acollaboration and license agreement with Kirin, which provides for us to exchangecertain cross-licenses for each other’s technology for the development andcommercialization of human antibody products made using the HuMAb-Mouse, theKM-Mouse and certain other antibody-generating mice. Kirin has certain rightsto distribute and use such mice throughout the world. Our business may sufferas a consequence of competition from Kirin and its licensees and sublicenseesor if the collaboration and license agreement were breached or terminated forany reason.

Our patents may not protect against the importation ofproducts, such as antibodies, made using HuMAb-Mouse or KM-Mouse technology.

Moreover, other parties could have blocking patentrights to products made using UltiMAb technology, such as antibodies, and theirproduction and uses, for instance because of a proprietary position coveringthe antibody or the antibody’s target or the method of manufacturing suchantibody. For example, we are aware of certain U.S. and European patents heldby third parties relating to particular targets for their human monoclonalantibodies, to human monoclonal antibodies against various targets, and to themethod of manufacture and use of such products. In particular, we are aware ofa patent held by Pfizer to which we may need a license in order to manufacturecommercial supplies of ipilimumab. We are also aware of certain U.S. andforeign patents and patent applications held by third parties relating toanti-CTLA-4 antibodies, such as ipilimumab; anti-CD30 antibodies, such asMDX-060; anti-PSMA antibodies, such as MDX-070; anti-Type 1 IFNantibodies, such as MEDI-545 and MDX-1333; anti-IP10 antibodies,such as MDX-1100; anti-anthrax protective antigen  antibodies, such as MDX-1303; anti-*C. difficile* antibodies, such as MDX-066; andantibodies that target the same disease antigen as MDX-018(HuMax-Inflam), as well as other antibody products under development by usalone or with our collaborators.

With respect to third party patent rights, we areaware of a U.S. patent owned by Genentech, Inc. relating to the productionof recombinant antibodies in host cells. Two separate re-examinations beforethe U.S. Patent and Trademark Office, or the USPTO were requested anonymouslyin May and December 2005.  Inthe re-examination filed in May 2005, the USPTO rejected all of the patentclaims, and Genentech recently filed its response following an interview withthe USPTO. In January 2006, the USPTO ordered re-examination of the patenton the basis of the second request for re-examination, filed in December 2005,but has not yet taken any further action on this second request. If the claimsare determined to be unpatentable during the re-examination, Genentech willhave the opportunity to appeal, and the determination of unpatentability couldbe reversed. It is also possible that the claims might be confirmed as valid bythe USPTO upon completion of the re-examination. The re-examination and appealprocess could take several years each to complete.

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 the Genentech patent, and the patentsurvives the re-examination and appeal processes, then we may need to obtain alicense, should one be available. 

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We have a license to thispatent from Genentech for our anti-CTLA-4 product candidate (ipilimumab)but currently do not have licenses for any of our other antibody productcandidates. If we desire a license for any of our other antibody productcandidates and are unable to obtain a license on commercially reasonable termsor at all, we may be restricted in our ability to make and import recombinantantibodies using Genentech’s techniques.

In addition to the Genentech patent, we are also awareof certain U.S. patents held by third parties relating to antibody expressionin particular types of host cells, including CHO cells, and methods ofculturing CHO cells in certain media, and to particular antibody formulations,which may be relevant to our 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 any other patents, orpatents that may issue from the aforementioned patent applications or any otherpatent applications, then we or our partners may need a license to one or moreof these patents. Further, we are aware of a number of other third party patentapplications that, if granted, with claims as currently drafted, may cover ourand our partners’ current or planned activities. We cannot assure you that ourproducts and/or actions in developing or selling human antibody products willnot infringe such patents. We intend to seek licenses to such patents when, inour judgment, such licenses are needed. If any licenses are required, there canbe no assurance 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.

**Wehave had and may continue to face product liability claims related to the useor misuse of products developed by us or our partners.**

The administration of drugs to humans, in clinicaltrials or after approval and during commercialization, may expose us to productliability claims. Consumers, healthcare producers or persons selling productsbased on our technology may be able to bring claims against us based on the useof our products in clinical trials and the sale of products based on ourtechnology. Product liability claims may be expensive to defend and may resultin large judgments against us. We have obtained limited product liabilitycoverage for our clinical trials, under which coverage limits are $15 millionper occurrence and $15 million in the aggregate. Although we believe thesecoverage limits are adequate, we cannot be certain that the insurance policieswill be sufficient to cover all claims that may be made against us. We intendto increase our coverage limits as we progress into additional late-stageclinical trials and to expand our insurance coverage to include the sale ofcommercial 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, we voluntarily suspendedclinical trials for one of our products after some patients experienced seriousadverse events, or SAEs. This product did not employ our core fully humanantibody technology and we have determined not to pursue further development ofthis product. As a result of these SAEs, we received a small number of claims,of which five resulted in lawsuits being filed. All of these lawsuits have beensettled for insubstantial amounts. We cannot make assurances that additionalclaims will not be filed against us relating to these SAEs or arising out ofany other clinical trial we have conducted 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 

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therapiesthat themselves have significant adverse event profiles. During the course oftreatment, these patients could suffer adverse medical events or die for reasonsthat may or may not be related to our products. The most common adverse eventsassociated with our melanoma trials of ipilimumab have consisted of flu-likesymptoms such as fever, chills and nausea. These events were expected andgenerally responded to standard medical therapy. In addition, some patientshave experienced anticipated drug-related immune-mediated adverse events, suchas diarrhea, rash, reduced pituitary function, colitis and increased liverenzymes, ranging from mild in most cases to severe in a very small number ofinstances. Almost all of these adverse events responded to medical therapy. Ina very small number of instances (less than 1% of over 600 patients treated),fatalities not directly related to disease progression have occurred during thecourse of these trials—such fatalities may or may not be attributable to ourproduct. Any of these events or any other adverse events in any of our otherclinical trials could result in a product liability claim. Any such claimsagainst us, regardless of their merit, could result in significant awardsagainst us, which could materially harm our business, financial condition andresults of operations.

**Weface intense competition and rapid technological change.**

The development of biotechnology and pharmaceuticalproducts is a highly competitive business subject to significant and rapidtechnological change. We face competition in several different forms. First,our human antibody generation activities currently face competition fromseveral competitors with similar technology to ours as well as distinctlydifferent technologies. Second, the actual products being developed by us or byour partners also face actual and potential competition. Developments by ourcompetitors may render our human antibody technology or our products obsoleteor non-competitive.

We are aware of several pharmaceutical andbiotechnology companies that are actively engaged in research and developmentin areas related to antibody therapeutics. Some of these companies have commencedclinical trials of antibody products or have successfully commercializedantibody products. Many of these companies are addressing the same diseases anddisease indications as are we and our partners. Also, we compete with companiesthat offer antibody generation services to other companies that have 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 December 2005, Abgenix and Amgen announced theirexecution of a merger agreement which, subject to certain conditions, isexpected to close by the end of April 2006. Upon completion of the merger,Amgen will own Abgenix’s XenoMouse technology and may engage in directcompetition with us in the area of generating fully human monoclonal antibodiesfor antibody-based therapeutics. In addition, we have entered into agreementswith each of Kirin and Genmab, respectively, that grant these companieslicenses to our proprietary transgenic mouse technology platform, enabling themto compete with us in offering antibody generation and development services incertain markets.

We have also entered into license agreements with Pfizerwhich enable it to compete with us in the generation and development ofantibodies to CTLA-4. Pfizer is developing ticilimumab (also known as CP-675,206),a fully human antibody generated by using transgenic mouse technologysubstantially similar to our HuMAb-Mouse technology that targets the immunereceptor CTLA-4. According to publicly available information, afirst-line Phase III clinical trial comparing ticilimumab alone to chemotherapyalone for metastatic melanoma was initiated by Pfizer in December 2005.  Pfizer has disclosed that it expects to file aBLA with respect to ticilimumab in 2007.

Xenerex Biosciences and XTL Biopharmaceutical, Ltd.have developed technology that, according to Xenerex and XTL, will allow themto generate fully human monoclonal antibodies in functionally modified mice.Regeneron claims to have developed VelocImmune mice, in which portions of themouse immune genome have been humanized, generating mice with humanized immunesystems that can generate fully human antibodies. Numerous additional companiesare developing therapeutic products comprising 

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human antibody components.Furthermore, several companies are developing, or have developed, technologiesthat do not involve immunization of animals for creating antibodies comprisinghuman antibody sequences. For example, phage display technology is being usedby companies, such as CAT, Dyax and MorphoSys to develop therapeutic productscomprising human antibody sequences. Companies such as Johnson &Johnson, MedImmune, Amgen, Biogen Idec, Novartis, Genentech, PDLBioPharma, Wyeth, Abbott Laboratories and GlaxoSmithKline have generatedtherapeutic products that are currently in development or on the market andthat are derived from recombinant DNA that comprise human antibody components.

Other technologies can also be applied to thetreatment of the diseases that we or our partners are pursuing. For example,immunoconjugates—monoclonal antibodies linked to toxins or radioactive isotopes—arebeing developed by others, as well as by us. In addition, the application ofrecombinant DNA technology to develop potential products consisting of proteins(such as growth factors, hormones, enzymes, cytokines receptor fragments andfusion proteins) that do not occur normally in the body, or occur only in smallamounts, has been underway for some time. Included in this group areinterleukins such as IL-2 and IL-11, interferons, colonystimulating factors such as G-CSF and GM-CSF, clotting factors, growthhormones, erythropoeitin, DNAse, tPA, glucocerebrosidase, PDGF, and a number ofother similar biological agents. Continuing development of new chemicalentities and other drugs by pharmaceutical and other biotechnology companiescarries with it the potential discovery of agents for treating diseaseindications also targeted by drugs that we or our partners are developing.

Some of ourcompetitors have received regulatory approval or are developing or testingproduct candidates that compete directly with product candidates employing ourantibody technology. Many of these companies and institutions, either alone ortogether with their partners, have substantially greater financial resourcesand larger research and development staffs than we or some of our partners do.In addition, many of these competitors have significantly greater experiencethan we do in:

·       developingproducts;

·       undertakingpreclinical testing and clinical trials;

·       obtainingFDA and other regulatory approvals of products; and

·       manufacturingand marketing products.

Accordingly, our competitors may obtain patentprotection, receive FDA approval or commercialize products before we or ourpartners do. If we or our partners commence commercial product sales, we or ourpartners will be competing against companies with greater manufacturing,marketing and sales capabilities, areas in which we and certain of our partnershave limited or no experience.

We also face intense competition from otherpharmaceutical and biotechnology companies to establish partnerships, as wellas relationships with academic and research institutions, and to in-licenseproprietary technology from these institutions. These competitors, either aloneor with their partners, may succeed in developing or licensing technologies orproducts instead of us that are more effective than ours.

Our competitive strategy includes seeking orphan drugdesignation for eligible products (i.e., certain products for diseases withsmall patient populations). The first drug with an orphan drug designation fora given disease to receive regulatory approval for such disease generallyreceives marketing exclusivity for the use of the drug for such disease for aperiod of seven years from approval.

We have obtained orphan drug designation for each ofipilimumab and MDX-1379 for specified metastatic melanoma patientpopulations, and therefore each is eligible for orphan drug exclusivity ifapproved first. The FDA’s approach with respect to orphan drug status forantibody products is uncertain, particularly with respect to whether twoantibody products against the same disease target would be considered to be thesame for orphan drug purposes under current law and regulations. Furthermore,we 

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are not aware ofestablished FDA policies or precedent for how orphan drug exclusivity appliesin circumstances where two or more compounds with orphan drug designations areapproved for combination therapy. The FDA may not grant us exclusivity for theipilimumab and MDX-1379 combination therapy, or may permit others toreceive approval for differing combinations of similar compounds despite anyorphan drug exclusivity we receive, depending on FDA’s assessment of thechemical similarity of the other drugs to Medarex’s products. Even if wereceive orphan drug exclusivity, the FDA may permit others to market similar ordifferent compounds for different uses or it may permit others to marketsimilar compounds for treating metastatic melanoma. We therefore may notreceive any meaningful protection for ipilimumab, MDX-1379 or our otherproducts based on orphan drug exclusivity.

In addition, Pfizer couldobtain orphan drug designation for ticilimumab for specific patientpopulations, including metastatic melanoma and, if they are first to receiveapproval by the FDA, could obtain market exclusivity with respect to suchpopulations, thereby blocking Medarex and BMS from obtaining approval to sellipilimumab, whether as a monotherapy or combination therapy with MDX-1379,for such patient populations, including metastatic melanoma.

**Weare subject to extensive and costly government regulation.**

Product candidates employing our human antibodytechnology are subject to extensive and rigorous domestic government regulationincluding regulation by the FDA, the Centers for Medicare and MedicaidServices, other divisions of the U.S. Department of Health and Human Services,the U.S. Department of Justice, state and local governments and theirrespective foreign equivalents. The FDA regulates the research, development,preclinical and clinical testing, manufacture, safety, effectiveness,record-keeping, reporting, labeling, storage, approval, advertising, promotion,sale, distribution, import, and export of biopharmaceutical products. The FDAregulates human antibodies as biologics, subject to a Biologic LicenseApplication, or BLA, under the Public Health Service Act, as amended. Ifproducts employing our human antibody technology are marketed abroad, they willalso be subject to extensive regulation by foreign governments, whether or notwe have obtained FDA approval for a given product and its uses. Such foreignregulation may be equally or more demanding than 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 beinspected and meet legal requirements. Securing regulatory approval requiresthe submission 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 medical uses for the product, may otherwiselimit our ability to promote, sell, and distribute the product, may requirethat we conduct costly post-marketing surveillance, and/or may require that weconduct ongoing post-marketing studies. Material changes to an approvedproduct, such as, for example, 

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manufacturing changes or revised labeling, may requirefurther regulatory review and approval. Once obtained, any approvals may bewithdrawn, including, for example, if there is a later discovery of previouslyunknown problems with the product, such as a previously unknown safety issue.If we, our partners or our contract manufacturers fail to comply withapplicable regulatory requirements at any stage during the regulatory process,such noncompliance 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;

·       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 donot have, and may never obtain, the regulatory approvals we need to market ourproduct candidates.**

Following completion of clinical trials, the resultsare evaluated and, depending on the outcome, submitted to the FDA in the formof a BLA, or a New Drug Application, or NDA, in order to obtain FDA approval ofthe product and authorization to commence commercial marketing. In respondingto a BLA or NDA, the FDA may require additional testing or information, mayrequire that the product labeling be modified, may impose post-approval studyor reporting requirements or other restrictions on product distribution, or maydeny the application. The FDA has established performance goals for review ofNDAs and BLAs—six months for priority applications and 10 months for standardapplication. However, the FDA is not required to complete its review withinthese time periods. The timing of final FDA review and action varies greatly,but can take years in some cases and often involves the input of an FDAadvisory committee of outside experts. Product sales in the U.S. may commenceonly when a BLA or NDA is approved.

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To date, we have not applied for or received theregulatory approvals required for the commercial sale of any of our products inthe U.S. or in any foreign jurisdiction. None of our product candidates hasbeen determined to be safe and effective, and we have not submitted an NDA orBLA to the FDA or an equivalent application to any foreign regulatoryauthorities for any of our product candidates. We have only limited experiencein filing and pursuing applications necessary to obtain regulatory approval. Itis possible that none of our product candidates will be approved for marketing.

Product candidatesthat appear promising in the early phases of development, such as inpreclinical development or in early human clinical trials, may fail to reachthe market for a number of reasons, such as:

·       theproduct candidate did not demonstrate acceptable clinical trial results eventhough it demonstrated positive preclinical trial results;

·       theproduct candidate was not effective in treating the specified disease or condition;

·       theproduct candidate had harmful side effects on humans or presented unacceptablesafety risks;

·       thegoverning regulatory authorities (such as the FDA) denied approval to theproduct candidate altogether or denied a commercially important indicated use;

·       theproduct candidate was not economical for us to manufacture; and/or

·       theproduct candidate was not cost effective in light of alternative therapies.

We cannot guarantee thatwe will ever be able to produce commercially successful products.

**If weor our manufacturing partners do not comply with current good manufacturingpractices requirements, we will not be able to commercialize our productcandidates.**

We will depend on our ownmanufacturing facilities and/or on those of our partners and other thirdparties to 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 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 different requirementsmay apply in the future. We, our partners or third party contract manufacturersmay not be able to comply with the applicable regulations. After regulatoryapprovals are obtained, the subsequent discovery of previously unknownproblems, or the failure to maintain compliance with existing or new regulatoryrequirements, may result in restrictions on the marketing of a product,withdrawal of the product from the market, seizures, the shutdown ofmanufacturing facilities, injunctions, monetary fines and/or civil or criminalsanctions.

**Evenif approved, our products will be subject to extensive post-approvalregulation.**

Once a product is approved, numerous post-approvalrequirements apply. Among other things, the holder of an approved BLA or NDA issubject to periodic and other FDA monitoring and reporting obligations,including obligations to monitor and report adverse events and instances of thefailure of a product to meet the specifications in the BLA or NDA. Applicationholders must submit new or supplemental applications and obtain FDA approvalfor certain changes to the approved product, product labeling or manufacturingprocess. Application holders must also submit advertising and other promotionalmaterial to the FDA and report on ongoing clinical trials.

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Advertising and promotional materials must comply withFDA rules in addition to other potentially applicable federal and statelaws. The distribution of product samples to physicians must comply with therequirements of the Prescription Drug Marketing Act. Manufacturing facilitiesremain subject to FDA inspection and must continue to adhere to FDA’s currentgood manufacturing practice requirements. Application holders must obtain FDAapproval for product, manufacturing, and labeling changes, depending on thenature of the change. Sales, marketing, and scientific/educational grantprograms must comply with the anti-fraud and abuse provisions of the SocialSecurity Act, the False Claims Act and similar state laws, each as amended.Pricing and rebate programs must comply with the Medicaid rebate requirementsof the Omnibus Budget Reconciliation Act of 1990 and the Veteran’s Health CareAct of 1992, each as amended. If products are made available to authorizedusers of the Federal Supply Schedule of the General Services Administration,additional laws and requirements apply. All of these activities are alsopotentially subject to federal and state consumer protection and unfaircompetition 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 weare able to obtain approvals for our products, the law or FDA policy couldchange and expose us to competition from “generic” or “follow-on” versions ofour products.**

Under current U.S. law and FDA policy, genericversions of conventional chemical drug compounds, sometimes referred to assmall molecule compounds, may be approved through an abbreviated approvalprocess. In general terms, the generic applicant references an approvedinnovator product for which full clinical data demonstrating safety and effectivenessexist for the approved conditions of use. The generic applicant in turn needonly demonstrate that its product has the same active ingredient(s), dosageform, strength, route of administration, and conditions of use (labeling) asthe referenced innovator drug, and that the generic product is absorbed in thebody at the same rate and to the same extent as the referenced innovator drug(this is known as bioequivalence). In addition, the generic application mustcontain information regarding the manufacturing processes and facilities thatwill be used to ensure product quality, and must contain certifications topatents listed with the FDA for the referenced innovator drug.

There is no such abbreviated approval process undercurrent law for biological products approved under the Public Health ServiceAct through a BLA, such as monoclonal antibodies, cytokines, growth factors,enzymes, interferons and certain other proteins. However, various proposalshave been made to establish an abbreviated approval process to permit approvalof generic or follow-on versions of these types of biological products. Theproposals include proposals for legislation, and proposals for FDA to extendits existing authority to this area.

If the law is changed orif FDA somehow extends its existing authority in new ways, and third partiesare permitted to obtain approvals of versions of our products through anabbreviated approval mechanism, and without conducting full clinical studies oftheir own, it could adversely effect our business. Such products would besignificantly less costly than ours to bring to market, and could lead to theexistence of multiple lower priced competitive products. This wouldsubstantially limit our ability to obtain a return on the investments we havemade in those products.

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**Ouroperations involve hazardous materials and are subject to environmental, healthand 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 besubstantial. Our business activities involve the controlled use of hazardousmaterials and we cannot eliminate the risk of accidental contamination orinjury from these materials. In the event of an accident or environmentaldischarge, we may be held liable for any resulting damages, which may exceedour financial resources and may materially harm our business, financial conditionand results of operations.

**Our stock price may be volatile.**

Historically, therehas been significant volatility in the market prices of biotechnology companies’securities. During the two-year period ended December 31, 2005, the saleprices of our common stock ranged between $4.37 and $14.35. Various factors andevents may have a significant impact on the market 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;

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

·       generalmarket conditions.

The trading price of ourcommon stock has been, and could continue to be, subject to wide fluctuationsin response to these or other factors, including the sale or attempted sale ofa large amount of our common stock into the market. Broad market fluctuationsmay also adversely affect the market price of our common stock.

**Wehave obligations to issue shares of our common stock in the future, which mayhave a dilutive effect on the shares of our common stock currently outstanding.**

As of February 28, 2006, we had 16,665,756 sharesof common stock reserved for issuance pursuant to options and other stock basedawards which had been granted under our equity incentive plans having aweighted average exercise price of $8.58 per share and we had reserved3,940,137 shares of common stock for issuance pursuant to future grants ofoptions under our equity incentive plans. We have filed registration statementson Form S-8 under the Securities Act covering all of these shares.Shares issued pursuant to these plans, other than shares issued to affiliates,will be freely tradable in the open market. Shares held by affiliates may besold pursuant to the requirements of Rule 144.

In addition, as of that date, there were 41,168 sharesreserved for issuance pursuant to a deferred compensation program. The sharesreserved for the deferred compensation program will be issued in various amountsover various periods of time during the next three years. We have filed aregistration statement on Form S-8 under the Securities Act coveringthose shares. Shares issued pursuant to this 

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program, other than sharesissued to affiliates, will be freely tradable in the open market. Shares heldby affiliates may be sold pursuant to the requirements of Rule 144.

As of February 28, 2006, we had reserved 766,184shares of common stock for issuance pursuant to our 2002 Employee StockPurchase Plan. We have filed a registration statement on Form S-8under the Securities Act covering all of those shares. All shares issued underthis plan, other than shares issued to affiliates, will be freely tradable onthe open market. Shares held by affiliates may be sold pursuant to therequirements of Rule 144.

The exercise of all or a portion of the outstandingoptions may result in a significant increase in the number of shares of ourcommon stock that will be subject to trading on the NASDAQ National Market andthe issuance and sale of the shares of our common stock upon the exercisethereof may have an adverse effect on the price of our common stock.

As of February 28,2006, 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.

**Futuresales of our common stock or other securities could cause the market price ofour common stock to decline.**

As of February 28, 2006, we had 111,964,174shares of common stock outstanding, of which 9,477,928 are restrictedsecurities as that term is defined in Rule 144 under the Securities Act.Under certain circumstances, these restricted securities may be sold withoutregistration pursuant to such rule. We are unable to predict the effect thatsales made under Rule 144 or pursuant to any registration may have on themarket price of our common stock. The sale of a significant number ofadditional securities, or even the possibility thereof, may lower the marketprice of our common stock.

In addition, wehave filed a shelf registration statement on Form S-3 under theSecurities 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 filed a registration statement on Form S-3under the Securities Act relating to our $150.0 million 2.25% ConvertibleSenior Notes due May 15, 2011, and up to 10,936,935 shares of our commonstock which may be issued upon conversion of the notes. The notes and theshares of common stock are freely tradable without restriction or furtherregistration under the Securities Act except for shares held by our affiliates,which will be subject to the resale limitations of Rule 144.

We have filed a registration statement on Form S-4under the Securities Act to register shares of our common stock having amaximum aggregate offering price of $12.0 million. Such shares are freelytradable without restriction or further registration under the Securities Act.This registration statement on Form S-4 under the Securities Act iscurrently available for the sale of up to $7.7 million of our common stock.

We have also filedregistration statements on Form S-3 under the Securities Act thatrelate to the sale by certain selling securityholders of up to 21,875,353shares of our common stock. These shares are included in the 111,964,174 sharesof our common stock outstanding as of February 28, 2006 mentioned 

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above,and were issued upon the conversion of our 4.25% Convertible Senior Notes due August 15,2010 in connection with the provisional redemption of such notes in January 2005.These shares of common stock are freely tradable without restriction or furtherregistration under the Securities Act except for shares held by our affiliates,which will be subject to the resale limitations of Rule 144.

**Uponthe occurrence of certain change of control events of our company, we arerequired to offer to repurchase all of our debt, which may adversely affect ourbusiness 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 15,2011. As of February 28, 2006, $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 include, without limitation, (i) the acquisition by any third partyof at least 50% of our common stock; or (ii) our merger or consolidationwith or into any other person, any merger or consolidation of another personinto us or our sale or other disposal of all or substantially all of ourassets, except in certain limited circumstances provided in the indenturesrelating to the notes. Such repurchase rights may be triggered at a time atwhich we do not have sufficient funds available to pay the repurchase price incash or determine that payment in cash is otherwise inadvisable. In such event,the issuance of a significant number of additional shares of common stock inpayment of the repurchase price may lower the market price of our common stock.

**Ourrestated certificate of incorporation, amended and restated by-laws,shareholder rights plan and New Jersey law contain provisions that could delayor prevent an acquisition of our company even if the acquisition would bebeneficial to our shareholders, and as a result, our management may becomeentrenched and hard to replace.**

In May 2001, our board of directors adopted ashareholder rights plan. The shareholder rights plan provides for a dividend ofone preferred share purchase right on each outstanding share of our commonstock. Each right entitles shareholders to buy 1/1000th of a share of our Series Ajunior participating preferred stock at an exercise price of $150.00. Eachright will become exercisable following the tenth day after a person or groupannounces an acquisition of 20% or more of our common stock. We will beentitled to redeem the rights at $0.001 per right at any time on or before theclose of business on the tenth day following acquisition by a person or groupof 20% or more of our common stock.

The shareholderrights plan and certain provisions of our restated certificate of incorporationand amended and restated by-laws and New Jersey law may have the effect ofmaking it more difficult for a third party to acquire, or of discouraging athird party from attempting to acquire, control of us. This could limit theprice that certain investors might be willing to pay in the future for ourcommon stock. The provisions of our restated certificate of incorporation andamended and restated 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 theprotections of the New Jersey Shareholders Protection Act. This New Jerseystatute contains provisions that impose restrictions on shareholder action toacquire control of our 

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company.The effect of the provisions of our shareholder rights plan, restatedcertificate of incorporation and amended and restated by-laws and New Jerseylaw may discourage third parties from acquiring control of our company. Inaddition, these measures may result in the entrenchment of our management andmay prevent or frustrate any attempt by shareholders to replace or remove ourcurrent management.

**We donot intend to pay cash dividends on our common stock 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.

**Item 1B.   Unresolved Staff Comments**

As of the date of filingof this Annual Report on Form 10-K, there are no written commentsfrom the SEC’s staff in connection with its review of our periodic or currentreports under the Exchange Act that remain unresolved.

**Item 2.**   Properties

Thefollowing is a description of our owned and leased properties:

| **Location**            | ** ** | ** ** | ** ** | **Leased/  Owned** | ** ** | **Square  Feet**                     | ** ** | **Use** | ** ** | **Lease  Expiration  Date** | ** ** |
|-------------------------|------------|------------|------------|--------------------|------------|--------------------------------------|------------|---------|------------|-----------------------------|------------|
| Annandale, New  Jersey  |       | Leased     |       | 45,000             |       | Laboratory, Office              |       |    | 2011       |                        |       |
| Bloomsbury, New  Jersey |       | Owned      |       | 165,000            |       | Laboratory,  Office                  |       |    | N/A        |                        |       |
| Milpitas,  California   |       | Owned      |       | 65,000             |       | Laboratory,  Office                  |       |    | N/A        |                        |       |
| Sunnyvale, California   |       | Leased     |       | 37,000             |       | Laboratory,  Office                  |       |    | 2009       |                        |       |
| Princeton, New Jersey   |       | Leased     |       | 20,000             |       | Corporate Headquarters,  Office |       |    | 2013       |                        |       |

 

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.**   Legal Proceedings

In the ordinary course ofour business, we are at times subject to various legal proceedings. We do not believe that any of thecurrently pending legal proceedings of which we are a party or of which any of ourproperty is the subject individually or in the aggregate will have a material adverseeffect on our operations or financial condition

**Item 4.**   Submission of Matters to a Vote ofSecurity Holders

None.

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**PART II**

**Item 5.   Market for Registrant’s Common Equityand 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,  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 |   |
| **Year ended December 31,  2005** |       |                         |       |   |   |
| First Quarter                          |       | $                            | 10.87      |   | $ | 6.88 |   |
| Second Quarter                         |       | $                            | 8.82       |   | $ | 6.65 |   |
| Third Quarter                          |       | $                            | 10.50      |   | $ | 8.22 |   |
| Fourth Quarter                         |       | $                            | 14.35      |   | $ | 7.45 |   |

 

The number of shares of our common stock outstanding asof February 28, 2006 was 111,964,174. As of February 28, 2006, therewere approximately 600 record holders of our common stock. As of March 22,2005, the record date for our last Annual Meeting of Shareholders held on May 19,2005, there were approximately 600 record holders of common stock (whichincludes individual holders) and approximately 42,753 beneficial shareholdersof our common stock.

No dividends have beenpaid on our common stock. We currently expect to retain our future earnings, ifany, for use in the operation and expansion of our business and do notanticipate paying any cash dividends in the foreseeable future.

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

The information required by this Item is contained in Part IIIof this Annual Report on Form 10-K under “Item 12. SecurityOwnership of Certain Beneficial Owners and Management Related to StockholderMatters.”

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**Item6.   Selected Consolidated Financial Data**

| ** **                                                       | ** ** | **For the Year Ended December 31,**       | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                       | ** ** | **(In thousands, except per share data)** | ** ** |
| **Statement of Operations Data:**                                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenues:                                                        |       |                                                               |       |   |   |   |   |   |   |   |   |
| Sales                                                            |       | $                                                                  | —     |   | $ | — |   | $ | 25 |   | $ | 176 |   | $ | 191 |   |
| Contract and license revenues                                    |       | 30,226                                                             |       | 9,119 |   | 5,833 |   | 24,552 |   | 37,140 |   |
| Sales, contract and license revenues from Genmab                 |       | 4,067                                                              |       | 3,355 |   | 5,316 |   | 14,751 |   | 4,973 |   |
| Reimbursement of development costs                               |       | 17,162                                                             |       | — |   | — |   | — |   | — |   |
| Total revenues                                                   |       | 51,455                                                             |       | 12,474 |   | 11,174 |   | 39,479 |   | 42,304 |   |
| Costs and expenses:                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cost of sales                                                    |       | —                                                             |       | — |   | 3 |   | 8,327 |   | 642 |   |
| Research and development                                         |       | 135,847                                                            |       | 122,007 |   | 95,459 |   | 82,626 |   | 38,626 |   |
| General and administrative                                       |       | 28,054                                                             |       | 24,314 |   | 21,727 |   | 22,852 |   | 19,344 |   |
| Write-off of facility costs                                      |       | —                                                             |       | — |   | — |   | 11,294 |   | — |   |
| Acquisition of in-process technology                             |       | 8,447                                                              |       | 5,455 |   | 6,500 |   | 16,312 |   | — |   |
| Total costs and expenses                                         |       | 172,348                                                            |       | 151,776 |   | 123,689 |   | 141,411 |   | 58,612 |   |
| Operating loss                                                   |       | (120,893                                                           | )          | (139,302 | ) | (112,515 | ) | (101,932 | ) | (16,308 | ) |
| Equity in net loss of affiliate                                  |       | (6,323                                                             | )          | (19,791 | ) | (14,997 | ) | (50,625 | ) | (7,334 | ) |
| Interest and dividend income                                     |       | 14,740                                                             |       | 7,161 |   | 12,311 |   | 16,070 |   | 24,728 |   |
| Impairment loss on investments in partners                       |       | (33,347                                                            | )          | (7,309 | ) | (1,400 | ) | (11,886 | ) | — |   |
| Interest expense                                                 |       | (4,233                                                             | )          | (12,845 | ) | (11,777 | ) | (9,065 | ) | (4,615 | ) |
| Minority interest—Celldex                                   |       | 4,410                                                              |       | — |   | — |   | — |   | — |   |
| Debt conversion expense                                          |       | —                                                             |       | (10,151 | ) | — |   | — |   | — |   |
| Net loss on extinguishment of debt                               |       | —                                                             |       | (4,241 | ) | — |   | — |   | — |   |
| Gain on disposition of Genmab stock                              |       | —                                                             |       | — |   | — |   | — |   | 1,442 |   |
| Loss before provision for income taxes                           |       | (145,646                                                           | )          | (186,478 | ) | (128,378 | ) | (157,438 | ) | (2,087 | ) |
| Provision for income taxes                                       |       | 358                                                                |       | 31 |   | 69 |   | 103 |   | 600 |   |
| Loss before cumulative effect of change in accounting  principle |       | (146,004                                                           | )          | (186,509 | ) | (128,447 | ) | (157,541 | ) | (2,687 | ) |
| Cumulative effect of change in accounting principle              |       | —                                                             |       | — |   | (830 | ) | — | ) | — |   |
| Net loss                                                         |       | (146,004                                                           | )          | $ | (186,509 | ) | $ | (129,277 | ) | $ | (157,541 | ) | $ | (2,687 | ) |
| Basic and diluted net  loss per share(1):                        |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss before cumulative effect of change in accounting  principle |       | $                                                                  | (1.32      | ) | $ | (2.29 | ) | $ | (1.64 | ) | $ | (2.09 | ) | $ | (0.04 | ) |
| Cumulative effect of change in accounting principle              |       | —                                                             |       | — |   | (0.01 | ) | — | ) | — |   |
| Net loss                                                         |       | $                                                                  | (1.32      | ) | $ | (2.29 | ) | $ | (1.65 | ) | $ | (2.09 | ) | $ | (0.04 | ) |
| Weighted average  common shares outstanding(1)                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| —basic and diluted                                          |       | 110,309                                                            |       | 81,494 |   | 78,314 |   | 75,231 |   | 73,937 |   |

 

| ** **                                       | ** ** | **December 31,**   | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                       | ** ** | **(In thousands)** | ** ** |
| **Balance Sheet Data:**                          |       |                    |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and marketable securities |       | $                       | 351,307    |   | $ | 374,507 |   | $ | 358,458 |   | $ | 350,046 |   | $ | 466,952 |   |
| Working capital                                  |       | 329,199                 |       | 341,110 |   | 350,437 |   | 339,480 |   | 447,326 |   |
| Total assets                                     |       | 486,876                 |       | 549,345 |   | 557,726 |   | 549,051 |   | 720,427 |   |
| Long term convertible debt                       |       | 150,000                 |       | 296,986 |   | 300,000 |   | 175,000 |   | 175,000 |   |
| Cash dividends declared per common share         |       | —                  |       | — |   | — |   | — |   | — |   |
| Accumulated deficit                              |       | (745,393                | )          | (599,389 | ) | (412,880 | ) | (283,603 | ) | (126,062 | ) |
| Total  shareholders’ equity                 |       | 160,711                 |       | 107,389 |   | 234,011 |   | 352,143 |   | 482,562 |   |
|                                                  |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)             Computed on the basis described in Note 2 to the ConsolidatedFinancial 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 suchproducts for a wide range of diseases, including cancer, inflammation,autoimmune disorders and other life-threatening and debilitating diseases.

Currently, 31 antibody product candidates generatedfrom our UltiMAb Human Antibody Development System are in human clinicaltrials, or have had regulatory applications submitted for such trials(1). In 2006, we expect at least11 Phase III clinical trials to be underway relating to five of the mostadvanced product candidates in which Medarex has an economic interest throughco-promotion/profit sharing rights, royalties and/or equity ownership. Inaddition, our partner Genmab A/S has announced that it expects to initiatemultiple Phase III trials for two additional product candidates in 2006. Fourof the five product candidates currently in Phase III trials weregenerated through the use of our UltiMAb® technology and include:

·       ipilimumab(also known as MDX-010), which we are developing jointly withBristol-Myers Squibb Company, or BMS, for the treatment of metastatic melanomaand other cancers;

·       golimumab(also known as CNTO 148) under development by Centocor, Inc. (a subsidiaryof Johnson & Johnson) for the treatment of rheumatoid arthritis,psoriatic arthritis and ankylosing spondylitis;

·       CNTO1275 for the treatment of psoriasis, also under development by Centocor; and

·       zanolimumab(also known as HuMax-CD4TM),being developed by Genmab A/S for the treatment of T-cell lymphoma.

The fifth product candidate currently in Phase IIItrials in which we have an economic interest is ticilimumab (also known as CP-675,206),which is being developed by Pfizer, Inc. for the treatment of metastaticmelanoma. We expect to receive double-digit royalties on sales of this product,should commercialization occur.

Medarex is committed to building value by developing adiverse pipeline of antibody products to address the world’s unmet healthcareneeds. In addition to the five antibody candidates currently in Phase IIItrials, multiple product candidates in Phase II, Phase I and preclinicaltesting are being developed by Medarex either alone or jointly with orseparately by our partners, including Amgen, Inc., BMS, Centocor, 

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

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Eli Lilly and Company, Genmab, ImClone SystemsIncorporated, MedImmune, Inc., Novartis Pharma AG, Novo Nordisk A/S andSchering AG. We believe that through the broad use of our UltiMAb technology,we are leveraging our efforts and our partners’ efforts to create, develop andpotentially commercialize innovative important treatments for a wide range ofdiseases.

In addition to our UltiMAb Human Antibody DevelopmentSystem, we have considerable experience in preclinical and clinical developmentas well as in manufacturing antibodies for clinical trials. Our existingmanufacturing facility in Annandale, New Jersey currently has the capacity toundertake multiple antibody projects concurrently for clinical developmentpurposes, meeting our near-term production demands. We have assembled a team ofexperienced scientific, production, clinical and regulatory personnel tofacilitate the discovery and development of antibody-based products for us andfor our partners. We intend to add sales and marketing and additionalmanufacturing capabilities as needed.

A portion of our revenue is 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.

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 31,2005, we had an accumulated deficit of approximately $745.4 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 paymentobligations as our products progress towards commercialization. In the absenceof substantial 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 Accounting Policies**

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 

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form thebasis for our judgments about the carrying value of assets and liabilities thatare not readily apparent from other sources. Actual results may vary from whatwe anticipate and different assumptions or estimates about the future couldmaterially change our reported results. We believe the following accountingpolicies are the most critical to us, in that they are important to theportrayal 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 and wehave no further obligations related to the development of the antibodies.

·       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.

·       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, whencollectibility of such milestone payment is assured and we have no futureperformance obligations relating to that event. 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 regulatory approvalof a product. Milestone payments are substantially at risk at the inception ofan agreement.

·       Revenuearrangements that include multiple deliverables are divided into separate unitsof accounting if the deliverables meet certain criteria, including whether thefair value of the delivered items can be determined and whether there isevidence of fair value of the undelivered items. In addition, the considerationis allocated among the separate units of accounting based on their fair values,and the applicable revenue recognition criteria are considered separately foreach of the separate units of accounting.

·       Revenuesderived from reimbursements of costs associated with the development of productcandidates are recorded in compliance with EITF Issue 99-19, “ReportingRevenue Gross as a Principal Versus Net as an Agent” (“EITF 99-19”). Accordingto the criteria established by EITF 99-19, in transactions where we actas a principal, with discretion to choose suppliers, bear credit risk andperform part of the services required in the transaction, we believe we havemet the criteria to record revenue for the gross amount of the reimbursements.

·       Grant revenues arerecognized as we provide the services stipulated in the underlying grant basedon the time and materials incurred. Amounts received in advance of servicesprovided are recorded as deferred revenue and amortized as revenue when theservices are provided.

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***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. Investmentsin companies whose securities are publicly traded (other than Genmab) areclassified as marketable securities on our consolidated balance sheets. Thefair market value of investments in our partners whose securities are publiclytraded (other than Genmab) represented approximately 2.6% of total marketablesecurities as of December 31, 2005 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 a separate line item in ourconsolidated balance sheet entitled “Investments in, and advances to, otherpartners” and were $6.4 million as of December 31, 2005. These securitiesare carried at original investment cost and adjusted for other than temporaryimpairment charges, if any. Because these securities are not listed on afinancial exchange, the value of these investments is inherently more difficultto estimate than investments in public companies. We value these investments byusing information acquired from industry trends, management of these companies,financial statements, and other external sources. Specifically, ourdetermination of any potential impairment of the value of privately held securitiesincludes an analysis of the following for each company on a periodic basis:review of interim and year-end financial statements, cash position and overallrate of cash used to support operations, the progress and development oftechnology and product platform, the per share value of subsequent financingsand potential strategic alternatives. Based on the information acquired throughthese sources, we record an investment impairment charge when we believe aninvestment has experienced a decline in value 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

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·       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 are based on assumptions, which we believe tobe reasonable but which are inherently uncertain and unpredictable. Theseassumptions may be incomplete or inaccurate, and unanticipated events and circumstancesmay occur. Appropriate operating expenses are deducted from forecasted netrevenues on a product-by-product basis to establish a forecast of net returnson the completed portion of the in-process technology. Finally, net returns arediscounted to a present value using discount rates that incorporate theweighted average cost of capital relative to the biotech industry and us aswell as product specific risks associated with the acquired in-process researchand development products. The product specific risk factors include the product’sphase of development, type of product candidate under development, likelihoodof regulatory approval, manufacturing process capability, scientific rationale,preclinical safety and efficacy data, target product profile, and developmentplan. In addition to the product specific risk factors, a discount rate is usedfor the valuation, which represents a considerable risk premium to our weightedaverage cost of capital. The valuations used to estimate in-process technologyrequire us to use significant estimates and assumptions that if changed, mayresult in a different valuation for in-process technology.

**Results of Operations**

***Years Ended December 31, 2005, 2004 and 2003***

***Contract and License Revenues***

Contract and license revenuestotaled $30.2 million, $9.1 million and $5.8 million for the years ended December 31,2005, 2004 and 2003, respectively. Contract and license revenues for 2005increased by $21.1 million or 231% as compared to 2004. This increase relatesprincipally to a total of approximately $13.8 million of increased revenuerecognized from our collaborations with Pfizer, BMS, Lilly and the NationalInstitutes of Health, or NIH, in accordance with an NIH grant we received, aswell as $4.0 million in milestone payments received from our contract andlicensing business. Contract and license revenues for 2004 increased by $3.3million or 56% as compared to 2003. This increase relates principally toapproximately $2.4 million of revenue recognized from our collaborationagreement with Pfizer which was executed in September 2004 andapproximately $0.6 million of revenue from the NIH in accordance with a grantwe received 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.

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***Contract and License Revenues from Genmab***

Contract and licenserevenues from Genmab were $4.1 million, $3.4 million and $5.3 million for theyears ended December 31, 2005, 2004 and 2003, respectively. Contract andlicense revenues from Genmab for 2005 increased by $0.7 million or 21% ascompared to 2004. This increase is primarily the result of payments receivedfrom Genmab for the licensing of European and Asian rights to develop andcommercialize antibodies raised against the CD4 antigen, partially offset by adecrease in antibody exclusive licenses granted to Genmab in 2005 as comparedto 2004. Contract and license revenues from Genmab for 2004 decreased by $1.9million or 37% as compared to 2003. This decrease relates principally to fewerresearch licenses and antibody exclusive licenses requested by and granted toGenmab in 2004 as compared to 2003.

***Reimbursement of Development Costs***

Revenues derived from thereimbursement of costs associated with the development of our productcandidates are recorded in compliance with EITF Issue 99-19, “*Reporting Revenue Gross as a Principal**Versus as anAgent”* (“EITF 99-19”). Reimbursement of development costs were$17.2 million in 2005 and related primarily to the development of ipilimumabwith BMS. There were no such reimbursements in 2004 and 2003.

***Research and Development Expenses***

Research and development expenses for our products indevelopment were $135.8 million, $122.0 million and $95.5 million for the yearsended December 31, 2005, 2004 and 2003, respectively. Research anddevelopment expenses in 2005 increased by $13.8 million, or 11% as compared to2004 and research and development expenses in 2004 increased by $26.5 million,or 28% as compared to 2003. Historically, due to the limited number of ourproduct candidates in clinical trials, we have not accounted for our researchand development expenses on a project-by-project basis. We track our costs inthe 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 the HuMAb-Mouse® and KM-Mouse®, as well as costs associated withresearch and testing of our product candidates prior to reaching thepreclinical stage. Such research costs primarily include personnel costs,facilities (including depreciation), research supplies, funding of outsideresearch and license and technology access fees.

Our product development costs consist of costs ofpreclinical development (including manufacturing) and conducting andadministering clinical trials (including manufacturing). Such productdevelopment costs also include personnel costs, facilities (includingdepreciation), supply expense related to antibody manufacturing and clinicaltrial 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,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Research             |       | $                                          | 46,207     |   | $ | 53,284 |   | $ | 37,495 |   |
| Product  Development |       | 89,640                                     |       | 68,723 |   | 57,964 |   |
| Total                |       | $                                          | 135,847    |   | $ | 122,007 |   | $ | 95,459 |   |

 

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***Research Costs***

Research costs in2005 decreased by $7.1 million, or 13% as compared to 2004. Research costs in2004 increased by $15.8 million, or 42% as compared to 2003. The changes inresearch costs primarily relate to the following.

·       Personnelcosts in 2005 were $14.7 million, an increase of $1.5 million or 11% ascompared to 2004. 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., orGilead, for the reduction of future royalty obligations relating to certainintellectual property rights regarding anti-CTLA-4 product candidates in2004 for which no comparable expenses were incurred in 2005 or 2003. The totalconsideration of $8.5 million is being paid to Gilead in eight equal quarterlyinstallments. As of December 31, 2005, approximately $2.1 million (twoinstallments) remained due to Gilead under this obligation (see furtherdiscussion under the section herein entitled “*OtherLiquidity Matters”*).

·       Licenseand technology access fees in 2005 were $5.4 million, a decrease of $1.5million or 22% as compared to 2004. License and technology access fees in 2004were $6.9 million, an increase of $3.8 million or 125% as compared to 2003. Increasesand decreases in license and technology access fees are primarily the result ofthe timing of such agreements. These costs represent fees paid to certainpartners and research organizations in connection with certain of ourcollaboration and license agreements. Included in the 2005 costs are paymentsto Genentech, Inc. and the Mayo Foundation for Medical Education andResearch. Included in the 2004 costs are payments to diaDexus, Inc.,Pharma Pacific Pty Ltd. and Kirin Brewery Co., Ltd., or Kirin, for licenses tocertain technologies. We expect license fees, including funds paid to certainpartners, to increase in the future.

·       Supply costs in 2005 were$6.2 million, an increase of $1.1 million or 23% as compared to 2004. Supplycosts in 2004 were $5.1 million, a decrease of $0.1 million or 1% as comparedto 2003. The increased supply costs in 2005 are primarily attributable to thecontinued development of our UltiMAb® system, and the performance of contractservices for our collaborative partners. Included in these costs are materials,chemicals and disposables. We expect these costs to increase as we continue toexpand our research efforts.

***Product Development Costs***

Product developmentcosts in 2005 increased by $20.9 million, or 30% as compared to 2004. Product developmentcosts in 2004 increased by $10.8 million, or 19% as compared to 2003. Theincreases in product development costs primarily relate to the following:

·       Contractmanufacturing costs in 2005 were $10.3 million, an increase of $1.2 million or12% as compared to 2004. 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 ipilimumab in combinationwith MDX-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 2005 were $25.6 million, an increase of $2.7 million or 12% ascompared to 2004. Personnel costs in 2004 were $22.9 million, an increase of$2.3 million or 11% as compared to 2003. 

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The increased personnelcosts are a result of the increased staff needed to support more extensiveclinical trial activities primarily for ipilimumab. Personnel costs primarilyinclude salary, benefits, payroll taxes and recruiting costs. We expectpersonnel costs to continue to increase as we continue to increase our productdevelopment activities and progress our product candidates through clinicaltrials.

·       Supplycosts in 2005 were $5.1 million, an increase of $0.5 million or 10% as comparedto 2004. Supply costs in 2004 were $4.6 million, a decrease of $1.1 million or19% as compared to 2003. The increases in 2005 costs reflect production ofclinical material for phase I and phase II trials for certain of our productcandidates. In 2003 we completed a change to our method of production whichresulted in comparatively lower supply costs in 2004. Included in these costsare materials, chemicals and disposables associated with the manufacture ofmaterial for clinical trials. We expect these costs to increase as we continueto expand our product development efforts and increase our clinical trialactivities.

·       Clinicalresearch fees in 2005 were $11.5 million, an increase of $6.8 million or 145%as compared to 2004. This increase resulted primarily from the continuedenrollment of patients in the Phase III clinical trial for ipilimumab incombination with MDX-1379 and the initiation of additional sites for thistrial. As of December 31, 2005 sites participating in this Phase IIIclinical trial are located in North America, Europe and Latin America. Thecontinued enrollment of patients in the Phase III trial and the initiation ofadditional sites resulted in increased monitoring costs and increasedinvestigator site fees. Clinical research fees in 2004 were $4.7 million, thesame as 2003. These costs represented the conclusion of certain Phase IIclinical trials for ipilimumab offset by the initiation of the Phase IIIclinical trial for ipilimumab in combination with MDX-1379 which began inthe third quarter of 2004.      Clinical research fees include clinical investigator site fees, external trialmonitoring costs and data accumulation costs. We expect expenses related toclinical trials to increase in the future as we continue to develop ourtherapeutic product pipeline.

·       Anexpense of $6.4 million for 2005 representing the reimbursement of our share(35%) of the BMS costs for the development of ipilimumab. No comparable expensewas incurred in 2004 or 2003. We expect our 35% share of BMS’s costs related tothe development of ipilimumab to increase in the future as BMS continues toincrease its development activities related to ipilimumab.

Weexpect product development costs to increase in the future as more of ourproduct candidates enter clinical trials. In addition, we may be obligated tomake milestone payments on certain of our product candidates as they progressthrough the clinical trial process. Completion of clinical trials may takeseveral years or more. The length of time varies according to the type,complexity and intended use of the product candidate. We estimate that clinicaltrials of the type we generally conduct are typically completed over thefollowing 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;

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·       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 regulatory approval,failure to receive market acceptance, the emergence of competitive products andthe inability to produce or market our products due to third-party proprietaryrights.

***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 $28.1 million, $24.3 million and$21.7 million for the years ended December 31, 2005, 2004 and 2003,respectively. General and administrative expenses increased by $3.8 million in2005, or 15% as compared to 2004. The 2005 increase was primarily attributableto the operations of Celldex Therapeutics, Inc., or Celldex, including thewrite-off of deferred offering costs (legal, accounting and printing) of $1.9million. Such costs were written off in 2005 as a result of Celldex terminatingits initial public offering and withdrawing its registration statement with theSecurities and Exchange Commission due to unfavorable market conditions. Generaland administrative expenses increased by $2.6 million in 2004, or 12% ascompared to 2003. The 2004 increase is primarily attributable to increasedpersonnel costs of $1.1 million, and increased legal fees of $1.0 millionprimarily as a result of the completion of the negotiation and execution of aseries of agreements with Pfizer and our collaboration and license agreementwith BMS. General and administrative expenses are expected to increase in thefuture as our product candidates are developed and we expand our businessactivities.

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

Acquisition of in-process technology for the yearended December 31, 2005 related to acquisition of all of the outstandingcapital stock of Lorantis Limited, a privately held biotechnology company basedin Cambridge, U.K. and the acquisition of substantially all assets of AlterisTherapeutics, Inc., a privately held biotechnology company based inPhiladelphia, PA, in each case by Celldex. These acquisitions were completed inOctober 2005. The total cost of these acquisitions (including transactioncosts) was $42.8 million, of which approximately $8.4 million (based uponindependent third-party valuations) of in-process research and development wasdetermined not to be technologically feasible and had no alternative future usesat the time of the respective acquisitions, and, as a result, was charged tooperations as acquisition of in-process technology during 2005.

Acquisition of in-process technology for the yearended December 31, 2004 related to our acquisition of all of theoutstanding capital stock not already owned by us of Ability BiomedicalCorporation, 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 

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was determined not to betechnologically feasible and had no alternative future uses at the time ofacquisition, and, as a result, was charged to operations as acquisition ofin-process technology during 2004.

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 Corporation, or Corixa, whose license agreement we acquired as part ofour May 2002 asset acquisition from Corixa. Upon the execution of theKyowa License, we paid Kyowa a total of $4.0 million and also made a finalpayment to Corixa in the amount of $2.5 million.

***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, 2005, 2004 and 2003.Genmab is an affiliated company and during these periods was accounted forusing the equity method of accounting (see Note 11 to the consolidatedfinancial statements). The recognition of our share of Genmab’s net lossesreduces the carrying value, or basis, of our investment in Genmab.

Equity in net loss of affiliate was $6.3 million,$19.8 million and $15.0 million for the years ended December 31, 2005,2004 and 2003, respectively.

Equity in net loss of affiliate in 2005 decreased by$13.5 million, or 68% as compared to 2004. The decrease was primarily relatedto the suspension of our share of Genmab’s net losses for a portion of2005. See Note 11 to the consolidated financial statements for furtherexplanation. Equity in net loss of affiliate in 2004 increased by $4.8 millionor 32% as compared to 2003. This increase reflects an increase in Genmab’s netloss as a result of its expanded research and development efforts offset, inpart, by a reduction in our ownership percentage, resulting from Genmab’s 2004private placement of its ordinary shares (discussed below), and therefore areduction of our share of Genmab’s net loss for the second half of 2004.

In August 2005, Genmab sold approximately 2.5million shares of its stock to a corporate partner in connection with a globaldevelopment and commercialization agreement. As a result of this sale of stock,our ownership percentage in Genmab was reduced from approximately 24.7% toapproximately 22.2%. The difference between our proportionate share of theequity and our carrying value after completion of Genmab’s sale of stock to thecorporate partner was approximately $8.0 million and was accounted for inaccordance with APB Opinion No. 18, *TheEquity Method of Accounting for Investment in Common Stock*and StaffAccounting Bulletin No. 51, *Accountingfor Sales of Stock by a Subsidiary*increasing our investment inGenmab and capital in excess of par value*.*

In July 2004, Genmab completed a privateplacement of 5.6 million shares of its stock. As a result of this privateplacement, our ownership percentage of Genmab was reduced from approximately30.9% to 24.7%. The difference between our proportionate share of the equityand our carrying value after completion of the private placement wasapproximately $9.7 million and was accounted for in accordance with APB OpinionNo. 18, *The Equity Method of Accounting forInvestment in Common Stock,*and Staff Accounting BulletinNo. 51, *Accounting for Sales of Stock by aSubsidiary*increasing our investment in Genmab and capital in excessof par value.

On February 1, 2006, Genmab completed the privateplacement of 5.75 million shares of its stock. As a result of this privateplacement, our ownership percentage of Genmab was reduced to approximately18.9%. Beginning February 1, 2006, we expect to account for our investmentin Genmab as a marketable security in accordance with SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities*.

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***Interest, Dividend Income and Realized Gains***

Interest, dividend incomeand realized gains consists primarily of interest earned from our cash, cashequivalents and marketable securities. Interest, dividend income and realizedgains was $14.7 million, $7.2 million and $12.3 million for the years ended December 31,2005, 2004 and 2003, respectively. Interest, dividend income and realized gainsin 2005 increased by $7.6 million, or 106% as compared to 2004. Included ininterest, dividend income and realized gains for the year ended December 31,2005 is a gain on the sale of common stock of one of our partners ofapproximately $3.3 million and included in interest, dividend income andrealized gains for the year ended December 31, 2004 is a gain on the saleof common stock of one of our partners of approximately $1.7 million. Excludingthe impact of these gains, interest and dividend income in 2005 would haveincreased by $6.1 million. This increase primarily relates a higher averagebalance and higher returns on our investment portfolio as well as decreasedamortization of premiums on debt securities. Interest and dividend income in2004 decreased by $6.9 million, or 56% (excluding the $1.7 million gaindiscussed above) as compared to 2003. This decrease primarily relates to lowerreturns on our investment portfolio as well as increased amortization ofpremiums on debt securities. We anticipate lower interest and dividend incomein the future as we continue to fund our operations and capital expendituresfrom our cash reserves.

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

We recorded impairment charges of $0, $0.2 and $0million for the years ended December 31, 2005, 2004 and 2003,respectively, related to investments in certain of our partners (other thanGenmab) whose securities are publicly traded. The 2004 impairment charge wasthe result of losses on one of these investments which were considered to beother than temporary. If we deem these investments to be further impaired atthe end of any future period, we may incur additional impairment charges onthese 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 more difficult to estimate than investments in publicly tradedcompanies. We recorded impairment charges of $33.3 million, $7.1 million and$1.4 million for the years ended December 31, 2005, 2004 and 2003,respectively, related to investments in certain of our partners whosesecurities are not publicly traded. Approximately $29.3 million of the 2005impairment charge related to our investment in IDM prior to its businesscombination with Epimmune, Inc. The amount of the IDM impairment chargewas calculated as the difference between (i) the estimated per share valueexpected to be received by IDM shareholders upon completion of its merger withEpimmune, publicly announced on March 16, 2005, and (ii) ourcarrying value. This transaction closed in the third quarter of 2005 and ourinvestment in IDM was reclassified to marketable securities. The 2004impairment charge is primarily comprised of a $7.0 million impairment relatedto our investment in IDM. The amount of the IDM impairment charge wascalculated as the difference between the per share price received by IDM in a December 2004private placement of its equity securities and our cost basis.   If we deem these investments to be furtherimpaired at the end of any future period, we may incur additional impairmentcharges on these investments.

***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 issued in May 2004, or the2.25% notes. Interest expense was $4.2 million, $12.8 million and $11.8 millionfor the years ended December 31, 2005, 2004 and 2003, respectively.Interest expense in 2005 decreased by $8.6 million, or 67% as compared to 2004.This decrease reflects the January 2005 conversion of all of our 4.25%Notes ($146.986 million) into a total of 21,875,353 shares of our common stock.Interest expense in 

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2004increased by $1.1 million, or 9% as compared to 2003. The increase reflects afull year of interest expense on our 4.25% notes and the addition ofapproximately seven months of interest expense on our 2.25% notes, offset, inpart, by a decrease in interest expense resulting from the redemption,repurchase and cancellation of the 4.50% notes in June and July 2004.The 2.25% notes are due in May 2011 and interest is payable semi-annuallyon May 15 and November 15 of each year.

***Minority Interest—Celldex***

Minority interest in lossof Celldex for the year ended December 31, 2005 of $4.4 million represents40% of Celldex’s net loss for the period from October 12, 2005 through December 31,2005. Prior to October 12, 2005 we owned 100% of the outstanding capitalstock of Celldex.  As a result of certainacquisitions by Celldex (see Note 15 to the consolidated financial statements)our ownership percentage was reduced from 100% to approximately 60%. Celldex’sresults of operations for 2005 have been consolidated for reporting purposesand the $4.4 million (the portion of Celldex’s net loss for the period from October 12,2005 through December 31, 2005 not attributable to us) is recorded as areduction of our expenses.

***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 no comparable charges for the years ended December 31, 2005 and2003.

***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 Capital Resources”*) we repurchased andredeemed $142.0 million in aggregate principal amount of our 4.50% notes forcancellation in January 2005. As a result of this repurchase andcancellation we recorded a loss on the early extinguishment of debt ofapproximately $4.5 million for the year ended December 31, 2004.

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 96-19 requires that the gain onthe early extinguishment of debt be computed using the fair value of the newlyissued convertible debt which, at the time of the debt exchange, was trading ata premium to the principal amount of the notes. We classified the premiumassociated with the newly issued 4.25% notes of approximately $10.2 million ascapital in excess of par value in accordance with APB 14, *Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants*.

***Provision for Income Taxes***

Our provision for incometaxes of $0.4 million, $31 thousand and $0.1 million for the years ended December 31,2005, 2004 and 2003, respectively, relates primarily to the New Jerseyalternative minimum tax assessment.

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***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 SFASNo. 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 and Capital 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 2003, 2004, and2005, we received net proceeds of $331.5 million from sales of our equity anddebt securities.

At December 31, 2005and 2004, we had $351.3 million and $374.5 million, respectively, in cash, cashequivalents and marketable securities. Approximately $25.2 of cash and cashequivalents included in the December 31, 2005 balance relates to Celldexand is consolidated for accounting purposes. We primarily invest our cashequivalents and marketable securities in highly liquid, interest-bearing, investmentgrade and government securities in order to preserve principal.

***Cash Used in Operating Activities***

Cash used in operating activities was $88.9 million,$6.0 million and $89.3 million for the years ended December 31, 2005, 2004and 2003, respectively. This reflects an increase of $82.9 million in 2005 ascompared to 2004 and a decrease of $83.3 million in 2004 as compared to 2003.

The 2005 increase is primarily due to a decrease indeferred contract revenue (approximately $72.9 million) resulting from lessup-front payments associated with collaborations in 2005 as compared to 2004. The2004 decrease is primarily due to an increase in deferred contract revenue(approximately $99.1 million) resulting from the up-front payments associatedwith collaborations with each of Pfizer and MedImmune, Inc., offset inpart, by higher research and development expenses (approximately $26.5million). The increase in research and development expenses resulted primarilyfrom higher personnel costs, expenses related to our facilities, third-partyresearch and contract manufacturing costs, and the costs of clinical trials.All of these costs were higher as result of our increased clinical trial andproduct development activities.

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 progressthrough the clinical trial process, we may be obligated to make significantmilestone payments on certain of our products. We also expect to incur futurefacility costs as a result of our continued capital expansion, renovations andreplacements. To a lesser extent, we expect our general and administrativecosts to increase as we expand our administrative and business development activities.Furthermore, we expect our investment income to decrease as we fund our futureoperations and capital expenditures from our cash 

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reserves.We anticipate that our operating expenditures may be partially offset byrevenues from partners for license fees, milestone payments, and developmentand manufacturing services.

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

Net cash providedby investing activities was $84.1 million in 2005. Net cash used in investingactivities was $33.8 million in 2004 and $22.6 million in 2003, respectively.Cash was provided by and used in investing activities primarily as follows:

·       Capitalexpenditures of $9.3 million, $9.1 million and $8.9 million in 2005, 2004 and2003, respectively. The capital expenditures for these periods reflect aninvestment in laboratory automation as well as the addition of machinery andequipment.

·       Netsales of marketable securities were $65.9 million and $3.2 million in 2005 and2003, respectively. The net sales of marketable securities in 2005 wereprimarily to fund operations and capital expenditures offset in part, by theproceeds received from the BMS collaboration ($50.0 million). 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 Pfizer collaboration($110.0 million), the MedImmune collaboration ($15.0 million) and the netproceeds ($145.2 million) received for the private placement of our 2.25%notes, offset in part, by sales of marketable securities ($242.6 million) tofund operations and capital expenditures as well as to repurchase and redeemour 4.50% notes as discussed further in the section entitled *“Cash Provided byFinancing Activities”*.

·       Netcash of approximately $29.7 million provided through the acquisition ofLorantis by Celldex (see further explanation in the section entitled *“Other Liquidity Matters”*).

We expect 2006 capitalexpenditures to be approximately $15.0 million representing the purchase ofmachinery and scientific equipment and additional investment in lab automation.

***Cash Provided by Financing Activities***

Cash provided by financing activities was $31.1million, $31.6 million and $123.0 million in 2005, 2004 and 2003, respectively.In 2005, cash provided by financing activities consisted primarily of proceedsreceived ($25.0 million) from the sale of common stock to BMS in connectionwith our collaboration. In 2004, cash provided by financing activitiesconsisted primarily of $145.2 million in net proceeds received from the sale ofour 2.25% notes in May 2004 and $31.8 million from sales of common stockprimarily to Pfizer ($30.0 million) and the issuance of common stock under ouremployee stock purchase plan ($1.1 million), offset in part, by the repurchase,redemption and cancellation of our 4.50% notes ($144.6 million). In 2003, cashprovided by financing activities consisted primarily of $121.2 million in netproceeds received from the sale of our 4.25% notes in July 2003 and $0.9million from the issuance of common stock under our employee stock purchaseplan.

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.

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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 wasclassified as segregated securities in the current assets section of our December 31,2004, consolidated balance sheet.

In January 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 may be required to use a significantportion of our cash to repay the remaining balance ($150.0 million) of the2.25% notes. If our cash is not sufficient to meet our obligations under the2.25% 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, 2005, we had federal netoperating loss (NOL) carryforwards of approximately $438.2 million. These NOLcarryforwards will expire in the years 2006-2025 (as more fully describedin Note 5 to the consolidated financial statements), if not utilized. During2000 we determined that an ownership change under Section 382 of theInternal Revenue Code of 1986, as amended, occurred during 1998. The effect ofthis ownership change was the imposition of a $3.2 million annual limitation onthe use of NOL carryforwards attributable to periods before the change. Thisannual limitation will result in the expiration of some NOL carryforwardsbefore they become available for utilization. At December 31, 2005 

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the amount of NOL subjectto the limitation was $43.1 million and the amount not subject to limitationwas $395.1 million.

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. Thefirst of 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, fourth, fifth and sixth payment (all made in 2005)were also made in cash. The seventh payment was made on January 3, 2006 incash. The remaining payment will be made on April 3, 2006.

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 beassociated with a variety of immune disorders, including multiple sclerosis,rheumatoid arthritis, inflammatory bowel disease, chronic obstructive pulmonarydisease and 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.

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 $3.65 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-10antibody.

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 fourthagreement was a stock purchase agreement also related to the anti-CTLA-4programs. Pursuant to certain of these agreements, Pfizer made a total initialcash payment to us of $80.0 million and purchased 4,827,808 shares of ourcommon stock at a purchase price equal to $6.21 per share for an aggregatepurchase price of $30.0 million. These shares were issued in a privateplacement pursuant to an exemption from registration provided by Section 4(2) ofthe Securities Act of 1933, as amended, or the Securities Act. The purchaseprice represented a small premium to market price at the time we entered intothe collaboration. Pfizer agreed to a two-year lock-up with respect to thesales of such stock. We have no further obligation to register such stock.

In January 2005, we announced the closing of acollaboration and co-promotion agreement and a related securities purchaseagreement with BMS. Under the terms of the collaboration, we and BMS eachgranted the other certain intellectual property licenses and product rights ona worldwide basis in order to enable us to collaborate in research anddevelopment of certain therapeutic antibody-based products for the treatment ofcancer and other diseases, and, in the event that further development work issuccessful, to commercialize any resulting products. In particular, thecollaboration includes a grant by us to BMS of a 

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license to commercializeipilimumab, a fully human antibody product developed using our UltiMAb HumanAntibody Development System. Ipilimumab is currently under investigation forthe treatment of a broad range of cancers. The collaboration also includes thegrant by us to BMS of a sub-license to MDX-1379, a gp100 peptide vaccinelicensed by us from the U.S. Public Health Service, for use with ipilimumab forthe treatment of metastatic melanoma. We and BMS are currently conducting aPhase III clinical trial with ipilimumab and MDX-1379 combination therapyin Stage III and Stage IV metastatic melanoma patients at multiple sitesworldwide.

As part of the collaboration, we and BMS committed toan initial multi-year budget of approximately $192.0 million to fund thedevelopment of ipilimumab as a potential treatment for a broad range ofcancers. BMS is 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 these agreements, BMS made an initial cashpayment to us on January 21, 2005 of $25.0 million. In addition, BMSpurchased a total of 2,879,223 unregistered shares of our common stock at apurchase price equal to $8.6829 per share for an aggregate purchase price of $25.0million. These shares were issued in a private placement pursuant to theexemption from registration provided by Section 4(2) of theSecurities Act of 1933. The purchase price represented a small premium to themarket price on the date we entered into the collaboration. BMS agreed to atwo-year lock-up period with respect to any sales of such stock. We have nofuture obligation to register such stock.

In October 2005, Celldex completed theacquisition of all of the issued and outstanding shares of capital stock ofLorantis Limited (“Lorantis”), a privately held biotechnology company based inCambridge, U.K. and substantially all of the assets of Alteris Therapeutics, Inc.(“Alteris”), a privately held biotechnology company based in Philadelphia, PA.

The purchase price of Lorantis consisted of 6.8million shares of Celldex Class A common stock (valued at $34.0 million).

The purchase price forsubstantially all of the Alteris assets consisted of 1.2 million shares ofCelldex common stock (valued at $6.0 million) and approximately $1.6 million incash. Celldex may be required to pay Alteris up to $5.0 million upon obtainingthe first approval for commercial sale of an EGFRvIII product. In addition,Celldex may be required to pay an amount equal to 20% of any upfront fees ormilestone payments received from a certain unrelated third-party licensee, inthe event that within 12 months of the closing, Celldex enters into a licenseagreement with such third party for any EGFRvIII-derived product developedusing the technology acquired from Alteris.

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***Contractual Obligations***

Our material contractual obligations under lease, debtand research funding agreements for the next five years, and thereafter, as of December 31,2005, 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)                |       |                                      | $          | 3,375 |   |   | $ | 6,750 |   | $ | 6,750 |   | $ | 150,000 |   | $ | 166,875 |   |
| Research funding(3)                 |       |                                      | 47,649     |   |   | 5,300 |   | 50 |   | — |   | 52,999 |   |
| Operating leases  and other         |       |                                      | 6,803      |   |   | 8,194 |   | 3,975 |   | 3,070 |   | 22,042 |   |
| Total contractual cash  obligations |       |                                      | $          | 57,827 |   |   | $ | 20,244 |   | $ | 10,775 |   | $ | 153,070 |   | $ | 241,916 |   |

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(1)          This table does notinclude (a) any milestone payments which may become payable to thirdparties under research collaborations or license agreements as the timing andlikelihood of such payments are not known, (b) any royalty payments tothird parties as the amounts of such payments, timing and/or the likelihood ofsuch payments are not known, (c) amounts, if any, that may be committed inthe future to construct additional facilities, and (d) contracts that areentered into in the ordinary course of business which are not material in theaggregate in any period presented above.

(2)          Ourconvertible notes may be converted to common stock prior to the maturity dateand, therefore, may not require the use of our capital resources.

(3)          Research funding for “Less than 1 year”includes up to $40.1 million that we anticipate may be used under ourcollaboration agreement with BMS to fund our share of the expected costsof  the development of ipilimumab during2006. This amount represents our costs; net of reimbursement of 65% from ourpartner BMS, as well as our share (35%) of the BMS development costs during2006.  The amounts that we actually spendduring 2006  for the development ofipilimumab may vary significantly depending on numerous factors, including theoutcome of our meetings with regulatory authorities, results from current andfuture clinical trials, the continued analysis of the clinical trial data foripilimumab, actions taken by our partner BMS under the collaboration agreementand technological developments.

***Off-Balance Sheet Arrangements***

We do not have any off-balance sheet arrangements.

***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 superseded 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 thecollaboration and license agreement, we have exchanged cross-licenses withKirin with respect to the KM-Mouse and other antibody-generating mice. Inaddition, certain of the cross-licenses granted under the Collaboration andLicense Agreement are subject to license, milestone and royalty payments by oneparty to the other.

Through December 31, 2005, we have not made anymilestone payments to Kirin although approximately $2.8 million has been paidto Kirin as of December 31, 2005 representing a payment due Kirin as aresult of our collaboration with Pfizer. Based on a total of three products weare developing which use or, we believe may use, Kirin technology that (i) arecurrently in clinical trials, or (ii) we 

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anticipate may enterclinical trials through the end of 2007, we may be required to make milestonepayments to Kirin aggregating up to approximately $12.75 million withrespect to such products, or a maximum of approximately $4.25 million perproduct. Our future milestone payment obligations to Kirin may or may not betriggered, and may vary in size, depending on a number of variables, almost allof 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 milestone payments that are due with respect toproducts using/targeting the licensed technology/antigen only if and whencertain specified pre-commercialization events occur. Not all of our productscurrently under development trigger such milestone payments. Through December 31,2005, we had made milestone payments of approximately $0.3 million under theseagreements. In addition, under the agreements we currently have in place (otherthan with Kirin), based on a total of nine products we are developing for whichmilestones are potentially due and that (i) are now in clinical trials, or(ii) which we anticipate may enter clinical trials before the end of 2007,we may be obligated to make future milestone payments aggregating up toapproximately $59.9 million with respect to such products. In general,potential milestone payments for our antibody products may or may not betriggered under these licenses, and may vary in size, depending on a number ofvariables, almost all of which are currently uncertain. Typically, the eventsthat trigger these 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.

***Future Liquidity Resources***

Our current sources ofliquidity are our cash, cash equivalents and marketable securities, interest anddividends 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 

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2.25%notes are converted into shares of our common stock on or before their maturitydate, we will have use of that portion of the principal amount of the notes tofund our on-going operations. In any event, we may require additional financingwithin this time frame and may raise funds through public or privatefinancings, line of credit arrangements, collaborative relationships and/orother methods. The use of cash on hand or other financial alternatives willdepend on several factors including, but not limited to, the future success ofour products in clinical development, the prevailing interest rate environment,and access to the capital markets. We cannot assure you that we will be able toraise such additional funds. We may be unable to raise sufficient funds tocomplete development of any of our product candidates or to continueoperations. As a result, we may face delay, reduction or elimination ofresearch and development programs or preclinical or clinical trials, in whichcase our business, financial condition or results of operations may bematerially 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 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. We are required toadopt Statement No. 123(R)  beginning January 1, 2006. We haveselected the Black-Scholes option valuation method and the modified prospectivetransition method available under Statement 123(R). Although we have not yetdetermined the impact of Statement 123(R), we believe the non-cash expense for2006 related to Statement 123(R) will be in the range of $17.0 million to$18.0 million.

**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.

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**Item8.   Consolidated Financial Statements and Supplementary Data**

**Indexto Consolidated Financial Statements**

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| **Medarex, Inc.**                                                                                          |       |     |       |
| Report of Independent Registered Public Accounting  Firm                                                        |       | F-2      |       |
| Consolidated Balance Sheets as of December 31,  2005 and 2004                                              |       | F-3      |       |
| Consolidated Statements of Operations for the years  ended December 31, 2005, 2004 and 2003                |       | F-4      |       |
| Consolidated Statements of Shareholders’ Equity for  the years ended December 31, 2005, 2004 and 2003 |       | F-5      |       |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2005, 2004 and 2003                |       | F-6      |       |
| Notes to Consolidated Financial Statements                                                                      |       | F-7      |       |
| **Genmab A/S (A development stage  company)**                                                                   |       |     |       |
| Report of Independent Registered Public Accounting  Firm                                                        |       | F-32     |       |

 

F-1

----

**Report of Independent Registered Public AccountingFirm**

The Board of Directors and ShareholdersMedarex, Inc.

We have audited the accompanying consolidated balancesheets of Medarex, Inc. and subsidiaries as of December 31, 2005 and2004, and the related consolidated statements of operations, shareholders’equity and cash flows for each of the three years in the period ended December 31,2005. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits. The financial statements of Genmab A/S (acorporation in which the Company has an 22% interest at December 31,2005), have been audited by other auditors whose report for December 31,2004 and the two year period then ended has been furnished to us, and ouropinion on the consolidated financial statements, insofar as it relates to theamounts included for Genmab A/S, is based solely on the report of the otherauditors. In the consolidated financial statements, the Company’s investment inGenmab A/S represents 0.7% and 0.3% of total assets as of December 31,2005 and 2004, respectively, and the Company’s equity in the net loss of GenmabA/S represents 4% in 2005, 10% in 2004, and 12% in 2003 of pre-tax loss.

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, 2005 and 2004, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2005 in conformity with U.S. generallyaccepted accounting principles.

As discussed in Note 2 to the consolidated financialstatements, effective January 1, 2003, the Company adopted Statement ofFinancial Accounting Standards No. 143, “Accounting for Asset RetirementObligations.”

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, 2005, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission, and ourreport dated March 3,2006 expressed an unqualified opinion thereon.

|                        | /s/ ERNST &  YOUNG LLP |
|------------------------|--------------------------------------|
| MetroPark, New  Jersey |                                 |
| March 3,  2006    |                                 |

 

F-2

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**MEDAREX,INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, except share data)**

| ** **                                                                                                                                                                                                                                                   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                   |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                                                              |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                    |       | $                     | 90,602     |   | $ | 64,843 |   |
| Marketable securities                                                                                                                                                                                                                                        |       | 260,705               |       | 309,664 |   |
| Segregated securities                                                                                                                                                                                                                                        |       | —                |       | 12,301 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                    |       | 31,608                |       | 6,708 |   |
| Total current assets                                                                                                                                                                                                                                         |       | 382,915               |       | 393,516 |   |
| Property, buildings and  equipment:                                                                                                                                                                                                                          |       |                  |       |   |   |
| Land                                                                                                                                                                                                                                                         |       | 6,795                 |       | 6,795 |   |
| Buildings and leasehold improvements                                                                                                                                                                                                                         |       | 82,338                |       | 77,995 |   |
| Machinery and equipment                                                                                                                                                                                                                                      |       | 54,130                |       | 45,898 |   |
| Furniture and fixtures                                                                                                                                                                                                                                       |       | 4,553                 |       | 4,290 |   |
|                                                                                                                                                                                                                                                         |       | 147,816               |       | 134,978 |   |
| Less accumulated depreciation and amortization                                                                                                                                                                                                               |       | (61,832               | )          | (45,098 | ) |
|                                                                                                                                                                                                                                                         |       | 85,984                |       | 89,880 |   |
| Investment in Genmab                                                                                                                                                                                                                                         |       | 3,255                 |       | 1,657 |   |
| Investment in IDM                                                                                                                                                                                                                                            |       | —                |       | 41,206 |   |
| Investments in, and advances to, other partners                                                                                                                                                                                                              |       | 6,400                 |       | 10,482 |   |
| Segregated securities                                                                                                                                                                                                                                        |       | 2,033                 |       | 1,700 |   |
| Other assets                                                                                                                                                                                                                                                 |       | 6,289                 |       | 10,904 |   |
| Total assets                                                                                                                                                                                                                                                 |       | $                     | 486,876    |   | $ | 549,345 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                                                                               |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                                                                                         |       |                  |       |   |   |
| Trade accounts payable                                                                                                                                                                                                                                       |       | $                     | 4,939      |   | $ | 4,998 |   |
| Accrued liabilities                                                                                                                                                                                                                                          |       | 27,905                |       | 32,148 |   |
| Deferred contract revenue - current                                                                                                                                                                                                                          |       | 20,872                |       | 15,260 |   |
| Total current liabilities                                                                                                                                                                                                                                    |       | 53,716                |       | 52,406 |   |
| Deferred contract revenue - long-term                                                                                                                                                                                                                        |       | 106,827               |       | 86,691 |   |
| Other long-term liabilities                                                                                                                                                                                                                                  |       | 4,032                 |       | 5,873 |   |
| 4.25% Convertible senior notes due August 15,  2010                                                                                                                                                                                                     |       | —                |       | 146,986 |   |
| 2.25% Convertible senior notes due May 15, 2011                                                                                                                                                                                                         |       | 150,000               |       | 150,000 |   |
| Minority interest                                                                                                                                                                                                                                            |       | 11,590                |       | — |   |
| 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; 111,773,230 shares issued and 111,687,930 outstanding at  December 31, 2005 and 85,865,333 shares issued and 85,673,693 shares  outstanding at December 31, 2004 |       | 1,118                 |       | 859 |   |
| Capital in excess of par value                                                                                                                                                                                                                               |       | 908,151               |       | 699,380 |   |
| Treasury stock, at cost 85,300 shares in 2005 and  191,640 shares in 2004                                                                                                                                                                                    |       | (215                  | )          | (482 | ) |
| Deferred compensation                                                                                                                                                                                                                                        |       | (599                  | )          | 372 |   |
| Accumulated other comprehensive income                                                                                                                                                                                                                       |       | (2,351                | )          | 6,649 |   |
| Accumulated deficit                                                                                                                                                                                                                                          |       | (745,393              | )          | (599,389 | ) |
| Total shareholders’ equity                                                                                                                                                                                                                              |       | 160,711               |       | 107,389 |   |
| Total liabilities  and shareholders’ equity                                                                                                                                                                                                             |       | $                     | 486,876    |   | $ | 549,345 |   |

 

See notes to these consolidated financial statements.

F-3

----

**MEDAREX,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)**

| ** **                                                       | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Sales                                                            |       | $                                                            | —     |   | $ | — |   | $ | 25 |   |
| Contract and  license revenues                                   |       | 30,226                                                       |       | 9,119 |   | 5,833 |   |
| Contract and  license revenues from Genmab                       |       | 4,067                                                        |       | 3,355 |   | 5,316 |   |
| Reimbursement of  development costs                              |       | 17,162                                                       |       | — |   | — |   |
| Total revenues                                                   |       | 51,455                                                       |       | 12,474 |   | 11,174 |   |
| Costs and expenses:                                              |       |                                                         |       |   |   |   |   |
| Cost of sales                                                    |       | —                                                       |       | — |   | 3 |   |
| Research and development                                         |       | 135,847                                                      |       | 122,007 |   | 95,459 |   |
| General and administrative                                       |       | 28,054                                                       |       | 24,314 |   | 21,727 |   |
| Acquisition of in-process technology                             |       | 8,447                                                        |       | 5,455 |   | 6,500 |   |
| Total costs and expenses                                         |       | 172,348                                                      |       | 151,776 |   | 123,689 |   |
| Operating loss                                                   |       | (120,893                                                     | )          | (139,302 | ) | (112,515 | ) |
| Equity in net  loss of affiliate                                 |       | (6,323                                                       | )          | (19,791 | ) | (14,997 | ) |
| Interest,  dividend income and realized gains                    |       | 14,740                                                       |       | 7,161 |   | 12,311 |   |
| Impairment loss  on investments in partners                      |       | (33,347                                                      | )          | (7,309 | ) | (1,400 |   |
| Interest expense                                                 |       | (4,233                                                       | )          | (12,845 | ) | (11,777 | ) |
| Minority interest—Celldex                                   |       | 4,410                                                        |       | — |   | — |   |
| Debt conversion  expense                                         |       | —                                                       |       | (10,151 | ) | — |   |
| Net loss on  extinguishment of debt                              |       | —                                                       |       | (4,241 | ) | — |   |
| Pre tax loss                                                     |       | (145,646                                                     | )          | (186,478 | ) | (128,378 | ) |
| Provision for  income taxes                                      |       | 358                                                          |       | 31 |   | 69 |   |
| Loss before  cumulative effect of change in accounting principle |       | (146,004                                                     | )          | (186,509 | ) | (128,447 | ) |
| Cumulative effect  of change in accounting principle             |       | —                                                       |       | — |   | (830 | ) |
| Net loss                                                         |       | $                                                            | (146,004   | ) | $ | (186,509 | ) | $ | (129,277 | ) |
| Basic and diluted net  loss per share:                           |       |                                                         |       |   |   |   |   |
| Loss before  cumulative effect of change in accounting principle |       | $                                                            | (1.32      | ) | $ | (2.29 | ) | $ | (1.64 | ) |
| Cumulative effect  of change in accounting principle             |       | —                                                       |       | — |   | (0.01 | ) |
| Net loss                                                         |       | $                                                            | (1.32      | ) | $ | (2.29 | ) | $ | (1.65 | ) |
| Weighted average number  of common                               |       |                                                         |       |   |   |   |   |
| shares outstanding                                               |       |                                                         |       |   |   |   |   |
| —basic and  diluted                                         |       | 110,309                                                      |       | 81,494 |   | 78,314 |   |

 

See notes to these consolidated financial statements.

F-4

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**MEDAREX,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(Dollars in thousands)**

| ** **                                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **                 | ** ** | ** **         | ** ** | **Accumulated** | ** ** | ** **       | ** ** | ** **              | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------------------|------------|--------------------|------------|-----------------|------------|------------------|------------|-------------------------|------------|
| ** **                                                                               | ** ** | **Common stock** | ** ** | **Capital** | ** ** | **Treasury Stock**    | ** ** | ** **         | ** ** | **other**       | ** ** | ** **       | ** ** | **Total**               | ** ** |
| ** **                                                                               | ** ** | **Number of**    | ** ** | ** **  | ** ** | **in excess**         | ** ** | **Number of** | ** ** | ** **      | ** ** | **Deferred**     | ** ** | ** comprehensive** | ** ** | **Accumulated** | ** ** | **shareholders’** | ** ** |
| ** **                                                                               | ** ** | **shares**            | ** ** | **Amount**  | ** ** | **of par value** | ** ** | **shares**         | ** ** | **Amount**      | ** ** | **Compensation** | ** ** | **income (loss)**  | ** ** | **deficit** | ** ** | **equity** | ** ** |
| 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 |   |   |
| Issuance of common stock  for exercise of options and grant of restricted shares         |       | 919,067               |       |        | 9          |                       |       |               | 4,626      |            |       |             |       |                    |       |   |   |   |   |   | (94 | ) |   |   |   |   |   |   |   |   |   |   | 4,541 |   |   |
| Stock based  compensation—Celldex                                                   |       |                  |       |        |       |                       |       |               | 898        |            |       |             |       |                    |       |   |   |   |   |   | (610 | ) |   |   |   |   |   |   |   |   |   |   | 288 |   |   |
| Issuance of vested  restricted stock units under deferred compensation plan              |       |                  |       |        |       |                       |       |               | 1,246      |            |       |             |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,246 |   |   |
| Withdrawal from executive  deferred compensation plan                                    |       |                  |       |        |       |                       |       |               |       |            |       |             | 106,340    |                    |       |   | 267 |   |   |   | (267 | ) |   |   |   |   |   |   |   |   |   |   | — |   |   |
| Issuance of common stock  in connection with collaboration agreements, net               |       | 2,879,223             |       |        | 29         |                       |       |               | 24,971     |            |       |             |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 25,000 |   |   |
| Issuance of common stock  in connection with the redemption of convertible note          |       | 21,875,353            |       |        | 219        |                       |       |               | 143,564    |            |       |             |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 143,783 |   |   |
| Issuance of common stock  under the employee stock purchase plan                         |       | 234,254               |       |        | 2          |                       |       |               | 1,427      |            |       |             |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,429 |   |   |
| Appreciation of equity  method investee                                                  |       |                  |       |        |       |                       |       |               | 8,039      |            |       |             |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 8,039 |   |   |
| Subsidary stock issuance                                                                 |       |                  |       |        |       |                       |       |               | 24,000     |            |       |             |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 24,000 |   |   |
| Net loss                                                                                 |       |                  |       |        |       |                       |       |               |       |            |       |             |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (146,004 | ) |   |   | (146,004 | ) |   |
| Other comprehensive  income (loss)—  foreign currency translation adjustment        |       |                  |       |        |       |                       |       |               |       |            |       |             |       |                    |       |   |   |   |   |   |   |   |   |   | (610 | ) |   |   |   |   |   |   | (610 | ) |   |
| unrealized loss on  securities                                                           |       |                  |       |        |       |                       |       |               |       |            |       |             |       |                    |       |   |   |   |   |   |   |   |   |   | (8,390 | ) |   |   |   |   |   |   | (8,390 | ) |   |
| Comprehensive loss                                                                       |       |                  |       |        |       |                       |       |               |       |            |       |             |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (155,004 | ) |   |

| Balance at  December 31, 2005 |   | 111,773,230 |   |   | $ | 1,118 |   |   |   | $ | 908,151 |   |   |   | (85,300 | ) |   |   | $ | (215 | ) |   |   | $ | (599 | ) |   |   | $ | (2,351 | ) |   |   | $ | (745,393 | ) |   |   | $ | 160,711 |   |   |
|------------------------------------|--------|-------------|--------|--------|---|-------|--------|--------|--------|---|---------|--------|--------|--------|---------|---|--------|--------|---|------|---|--------|--------|---|------|---|--------|--------|---|--------|---|--------|--------|---|----------|---|--------|--------|---|---------|--------|--------|

 

See notes to theseconsolidated financial statements.

F-5

 

----

**MEDAREX,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

 

| ** **                                                                 | ** ** | **For the Year Ended  December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Operating activities:                                                      |       |                                                     |       |   |   |   |   |
| Net loss                                                                   |       | $                                                        | (146,004   | ) | $ | (186,509 | ) | $ | (129,277 | ) |
| Adjustments to reconcile net loss to net cash used in                      |       |                                                     |       |   |   |   |   |
| operating activities:                                                      |       |                                                     |       |   |   |   |   |
| Cumulative effect  of change in accounting principle                       |       | —                                                   |       | — |   | 830 |   |
| Depreciation                                                               |       | 12,737                                                   |       | 12,020 |   | 10,650 |   |
| Amortization                                                               |       | 5,627                                                    |       | 8,914 |   | 4,613 |   |
| Loss on sale of  equipment                                                 |       | —                                                   |       | 105 |   | — |   |
| Stock options and  awards to employees                                     |       | 194                                                      |       | 1,203 |   | 773 |   |
| Write-off of  deferred offering costs—Celldex                         |       | 978                                                      |       | — |   | — |   |
| Non cash revenue—Genmab                                               |       | —                                                   |       | (1,166 | ) | (834 | ) |
| Licenses fees paid  with stock                                             |       | —                                                   |       | 2,560 |   | — |   |
| Acquisition of  in-process technology                                      |       | 8,447                                                    |       | 5,455 |   | 6,100 |   |
| Equity in net loss  of Genmab                                              |       | 6,323                                                    |       | 19,791 |   | 14,997 |   |
| Impairment losses  on investments in partners and other assets             |       | 36,120                                                   |       | 7,309 |   | 1,400 |   |
| Gain on exchange  of convertible debt                                      |       | —                                                   |       | (325 | ) | — |   |
| Loss on redemption  convertible debt                                       |       | —                                                   |       | 4,566 |   | — |   |
| Gain on sale of  partners’ stock                                      |       | (3,315                                                   | )          | (1,664 | ) | (1,530 | ) |
| Minority interest—Celldex                                             |       | (4,410                                                   | )          | — |   | — |   |
| Changes in operating assets and liabilities                                |       |                                                     |       |   |   |   |   |
| Other current  assets                                                      |       | (24,900                                                  | )          | (458 | ) | 3,799 |   |
| Trade accounts  payable                                                    |       | (59                                                      | )          | 2,801 |   | (489 | ) |
| Accrued liabilities                                                        |       | (6,400                                                   | )          | 20,769 |   | 214 |   |
| Deferred contract  revenue                                                 |       | 25,748                                                   |       | 98,649 |   | (497 | ) |
| Net cash used in  operating activities                                     |       | (88,914                                                  | )          | (5,980 | ) | (89,251 | ) |
| Investing activities:                                                      |       |                                                     |       |   |   |   |   |
| Purchase of  property and equipment                                        |       | (9,312                                                   | )          | (9,074 | ) | (8,890 | ) |
| Proceeds from sale  of land and equipment                                  |       | —                                                   |       | 600 |   | — |   |
| Increase in  investments and advances to affiliates and partners           |       | —                                                   |       | (581 | ) | (1,000 | ) |
| Decrease  (increase) in segregated cash                                    |       | —                                                   |       | 3,195 |   | (15,896 | ) |
| Investment in  Lorantis, net of acquired cash                              |       | 29,742                                                   |       | — |   | — |   |
| Investment in  Alteris, net of acquired cash                               |       | (2,208                                                   | )          | — |   | — |   |
| Purchase of  marketable securities                                         |       | (56,108                                                  | )          | (270,500 | ) | (121,191 | ) |
| Sales and  maturities of marketable securities                             |       | 121,999                                                  |       | 242,573 |   | 124,407 |   |
| Net cash provided  by (used in) investing activities                       |       | 84,113                                                   |       | (33,787 | ) | (22,570 | ) |
| Financing activities:                                                      |       |                                                     |       |   |   |   |   |
| Cash received from  sales of securities and exercise of stock options, net |       | 31,061                                                   |       | 31,850 |   | 2,091 |   |
| Proceeds from sale  of convertible subordinated notes, net                 |       | —                                                   |       | 145,217 |   | 121,239 |   |
| Repurchase of  4.50% convertible notes                                     |       | —                                                   |       | (144,585 | ) | — |   |
| Deferred offering  costs - Celldex                                         |       | —                                                   |       | (692 | ) | — |   |
| Debt exchange  costs                                                       |       | —                                                   |       | (100 | ) | — |   |
| Principal payments  under capital lease obligations                        |       | (9                                                       | )          | (78 | ) | (323 | ) |
| Net cash provided  by financing activities                                 |       | 31,052                                                   |       | 31,612 |   | 123,007 |   |
| Effect of exchange  rate differences on cash and cash equivalents          |       | (492                                                     | )          | — |   | — |   |
| Net increase  (decrease) in cash and cash equivalents                      |       | 25,759                                                   |       | (8,155 | ) | 11,186 |   |
| Cash and cash  equivalents at beginning of period                          |       | 64,843                                                   |       | 72,998 |   | 61,812 |   |
| Cash and cash  equivalents at end of period                                |       | $                                                        | 90,602     |   | $ | 64,843 |   | $ | 72,998 |   |
| Non-cash investing and financing activities:                               |       |                                                     |       |   |   |   |   |
| Issuance of common  stock for intangible assets                            |       | $                                                        | —     |   | $ | — |   | $ | 7,100 |   |
| Supplemental disclosures of cash flow information                          |       |                                                     |       |   |   |   |   |
| Cash paid during period  for:                                              |       |                                                     |       |   |   |   |   |
| Income taxes                                                               |       | $                                                        | 365        |   | $ | 3 |   | $ | 108 |   |
| Interest                                                                   |       | $                                                        | 5,717      |   | $ | 10,789 |   | $ | 11,841 |   |

 

See notes to these consolidated financial statements.

F-6

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

**1.**   Organizationand 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’s financialstatements consolidate all of its subsidiaries, including those that itcontrols and those in which it holds a majority voting interest. As of December 31,2005, Medarex owns approximately 60% of the outstanding common stock of CelldexTherapeutics, Inc. (“Celldex”) (see Note 15). As of December 31,2005, the Company has significant investments in Genmab A/S (“Genmab”) (seeNote 11) and IDM Pharma, Inc. (“IDM Pharma”) (see Note 12). The Company’soperations constitute one business segment. All significant intercompanybalances and transactions have been eliminated in consolidation.

**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.

In addition, the Company has investments in several ofits partners whose securities are not publicly traded. These investments areaccounted for under the cost basis. Because these securities are not publiclytraded, the Company values these investments by using information acquired fromindustry trends, management of these companies, such companies’ financialstatements, and other external sources. Specifically, the Company’sdetermination of any potential impairment of the value of privately heldsecurities includes an analysis of the following for each company on a periodicbasis: review of interim and 

F-7

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

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, the Company records aninvestment impairment charge when it believes an investment has experienced adecline in value that is considered to be other than temporary.

The Company recordedinvestment impairment charges of $0, $0.2 million and $0 related to investmentsin partners whose securities are publicly traded for the years ended December 31,2005, 2004 and 2003, respectively. In addition, the Company recorded investmentimpairment charges of $33.3 million, $7.1 million and $1.4 million in partnerswhose securities are privately held for the years ended December 31, 2005,2004 and 2003, respectively. Approximately $29.3 million, $7.1 million and $0of investments impairment charges for the years ended December 31, 2005,2004 and 2003, respectively, related to the Company’s investment inImmuno-Design Molecules, S.A. (“IDM”) prior to its business combination withEpimmune, Inc. (“Epimmune”) (see Note 12).

***Segregated Securities***

Segregated securitiesprimarily represent U.S. treasury security strips which collateralized interestpayments related to the Company’s 4.25% convertible senior notes which were dueAugust 15, 2010 and all of which were converted into shares of commonstock in January 2005 (see Note 6).

***Financial Instruments***

The fair values of cash andcash equivalents, marketable securities, accounts payable, accrued liabilitiesand convertible subordinated notes payable are not materially different fromtheir carrying amounts as of December 31, 2005 and 2004. Receivables frompartners are concentrated primarily in the pharmaceutical and biotechnologyindustries. Although the Company’s partners are concentrated primarily withinthese two industries, management considers the likelihood of material creditrisk 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 and machineryand equipment principally range from fifteen to thirty years, five years andthree to five years, respectively. Leasehold improvements are amortized overthe estimated useful lives of the assets or the initial lease terms, whicheveris 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 flows resulting from theuse of the asset and its eventual disposition. In the event that such cashflows are not expected to be sufficient to recover the carrying amount of theassets, the assets are written down to 

F-8

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

theirestimated fair values. Long-lived assets and certain identifiable intangibleassets to be disposed of are reported at the lower of carrying amount or fairvalue less cost 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 31,2005, the accumulated unrealized foreign exchange translation gain included inother comprehensive income was approximately $4.9 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 are recognizableas revenue. The Company follows the following principles in recognizingrevenue:

·       TheCompany sells antibodies primarily to partners in the United States andoverseas. Revenue from these sales is recognized when the antibodies areshipped and the Company has no further obligations related to the developmentof the antibodies.

·       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, 2005, 2004 and 2003 (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.

·       Revenuearrangements that include multiple deliverables are divided into separate unitsof accounting if the deliverables meet certain criteria, including whether thefair value of the delivered items can be determined and whether there isevidence of fair value of the undelivered items. In addition, the considerationis allocated among the separate units of accounting based on their fair values,and the applicable revenue recognition criteria are considered separately foreach of the separate units of accounting.

·       Revenuesderived from reimbursements of costs associated with the development of productcandidates are recorded in compliance with EITF Issue 99-19, “ReportingRevenue Gross as a Principal Versus Net as an Agent” (“EITF 99-19”). Accordingto the criteria established by EITF 99-19, in transactions where theCompany acts as a principal, with discretion to choose suppliers, bears creditrisk and performs part of the services required in the transaction, the Companybelieves it has met the criteria to record revenue for the gross amount of thereimbursements.

·       Grant revenues arerecognized as the Company provides the services stipulated in the underlyinggrant based on the time and materials incurred. Amounts received in advance ofservices provided are recorded as deferred revenue and amortized as revenuewhen the services are provided.

***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.

F-10

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

***Stock-Based Compensation***

At December 31,2005, the Company’s stock awards are governed by its 2005 Equity IncentivePlan, as amended, which is described more fully in Note 8. The Company accountsfor its stock awards plan under the recognition and measurement principles ofAPB Opinion No. 25, *Accounting forStock Issued to Employees,* and related Interpretations. Thefollowing table illustrates the effect on net loss per share if the Company hadapplied the fair value recognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*, tostock-based employee compensation.

| ** **                                                                                  | ** ** | **Year ended December 31** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss, as  reported                                                                      |       | $                                         | (146,004   | ) | $ | (186,509 | ) | $ | (129,277 | ) |
| Add: Non-cash  employee compensation                                                        |       | 194                                       |       | 1,203 |   | 773 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value method |       | (17,701                                   | )          | (14,797 | ) | (11,303 | ) |
| Pro forma net  loss                                                                         |       | $                                         | (163,511   | ) | $ | (200,103 | ) | $ | (139,807 | ) |
| Loss per share:                                                                             |       |                                      |       |   |   |   |   |
| Basic and diluted, as reported                                                              |       | $                                         | (1.32      | ) | $ | (2.29 | ) | $ | (1.65 | ) |
| Basic and  diluted, pro forma                                                               |       | $                                         | (1.48      | ) | $ | (2.46 | ) | $ | (1.79 | ) |

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions:

| ** **                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Expected dividend  yield         |       | 0          | %          | 0        | %          | 0        | %          |
| Expected stock  price volatility |       | 99.1       | %          | 55.0     | %          | 64.0     | %          |
| Risk-free  interest rate         |       | 4.29       | %          | 3.60     | %          | 2.75     | %          |
| Expected life of options         |       | 6.25 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.Changes in valuation allowances from period to period are included in theCompany’s tax provision in the period of change.

***Net Loss Per Share***

Basicand diluted net loss per share are calculated in accordance with SFAS No. 128,*Earnings Per Share*. Basic netloss per share is based upon the number of weighted average shares of commonstock outstanding. Diluted net loss per share is based upon the weightedaverage number of shares of common stock and dilutive potential shares ofcommon stock outstanding. Potential shares of common stock result 

F-11

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

from the assumed exercise of outstanding stockoptions, which are included under the treasury stock method as well as theassumed conversion of convertible senior notes. Potentially dilutive securitieshave been excluded from the computation of diluted net loss per share for allyears presented, as their effect is antidilutive. A summary of such potentiallydilutive securities is as follows:

| ** **        | ** ** | **Year ended December 31** | ** ** |
|-------------------|------------|-------------------------------------------|------------|
| ** **        | ** ** | **  2005  **          | ** ** | **  2004  ** | ** ** | **  2003  ** | ** ** |
| Convertible notes |       | 10,936,935                                |       | 29,161,546 |   | 13,818,457 |   |
| Stock options     |       | 3,191,712                                 |       | 3,087,816 |   | 729,386 |   |
|              |       | 14,128,647                                |       | 32,249,362 |   | 14,547,843 |   |

 

***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 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. Adoption of SFAS No. 143had no material impact on net loss before the cumulative effect of adoption inthe year ended December 31, 2003.

***Reclassifications***

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

***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 amends Statement No. 95, *Statementof Cash Flows.*Statement 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values.Historically, in accordance with SFAS 123 and SFAS 148, *Accounting for Stock-Based Compensation*—*Transition and Disclosure*, the Company hadelected to follow the disclosure only provisions of Statement No. 123 and,accordingly, continues to account for share-based compensation under therecognition and measurement principles of APB Opinion No. 25 and relatedinterpretations. Under APB 25, when stock options are issued with an 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 is only disclosed in the footnotes to the financialstatements. The Company is required to adopt Statement No. 123(R) beginningJanuary 1, 2006. The Company selected the Black-Scholes option valuationmethod 

F-12

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

and themodified prospective transition method available under Statement 123(R).Although the Company has not yet determined the final impact of Statement123(R), the Company believes the non-cash expense for 2006 related to Statement123(R) will be in the range of $17.0 million to $18.0 million.

**3.**   Availablefor Sale Investments

Availablefor sale investments consist of the following as of December 31:

| ** **                                                       | ** ** | **2005** | ** ** | **2004**             | ** ** |                 |
|------------------------------------------------------------------|------------|----------|------------|----------------------|------------|----------------------|
| ** **                                                       | ** ** | **Cost** | ** ** | **Unrealized  Gain** | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Unrealized  Gain** | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** |   |
| Money market funds (included in cash and cash  equivalents) |       | $        | 62,315     |                 |       | —               |   |   |   | — |   |   |   | $ | 62,315 |   |   | $ | 57,984 |   |   | $ | 1 |   |   |   | $ | (2 | ) |   |   | $ | 57,983 |   |   |
| U.S. Treasury Obligations                                        |       | 41,938   |       |                 | —     |                 |   |   | (342 | ) |   |   | 41,596 |   |   | 32,746 |   |   | 2 |   |   |   | (201 | ) |   |   | 32,547 |   |   |
| U.S. Corporate Debt Securities                                   |       | 214,105  |       |                 | 32         |                 |   |   | (1,851 | ) |   |   | 212,286 |   |   | 275,131 |   |   | 23 |   |   |   | (1,267 | ) |   |   | 273,887 |   |   |
| Equity Securities                                                |       | 11,940   |       |                 | —     |                 |   |   | (5,117 | ) |   |   | 6,823 |   |   | 674 |   |   | 2,556 |   |   |   | — |   |   |   | 3,230 |   |   |
|                                                                  |            |          |            |                      |            |                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

|   |   | $ | 330,298 |   |   | $ | 32 |   |   |   | $ | (7,310 | ) |   |   | $ | 323,020 |   |   | $ | 366,535 |   |   | $ | 2,582 |   |   |   | $ | (1,470 | ) |   |   | $ | 367,647 |   |   |
|--------|--------|---|---------|--------|--------|---|----|--------|--------|--------|---|--------|---|--------|--------|---|---------|--------|--------|---|---------|--------|--------|---|-------|--------|--------|--------|---|--------|---|--------|--------|---|---------|--------|--------|

 

TheCompany’s available for sale investments have the following maturities at December 31,2005:

| Due in one year  or less                  |   | $       | 205,374 |   |
|-------------------------------------------|--------|---------|---------|--------|
| Due after one  year, less than five years |   | 117,646 |    |
| Due after five years                      |   | —  |    |

 

For the years ended December 31, 2005, 2004 and 2003,realized gains totaled $3.3 million, $2.3 million and $2.1 million,respectively, and realized losses totaled $0, $0 and $0.1 million,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, 2005, is summarized as follows:

| ** **                       | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
|----------------------------------|------------|-----------------|------------|----------------------|------------|
| Purchased less  than one year    |       | $               | 127,136    |                 |       | $ | (6,398 | ) |   |
| Purchased greater  than one year |       | 106,978         |       |                 | (912       | ) |   |
|                             |       | $               | 234,114    |                 |       | $ | (7,310 | ) |   |

 

Unrealized losses in theportfolio relate to an equity security (approximately $5.1 million) and variousdebt securities including U.S. treasury obligations, asset backed securitiesand corporate bonds (approximately $2.2 million). For the equity security, theunrealized loss was due to a temporary decline in the value of the security.For the debt securities, the unrealized losses were primarily due to increasesin interest rates. The Company has concluded that unrealized losses in itsinvestment securities are not other-than-temporary and the Company has theability to hold securities to maturity date or the recovery period.

F-13

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

**4.**   BalanceSheet Detail

Othercurrent assets consist of the following as of December 31:

| ** **                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Interest and  dividends receivable |       | $        | 1,893      |     | $          | 2,198 |   |
| Employee  receivables              |       | 520      |       | 488      |       |
| Prepaid insurance                  |       | 2,067    |       | 2,011    |       |
| Receivables from  partners         |       | 22,416   |       | 915      |       |
| Other                              |       | 4,712    |       | 1,096    |       |
|                               |       | $        | 31,608     |     | $          | 6,708 |   |

 

Otherassets consist of the following as of December 31:

| ** **                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred debt  issuance costs, net of accumulated amortization of $1,111 in 2005 and $1,249  in 2004 |       | $        | 3,586      |     | $          | 7,477 |   |
| Patents, net of  accumulated amortization of $3,571 in 2005 and $2,651 in 2004                       |       | 1,436    |       | 2,356    |       |
| Acquired  workforce, net of accumulated amortization of $705 in 2005 and $612 in 2004                |       | —   |       | 93       |       |
| Deferred offering  costs—Celldex                                                                |       | —   |       | 978      |       |
| Acquired  technology—Celldex, net of accumulated amortization of $29 in 2005                    |       | 1,267    |       | —   |       |
|                                                                                                 |       | $        | 6,289      |     | $          | 10,904 |   |

 

Accruedliabilities consist of the following as of December 31:

| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Accrued  convertible debt redemption expense |       | $        | —     |     | $          | 10,151 |   |
| Accrued  construction and equipment costs    |       | 312      |       | 330      |       |
| Accrued interest                             |       | 450      |       | 2,793    |       |
| Accrued  compensation                        |       | 6,740    |       | 5,902    |       |
| Accrued contract  manufacturing              |       | 28       |       | 1,984    |       |
| Accrued license  and royalty fees            |       | 3,143    |       | 6,313    |       |
| Accrued  professional fees                   |       | 2,993    |       | 1,280    |       |
| Due to Essex  Chemical Corp.                 |       | 667      |       | 667      |       |
| Accrued clinical  trial expenses             |       | 2,917    |       | 928      |       |
| Accrued partner  reimbursements              |       | 6,439    |       | —   |       |
| Other                                        |       | 4,216    |       | 1,800    |       |
|                                         |       | $        | 27,905     |     | $          | 32,148 |   |

 

F-14

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

**5.**   Taxes

Theprovision (benefit) for income taxes is as follows:

| ** **    | ** ** | **Year ended December 31** | ** ** |
|---------------|------------|-------------------------------------------|------------|
| ** **    | ** ** | **  2005  **          | ** ** | **  2004  ** | ** ** | **  2003  ** | ** ** |
| Federal       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Current       |       |                                      | $          | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Deferred      |       |                                      | —     |   |   |   | — |   |   |   | — |   |   |
| Total federal |       |                                      | —     |   |   |   | — |   |   |   | — |   |   |
| State         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Current       |       |                                      | 333        |   |   |   | 21 |   |   |   | 34 |   |   |
| Deferred      |       |                                      | —     |   |   |   | — |   |   |   | — |   |   |
| Total state   |       |                                      | 333        |   |   |   | 21 |   |   |   | 34 |   |   |
| Foreign       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Current       |       |                                      | 25         |   |   |   | 10 |   |   |   | 35 |   |   |
| Deferred      |       |                                      | —     |   |   |   | — |   |   |   | — |   |   |
| Total foreign |       |                                      | 25         |   |   |   | 10 |   |   |   | 35 |   |   |
| Total         |       |                                      | $          | 358 |   |   |   | $ | 31 |   |   |   | $ | 69 |   |   |

 

The current foreign tax provision relates to foreignwithholding taxes. The current state tax provision is attributable to the NewJersey alternate minimum tax assessment.

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** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Computed at  statutory rate                           |       | $                                         | (49,542    | ) | $ | (63,403 | ) | $ | (43,649 | ) |
| State income  taxes, net of federal tax effect        |       | (8,594                                    | )          | (10,832 | ) | (7,733 | ) |
| Minority  interest—Celldex                       |       | (1,477                                    | )          | — |   | — |   |
| In-process  technology                                |       | 359                                       |       | 1,836 |   | — |   |
| Loss of foreign  subsidiary                           |       | 770                                       |       | 64 |   | 24 |   |
| Foreign  withholding taxes                            |       | 17                                        |       | 7 |   | 23 |   |
| Research and  development credit carryforward benefit |       | (3,068                                    | )          | (2,922 | ) | (2,876 | ) |
| Other                                                 |       | 51                                        |       | 54 |   | 74 |   |
| Other change in  deferred tax valuation reserve       |       | 61,842                                    |       | 75,227 |   | 54,206 |   |
|                                                  |       | $                                         | 358        |   | $ | 31 |   | $ | 69 |   |

 

F-15

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

Thecomponents of deferred tax assets and liabilities consist of the following asof December 31:

| ** **                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                  |       |     |       |     |       |
| Net operating loss carryforwards                       |       | $        | 170,414    |     | $          | 165,789 |   |
| Accrued compensation                                   |       | 25       |       | 1,196    |       |
| Research and development capitalized for tax  purposes |       | 4,217    |       | 4,217    |       |
| Deferred revenue                                       |       | 38,835   |       | 116      |       |
| Research credits                                       |       | 12,656   |       | 10,505   |       |
| Impairment loss on investments                         |       | 42,546   |       | 25,615   |       |
| License fees capitalized for tax purposes              |       | 6,265    |       | 6,117    |       |
| In-process technology capitalized for tax purposes     |       | 11,269   |       | 9,671    |       |
| Accrued debt “make-whole” payment            |       | —   |       | 4,059    |       |
| Accrued royalty                                        |       | 2,692    |       | 814      |       |
| Cumulative effect—asset retirement obligation     |       | 332      |       | 332      |       |
| Other                                                  |       | 1,896    |       | 856      |       |
|                                                   |       | 291,147  |       | 229,287  |       |
| Deferred tax  asset valuation allowance                |       | (291,147 | )          | (229,287 | )          |
| Net deferred tax assets                                |       | $        | —     |     | $          | — |   |

 

At December 31, 2005, approximately $18.9 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, 2005, the Company had federal NOLcarryforwards of approximately $438.2 million. The NOL carryforwardsexpire in 2006 ($0.8 million), 2007 ($4.0 million), 2008($5.5 million), 2009 ($7.6 million), 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 ($19.2 million), 2022($87.6 million), 2023 ($109.8 million), 2024 ($94.4 million) and2025 ($48.9 million). The Company determined that an ownership changeunder Section 382 of the Internal Revenue Code of 1986, as amended,occurred during 1998. The effect of the ownership change is the imposition of a$3.2 million annual limitation on the use of NOL carryforwards attributable toperiods before the change. At December 31, 2005, the amount of NOL subjectto the limitation was $43.1 million and the amount not subject tolimitation was $395.1 million.

The Company had federal research tax creditcarryforwards at December 31, 2005 of approximately $11.7 million whichexpire between 2006 and 2025. As a result of the 1998 ownership change under Section 382,the use of approximately $1.4 million of these carryforwards is subject tolimitation.

At December 31, 2005**,**the Company had state NOL carryforwardsof approximately $280.3 million. These NOL carryforwards will expire in varyingamounts between 2006 and 2014.

F-16

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

**6.**   ConvertibleNotes

***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 was obligatedto pay interest on the 4.50% Notes on January 1 and July 1 of eachyear. Interest payable per $1,000 principal amount of notes for each subsequentinterest period was $22.50. Interest was calculated on the basis of a 360-dayyear consisting of twelve 30-day months. The 4.50% Notes were eitherrepurchased and cancelled 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(the “Securities Act”), of $125.0 million of 4.25% Convertible Senior Notes dueAugust 15, 2010 (the “4.25% Notes”) to qualified institutional investors.The 4.25% Notes were initially convertible into shares of the Company’s commonstock at the rate of 148.8261 per each $1,000 principal amount of notes, whichis equivalent to an initial conversion price of approximately $6.72 per share,subject to anti-dilution adjustments. As of December 31, 2004, the Companyhad a total of 21,875,353 shares of common stock reserved for issuance pursuantto 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, theCompany’s total convertible debt was reduced by $11.014 million. In addition,the Company recorded a gain on the early extinguishment of debt ofapproximately $0.3 million in connection with the exchange and cancellation.Such gain is included within net loss on the extinguishment of debt for theyear ended December 31, 2004 in the Company’s consolidated statement ofoperations.

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 assets section of the Company’s December 31,2004 consolidated balance sheet.

F-17

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

In January 2005, theCompany completed the provisional redemption of all of its outstanding 4.25%Notes which was previously announced in December 2004. Prior to theredemption date, holders of all of the outstanding 4.25% Notes ($146.986million) converted their notes into a total of 21,875,353 shares of the Company’scommon stock. In connection with the redemption, the Company paid approximately$12.5 million in cash representing primarily the “make-whole” payment of $10.2million 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 the completion ofthis transaction, unamortized debt issuance costs of approximately $3.2 millionwere reclassified to capital in excess of par value at the time the 4.25% Noteswere converted to common stock.

***2.25% Convertible Senior Notes***

On May 3, 2004, the Company completed a privateplacement pursuant to Rule 144A of the Securities Act of $150.0 million of2.25% Convertible Senior Notes due May 15, 2011 (the “2.25% Notes”) toqualified institutional investors. The 2.25% Notes are initially convertibleinto shares of the Company’s common stock at the rate of 72.9129 per each$1,000 principal amount of the 2.25% Notes, which is equivalent to an initialconversion price of approximately $13.72 per share, subject to anti-dilutionadjustments.

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. As of December 31, 2005, the Company had10,936,935 shares of common stock reserved for issuance pursuant to theconversion of the 2.25% Notes.

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).

F-18

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

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.

**8.**   StockOptions

The Company’s stock awards are governed by its 2005Equity Incentive Plan, as amended (the “Plan”). The purchase price of stockoptions under the Plan is determined by the Compensation and OrganizationCommittee of the Board of Directors of the Company (the “Committee”). The termis fixed by the Committee, but no incentive stock option is exercisable after10 years from the date of grant. Stock options generally vest over a four yearperiod. At December 31, 2005, a total of 4,081,085 shares were availablefor future grants under the Plan.

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 $10.00 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 $25.00 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 issued1,313,919 replacement options with an exercise price of $6.33 on September 8,2003.

Asummary of the Company’s stock option activity and related information for theyears ended December 31, 2005, 2004 and 2003 is as follows:

| ** **                                                      | ** ** | **2005**    | ** ** | **2004**     | ** ** | **2003**    | ** ** |
|-----------------------------------------------------------------|------------|-------------|------------|--------------|------------|-------------|------------|
| ** **                                                      | ** ** | ** **  | ** ** | **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                               |       | 14,245,187  |       |         | $          | 7.84        |       |   | 11,629,594 |   |   | $ | 8.32 |   |   | 9,935,072 |   |   | $ | 13.64 |   |   |
| Granted                                                         |       | 3,888,462   |       |         | 9.78       |        |       | 3,141,325 |   |   | 5.80 |   |   | 5,018,019 |   |   | 6.43 |   |   |
| Exercised                                                       |       | (919,067    | )          |         | (4.88      | )           |       | (201,450 | ) |   | (3.88 | ) |   | (451,897 | ) |   | 2.52 |   |   |
| Canceled                                                        |       | (410,854    | )          |         | (7.05      | )           |       | (324,282 | ) |   | (7.53 | ) |   | (2,871,600 | ) |   | 24.25 |   |   |
| Outstanding at  end of year                                     |       | 16,803,728  |       |         | 8.47       |        |       | 14,245,187 |   |   | 7.84 |   |   | 11,629,594 |   |   | 8.32 |   |   |
| Exercisable at  end of year                                     |       | 9,534,573   |       |         | 8.82       |        |       | 7,372,351 |   |   | 9.21 |   |   | 5,093,394 |   |   | 10.04 |   |   |
| Weighted average fair  value of options granted during the year |       |        |       |         | $          | 7.95        |       |   |   |   |   | $ | 2.99 |   |   |   |   |   | $ | 3.63 |   |   |

 

F-19

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

Stockoptions outstanding at December 31, 2005 are summarized as follows:

| ** **                                 | ** ** | **Outstanding ** | ** ** | **Weighted Average**       | ** ** | **Weighted**              | ** ** | **Exercisable**         | ** ** | **Weighted**                    | ** ** |
|--------------------------------------------|------------|-----------------------|------------|---------------------------------|------------|---------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **Options at**   | ** ** | **Remaining**                   | ** ** | **Average**               | ** ** | **Options at**     | ** ** | **Average**                     | ** ** |
| **Range of Exercise Price** | ** ** | ** **            | ** ** | **December 31, 2005** | ** ** | **Contractual Life** | ** ** | **Exercise Price** | ** ** | **December 31, 2005** | ** ** | **Exercise Price** | ** ** |
| $  1.47  to $  5.61    |       |                  | 4,580,127  |                            |       |                      | 6.55       |                    |       |                            | $          | 4.01 |   |   |   | 2,826,842 |   |   |   | $ | 4.05 |   |   |
| $  5.70  to $  6.37    |       |                  | 3,266,949  |                            |       |                      | 6.94       |                    |       |                            | 6.35       |   |   |   | 2,896,195 |   |   |   | 6.35 |   |   |
| $  6.46  to $9.88                |       |                  | 3,816,402  |                            |       |                      | 7.99       |                    |       |                            | 7.27       |   |   |   | 2,003,347 |   |   |   | 7.23 |   |   |
| $  9.90  to $11.89               |       |                  | 3,346,200  |                            |       |                      | 9.66       |                    |       |                            | 9.91       |   |   |   | 17,095 |   |   |   | 10.41 |   |   |
| $12.50 to $53.41                           |       |                  | 1,794,050  |                            |       |                      | 5.40       |                    |       |                            | 22.10      |   |   |   | 1,791,094 |   |   |   | 22.11 |   |   |
|                                       |       |                  | 16,803,728 |                            |       |                      |       |                    |       |                            |       |   |   |   | 9,534,573 |   |   |   |   |   |   |
|                                            |            |                       |            |                                 |            |                           |            |                         |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**9.**   DeferredCompensation

The Company maintainsdeferred compensation programs, under which each of the Company’s executiveofficers elected to have a portion of his 2005, 2004 and 2003 bonuses, whichwere otherwise payable in cash, converted to restricted stock unitsrepresenting shares of the Company’s common stock. Participants in the deferredcompensation programs could elect to defer up to 50% of their respectivebonuses. The number of restricted stock units awarded upon such conversion wasdetermined by dividing (i) the amount of the bonus to be converted by (ii) thefair market value of the Company’s common stock on the grant date. Participantsin the deferred compensation programs elected to defer receipt of the commonstock portion of their bonuses until the earlier of three years from the grantdate or the participant’s termination from the Company. The bonus portiondeferred by each of the participants is matched on a 1:1 basis by the Companyand 25% of the match vested as of the respective grant dates. So long as aparticipant remains employed by the Company, an additional 25% of the Company’smatching contribution vests on each anniversary of the respective grant datesfor the next three years. All benefits under the deferred compensation programsare distributed in a single payment and will be paid exclusively in the form ofshares of the Company’s common stock. The Company’s matching contribution wasapproximately $0.5 million, $0.3 million and $0.1 million for the years ended, December 31,2005, 2004 and 2003, respectively.

**10.**   CollaborationAgreements

***Kirin***

Effective September 4,2002, the Company entered into a Collaboration and License Agreement with Kirinwhich provides for the exchange by Kirin and the Company of certaincross-licenses for each other’s technology for the development andcommercialization of human antibody products. The Collaboration and LicenseAgreement supersedes a previous binding letter of intent. Pursuant to theletter of intent, the Company and Kirin developed the KM-Mouse®, a uniquecrossbred mouse which combines the traits of the Company’s HuMAb-Mouse® withKirin’s TC MouseTM. Under the Collaboration and License Agreement, the Companyand Kirin are exchanging cross-licenses with respect to the KM-Mouse and otherantibody-generating mice. In addition, each of the cross-licenses granted underthe Collaboration and License Agreement are subject to certain license,milestone and royalty payments by each party to the other.

F-20

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

Through December 31,2005, the Company has not made any milestone payments to Kirin. However,approximately $2.8 million has been paid to Kirin as of December 31, 2005representing a payment due Kirin as a result of the Company’s collaborationwith Pfizer. Based on a total of three products the Company is developing,which use 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 2007, the Company may be required to makemilestone payments to Kirin aggregating up to approximately $12.75 millionwith respect 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.

Whether the Company may beobligated to make milestone payments to Kirin in the future is subject to thesuccess of its efforts with respect to products the Company is developing thatutilize the 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.

***Bristol-MyersSquibb Collaboration***

In January 2005, theCompany announced the closing of a collaboration and co-promotion agreement anda related securities purchase agreement with BMS, pursuant to which the Companyand BMS each granted the other certain intellectual property licenses andproduct rights on a worldwide basis in order to enable the parties tocollaborate in research and development of ipilimumab for the treatment ofcancer and other diseases, and, in the event that further development work issuccessful, to commercialize any resulting products. In particular, thecollaboration includes a grant by the Company to BMS of a license tocommercialize ipilimumab, a fully human antibody product developed using theCompany’s UltiMAb Human Antibody Development System, that is antagonistic tocytotoxic T-lymphocyte antigen 4 (CTLA-4). Ipilimumab is currently underinvestigation for the treatment of a broad range of cancers and other diseases.The collaboration also includes the grant by the Company to BMS of a license toMDX-1379, a gp100 peptide vaccine, for use with ipilimumab for thetreatment of metastatic melanoma.

F-21

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

As part of thecollaboration, the two companies have committed to an initial multi-year budgetof approximately $192.0 million to fund their development of ipilimumab as apotential treatment for a broad range of cancers. BMS will be responsible for65% of all development costs related to clinical trials intended to supportregulatory approval in both the United States and Europe, with the remaining35% to be paid by the Company. The parties will share equally the costs of anyclinical trials of products intended solely for regulatory approval in theUnited States, and BMS will be fully responsible for all development effortsthat relate solely to regulatory approval in Europe and other parts of theworld. Approximately $14.7 million of the Company’s revenue for the year ended December 31,2005 represented the reimbursement of 65% of the Company’s costs associatedwith the development of ipilimumab recorded in accordance with EITF 99-19.The Company’s 35% share of the BMS development costs for the year ended December 31,2005 was approximately $6.4 million.

Under the terms of thecollaboration, the Company could receive up to $205.0 million from BMS if allregulatory milestones are met, plus up to an additional $275.0 million insales-related milestones. The Company will also have the option to co-promoteany products in the United States, and, if the Company elects to exercise thisoption and has participated in the funding of the applicable Phase III clinicaltrial(s), the Company will receive 45% of any profits from commercial sales inthe United States. In the event the Company chooses not to exercise itsco-promotion rights, BMS will have exclusive commercial rights in the UnitedStates and will pay the Company royalties on any commercial sales. Outside theUnited States, BMS will have exclusive commercial rights and will pay theCompany 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 asmall premium to the market price on the date the Company entered into thecollaboration.

***Pfizer***

In September 2004,the Company entered into a series of agreements with Pfizer, Inc. Thefirst agreement amended the Company’s existing collaborative research andlicense and royalty agreements with Pfizer to provide for the discovery and developmentof up to 50 antibody products over ten years. The second and third agreementswere a sublicense from the Company to Pfizer and a cross-license of certainpatents and patent applications solely relating to the companies’ respectiveanti-CTLA-4 antibody programs. The fourth agreement was a stock purchaseagreement also related to the anti-CTLA-4 programs. Pursuant to certainof these agreements, Pfizer made a total initial cash payment to the Company of$80.0 million and purchased 4,827,808 unregistered shares of the Company’scommon stock at a purchase price equal to $6.21 per share for an aggregatepurchase price of $30.0 million. The purchase price represented a small premiumto market price at the time the Company entered into the collaboration.

The Company accounts forrevenue arrangements that include multiple deliverables in accordance withEmerging Issues Task Force No. 00-21, *Accounting for Revenue Arrangements with Multiple Arrangements*(EITF00-21).

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

The Company has concludedthat because the Pfizer collaboration contains multiple deliverables (licensesto technology and research services) EITF 00-21 applies. The Companyconsiders the arrangement with Pfizer to be a single unit of accounting underEITF 00-21 for purposes of recognizing the initial $80.0 million payment.For the years ended December 31, 2005 and 2004, the Company recognized$9.3 million and $2.6 million of revenue under the agreements with Pfizer.

***MedImmune***

In November 2004, theCompany entered into an exclusive license and collaboration agreement withMedImmune, Inc. to develop antibodies targeting interferon-alpha and thetype I interferon receptor 1. The collaboration focuses on two fully humanantibodies, MEDI-545 (MDX-1103) and MDX-1333, that arecurrently in clinical and preclinical development, respectively, by MedImmuneand the Company for the treatment of autoimmune diseases.

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.The first of these payments was paid on August 2, 2004 through theissuance of 185,622 shares of the Company’s common stock to Gilead. The secondpayment was made on October 1, 2004 in cash. The third, fourth, fifth andsixth payments (all made in 2005) were also in cash. The seventh payment wasmade on January 3, 2006 in cash. The remaining payment will be made on April 3,2006.

F-23

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

***Kyowa Hakko KogyoCo., Ltd.***

In October 2003, theCompany entered into an Amended and Restated License Agreement with Kyowa HakkoKogyo Co., Ltd., (the “Kyowa License”). Under the terms of the Kyowa License,the Company received certain intellectual property rights relating to thedevelopment and commercialization of our Ultra-Potent ToxinTM technology. Aspartial consideration for these rights, the Company paid Kyowa a total of $4.0million, $3.6 million of which was paid through the issuance of 552,020 sharesof our common stock with the balance of $0.4 million paid in cash, representingapplicable withholding taxes.

The Kyowa License was theresult of the renegotiation of a pre-existing license agreement with respect toUltra-Potent Toxin technology between Kyowa Hakko and Corixa Corporation (“Corixa”)which license agreement the Company acquired as part of the purchase of certainassets of Corixa in May 2002. Under the terms of the Corixa Asset PurchaseAgreement, upon the execution of the Kyowa License, the Company was required tomake a final payment to Corixa of $2.5 million, which was paid through theissuance of 353,807 shares of the Company’s common stock. The Company has nofurther obligation to Corixa in connection 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.

**11.**   Transactionswith Genmab

In August 2000, theCompany entered into a binding memorandum of understanding, or the GenomicsAgreement, with Genmab, pursuant to which the Company granted Genmab rights tomarket its transgenic mouse technologies for multi-target (five or moretargets) genomics partnerships to certain pharmaceutical and biotechnologycompanies whose headquarters are located in Europe.

The Genomics Agreement hadan initial term of five years with a right exercisable by Genmab to extend theterm for an additional two years. The initial term of the agreement expired in August 2005and was not extended. For each year of the agreement, the Company received $2.0million per year from Genmab. At Genmab’s option, these amounts were paid ineither cash or capital stock. During the years ended December 31, 2005,2004 and 2003, the Company recognized $1.3 million, $2.0 million and $2.0million, respectively, of revenue from this agreement.

As of January 1,2003, the Company owned approximately 31.3% of the outstanding stock of Genmab.In July 2003, the Company received 246,914 shares of Genmab stock valuedat $2.0 million representing payment for the fourth of five annual paymentsunder the August 2000 Genomics Agreement between the Company and Genmab(described above). The Company’s ownership percentage in Genmab increased toapproximately 32.0% as a result of the receipt of the 246,914 shares of Genmabstock.

In July 2004 Genmabcompleted a private placement of 5.6 million shares of its stock. As a resultof this private placement, the Company’s ownership percentage of Genmab wasreduced to approximately 24.7%. The difference between the Company’sproportionate share of the equity and its carrying value at the time theprivate placement was completed was approximately $9.7 million and wasaccounted for in accordance with APB Opinion No.18, *The Equity Method of Accounting for Investment in Common Stock*,and Staff Accounting Bulletin No. 51, *Accountingfor Sales of Stock by a Subsidiary.* This transaction is 

F-24

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

reflectedas an increase to capital in excess of par value in the Company’s consolidatedfinancial statements as of and for the year ended December 31, 2004.

During the first quarterof 2005, the remaining basis of the Company’s investment in Genmab was reducedto zero and accordingly, recognition of the Company’s share of Genmab’s netlosses for the remainder of the first quarter of 2005, the second quarter of2005 and a portion of the third quarter of 2005 was suspended.

In August 2005,Genmab sold approximately 2.5 million shares of its stock to a corporatepartner in connection with a global development and commercializationagreement. As a result of this sale of stock, the Company’s ownershippercentage in Genmab was reduced to approximately 22.2%. The difference betweenthe Company’s proportionate share of the equity and its carrying value aftercompletion of Genmab’s sale of stock to the corporate partner was approximately$8.0 million and was also accounted 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.* This transaction is reflected as anincrease to capital in excess of par value in the Company’s consolidated financialstatements as of and for the year ended December 31, 2005.

As a result of theincrease in carrying value of the Company’s investment in Genmab ofapproximately $8.0 million in August 2005 and in accordance with EITF 02-18,*Accounting for Subsequent Investments in anInvestee after Suspension of Equity Method Loss Recognition,*theCompany was required to resume the recognition of its share of Genmab’s netlosses in the third quarter of 2005. In accordance with the equity method ofaccounting, the Company will continue to record its proportionate share ofGenmab’s net losses in the future until such time when the Company’s carryingvalue of its investment in Genmab has been reduced to zero or when the Company’sownership percentage in Genmab has been reduced to less than 20% (see Note 19).

The Chairman of theCompany’s board of directors is also on the board of directors of Genmab. Inaddition, the President and Chief Executive Officer of the Company, who is alsoa member of the board of directors of the Company, and the President and ChiefExecutive Officer of Genmab are husband and wife. The President and ChiefExecutive Officer of Genmab and the Chief Scientific Officer of Genmab haveconsulting agreements with the Company. No services were rendered under theseconsulting agreements for the years ended December 31, 2005, 2004 and2003.

As of December 31,2005, the market value of the Company’s investment in Genmab was approximately$157.2 million.

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

Summaryfinancial information for Genmab is as follows as of and for the years ended December 31,2005, 2004 and 2003:

| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current Assets           |       | $        | 209,226    |     | $          | 217,582  |       | $ | 178,596 |   |
| Non Current  Assets      |       | 7,473    |       | 15,044   |       | 19,487   |       |
| Current  Liabilities     |       | 37,504   |       | 12,796   |       | 12,606   |       |
| Non Current  Liabilities |       | 2,290    |       | 3,833    |       | 3,117    |       |
| Revenue                  |       | 15,946   |       | 750      |       | 10,500   |       |
| Gross Profit             |       | 15,946   |       | 750      |       | 10,500   |       |
| Net Loss                 |       | (62,479  | )          | (70,787  | )          | (47,613  | )          |
|                          |            |          |            |          |            |          |            |  |  |  |

 

**12.**   Transactionswith Immuno-Designed Molecules S.A. (“IDM”)

In December 2004, IDMcompleted a private placement of its equity securities at a per share pricewhich was less than the Company’s cost basis in IDM. As a result, the Companyrecorded  a non-cash investmentimpairment charge of approximately $7.0 million during the fourth quarter of2004.

The Company’s equityownership in IDM was approximately 8% as of December 31, 2004. As of December 31,2004, the Company held 503,400 Class A shares, 713,576 Class B sharesand 192,278 units, each unit comprising one Class B share and 19 warrantsallowing each to purchase one convertible or redeemable bond into one Class Bshare. If the warrants were exercised and converted or redeemed, the Companywould own an additional 3,653,282 Class B shares of IDM. The warrants wereexercisable between September 2002 and September 2010, for bonds thatin turn are convertible into or redeemable in Class B shares six monthsafter the exercise.

On August 16, 2005Epimmune, Inc. and IDM announced the completion of their previouslyannounced business combination. In connection with the business combination allof the Company’s Class A shares, Class B shares and units of IDM wereconverted into approximately 2.6 million shares of common stock of the combinedentity, IDM Pharma, Inc. (“IDM Pharma”), a publicly traded company. As of December 31,2005, the Company’s investment in IDM Pharma is included within marketablesecurities in the Company’s consolidated balance sheet.

The Company’s Presidentand Chief Executive Officer is on the board of directors of IDM Pharma.

**13.**   Commitmentsand contingencies

TheCompany is obligated under non-cancelable operating leases for laboratory,production and office space in New Jersey and California. These leases expireon various dates between September 2008 and February 2013. The Companyis also obligated under certain research and license agreements. A summary ofthe Company’s commitments as of December 31, 2005 is as follows:

| ** **       | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Operating leases |       | $        | 6,803      |     | $          | 4,281    |       | $        | 3,913      |     | $          | 2,373    |       | $ | 1,602 |   | $ | 1,529 |   |
| Research funding |       | 7,549    |       | 3,025    |       | 2,275    |       | 25       |       | 25       |       | —   |       |
| Total            |       | $        | 14,352     |     | $          | 7,306    |       | $        | 6,188      |     | $          | 2,398    |       | $ | 1,627 |   | $ | 1,529 |   |

 

F-26

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

The Company incurred rentexpense of $4.0 million in 2005, $3.9 million in 2004 and $3.5 million in 2003.

The Company has secured abank letter of credit pursuant to the requirements of its Annandale, New Jerseylease. This letter of credit in the amount of $1.3 million is fully cashcollateralized and the cash is categorized as segregated securities in theconsolidated balance sheets.

TheCompany has entered into a number of other agreements that contain in-licensesof third-party technology (in addition to 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 31,2005, the Company had made milestone payments under these agreements ofapproximately $0.3 million. In addition, under the agreements the Companycurrently has in place (other than with Kirin), based on a total of nine products the Company is developingfor which milestones are potentially due and that (i) are now inclinical trials, or (ii) which the Company anticipates may enter clinicaltrials before the end of 2007, the Company may be obligated to make futuremilestone payments aggregating up to approximately $59.9 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 licensesabove may trigger royalty payments in connection with the commercialization ofcertain of the Company’s products. Whether the Company will be obligated tomake milestone or royalty payments in the future is subject to the success ofits product development efforts and, accordingly, is inherently uncertain.

In the ordinary course ofits business, the Company is at times subject to various legal proceedings. TheCompany does not believe that any of the currently pending legal proceedings towhich the company or any of its subsidiaries is a party or of which any oftheir property is subject, individually or in the aggregate, will have amaterial adverse effect on its operations or financial condition.

**14.**   SegmentInformation

The Company is anintegrated monoclonal antibody-based company with antibody discovery,development and clinical manufacturing capabilities. The operations of theCompany and its subsidiaries constitute one business segment.

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

Revenuefrom partners representing 10% or more of total revenues for the years ended December 31,2005, 2004 and 2003 is as follows:

| **Partners** | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| BMS          |       |       | 34         | %        |       |     | 4          | %        |       |   | — |   |   |
| Genmab       |       |       | 8          | %        |       |     | 26         | %        |       |   | 48 | % |   |
| Pfizer       |       |       | 18         | %        |       |     | 20         | %        |       |   | — |   |   |
| Amgen        |       |       | 1          | %        |       |     | 8          | %        |       |   | 15 | % |   |

 

**15.   CelldexTherapeutics, Inc.**

In March 2004, theCompany assigned or licensed to Celldex certain intellectual property relatedto the Company’s vaccine technology, including the rights to MDX-1307,one of the Company’s product candidates for the treatment of cancer, as well asthe Investigational New Drug Application (“IND”), associated with this productcandidate which became effective in February 2004.

In order to complement itstechnology and its internal clinical pipeline, in October 2005, Celldexcompleted the acquisition of all of the issued and outstanding shares ofcapital stock of Lorantis Limited (“Lorantis”), a privately held biotechnologycompany based in Cambridge, U.K. and substantially all of the assets of AlterisTherapeutics, Inc. (“Alteris”), a privately held biotechnology companybased in Philadelphia, PA. As a result of the Lorantis acquisition and theAlteris asset acquisition, the Company’s ownership percentage of Celldex wasreduced from 100% to approximately 60%.

The purchase price of Lorantisconsisted of 6.8 million shares of Celldex Class A common stock (valued at$34.0 million).

The purchase price forsubstantially all of the Alteris assets consisted of 1.2 million shares ofCelldex common stock (valued at $6.0 million) and approximately $1.6 million incash. Celldex may be required to pay Alteris up to $5.0 million upon obtainingthe first approval for commercial sale of an EGFRvIII product. In addition,Celldex may be required to pay an amount equal to 20% of any upfront fees ormilestone payments received from a certain unrelated third-party licensee, inthe event that within 12 months of the closing, Celldex enters into a licenseagreement with such third party for any EGFRvIII-derived product developedusing the technology acquired from Alteris.

Thetotal cost of the Lorantis acquisition was $34.6 million, of which $0.5 millionrepresented transaction costs. The total cost of the Alteris asset acquisitionwas $8.2 million, of which $0.6 million represented transaction costs. These amountshave been allocated as follows based upon independent third party valuationsusing the income approach:

| ** **                                                | ** ** | **Lorantis** | ** ** | **Alteris** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|--------------|------------|-------------|------------|-----------|------------|
| Net current  assets (primarily cash and cash equivalents) |       | $            | 30,297     |        | $          | —    |       | $ | 30,297 |   |
| Fixed assets                                              |       | 2,717        |       | 6           |       | 2,723     |       |
| Acquired  technology                                      |       | —       |       | 1,296       |       | 1,296     |       |
| In-process  research and development                      |       | 1,541        |       | 6,906       |       | 8,447     |       |
|                                                      |       | $            | 34,555     |        | $          | 8,208     |       | $ | 42,763 |   |

 

F-28

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

The total in-processresearch and development of $8.4 million was determined not to be technologicallyfeasible and had no alternative future uses. The developed technology is beingamortized over its estimated useful life of 11 years.

The value of the acquiredin-process research and development was determined by estimating the relatedprobability-adjusted net cash flows, which were then discounted to a presentvalue using a rate of 27.5%. The discount rate was based upon Celldex’sweighted average cost of capital taking into account the risk associated withthe technologies acquired. The projected cash flows for such projects werebased on estimated revenues and operating profits related to such projectsconsidering the development of each of the technologies acquired, the time andresources needed to develop the technologies, the estimated life of eachpotential commercialized product and associated risks, including the inherentdifficulties and uncertainties in developing a drug compound and obtaining FDAand other regulatory approvals.

The results of operationsfor the Lorantis acquisition and the Alteris asset acquisition are included inthe consolidated statement of operations from October 12, 2005.

Theunaudited pro-forma results of operations for the years ended December 31,2005 and 2004, assuming the acquisition of Lorantis and the Alteris asset acquisitiontook place on January 1, 2004, are as follows:

| ** **                            | ** ** | **Year Ended December 31** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Total revenue                         |       | $                                         | 51,593     |   | $ | 12,525 |   |
| Net loss                              |       | (145,621                                  | )          | (192,247 | ) |
| Basic and diluted net  loss per share |       | $                                         | (1.32      | ) | $ | (2.36 | ) |

 

The pro-forma informationdoes not include the write-off of in-process technology of $8.4 million whichis not expected to recur in the future. The pro-forma unaudited financialresults are not necessarily indicative of the results of operations that wouldhave occurred had the Lorantis acquisition and the Alteris asset acquisitiontaken place at the beginning of the periods presented nor are they intended tobe indicative of results that may occur in the future.

**16.**   Acquisitionof Ability Biomedical Corporation

On August 5, 2004,the Company completed the acquisition of all of the outstanding capital stocknot already owned by the Company of Ability Biomedical Corporation, a privatelyheld Canadian biotechnology company. Pursuant to such acquisition, the Companyacquired Ability Biomedical’s intellectual property related to IP-10, aprotein believed to be associated with a variety of immune disorders, includingmultiple sclerosis, rheumatoid arthritis, inflammatory bowel disease, chronicobstructive pulmonary disease and type I diabetes.

The purchase priceconsisted of 731,823 shares of Medarex common stock (valued at approximately$4.3 million), cash payments of approximately $0.6 million and transactioncosts of approximately $0.2 million. In addition, the Company had owned sharesof Ability Biomedical prior to the acquisition, which were valued atapproximately $0.6 million, therefore the total cost of the acquisition was$5.7 million. During the 60-day period following the issuance of sharesof the Company’s common stock to the Ability Biomedical shareholders inconnection with the acquisition, certain shareholders sold all of the shares 

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

issuedto them for an amount less than the amount due to them under the share purchaseagreement while certain other shareholders sold shares issued to them for anamount greater 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 ofcertain development milestones with respect to the Company’s anti-IP-10antibody program, but no later than September 4, 2007, the Company may berequired to pay the former shareholders of Ability Biomedical an additionalamount of approximately $3.65 million in cash and/or common stock subject tofluctuations in currency exchange rates. In lieu of such additional payment,the Company also has 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-10antibody.

Thetotal cost of the acquisition was $5.7 million. This amount has been allocatedas follows:

| In-process  technology                            |   | $   | 5.4    |   |
|---------------------------------------------------|--------|-----|--------|--------|
| Net assets  (primarily cash and cash equivalents) |   | 0.3 |   |
|                                              |   | $   | 5.7    |   |

 

The assets and liabilitiesassumed have been recorded at their estimated fair market values at the date ofacquisition. Since technological feasibility of the in-process research anddevelopment costs have not yet been established and the technology had noalternative future use at the acquisition date, the in-process research anddevelopment costs of $5.4 million were immediately written-off and included inthe results of operations for the year ended December 31, 2004.

**17.   EmployeeBenefit Plans**

***Employee Stock Purchase Plan***

In May 2002,the Company adopted an Employee Stock Purchase Plan (the “ESPP”) whichcurrently authorizes the issuance of 1,500,000 shares of its common stockpursuant to purchase rights granted to eligible employees of the Company. TheESPP provides a means by which employees purchase common stock of the Companythrough payroll deductions of up to 10% of their base compensation. At the endof each of two purchase periods during the calendar year, the Company usesaccumulated payroll deductions to purchase, on behalf of participatingemployees, shares of common stock at a price equal to the lower of 85% of thefair market value of a share of common stock (i) on July 1, 2004 or (ii) atthe end of each six month purchase period. The purchase periods under the ESPPend on June 30 and December 31 of each year. Generally all employees,including executive officers, who work at least 20 hours per week and fivemonths per year may participate in the ESPP. Employees who are deemed to owngreater than 5% of the combined voting power of all classes of stock of theCompany are not eligible for participation in the ESPP. During the years ended December 31,2005, 2004 and 2003, 234,254, 176,625 and 175,955 shares of common stock wereissued under the ESPP resulting in net proceeds to the Company of $1.4 million,$1.1 

F-30

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**MEDAREX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2005, 2004 and 2003 (Dollars in thousands, unless otherwise indicated, except share data)**

million and $1.0 million,respectively. As of December 31, 2005, the Company had reserved 766,184shares of common stock for issuance pursuant to the ESPP.

***Employee SavingsPlan***

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 2005, 2004 and 2003, the Company madecontributions to the plan totaling $0.7 million, $0.6 million and $0.6 million,respectively.

**18.**   QuarterlyFinancial Information—Unaudited

The following is a summaryof the quarterly results of operations for the years ended December 31,2005 and 2004:

| **2005**                                | ** ** | ** ** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|
| Contract and  license revenues          |       | $          | 6,532      |               | $          | 11,716            |       |                   | $          | 7,621                 |       |      |       | $ | 8,424 |   |   | $ | 34,293 |   |
| Reimbursement of  development costs     |       | 1,979      |       | 6,821              |       |              | 3,045      |                   |       |                  | 5,317      |      |       | 17,162 |   |
| Total revenue                           |       | 8,511      |       | 18,537             |       |              | 10,666     |                   |       |                  | 13,741     |      |       | 51,455 |   |
| Loss before  provision for income taxes |       | (46,838    | )          | (30,662            | )          |              | (23,005    | )                      |       |                  | (45,141    | )(1)      |       | (145,646 | ) |
| Net loss                                |       | (46,896    | )          | (30,800            | )          |              | (23,095    | )                      |       |                  | (45,213    | )         |       | (146,004 | ) |
| Basic and diluted net loss  per share   |       | $          | (0.44      | )                  | $          | (0.28             | )          |                   | $          | (0.21                 | )          |      |       | $ | (0.41 | ) |   | $ | (1.32 | ) |

 

| **2004**                                | ** ** | ** ** | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|
| 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 |   |
| 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 | ) |

----

(1)          Includesacquisition of in-process technology of $8,447.

**19.**   SubsequentEvents

On February 1, 2006,Genmab completed the private placement of 5.75 million shares of itsstock.  As a result of this privateplacement, the Company’s ownership percentage of Genmab was reduced toapproximately 18.9%.  Beginning February1, 2006, the Company expects to account for its investment in Genmab as amarketable security in accordance with SFAS No. 115 *Accountingfor Certain Investments in Debt and Equity Securities*.

F-31

----

**Report of Independent Registered Public AccountingFirm**

To the Board of Directors and Shareholders of GenmabA/S:

In ouropinion, the accompanying consolidated balance sheet and the relatedconsolidated statements of operations, shareholders’ equity and cash flows (notpresented herein) present fairly, in all material respects, the financialposition of Genmab A/S and its subsidiaries (a development stage company) at December 31,2004, and the results of their operations and their cash flows for the years endedDecember 31, 2004 and 2003 and, cumulatively, for the period from June 11,1998 (date of inception) to December 31, 2004 in conformity withaccounting principles generally accepted in the United States of America. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance withstandards 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, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

| PricewaterhouseCoopers                     |   |
|--------------------------------------------|--------|
| Statsautoriseret Revisionsinteressentskab  |   |
| Copenhagen, Denmark, February 8, 2005 |   |
| /s/ JENS RØDER                        |   |
| State Authorized Public Accountant         |   |

 

F-32

----

**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosures

None.

**Item 9A.**                Controlsand Procedures

*Evaluationof Disclosure Controls and Procedures:*   Ourprincipal executive officer and principal financial officer reviewed andevaluated our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e))as of the end of the period covered by this Annual Report on Form 10-K.Based on that evaluation, our principal executive officer and principalfinancial officer have concluded that our disclosure controls and proceduresare effective in ensuring that all material information required to be includedin this Annual Report on Form 10-K has been made known to them in atimely fashion.

*Management’sAnnual Report on Internal Control Over Financial Reporting:**  *Our management is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rules 13a-15(f) and 15d-15(f) underthe 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, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of Medarex; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat our receipts and expenditures are being made only in accordance with authorizationsof our management and our directors; and (iii) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of our assets that could have a material effect on thefinancial statements.

Because of its inherent limitations, internal controlover 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.

Our management assessed the effectiveness of ourinternal control over financial reporting as of December 31, 2005. Inmaking this assessment, management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO) in InternalControl-Integrated Framework. Based on its assessment and those criteria, ourmanagement has concluded that we maintained effective internal control overfinancial reporting as of December 31, 2005**.**

Our independent auditors have issued an attestationreport on our management’s assessment of Medarex’s internal control overfinancial reporting. That report appears on page 75 of this annual report.

*Changesin Internal Controls Over Financial Reporting:**  *Such evaluation did not identifyany significant changes in our internal controls over financial reporting thatoccurred during the quarter ended December 31, 2005 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 AccountingFirm**

The Board of Directors andShareholdersMedarex, Inc.

We have audited management’sassessment, included in the accompanying Management’s Annual Report on InternalControl Over Financial Reporting in Item 9A that Medarex, Inc. maintainedeffective internal control over financial reporting as of December 31,2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Medarex, Inc.’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility 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 inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions 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 preventionor timely detection of unauthorized acquisition, use or disposition of thecompany’s 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.

In our opinion, management’sassessment that Medarex, Inc. maintained effective internal control overfinancial reporting as of December 31, 2005, is fairly stated, in allmaterial respects, based on the COSO criteria. Also, in our opinion, Medarex, Inc.maintained, in all respects, effective internal control over financialreporting as of December 31, 2005, based on the COSO criteria.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofMedarex, Inc. and subsidiaries as of December 31, 2005 and 2004, andthe related consolidated statements of operations, shareholders’ equity andcash flows for each of the three years in the period ended December 31,2005 and our report dated March 3, 2006 expresses an unqualified opinion thereon.
|                        |   | /s/ ERNST &  YOUNG LLP |
|------------------------|--------|--------------------------------------|
| MetroPark, New  Jersey |   |                                 |
| March 3, 2006     |   |                                 |

 

** **

75

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**Item 9B.**               OtherInformation

None

**PART III**

**Item 10.**                 Directorsand Executive Officers of the Registrant

**Identificationof Directors and Executive Officers**

The information requiredby this Item will be reported in our definitive Proxy Statement for the Annual Meetingof Shareholders which we expect will be filed on or before April 28, 2006,or the Proxy Statement, under the heading “Proposal 1—Election of Directors,”and is incorporated herein by reference.

**Compliancewith Section 16(a) of the Exchange Act**

The information requiredby this Item will be reported in the Proxy Statement under the heading “Ownershipof Company Stock—Section 16(a) Beneficial Ownership ReportingCompliance,” and is incorporated herein by reference.

**Code of Ethics**

The information requiredby this Item will be reported in the section entitled “Proposal 1—Election ofDirectors—Corporate Governance—Standards of Integrity” in the Proxy Statementand is incorporated herein by reference.

**Item 11.**                 ExecutiveCompensation

The information requiredby this Item will be reported in the Proxy Statement under the headings “Proposal1—Election of Directors—Executive Compensation,” “Proposal 1—Election ofDirectors—Information Regarding the Board and its Committees—Compensation ofDirectors,” and “Proposal 1—Election of Directors—Stock Price PerformanceGraph,” and is incorporated herein by reference.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related ShareholderMatters

The information requiredby this Item will be reported in the Proxy Statement under the headings “Ownershipof Company Stock—Medarex Stock Owned by Principal Shareholders and Management,”“Equity Compensation Plan Information” and “Equity Compensation Plans NotApproved by Shareholders,” and is incorporated herein by reference.

**Item 13.**                 CertainRelationships and Related Transactions

The information requiredby this Item will be reported in the Proxy Statement under the heading “Proposal1—Election of Officers—Certain Relationships and Related Transactions,” and isincorporated herein by reference.

**Item 14.**                 PrincipalAccountant Fees and Services

The information required by this Item will be reportedin the Proxy Statement under the heading “Proposal 2—Ratification of theAppointment of Independent Registered Public Accounting Firm,” and isincorporated herein by reference.

76

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**PART IV**

**Item15.**                 Exhibits,Financial Statement Schedules 

| ItemNumber      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                       |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a).1.(a)       |       | Consolidated Financial Statements—**Medarex, Inc.**                                                                                                                                                                                                                                                                                    |
|            |       | Report of Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                        |
|            |       | Consolidated Balance  Sheets as of December 31, 2005 and 2004.                                                                                                                                                                                                                                                                              |
|            |       | Consolidated Statements  of Operations for the Years Ended December 31, 2005, 2004 and 2003.                                                                                                                                                                                                                                                |
|            |       | Consolidated Statements  of Shareholders’ Equity for the Years Ended December 31, 2005, 2004  and 2003.                                                                                                                                                                                                                           |
|            |       | Consolidated Statements  of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003.                                                                                                                                                                                                                                                |
|            |       | 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.                                                                                                                                                                                                                                                                                        |
| (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.                                                                                                                                                                                                                                                                                              |
| 4.2(74)         |       | Form of Rights  Agreement (including Form of Rights Certificate).                                                                                                                                                                                                                                                                      |
| 4.3(75)         |       | Indenture dated as of  May 3, 2004 between Registrant and Wilmington Trust Company, as trustee.                                                                                                                                                                                                                                             |
| 4.4(76)         |       | Registration Rights  Agreement dated as of May 3, 2004 by and among Registrant, Goldman,  Sachs & Co. and J.P. Morgan Securities, Inc.                                                                                                                                                                                        |
| 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(77)† |       | Employment Agreement  between the Registrant and Dr. Nils Lonberg, dated  January 5, 2004.                                                                                                                                                                                                                                        |
| 10.31(77)† |       | Employment Agreement  between the Registrant and W. Bradford Middlekauff, dated January 5,  2004.                                                                                                                                                                                                                                           |

77

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| 10.32(77)†   |   | Employment Agreement  between the Registrant and Dr. Geoffrey M. Nichol, dated January 5,  2004.                                                                                                             |
|-------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.33(77)†   |   | Employment Agreement  between the Registrant and Dr. Ronald A. Pepin, dated January 5,  2004.                                                                                                                |
| 10.34(77)†   |   | Employment Agreement  between the Registrant and Christian S. Schade, dated January 5, 2004.                                                                                                                      |
| 10.40(77)†   |   | Form of Employee  Incentive Stock Option Agreement.                                                                                                                                                               |
| 10.41(77)†   |   | Form of Employee  Nonqualified Stock Option Agreement.                                                                                                                                                            |
| 10.42(77)†   |   | 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. |
| 10.84(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.                                                                                                                                                                            |
| 10.104(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.                                                             |

78

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| 10.111(79)† |   | Medarex, Inc. 2004  Restricted Stock Unit Award and Deferred Compensation Program, as amended.                                                       |
|------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.112(80)† |   | Medarex, Inc.  Second 2004 Restricted Stock Unit Award and Deferred Compensation Program, as  amended.                                               |
| 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.                                                    |
| 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.                                          |
| 10.121(78)† |   | Medarex, Inc. 2005  Equity Incentive Plan, as amended.                                                                                               |
| 21               |   | Subsidiaries of the  Registrant.                                                                                                                          |
| 23.1             |   | Consent of  Ernst & Young LLP.                                                                                                                   |
| 23.2             |   | Consent of  PriceWaterhouseCoopers.                                                                                                                       |
| 24               |   | Power of Attorney  (contained on the signature page hereto).                                                                                         |
| 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)          Incorporatedby reference to the identically numbered exhibit to the Registrant’s RegistrationStatement on Form S-1 (File No. 33-39956) filed on April 12,1991.

(2)          Incorporatedby reference 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)          Incorporatedby reference to the identically numbered exhibit to the Registrant’s AnnualReport on Form 10-K filed on March 15, 1993.

(9)          Incorporatedby reference to the identically numbered exhibit to the Registrant’s AnnualReport on Form 10-K filed on February 23, 1996.

79

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(10)   Incorporatedby reference to the identically numbered exhibit to the Registrant’s QuarterlyReport on Form 10-Q filed on May 17, 1993.

(11)   Incorporatedby reference to the identically numbered exhibit to the Registrant’s QuarterlyReport on Form 10-Q filed on August 13, 1993.

(23)   Incorporatedby reference to Exhibit Number 10.44 to Cell Genesys, Inc.’s AnnualReport on Form 10-K/A filed on April 30, 1997.

(24)   Incorporatedby reference to Exhibit Number 10.45 to Cell Genesys, Inc.’s AnnualReport on Form 10-K/A filed on April 30, 1997.

(25)   Incorporatedby reference to Exhibit Number 10.46 to Cell Genesys, Inc.’s AnnualReport on Form 10-K/A filed on April 30, 1997.

(28)   Incorporatedby reference to Exhibit Number 2.1 to the Registrant’s Current Report on Form 8-Kfiled on June 17, 1997.

(30)   Incorporatedby reference to Exhibit Number 10.82 to the Registrant’s Quarterly Reporton Form 10-Q filed on August 13, 1999.

(36)   Incorporatedby reference to Exhibit Number 10.80 to the Registrant’s Current Report onForm 8-K filed on August 11, 1999.

(37)   Incorporatedby reference to Exhibit Number 10.81 to the Registrant’s Current Report onForm 8-K filed on August 11, 1999.

(39)   Incorporatedby reference to Exhibit Number 10.83 to the Registrant’s Quarterly Reporton Form 10-Q filed on August 13, 1999.

(40)   Incorporatedby reference to Exhibit Number 10.84 to the Registrant’s Quarterly Reporton Form 10-Q filed on August 13, 1999.

(41)   Incorporatedby reference to Exhibit Number 10.85 to the Registrant’s Quarterly Reporton Form 10-Q filed on August 13, 1999.

(52)   Incorporatedby reference to Exhibit Number 10.10 to the Registrant’s Current Report onForm 8-K filed on January 26, 2000.

(56)   Incorporatedby reference to Exhibit Number 3.1 to the Registrant’s QuarterlyReport on Form 10-Q filed on August 12, 2003.

(57)   Incorporatedby reference to Exhibit Number 10.1 to the Registrant’s RegistrationStatement on Form S-8 (File Number 333-39084) filed on June 12,2000.

(58)   Incorporatedby reference to Exhibit No. 10.1 to Registrant’s RegistrationStatement on Form S-8 (File Number 333-55222) filed on February 8,2001.

(59)   Incorporatedby reference to Exhibit No. 10.1 to Registrant’s RegistrationStatement on Form S-8 (File Number 333-55224) filed on February 8,2001.

(60)   Incorporatedby reference to Exhibit No. 10.1 to Registrant’s RegistrationStatement on Form S-8 (File Number 333-72154) filed on October 24,2001.

(61)   Incorporatedby reference to Exhibit No. 10.1 to Registrant’s RegistrationStatement on Form S-8 (File Number 333-91394) filed on June 28,2002.

(62)   Incorporatedby reference to Exhibit No. 10.1 to Registrant’s RegistrationStatement on Form S-8 (File Number 333-101698) filed on December 6,2002.

(63)   Incorporatedby reference to Exhibit No. 10.1 to Registrant’s Current Report on Form 8-Kfiled on September 18, 2002.

80

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(64)   Incorporatedby reference to Exhibit No. 99.2 to Registrant’s Current Report on Form 8-Kfiled on July 29, 2005.

(65)   Incorporatedby reference to Exhibit 10.1 to Registrant’s Registration Statement on Form S-8(File Number 333-121387) filed on December 17, 2004.

(66)   Incorporatedby reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-Kfiled on November 8, 2004.

(67)   Incorporatedby reference to Exhibit 99.3 to Registrant’s Current Report on Form 8-Kfiled on November 8, 2004.

(68)   Incorporatedby reference to Exhibit 99.5 to Registrant’s Current Report on Form 8-Kfiled on November 8, 2004.

(69)   Incorporatedby reference to Exhibit 99.6 to Registrant’s Current Report on Form 8-Kfiled on November 8, 2004.

(70)   Incorporatedby reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-Kfiled on November 8, 2004.

(71)   Incorporatedby reference to Exhibit 99.4 to Registrant’s Current Report on Form 8-Kfiled on November 8, 2004.

(72)   Incorporatedby reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-Kfiled on January 24, 2005.

(73)   Incorporatedby reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-Kfiled on January 24, 2005.

(74)   Incorporatedby reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-Kfiled on May 25, 2001.

(75)   Incorporatedby reference to Exhibit 4.3 to Registrant’s Current Report on Form 8-Kfiled on May 4, 2004.

(76)   Incorporatedby reference to Exhibit 4.2 to Registrant’s Current Report on Form 8-Kfiled on May 4, 2004.

(77)   Incorporated by reference to the identically numbered exhibit to Registrant’sAnnual Report on Form 10-K filed on March 16, 2005.

(78)   Incorporatedby reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-Kfiled on January 20, 2006.

(79)   Incorporatedby reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-Kfiled on January 20, 2006.

(80)   Incorporatedby reference to Exhibit 99.3 to Registrant’s Current Report on Form 8-Kfiled on January 20, 2006.

*                    Thiscertification accompanies this Annual Report on Form 10-K pursuantto Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed”by the Company for purposes of Section 18 of the Securities Exchange Actof 1934, as amended. A signed original of this certification has been providedto the Company and will be retained by the Company and furnished to theSecurities and Exchange Commission or its staff upon request.

**             Confidentialtreatment has been granted with respect to specified portions of this exhibit. Omittedportions have been filed separately with the Securities and ExchangeCommission.

†           Management contract orcompensatory plan or arrangement required to be filed (and/or incorporated byreference) as an exhibit to this Annual Report on Form 10-K pursuantto Item 15(c) of Form 10-K.

81

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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 15, 2006.

|        | MEDAREX, Inc. |
|--------|--------------------|
|   | By:                | /s/  DONALD L. DRAKEMAN |
|   |               | Donald L. Drakeman |
|   |               | *President and Chief Executive Officer* |

 

**POWER OF 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 the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities indicated and on thedates indicated.

**PrincipalExecutive Officer and Director:**

| Director, President and     |       | /s/  DONALD L. DRAKEMAN   |   | Date March 15, 2006 |
|-----------------------------|------------|-------------------------------------|--------|--------------------------|
| Chief Executive Officer     | ** ** | **Donald  L. Drakeman**             |   |                     |
| **Principal Financial and** |       |                                |   |                     |
| **Accounting Officer**      |       | /s/  CHRISTIAN S. SCHADE  |   | Date March 15, 2006 |
| Senior Vice President and   |       | **Christian  S. Schade**            |   |                     |
| Chief Financial Officer     |       |                                |   |                     |
| **Directors:**              |       | /s/  IRWIN LERNER         |   |                     |
| ** **                  | ** ** | **Irwin  Lerner**                   |   | Date March 15, 2006 |
| ** **                  | ** ** | **Chairman of the Board**           |   |                     |
| ** **                  |       | /s/  MICHAEL A. APPELBAUM |   | Date March 15, 2006 |
| ** **                  | ** ** | **Michael  A. Appelbaum**           |   |                     |
| ** **                  |       | /s/  PATRICIA M. DANZON   |   | Date March 15, 2006 |
| ** **                  | ** ** | **Patricia  M. Danzon**             |   |                     |
| ** **                  |       | /s/  RONALD J. SALDARINI  |   | Date March 15, 2006 |
| ** **                  | ** ** | **Ronald  J. Saldarini**            |   |                     |
| ** **                  |       | /s/  CHARLES R. SCHALLER  |   | Date March 15, 2006 |
| ** **                  | ** ** | **Charles  R. Schaller**            |   |                     |
| ** **                  |       | /s/  JULIUS A. VIDA       |   | Date March 15, 2006 |
| ** **                  | ** ** | **Julius  A. Vida**                 |   |                     |

 

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