**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K/A**

**(AmendmentNo. 1 to Form 10-K)**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended December 31, 2005**

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

**For the transition period from                  to                   **

**Commission File 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 organization) |   | (I.R.S. Employer  Identification No.) |
| ** **                                                      |   | ** **                            |
| **707  State Road, Princeton, New Jersey**                      |   | **08540**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |

 

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

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**Securities registered pursuant toSection 12(b) of the Act:**None

**Securities registered pursuant toSection 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 if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   x  No   o

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of theAct.  Yes   o No   x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.     Yes  x    No   o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Act. (check one):

Largeaccelerated filer x                   Accelerated filer o              Non-acceleratedfiler o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).

Yes  o No x

The aggregate market value of the voting stock held bynon-affiliates of the Registrant was approximately $831.5 million as ofJune 30, 2005, based upon the closing sale price on the NASDAQ NationalMarket reported for such date. The determination of affiliate status for thepurposes of this calculation is not necessarily a conclusive determination forother purposes. The calculation excludes approximately 10,808,686 shares heldby directors, officers and shareholders whose ownership exceeded 5% of theRegistrant’s outstanding Common Stock as of June 30, 2005. Exclusion ofthese shares should not be construed to indicate that such person controls, iscontrolled by or is under common control with the Registrant.

As of February 28, 2006, the registrant hadoutstanding 111,964,174 shares of Common Stock, $0.01 par value (“Common Stock”),which is registrant’s only class of Common Stock.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the registrant’s definitive Proxy Statement for the Annual Meeting ofShareholders to be held on May 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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**ExplanatoryNote**

In this Form 10-K/A, Medarex, Inc. (“Medarex” or “theCompany”) is restating its beginning accumulated deficit as of January 1, 2003for the years 1996 through 2002, and  itsconsolidated financial statements as of December 31, 2005 and 2004, and for theyears ended December 31, 2005, 2004 and 2003. Previously filed annual reports on Form 10-K and quarterlyreports on Form 10-Q for all periods from 2000 up to and including September30, 2005 affected by the restatements have not been amended and should not berelied upon.

InMay 2006, the Company received a letter from the United States Securities andExchange Commission, or SEC, informing the Company that the SEC was conductingan informal inquiry into the Company’s stock option grant practices andrequesting certain information and documentation related thereto.  The Company also received a grand jurysubpoena from the U.S. Attorney’s Office, District of New Jersey, requestingsubstantially similar information and documentation as the SEC had requested.

InJune 2006, the Company announced that the Company’s Board of Directorsinitiated an investigation (the “Investigation”) of the Company’s stock optiongrant practices from 1996 through June 30, 2006 (the “relevant period”) anddesignated one of its independent directors to oversee the Investigation.  In September 2006, the Company announced thatthe Company’s Board of Directors elected two new members, who were appointed,together with the previously designated director, to a Special InvestigationCommittee, to complete the Investigation. The Special Investigation Committee retained outside legal counsel thathad not previously been involved with the Company’s stock option plans and theoutside legal counsel retained forensic accounting consultants to assist in theInvestigation and the analysis of the measurement dates for equity awardsduring the relevant period.  At thedirection of the Special Investigation Committee, the outside legal counsel, withthe assistance of forensic accounting consultants, reviewed more than 3.5million pages of documents and conducted more than fifty witnessinterviews.  On November 6, 2006, theCompany announced the key results of the Investigation, which are set forth inthe Company’s Form 8-K filed on that date.

As aresult of the findings of the Special Investigation Committee, management hasconcluded that incorrect measurement dates were used for financial accountingpurposes for certain equity awards made in prior periods.  Management has determined that the cumulativenon-cash stock-based compensation expense and related payroll tax liabilitiesresulting from revised measurement dates with regard to past equity awards wasapproximately $36.6 million and recorded non-cash, stock-based compensationexpense and related payroll tax liabilities with regard to past equity awardsof approximately $2.0 million, $2.0 million and $4.5 million for the yearsended December 31, 2005, 2004 and 2003, respectively, and approximately $28.1million prior to fiscal year 2003.  Inaddition to the adjustments related to stock-based compensation and relatedpayroll taxes, the Company is also correcting immaterial errors identified inprior years related to the amortization of premiums and discounts related toits marketable securities.  The totaleffect of all of these adjustments was to increase previously reported basicand diluted net loss per share by $0.02, $0.00 and $0.08 for the years endedDecember 31, 2005, 2004 and 2003, respectively. Accordingly, for the years 1996through 2002, the Company has corrected these errors by restating its beginningaccumulated deficit as of January 1, 2003 and has restated its consolidatedfinancial statements as of December 31, 2005 and 2004 and for the years endedDecember 31, 2005, 2004 and 2003.  Therewas no impact on revenue or net cash used in operating activities as a resultof this compensation expense, nor was there any impact on income tax expensefor any period given the Company’s sustained history of losses.

As aresult of the grants described below, the Company is required to recordnon-cash compensation expense in accordance with APB No. 25, “Accounting forStock Issued to Employees,” or APB No. 25. Stock based compensation expense was calculated as the excess of thefair market value of the Company’s stock on the measurement dates less theexercise price of the option multiplied by the number of equity awardsgranted.   Stock-based compensation isrecognized ratably over the vesting period of the equity awards.  Prior to September 2001, the Company’s stockoptions had a vesting period of 1 year or less. Beginning in September 2001, the Company changed the vesting period foremployee stock option grants to 4 years.

Basedupon the information obtained in the Investigation, through July 2002, theCompany had a practice, in many instances, of selecting dates for its stockoption grants and restricted stock grants as of the date when the stock pricewas the lowest during the month of grant, without disclosing this practice inits public filings and without properly measuring the compensation expense on adate that the terms of the equity awards were finalized.  The terms of these grants are discussed infurther detail below.  Subsequent to July2002, while the practice of selecting dates described above ceased by theCompany in response to new legal and regulatory reporting requirements, therewere two annual equity grants for rank and file employees for which themeasurement dates differ from the grant dates recorded in the Company’s booksand records,

  

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which theInvestigation revealed were primarily a result of administrative delays, withno apparent intent to achieve favorable exercise prices.

TheCompany analyzed the evidence gathered in the Investigation related to theequity awards including electronic and hard copy documents and witnessinterviews.  Equity awards were organizedinto categories based upon recipient and the process by which the equity awardwas finalized.  Based upon the specificfacts and circumstances, the Company applied the controlling accountingstandards to determine the proper accounting measurement date with respect toevery grant during the period from 1996 through July 2002 within each of thefollowing categories:

EquityAwards Issued From 1996 through July 2002

*Officer Annual Equity Awards*

Officersreceived equity awards on an annual basis (although the dates of such awardsvaried from year to year).  The Company’sStock Option Committee would approve the number of equity awards to be grantedto officers, however, the Stock Option Committee did not select or consider anexercise price when approving the number of annual equity awards during itsStock Option Committee meetings.  TheCompany’s procedure for establishing the exercise prices of such awards, at thetime, would be for certain former officers to select the lowest price for theCompany’s common stock during the month of the grant of such annualawards.  The former officers believedthey had the discretionary authority to select such exercise prices and thisprocedure was followed by the Company during the period from 1996 through July2002. Once the price was selected, the Form 4 filing process was started by theCompany and unanimous written consents (“UWCs”) were prepared and circulatedfor execution by the members of the Stock Option Committee in situations whereUWCs were used. UWCs for three grants could not be located in the Company’sfiles.  The UWCs, which included theexercise prices selected by the former officers, were subsequently approved, inall instances, by the Stock Option Committee when the UWCs were signed, withoutexception. Since the Company’s practice was to select, at the conclusion of themonth in which the grant was designated, the date corresponding to the lowestprice for the Company’s stock for the month, the Company has concluded that themost appropriate measurement date is the last business day of the month inwhich the designated grant date occurred since at that point both the exerciseprice and the number of equity awards was determinable.

Forall officer annual stock option awards, of which there were seven, and oneofficer stock award, during the relevant period, a total of approximately 3.9million stock options and/or stock awards were made to officers where the selectedgrant dates coincided with a date when the stock price was the lowest duringthe month in which the grant was dated. Accordingly, the Company determined the total stock based compensationexpense, after accounting for forfeitures, associated with these seven officerannual stock option awards and one officer stock award was approximately $8.9million.

*Director Equity Awards*

Therewas no specific pattern regarding equity awards to directors except that eachnon-executive director received an equity award when he/she joined the Company’sBoard of Directors.  In certaincircumstances, certain directors received annual equity awards on the date ofthe Company’s Annual Meeting of Shareholders in connection with previouslyagreed upon arrangements.  There werefour designated grant dates in which a total of approximately 0.8 million stockoptions were made to directors when the stock price was the lowest during themonth in which the designated grant occurred. The Company determined the total stock based compensation expenseassociated with these four director awards was approximately $5.9 million andis detailed as follows:

·                  Twoof the four grants were issued at the same time as the officer annual awardsdescribed above and therefore, the Company has concluded that the mostappropriate measurement date for these two grants is the last business day ofthe month in which the designated grant date occurred since at that point boththe exercise price and the number of equity awards was determinable consistentwith the determination of measurement dates for officer annual awards describedabove.  The Company determined the totalstock based compensation expense associated with these two awards wasapproximately $0.5 million.

·                  Onegrant was accounted for using variable accounting because the original grantprice was modified when a Form 4 filing date was missed and the grant wascancelled and reissued subsequently at a lower price.  In that situation, Form 4s for two stock optionrecipients were not filed on time and the Company cancelled and issued newstock 

ii

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options with anexercise price representing the lowest price of the Company’s stock in thefollowing month.  Total variable stockbased compensation expense associated with this grant was approximately $0.3 million.

·                  Theremaining grant was approved at a meeting of the Company’s Board of Directorswhere the Board of Directors specified a designated grant date that precededthe date of the Board of Directors meeting. The Company’s stock price on the designated grant date was lower thanthe Company’s stock price on the date of approval.  The Company used the date of approval by theCompany’s Board of Directors as the measurement date resulting in stock basedcompensation expense of approximately $5.1 million.

*Rank and File Employee Annual Equity Awards*

Rankand file employees generally received equity awards on an annual basis(although the dates of such awards varied from year to year).  The designated grant dates for such awardswere the same as officer annual equity awards with the exception of one datewhere the grant of annual equity awards to rank and file employees occurredapproximately one month after the date of the officers annual equityaward.  During the period from 1996through July 2002, on an annual basis, management would allocate a pool ofstock options previously discussed with and agreed to by the Chairman of theStock Option Committee to individual employees. Once the allocation of the total awards was finalized by management, aUWC was prepared (which included the selected grant date and exercise price)and forwarded to the Stock Option Committee for execution. Attached to the UWCwas a list of the optionees and the number of options allocated by managementto the optionees.  The Stock OptionCommittee rarely discussed individual rank and file employee equity awards,leaving it to management to make such allocations since it was generallyunderstood that the allocation process was delegated to management and it wasalso generally understood that it was management’s responsibility to performthis function.  The Stock OptionCommittee did not dispute, challenge or question management’s allocations ofany of the annual equity awards to rank and file employees.   The Company has concluded that theappropriate measurement date for rank and file annual equity awards is the UWCcreation date, as both the exercise price and number of equity awards for eachemployee were known with finality at such date.

Forall rank and file annual equity awards, of which there were six, during therelevant period, a total of approximately 3.1 million stock options and/orstock awards were made where the price of the Company’s stock on the accountingmeasurement date was higher than the award’s exercise price.  Five grants had the same exercise price asthe officers annual equity awards described above however, the measurement datewas always later than the measurement date for officer annual equity awardssince the process of allocating the pool of options granted to rank and fileemployees was typically finalized a few weeks after the exercise price wasdetermined.  The remaining designatedgrant had a different exercise price as this equity award occurredapproximately one month after the date of the officers annual equityaward.  The Company determined the totalstock based compensation expense, after accounting for forfeitures, associatedwith all rank and file annual awards was approximately $15.2 million during therelevant period.

*New Hire Employee Equity Awards*

Generally,all new employees received an equity award as of the respective employee’sfirst day of employment.  In oneinstance, the designated grant date used by the Company for a new officer’sequity award of approximately 0.3 million stock options and/or stock awards wasnot the same as the measurement date.  Inthis instance, the designated grant date was the stated effective date of theofficer’s employment agreement which preceded the officer’s first day ofemployment.  Since the controllingaccounting literature at the time required compensation cost to be measured asof the officer’s first day of employment, the Company determined thatapproximately $5.1 million of stock based compensation should have beenmeasured on the date employment began by the officer.  Other than this one instance, there were noequity awards to new hires where the measurement date used by the Company wasinappropriate.

EquityAwards Issued Subsequent to July 2002

Forthe period subsequent to July 2002 through 2005 there were two rank and fileannual equity awards where option lists were finalized two days after thedesignated grant date resulting in stock based compensation expense ofapproximately $0.6 million.

AdditionalStock Based Compensation

Asummary of additional stock based compensation by type is as follows:

iii

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| ** **                          | ** ** | **Additional Stock Based Compensation Expense By Type** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                          | ** ** | **(In thousands)**                                                               | ** ** |
| Officer annual  equity awards       |       | $                                                                                     | 811        |   | $ | 929 |   | $ | 924 |   | $ | 636 |   | $ | 3,105 |   |
| Director equity  awards             |       | 36                                                                                    |       | 65 |   | 32 |   | (202 | ) | 3,738 |   |
| Rank and file  annual equity awards |       | 849                                                                                   |       | 850 |   | 3,395 |   | 1,973 |   | 1,829 |   |
| New hire  employee equity awards    |       | —                                                                                |       | — |   | 39 |   | 49 |   | 3,937 |   |
| Payroll tax liabilities             |       | 312                                                                                   |       | 106 |   | 67 |   | 54 |   | 161 |   |
| Total                               |       | $                                                                                     | 2,008      |   | $ | 1,950 |   | $ | 4,457 |   | $ | 2,510 |   | $ | 12,770 |   |

 

 
| ** **                          | ** ** | **Additional Stock Based Compensation Expense By Type** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **2000**                                                                              | ** ** | **1999** | ** ** | **1998** | ** ** | **1997** | ** ** | **1996** | ** ** |
| ** **                          | ** ** | **(In thousands)**                                                               | ** ** |
| Officer annual  equity awards       |       | $                                                                                     | 1,555      |   | $ | 371 |   | $ | 274 |   | $ | 209 |   | $ | 99 |   |
| Director equity  awards             |       | 1,445                                                                                 |       | 381 |   | 232 |   | 201 |   | — |   |
| Rank and file  annual equity awards |       | 5,746                                                                                 |       | — |   | 193 |   | 214 |   | 136 |   |
| New hire  employee equity awards    |       | 1,043                                                                                 |       | — |   | — |   | — |   | — |   |
| Payroll tax  liabilities            |       | 698                                                                                   |       | 68 |   | — |   | — |   | — |   |
| Total                               |       | $                                                                                     | 10,487     |   | $ | 820 |   | $ | 699 |   | $ | 624 |   | $ | 235 |   |

 

Aspart of this restatement, the Company recorded payroll tax liabilities relatingto stock options that were incorrectly characterized as incentive stock optionsor ISOs.  The Company recorded aliability for payroll taxes in the event such grants would not be treated asISOs under principles of the Internal Revenue Code, or IRC, and the regulationsthereunder.  These payroll taxliabilities, which have been classified within research and development expenseand general and administrative expense are not material to the consolidatedfinancial statements for any period.

Thefollowing tables set forth the effects of the restatement on certain line itemswithin the Company’s consolidated statements of operations for the years endedDecember 31, 2005, 2004 and 2003 and the consolidated balance sheets as ofDecember 31, 2005 and 2004.  See Note 18to the consolidated financial statements for impact of this restatement on theCompany’s consolidated balance sheets as of December 31, 2005 and 2004 and theCompany’s consolidated statements of operations and cash flows for the yearsended December 31, 2005, 2004 and 2003. (dollars in thousands, except per sharedata):

|                                                | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Research and  development:                     |       |                                       |       |   |   |   |   |
| As previously reported                         |       | $                                          | 135,847    |   | $ | 122,007 |   | $ | 95,459 |   |
| As restated                                    |       | 136,940                                    |       | 123,012 |   | 97,803 |   |
|                                           |       |                                       |       |   |   |   |   |
| General and  administrative:                   |       |                                       |       |   |   |   |   |
| As previously reported                         |       | 28,054                                     |       | 24,314 |   | 21,727 |   |
| As restated                                    |       | 28,969                                     |       | 25,259 |   | 23,840 |   |
|                                           |       |                                       |       |   |   |   |   |
| Interest,  dividend income and realized gains: |       |                                       |       |   |   |   |   |
| As previously reported                         |       | 14,740                                     |       | 7,161 |   | 12,311 |   |
| As restated                                    |       | 14,740                                     |       | 9,228 |   | 11,301 |   |
|                                           |       |                                       |       |   |   |   |   |
| Net loss:                                      |       |                                       |       |   |   |   |   |
| As previously reported                         |       | (146,004                                   | )          | (186,509 | ) | (129,277 | ) |
| As restated                                    |       | (148,012                                   | )          | (186,392 | ) | (134,744 | ) |
|                                           |       |                                       |       |   |   |   |   |
| Basic and  diluted net loss per share:         |       |                                       |       |   |   |   |   |
| As previously reported                         |       | $                                          | (1.32      | ) | $ | (2.29 | ) | $ | (1.65 | ) |
| As restated                                    |       | (1.34                                      | )          | (2.29 | ) | (1.72 | ) |

 

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** **

|                                  | ** ** | **As of December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Capital in  excess of par value: |       |                                  |       |   |   |
| As previously reported           |       | $                                     | 908,151    |   | $ | 699,380 |   |
| As restated                      |       | 943,245                               |       | 732,778 |   |
|                             |       |                                  |       |   |   |
| Accumulated  deficit:            |       |                                  |       |   |   |
| As previously reported           |       | (745,393                              | )          | (599,389 | ) |
| As restated                      |       | (781,953                              | )          | (633,941 | ) |
|                                  |            |                                       |            |  |  |  |  |

 

Thefollowing table sets forth the amount of stock-based compensation expense andrelated payroll tax liabilities for the years 1996 through 2002.  The cumulative amount of stock-basedcompensation expense and related payroll tax liabilities for these years isapproximately $28.1 million and is included as an adjustment to accumulateddeficit as of January 1, 2003 (dollars in thousands).

| Year Ended  December 31, | ** ** | ** ** | ** ** | **Increase to Previously  Reported Net Loss** | ** ** |
|------------------------------------|------------|------------|------------|-------------------------------------------------------------------|------------|
| 1996                               |       | $          | (235       | )                                                                 |
| 1997                               |       | (624       | )          |
| 1998                               |       | (699       | )          |
| 1999                               |       | (820       | )          |
| 2000                               |       | (10,487    | )          |
| 2001                               |       | (12,770    | )          |
| 2002                               |       | (2,510     | )          |
|                                    |            |            |            |                                                                   |            |  |

 

For theconvenience of the reader, this Form 10-K/A restates the 2005 Form 10-K in itsentirety.  However, we have only amendeddisclosures presented in the 2005 Form 10-K as required to reflect the mattersdescribed above and accordingly, have amended only the following items:

·                  PartI — Item 1A — Risk Factors (to amend and restate our accumulated deficit as ofDecember 31, 2005 and our net loss for the year ended December 31, 2005 whichappears in the risk factor entitled “We have incurred large operating lossesand we anticipate that these losses will continue”) and to add two Risk Factorsentitled, “We are subject to an informal inquiry by the SEC and a grand juryinvestigation by the United States Attorney’s Office for the District of NewJersey, relating to our stock option granting practices, and those regulatoryinquiries may result in charges filed against us and in fines and penalties” and“We have civil litigation pending that relates to our stock option grantingpractices, and we cannot predict the ultimate outcome of this litigation”.

·                  PartI — Item 3 — Legal Proceedings

·                  PartII — Item 6 — Selected Consolidated Financial Data

·                  PartII — Item 7 — Management’s Discussion and Analysis of Financial Condition andResults of Operations

·                  PartII — Item 8 — Consolidated Financial Statements and Supplementary Data

·                  PartII — Item 9A — Controls and Procedures

·                  PartIV — Item 15 — Exhibits and Financial Statement Schedules

Inaddition, this Form 10-K/A includes updated certifications from our ChiefExecutive Officer and our Chief Financial Officer as Exhibits 31.1, 31.2, 32.1and 32.2.

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**MEDAREX,INC.TABLE OF CONTENTSFORM 10-K/A**
|                   | ** ** | ** **                                                                                      | ** ** | **Page**   | ** ** |
|-------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **        | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** |
| **PART I**   | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** |
| ** **        |       |                                                                                            |       |       |       |
| Item 1.           |       | Business                                                                                        |       | 1          |       |
|              |       |                                                                                            |       |       |       |
| Item 1A.          |       | Risk  Factors                                                                                   |       | 24         |       |
|              |       |                                                                                            |       |       |       |
| Item 1B.          |       | Unresolved Staff Comments                                                                       |       | 44         |       |
|              |       |                                                                                            |       |       |       |
| Item 2.           |       | Properties                                                                                      |       | 45         |       |
|              |       |                                                                                            |       |       |       |
| Item  3.          |       | Legal  Proceedings                                                                              |       | 45         |       |
|              |       |                                                                                            |       |       |       |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                             |       | 45         |       |
|              |       |                                                                                            |       |       |       |
| **PART II**  |       |                                                                                            |       |       |       |
| ** **        |       |                                                                                            |       |       |       |
| Item 5.           |       | Market for Registrant’s Common Equity and Related  Shareholder Matters                     |       | 46         |       |
|              |       |                                                                                            |       |       |       |
| Item 6.           |       | Selected Consolidated Financial Data                                                            |       | 47         |       |
|              |       |                                                                                            |       |       |       |
| 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                                                                              |       | 77         |       |
|              |       |                                                                                            |       |       |       |
| **PART III** |       |                                                                                            |       |       |       |
| ** **        |       |                                                                                            |       |       |       |
| Item 10.          |       | Directors and Executive Officers of the Registrant                                              |       | 77         |       |
|              |       |                                                                                            |       |       |       |
| Item 11.          |       | Executive Compensation                                                                          |       | 77         |       |
|              |       |                                                                                            |       |       |       |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Shareholder Matters |       | 77         |       |
|              |       |                                                                                            |       |       |       |
| Item 13.          |       | Certain Relationships and Related Transactions                                                  |       | 77         |       |
|              |       |                                                                                            |       |       |       |
| Item 14.          |       | Principal Accountant Fees and Services                                                          |       | 77         |       |
|              |       |                                                                                            |       |       |       |
| **PART IV**  |       |                                                                                            |       |       |       |
| ** **        |       |                                                                                            |       |       |       |
| Item 15.          |       | Exhibits, Financial Statement Schedules                                                         |       | 78         |       |
|              |       |                                                                                            |       |       |       |
|              |       | Signatures                                                                                      |       | 82         |       |
|              |       |                                                                                            |       |       |       |
|              |       | Certifications                                                                                  |       |       |       |
|              |       |                                                                                            |       |       |       |

 

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**PART I**

Inthis Annual Report, “Medarex” or the “company,” “we,” “us” and “our” refer toMedarex, Inc., and our wholly owned subsidiaries. This Annual Reportcontains forward-looking statements that involve risk and uncertainties. Actualevents or results may differ materially from those discussed in this AnnualReport.  Factors that might cause such adifference include, but are not limited to, those discussed in the sectionsentitled “Business,” “Risk Factors” and “Management’s Discussion and Analysisof Financial Condition and Results of Operations,” as well as those discussedelsewhere in this Annual Report.

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

**Item 1.**                          Business

**Overview**

Weare a biopharmaceutical company focused on the discovery, development andpotential commercialization of fully human antibody-based therapeutic products.We believe that our UltiMAb Human Antibody Development 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 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 11Phase III 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.  In addition, our partner Genmab A/S hasannounced that it expects to initiate multiple Phase III trials for twoadditional product candidates in 2006. Four of the five product candidates currently in Phase III trialswere generated through the use of our UltiMAb® technology and include:

·        ipilimumab (also known asMDX-010), which we are developing jointly with Bristol-Myers Squibb Company, orBMS, for the treatment of metastatic melanoma and other cancers;

·        golimumab (also known asCNTO 148) under development by Centocor, Inc. (a subsidiary of Johnson &Johnson) for the treatment of rheumatoid arthritis, psoriatic arthritis andankylosing spondylitis;

·        CNTO 1275 for thetreatment of psoriasis,  also underdevelopment by Centocor; and

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

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

Medarexis committed to building value by developing a diverse pipeline of antibodyproducts to address the world’s unmet healthcare needs. In addition to theantibody candidates currently in Phase III trials, multiple product candidatesin Phase II, Phase I and preclinical testing are being developed by Medarexeither alone or jointly with or separately by our partners, including Amgen,Inc., BMS, Centocor, Eli Lilly and Company, Genmab, ImClone SystemsIncorporated, MedImmune, Inc., Novartis Pharma AG, Novo Nordisk A/S andSchering AG.  We believe that through thebroad use of our UltiMAb technology, we are leveraging our efforts and ourpartners’ efforts to create, develop and potentially commercialize innovativetreatments for a wide range of diseases.

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

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Inaddition to our UltiMAb Human Antibody Development System, we have considerableexperience in preclinical and clinical development as well as in manufacturingantibodies for clinical trials. Our existing manufacturing facility inAnnandale, New Jersey currently has the capacity to undertake multiple antibodyprojects concurrently for clinical development purposes, meeting our near-termproduction demands. We have assembled a team of experienced scientific,production, clinical and regulatory personnel to facilitate the discovery anddevelopment of antibody-based products for us and for certain of our partners.We intend to add sales and marketing and additional manufacturing capabilitiesas needed.

Ouroperations constitute one business segment. For additional financial information regarding the reportable segment,see “Results of Operations” in Item 7 and the Consolidated Financial Statementsin Item 8 of this Annual Report on Form 10-K.

**Productsin Development**

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

***Phase III Product Candidates 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) We have the option to co-promote and share profits in the U.S. Weexpect to receive milestone payments as this product 

candidate moves toward product approval, and royalties on product salesoutside the U.S., should commercialization occur.

(2) We expect to receive milestone payments as this product candidatemoves through clinical trials, and royalties on product sales, shouldcommercialization occur.

(3) We received an equity interest in Genmab in exchange for a licenseof our proprietary antibody technology. In addition, we expect to receive milestone payments for activities inEurope and Asia, as well as royalties on product sales in Europe and Asia thatcould reach double-digits, should commercialization of zanolimumab occur.

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

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***PhaseII 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 to co-promote and share profitsin the U.S. We expect to receive milestone payments as this product candidatemoves toward product approval, and royalties on product sales outside the U.S.,should commercialization occur.

(2) We expect to share certain research and development costsassociated with this product, as well as profits or losses associated with its commercialization,on a 50/50 basis.

(3) We received an equity interest in Genmab in exchange for a licenseof our proprietary antibody technology. We are not entitled to license fees, milestone payments or royaltiesfrom the license of these product candidates.

(4) We expect to receive milestone payments as this product candidatemoves through clinical trials, and royalties on product sales, shouldcommercialization occur.

 

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***Phase I/II  andPhase I Product Candidates in Clinical Development***
| **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, Pancreaticand/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 on MDX-018, we have the right to 100% ofall revenues and profits in Asia.  Outside of Asia, we and Genmab share inthe revenues and profits on a 50/50 basis, subject to certain payments thatGenmab owes us with respect to milestones and royalties on MDX-018.

(2)We received an equity interest in Genmab in exchange for a license of ourproprietary antibody technology.  We arenot entitled to license fees, milestone payments or royalties from the licenseof these product candidates.

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

(4)In April 2004, we assigned our rights to this product candidate to Celldex, inwhich we currently have an equity interest of approximately 60%.  We will not be entitled to license fees ormilestone payments with respect to this product.  We expect to receive royalties on productsales, should commercialization occur.  

(5)We expect to receive royalties on product sales, should commercializationoccur.

(6)We have 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.

(7)PharmAthene is fully responsible for funding of research and developmentactivities for MDX-1303 that are not supported by government funds.  We expect to share profits associated withthis product according to a pre-agreed allocation percentage.

(8)We expect to share certain research and development costs associated with thisproduct, as well as profits or losses associated with its commercialization, ona 50/50 basis.

*** ***

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***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)We have 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)We have the right to develop and commercialize MDX-1106 in North America, andOno has the right to develop and commercialize MDX-1106 outside of NorthAmerica, in each case subject to payment of a royalty to the other party onsales in such territories, should commercialization occur.

*** ***

***PhaseIII Product Candidates in Clinical Development***

**Ipilimumab (Anti-CTLA-4 Antibody)**—*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, immunotherapyand vaccines. Effective January 2005, we entered into a collaboration withBMS to develop and potentially commercialize ipilimumab for melanoma and anyadditional disease indications.  A moredetailed description of our collaboration with BMS is included herein under thesection entitled “Our Human Antibody Partnering Business—BMS.”

*Metastatic Melanoma Registrational Program:  *Weand BMS are pursuing a registrational program of clinical studies investigatingipilimumab for the treatment of metastatic melanoma.  In addition to an ongoing pivotal vaccinecombination study in second-line patients (i.e., patients who have failed torespond to previous treatment with melanoma therapies other than ipilimumab)who are HLA-A2 positive, the components of this program also includemonotherapy studies in second-line patients and a dacarbazine, or DTIC,combination study in previously untreated patients, each of which is expectedto begin enrollment in the first half of 2006.

Undera Special Protocol Assessment agreement, or SPA, with the FDA, a Phase IIIpivotal trial of ipilimumab in combination with MDX-1379 (a melanomapeptide vaccine based on gp100) commenced enrollment in September 2004. Weexpect to enroll approximately 750 second-line HLA-A2 positive patients withunresectable Stage III or Stage IV melanoma in centers worldwide. The patientsare randomized to receive one of three regimens on a 3:1:1 basis, withapproximately 450 patients receiving ipilimumab/MDX-1379 combination,approximately 150 patients receiving MDX-1379 alone and approximately 150patients 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.

Asingle-arm monotherapy registrational study to enroll up to 150 patients withmetastatic melanoma previously-treated with DTIC is expected to beginenrollment in the first half of 2006.  Weare seeking an SPA for this study.  We are currently working out the finalSPA details with the FDA, and we and BMS are considering how best to allocatethe second-line patients between this study and the ongoing Phase III trial toensure that we complete enrollment for at least one second-line trial thisyear.  Other supportive Phase II studiesusing monotherapy in second-line patients with metastatic melanoma started inNovember 2005, and January 2006, respectively.

ADTIC combination registrational study to enroll up to 500 patients withpreviously untreated metastatic melanoma is also expected to begin enrollmentin the first half of 2006.

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Weand BMS continue to evaluate the relative priorities of these studies in lightof regulatory feedback, new clinical data, enrollment rates and other factorsrelevant to the timing of potential BLA filings.

OurPhase III pivotal trial of ipilumumab in combination with the MDX-1379 vaccinewas initiated 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 the 29 patients treated in the high-dosetreatment cohort, four patients experienced anti-tumor responses, with twopatients experiencing complete responses ongoing for over 40 months, and onepatient experiencing a partial response ongoing for over 43 months.  Of the 27 patients treated in the low-dose treatmentcohort, three patients experienced partial responses, two of which have hadongoing responses nearing three years. Historically, median survival after diagnosis of metastatic melanoma issix 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.  Ourregistrational trial of ipilimumab in combination with DTIC is based upon PhaseII data in which the combination of ipilimumab and DTIC produced an overallresponse rate of 17% with an acceptable safety profile.

InJune 2004, the FDA granted orphan drug designation to ipilimumab for thetreatment of high risk Stage II, Stage III and Stage IV melanoma, and in March2005, orphan drug designation was granted to MDX-1379 for the treatment ofHLA-A2-positive patients with Stage IIB, Stage IIC, Stage III and Stage IVmelanoma.  In October 2004, FastTrack status was granted to the development program for ipilimumab incombination with MDX-1379 for the treatment of second-line patients withunresectable Stage III or Stage IV melanoma.

Additionalhuman clinical trials of ipilimumab are described in the section entitled “PhaseII Product Candidates in Clinical Development” below.

*Adverse Events: *Our ipilimumabclinical trials are conducted in patients with serious life-threateningdiseases for whom conventional treatments have been unsuccessful or for whom noconventional treatment exists, and in some cases, our product is used incombination with approved therapies that themselves have significant adverseevent profiles. In trials of ipilimumab, the most common drug-specific adverse events include diarrhea, rash,reduced pituitary function, colitis and increased liver enzymes, ranging frommild in most cases to severe in a very small number of instances. T****hese****** ******events were anticipated and are consistent with an immune-basedmechanism of action due to ipilimumab-mediated CTLA-4 blockade.****Other than a very small number of fatalities not directly related to diseaseprogression, representing less than 1% of over 600 patients treated in all previous trials, which may or may notbe attributable to our product candidates, the majority of adverse eventsresolved or improved with treatment and without further significantcomplications. Through our experience in over 600 patients who have received ipilimumab, collectively, treatmentalgorithms have evolved and are in place to diagnose and manage the adverseevents, which are statistically correlated with clinical response. In addition,Phase II clinical trials are underway to explore the prophylactic use of oralnon-absorbable steroids to minimize the gastrointestinal events sometimesassociated with ipilimumab activity, as well as to explore potential biomarkersthat may be predictive of clinical responses.

**Golimumab (Anti-TNF**a**Antibody)**—*Inflammatory Diseases*.   In May 2005,Centocor reported that it was developing golimumab (also known as CNTO 148), ahigh affinity, fully human antibody that targets TNF*a*for inflammatory diseases. According to publicly available information,golimumab is in five separate Phase III clinical trials for active rheumatoidarthritis (three trials), active psoriatic arthritis (one trial) and ankylosingspondylitis (one trial). In addition, golimumab is in a Phase II clinical trialfor severe persistent asthma.

**CNTO 1275 (Anti-IL-12/IL-23Antibody)**—*InflammatoryDiseases.*   In May 2005, Centocor reported that it wasdeveloping CNTO 1275, a high affinity, fully human antibody that targetsIL-12/IL-23 for the treatment of inflammatory diseases. According to publiclyavailable information, CNTO 1275 is in a Phase III clinical trial for severeplaque-type psoriasis. In addition, CNTO 1275 is in Phase II clinical trialsfor psoriatic arthritis, multiple sclerosis and Crohn’s disease.

**Zanolimumab (Anti-CD4 Antibody)***—T-cell Lymphomas.*Genmab and Serono aredeveloping zanolimumab (also known as HuMax-CD4), a fully human antibody thattargets the CD4 receptor on cells known as T-cells, which are believed to beinvolved in promoting autoimmune disease. In April 2005, Genmab reached anagreement with the FDA for a SPA agreement for a pivotal Phase III trial forthe treatment of cutaneous T-cell lymphomas, or CTCL, which is currentlyunderway.

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InMarch 2004, Genmab announced that zanolimumab had been granted Fast Trackstatus by the FDA for patients with CTCL. Genmab has also disclosed thatzanolimumab has received orphan drug designation for the treatment of CTCL bythe European Agency for the Evaluation of Medicinal Products in April 2004 andby the FDA in August 2004.

InAugust 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 human antibodygenerated by using transgenic mouse technology substantially similar to ourHuMAb-Mouse® technology. Pfizer’s antibody targets the immune receptor CTLA-4. According to publiclyavailable information, a first-line Phase III clinical trial comparingticilimumab alone to chemotherapy alone for metastatic melanoma was initiatedby Pfizer in December 2005. This two-arm, randomized Phase III clinical trialis expected to enroll up to 630 patients, with a primary endpoint being overallsurvival. Secondary endpoints are said to include durable responses,progression-free survival at six months, objective tumor responses and durationof such responses and human anti-human antibody, or HAHA, responses.

***PhaseII Product Candidates in Clinical Development***

**Ipilimumab (Anti-CTLA-4 Antibody)**—*Metastatic Melanoma;Prostate, Breast, Renal Cell and Other Cancers.*   As part of ourjoint ipilimumab clinical development program with BMS, there are multiplePhase II and early clinical trials underway or expected to commence in multipletumor types, including melanoma, prostate, breast, renal, pancreatic,colorectal, ovarian, lymphoma and others. Some of these studies are designed to support our registrational programin melanoma, and other studies are designed to explore the activity ofipilimumab in additional disease indications as monotherapy and in combinationwith other cancer therapies.

**MDX-066 and MDX-1388 (Anti-Toxin A andAnti-Toxin B Antibodies)**—*Clostridium difficile Associated Diarrhea.*   MDX-066 (also known asCDA-1) and MDX-1388 are fully human antibodies that we are co-developing with the Massachusetts Biologic Laboratoriesof the University of Massachusetts Medical School, or MBL. MDX-066 and MDX-1388 are designed totarget Toxin A and Toxin B, respectively, the toxins produced by the bacterium *Clostridium difficile*, which are associatedwith a serious and sometimes deadly form of diarrhea called *Clostridium difficile* associated diarrhea, or CDAD.

In October 2005, we initiated a randomized,placebo-controlled MDX-066 Phase II clinical trial for CDAD. The single-dosePhase II clinical trial is expected to enroll up to 150 hospitalized patientswith CDAD and is designed to assess the safety and tolerability of MDX-066 whenadded to standard of care. MBL filed an IND for the combination of both theanti-Toxin A and B antibodies in 2005.  APhase I trial of this combination is underway.

**MDX-060 (Anti-CD30 Antibody)**—*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 believe that MDX-060may facilitate the elimination of such cells by the immune system. We haveobserved responses in HD and ALCL in early Phase I and Phase II clinical trialsand have expanded the development program to include three additional Phase IIclinical trials to further explore the activity profile of MDX-060 asmonotherapy for refractory HD, as a combination therapy with gemcitabine forHD, and as monotherapy in ALCL.  InOctober 2004, the FDA granted orphan drug designation to MDX-060 forthe treatment of HD.  In January 2006,orphan drug designation was received for the treatment of CD30-positive T-celllymphoma.

**MDX-070 (Anti-PSMA Antibody)***—Prostate Cancer*.   MDX-070 is afully human antibody that targets Prostate Specific Membrane Antigen, or PSMA.PSMA is a cell surface marker that is preferentially expressed on malignantprostate tissues and also on blood vessels in other tumors. Interim data from amulti-dose, dose-escalation Phase II clinical trial of MDX-070 in patients withhormone refractory prostate cancer indicated that the antibody was safe andwell-tolerated at all doses tested. We expect to complete dosing and review thedata for the disease marker prostate specific antigen, or PSA, response in thePhase II clinical trial in 2006 and potentially expand the MDX-070 developmentprogram to include a docetaxel combination study and a second-generationimmunoconjugate of the anti-PSMA antibody.

**HuMax-CD20 (Anti-CD20 Antibody)**—*Rheumatoid Arthritis, Lymphoma*.   Genmabis developing HuMax-CD20, a fully human antibody targeting CD20, a moleculefound on B cells. A Phase II clinical trial is underway for

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the treatment ofrheumatoid arthritis.  In March 2006, Genmabreported positive results from this trial. In addition, two Phase I/II clinical trials using HuMax-CD20 inpatients with non-Hodgkin’s lymphoma, or NHL, and chronic lymphocytic leukemia,or CLL, are ongoing. In December 2005, Genmab reported positive results fromthe Phase I/II clinical trial for CLL. In December 2004, Genmab announcedthat this product candidate was granted Fast Track designation by the FDA forthe 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® refractory follicular lymphoma.

**AMG 714 (Anti-IL-15 Antibody)***—Rheumatoid Arthritis.*   AMG 714,formerly known as HuMax-IL15, is a fully human antibody that is beingdeveloped 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 reforumulated AMG 714 in a differentcell line, and the antibody is undergoing preclinical testing.  Amgen anticipates entering a Phase I studywith the nre formulation in 2006.  Inaddition, a Phase II clinical trial for rheumatoid arthritis has beencompleted, and data from this study is expected to be presented in 2006.

**Amgen Antibody-1***—Undisclosed Disease*.   We are aware of one antibody productcandidate derived from our technology being developed by Amgen that is in Phase II clinical trials for anundisclosed indication.

***SelectedPhase I/II, Phase I  and PreclinicalProduct Candidates***

Weand our partners have active early clinical and preclinical developmentprograms that we anticipate may lead to the identification of new antibodyproduct candidates and novel combinations with antibodies currently indevelopment. We expect these development efforts to lead to additional clinicalcandidates in both the near and long term. Our programs and those of ourpartners include, among others, the following:

**MDX-214 (Anti-EGFr/CD89 Antibody)**—*Cancer.*   We are developing MDX-214,a fusion protein consisting of human epidermal growth factor, or EGF,genetically linked to a fully human antibody fragment that targets CD89, atrigger molecule expressed on immune effector cells. Through the use of EGF,the natural ligand to the epidermal growth factor receptor, or EGFr, MDX-214is designed to direct CD89 positive effector cells to EGFr-overexpressing tumorcells, potentially facilitating the interaction of the immune system with thecancer. An experimental Phase I/II clinical trial in up to 48 patients isongoing for the treatment of refractory or relapsed EGFr-expressing cancers,including cancers of the head and neck, breast, colon, prostate, lung andovary. Preliminary clinical results to date in this proof-of-concept studysuggest that we may not continue further development 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-EGFr Antibody)**—*Head and Neck Cancers.*   Genmab isdeveloping HuMax-EGFr, a fully human antibody targeting EGFr, a receptormolecule that has been found in excess on many types of tumor cells.  According to Genmab, HuMax-EGFr is underdevelopment in head and neck cancer, and an ongoing Phase I/II clinical trialfor the treatment of carcinoma of the head and neck has been completed. InJanuary 2006, the FDA granted Fast Track designation to HuMax-EGFr for thetreatment of patients with head and neck cancer who have previously failedstandard therapies.  In February 2006, Genmabannounced that it expects to initiate a HuMax-EGFr Phase III trial in head andneck cancer in 2006.

**CNTO 95 (Anti-integrin receptors Antibody)***—Cancer.*   In May 2005, Centocorannounced that it is developing CNTO 95, a high affinity, fully human antibodytargeting 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, Pancreatic and/or Bladder Cancers.*   Oursubsidiary, Celldex, is developing MDX-1307 (also known as ßHCG-VAC), a fusion protein composedof a mannose receptor-specific human antibody conjugated to the betachain of human chorionic gonadotropin, or ßhCG.

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This therapeuticcancer vaccine is designed to induce antibody and cytotoxic T-cell responsesdirected at 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 to initiatea Phase I clinical trial with MDX-1307 for the treatment of breastcancer.

**FG-3019 (Anti-CTGF)**—*Idiopathic Pulmonary Fibrosis, Diabetic Nephropathyand Pancreatic Cancer.*    FG-3019, being developed by FibroGen,****is a fully human therapeutic antibody that targets CTGF(connective tissue growth factor). According to publicly available sources, FG-3019 has completed aPhase I clinical trial for idiopathic pulmonary fibrosis and is also in Phase Iclinical trials for the treatment of diabetic nephropathy and pancreaticcancer.

**MDX-1100 (Anti-IP-10 Antibody)**—*Inflammatory Diseases.*   We aredeveloping 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 our acquisitionof Ability Biomedical Corporation in August 2004.

**MEDI-545 and MDX-1333(Anti-Type 1 IFN Antibodies)**—*Systemic Lupus Erythematosus.*  MedImmune is developing MEDI-545 (previously known as MDX-1103) and MDX-1333,fully human antibodies that target two different components of the Type 1 IFNpathway, which is believed to be involved with systemic lupus erythematosus, orSLE, disease activity. MEDI-545 is an antibody designed to block multiple Type1 IFN subtypes, 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 elect toco-develop and co-promote in return for a profit-share in the U.S. An IND forMEDI-545 was filed in October 2005.

**MDX-1303 (Anti-Anthrax Antibody)**—*Bacillus anthracis Infection.  *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.

In2004, we and PharmAthene received two grants from a division of the NationalInstitutes of Health, or NIH, for up to $7.2 million over three years tosupport our research and development of MDX-1303.  In January 2006, the FDA granted Fast Trackstatus for MDX-1303. Also in January 2006, we and PharmAthene procured $2.05million from the U.S. Department of Defense to support ongoing development ofMDX-1303. In February 2006, orphan drug designation was received for thetreatment of anthrax infection.

**MDX-1106 (Anti-PD-1 Antibody)**—*Cancer.  *MDX-1106 is a fullyhuman antibody in preclinical development that we are co-developing with OnoPharmaceuticals. MDX-1106 is designed to target PD-1, a receptor expressed onthe surface of activated lymphocytes and is involved in tumor evasion of theimmune system responses. We expect to file an IND on this product candidate forcancer in 2006.

**Other Product Candidates.  **Weare aware of a number of other antibody product candidates derived from ourUltiMAb technology for which our partners have commenced Phase I clinicaltrials, including two Novartis antibodies for the treatment of autoimmunedisease, two Amgen antibodies for undisclosed indications, an anti-TRAIL-R2 antibody(HGS-TR2J) being developed by Human Genome Sciences pursuant to a license withKirin, Eli Lilly’s antibody for an undisclosed indication, BMS-66513 by BMS forcancer, an undisclosed antibody being developed by Roche/Genmab for anundisclosed indication, another undisclosed antibody by an undisclosed partner,NI-0401 by NovImmune for autoimmune disease and an antibody for cancer beingdeveloped by ImClone. We are not aware of any additional information that hasbeen made public regarding any of these Phase I clinical trials.

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**Our Human AntibodyPartnering Business**

Asof March 1, 2006, we have more than 40 partnerships with pharmaceuticaland biotechnology companies to jointly develop and commercialize products or toenable other companies to use our UltiMAb Human Antibody Development System intheir development 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***

InJanuary 2005, we announced the closing of a collaboration and co-promotionagreement and a related securities purchase agreement with BMS. Under the termsof the collaboration, we and BMS have each granted the other certainintellectual property licenses and product rights on a worldwide basis in orderto enable us to collaborate in the research and development of certaintherapeutic antibody-based product candidates for the treatment of cancer andother diseases, and, in the event that further development work is successful,to commercialize any resulting products. In particular, the collaborationincludes a grant by us to BMS of a license to commercialize ipilimumab (alsoknown as MDX-010), a fully human antibody product candidate developed using ourUltiMAb Human Antibody Development System, that is antagonistic to CTLA-4.  Ipilimumab is currently under investigationfor the treatment of a broad range of cancers. The collaboration also includesthe grant 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. The FDA has granted orphan drugdesignation for ipilimumab for the treatment of high risk Stage II, Stage IIIand Stage IV melanoma, and we and BMS are currently conducting a Phase IIIclinical trial with ipilimumab and MDX-1379 combination therapy in StageIII and Stage IV metastatic melanoma patients, under a SPA agreement with theFDA, at multiple sites worldwide. This program has been granted Fast Trackstatus by the FDA.

Aspart of the collaboration, we and BMS have committed to an initial multi-yearbudget of approximately $192.0 million to fund the development of ipilimumab asa potential 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 U.S. and Europe, with the remaining 35% to bepaid by us. The parties will share equally the costs of any clinical trials ofproducts intended solely for regulatory approval in the U.S., and BMS will befully responsible for all development efforts that relate solely to regulatoryapproval in Europe and other parts of the world.

Underthe terms of the collaboration, we could receive up to $205.0 million from BMSif all regulatory milestones are met, plus up to an additional $275.0 millionin sales-related milestones. We will also have the option to co-promote anyproducts in the U.S., and, if we elect to exercise this option and haveparticipated in the funding of the applicable Phase III clinical trial(s), wewill receive 45% of any profits from commercial sales in the U.S. In the eventwe choose not to exercise our co-promotion rights, BMS will have exclusivecommercial rights in the U.S. and will pay us royalties on commercial sales.Outside the U.S., BMS will have exclusive commercial rights and will pay usroyalties on commercial sales.

Pursuantto these agreements, BMS made an initial cash payment to us on January 21,2005 of $25.0 million. In addition, BMS purchased a total of 2,879,223unregistered shares of our common stock at a purchase price equal to $8.6829per share for an aggregate purchase price of $25.0 million. These shares wereissued in a private placement pursuant to the exemption from registrationprovided by Section 4(2) of the Securities Act of 1933, as amended.The purchase price represented a small premium to the market price on the datewe entered into the collaboration. BMS agreed to a two-year lock-up period withrespect 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.

Unlessterminated earlier, the BMS collaboration will continue for as long asdevelopment and/or commercialization of any collaboration products continue.BMS, however, may terminate the collaboration on a country-by-country basis atany time and, under certain conditions, on a product-by-product basis,resulting in the return of all rights to us with respect to such country and/orproduct. In addition, BMS may terminate our co-promotion rights in the U.S. inthe event that we fail to satisfy certain performance criteria. We mayterminate the BMS collaboration in the event of certain specified materialbreaches by BMS (in which case product rights would

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revertto us), and we may terminate BMS’s co-promotion rights in the event thatBMS fails to satisfy certain performance criteria.

***Pfizer***

InSeptember 2004, we entered into a series of agreements with Pfizer. Thefirst agreement, or the Pfizer Amendment, 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 by us to Pfizer and across-license of certain patents and patent applications solely relating to ourrespective anti-CTLA-4 antibody programs, together, the Pfizer Licenses. Thefourth agreement 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, through its wholly-ownedsubsidiary Pfizer Overseas Pharmaceuticals, a total of 4,827,808 unregisteredshares of our common stock at a purchase price equal to $6.21 per share for anaggregate purchase price of $30.0 million at a small premium to market price atthe time we entered into the collaboration. The shares were issued in a privateplacement pursuant to the exemption from registration provided bySection 4(2) of the Securities Act of 1933, as amended. Pfizer alsoagreed to a two-year lock-up period with respect to any sales of such stock.Upon expiration of the lock-up period, such shares may be sold pursuant to theprovisions of Rule 144 under the Securities Act.  We have no future obligation to register suchstock.

Underthe Pfizer Amendment, we expect to use our UltiMAb Human Antibody DevelopmentSystem to generate product candidates to disease-associated targets identifiedby Pfizer. We will receive standard market rates for performing theseantibody-making services. The product candidates generated by the collaborationwill then be transferred to Pfizer, which will be fully responsible for theworldwide development and commercialization of such product candidates,including the payment of all costs and expenses related thereto. We have nofuture payment obligations relating to the development and commercialization ofthese product candidates. We have the potential to receive research funding,license fees and milestone payments (if certain development milestones aremet), as well as royalties on any commercial sales of the products.

Weand Pfizer have retained all rights to our respective separate anti-CTLA-4products. Pursuant to the Pfizer Licenses, which are non-exclusive, we have thepotential to receive milestones and double digit royalty payments based uponcommercial sales 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-4 productwe may develop. Both we and Pfizer are independently pursuing the clinicaltesting of antibodies to CTLA-4, including our ipilimumab and Pfizer’sticilimumab (also known as CP-675,206) product candidates, both of which arecurrently in Phase III clinical trials for metastatic melanoma.

***Our 50/50 Collaborative Partnerships***

Wehave continued to increase our access to novel therapeutic targets byestablishing collaborations with other companies and institutions that haveidentified potential therapeutic targets or have created platforms for theidentification of such targets. We actively seek opportunities to in-licenseand/or acquire such targets and intend to develop novel therapeutic products byproducing fully human antibodies that interact with such targets. As ofMarch 1, 2006, we had agreements with more than a dozen collaborators withwhom we plan to jointly develop and commercialize human antibody products.Typically, a collaborator will provide one or more target antigen(s), and wewill generate and develop antibodies against the antigen(s) using ourUltiMAb Human Antibody Development System. We and our collaborators typicallyagree to share equally the costs of clinical development and manufacturing, aswell as revenues, expenses and profits associated with any products arisingunder the collaboration. We believe this allows us to participate in theresearch and development of substantially more potential candidates than wecould develop on our own if we bore the entire cost of development.

***Our Out-LicensingPartnerships***

Ourlicensing partners typically obtain licenses to one or more of our antibodygenerating technologies which allow these partners to develop and commercializeantibody-based products using our technology. We could receive license fees,milestone payments and royalties on product sales in connection with each ofthese products. Under these licenses, there is usually an initial period duringwhich our licensing partner may elect to enter into a research license forantibodies to a particular designated target. Subsequently, our partner mayelect to obtain a commercial

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licensefor one or more specific monoclonal antibodies. In some cases, once a partnerhas obtained a commercial license for monoclonal antibodies to a given target,we can no longer license our human antibody technology to a different companyfor that particular 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.

Thefinancial terms of our licensing partnerships typically include license feesand a series of milestone payments commencing upon initiation of clinicaltrials and continuing through to commercialization. These fees and milestonesmay total up to $7.0 to $10.0 million per antibody if the antibody receivesapproval from the FDA or equivalent foreign agencies. A licensing partnershipmay involve multiple antibodies. Under these partnerships, we will also receiveroyalties on any product sales. In some cases, our partners reimburse us forresearch and development activities we conduct on their behalf. Generally,under the terms of these agreements, our partners are responsible for all costsof product development, manufacturing and commercialization of any products.

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

**Kirin**

InSeptember 2002, we entered into a collaboration and license agreement withKirin, which provides for us to exchange with Kirin certain cross-licenses foreach other’s technology for the development and commercialization of humanantibody products. Pursuant to a letter of intent that was superceded by thecollaboration and license agreement, we and Kirin developed the KM-Mouse®, a unique crossbred mousewhich combines the 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 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 and that(i) are currently in clinical trials, or (ii) we 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 with respectto such products, or a maximum of approximately $4.25 million per product. Ourfuture milestone payment obligations to Kirin may or may not be triggered, andmay vary in size, depending on a number of variables, almost all of which arecurrently unknown, including the following:

·       whether or not a decisionis made to request a license from Kirin;

·       the type of licenserequested (research or commercial);

·       the success and timing ofdevelopment efforts and clinical trials of product candidates covered by anysuch licenses;

·       the type of productdeveloped **(**payment obligationsdiffer depending on whether a product is an *exvivo* therapeutic, *in vivo*therapeutic, research reagent or diagnostic product**)**; and

·       other financial provisionsof the Kirin agreement that provide for variations in fee levels and netting ofcertain payments over specified periods of time that may impact the totalamount potentially payable to Kirin for any particular license fee or milestonepayment.

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

Unlessterminated earlier, the collaboration and license agreement with Kirin expireson December 31, 2014. The collaboration and license agreement can beterminated by either party in the event of a material breach by the other partyif the breach is not cured during a specified cure period. In addition, eitherparty may terminate any commercial license with respect to a specific biologictarget granted to it by the other party under the agreement at any time.

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**Other Cross-Licensing and In-LicensingPartnerships**

In addition to our collaboration with Kirin, we haveentered into a number of other agreements that contain in-licenses ofthird-party technology which may be used together with our own platformtechnologies for the generation, development and/or manufacture of our antibodyproducts. We have also entered into other third-party agreements that containlicenses associated with antibody products that target specific antigens. Manyof these agreements contain milestone payments, which we will be required topay, that become due with respect to products using/targeting the licensedtechnology/antigen only if and when certain specified pre-commercializationevents occur. Not all of our products currently under development trigger suchmilestone payments. Through December 31, 2005, we had made milestonepayments of approximately $0.3 million under these agreements. Inaddition, under the agreements we currently have in place (other than withKirin), 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 events thattrigger these payments per product include:

·       submission ofIND(s) or foreign equivalents;

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

·       submission ofBLA(s) or foreign equivalents; and

·       receipt of marketingapproval(s) to sell products in a particular country or region.

Inaddition, the licenses above may trigger royalty payments in connection withthe commercialization of certain of our products. To date, we have not made anyroyalty payments on sales of our products and believe we are at least a fewyears away from selling any products that would require us to make any suchroyalty payments. Whether we will be obligated to make milestone or royaltypayments in the future is subject to the success of our product developmentefforts and, accordingly, is inherently uncertain.

**SignificantPartner Revenue**

Revenue from partners representing 10% or more oftotal revenues for the years ended December 31, 2005, 2004 and 2003 is asfollows: 

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

 

Furtherinformation regarding revenues from partners is included in Notes 10 and 11 inthe Notes to the Consolidated Financial Statements included in Item 8 of thisAnnual Report on Form 10-K.

**StrategicInvestments**

***Genmab***

InAugust 2000, we entered into a binding memorandum of understanding, or theGenomics Agreement, with Genmab, a Danish biotechnology company in which weheld, at the time, an equity interest of approximately 44%, pursuant to whichwe granted Genmab rights to make available our transgenic mouse technologiesfor multi-target (five or more targets) genomics partnerships to certainpharmaceutical and biotechnology companies whose headquarters are located inEurope. The Genomics Agreement had an initial term of five years with a rightexercisable by Genmab to extend the term for an additional two years.  The initial term of the agreement expired inAugust 2005 and was not extended.  Foreach year of the agreement, we received $2.0 million per year from Genmab. AtGenmab’s option, these amounts were paid in either cash or capital stock.During the years ended December 31, 2005, 2004 and 2003, we recognized$1.3 million, $2.0 million and $2.0 million, respectively, of revenue from thisagreement.

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InOctober 2000, Genmab became a publicly listed company on the CopenhagenStock Exchange. As a result of raising the equivalent of $178.0 million (basedon the 8.7695 DKK/USD exchange rate on the listing date of October 18, 2000)and subsequent investments in Genmab by other parties, our ownership interestin Genmab decreased to approximately 32%. In July 2004, Genmab completed aprivate placement of 5.6 million shares of its stock, resulting in a furtherreduction in our ownership interest to approximately 24.7%.  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 Genmabwas reduced to approximately 22.2%, where it remained as of December 31,2005. We accounted for our investment in Genmab under the equity method ofaccounting through January 31, 2006.

InFebruary 2006, Genmab completed a private placement of 5.75 million shares ofits stock.  As a result of this offering,our ownership interest was reduced to approximately 18.9%.  Beginning February 1, 2006, we expect toaccount for our investment in Genmab as a marketable security in accordancewith SFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*.

***IDM***

Duringthe second half of the 1990s, the focus of our business shifted from humanizedand murine monoclonal antibody-based products to fully human antibodydevelopment. As a result, in July 2000, we entered into an agreement withImmuno-Design Molecules, S.A., or IDM, whereby we licensed to IDM certain ofour humanized and murine antibodies in exchange for equity units in IDM.  In August 2005, IDM completed a shareexchange with Epimmune Inc., a Delaware corporation traded on the Nasdaq,whereby IDM shareholders exchanged their IDM shares for shares ofEpimmune.  Epimmune subsequently changedits name to IDM Pharma, Inc., or IDM Pharma. As a result of the exchange, we currently hold an approximate 19.9%equity position in IDM Pharma. IDM Pharma’s lead product candidate, JunovanTM,has completed Phase III clinical trials for the treatment of osteosarcoma, abone cancer affecting adolescents.

***Celldex***

In2004, we assigned or licensed to Celldex Therapeutics, Inc., our thenwholly-owned subsidiary, certain intellectual property related to our vaccinetechnology, including the rights to MDX-1307, one of our productcandidates for the treatment of cancer, as well as the IND associated with thisproduct candidate.

InOctober 2005, Celldex acquired all of the issued and outstanding shares ofcapital stock of Lorantis Limited, or Lorantis, a privately held biotechnologycompany based in Cambridge, U.K. and substantially all of the assets of AlterisTherapeutics, Inc., or Alteris, a privately held biotechnology company based inPhiladelphia, PA.  The purchase price forthe Lorantis capital stock consisted of 6.8 million shares of Celldex Class Acommon stock, and the purchase price for the Alteris assets consisted of 1.2million shares of Celldex common stock, a cash payment of $1.6 million andcertain potential milestone and other payments. As a result of these transactions, our ownership percentage of Celldexwas reduced to approximately 60%.

Atthe date of acquisition, in addition to cash of approximately $30 million,Lorantis’ assets included a pre-clinical program based upon the discovery of afundamental immune mechanism, the Notch signaling pathway, that has been shownin preclinical studies to selectively modulate immune responses.

Throughthe acquisition of Alteris, Celldex obtained exclusive rights to ALT-110, atherapeutic cancer vaccine currently in an investigator-initiated Phase II clinicaltrial for 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 growth factorreceptor known as EGFRvIII.  In addition,Celldex acquired several patent applications from Alteris covering the RapidIdentification of Alternative Splicing system, or RIAS, a proprietarytechnology platform for the discovery of new disease-specific targets.

**OurHuman Antibody Technology**

***The UltiMAbTechnology Platform***

Antibodiesare natural proteins produced in the human body by B cells and serve as animportant defense against disease. Human B cells produce millions of differenttypes of antibodies, all with varying shapes that allow them to attach to and,as a result, neutralize different disease targets. For example, certain antibodiesseek out and attach to

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viruses,bacteria and diseased cells, making them susceptible for destruction by thehuman immune system. Others attach to specific disease targets and block theirinteraction with other molecules.

Oursolution to making antibodies with fully human protein sequences is to usetransgenic strains of mice in which mouse antibody gene expression issuppressed and replaced with human antibody gene expression. Because our micecontain genes encoding human antibodies, we believe the antibodies we generateare more likely to have favorable safety profiles and be eliminated lessrapidly from the human body, potentially reducing the frequency and amount ofdosing 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 technology refers totransgenic mice in which the mouse genes for creating antibodies have beendisrupted and functionally replaced by human antibody genes. Our HuMAb-Mousetransgenic strains contain key gene sequences from unrearranged human antibodygenes that code for both the heavy and light chains of human antibodies.Because genes determine what proteins are made, our transgenic mice make humanantibody proteins. We have thus created mice that have the ability to makefully human monoclonal antibodies. This result avoids the need to humanizemurine monoclonal antibodies, and because the human genes in our HuMAb-Mouseare stable, they are passed on to the mice offspring and, therefore, bredindefinitely at relatively low cost and without additional genetic engineering.Our HuMAb-Mouse can generate fully human antibodies with affinities in thepicomolar range, or as high as 1012 (molar-1).

Throughour collaboration with Kirin, we have access to the Kirin TC Mouse, whichcontains complete sets of the variable and constant genes found in thecorresponding natural human immunoglobulin loci, including all heavy chain classesthat encode all isotypes (IgG1-4, IgA1-2, IgD, IgM and IgE). The TCMouse also has the ability to make fully human monoclonal antibodies. Togetherwith Kirin, we have developed the KM-Mouse, a crossbred mouse that combines thecharacteristics of our HuMAb-Mouse with those of Kirin’s TC Mouse, retainingthe capability to produce all human antibody isotypes with an immune responsethat we believe is previously unseen in any human antibody producing mousesystem.

Tofurther enhance our ability to create products from genomics research, we havealso coupled the UltiMAb Human Antibody Development System with othertechnologies, such as our proprietary Ultra-Potent ToxinTM, or UPT, technology forcreating antibody immunoconjugates. Our UPT program includes a class of DNAalkylating agents, which have been designed to overcome multi-drug resistance.We believe this program provides us with a platform for generating cytotoxicdrugs that specifically target various cancers.

***The UltiMAbAdvantage***

Ourunique technology platform constitutes what we believe to be the most completetechnology solution available in the marketplace for generating fully humanantibodies and enables us to produce antibodies that we believe set theindustry standard in that they are (i) 100% human, (ii) of a veryhigh affinity, and (iii) can be produced and manufactured relativelyquickly and efficiently.

We believe that our fully human antibody technologiesoffer the following advantages over other antibody technologies:

·       *Fully Human Antibodies*.   Unlike humanizationtechniques, our UltiMAb Human Antibody Development System generates antibodieswith 100% human protein sequences, which we believe will permit the developmentof products with a favorable safety profile. Additionally, we believe fullyhuman antibody-based products are likely to be eliminated less rapidly from thehuman body, potentially reducing the frequency and amount of dosing.

·       *High Affinity Antibodies.  *Our human antibodytechnology takes advantage of the human body’s natural affinity maturationprocess (whereby antibodies evolve over time to have higher affinity totargets), creating antibodies that can have affinities up to 1,000 times higherthan the chimeric or humanized antibodies now approved for sale in the U.S. Ourhigh affinity antibodies have been generated against a wide range of targetantigens. Our human antibodies are produced without the need for any subsequentengineering to make them

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more human—aprocess that at times has proven to be challenging and time consuming. Thus, wereduce the risk that an antibody’s structure and function will be altered bysuch engineering.

·       *Rapid Development Capabilities.  *By combining ourtechnology for creating fully human antibodies with our in-house developmentand clinical supply manufacturing expertise, we believe that we can rapidlyprogress from first generation of the antibody to the clinic.

·       *Diverse Selection of Antibodies Responding to Many Disease Targets.  *Webelieve that our technology has the potential to generate high affinity humanantibodies of all isotypes and subclasses. In addition, we have been able tocreate large panels of monoclonal antibodies to many potentially medicallyrelevant antigens. For a given antigen target, the ability to select a productcandidate from a pool of multiple antibodies could be important in selectingthe optimal antibody product candidate for development.

·       *Flexibility for Our Partners.  *Our human antibodytechnology can be used either in our laboratories or in the laboratories of ourpartners. This provides our partners with the flexibility to incorporate ourtechnology into their research and development programs or to contract with us toproduce 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**

Ourproduct development efforts are supported by our experience in both generatingand developing numerous human antibodies and in manufacturing clinical supplymaterials. We believe this experience, together with access to noveltherapeutic targets, will allow us to rapidly generate and develop a large,diverse pipeline of fully human antibody products. We intend to develop some ofthese product candidates for our own account and some in collaboration withother companies, leveraging their respective research and development resources.

Ourantibody generation resources include highly trained teams of scientists in ourresearch facilities located in Milpitas and Sunnyvale, California, as well asin Annandale and Bloomsbury, New Jersey, that work with our UltiMAb HumanAntibody Development System to generate antibodies for our own development andfor our partners. These scientists are experienced in molecular biology,protein chemistry, animal biology, pharmacology, toxicology, process scienceand formulation development. Other development resources include in-housemedical professionals with product development expertise in oncology,infectious diseases, rheumatology, immunology and pulmonology, and consultingarrangements with leading academic researchers.

Inaddition to our experience in generating antibodies, we have considerableexperience in clinical development and clinical supply antibody manufacturing.To facilitate the development and commercialization of antibody-based productsfor us and for our partners, we have assembled a team of experiencedscientific, production and regulatory personnel. This team operates inBloomsbury, New Jersey, and in our clinical trial material manufacturingproduction facility in Annandale, New Jersey.

OurBloomsbury, New Jersey, research and development facility is situated onapproximately 135 acres of land and currently contains space for approximately165,000 square feet of laboratory and office space. We completed a renovationof these facilities in 2004 and currently use approximately 100,000 square feetin these facilities, accommodating approximately 220 employees engaged inantibody research, development and manufacturing.

Welease approximately 45,000 square feet of laboratory, clinical trial productionand office space in Annandale, New Jersey, where we manufacture antibodyproducts for use in clinical development and clinical trials conducted by usand by certain of our partners. Our Annandale facility currently has thecapacity to develop up to 15 new antibody projects per year and operates inaccordance with current good manufacturing practices, or cGMP, regulatoryrequirements for the manufacture of clinical trial materials. We believe thatour existing facility in Annandale is adequate for the production of materialsfor clinical trials of our products and for providing the support we offer tocertain of our partners in connection with our human antibody technology in thenear-term. In September 2003, we entered into a clinical supply agreementwith Lonza Group Ltd. with respect to ipilimumab and MDX-060. Our

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partnerBMS is responsible for securing commercial supply arrangements for ipilimumaband is currently in negotiations with respect to such arrangements. We do notcurrently have the capability to manufacture our product candidates underdevelopment in large commercial quantities and have no experience incommercial-scale manufacturing.

**OurCross License Agreement With Abgenix**

In1994, prior to our acquisition of GenPharm International, Inc.,Abgenix, Inc. and related entities brought a lawsuit against GenPharmrelating to intellectual property issues involved in creating transgenic micecapable of generating fully human antibodies. GenPharm filed counterclaims, andthe litigation was settled in March 1997 upon the execution of a patentcross-license and settlement agreement. Under the terms of this agreement,GenPharm granted a license, on a non-exclusive basis, to certain patents,patent applications, third-party licenses and inventions pertaining to thedevelopment and use of certain transgenic rodents, including mice, that producefully human antibodies. In exchange for this license, GenPharm receivedpayments in 1997, and after our acquisition of GenPharm, we received payments,including interest, from Abgenix and its related parties, which totaledapproximately $38.6 million. Neither Abgenix nor any of its related entitieshave any further payment obligations to us under the agreement. Neither we norGenPharm were required to make any payments to Abgenix or any related entity underthe terms of the agreement. The agreement also provides us with a non-exclusivelicense to certain intellectual property held by Abgenix. ** **In December 2005, Abgenix and Amgenannounced their execution of a merger agreement which, subject to certain conditions,is expected to close by the end of April 2006. If the merger is completed, Amgen will gain access to the patents,patent applications, third-party licenses and inventions licensed to Abgenixunder the cross-license agreement.

**IntellectualProperty**

Proprietaryprotection for our products, processes and know-how is important to ourbusiness. Our policy is to file patent applications to protect technology,inventions, and improvements that we consider important to the development ofour business. We also rely upon trade secrets, know-how and continuingtechnological innovation to develop and maintain our competitive position. Weplan to aggressively prosecute and defend our patents and proprietarytechnology.

Asof December 31, 2005, we hold an ownership interest in a total of 58 issuedpatents in the U.S. and 237 issued patents in foreign countries withrespect to our UltiMAb technology and products, our bispecific moleculetechnology and products, and our other technology and products.

Ofthese, 14 of our issued patents in the U.S. and 40 of our issued patents inforeign countries, including European countries, Japan, Korea, New Zealand andAustralia, among others, relate to various aspects of our UltiMAb technology.These patents, most of which are in the same patent family, claim thetransgene, the transgenic mouse and methods of obtaining high affinityantibodies, among others. These patents have expiration dates beginning in2008, although the majority of the key HuMAb-Mouse technology patents expirebeginning in 2011. In addition to our UltiMAb technology patents, we have twoissued U.S. patents and 11 issued foreign patents that relate particularly toHuMAb-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) andanti-CD30 (MDX-060) product candidates. We have been assigned patent rightsfrom Northwest Biotherapeutics, Inc. relating to aspects of MDX-070.  We have been assigned patent rights relatingto MEDI-545 and MDX-1333 by Nufarm, B.V., Medisup International N.V., PharmaPacific Pty. Ltd and Laboratorie European de Biotechnologie. We have acquiredpatent rights relating to MDX-1100 through our acquisition of AbilityBiomedical. In addition, we have acquired patent rights from Corixa Corporationrelating to tumor-activated prodrugs and Ultra-Potent Toxins.   A U.S. patent to our human anti-CTLA-4antibody products issued in January 2006.

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

Fromtime to time, we may decide to selectively divest some of our patents orpending patent applications as our business evolves.  Multiple provisional U.S. applications may becombined in a single U.S. and/or PCT filing;

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provisional U.S.filings expire in favor of a PCT filing which will eventually become nationalstage filings in the U.S. and other countries; and applications containingmultiple inventions may be filed separately in multiple divisionalapplications.  Thus, these patent andpatent application counts will not always correspond from year to year.

Inaddition to the patents and patent applications in which we hold an ownershipinterest, we hold exclusive and non-exclusive licenses to many other patentsand applications, including the license to the Abgenix intellectual propertymentioned above. For example, these technologies include microinjection oftransgene DNA, homologous recombination, chromosome transfer, yeast artificialchromosome transgene technology and other relevant technologies. We also holdan exclusive sub-license to intellectual property created at the University ofCalifornia relating to aspects of ipilimumab and also have licenses from BMSand Pfizer concerning other intellectual property related to ipilimumab. Wehave a license from the U.S. Public Health Service with respect to MDX-1379.We have a license from medac GmbH relating to certain aspects of MDX-060. Wehave a non-exclusive license from Millennium Pharmaceuticals, Inc.relating to aspects of MDX-070.

Weown registrations for the 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.

**RegulatoryIssues**

***General***

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

Thefollowing paragraphs provide further information on certain legal andregulatory issues with a particular potential to affect our operations or thefuture marketing of products employing our technology.

*Research, Development, and ProductApproval Process.  *The research, development, andapproval process in the U.S. and elsewhere is intensive and rigorous, andgenerally takes many years. The typical process required by the FDA before atherapeutic drug or biological product may be marketed in the U.S. includes:

·       submission to the FDA of anapplication for an IND, which must become effective before human clinicaltrials may commence;

·       preliminary human clinicalstudies to evaluate the drug or biologic and its manner of use; adequate andwell-controlled human clinical trials to establish (i) for a drug or abiological product (such as an antibody), whether it is safe and effective forits intended uses, and (ii) for a biological product, whether it is alsopure and potent;

·       FDA review of whether thefacility in which the drug or biologic is manufactured, processed, packed orheld meets standards designed to assure the product’s continued quality; and

·       submission of anappropriate product application to the FDA, and approval of the application bythe FDA.

Duringpreclinical testing, studies are performed with respect to the chemical andphysical properties of candidate formulations, and are subject to goodlaboratory practices requirements. Biological testing is typically done inanimal models to demonstrate the activity of the compound against the targeteddisease or condition and to assess

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theapparent effects of the new product candidate on various organ systems, as wellas its relative therapeutic effectiveness and safety. An IND must be submittedto the FDA and become effective before studies in humans may commence.

Clinicaltrial programs in humans generally follow a three-phase process. Typically,Phase I studies are conducted in small numbers of healthy volunteers or, onoccasion, in patients afflicted with the target disease, to determine themetabolic and pharmacological action of the product candidate in humans, theside effects associated with increasing doses, and, if possible, to gain earlyevidence of effectiveness. In Phase II, studies are generally conducted inlarger groups of patients having the target disease or condition in order tovalidate clinical endpoints, and to obtain preliminary data on theeffectiveness of the product candidate and optimal dosing. This phase alsohelps determine further the safety profile of the product candidate. In PhaseIII, large-scale clinical trials are generally conducted in hundreds ofpatients having the target disease or condition to provide sufficient data forthe statistical proof of effectiveness and safety of the product candidate asrequired by U.S. and foreign regulatory agencies.

Inthe case of products for cancer and certain other life-threatening diseases,the initial human testing may be done in patients with the disease rather thanin healthy volunteers. Because these patients are already afflicted with thetarget disease or condition, it is possible that such studies will also provideresults traditionally obtained in Phase II studies. These studies are oftenreferred to as “Phase I/II” studies. Notwithstanding the foregoing, even ifpatients participate in initial human testing and a Phase I/II study carriedout, the sponsor is still responsible for obtaining all the data usually obtainedin both Phase I and Phase II studies.

Beforeproceeding with a study, sponsors may seek a written agreement from the FDAregarding the design, size, and conduct of a clinical trial. This is known as aSpecial Protocol Assessment, or SPA. Among other things, SPAs can coverclinical studies for pivotal trials whose data will form the primary basis toestablish a product’s efficacy. Where the FDA agrees to an SPA, the agreementmay not be changed by either the sponsor or the FDA except if the sponsor and theFDA agree to a change, or a senior FDA official determines that a substantialscientific issue essential to determining the safety or effectiveness of theproduct was identified after the testing began. SPAs thus help establishup-front agreement with the FDA about the adequacy of a clinical trial designto support a regulatory approval, but the agreement is not binding if newcircumstances arise. There is no guarantee that a study will ultimately beadequate to support an approval even if the study is subject to an SPA.

U.S.law requires that studies conducted to support approval for product marketingbe “adequate and well controlled.” In general, this means that either a placeboor a product already approved for the treatment of the disease or condition understudy must be used as a reference control. Studies must also be conducted incompliance with good clinical practice, or GCP, requirements, and informedconsent must be obtained from all study subjects.

Theclinical trial process for a new compound can take 10 years or more tocomplete. The FDA may prevent clinical trials from beginning or may placeclinical trials on hold at any point in this process if, among other reasons,it concludes that study subjects are being exposed to an unacceptable health risk.Trials may also be prevented from beginning or may be terminated byinstitutional review boards, who must review and approve all research involvinghuman subjects. Side effects or adverse events that are reported duringclinical trials can delay, impede, or prevent marketing authorization.Similarly, adverse events that are reported after marketing authorization canresult in additional limitations being placed on a product’s use and,potentially, withdrawal of the product from the market.

Followingthe completion of clinical trials, the data are analyzed to determine whetherthe trials successfully demonstrated safety and effectiveness, and whether aproduct approval application may be submitted. In the U.S., if the product isregulated as a drug, a New Drug Application, or NDA, must be submitted andapproved before commercial marketing may begin. If the product, such as anantibody, is regulated as a biologic, a Biologic License Application, or BLA,must be submitted and approved before commercial marketing may begin. The NDAor BLA must include a substantial amount of data and other informationconcerning the safety and effectiveness (and, in the case of a biologic, purityand potency) of the compound from laboratory, animal and human clinical testing,as well as data and information on manufacturing, product quality andstability, and proposed product labeling.

Eachdomestic and foreign biopharmaceutical manufacturing establishment, includingany contract manufacturers we may decide to use, must be listed in the NDA orBLA and must be registered with the FDA. The application will not be approveduntil the FDA conducts a manufacturing inspection, approves the applicablemanufacturing process for the drug or biological product, and determines thatthe facility is in compliance with current good manufacturing practice, orcGMP, requirements.

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Underthe Prescription Drug User Fee Act, as amended, the FDA receives fees forreviewing a BLA or NDA and supplements thereto, as well as annual fees forcommercial manufacturing establishments and for approved products. These feescan be significant. For Fiscal Year 2006, the NDA or BLA review fee alone is$767,000, although certain limited deferrals, waivers and reductions may beavailable.

EachNDA or BLA submitted for FDA approval is usually reviewed for administrativecompleteness and reviewability within 45 to 60 days following submission of theapplication. If deemed complete, the FDA will “file” the NDA or BLA, therebytriggering substantive review of the application. The FDA can refuse to fileany NDA or BLA 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.

Significantlegal and regulatory requirements also apply after FDA approval to market underan NDA or BLA. These include, among other things, requirements related toadverse event and other reporting, product advertising and promotion, andongoing adherence to cGMPs, as well as the need to submit appropriate new orsupplemental applications and obtain FDA approval for certain changes to theapproved product, product labeling or manufacturing process. The FDA alsoenforces the requirements of the Prescription Drug Marketing Act, or PDMA,which, among other things, imposes various requirements in connection with thedistribution of product samples to physicians.

Theregulatory framework applicable to the production, distribution, marketing,sale and/or reimbursement of our products may change significantly from thecurrent descriptions provided herein in the time that it may take for any ofour products to reach a point at which an NDA or BLA is approved.

Overallresearch, development and approval times depend on a number of factors,including the period of review at the FDA, the number of questions posed by theFDA during review, how long it takes to respond to the FDA questions, the severityor life-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.

*Drugsand Biologics for Serious or Life-Threatening Illnesses.**  *The Federal Food,Drug and Cosmetic Act, as amended, and FDA regulations provide certainmechanisms for the accelerated “Fast Track” approval of products intended totreat serious or life-threatening illnesses which have been studied for safetyand effectiveness and which demonstrate the potential to address unmet medicalneeds. The procedures permit early consultation and commitment from the FDAregarding the preclinical and clinical studies necessary to gain marketingapproval. Provisions of this regulatory framework also permit, in certaincases, NDAs or BLAs to be approved on the basis of valid surrogate markers ofproduct effectiveness, thus accelerating the normal approval process. Where theFDA approves a product on the basis of a surrogate marker, it requires thesponsor to perform post-approval, or Phase IV, studies as a condition ofapproval. In addition, the FDA may impose restrictions on distribution and/orpromotion in connection with any accelerated approval, and may withdrawapproval if post-approval studies do not confirm the intended clinical benefitor safety of the product. Special rules would also apply to the submissionto FDA of advertising and promotional materials prior to use.

*OrphanDrugs.**  *Under the OrphanDrug Act, special incentives exist for companies to develop products for rarediseases or conditions, which are defined to include those diseases orconditions that affect fewer than 200,000 people in the U.S. Companies mayrequest that the FDA grant a drug orphan designation prior to approval.Products designated as orphan drugs are eligible for special grant funding forresearch and development, the FDA assistance with the review of clinical trialprotocols, potential tax credits for research, reduced filing fees formarketing applications, and a special seven-year period of market exclusivityafter marketing approval. Orphan drug exclusivity prevents the FDA approval ofapplications by others for the same drug and the designated orphan disease orcondition. The FDA may approve a subsequent application from another entity ifthe FDA determines that the application is for a different drug or differentuse, or if the FDA determines that the subsequent product is clinically

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superior, or thatthe holder of the initial orphan drug approval cannot assure the availabilityof sufficient quantities of the drug to meet the public’s need. A grant of anorphan designation is not a guarantee that a product will be approved. If asponsor receives orphan drug exclusivity upon approval, there can be noassurance that the exclusivity will prevent another entity or a similar drugfrom receiving approval for the same or other uses.

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

Inthe U.S., the research, manufacturing, distribution, sale, and promotion ofdrug and biological products are potentially subject to regulation by variousfederal, state and local authorities in addition to the FDA, including theCenters for Medicare and Medicaid Services (formerly the Health Care FinancingAdministration), other divisions of the U.S. Department of Health and HumanServices (e.g., the Office of Inspector General), the U.S. Department ofJustice and individual U.S. Attorney offices within the Department of Justice,and state and local governments. For example, sales, marketing andscientific/educational grant programs must comply with the anti-fraud and abuseprovisions of the Social Security Act, the False Claims Act, the privacyprovisions of the Health Insurance Portability and Accountability Act, orHIPAA, and similar state laws, each as amended. Pricing and rebate programsmust comply with the Medicaid rebate requirements of the Omnibus BudgetReconciliation Act of 1990 and the Veterans Health Care Act of 1992, each asamended. If products are made available to authorized users of the FederalSupply Schedule of the General Services Administration, additional laws andrequirements apply. All of these activities are also potentially subject tofederal and state consumer protection, unfair competition, and other laws.

Moreover,we are now, and may become subject to, additional federal, state and locallaws, regulations and policies relating to safe working conditions, laboratorypractices, the experimental use of animals, and/or the use, storage, handling,transportation and disposal of human tissue, waste and hazardous substances,including radioactive and toxic materials and infectious disease agents used inconjunction with our research work.

***Foreign RegulatoryRequirements***

Weand our collaborative partners are subject to widely varying foreignregulations, which may be quite different from those of the FDA, governingclinical trials, manufacture, product registration and approval, andpharmaceutical sales. Whether or not FDA approval has been obtained, we mustobtain a separate approval for a product by the comparable regulatoryauthorities of foreign countries prior to the commencement of product marketingin these countries. In certain countries, regulatory authorities also establishpricing and reimbursement criteria. The approval process varies from country tocountry, and the time may be longer or shorter than that required for FDAapproval. In addition, under current U.S. law, there are significantrestrictions on the export of products not approved by the FDA, depending onthe country involved and the status of the product in that country.

***Reimbursement andPricing Controls***

In many of the markets where we or our collaborativepartners would commercialize a product following regulatory approval, theprices of pharmaceutical products are subject to direct price controls (by law)and to drug reimbursement programs with varying price control mechanisms. Public and private health care payors controlcosts and influence drug pricing through a variety of mechanisms, includingthrough negotiating discounts with the manufacturers and through the use oftiered formularies and other mechanisms that provide preferential access tocertain drugs over others within a therapeutic class. Payors also set othercriteria to govern the uses of a drug that will be deemed medically appropriateand therefore reimbursed or otherwise covered. In particular, many public andprivate health care payors limit reimbursement and coverage to the uses of adrug that are either approved by the FDA or that are supported by otherappropriate evidence (for example, published medical literature) and appear ina recognized drug compendium. Drug compendia are publications that summarizethe available medical evidence for particular drug products and identify whichuses of a drug are supported or not supported by the available evidence,whether or not such uses have been approved by the FDA. For example, inthe case of Medicare coverage for physician-administered oncology drugs, theOmnibus Budget Reconciliation Act of 1993, with certain exceptions, prohibitsMedicare carriers from refusing to cover unapproved uses of an FDA-approveddrug if the unapproved use is supported by one or more citations in theAmerican Hospital Formulary Service Drug Information, the American MedicalAssociation Drug Evaluations, or the U.S. Pharmacopoeia Drug Information.Another commonly cited compendium, for example under Medicaid, is the DRUGDEXInformation System.

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**Competition**

Weface competition in several different forms. Our human antibody generationactivities currently face competition from several companies and from othertechnologies. In addition, the actual products being developed by us or by ourpartners also face actual and potential competition.

Thedevelopment of biotechnology and pharmaceutical products is a highlycompetitive business subject to rapid technological change. We know of manypharmaceutical and biotechnology companies conducting research or developmenton therapeutic monoclonal antibody products. Many of these companies havecommenced clinical trials with, and several have successfully commercialized,antibody products. Some of these companies are also pursuing productdevelopment efforts for the same disease areas or against the same biologicaltargets as we or our partners are pursuing.

Weface competition from many companies that provide the services of generatingmonoclonal antibodies for antibody-based therapeutics. One competitor withrespect to our human antibody technology is Abgenix. As a result of thecross-license agreement with GenPharm (our wholly owned subsidiary since 1997),Abgenix offers to potential partners the use of its transgenic mouse known asXenoMouse® 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 iscompleted, Amgen will gain access to the patents, patent applications,third-party licenses and inventions licensed to Abgenix under the cross-licenseagreement.

Inaddition, we have entered into agreements with each of Kirin and Genmab,respectively, which grant these companies licenses to our proprietarytransgenic mouse technology platform, enabling them to compete with us inoffering antibody generation and development services in certain markets.Certain of our other partners who have licensed our transgenic mouse technologyalso could compete with us with respect to the development of certainantibodies.

Othercompanies are also developing, or have developed technologies for generatinghuman or partially human antibodies. For example, Xenerex Biosciences (asubsidiary of Avanir Pharmaceuticals) and XTL Biopharmaceuticals Ltd. each havedeveloped technology that, according to Xenerex and XTL, will allow them togenerate fully human monoclonal antibodies in functionally modified mice.  Regeneron claims to have developed VelocImmuneTM mice, in which portions of the mouse immunegenome have been humanized, generating mice with humanized immune systems thatcan generate fully human antibodies.

Severalcompanies are developing, or have developed, technologies not involving animalimmunization that result in libraries composed of numerous human antibodysequences. For example, phage display technology is being used by companiessuch as Cambridge Antibody Technology Group plc, or CAT, Dyax Corp. andMorphoSys AG to develop therapeutic products comprising human antibody sequences.Companies such as Johnson & Johnson, MedImmune, Amgen, BiogenIdec, Inc., Novartis, Genentech, Inc., PDL BioPharma, Inc.,Abbott Laboratories, Wyeth and GlaxoSmithKline have generated therapeuticantibody-based products that are currently in development or on the market andare derived from recombinant DNA that comprise human antibody sequences.Numerous additional companies are developing therapeutic products comprisinghuman antibody components.

Weare aware of several pharmaceutical and biotechnology companies activelyengaged in research and development of antibody-based products that havecommenced clinical trials with or have successfully commercialized antibodyproducts. Some of these companies, such as Pfizer, ImClone, Johnson &Johnson, Wyeth, Amgen, Abbott, UCB Pharma, Biogen Idec, Abgenix, CAT, MorphoSysAG, Tanox, Inc., Genentech, Human Genome Sciences, Millennium and PDLBioPharma are addressing diseases and disease indications that are beingtargeted by us and certain of our partners. For example, Pfizer is developingticilimumab, an antibody to CTLA-4, in potential competition with ourproduct candidate, ipilimumab. Ticilimumab is currently in Phase III clinical trials, and Pfizer hasannounced that it expects to file a BLA on the product in 2007.  In addition, we are aware of a patent held byPfizer to which we may need a license in order to manufacture commercialsupplies of ipilimumab. Several of the foregoing companies are also licenseesof our transgenic mouse technology. Many of these companies and institutions,either alone or together with their partners, have substantially greaterfinancial resources and larger research and development divisions than we have.In addition, many of these competitors, either alone or together with their partners,have substantially greater experience than us in developing pharmaceuticalproducts, undertaking preclinical testing and human clinical trials, obtainingFDA and other regulatory approvals of such products and the manufacturing andmarketing of such products. Accordingly, our competitors may succeed inobtaining patent

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protection,receiving FDA or other foreign equivalent marketing approval andcommercializing products more rapidly than us.

Othertechnologies can also be applied to the treatment of the diseases that we orour partners are pursuing. For example, immunoconjugates—monoclonal antibodieslinked to toxins or radioactive isotopes—are being developed by others, as wellas by us. In addition, the application of recombinant DNA technology to developpotential products consisting of proteins (such as growth factors, hormones,enzymes, cytokines, receptor fragments and fusion proteins, or cytokines) thatdo not occur normally in the body, or occur only in small amounts, has beenunderway for some time. Included in this group are interleukins such as IL-2and IL-11, interferons, colony stimulating factors such as G-CSF andGM-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**

Ourpotential products may be marketed and sold in several possible ways, dependingon the product, including: solely by us, jointly by us and our collaborativepartners, or solely by or on behalf of our collaborative or our licensingpartners. Marketing and sales rights with respect to ipilimumab are subject tothe terms of our collaboration with BMS. We believe that a small sales forcecould successfully introduce and detail certain of our potential products thathave concentrated marketplaces. Other products, however, may require a largersales force. Currently, we have no sales force. We may develop our own internalsales force for these products if they proceed to commercialization.

Weacknowledge that the successful marketing of some of our potential products maybe beyond the capabilities of all but the largest pharmaceutical organizations.For this reason, we, along with our collaborative partners, may license tomajor pharmaceutical companies individual products serving large markets orthose that will be widely distributed and/or detailed geographically, if theproducts are approved by the FDA. Our collaboration with BMS is an example ofthis kind of relationship.

**Employees**

Asof December 31, 2005, we employed 461 regular, full and part-timeemployees, of whom approximately 405 were engaged in research and developmentactivities. As of that date, there were 56 employees involved in businessdevelopment, legal, finance and other administrative functions. None of ouremployees is covered by a collective bargaining agreement. We have entered intoemployment contracts with certain of our executive officers. Our success willdepend in large part upon our ability to attract and retain employees. We facecompetition for employees from other companies, research and academicinstitutions, government agencies and other organizations. We believe wemaintain good relations with our employees.

**AvailableInformation**

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

Wefile annual, quarterly and current reports, proxy statements and otherinformation with the Securities and Exchange Commission, or SEC. You may readand copy our reports, proxy statements and other information at the SEC’spublic reference room at Room 1024, 450 Fifth Street N.W.,Washington, D.C. 20549. You can request copies of these documents bywriting to the SEC and paying a fee for the copying cost. Please call the SECat 1-800-SEC-0330 for more information about the operation ofthe public reference room. Our SEC filings are also available at the SEC’s website at *www.sec.gov*. In addition, you can readand copy our SEC filings at the office of the National Association ofSecurities Dealers, Inc. at 1735 K Street N.W., Washington, D.C. 20006.

Youmay obtain a free copy of our annual reports on Form 10-K, quarterlyreports on Form 10-Q and current reports on Form 8-K andamendments to those reports on the day of filing with the SEC on our website at*www.medarex.com*, by contacting theInvestor Relations Department at our corporate offices by calling (609) 430-2880or by sending an e-mail message to *information@medarex.com*.You can direct requests for literature to the information request section onour website.

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**Item 1A.      Risk Factors**

**Forward LookingInformation**

This Annual Report contains forward-looking statementswithin the meaning of Sections 27A and 21E of the Securities Exchange Act of1934, as amended, including statements regarding our expectations, beliefs,intentions, or strategies regarding the future. Statements preceded by,followed by or that otherwise include the words “believes”, “expects”, “anticipates”,“intends”, “estimates”, “plans”, “forecasts”, “is likely to”, “projected” andsimilar expressions or future conditional verbs such as “should”, “would”, “may”,and “could” are generally forward-looking in nature and not historical facts.**Forward-looking statements include,without limitation, statements in this section, and in the sections entitled “Business,”“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and elsewhere in this Annual Report regarding, among other things,uncertainties relating to our technology; history of operating losses andanticipation of future losses; uncertainty of product development; uncertaintyrelating to competitive products, need for additional capital and uncertaintyof change; uncertainty of patent and proprietary rights; management of growth,and risks of acquiring new technologies; uncertainties related to clinicaltrials; government regulation and uncertainty of obtaining regulatory approval;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.

Asdescribed in the “Explanatory Note” immediately preceding Part I, Item 1, wehave amended and restated our accumulated deficit as of December 31, 2005 andour net loss for the year ended December 31, 2005 in the following risk factor:

**We have incurred largeoperating losses and we anticipate that these losses will continue.**

Wehave incurred large operating losses and we anticipate that these losses will continuefor the foreseeable future. In particular, as of December 31, 2005, we had anaccumulated deficit of approximately $782.0 million. Our net loss was $148.0million for the year ended December 31, 2005. Our losses have resultedprincipally from:

·       research and developmentcosts relating to the development of our technology and antibody productcandidates;

·       costs associated with theestablishment of our laboratory and manufacturing facilities and manufacturingof products; and

·       general and administrativecosts relating to our operations.

Weintend to continue to make significant investments in:

·       research and development;

·       preclinical testing andclinical trials;

·       manufacturing clinicalsupplies of our antibody products;

·       establishing new collaborations;and

·       new technologies.

Inaddition, we may be obligated to make milestone payments with respect tocertain of our products as they progress through the clinical trial process.

Wedo not know when or if we or our partners will complete any pending or futureproduct development efforts, receive regulatory approval or successfullycommercialize any approved products.

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We may continue to incur substantial operating losseseven if our revenues increase. As a result, we cannot predict the extent offuture losses or the time required for us to achieve profitability, if at all.

We have also addedtwo risk factors as follows:

**We are subject to an informal inquiry by the SECand a grand jury investigation by the United States Attorney’s Office for theDistrict of New Jersey, relating to our stock option granting practices, andsuch governmental inquiry and investigation may result in charges filed againstus and in fines or penalties.**

TheSEC is conducting an informal inquiry into our historical stock option grantsand practices and related accounting and disclosures.  In addition, the United States Attorney’sOffice for the District of New Jersey is conducting a grand jury investigationrelating to the same matters. A Special Investigation Committee of our outsidedirectors oversaw a review of those practices. Based on the results of the Special Investigation Committee’s review, wehave restated our financial statements for the quarter ended March 31, 2006 andthe years ended December 31, 2005, 2004 and 2003, respectively.

Criminalor civil charges could be filed against Medarex and we could be required to paysignificant fines or penalties in connection with either or both of the inquiryand investigation.  We have incurred, andcontinue to incur, substantial costs related to the inquiry and investigationand the inquiry and investigation will cause a diversion of our management’stime and attention which could have a material adverse effect on our financialcondition and results of operations.  Anyinquiry, investigation or legal action by the SEC or the U.S. Attorney’s Officecould materially harm our business, results of operations, financial positionand cash flows.

**We have civil litigation pending that relates toour stock option granting practices, and we cannot predict the ultimate outcomeof this litigation.**

InJune 2006, two derivative actions were filed in New Jersey state court byshareholders purporting to act on behalf of Medarex, naming Medarex as anominal defendant and certain current and former directors as defendants.  In November 2006 and January 2007, threeadditional derivative complaints were filed in the United States District Courtfor the District of New Jersey, containing nearly identical factual allegationsconcerning Medarex’s historical stock option granting practices.  The complaints allege, among other things,that certain of Medarex’s officers and directors breached their fiduciaryduties to the Company and violated federal securities laws in connection withpublic statements made in SEC filings relating to the Company’s historicalstock option granting practices and related accounting.  The complaints seek unspecified damages andequitable relief.  These actions are intheir preliminary stages.  We could berequired to pay significant damages in connection with this litigation.

**Successfuldevelopment of our products is uncertain.**

Basedon public disclosures, as of March 1, 2006, regulatory applications, includingINDs, 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 partnershave any product candidates employing our human antibody technology that havebeen approved for sale by the FDA or comparable foreign authorities and/orcommercialized. In addition, we are not aware of any commercialized fully humanmonoclonal antibody therapeutic products that have been generated from any technologiessimilar to ours. Product candidates employing our human antibody technology maynot advance beyond clinical development or demonstrate clinical safety andeffectiveness.

Our development ofcurrent and future product candidates is subject to the risks of failure anddelay inherent in the development of new pharmaceutical products and productsbased on new technologies. These risks include:

·       delays in productdevelopment, clinical testing or manufacturing;

·       slower than expectedpatient enrollment;

·       unplanned expenditures inproduct development, clinical testing or manufacturing;

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·       failure in clinical trialsor failure to receive regulatory approvals;

·       emergence of superior orequivalent products;

·       inability to manufacture onour own, or through others, product candidates on a commercial scale;

·       inability to marketproducts due to third-party proprietary rights;

·       election by our partnersnot to pursue product development;

·       failure by our partners todevelop products successfully; and

·       failure to achieve marketacceptance.

Incertain instances, we have experienced delays in our product development andclinical testing as a result of slower than anticipated patient recruitment. Ina number of instances, we have terminated the development of certain productsin the early stages of human clinical testing due to a lack of effectiveness.

Becauseof these risks, our research and development efforts or those of our partnersmay not result in any commercially viable products. If a significant portion ofthese development efforts are not successfully completed, required regulatoryapprovals are not obtained or any approved products are not commerciallysuccessful, our business, financial condition and results of operations may bematerially harmed.

**Our revenue and profit potential areunproven.  No revenues have beengenerated from the commercial sale of our products and our products may notgenerate revenues in the future.**

Because we and our partners have not begun commercialsales of our products, our revenue and profit potential are unproven whichmakes it difficult for an investor to evaluate our business and prospects. Ourtechnology may not result in any meaningful benefits to our current orpotential partners. No revenues have been generated from the commercial sale ofour products, and our products may not generate revenues in the future. Ourbusiness and prospects should be considered in light of the heightened risksand unexpected expenses and problems we may face as a company in an early stageof development in a rapidly evolving biopharmaceutical industry.

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

Our future revenues and operating results are expectedto vary significantly from period-to-period due to a number of factors. Many ofthese factors are outside of our control. These factors include:

·       the timing of thecommencement, completion or termination of partnership agreements;

·       the introduction of newproducts and services by us, our partners or our competitors;

·       delays in, or terminationof, preclinical testing and clinical trials;

·       changes in regulatoryrequirements for clinical trials;

·       costs and expensesassociated with preclinical testing and clinical trials;

·       the timing of regulatoryapprovals, if any;

·       sales and marketingexpenses; and

·       the amount and timing ofoperating costs and capital expenditures relating to the expansion of ourbusiness operations and facilities.

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

Itis possible that in some future periods, our operating results may be belowexpectations of analysts and investors. If this happens, the price of oursecurities may decrease.

**We are atrisk of securities class action litigation.**

Inthe past, securities class action litigation has often been brought against acompany following a decline in the market price of its securities.  The risk is especially relevant for us becausebiotechnology companies have

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experiencedgreater than average price 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.**

We will continue to expend substantial resources forresearch and development, including costs associated with developing ourantibody technology and conducting preclinical testing and clinical trials. Ourfuture capital requirements will depend on a number of factors, including, byway of example:

·       the size and complexity ofresearch and development programs;

·       the scope and results ofpreclinical testing and clinical trials;

·       the retention of existingand establishment of further partnerships, if any;

·       continued scientificprogress in our research and development programs;

·       the time and expenseinvolved in seeking regulatory approvals;

·       competing technological andmarket developments;

·       the time and expense offiling and prosecuting patent applications and enforcing patent claims; and

·       the cost of establishingcommercial scale manufacturing capabilities, conducting commercializationactivities and arrangements and in-licensing products.

Webelieve our current sources of liquidity will be sufficient to meet ouroperating, debt service and capital requirements for at least the next 24months. To the extent our 2.25% convertible senior notes due in 2011 areconverted into shares of our common stock on or before their maturity date, wewill have use of that portion of the principal amount of the notes to fund ouron-going operations. In any event, we may require additional financing withinthis time frame and may raise funds through public or private financings, lineof credit arrangements, collaborative relationships and/or other methods. Theuse of cash on hand or other financial alternatives will depend on several factorsincluding, but not limited to, the future success of our products in clinicaldevelopment, the prevailing interest rate environment, and access to thecapital markets. We may be unable to raise sufficient funds to completedevelopment of any of our product candidates, to continue operations or torepay our debt obligations at maturity. As a result, we may face delay,reduction or elimination of research and development programs or preclinical orclinical trials, in which case our business, financial condition or results ofoperations may be materially harmed.

**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 in aggregate principal amount of our 2.25% convertible seniornotes outstanding, which, unless converted to shares of our common stock orredeemed, will mature in 2011. Our ability to make payments on these notes andour other obligations will depend on our future operating performance andability to generate cash and may also depend on our ability to obtainadditional debt or equity financing. Generally, during the last five years, ouroperating cash flows were negative and insufficient to cover our fixed charges.Our ability to generate sufficient operating cash flow to service ourindebtedness, including the notes, and fund our operating requirements willdepend on our ability, alone or with others, to successfully develop,manufacture, and obtain required regulatory approvals and market our productcandidates, as well as other factors, including general economic, financial,competitive, legislative and regulatory conditions, some of which are beyondour control. If we are unable to generate sufficient operating cash flow toservice our indebtedness and fund our operating requirements, we may need toobtain additional debt or equity financing to do so, which may not be availableto us on satisfactory terms or at all. In addition, if new indebtedness isincurred, the risks relating to our ability to service our indebtedness that weface could intensify.

Even if we are able to meet our debt serviceobligations, the amount of debt we have could adversely affect us in a numberof ways, including by:

·       limiting our ability toobtain any necessary financing in the future for working capital, capitalexpenditures, debt service requirements or other purposes;

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·       limiting our flexibility inplanning for, or reacting to, changes in our business;

·       placing us at a competitivedisadvantage relative to our competitors who have lower levels of debt;

·       making us more vulnerableto 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.**

In order to obtainFDA approval to market a new drug product, we or our partners must demonstrateproof of safety and efficacy in humans. To meet these requirements, we or ourpartners will have to conduct extensive preclinical testing and “adequate andwell-controlled” clinical trials. Conducting clinical trials is a lengthy,time-consuming and expensive process. The length of time may vary substantiallyaccording to the type, complexity, novelty and intended use of the productcandidate, and often can be several years or more per trial. Delays associatedwith products for which we are directly conducting preclinical or clinicaltrials may cause us to incur additional operating expenses. Moreover, we willcontinue to be affected by delays associated with the preclinical testing andclinical trials of certain product candidates conducted by our partners overwhich we have no control. The commencement and rate of completion of clinicaltrials may be delayed by many factors, including, for example:

·       the inability to manufacturesufficient quantities of qualified materials under current good manufacturingpractices, or cGMPs, for use in clinical trials;

·       the need or desire tomodify our manufacturing processes;

·       slower than expected ratesof patient recruitment;

·       modification of clinicaltrial protocols;

·       the inability to adequatelyobserve patients after treatment;

·       changes in regulatoryrequirements for clinical trials;

·       the lack of effectivenessduring the clinical trials;

·       unforeseen safety issues;

·       delays, suspension, ortermination of the clinical trials due to the institutional review boardresponsible for overseeing the study at a particular study site; and

·       government or regulatorydelays or “clinical holds” requiring suspension or termination of the trials.

Evenif we obtain positive results from preclinical or clinical trials, we may notachieve the same success in future trials. Clinical trials may not demonstratestatistically sufficient safety and effectiveness to obtain the requisiteregulatory approvals for product candidates employing our human antibodytechnology. In a number of instances, we have terminated the development ofcertain products in the early stages of human clinical testing due to a lack ofeffectiveness.

Generally,our clinical trials, including our melanoma trials, are conducted in patientswith serious or life-threatening diseases for whom conventional treatments havebeen unsuccessful or for whom no conventional treatment exists, and in somecases, our product is used in combination with approved therapies thatthemselves have significant adverse event profiles. During the course oftreatment, these patients could suffer adverse medical events or die forreasons that may or may not be related to our products. The most common adverse events associated with our trials of ipilimumabhave consisted of flu-like symptoms such as fever, chills and nausea.These events were expected and generally responded to standard medical therapy.In addition, some patients haveexperienced anticipated drug-related immune-mediated events, such as diarrhea,rash, reduced pituitary function, colitis and increased liver enzymes, rangingfrom mild in most cases to severe in a very small number of instances. Otherthan a very small number of fatalities, representing less than 1% ofover 600 patients treated in allprevious trials, which may or may not be attributable to our product candidate,most events resolved with treatment. We cannot assure you that additionalsafety issues will not arise with respect to our products in the future.

Todate, we have experienced slower than expected rates of patient recruitment incertain of our clinical trials. As a result, in certain instances, we haveexperienced or may experience delays in our product development and clinicaltesting.

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Inaddition, we are currently working out the final SPA details with the FDA for asingle-arm monotheraphy registrational study of our ipilimumab productcandidate to enroll up to 150 second-line patients with metastatic melanomapreviously treated with DTIC.  A Phase III pivotal study of ipilimumab incombination with MDX-1379 (a melanoma peptide vaccine based on gp100) commencedenrollment of second-line patients in September 2004 and is currentlyongoing.  If the SPA for the monotheraphy study is approved by the FDA, wemay reallocate patients from the Phase III combination study to the newmonotheraphy study.  Any such reallocations may delay the development ofthe combination therapy product candidate. Data obtained from clinical trials of our product candidates to datehave been insufficient to demonstrate safety and efficacy under applicable FDAcriteria. As a result, such data will not support an application for regulatoryapproval without further clinical trials. Clinical trials that we conduct orthat third parties conduct on our behalf may not demonstrate sufficient safetyand efficacy to obtain the requisite regulatory approvals for any of ourproduct candidates. We expect to commence new clinical trials from time to timein the course of our business as our product development work continues. Thefailure of clinical trials to demonstrate safety and effectiveness for ourdesired indications could harm the development of that product candidate aswell as other product candidates. Any change in, or termination of, ourclinical trials could materially harm our business, financial condition andresults of operations.

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

Resultsof our early clinical trials and those of our partners using our human antibodytechnology are based on a limited number of patients and may, upon review, berevised or negated by authorities or by later stage clinical results.Historically, the results from preclinical testing and early clinical trialshave often not been predictive of results obtained in later clinical trials. Anumber of new drugs and biologics have shown promising results in initialclinical trials, but subsequently failed to establish sufficient safety andeffectiveness data to obtain necessary regulatory approvals. Data obtained frompreclinical and clinical activities are subject to varying interpretations,which may delay, limit or prevent regulatory approval.

Inaddition, regulatory delays or rejections may be encountered as a result ofmany factors, including changes in regulatory policy during the period ofproduct development.

 

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

Even if clinical trials demonstrate the safety andeffectiveness of products developed by us or our partners using our technologyand all regulatory approvals have been obtained, product candidates employingour antibody technology may not gain market acceptance among physicians,patients, third-party payors and the medical community. For example, thecurrent delivery systems for antibody-based therapeutic products are intravenousand subcutaneous injection, which are generally less well received by patientsthan tablet or capsule delivery. The degree of market acceptance of any productcandidates employing our technology will depend on a number of factors,including, for example:

·       establishment anddemonstration of clinical efficacy and safety, especially as compared toconventional treatments;

·       cost-effectiveness;

·       alternative treatmentmethods;

·       reimbursement policies ofgovernment and third-party payors; and

·       marketing and distributionsupport for our product candidates.

Inaddition, many of our activities involve genetic engineering in animals andanimal testing, controversial subjects which have received adverse publicityfrom animal rights activists and various other interest groups. Such adversepublicity could decrease market acceptance of products employing ourtechnology.

Ifproducts employing our technology do not achieve significant market acceptance,our business, financial condition and results of operations may be materiallyharmed.

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

Salesof pharmaceutical products largely depend on the reimbursement of patients’medical expenses by government health care programs and private healthinsurers. Without the financial support of the governments or third-partypayors, the market for products employing our human antibody technology will belimited. These third-party payors are increasingly challenging the price andexamining the cost effectiveness of medical products and services. In addition,significant uncertainty exists as to the reimbursement status of newly approvedhealthcare products. We may need to conduct post-marketing studies in order todemonstrate the cost-effectiveness of our products. Such studies may require usto dedicate a significant amount of resources. Our project candidates may notbe considered cost-effective. Third-party payors may not reimburse sales ofproducts employing our human antibody technology, or enable us or our partnersto sell them at profitable prices.

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

Beforeapproving a new drug or biologic product, the FDA requires that the facilitiesat which the product will be manufactured are in compliance with current goodmanufacturing practices, or cGMP requirements. To be successful, ourtherapeutic products must be manufactured for development and, followingapproval, in commercial quantities, in compliance with regulatory requirementsand at acceptable costs. While we believe our current facilities are adequatefor the limited production of product candidates for clinical trials, ourfacilities are not adequate to produce sufficient quantities of any productsfor commercial sale.

Ifwe are unable to establish and maintain a manufacturing facility or securethird-party manufacturing capacity within our planned time and cost parameters,the development and sales of our products and our financial performance may bematerially harmed.

We may also encounter problems with the following:

·       production yields;

·       quality control andassurance;

·       shortages of qualifiedpersonnel;

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·       compliance with FDAregulations, including the demonstration of purity and potency;

·       changes in FDArequirements;

·       production costs; and/or

·       development of advancedmanufacturing techniques and process controls.

Weare aware of only a limited number of companies on a worldwide basis thatoperate manufacturing facilities in which our product candidates can bemanufactured under cGMP regulations, a requirement for all pharmaceuticalproducts. We are currently pursuing late-stage clinical and commercial supplyagreements with cGMP-compliant third-party manufacturers with availablecapacity to meet our internal production timetables. We have entered intoclinical supply agreements with Lonza with respect to ipilimumab and MDX-060.  As part of our collaboration with BMS, weassigned to BMS the clinical supply agreement with respect to ipilimumab.  Our partner BMS is responsible for securingcommercial supply agreements for ipilimumab and is currently in negotiationswith respect to such arrangements.  BMSmay not be able to successfully consummate such arrangements. We do notcurrently have the capability to manufacture our product candidates underdevelopment in large commercial quantities and have no experience incommercial-scale manufacturing. It would take a substantial period of time fora contract facility that has not been producing antibodies to begin producingantibodies under cGMP regulations. We cannot make assurances that we will beable to contract with such companies for clinical and/or commercial supply onacceptable terms or in a timely manner, if at all. Moreover, even if we areable to enter into clinical and/or commercial supply manufacturing arrangementswith cGMP-compliant third-party manufacturers, we cannot assure you that suchmanufacturers will be able to produce products that are substantiallyequivalent to the product candidates that we have produced in our ownfacilities and used in our clinical trials. If such companies are not able toproduce products that are substantially equivalent to our product candidates,the progress of our clinical trials and/or commercialization of our productsmay be delayed and our business, financial condition and results of operationsmay be materially harmed.

Inaddition, we and any third-party manufacturer will be required to registermanufacturing facilities with the FDA and other regulatory authorities. Thefacilities will be subject to inspections confirming compliance with cGMP orother regulations. If we or any of our third-party manufacturers fail tomaintain regulatory compliance, the FDA or other regulatory authorities can impose regulatory sanctionsincluding, among other things, refusal to approve a pending application for anew drug product or biologic product, or revocation of a pre-existing approval.As a result, our business, financial condition and results of operations may bematerially harmed.

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

Wedepend, in part, on our partners to support our business, including thedevelopment of products generated through the use of our antibody technology.In particular, under the terms of our collaboration and co-promotion agreementwith BMS, we have granted a license to commercialize our lead productcandidate, ipilimumab, to BMS for the treatment of all diseases. We have alsogranted to BMS a sub-license to MDX-1379 for use in combination with ipilimumabfor the treatment of metastatic melanoma. The successful development andcommercialization of ipilimumab is dependent, in large part, on the actions ofBMS, which are outside of our control. The failure of BMS to act in accordancewith its obligations under the collaboration and co-promotion agreement maycause us to incur substantial additional costs in order to develop andcommercialize ipilimumab, which could have a material adverse effect on ourbusiness.

**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 in the future may, rely on ourpartners to:

·       access proprietary antigensfor the development of product candidates;

·       access skills andinformation that we do not possess;

·       fund our research anddevelopment activities;

·       manufacture products;

·       fund and conductpreclinical testing and clinical trials;

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·       seek and obtain regulatoryapprovals for product candidates; and/or

·       commercialize and marketfuture products.

Our dependence on ourpartners subjects us to a number of risks, including:

·       our partners havesignificant discretion whether to pursue planned activities;

·       we cannot control thequantity and nature of the resources our partners may devote to productcandidates;

·       our partners may notdevelop products generated using our antibody technology as expected; and

·       business combinations orsignificant changes in a partner’s business strategy may adversely affect thatpartner’s willingness or ability to continue to pursue these productcandidates.

Ifwe do not realize the contemplated benefits from our partners, our business,financial condition and results of operations may be materially harmed.

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

Our licensing partners generally have the right toterminate our partnerships at any time. Our ability to continue our currentpartnerships and to enter into additional partnerships is dependent in largepart on our ability to successfully demonstrate that our UltiMAb technology isan attractive method of developing fully human antibody therapeutic products.Existing or potential partners may pursue alternative technologies, includingthose of our competitors, or enter into other transactions that could make acollaboration with us less attractive to them. For example, if an existingpartner purchases or is purchased by a company that is one of our competitors,that company could be less willing to continue its collaboration with us andmay, instead, become one of our competitors. For example, in December 2005,Abgenix and Amgen announced their execution of a merger agreement which,subject to certain conditions, is expected to close by the end of April2006.  Upon completion of the merger,Amgen will own Abgenix’s XenoMouse technology. As a result, Amgen may be less willing to continue its collaborationwith us and may, through the use of its newly acquired XenoMouse technology,engage in direct competition with us in the area of generating fully humanmonoclonal antibodies for antibody-based therapeutics. In addition, a companythat has a strategy of purchasing companies rather than entering intopartnership arrangements might have less incentive to enter into acollaboration agreement with us. Moreover, disputes may arise with respect tothe ownership of rights to any technology or products developed with anycurrent or future partner. Lengthy negotiations with potential new partners ordisagreements between us and our partners may lead to delays or termination inthe research, development or commercialization of product candidates. If we arenot able to establish additional partnerships on terms that are favorable to usor if a significant number of our existing partnerships are terminated and wecannot replace them, we may be required to increase our internal productdevelopment and commercialization efforts. This would likely:

·       limit the number of productcandidates that we will be able to develop and commercialize;

·       significantly increase ourneed for capital; and/or

·       place additional strain onmanagement’s time.

Anyof the above may materially harm our business, financial condition and resultsof operations.

**Due tothe size of our equity interest in Celldex, we must consolidate the results ofits operations in our financial statements.**

Dueto the size of our equity interest in Celldex, we are currently required toconsolidate the operations of Celldex in our financial statements, whichresults in the inclusion of their losses in our financial statements.  We are unable to predict what such losseswill be. For the year ended December 31, 2005, our share, net of minorityinterest, of Celldex’s net loss included in our financial statements wasapproximately $12.6 million.

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**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.**

Wehave a number of strategic investments which expose us to equity price risk.These investments may become impaired which would adversely affect our resultsof operations.

Weare exposed to equity price risk on our strategic investments in ourpublicly-traded partners, and as part of our business strategy, we may chooseto make additional similar investments in public companies in the future. Asthese investments are the result of strategic alliances with our collaborativepartners, we typically do not attempt to reduce or eliminate our marketexposure of these types of strategic investments. Under SFAS No. 115, “Accountingfor Certain Investments in Debt and Equity Securities,” these investments aredesignated as available-for-sale and are reported at fair value on ourconsolidated balance sheet. Unrealized holding gains and losses onavailable-for-sale securities are generally excluded from earnings and reportedwithin other comprehensive income which is a separate component of shareholders’equity. Under our accounting policy, marketable equity securities are generallyconsidered to be impaired if their fair value is less than our cost basis insuch securities for more than six months, or some other period in light of theparticular facts and circumstances surrounding the investment. If a decline inthe fair value of available-for-sale securities is considered to be other thantemporary, the cost basis of the security is written down to fair value as anew cost basis and the amount of the write-down is included in earnings as animpairment charge. 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.  Ifwe deem these investments to be further impaired at the end of any futurereporting period, we may incur additional impairment charges on these investments.

Inaddition, we have investments in several of our partners whose securities arenot publicly traded. The value of our investments in these companies areinherently more difficult to estimate than our investments in publicly tradedcompanies. We estimate the value of these investments by using informationacquired from industry trends, management of these companies, financialstatements, and other external sources. Specifically, our determination of anypotential impairment of the value of privately held securities includes ananalysis of the following for each company on a periodic basis: review ofinterim and year-end financial statements, cash position and overall rate ofcash used to support operations, the progress and development of technology andproduct platform, the per share value of subsequent financing and potentialstrategic alternatives. Based on the information acquired through thesesources, we record an investment impairment charge when we believe aninvestment has experienced a decline in value that is considered to be otherthan temporary. For the years ended December 31, 2005, 2004 and 2003, werecorded impairment charges of approximately $33.3 million, $7.1 million and$1.4 million, respectively, on our investments in privately-held companies.Approximately $7.0 million of the 2004 impairment charge related to IDM.  Approximately $29.3 million of the 2005impairment charge related to IDM prior to their share exchange with Epimmune.Future adverse changes in market conditions or adverse changes in operatingresults of these companies may also require an impairment charge in the future.

**Weare dependent on our key personnel.**

Weare highly dependent on the members of our scientific and management staff. Ifwe are not able to retain any of these persons, our business may suffer. Inparticular, we depend on the services of Donald L. Drakeman, J.D., Ph.D., ourPresident and Chief Executive Officer; Nils Lonberg, Ph.D., our Senior VicePresident and Scientific Director; and Geoffrey M. Nichol, M.D., M.B.A., ourSenior Vice President, Product Development. We maintain a key man lifeinsurance policy for Dr. Drakeman in the amount of $2.0 million andmaintain key man life insurance policies in the amount of $1.0 million for eachof Dr. Lonberg and Dr. Nichol. We have entered into employmentagreements with Dr. Drakeman and all of our other executive officers,which expire in January 2007. Thereafter, all of these agreements areautomatically renewed for successive one (1) year terms unless we or theemployee elect not to renew.

Forus to pursue product development, marketing and commercialization plans, wewill need to hire additional qualified scientific personnel to perform researchand development. We will also need to hire personnel with expertise in clinicaltesting, government regulation, manufacturing, sales and marketing, relevantlaw and finance. We may not

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be ableto attract and retain personnel on acceptable terms, given the competition forsuch personnel among biotechnology, pharmaceutical and healthcare companies,universities and non-profit research institutions. If we are not able toattract and retain qualified personnel, our business, financial condition andresults of operations may be materially harmed.

**Wedepend on patents and proprietary rights.**

Our success depends in part on our ability to:

·       apply for, obtain, protectand enforce patents;

·       protect trade secrets;

·       operate without infringingupon the proprietary rights of others; and

·       in-license certaintechnologies.

Wewill be able to protect our proprietary rights from unauthorized use by thirdparties only to the extent that our proprietary rights are covered by valid andenforceable patents or are effectively maintained as trade secrets. We protectour proprietary position by filing U.S. and foreign patent applications relatedto our proprietary technology, inventions and improvements that are importantto the development of our business. Our pending patent applications, those wemay file in the future, or those we may license from third parties, may notresult in patents being issued or enforceable. The patent position ofbiotechnology intellectual property involves complex legal and factualquestions and, therefore, enforceability cannot be predicted with certainty.Patents, if issued, may be challenged, invalidated or circumvented. Thus, anypatents that we own or license from third parties may not provide sufficientprotection against competitors. Also, patent rights may not provide us withproprietary protection or competitive advantages against competitors withsimilar technology. Furthermore, others may independently develop similartechnologies or duplicate any technology that we have developed which is notcovered by an issued patent. The laws of foreign countries may not protect ourintellectual property rights to the same extent as do the laws of the U.S.

Inaddition to patents, we rely on trade secrets and proprietary know-how. We seekprotection, in part, through confidentiality and proprietary informationagreements. These agreements may not provide protection or adequate remedies inthe event of unauthorized use or disclosure of confidential and proprietaryinformation, or breach of these agreements. Furthermore, our trade secrets mayotherwise 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.**

Ourcommercial success depends significantly on our ability to operate withoutinfringing the patents and other proprietary rights of third parties. In theevent that our products or technologies may infringe on the patents or violateother proprietary rights of third parties, we and our partners may be preventedfrom pursuing product development, manufacturing or commercialization or may berequired to pay significant monetary damages to third parties. Such a resultmay materially harm our business, financial condition and results ofoperations.

Ifwe become involved in any intellectual property litigation, interference orother judicial or administrative proceedings, we will incur substantial expenseand the efforts of our technical and management personnel will be diverted. Anadverse determination may subject us to significant liabilities or require usto seek licenses that may not be available from third parties on commerciallyfavorable terms, if at all. Therefore, we and our partners may be restricted orprevented from manufacturing and selling products that are covered by suchintellectual property, which would harm our business.

Eventhough we have issued patents, filed applications and received licensespertaining to the HuMAb-Mouse and the KM-Mouse technologies, this does not meanthat we and our licensees of the HuMAb-Mouse and the KM-Mouse technology willhave exclusive rights to antibodies against all targets that are made usingthis technology, or that we or our licensees will have the right to make,develop, use or sell such antibodies.

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Ourpatents and applications covering the HuMAb-Mouse and the KM-Mouse technologyinclude patents and applications that cover particular human antibodies. Thesepatents do not cover all human antibodies.

Wedo not have exclusive access to the patents underlying the HuMAb-Mouse. InMarch 1997, prior to our acquisition of GenPharm, GenPharm entered into across-license and settlement agreement with Abgenix, Cell Genesys, Inc.,Xenotech, L.P. and Japan Tobacco, Inc., pursuant to which Abgenix andthese entities paid GenPharm a total of approximately $38.6 million in exchangefor a non-exclusive license to certain patents, patent applications, third-partylicenses and inventions pertaining to the development and use of certaintransgenic rodents, including mice, that produce fully human antibodies thatare integral to our products and business. These patents, patent applications,third party licenses and inventions form the basis of our HuMAb-Mousetechnology.  Abgenix has announced apotential merger with Amgen which, if completed, will give Amgen access to suchpatents, patent applications, third party licenses and inventions. Our businessmay suffer from the competition of these entities and their licensees andsublicensees.

Weare not the exclusive owner of the technology underlying the KM-Mouse.Effective September 2002, we entered into a collaboration and licenseagreement with Kirin, which provides for us to exchange certain cross-licensesfor each other’s technology for the development and commercialization of humanantibody products made using the HuMAb-Mouse, the KM-Mouse and certain otherantibody-generating mice. Kirin has certain rights to distribute and use suchmice throughout the world. Our business may suffer as a consequence ofcompetition from Kirin and its licensees and sublicensees or if thecollaboration and license agreement were breached or terminated for any reason.

Ourpatents may not protect against the importation of products, such asantibodies, made using HuMAb-Mouse or KM-Mouse technology.

Moreover,other parties could have blocking patent rights to products made using UltiMAbtechnology, such as antibodies, and their production and uses, for instancebecause of a proprietary position covering the antibody or the antibody’starget or the method of manufacturing such antibody. For example, we are awareof certain U.S. and European patents held by third parties relating to particulartargets for their human monoclonal antibodies, to human monoclonal antibodiesagainst various targets, and to the method of manufacture and use of suchproducts.  In particular, we are aware ofa patent held by Pfizer to which we may need a license in order to manufacturecommercial supplies of ipilimumab.  Weare also aware of certain U.S. and foreign patents and patent applications heldby third parties relating to anti-CTLA-4 antibodies, such as ipilimumab; anti-CD30antibodies, such as MDX-060; anti-PSMA antibodies, such as MDX-070; anti-Type 1IFN antibodies, such as MEDI-545 and MDX-1333; anti-IP10 antibodies, such asMDX-1100; anti-anthrax protective antigen antibodies, such as MDX-1303; anti-*C. difficile*antibodies, such as MDX-066; and antibodies that target the same diseaseantigen as MDX-018 (HuMax-Inflam), as well as other antibody products underdevelopment by us alone or with our collaborators.

Withrespect to third party patent rights, we are aware of a U.S. patent owned byGenentech, Inc. relating to the production of recombinant antibodies in hostcells.  Two separate re-examinationsbefore the U.S. Patent and Trademark Office, or the USPTO were requestedanonymously in May and December 2005.  In the re-examination filed in May 2005, the USPTO rejected all of thepatent claims, and Genentech recently filed its response following an interviewwith the USPTO.  In January 2006, theUSPTO ordered re-examination of the patent on the basis of the second requestfor re-examination, filed in December 2005, but has not yet taken any furtheraction on this second request.  If theclaims are determined to be unpatentable during the re-examination, Genentechwill have the opportunity to appeal, and the determination of unpatentabilitycould be reversed.  It is also possiblethat the claims might be confirmed as valid by the USPTO upon completion of there-examination.  The re-examination andappeal process could take several years each to complete.

Wecurrently produce certain of our products and our partners’ products usingrecombinant antibodies from host cells and may choose to produce additionalproducts in this manner. If any of our antibody products are produced in themanner claimed in the Genentech patent, and the patent survives the re-examinationand appeal processes, then we may need to obtain a license, should one beavailable. We have a license to this patent from Genentech for our anti-CTLA-4product candidate (ipilimumab) but currently do not have licenses for any ofour other antibody product candidates. If we desire a license for any of ourother antibody product

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candidatesand are unable to obtain a license on commercially reasonable terms or at all,we may be restricted in our ability to make and import recombinant antibodiesusing Genentech’s techniques.

Inaddition to the Genentech patent, we are also aware of certain U.S. patentsheld by third parties relating to antibody expression in particular types ofhost cells, including CHO cells, and methods of culturing CHO cells in certainmedia, and to particular antibody formulations, which may be relevant to ourcurrent or future manufacturing techniques.

Ifour antibody products (or those antibody products of our partners using ourhuman antibody technology) or their commercial use or production meet all ofthe requirements of any of the claims of the aforementioned patents or anyother patents, or patents that may issue from the aforementioned patentapplications or any other patent applications, then we or our partners may needa license to one or more of these patents. Further, we are aware of a number ofother third party patent applications that, if granted, with claims ascurrently drafted, may cover our and our partners’ current or plannedactivities. We cannot assure you that our products and/or actions in developingor selling human antibody products will not infringe such patents.  We intend to seek licenses to such patentswhen, in our judgment, such licenses are needed. If any licenses are required,there can be no assurance that we will be able to obtain any such license oncommercially favorable terms, if at all, and if these licenses are notobtained, we might be prevented from using certain of our technologies for thegeneration of our recombinant human antibody products. Our failure to obtain alicense to any technology that we may require may materially harm our business,financial condition 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.**

Theadministration of drugs to humans, in clinical trials or after approval andduring commercialization, may expose us to product liability claims. Consumers,healthcare producers or persons selling products based on our technology may beable to bring claims against us based on the use of our products in clinicaltrials and the sale of products based on our technology. Product liabilityclaims may be expensive to defend and may result in large judgments against us.We have obtained limited product liability coverage for our clinical trials,under which coverage limits are $15 million per occurrence and $15 million inthe aggregate. Although we believe these coverage limits are adequate, wecannot be certain that the insurance policies will be sufficient to cover allclaims that may be made against us. We intend to increase our coverage limitsas we progress into additional late-stage clinical trials and to expand ourinsurance coverage to include the sale of commercial products if we obtainmarketing approval for products in development. Product liability insurance isexpensive, difficult to obtain and may not be available in the future onacceptable terms.

InNovember 1998, we voluntarily suspended clinical trials for one of ourproducts after some patients experienced serious adverse events, or SAEs. Thisproduct did not employ our core fully human antibody technology and we havedetermined not to pursue further development of this product. As a result ofthese SAEs, we received a small number of claims, of which five resulted inlawsuits being filed. All of these lawsuits have been settled for insubstantialamounts. We cannot make assurances that additional claims will not be filedagainst us relating to these SAEs or arising out of any other clinical trial wehave conducted or will conduct in the future.

Generally,our clinical trials, including our melanoma trials, are conducted in patientswith serious life-threatening diseases for whom conventional treatments havebeen unsuccessful or for whom no conventional treatment exists, and in somecases, our product is used in combination with approved therapies thatthemselves have significant adverse event profiles. During the course oftreatment, these patients could suffer adverse medical events or die forreasons that may or may not be related to our products. The most common adverseevents associated with our melanoma trials of ipilimumab have consisted offlu-like symptoms such as fever, chills and nausea. These events were expectedand generally 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

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trials—suchfatalities may or may not be attributable to our product. Any of these eventsor any other adverse events in any of our other clinical trials could result ina product liability claim. Any such claims against us, regardless of theirmerit, could result in significant awards against us, which could materiallyharm our business, financial condition and results of operations.

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

Thedevelopment of biotechnology and pharmaceutical products is a highlycompetitive business subject to significant and rapid technological change. Weface competition in several different forms. First, our human antibodygeneration activities currently face competition from several competitors withsimilar technology to ours as well as distinctly different technologies.Second, the actual products being developed by us or by our partners also faceactual and potential competition. Developments by our competitors may renderour human antibody technology or our products obsolete or non-competitive.

Weare aware of several pharmaceutical and biotechnology companies that areactively engaged in research and development in areas related to antibodytherapeutics. Some of these companies have commenced clinical trials ofantibody products or have successfully commercialized antibody products. Manyof these companies are addressing the same diseases and disease indications asare we and our partners. Also, we compete with companies that offer antibodygeneration services to other companies that have disease related targetantigens. These competitors have specific expertise or technology related tomonoclonal antibody development. We compete directly with Abgenix, with respectto the generation of fully human antibodies from transgenic mice.  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 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.

Wehave also entered into license agreements with Pfizer which enable it tocompete with us in the generation and development of antibodies to CTLA-4.  Pfizer is developing ticilimumab (also knownas 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, a first-linePhase III clinical trial comparing ticilimumab alone to chemotherapy alone formetastatic melanoma was initiated by Pfizer in December 2005.   Pfizer has disclosed that it expects to filea BLA with respect to ticilimumab in 2007.

XenerexBiosciences and XTL Biopharmaceutical, Ltd. have developed technology that,according to Xenerex and XTL, will allow them to generate fully humanmonoclonal antibodies in functionally modified mice. Regeneron claims to havedeveloped VelocImmune mice, in which portions of the mouse immune genome havebeen humanized, generating mice with humanized immune systems that can generatefully human antibodies.  Numerousadditional companies are developing therapeutic products comprising humanantibody components. Furthermore, several companies are developing, or havedeveloped, technologies that do not involve immunization of animals forcreating antibodies comprising human antibody sequences. For example, phagedisplay technology is being used by companies, such as CAT, Dyax and MorphoSysto develop therapeutic products comprising human antibody sequences. Companiessuch as Johnson & Johnson, MedImmune, Amgen, Biogen Idec, Novartis,Genentech, PDL BioPharma, Wyeth, Abbott Laboratories and GlaxoSmithKlinehave generated therapeutic products that are currently in development or on themarket and that are derived from recombinant DNA that comprise human antibodycomponents.

Othertechnologies can also be applied to the treatment of the diseases that we orour partners are pursuing. For example, immunoconjugates—monoclonal antibodieslinked to toxins or radioactive isotopes—are being developed by others, as wellas by us. In addition, the application of recombinant DNA technology to developpotential products consisting of proteins (such as growth factors, hormones,enzymes, cytokines receptor fragments and fusion proteins) that do not occurnormally in the body, or occur only in small amounts, has been underway forsome time. Included in this group are interleukins such as IL-2 and IL-11,interferons, colony stimulating factors such as G-CSF and GM-CSF, clottingfactors, growth hormones, erythropoeitin, DNAse, tPA, glucocerebrosidase, PDGF,and a number of

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othersimilar biological agents. Continuing development of new chemical entities andother drugs by pharmaceutical and other biotechnology companies carries with itthe potential discovery of agents for treating disease indications alsotargeted by drugs that we or our partners are developing.

Some of our competitors have received regulatoryapproval or are developing or testing product candidates that compete directlywith product candidates employing our antibody technology. Many of thesecompanies and institutions, either alone or together with their partners, havesubstantially greater financial resources and larger research and developmentstaffs than we or some of our partners do. In addition, many of thesecompetitors have significantly greater experience than we do in:

·       developing products;

·       undertaking preclinicaltesting and clinical trials;

·       obtaining FDA and otherregulatory approvals of products; and

·       manufacturing and marketingproducts.

Accordingly,our competitors may obtain patent protection, receive FDA approval orcommercialize products before we or our partners do. If we or our partnerscommence commercial product sales, we or our partners will be competing againstcompanies with greater manufacturing, marketing and sales capabilities, areasin which we and certain of our partners have limited or no experience.

Wealso face intense competition from other pharmaceutical and biotechnologycompanies to establish partnerships, as well as relationships with academic andresearch institutions, and to in-license proprietary technology from theseinstitutions. These competitors, either alone or with their partners, maysucceed in developing or licensing technologies or products instead of us thatare more effective than ours.

Ourcompetitive strategy includes seeking orphan drug designation for eligibleproducts (i.e., certain products for diseases with small patientpopulations).  The first drug with anorphan drug designation for a given disease to receive regulatory approval forsuch disease generally receives marketing exclusivity for the use of the drugfor such disease for a period of seven years from approval.

Wehave obtained orphan drug designation for each of ipilimumab and MDX-1379 forspecified metastatic melanoma patient populations, and therefore each iseligible for orphan drug exclusivity if approved first.  The FDA’s approach with respect to orphandrug status for antibody products is uncertain, particularly with respect towhether two antibody products against the same disease target would beconsidered to be the same for orphan drug purposes under current law andregulations.  Furthermore, we are notaware of established FDA policies or precedent for how orphan drug exclusivityapplies in circumstances where two or more compounds with orphan drugdesignations are approved for combination therapy.  The FDA may not grant us exclusivity for theipilimumab and MDX-1379 combination therapy, or may permit others to receiveapproval for differing combinations of similar compounds despite any orphandrug exclusivity we receive, depending on FDA’s assessment of the chemicalsimilarity of the other drugs to Medarex’s products.  Even if we receive orphan drug exclusivity,the FDA may permit others to market similar or different compounds fordifferent uses or it may permit others to market similar compounds for treatingmetastatic melanoma.  We therefore maynot receive any meaningful protection for ipilimumab, MDX-1379 or our otherproducts based on orphan drug exclusivity.

Inaddition, Pfizer could obtain orphan drug designation for ticilimumab forspecific patient populations, including metastatic melanoma and, if they arefirst to receive approval by the FDA, could obtain market exclusivity withrespect to such populations, thereby blocking Medarex and BMS from obtainingapproval to sell ipilimumab, whether as a monotherapy or combination therapywith MDX-1379, for such patient populations, including metastatic melanoma.

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**We aresubject to extensive and costly government regulation.**

Productcandidates employing our human antibody technology are subject to extensive andrigorous domestic government regulation including regulation by the FDA, theCenters for Medicare and Medicaid Services, other divisions of the U.S.Department of Health and Human Services, the U.S. Department of Justice, stateand local governments and their respective foreign equivalents. The FDAregulates the research, development, preclinical and clinical testing,manufacture, safety, effectiveness, record-keeping, reporting, labeling,storage, approval, advertising, promotion, sale, distribution, import, andexport of biopharmaceutical products. The FDA regulates human antibodies asbiologics, subject to a Biologic License Application, or BLA, under the PublicHealth Service Act, as amended. If products employing our human antibodytechnology are marketed abroad, they will also be subject to extensiveregulation by foreign governments, whether or not we have obtained FDA approvalfor a given product and its uses. Such foreign regulation may be equally ormore demanding than corresponding U.S. regulation.

Government regulation substantially increases the costand risk of researching, developing, manufacturing, and selling our products.The regulatory review and approval process, which includes preclinical testingand clinical trials of each product candidate, is lengthy, expensive anduncertain. We or our partners must obtain and maintain regulatory authorizationto conduct clinical trials. We or our partners must obtain regulatory approvalfor each product we intend to market, and the manufacturing facilities used forthe products must be inspected and meet legal requirements. Securing regulatoryapproval requires the submission of extensive preclinical and clinical data andother supporting information for each proposed therapeutic indication in orderto establish the product’s safety, efficacy, potency and purity for eachintended use. The development and approval process takes many years, requiressubstantial resources, and may never lead to the approval of a product. Failureto obtain regulatory approvals, or delays in obtaining regulatory approvalsmay:

·       adversely affect thesuccessful commercialization of any drugs that we or our partners develop;

·       impose additional costs onus or our partners;

·       diminish any competitiveadvantages that we or our partners may attain; and

·       adversely affect ourreceipt of revenues or royalties.

Even if we are able to obtain regulatory approval fora particular product, the approval may limit the indicated medical uses for theproduct, may otherwise limit our ability to promote, sell, and distribute theproduct, may require that we conduct costly post-marketing surveillance, and/ormay require that we conduct ongoing post-marketing studies. Material changes toan approved product, such as, for example, manufacturing changes or revisedlabeling, may require further regulatory review and approval. Once obtained,any approvals may be withdrawn, including, for example, if there is a laterdiscovery of previously unknown problems with the product, such as a previouslyunknown safety issue. If we, our partners or our contract manufacturers fail tocomply with applicable regulatory requirements at any stage during theregulatory process, such noncompliance could result in, among other things:

·       delays in the approval ofapplications or supplements to approved applications;

·       refusal of a regulatoryauthority, including the FDA, to review pending market approval applications orsupplements to approved applications;

·       warning letters;

·       fines;

·       import and/or exportrestrictions;

·       product recalls orseizures;

·       injunctions;

·       total or partial suspensionof production;

·       civil penalties;

·       withdrawals of previouslyapproved marketing applications or licenses;

·       recommendations by the FDAor other regulatory authorities against governmental contracts; and

·       criminal prosecutions.

Incertain cases, we expect to rely on our partners to file Investigational NewDrug applications, or INDs, with the FDA and to direct the regulatory approvalprocess for products employing our human antibody technology. Our partners maynot be able to conduct clinical testing or obtain necessary approvals from theFDA or other regulatory authorities for their product candidates employing ourhuman antibody technology. If they fail to obtain required

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governmentalapprovals, our partners will be delayed or precluded from marketing theseproducts. As a result, commercial use of products employing our technology willnot occur and our business, financial condition and results of operations maybe materially harmed.

**Wedo not have, and may never obtain, the regulatory approvals we need to marketour product candidates.**

Followingcompletion of clinical trials, the results are evaluated and, depending on theoutcome, submitted to the FDA in the form of a BLA, or a New Drug Application,or NDA, in order to obtain FDA approval of the product and authorization tocommence commercial marketing. In responding to a BLA or NDA, the FDA mayrequire additional testing or information, may require that the productlabeling be modified, may impose post-approval study or reporting requirementsor other restrictions on product distribution, or may deny theapplication.  The FDA has establishedperformance goals for review of NDAs and BLAs — six months for priorityapplications and 10 months for standard application.  However, the FDA is not required to completeits review within these time periods. The timing of final FDA review and actionvaries greatly, but can take years in some cases and often involves the inputof an FDA advisory committee of outside experts. Product sales in the U.S. maycommence only when a BLA or NDA is approved.

Todate, we have not applied for or received the regulatory approvals required forthe commercial sale of any of our products in the U.S. or in any foreignjurisdiction. None of our product candidates has been determined to be safe andeffective, and we have not submitted an NDA or BLA to the FDA or an equivalentapplication to any foreign regulatory authorities for any of our productcandidates. We have only limited experience in filing and pursuing applicationsnecessary to obtain regulatory approval. It is possible that none of ourproduct candidates will be approved for marketing.

Productcandidates that 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:

·       the product candidate didnot demonstrate acceptable clinical trial results even though it demonstratedpositive preclinical trial results;

·       the product candidate wasnot effective in treating the specified disease or condition;

·       the product candidate hadharmful side effects on humans or presented unacceptable safety risks;

·       the governing regulatoryauthorities (such as the FDA) denied approval to the product candidatealtogether or denied a commercially important indicated use;

·       the product candidate wasnot economical for us to manufacture; and/or

·       the product candidate wasnot cost effective in light of alternative therapies.

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

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

Wewill depend on our own manufacturing facilities and/or on those of our partnersand other third parties to manufacture products generated through the use ofour human antibody technology. Before commercializing a new drug, manufacturersmust demonstrate compliance with the applicable current good manufacturingpractices, or cGMP, requirements which include quality control and qualityassurance requirements as well as the maintenance of extensive records anddocumentation. Manufacturing facilities are subject to ongoing periodicinspection by the FDA and corresponding foreign and state authorities,including unannounced inspections, and must be licensed before they can be usedin commercial manufacturing for products generated through the use of ourtechnology. In addition, cGMP requirements are constantly evolving, and new ordifferent requirements may apply in the future. We, our partners or third partycontract manufacturers may not be able to comply with the applicableregulations. After regulatory approvals are obtained, the subsequent discoveryof previously unknown problems, or the failure to maintain compliance withexisting or new regulatory requirements, may result in restrictions on themarketing of a product, withdrawal of the product from the market, seizures,the shutdown of manufacturing facilities, injunctions, monetary fines and/orcivil or criminal sanctions.

 

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

Oncea product is approved, numerous post-approval requirements apply. Among otherthings, the holder of an approved BLA or NDA is subject to periodic and otherFDA monitoring and reporting obligations, including obligations to monitor andreport adverse events and instances of the failure of a product to meet thespecifications in the BLA or NDA. Application holders must submit new or supplemental applications andobtain FDA approval for certain changes to the approved product, productlabeling or manufacturing process. Application holders must also submitadvertising and other promotional material to the FDA and report on ongoingclinical trials.

Advertisingand promotional materials must comply with FDA rules in addition to otherpotentially applicable federal and state laws. The distribution of productsamples to physicians must comply with the requirements of the PrescriptionDrug Marketing Act. Manufacturing facilities remain subject to FDA inspectionand must continue to adhere to FDA’s current good manufacturing practicerequirements. Application holders must obtain FDA approval for product,manufacturing, and labeling changes, depending on the nature of the change. Sales,marketing, and scientific/educational grant programs must comply with theanti-fraud and abuse provisions of the Social Security Act, the False ClaimsAct and similar state laws, each as amended. Pricing and rebate programs mustcomply with the Medicaid rebate requirements of the Omnibus BudgetReconciliation Act of 1990 and the Veteran’s Health Care Act of 1992, each asamended. If products are made available to authorized users of the FederalSupply Schedule of the General Services Administration, additional laws andrequirements apply. All of these activities are also potentially subject tofederal and state consumer protection and unfair competition laws.

Dependingon the circumstances, failure to meet these post-approval requirements canresult in criminal prosecution, fines or other penalties, injunctions, recallor seizure of products, total or partial suspension of production, denial orwithdrawal of pre-marketing product approvals, or refusal to allow us to enterinto supply contracts, including government contracts. In addition, even if wecomply with FDA and other requirements, new information regarding the safety oreffectiveness of a product could lead the FDA to modify or withdraw a productapproval.

**Ifwe are 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.**

Undercurrent U.S. law and FDA policy, generic versions of conventional chemical drugcompounds, sometimes referred to as small molecule compounds, may be approvedthrough an abbreviated approval process. In general terms, the genericapplicant references an approved innovator product for which full clinical datademonstrating safety and effectiveness exist for the approved conditions ofuse. The generic applicant in turn need only demonstrate that its product hasthe same active ingredient(s), dosage form, strength, route of administration,and conditions of use (labeling) as the referenced innovator drug, and that thegeneric product is absorbed in the body at the same rate and to the same extentas the referenced innovator drug (this is known as bioequivalence). Inaddition, the generic application must contain information regarding themanufacturing processes and facilities that will be used to ensure productquality, and must contain certifications to patents listed with the FDA for thereferenced innovator drug.

Thereis no such abbreviated approval process under current law for biologicalproducts approved under the Public Health Service Act through a BLA, such asmonoclonal antibodies, cytokines, growth factors, enzymes, interferons andcertain other proteins. However, various proposals have been made to establishan abbreviated approval process to permit approval of generic or follow-onversions of these types of biological products. The proposals include proposalsfor legislation, and proposals for FDA to extend its existing authority to thisarea.

Ifthe law is changed or if FDA somehow extends its existing authority in newways, and third parties are permitted to obtain approvals of versions of ourproducts through an abbreviated approval mechanism, and without conducting fullclinical studies of their own, it could adversely effect our business. Suchproducts would be significantly less costly than ours to bring to market, andcould lead to the existence of multiple lower priced competitive products. Thiswould substantially limit our ability to obtain a return on the investments wehave made in those products.

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**Ouroperations involve hazardous materials and are subject to environmental, healthand safety controls and regulations.**

As abiopharmaceutical company, we are subject to environmental, health and safetylaws and regulations, including those governing the use of hazardous materials.The cost of 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 or injuryfrom these materials. In the event of an accident or environmental discharge,we may be held liable for any resulting damages, which may exceed our financialresources and may materially harm our business, financial condition and resultsof operations.

**Ourstock price may be volatile.**

Historically, there has been significant volatility inthe market prices of biotechnology companies’ securities. During the two-yearperiod ended December 31, 2005, the sale prices of our common stock rangedbetween $4.37 and $14.35.  Variousfactors and events may have a significant impact on the market price of ourcommon stock. These factors include, by way of example:

·       fluctuations in ouroperating results;

·       announcements oftechnological innovations or new commercial therapeutic products by us or ourcompetitors;

·       published reports bysecurities analysts;

·       progress with clinicaltrials;

·       governmental regulation;

·       developments in patent orother proprietary rights;

·       developments in ourrelationship with collaborative partners;

·       public concern as to thesafety and effectiveness of our products; and

·       general market conditions.

Thetrading price of our common stock has been, and could continue to be, subjectto wide fluctuations in response to these or other factors, including the saleor attempted sale of a large amount of our common stock into the market. Broadmarket fluctuations may also adversely affect the market price of our commonstock.

**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.**

Asof February 28, 2006, we had 16,665,756 shares of common stock reserved forissuance pursuant to options and other stock based awards which had beengranted under our equity incentive plans having a weighted average exerciseprice of $8.58 per share and we had reserved 3,940,137 shares of common stockfor issuance pursuant to future grants of options under our equity incentiveplans. We have filed registration statements on Form S-8 under theSecurities Act covering all of these shares. Shares issued pursuant to theseplans, other than shares issued to affiliates, will be freely tradable in theopen market. Shares held by affiliates may be sold pursuant to the requirementsof Rule 144.

Inaddition, as of that date, there were 41,168 shares reserved for issuancepursuant to a deferred compensation program. The shares reserved for thedeferred compensation program will be issued in various amounts over variousperiods of time during the next three years. We have filed a registrationstatement on Form S-8 under the Securities Act covering those shares.Shares issued pursuant to this program, 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.

Asof February 28, 2006, we had reserved 766,184 shares of common stock forissuance pursuant to our 2002 Employee Stock Purchase Plan. We have filed aregistration statement on Form S-8 under the Securities Act covering allof those shares. All shares issued under this plan, other than shares issued toaffiliates, will be freely tradable on the open market. Shares held byaffiliates may be sold pursuant to the requirements of Rule 144.

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Theexercise of all or a portion of the outstanding options may result in asignificant increase in the number of shares of our common stock that will besubject to trading on the NASDAQ National Market and the issuance and sale ofthe shares of our common stock upon the exercise thereof may have an adverseeffect on the price of our common stock.

Asof February 28, 2006, we had 10,936,935 shares of common stock reserved for theissuance pursuant to the conversion of the $150.0 million aggregate principalamount of our outstanding 2.25% Convertible Senior Notes due May 15, 2011.Holders of these notes may convert their notes into shares of common stock atany time prior to maturity or redemption by us at a conversion rate of 72.9129shares per each $1,000 principal amount of the notes ($13.72 per share),subject to adjustment.

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

Asof February 28, 2006, we had 111,964,174 shares of common stock outstanding, ofwhich 9,477,928 are restricted securities as that term is defined inRule 144 under the Securities Act. Under certain circumstances, theserestricted securities may be sold without registration pursuant to such rule.We are unable to predict the effect that sales made under Rule 144 orpursuant to any registration may have on the market price of our common stock.The sale of a significant number of additional securities, or even thepossibility thereof, may lower the market price of our common stock.

In addition, we have filed a shelf registrationstatement on Form S-3 under the Securities Act relating to the sale of upto $294.59 million of any of the following securities:

·       debt securities;

·       preferred stock;

·       common stock; or

·       warrants to purchase debtsecurities, preferred stock or common stock.

Wehave filed a registration statement on Form S-3 under the Securities Actrelating to our $150.0 million 2.25% Convertible Senior Notes due May 15,2011, and up to 10,936,935 shares of our common stock which may be issued uponconversion of the notes. The notes and the shares of common stock are freelytradable without restriction or further registration under the Securities Actexcept for shares held by our affiliates, which will be subject to the resalelimitations of Rule 144.

Wehave filed a registration statement on Form S-4 under the Securities Actto register shares of our common stock having a maximum aggregate offeringprice of $12.0 million. Such shares are freely tradable without restriction orfurther registration under the Securities Act. This registration statement onForm S-4 under the Securities Act is currently available for the sale ofup to $7.7 million of our common stock.

Wehave also filed registration statements on Form S-3 under the SecuritiesAct that relate to the sale by certain selling securityholders of up to21,875,353 shares of our common stock. These shares are included in the 111,964,174 shares of our common stockoutstanding as of February 28, 2006 mentioned above, and were issued upon theconversion of our 4.25% Convertible Senior Notes due August 15, 2010 inconnection 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.**

Uponthe occurrence of certain change of control events of our company, we arerequired to offer to repurchase all of our outstanding 2.25% Convertible SeniorNotes due May 15, 2011. As of February 28, 2006, $150.0 million aggregateprincipal amount of these notes was outstanding. In each instance, we may paythe repurchase price in cash or, at our option, in common stock. These changeof control events include, without limitation, (i) the acquisition by

43

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anythird party of at least 50% of our common stock; or (ii) our merger orconsolidation with or into any other person, any merger or consolidation ofanother person into us or our sale or other disposal of all or substantiallyall of our assets, except in certain limited circumstances provided in theindentures relating to the notes. Such repurchase rights may be triggered at atime at which we do not have sufficient funds available to pay the repurchaseprice in cash or determine that payment in cash is otherwise inadvisable. Insuch event, the issuance of a significant number of additional shares of commonstock in payment of the repurchase price may lower the market price of ourcommon 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.**

InMay 2001, our board of directors adopted a shareholder rights plan. Theshareholder rights plan provides for a dividend of one preferred share purchaseright on each outstanding share of our common stock. Each right entitlesshareholders to buy 1/1000th of a share of our Series A juniorparticipating preferred stock at an exercise price of $150.00. Each right willbecome exercisable following the tenth day after a person or group announces anacquisition of 20% or more of our common stock. We will be entitled to redeemthe rights at $0.001 per right at any time on or before the close of businesson the tenth day following acquisition by a person or group of 20% or more ofour common stock.

The shareholder rights plan and certain provisions ofour restated certificate of incorporation and amended and restated by-laws andNew Jersey law may have the effect of making it more difficult for a thirdparty to acquire, or of discouraging a third party from attempting to acquire,control of us. This could limit the price that certain investors might bewilling to pay in the future for our common stock. The provisions of ourrestated certificate of incorporation and amended and restated by-laws include:

·       a classified board ofdirectors;

·       a requirement that specialmeetings of shareholders be called only by our board of directors, chairman ofthe board, chief executive officer or president;

·       advance notice requirementsfor shareholder proposals and nominations;

·       limitations on the abilityof shareholders to amend, alter or repeal our by-laws; and

·       the authority of the boardof directors to issue, without shareholder approval, preferred stock with suchterms as the board of directors may determine.

Weare also afforded the protections of the New Jersey Shareholders ProtectionAct. This New Jersey statute contains provisions that impose restrictions onshareholder action to acquire control of our company. The effect of theprovisions of our shareholder rights plan, restated certificate ofincorporation and amended and restated by-laws and New Jersey law maydiscourage third parties from acquiring control of our company. In addition,these measures may result in the entrenchment of our management and may preventor frustrate any attempt by shareholders to replace or remove our currentmanagement.

**Wedo not intend to pay cash dividends on our common stock in the foreseeablefuture.**

Weintend to retain any future earnings to finance the growth and development ofour business, and we do not plan to pay cash dividends on our common stock inthe foreseeable future.

**Item 1B.**                 Unresolved Staff Comments

Asof the date of filing of this Annual Report on Form 10-K, there are no writtencomments from the SEC’s staff in connection with its review of our periodic orcurrent reports under the Exchange Act that remain unresolved.

44

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**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    |

 

Webelieve that our existing owned and leased facilities are adequate for theproduction of materials for clinical trials of our current products and forproviding the services we currently offer to our partners in connection withour human antibody technology.

**Item 3.**                          Legal Proceedings

The following legal proceedings relating to thestock option review discussed in the Explanatory Note at the beginning of thisAmended Report of Form 10-K/A and Note 18 to the consolidated financialstatements set forth herein were initiated after December 31, 2005.

The SEC is conducting an informal inquiry into ourstock option grants and practices and related accounting.  In addition, we have received a subpoena fromthe U.S. Attorney’s Office, District of New Jersey, relating to the samematters.  We could be required to paysignificant fines or penalties in connection with these regulatory inquiries.

In June 2006, two derivative actions were filed in NewJersey state court by shareholders purporting to act on behalf of Medarex,naming Medarex as a nominal defendant and certain current and former directorsas defendants.  In November 2006 andJanuary 2007, three additional derivative complaints were filed in the UnitedStates District Court for the District of New Jersey, containing nearlyidentical factual allegations concerning Medarex’s historical stock optiongranting practices.  The complaintsallege, among other things, that certain of Medarex’s officers and directorsbreached their fiduciary duties to the Company and violated federal securitieslaws in connection with public statements made in SEC filings relating to theCompany’s historical stock option granting practices and related accounting.  The complaints seek unspecified damages andequitable relief.  These actions are intheir preliminary stages.

In the ordinary course of our business, we are at timessubject to various legal proceedings. Except as described above, we do notbelieve that any of our current legal proceedings, individually or in theaggregate, will have a material adverse effect on our operations or financialcondition.

**Item 4.**                          Submission of Matters to aVote of Security Holders

None.

45

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**PART II**

**Item5.**                          Marketfor Registrant’s Common Equity and Related Shareholder Matters

Our common stock istraded on The NASDAQ National Market under the symbol “MEDX.” The followingtable sets forth, during the periods indicated, the high and low sales pricesper share of our common stock, as reported on The NASDAQ National Market:

|                                        | ** ** | **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 |   |

 

Thenumber of shares of our common stock outstanding as of February 28, 2006was 111,964,174. As of February 28, 2006, there were approximately 600record holders of our common stock. As of March 22, 2005, the record datefor our last Annual Meeting of Shareholders held on May 19, 2005, therewere approximately 600 record holders of common stock (which includesindividual holders) and approximately 42,753 beneficial shareholders of ourcommon stock.

Nodividends have been paid on our common stock. We currently expect to retain ourfuture earnings, if any, for use in the operation and expansion of our businessand do not anticipate paying any cash dividends in the foreseeable future.

***SecuritiesAuthorized for Issuance Under Equity Compensation Plans***

Theinformation required by this Item is contained in Part III of this AnnualReport on Form 10-K under “Item 12. Security Ownership of Certain Beneficial Owners and Management Relatedto Stockholder Matters.”

46

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**Item6.**                          SelectedConsolidated Financial Data

Theconsolidated balance sheets as of December 31, 2005 and 2004 and theconsolidated statements of operations for the years ended December 31, 2005,2004 and 2003 have been restated as set forth in this Form 10-K/A.  The data for the consolidated balance sheetsas of December 31, 2003, 2002 and 2001 and the consolidated statements ofoperations for the years ended December 31, 2002 and 2001 have been restated toreflect the impact of stock-based compensation expense, related payroll taxliabilities and other immaterial errors related to the amortization of premiumsand discounts related to marketable securities, but such restated data has notbeen audited and is derived from the books and records of the Company.  The information set forth below is notnecessarily indicative of results of future operations, and should be read inconjunction with Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the consolidated financial statementsand related notes thereto included in Item 8 of this Form 10-K/A to fullyunderstand the factors that may affect the comparability of the informationpresented below.  The informationpresented below has been adjusted to reflect the restatement of the Company’sfinancial results, which is more fully described in the “Explanatory Note”immediately preceding Part I, Item 1 and in Note 18, “Restatement ofConsolidated Financial Statements” in the notes to the consolidated financialstatements of this Form 10-K/A.

TheCompany has not amended its previously filed annual reports on Form 10-K orquarterly reports on Form 10-Q for all periods up to and including September30, 2005 affected by this restatement. The consolidated financial statements and related financial informationcontained in such previously filed reports should not be relied upon.

47

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| ** **                                                       | ** ** | **For the Year Ended December 31,**       | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                       | ** ** | **(restated)**                                                     | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| ** **                                                       | ** ** | **(2)**                                                            | ** ** | **(2)** | ** ** | **(2)** | ** ** | **(2)** | ** ** | **(2)** | ** ** |
| ** **                                                       | ** ** | **(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                                        |       | 136,940                                                            |       | 123,012 |   | 97,803 |   | 84,261 |   | 43,038 |   |
| General and  administrative                                      |       | 28,969                                                             |       | 25,259 |   | 23,840 |   | 23,727 |   | 27,702 |   |
| Write-off of  facility costs                                     |       | —                                                             |       | — |   | — |   | 11,294 |   | — |   |
| Acquisition of  in-process technology                            |       | 8,447                                                              |       | 5,455 |   | 6,500 |   | 16,312 |   | — |   |
| Total costs and  expenses                                        |       | 174,356                                                            |       | 153,726 |   | 128,146 |   | 143,921 |   | 71,382 |   |
| Operating loss                                                   |       | (122,901                                                           | )          | (141,252 | ) | (116,972 | ) | (104,442 | ) | (29,078 | ) |
| Equity in net  loss of affiliate                                 |       | (6,323                                                             | )          | (19,791 | ) | (14,997 | ) | (50,625 | ) | (7,334 | ) |
| Interest and  dividend income                                    |       | 14,740                                                             |       | 9,228 |   | 11,301 |   | 15,448 |   | 24,293 |   |
| 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                          |       | (147,654                                                           | )          | (186,361 | ) | (133,845 | ) | (160,570 | ) | (15,292 | ) |
| Provision for  income taxes                                      |       | 358                                                                |       | 31 |   | 69 |   | 103 |   | 600 |   |
| Loss before  cumulative effect of change in accounting principle |       | (148,012                                                           | )          | (186,392 | ) | (133,914 | ) | (160,673 | ) | (15,892 | ) |
| Cumulative  effect of change in accounting principle             |       | —                                                             |       | — |   | (830 | ) | — |   | — |   |
| Net loss                                                         |       | $                                                                  | (148,012   | ) | $ | (186,392 | ) | $ | (134,744 | ) | $ | (160,673 | ) | $ | (15,892 | ) |
| Basic and diluted net  loss per share(1):                        |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss before  cumulative effect of change in accounting principle |       | $                                                                  | (1.34      | ) | $ | (2.29 | ) | $ | (1.71 | ) | $ | (2. 14) |   | $ | (0.21 | ) |
| Cumulative  effect of change in accounting principle             |       | —                                                             |       | — |   | (0.01 | ) | — |   | — |   |
| Net loss                                                         |       | $                                                                  | (1.34      | ) | $ | (2.29 | ) | $ | (1.72 | ) | $ | (2.14 | ) | $ | (0.21 | ) |
| 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** | ** ** |
| ** **                                        | ** ** | **(restated)**          | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| ** **                                        | ** ** | **(In thousands)** | ** ** |
| **Balance Sheet Data:**                 | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash equivalents  and marketable securities |       | $                       | 351,307    |   | $ | 374,507 |   | $ | 358,458 |   | $ | 350,046 |   | $ | 466,952 |   |
| Working capital                                   |       | 327,733                 |       | 339,956 |   | 349,389 |   | 338,499 |   | 446,399 |   |
| 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                               |       | (781,953                | )          | (633,941 | ) | (447,549 | ) | (312,805 | ) | (152,132 | ) |
| Total shareholders’ equity                   |       | 159,245                 |       | 106,235 |   | 232,963 |   | 351,162 |   | 481,635 |   |
|                                                   |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)             Computed on the basis described in Note 2 tothe Consolidated Financial Statements.

(2)             See “Explanatory Note” immediately precedingPart I, Item 1 and Note 18, “Restatement of Consolidated Financial Statements”.

Theimpact of the restatement and a comparison to the amounts originally reportedas of and for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 aredetailed in the table below:

48

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| ** **                                       | ** ** | **Year Ended  December 31, 2005**                   | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| ** **                                       | ** ** | **As  Reported**                                                   | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| **Statement of Operations Data:** | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Contract and license  revenues                   |       | $                                                                  | 30,226     |   |   |   | $ | 30,226 |   |
| Contract and license  revenues from Genmab       |       | 4,067                                                              |       |   |   | 4,067 |   |
| Reimbursement of  development costs              |       | 17,162                                                             |       |   |   | 17,162 |   |
| Total revenues                                   |       | 51,455                                                             |       |   |   | 51,455 |   |
| Costs and expenses:                              |       |                                                               |       |   |   |   |   |
| Research and  development                        |       | 135,847                                                            |       | $ | 1,093 |   | 136,940 |   |
| General and  administrative                      |       | 28,054                                                             |       | 915 |   | 28,969 |   |
| Acquisition of  in-process technology            |       | 8,447                                                              |       |   |   | 8,447 |   |
| Total costs and  expenses                        |       | 172,348                                                            |       | 2,008 |   | 174,356 |   |
| Operating loss                                   |       | (120,893                                                           | )          | (2,008 | ) | (122,901 | ) |
| Equity in net  loss of affiliate                 |       | (6,323                                                             | )          |   |   | (6,323 | ) |
| Interest and  dividend income                    |       | 14,740                                                             |       |   |   | 14,740 |   |
| Impairment loss  on investments in partners      |       | (33,347                                                            | )          |   |   | (33,347 | ) |
| Interest expense                                 |       | (4,233                                                             | )          |   |   | (4,233 | ) |
| Minority  interest — Celldex                |       | 4,410                                                              |       |   |   | 4,410 |   |
| Loss before  provision for income taxes          |       | (145,646                                                           | )          | (2,008 | ) | (147,654 | ) |
| Provision for  income taxes                      |       | 358                                                                |       |   |   | 358 |   |
| Net loss                                         |       | $                                                                  | (146,004   | ) | $ | (2,008 | ) | $ | (148,012 | ) |
|                                             |       |                                                               |       |   |   |   |   |
| Basic and diluted net  loss per share:           |       | $                                                                  | (1.32      | ) | $ | (0.02 | ) | $ | (1.34 | ) |
| Weighted average common  shares outstanding      |       |                                                               |       |   |   |   |   |
| —basic and diluted                          |       | 110,309                                                            |       |   |   | 110,309 |   |

 
| ** **                                        | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **(in thousands)**         | ** ** |
| ** **                                        | ** ** | **As  Reported**                | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| **Balance Sheet Data:**                 | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash equivalents  and marketable securities |       | $                               | 351,307    |   |   |   | $ | 351,307 |   |
| Working capital                                   |       | 328,045                         |       | (312 | ) | 327,733 |   |
| Total assets                                      |       | 486,876                         |       |   |   | 486,876 |   |
| Long term convertible  debt                       |       | 150,000                         |       |   |   | 150,000 |   |
| Cash dividends declared  per common share         |       | —                          |       |   |   | — |   |
| Accumulated deficit                               |       | (779,945                        | )          | (2,008 | ) | (781,953 | ) |
| Total shareholders’ equity                   |       | 159,557                         |       | (312 | ) | 159,245 |   |
|                                                   |            |                                 |            |  |  |  |  |  |  |

 

49

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| ** **                                  | ** ** | **Year Ended  December 31, 2004**                   | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **(in thousands, except per share data)** | ** ** |
| ** **                                  | ** ** | **As  Reported**                                                   | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|                                        |       |                                                               |       |   |   |   |   |
| Contract and license  revenues              |       | $                                                                  | 9,119      |   |   |   | $ | 9,119 |   |
| Contract and license  revenues from Genmab  |       | 3,355                                                              |       |   |   | 3,355 |   |
| Total revenues                              |       | 12,474                                                             |       |   |   | 12,474 |   |
| Costs and expenses:                         |       |                                                               |       |   |   |   |   |
| Research and  development                   |       | 122,007                                                            |       | $ | 1,005 |   | 123,012 |   |
| General and  administrative                 |       | 24,314                                                             |       | 945 |   | 25,259 |   |
| Acquisition of  in-process technology       |       | 5,455                                                              |       |   |   | 5,455 |   |
| Total costs and  expenses                   |       | 151,776                                                            |       | 1,950 |   | 153,726 |   |
| Operating loss                              |       | (139,302                                                           | )          | (1,950 | ) | (141,252 | ) |
| Equity in net  loss of affiliate            |       | (19,791                                                            | )          |   |   | (19,791 | ) |
| Interest and  dividend income               |       | 7,161                                                              |       | 2,067 |   | 9,228 |   |
| Impairment loss  on investments in partners |       | (7,309                                                             | )          |   |   | (7,309 | ) |
| Interest expense                            |       | (12,845                                                            | )          |   |   | (12,845 | ) |
| Debt conversion  expense                    |       | (10,151                                                            | )          |   |   | (10,151 | ) |
| Net loss on  extinguishment of debt         |       | (4,241                                                             | )          |   |   | (4,241 | ) |
| Loss before  provision for income taxes     |       | (186,478                                                           | )          | 117 |   | (186,361 | ) |
| Provision for  income taxes                 |       | 31                                                                 |       |   |   | 31 |   |
| Net loss                                    |       | $                                                                  | (186,509   | ) | $ | 117 |   | $ | (186,392 | ) |
|                                        |       |                                                               |       |   |   |   |   |
| Basic and diluted net  loss per share:      |       | $                                                                  | (2.29      | ) | $ | (0.00 | ) | $ | (2.29 | ) |
| Weighted average common  shares outstanding |       |                                                               |       |   |   |   |   |
| —basic and diluted                     |       | 81,494                                                             |       |   |   | 81,494 |   |

 
| ** **                                        | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **(in thousands)**         | ** ** |
| ** **                                        | ** ** | **As  Reported**                | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| **Balance Sheet Data:**                 |       |                            |       |   |   |   |   |
| Cash, cash equivalents  and marketable securities |       | $                               | 374,507    |   |   |   | $ | 374,507 |   |
| Working capital                                   |       | 340,062                         |       | (106 | ) | 339,956 |   |
| Total assets                                      |       | 549,345                         |       |   |   | 549,345 |   |
| Long term convertible  debt                       |       | 296,986                         |       |   |   | 296,986 |   |
| Cash dividends declared  per common share         |       | —                          |       |   |   | — |   |
| Accumulated deficit                               |       | (634,058                        | )          | 117 |   | (633,941 | ) |
| Total shareholders’ equity                   |       | 106,341                         |       | (106 | ) | 106,235 |   |
|                                                   |            |                                 |            |  |  |  |  |  |  |

 

50

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| ** **                                                       | ** ** | **Year Ended December 31, 2003**               | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| ** **                                                       | ** ** | **As  Reported**                                                   | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|                                                             |       |                                                               |       |   |   |   |   |
| Sales                                                            |       | $                                                                  | 25         |   |   |   | $ | 25 |   |
| Contract and license  revenues                                   |       | 5,833                                                              |       |   |   | 5,833 |   |
| Contract and license  revenues from Genmab                       |       | 5,316                                                              |       |   |   | 5,316 |   |
| Total revenues                                                   |       | 11,174                                                             |       |   |   | 11,174 |   |
| Costs and expenses:                                              |       |                                                               |       |   |   |   |   |
| Cost of sales                                                    |       | 3                                                                  |       |   |   | 3 |   |
| Research and  development                                        |       | 95,459                                                             |       | $ | 2,344 |   | 97,803 |   |
| General and  administrative                                      |       | 21,727                                                             |       | 2,113 |   | 23,840 |   |
| Acquisition of  in-process technology                            |       | 6,500                                                              |       |   |   | 6,500 |   |
| Total costs and  expenses                                        |       | 123,689                                                            |       | 4,457 |   | 128,146 |   |
| Operating loss                                                   |       | (112,515                                                           | )          | (4,457 | ) | (116,972 | ) |
| Equity in net  loss of affiliate                                 |       | (14,997                                                            | )          |   |   | (14,997 | ) |
| Interest and  dividend income                                    |       | 12,311                                                             |       | (1,010 | ) | 11,301 |   |
| Impairment loss  on investments in partners                      |       | (1,400                                                             | )          |   |   | (1,400 | ) |
| Interest expense                                                 |       | (11,777                                                            | )          |   |   | (11,777 | ) |
| Loss before  provision for income taxes                          |       | (128,378                                                           | )          | (5,467 | ) | (133,845 | ) |
| Provision for  income taxes                                      |       | 69                                                                 |       |   |   | 69 |   |
| Loss before  cumulative effect of change in accounting principle |       | (128,447                                                           | )          | (5,467 | ) | (133,914 | ) |
| Cumulative  effect if change in accounting principle             |       | (830                                                               | )          |   |   | (830 | ) |
| Net loss                                                         |       | $                                                                  | (129,277   | ) | $ | (5,467 | ) | $ | (134,744 | ) |
| Basic and diluted net  loss per share:                           |       |                                                               |       |   |   |   |   |
| Loss before  cumulative effect of change in accounting principle |       | $                                                                  | (1.64      | ) | $ | (0.07 | ) | $ | (1.71 | ) |
| Cumulative  effect of change in accounting principle             |       | (0.01                                                              | )          | — |   | (0.01 | ) |
| Net loss                                                         |       | $                                                                  | (1.65      | ) | $ | (0.07 | ) | $ | (1.72 | ) |
| Weighted average common  shares outstanding                      |       |                                                               |       |   |   |   |   |
| —basic and diluted                                          |       | 78,314                                                             |       |   |   | 78,314 |   |

 
| ** **                                        | ** ** | **December 31, 2003** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **(in thousands)**         | ** ** |
| ** **                                        | ** ** | **As Reported**            | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| **Balance Sheet Data:**                 |       |                            |       |   |   |   |   |
| Cash, cash equivalents  and marketable securities |       | $                               | 358,458    |   |   |   | $ | 358,458 |   |
| Working capital                                   |       | 349,456                         |       | (67 | ) | 349,389 |   |
| Total assets                                      |       | 557,726                         |       |   |   | 557,726 |   |
| Long term convertible  debt                       |       | 300,000                         |       |   |   | 300,000 |   |
| Cash dividends declared  per common share         |       | —                          |       |   |   | — |   |
| Accumulated deficit                               |       | (442,082                        | )          | (5,467 | ) | (447,549 | ) |
| Total shareholders’ equity                   |       | 233,030                         |       | (67 | ) | 232,963 |   |
|                                                   |            |                                 |            |  |  |  |  |  |  |

 

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| ** **                                       | ** ** | **Year Ended  December 31, 2002**                   | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement of Operations Data:** | ** ** | **As   Reported**                                             | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|                                             |       |                                                               |       |   |   |   |   |
| Sales                                            |       | $                                                                  | 176        |   |   |   | $ | 176 |   |
| Contract and license  revenues                   |       | 24,552                                                             |       |   |   | 24,552 |   |
| Contract and license  revenues from Genmab       |       | 14,751                                                             |       |   |   | 14,751 |   |
| Total revenues                                   |       | 39,479                                                             |       |   |   | 39,479 |   |
| Costs and  expenses:                             |       |                                                               |       |   |   |   |   |
| Cost of sales                                    |       | 8,327                                                              |       |   |   | 8,327 |   |
| Research and  development                        |       | 82,626                                                             |       | $ | 1,635 |   | 84,261 |   |
| General and  administrative                      |       | 22,852                                                             |       | 875 |   | 23,727 |   |
| Write-off of  facility costs                     |       | 11,294                                                             |       |   |   | 11,294 |   |
| Acquisition of  in-process technology            |       | 16,312                                                             |       |   |   | 16,312 |   |
| Total costs and  expenses                        |       | 141,411                                                            |       | 2,510 |   | 143,921 |   |
| Operating loss                                   |       | (101,932                                                           | )          | (2,510 | ) | (104,442 | ) |
| Equity in net  loss of affiliate                 |       | (50,625                                                            | )          |   |   | (50,625 | ) |
| Interest and  dividend income                    |       | 16,070                                                             |       | (622 | ) | 15,448 |   |
| Impairment loss  on investments in partners      |       | (11,886                                                            | )          |   |   | (11,886 | ) |
| Interest expense                                 |       | (9,065                                                             | )          |   |   | (9,065 | ) |
| Loss before  provision for income taxes          |       | (157,438                                                           | )          | (3,132 | ) | (160,570 | ) |
| Provision for  income taxes                      |       | 103                                                                |       |   |   | 103 |   |
| Net loss                                         |       | $                                                                  | (157,541   | ) | $ | (3,132 | ) | $ | (160,673 | ) |
|                                             |       |                                                               |       |   |   |   |   |
| Basic and diluted net  loss per share:           |       | $                                                                  | (2.09      | ) | $ | (0.04 | ) | $ | (2.14 | ) |
| Weighted average common  shares outstanding      |       |                                                               |       |   |   |   |   |
| —basic and  diluted                         |       | 75,231                                                             |       |   |   | 75,231 |   |
|                                             |       |                                                               |       |   |   |   |   |

 

 
| ** **                                        | ** ** | **December 31, 2002** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **(in thousands)**         | ** ** |
| **Balance Sheet Data:**                 | ** ** | **As  Reported**                | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|                                              |       |                            |       |   |   |   |   |
| Cash, cash  equivalents and marketable securities |       | $                               | 350,046    |   |   |   | $ | 350,046 |   |
| Working capital                                   |       | 338,553                         |       | (54 | ) | 338,499 |   |
| Total assets                                      |       | 549,051                         |       |   |   | 549,051 |   |
| Long term  convertible debt                       |       | 175,000                         |       |   |   | 175,000 |   |
| Cash dividends  declared per common share         |       | —                          |       |   |   | — |   |
| Accumulated  deficit                              |       | (309,673                        | )          | (3,132 | ) | (312,805 | ) |
| Total shareholders’  equity                  |       | 351,216                         |       | (54 | ) | 351,162 |   |
|                                                   |            |                                 |            |  |  |  |  |  |  |

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| ** **                                       | ** ** | **Year Ended  December 31, 2001**                   | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement of Operations Data:** | ** ** | **As  Reported**                                                   | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|                                             |       |                                                               |       |   |   |   |   |
| Sales                                            |       | $                                                                  | 191        |   |   |   | $ | 191 |   |
| Contract and  license revenues                   |       | 37,140                                                             |       |   |   | 37,140 |   |
| Contract and  license revenues from Genmab       |       | 4,973                                                              |       |   |   | 4,973 |   |
| Total revenues                                   |       | 42,304                                                             |       |   |   | 42,304 |   |
| Costs and  expenses:                             |       |                                                               |       |   |   |   |   |
| Cost of sales                                    |       | 642                                                                |       |   |   | 642 |   |
| Research and development                         |       | 38,626                                                             |       | $ | 4,412 |   | 43,038 |   |
| General and administrative                       |       | 19,344                                                             |       | 8,358 |   | 27,702 |   |
| Total costs and expenses                         |       | 58,612                                                             |       | 12,770 |   | 71,382 |   |
| Operating loss                                   |       | (16,308                                                            | )          | (12,770 | ) | (29,078 | ) |
| Equity in net loss of affiliate                  |       | (7,334                                                             | )          |   |   | (7,334 | ) |
| Interest and dividend income                     |       | 24,728                                                             |       | (435 | ) | 24,293 |   |
| Interest expense                                 |       | (4,615                                                             | )          |   |   | (4,615 | ) |
| Gain on disposition of Genmab stock              |       | 1,442                                                              |       |   |   | 1,442 |   |
| Loss before provision for income taxes           |       | (2,087                                                             | )          | (13,205 | ) | (15,292 | ) |
| Provision for income taxes                       |       | 600                                                                |       |   |   | 600 |   |
| Net loss                                         |       | $                                                                  | (2,687     | ) | $ | (13,205 | ) | $ | (15,892 | ) |
|                                             |       |                                                               |       |   |   |   |   |
| Basic and  diluted net loss per share:           |       | $                                                                  | (0.04      | ) | $ | (0.18 | ) | $ | (0.21 | ) |
| Weighted average  common shares outstanding      |       |                                                               |       |   |   |   |   |
| —basic and  diluted                         |       | 73,937                                                             |       |   |   | 73,937 |   |
|                                             |       |                                                               |       |   |   |   |   |

 

 
| ** **                                        | ** ** | **December 31, 2001** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **(in thousands)**         | ** ** |
| **Balance Sheet Data:**                 | ** ** | **As  Reported**                | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|                                              |       |                            |       |   |   |   |   |
| Cash, cash  equivalents and marketable securities |       | $                               | 466,952    |   |   |   | $ | 466,952 |   |
| Working capital                                   |       | 446,560                         |       | (161 | ) | 446,399 |   |
| Total assets                                      |       | 720,427                         |       |   |   | 720,427 |   |
| Long term  convertible debt                       |       | 175,000                         |       |   |   | 175,000 |   |
| Cash dividends  declared per common share         |       | —                          |       |   |   | — |   |
| Accumulated  deficit                              |       | (138,927                        | )          | (13,205 | ) | (152,132 | ) |
| Total shareholders’  equity                  |       | 481,796                         |       | (161 | ) | 481,635 |   |
|                                                   |            |                                 |            |  |  |  |  |  |  |

** **

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

*Certain statements madein this Annual Report on Form 10-K are “forward-looking statements” thatare subject to risks and uncertainties that may cause our actual results, performanceor achievements to be materially different from any future results, performanceor achievements expressed or implied by these forward-looking statements.Forward-looking statements include information concerning our future financialperformance, business strategy, plans, goals and objectives. Statementspreceded 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 verbs such as “should”, “would”, “may”,and “could” are generally forward-looking in nature and not historical facts.You should not place undue reliance on any such forward-looking statements assuch statements speak only as of the date on which they are made, and we mightnot update them to reflect changes that occur after the date they are made.*

Thediscussion and analysis set forth in this Item 7 has been amended to reflectthe restatement of the Company’s financial results, which is more fullydescribed in the “Explanatory Note” immediately preceding Part I, Item 1 and inNote 18, “Restatement of Consolidated Financial Statements” in the notes to theconsolidated financial statements of this Form 10-K/A.  The impact of the adjustments for the yearsended December 31, 2005, 2004 and 2003 was to increase (decrease) net loss byapproximately $2.0 million, $(0.1) million and $5.5 million, respectively.   The impact of these adjustments was not significantto the Company’s operating results, trends, or liquidity for the annual orquarterly periods in 2005, 2004 or 2003.

**Overview**

Weare a biopharmaceutical company focused on the discovery, development andpotential commercialization of fully human antibody-based therapeutic products.We believe that our UltiMAb Human Antibody Development 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 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.  In addition, our partner Genmab A/S hasannounced that it expects to initiate multiple Phase III trials for twoadditional product candidates in 2006. Four of the five product candidates currently in Phase III trialswere generated through the use of our UltiMAb® technology and include:

----

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

·        ipilimumab (also known asMDX-010), which we are developing jointly with Bristol-Myers Squibb Company, orBMS, for the treatment of metastatic melanoma and other cancers;

·        golimumab (also known asCNTO 148) under development by Centocor, Inc. (a subsidiary of Johnson &Johnson) for the treatment of rheumatoid arthritis, psoriatic arthritis andankylosing spondylitis;

·        CNTO 1275 for thetreatment of psoriasis,  also underdevelopment by Centocor; and

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

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

Medarexis committed to building value by developing a diverse pipeline of antibodyproducts to address the world’s unmet healthcare needs. In addition to the fiveantibody candidates currently in Phase III trials, multiple product candidatesin Phase II, Phase I and preclinical testing are being developed by Medarexeither alone or jointly with or separately by our partners, including Amgen,Inc., BMS, Centocor, Eli Lilly and Company, Genmab, ImClone SystemsIncorporated, MedImmune, Inc., Novartis Pharma AG, Novo Nordisk A/S andSchering AG.  We believe

54

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that through thebroad use of our UltiMAb technology, we are leveraging our efforts and ourpartners’ efforts to create, develop and potentially commercialize innovativeimportant treatments for a wide range of diseases.

Inaddition to our UltiMAb Human Antibody Development System, we have considerableexperience in preclinical and clinical development as well as in manufacturingantibodies for clinical trials. Our existing manufacturing facility inAnnandale, New Jersey currently has the capacity to undertake multiple antibodyprojects concurrently for clinical development purposes, meeting our near-termproduction demands. We have assembled a team of experienced scientific,production, clinical and regulatory personnel to facilitate the discovery anddevelopment of antibody-based products for us and for our partners. We intendto add sales and marketing and additional manufacturing capabilities as needed.

Aportion of our revenue is derived from licensing our fully human antibodytechnology to pharmaceutical and biotechnology companies. The terms of theselicense agreements typically include potential license fees and a series ofpotential milestone payments commencing upon the initiation of clinical trialsand continuing through commercialization. These payments may total $7.0 millionto $10.0 million per product if the antibody receives approval from the U.S.Food and Drug Administration, or FDA, and equivalent foreign agencies. Ingeneral, we are also entitled to receive royalties on product sales. Additionalrevenue may be earned from the sales to, and in some cases, the manufacturingof antibodies for, our partners, as well as from government grants.

Ourmost significant costs on an annual basis are research and development expensesand general and administrative expenses. Research and development expensesrepresent those costs that support the advancement of our product pipeline andprimarily consist of personnel costs, facilities (including depreciation),research and laboratory supplies, funding of outside research, license andtechnology access fees, expenses related to antibody manufacturing and clinicaltrial expenses. We believe that continued investment in research anddevelopment is critical to attaining our strategic objectives. General andadministrative expenses consist primarily of personnel expenses for executive,finance, legal and administrative personnel, professional fees and othergeneral corporate expenses. We may be required to add personnel in the futureand incur additional costs as we expand our business activities.

Wehave a history of operating losses and may not achieve profitability. As ofDecember 31, 2005, we had an accumulated deficit of approximately $782.0million. Over the next several years, we expect to incur substantial expensesas we continue to identify, develop and manufacture our potential products,invest in research, move forward with our product development and prepare tocommercialize our product(s). Our commitment of resources to research and thecontinued development and potential commercialization of our product candidateswill require substantial additional funds. Our operating expenses may alsoincrease as we invest in research or acquire additional technologies, asadditional potential product candidates are selected for clinical developmentand as some of our earlier stage product candidates move into later stageclinical development. 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.

**CriticalAccounting Policies**

Themethods, estimates and judgments we use in applying our most criticalaccounting policies have a significant impact on the results we report in ourconsolidated financial statements. We evaluate our estimates and judgments onan on-going basis. We base our estimates on historical experience and onassumptions that we believe to be reasonable under the circumstances. Ourexperience and assumptions form the basis for our judgments about the carryingvalue of assets and liabilities that are not readily apparent from othersources. Actual results may vary from what we anticipate and differentassumptions or estimates about the future could materially change our reportedresults. We believe the following accounting policies are the most critical tous, in that they are important to the portrayal of our financial statements andthey require our most difficult, subjective or complex judgments in thepreparation of our consolidated financial statements.

55

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***RevenueRecognition***

Wereceive payments from our customers and partners for the sale of antibodies,for licenses to our proprietary technology, for product development servicesand from the achievement of product development milestones. These payments aregenerally non-refundable and are reported as deferred revenue until they arerecognizable as revenue. We follow the following principles in recognizingrevenue:

·       We sell antibodiesprimarily to partners in the United States and overseas. Revenue from thesesales is recognized when the antibodies are shipped and we have no furtherobligations related to the development of the antibodies.

·       We receive research feesfrom the licensing of our proprietary technologies for research and developmentperformed by our customers and partners. Revenue from these research fees is recognizedgenerally over the term of the respective license period beginning only afterboth the license period has begun and the technology has been delivered.

·       We receive fees for productdevelopment services (including manufacturing) we perform for our customers andpartners. These fees are recognized ratably over the entire period during whichthe services are performed.

·       Revenue from milestonepayments is recognized when each milestone is achieved, when collectibility ofsuch milestone payment is assured and we have no future performance obligationsrelating to that event. Milestone payments are triggered either by the resultsof our research efforts or by the efforts of our partners and include suchevents as submission of an Investigational New Drug Application, or IND,commencement of Phase I, II or III clinical trials, submission of aBiologic License Application, or BLA, and regulatory approval of a product.Milestone payments are substantially at risk at the inception of an agreement.

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

· Revenues derived from reimbursements of costsassociated with the development of product candidates are recorded incompliance with EITF Issue 99-19, “Reporting Revenue Gross as a PrincipalVersus Net as an Agent” (“EITF 99-19”). According to the criteria established by EITF 99-19, in transactionswhere we act as a principal, with discretion to choose suppliers, bear creditrisk and perform part of the services required in the transaction, we believewe have met the criteria to record revenue for the gross amount of thereimbursements.

·  Grantrevenues are recognized as we provide 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.

***Investments***

Ourinvestment policy calls for investments in fixed income high grade securitiessuch as U.S. corporate debt securities, U.S. treasury obligations and moneymarket funds for which we believe there is not a significant risk of loss. Ourprimary objectives for our investment portfolio are liquidity and safety ofprincipal. Investments are made to achieve the highest rate of returnconsistent with these two objectives. However, in the course of our business,we have made and may continue to make investments in companies (both public andprivate) as part of our strategic collaborations. Investments in companieswhose securities are publicly traded (other than Genmab) are classified asmarketable securities on our consolidated balance sheets. The fair market valueof investments in our partners whose securities are publicly traded (other thanGenmab)

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representedapproximately 2.6% of total marketable securities as of December 31, 2005and approximately 0.9% of total marketable securities as of December 31,2004.

UnderSFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities,*our marketable securitiesare classified as available-for-sale securities and are carried at fair value.Marketable securities will include those securities of debt and publicly tradedequity securities accounted for under the cost method. These securities tradeon listed exchanges; therefore, fair value is readily available. Thesesecurities are also subject to an impairment charge when we believe aninvestment has experienced a decline in value that is other than temporary.Under our accounting policy, a decline in the value of our investments isdeemed to be other than temporary and such investments are generally consideredto be impaired if their value is less than our cost basis for more than six(6) months, or some other applicable period in light of the facts andcircumstances surrounding the investments.

Inaddition, in connection with our collaborative partnering business, wesometimes make strategic investments in the securities of companies that areprivately held. Investments in our partners whose equity is not publicly tradedare classified in a separate line item in our consolidated balance sheet entitled“Investments in, and advances to, other partners” and were $6.4 million as ofDecember 31, 2005. These securities are carried at original investmentcost and adjusted for other than temporary impairment charges, if any. Becausethese securities are not listed on a financial exchange, the value of theseinvestments is inherently more difficult to estimate than investments in publiccompanies. We value 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 financings and potential strategic alternatives. Based onthe information acquired through these sources, we record an investmentimpairment charge when we believe an investment has experienced a decline invalue that is other than temporary.

Futureadverse changes in market conditions or adverse changes in financial conditionand/or operating results of the companies in which we invest that may not bereflected in an investment’s current carrying value may also require animpairment charge in the future.

***StockBased Compensation***

Wesponsor an equity incentive plan pursuant to which incentive stock options,non-qualified stock options and stock awards are granted to eligibleemployees.  Through December 31, 2005, wefollowed the disclosure only provisions of Statement of Financial AccountingStandards No. 123, *Accounting for Stock-BasedCompensation*, (“SFAS No. 123”) and accordingly, accounted for equityawards under this plan pursuant to the recognition and measurement principlesof Accounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees*, (“APB No. 25”) and relatedInterpretations, as permitted by SFAS No. 123. Under APB No. 25, compensation expense was recognized relating to anyequity awards where, at the measurement date, there was intrinsic value.  Stock-based compensation expense is recognizedratably over the vesting period. Prior to September 2001, the Company’s stockoptions had a vesting period of 1 year or less. Beginning in September 2001, the Company changed the vesting period foremployee stock option grants to 4 years. We record stock-based compensation expense in the line items of thestatements of operations based on the function of the grant recipient.  Additionally, no compensation expense wasrecorded in the consolidated financial statements for shares purchased byemployees under our Employee Stock Purchase Plan (“ESPP”) (pursuant to whichemployees are able to purchase shares of our common stock at a price equal tothe lower of 85% of the fair market value of a share of common stock (i) onJuly 1, 2004 or (ii) at the end of each six month purchase period) as the ESPPwas considered to be non-compensatory under APB No. 25.

Inconnection with the preparation of our restated consolidated financialstatements, there were certain instances from 1996 through 2002 wheredocumentation to support what the measurement date should have been was notavailable.  In these instances, we had anarrow range of dates from which to form a reasonable conclusion as to the mostlikely point in which the terms of the equity awards were known with finality.  Under APB No. 25, the

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accountingmeasurement date is the date that both the quantity of equity awards and theexercise price of such equity awards are known with finality.

*Officers Annual Equity Awards*

Forthis restatement, we determined the measurement date by determining when theinformation necessary to complete a grant was determinable. Our historicalpricing practice for officer annual awards through July 2002 was to select thelowest stock price during the month of the award from which to price theaward.  In these instances, both theprice and the quantity of the awards to officers were determinable withfinality by the end of the month and therefore the last business day of themonth of grant was used as the accounting measurement date.  Total stock-based compensation expense forofficer annual equity awards granted during the period from 1996 through July2002 was approximately $8.9 million.  Ifother dates in the period between the end of the month and the preparation ofthe Unanimous Written Consent (“UWC”) had been used as the measurement date,the total stock-based compensation would have ranged from $5.5 million to $13.6million.

*Rank and File Employee Annual Equity Awards*

Ourprocess for granting annual equity awards to Rank and File employees wasinconsistent in that the point in time the total approved pool of options wasallocated to individual Rank and File employees in its final form varied fromyear to year. In these instances, we were required to provide a reasonableestimate of when the allocation of the approved pool of equity awards toindividual employees was finalized.  Theaccounting measurement date used assumed that, on the dates the UWCs werecreated, both the exercise price of the equity awards and the final allocation ofequity awards to individual employees was known with finality.  The Company identified no evidence suggestingthat the allocation of equity awards changed after the UWCs were created forequity awards granted through July 2002, however, it is at least reasonablypossible that the allocations could have been finalized prior to the UWCcreation date.  The investigationindicated that the Company’s past practice was that UWCs were not created untilallocation of the total pool had been finalized.  Information obtained in the investigationindicated that the allocation of the total pool could have been finalized up tofive days prior to the creation of the UWCs in certain cases.  Total stock-based compensation expense forrank and file annual equity awards granted during the period from 1996 throughJuly 2002 was approximately $16.1 million. Had the allocation of the total poolof options been finalized up to five days prior to the creation of the UWCs,the total stock-based compensation expense could have ranged from $9.7 millionto $16.6 million.

*Director Equity Awards*

Therewas no specific pattern regarding equity awards to directors except that eachnon-executive director received an equity award when he/she joined the Company’sBoard of Directors.  In certaincircumstances, certain directors received annual equity awards on the date ofthe Company’s Annual Meeting of Shareholders in connection with previouslyagreed upon arrangements.  There werefour designated grant dates in which stock options were granted to directorswhen the stock price was the lowest during the month in which the designatedgrant occurred.  Two of the four grantswere issued at the same time as the officer annual awards described above.  Total stock-based compensation expense forthese two director equity awards granted during the period from 1996 throughJuly 2002 was approximately $0.5 million. If other dates in the period between the end of the month and thepreparation of the UWC had been used as the measurement date, the total stock-basedcompensation could have ranged from $0.4 million to $0.5 million.  There are no significant estimates associatedwith the other two director equity awards.

Thereare no estimates related to our new hire awards since both the exercise priceand the quantity were determinable as of the first day of employment in all butone case.  In this instance, the grantdate was the stated effective date of the officer’s employment agreement whichpreceded the officer’s first day of employment. Since the controlling accounting literature at the time requiredcompensation cost to be measured as of the officer’s first day of employment,we determined that approximately $5.1 million of stock-based compensationexpense should have been measured on the date employment began by the officer.

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*** ***

***Valuation ofLong-Lived and Intangible Assets***

We assess the impairment of identifiable intangibleassets and long-lived assets whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Factors we considerimportant that could trigger an impairment review include the following:

·       a significantunderperformance relative to expected historical or projected future operatingresults;

·       a significant change in themanner of our use of the acquired asset or the strategy for our overallbusiness; and/or

·       a significant negativeindustry or economic trend.

When we determine that the carrying value ofintangible assets or long-lived assets are not recoverable based upon theexistence of one or more of the above indicators of impairment, we may berequired to record impairment charges for these assets that have not beenpreviously recorded.

***AcquiredIn-Process Technology***

In-process technology expense for significanttechnology acquisitions is determined based on an analysis using risk-adjustedcash flows expected to be generated by products that may result from in-processtechnologies which have been acquired. This analysis includes forecastingfuture cash flows that are expected to result from the progress made on eachin-process project prior to the acquisition date. Cash flows are estimated byfirst forecasting, on a product-by-product basis, net revenues expected fromthe sales of the first generation of each in-process project and risk adjustingthese revenues to reflect the probability of advancing to the next stage of theFDA approval process. The forecast data in the analysis is based on internalproduct level forecast information maintained by us in the ordinary course ofbusiness. The inputs used in analyzing in-process technology are based onassumptions, which we believe to be reasonable but which are inherentlyuncertain and unpredictable. These assumptions may be incomplete or inaccurate,and unanticipated events and circumstances may occur. Appropriate operating expensesare deducted from forecasted net revenues on a product-by-product basis toestablish a forecast of net returns on the completed portion of the in-processtechnology. Finally, net returns are discounted to a present value usingdiscount rates that incorporate the weighted average cost of capital relativeto the biotech industry and us as well as product specific risks associatedwith the acquired in-process research and development products. The productspecific risk factors include the product’s phase of development, type ofproduct candidate under development, likelihood of regulatory approval,manufacturing process capability, scientific rationale, preclinical safety andefficacy data, target product profile, and development plan. In addition to theproduct specific risk factors, a discount rate is used for the valuation, whichrepresents a considerable risk premium to our weighted average cost of capital.The valuations used to estimate in-process technology require us to usesignificant estimates and assumptions that if changed, may result in adifferent valuation for in-process technology.

**Resultsof Operations**

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

***Contract andLicense Revenues***

Contract and license revenues totaled $30.2 million,$9.1 million and $5.8 million for the years ended December 31, 2005, 2004and 2003, respectively. Contract and license revenues for 2005 increased by$21.1 million or 231% as compared to 2004. This increase relates principally toa total of approximately $13.8 million of increased revenue recognized from ourcollaborations with Pfizer, BMS, Lilly and the National Institutes of Health,or NIH, in accordance with an NIH grant we received, as well as $4.0 million inmilestone payments received from our contract and licensing business.  Contract and license revenues for 2004increased by $3.3 million or 56% as compared to 2003. This increase relatesprincipally to approximately $2.4 million of revenue recognized from ourcollaboration agreement with Pfizer which was executed in September 2004and approximately $0.6 million of revenue from the NIH in accordance with agrant we received in 2004. Because contract and license revenues depend to alarge extent 

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on the product development efforts of our partners andlicensees, our year-to-year contract and license revenues can fluctuatesignificantly and are inherently difficult to predict.

***Contract andLicense Revenues from Genmab***

Contract and license revenues from Genmab were $4.1million, $3.4 million and $5.3 million for the years ended December 31,2005, 2004 and 2003, respectively. Contract and license revenues from Genmabfor 2005 increased by $0.7 million or 21% as compared to 2004. This increase isprimarily the result of payments received from Genmab for the licensing of Europeanand Asian rights to develop and commercialize antibodies raised against the CD4antigen, partially offset by a decrease in antibody exclusive licenses grantedto Genmab in 2005 as compared to 2004. Contract and license revenues fromGenmab for 2004 decreased by $1.9 million or 37% as compared to 2003. Thisdecrease relates principally to fewer research licenses and antibody exclusivelicenses requested by and granted to Genmab in 2004 as compared to 2003.

***Reimbursement ofDevelopment Costs***

Revenues derived from the reimbursement of costsassociated with the development of our product candidates are recorded incompliance with EITF Issue 99-19, “*Reporting Revenue Gross asa Principal**Versus as an Agent”*(“EITF 99-19”).  Reimbursement ofdevelopment costs were $17.2 million in 2005 and related primarily to thedevelopment of ipilimumab with BMS. There were no such reimbursements in 2004 and 2003.

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***Research andDevelopment Expenses***

Research and development expenses for our products indevelopment were $136.9 million, $123.0 million and $97.8 million for the yearsended December 31, 2005, 2004 and 2003, respectively. Research anddevelopment expenses in 2005 increased by $13.9 million, or 11% as compared to2004 and research and development expenses in 2004 increased by $25.2 million,or 26% 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 outside researchand 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.

The following table sets forth a breakdown of ourresearch and development expenses by those associated with research and thoseassociated with product development for the periods indicated.

 

|                      | ** ** | **Year Ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Research             |       | $                                          | 46,568     |   | $ | 53,616 |   | $ | 38,269 |   |
| Product  Development |       | 90,372                                     |       | 69,396 |   | 59,534 |   |
| Total                |       | $                                          | 136,940    |   | $ | 123,012 |   | $ | 97,803 |   |

 

***Research Costs***

Research costs in 2005 decreased by $7.0 million, or13% as compared to 2004. Research costs in 2004 increased by $15.3 million, or40% as compared to 2003. The changes in research costs primarily relate to thefollowing.

·       Personnel costs in 2005were $14.7 million, an increase of $1.5 million or 11% as compared to2004.  Personnel costs in 2004 were $13.2million, an increase of $0.5 million or 3% as compared to 2003. The increasedpersonnel costs are primarily attributable to staff needed to support higherlevels of new product development opportunities, the continued development ofour UltiMAb® system, and the performance of contract services for ourcollaborative partners. Personnel costs include primarily salary, benefits,payroll taxes and recruiting costs. We expect personnel costs to continue toincrease as we continue to increase our research activities.

·       An $8.5 million expenserepresenting a liability to Gilead Sciences, Inc., or Gilead, for thereduction of future royalty obligations relating to certain intellectualproperty rights regarding anti-CTLA-4 product candidates in 2004 for which nocomparable expenses were incurred in 2005 or 2003. The total consideration of$8.5 million is being paid to Gilead in eight equal quarterlyinstallments.  As of December 31,2005, approximately $2.1 million (two installments) remained due to Gileadunder this obligation (see further discussion under the section herein entitled“Other Liquidity Matters”).

·       License and technologyaccess fees in 2005 were $5.4 million, a decrease of $1.5 million or 22% ascompared to 2004. License and technology access fees in 2004 were $6.9 million,an increase of $3.8 million or 125% as compared to 2003.  Increases and decreases in license andtechnology access fees are primarily the result of the timing of suchagreements. These costs represent fees paid to certain partners and researchorganizations in connection with certain of our collaboration and licenseagreements. Included in the 2005 costs are payments to Genentech, Inc. and theMayo Foundation for Medical Education and Research.  

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Included in the 2004 costs are payments todiaDexus, Inc., Pharma Pacific Pty Ltd. and Kirin Brewery Co., Ltd., orKirin, for licenses to certain technologies. We expect license fees, includingfunds paid to certain partners, 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 in2005 are primarily attributable to the continued development of our UltiMAb®system, and the performance of contract services for our collaborativepartners. Included in these costs are materials, chemicals and disposables. Weexpect these costs to increase as we continue to expand our research efforts.

***ProductDevelopment Costs***

Product development costs in 2005 increased by $21.0million, or 30% as compared to 2004. Product development costs in 2004increased by $9.9 million, or 17% as compared to 2003. The increases in productdevelopment costs primarily relate to the following:

·       Contract manufacturingcosts in 2005 were $10.3 million, an increase of $1.2 million or 12% ascompared to 2004. Contract manufacturing costs in 2004 were $8.1 million, anincrease of $7.4 million or 1091% as compared to 2003. The increase in thirdparty 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.

·       Personnel costs in 2005were $25.6 million, an increase of $2.7 million or 12% as compared to2004.  Personnel costs in 2004 were $22.9million, an increase of $2.3 million or 11% as compared to 2003. The increasedpersonnel costs are a result of the increased staff needed to support moreextensive clinical trial activities primarily for ipilimumab. Personnel costsprimarily include salary, benefits, payroll taxes and recruiting costs. Weexpect personnel costs to continue to increase as we continue to increase ourproduct development activities and progress our product candidates throughclinical trials.

·       Supply costs in 2005 were$5.1 million, an increase of $0.5 million or 10% as compared to 2004.  Supply costs in 2004 were $4.6 million, adecrease of $1.1 million or 19% as compared to 2003. The increases in 2005costs reflect production of clinical material for phase I and phase II trialsfor certain of our product candidates. In 2003 we completed a change to ourmethod of production which resulted in comparatively lower supply costs in2004. Included in these costs are materials, chemicals and disposablesassociated with the manufacture of material for clinical trials. We expectthese costs to increase as we continue to expand our product developmentefforts and increase our clinical trial activities.

·       Clinical research fees in2005 were $11.5 million, an increase of $6.8 million or 145% as compared to2004. This increase resulted primarily from the continued enrollment ofpatients in the Phase III clinical trial for ipilimumab in combination withMDX-1379 and the initiation of additional sites for this trial.  As of December 31, 2005 sites participatingin this Phase III clinical trial are located in North America, Europe and LatinAmerica.  The continued enrollment ofpatients in the Phase III trial and the initiation of additional sites resultedin increased monitoring costs and increased investigator site fees. Clinicalresearch fees in 2004 were $4.7 million, the same as 2003. These costsrepresented the conclusion of certain Phase II clinical trials for ipilimumaboffset by the initiation of the Phase III clinical trial for ipilimumab incombination with MDX-1379 which began in the third quarter of 2004.  Clinical research fees include clinicalinvestigator site fees, external trial monitoring costs and data accumulationcosts. We expect expenses related to clinical trials to increase in the futureas we continue to develop our therapeutic product pipeline.

·       An expense of $6.4 millionfor 2005 representing the reimbursement of our share (35%) of the BMS costs forthe development of ipilimumab.  Nocomparable expense was incurred in 2004 or 2003. We expect our 35% share of BMS’scosts related to the development of ipilimumab to increase in the future as BMScontinues to increase its development activities related to ipilimumab.

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We expect product development costs to increase in thefuture as more of our product candidates enter clinical trials. In addition, wemay be obligated to make milestone payments on certain of our productcandidates as they progress through the clinical trial process. Completion ofclinical trials may take several years or more. The length of time variesaccording to the type, complexity and intended use of the product candidate. Weestimate that clinical trials of the type we generally conduct are typicallycompleted over the following periods:

 

| Clinical Phase | ** ** | ** ** | ** ** | **Estimated Completion  Period** |
|---------------------|------------|------------|------------|---------------------------------------|
| Phase I             |       | 1-2  Years |
| Phase II            |       | 1-2  Years |
| Phase III           |       | 2-4 Years  |

 

The duration and cost of clinical trials may varysignificantly over the life of a particular project as a result of, among otherthings, the following factors:

·       the length of time requiredto recruit qualified patients for clinical trials

·       the duration of patientdosing and follow-up in light of trial results;

·       the number of clinicalsites required for trials; and

·       the number of patients thatultimately participate.

We continue to explore new collaborative arrangementsthat may affect future spending for research and development. As part of ourpartnering strategy, a significant portion of the research and developmentexpenses incurred in connection with products using our technology is expectedto be borne by our partners. We believe this allows us to participate in theresearch and development of substantially more potential product candidatesthan we could develop on our own if we bore the entire cost of development.Products using our technology are currently in various stages of developmentfrom preclinical to Phase III. The successful development of these productcandidates is dependent on many factors, including among other things, theefforts of our partners, unforeseen delays in, or expenditures relating to,preclinical development, clinical testing, manufacturing or regulatoryapproval, failure to receive regulatory approval, failure to receive marketacceptance, the emergence of competitive products and the inability to produceor market our products due to third-party proprietary rights.

***General andAdministrative Expenses***

General and administrative expenses includecompensation, professional services, consulting, travel and facilities(including depreciation) and other expenses related to legal, businessdevelopment, finance, information systems and investor relations. General andadministrative expenses totaled $29.0 million, $25.3 million and $23.8 millionfor the years ended December 31, 2005, 2004 and 2003, respectively.  General and administrative expenses increasedby $3.7 million in 2005, or 15% as compared to 2004. The 2005 increase wasprimarily attributable to the operations of Celldex Therapeutics, Inc., orCelldex, including the write-off of deferred offering costs (legal, accountingand printing) of $1.9 million.  Suchcosts were written off in 2005 as a result of Celldex terminating its initialpublic offering and withdrawing its registration statement with the Securitiesand Exchange Commission due to unfavorable market conditions.  General and administrative expenses increasedby $1.4 million in 2004, or 6% as compared to 2003. The 2004 increase isprimarily attributable to increased personnel costs of $1.1 million, andincreased legal fees of $1.0 million primarily as a result of the completion ofthe negotiation and execution of a series of agreements with Pfizer and ourcollaboration and license agreement with BMS offset, in part, by decreasednon-cash stock based compensation of $1.2 million. General and administrativeexpenses are expected to increase in the future as our product candidates aredeveloped and we expand our business activities.

***Acquisition ofIn-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 in October 2005.  The total cost of these acquisitions(including transaction costs) was $42.8 million, of which approximately $8.4million (based upon independent third-party valuations) of in-process researchand development was determined not to be technologically 

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feasible and had no alternative future uses at the time of the respective acquisitions, and, as a result, was charged to operations 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, inAugust 2004. The total cost of the acquisition (including transactioncosts), discussed more fully under the section herein entitled “Liquidity andCapital Resources,” was $5.7 million, of which approximately $5.5 million ofin-process research and development was determined not to be technologicallyfeasible and had no alternative future uses at the time of acquisition, and, asa result, was charged to operations as acquisition of in-process technologyduring 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 Lossof 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 ofaffiliate in 2004 increased by $4.8 million or 32% as compared to 2003. This increasereflects an increase in Genmab’s net loss as a result of its expanded researchand development efforts offset, in part, by a reduction in our ownershippercentage, resulting from Genmab’s 2004 private placement of its ordinaryshares (discussed below), and therefore a reduction of our share of Genmab’snet loss for the second half of 2004.

In August 2005, Genmab sold approximately 2.5 millionshares 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, *Accounting forSales of Stock by a Subsidiary*increasing our investment in Genmaband 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 for Investmentin Common Stock,*and Staff Accounting Bulletin No. 51, *Accounting for Sales of Stock by a Subsidiary*increasing ourinvestment in Genmab and capital in excess of par value.

On February 1, 2006, Genmab completed the privateplacement of 5.75 million shares of its stock. As a result of this private placement, our ownership percentage ofGenmab was reduced to approximately 18.9%. 

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BeginningFebruary 1, 2006, we expect to account for our investment in Genmab as amarketable security in accordance with SFAS No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*.

***Interest, DividendIncome and Realized Gains***

Interest, dividend income and realized gains consistsprimarily of interest earned from our cash, cash equivalents and marketable securities.Interest, dividend income and realized gains was $14.7 million, $9.2 millionand $11.3 million for the years ended December 31, 2005, 2004 and 2003,respectively. Interest, dividend income and realized gains in 2005 increased by$5.5 million, or 60% as compared to 2004. Included in interest, dividend income and realized gains for the yearended December 31, 2005 is a gain on the sale of common stock of one of ourpartners of approximately $3.3 million and included in interest, dividendincome and realized gains for the year ended December 31, 2004 is a gain on thesale of common stock of one of our partners of approximately $1.7 million.  Excluding the impact of these gains, interestand dividend income in 2005 would have increased by $3.9 million.  This increase primarily relates a higheraverage balance and higher returns on our investment portfolio as well asdecreased amortization of premiums on debt securities. Interest and dividendincome in 2004 decreased by $3.7 million, or 33% (excluding the $1.7 milliongain discussed above) as compared to 2003. This decrease primarily relates tolower returns on our investment portfolio as well as increased amortization ofpremiums on debt securities. We anticipate lower interest and dividend income inthe future as we continue to fund our operations and capital expenditures fromour cash reserves.

***Impairment Loss onInvestments 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 than Genmab) whosesecurities are publicly traded. The 2004 impairment charge was the result oflosses on one of these investments which were considered to be other thantemporary. If we deem these investments to be further impaired at the end ofany future period, we may incur additional impairment charges on theseinvestments.

In addition, we have investments in several partnerswhose securities are not publicly traded. Because these securities are notpublicly traded, the value of these investments is more difficult to estimatethan investments in publicly traded companies. We recorded impairment chargesof $33.3 million, $7.1 million and $1.4 million for the years endedDecember 31, 2005, 2004 and 2003, respectively, related to investments incertain of our partners whose securities are not publicly traded. Approximately$29.3 million of the 2005 impairment charge related to our investment in IDMprior to its business combination with Epimmune, Inc. The amount of the IDMimpairment charge was calculated as the difference between (i) theestimated per share value expected to be received by IDM shareholders uponcompletion of its merger with Epimmune, publicly announced on March 16,2005, and (ii) our carrying value.  This transaction closed in thethird quarter of 2005 and our investment in IDM was reclassified to marketablesecurities. The 2004 impairment charge is primarily comprised of a $7.0 millionimpairment related to our investment in IDM. The amount of the IDM impairmentcharge was calculated as the difference between the per share price received byIDM in a December 2004 private placement of its equity securities and ourcost basis.    If we deem theseinvestments to be further impaired at the end of any future period, we mayincur additional impairment charges on these investments.

***Interest Expense***

Interest expense was primarily related to interest andamortization of issuance costs on our 4.50% Convertible Subordinated Notesissued in June 2001, or the 4.50% notes, our 4.25% Convertible SeniorNotes issued in July 2003, or the 4.25% notes, and our 2.25% SeniorSubordinated Notes issued in May 2004, or the 2.25% notes.  Interest expense was $4.2 million, $12.8million and $11.8 million for the years ended December 31, 2005, 2004 and2003, respectively. Interest expense in 2005 decreased by $8.6 million, or 67%as compared to 2004. This decrease reflects the January 2005 conversion ofall of our 4.25% Notes ($146.986 million) into a total of 21,875,353 shares ofour common stock.  Interest expense in2004 increased by $1.1 million, or 9% as compared to 2003. The increasereflects a full 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-annually onMay 15 and November 15 of each year.

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***Minority Interest—Celldex***

Minority interest in lossof Celldex for the year ended December 31, 2005 of $4.4 million represents 40%of Celldex’s net loss for the period from October 12, 2005 through December 31,2005.  Prior to October 12, 2005 we owned100% of the outstanding capital stock of Celldex.   As a result of certain acquisitions byCelldex (see Note 15 to the consolidated financial statements) our ownershippercentage was reduced from 100% to approximately 60%.  Celldex’s results of operations for 2005 havebeen consolidated for reporting purposes and the $4.4 million (the portion ofCelldex’s net loss for the period from October 12, 2005 through December 31,2005 not attributable to us) is recorded as a reduction of our expenses.

***Debt ConversionExpense***

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

***Net Loss onExtinguishment 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 and cancellationwe recorded a loss on the early extinguishment of debt of approximately $4.5million for the year ended December 31, 2004.

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 and, inconnection therewith, we recorded a gain of approximately $0.3 million for2004. 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 on theearly 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 forIncome Taxes***

Our provision for income taxes of $0.4 million, $31thousand and $0.1 million for the years ended December 31, 2005, 2004 and2003, respectively, relates primarily to the New Jersey alternative minimum taxassessment.

***Cumulative Effectof a Change in Accounting Principle***

Cumulative effect of a change in accounting principle forthe year ended December 31, 2003 was $0.8 million. EffectiveJanuary 1, 2003, we changed our method of accounting for asset retirementobligations in accordance with SFAS No. 143, *Accountingfor Asset Retirement Obligations*. Previously, we were not requiredto recognize amounts related to asset retirement obligations. Under SFASNo. 143, we now recognize asset retirement obligations in the period inwhich they are incurred if a reasonable estimate of a fair value can be made.The associated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset. The adoption of SFAS No. 143 resulted inan increase in net property, buildings and equipment of approximately $1.4million, recognition of an asset retirement obligation liability ofapproximately $2.2 million and a cumulative effect of a change in accountingprinciple of approximately $0.8 million.

**Liquidityand 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 

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oursecurities in public and private placements, sales of our products for researchpurposes, development and manufacturing services, technology transfer andlicense fees and milestone payments. We expect to continue to fund our cashrequirements from these sources in the future. In 2003, 2004, and 2005, wereceived net proceeds of $331.5 million from sales of our equity and debt securities.

At December 31, 2005 and 2004, we had $351.3million and $374.5 million, respectively, in cash, cash equivalents andmarketable securities.  Approximately$25.2 of cash and cash equivalents included in the December 31, 2005 balancerelates to Celldex and is consolidated for accounting purposes. We primarilyinvest our cash equivalents and marketable securities in highly liquid,interest-bearing, investment grade and government securities in order topreserve principal.

***Cash Used inOperating 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 to2004.  The 2004 decrease is primarily dueto an increase in deferred contract revenue (approximately $99.1 million)resulting from the up-front payments associated with collaborations with eachof Pfizer and MedImmune, Inc., offset in part, by higher research anddevelopment expenses (approximately $26.5 million). The increase in researchand development expenses resulted primarily from higher personnel costs,expenses related to our facilities, third-party research and contractmanufacturing costs, and the costs of clinical trials. All of these costs werehigher as result of our increased clinical trial and product developmentactivities.

We have incurred and will continue to incursignificant costs in the area of research and development, includingpreclinical and clinical trials, as our products are developed. We plan tospend significant amounts to progress our current products through the clinicaltrial and commercialization process as well as to develop additional productcandidates on our own or with our partners. As our products progress throughthe clinical trial process, we may be obligated to make significant milestonepayments on certain of our products. We also expect to incur future facilitycosts as a result of our continued capital expansion, renovations andreplacements. To a lesser extent, we expect our general and administrativecosts to increase as we expand our administrative and business developmentactivities. Furthermore, we expect our investment income to decrease as we fundour future operations and capital expenditures from our cash reserves. Weanticipate that our operating expenditures may be partially offset by revenuesfrom partners for license fees, milestone payments, and development andmanufacturing services.

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

Net cash provided by investing activities was $84.1million in 2005. Net cash used in investing activities was $33.8 million in2004 and $22.6 million in 2003, respectively. Cash was provided by and used ininvesting activities primarily as follows:

·       Capital expenditures of$9.3 million, $9.1 million and $8.9 million in 2005, 2004 and 2003,respectively. The capital expenditures for these periods reflect an investmentin laboratory automation as well as the addition of machinery and equipment.

·       Net sales of marketablesecurities were $65.9 million and $3.2 million in 2005 and 2003, respectively.The net sales of marketable securities in 2005 were primarily to fundoperations and capital expenditures offset in part, by the proceeds receivedfrom the BMS collaboration ($50.0 million). The net sales of marketablesecurities 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.

·       Net purchases of marketablesecurities in 2004 were $27.9 million. The 2004 net purchases were the resultof the proceeds received from the Pfizer collaboration ($110.0 million), theMedImmune collaboration ($15.0 million) and the net proceeds ($145.2 million)received for the private placement of 

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our 2.25% notes, offset in part, by sales ofmarketable securities ($242.6 million) to fund operations and capitalexpenditures as well as to repurchase and redeem our 4.50% notes as discussedfurther in the section entitled *“Cash Provided byFinancing Activities”*.

·       Net cash of approximately$29.7 million provided through the acquisition of Lorantis by Celldex (seefurther explanation in the section entitled *“Other Liquidity Matters”*).

We expect 2006 capital expenditures to beapproximately $15.0 million representing the purchase of machinery andscientific equipment and additional investment in lab automation.

***Cash Provided byFinancing 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, cash provided by financingactivities consisted primarily of $121.2 million in net proceeds received fromthe sale of our 4.25% notes in July 2003 and $0.9 million from theissuance of common stock under our employee stock purchase plan.

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

The 4.25% notes were scheduled to mature onAugust 15, 2010 and were redeemable at our option on or afterAugust 15, 2006, or earlier if the price of our common stock exceededspecified levels. We received net proceeds from the private placement of the4.25% notes of approximately $121.2 million (after deducting the initialpurchasers’ discounts and offering expenses). As of December 31, 2004, wehad purchased U.S. Treasury security strips to collateralize the notes in anamount sufficient to pay the four interest payments due on the 4.25% notes in2005 and 2006. Such amount was classified as segregated securities in thecurrent assets section of our December 31, 2004, consolidated balancesheet.

In January 2005, we completed the provisionalredemption of all of our 4.25% notes which was previously announced inDecember 2004. Holders of all of the outstanding 4.25% notes ($146.986million) converted their notes into a total of 21,875,353 shares of our commonstock prior to the redemption date. In connection with the redemption, we paidapproximately $12.5 million in cash representing the “make-whole” payment of$10.2 million and accrued interest of $2.3 million. We accrued the $10.2million “make-whole” payment in the quarter ended December 31, 2004, atthe time the redemption was 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 dueAugust 15, 2010. As a result of this exchange and cancellation, our totalconvertible debt was 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.

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The2.25% notes mature on May 15, 2011 and are redeemable at our option on orafter May 20, 2009. Holders of the 2.25% notes may require us torepurchase the notes if we undergo a “change in control” as defined in theindenture. We received net proceeds from the private placement of the 2.25%notes of approximately $145.2 million (after deducting the initial purchasers’discounts and offering expenses). The costs of issuance of the 2.25% notes ofapproximately $4.8 million have been deferred and are being amortized over theterm of the 2.25% notes. In May 2011, or earlier if we undergo a change incontrol, we may be required to use a significant portion of our cash to repaythe remaining balance ($150.0 million) of the 2.25% notes. If our cash is not sufficientto meet our obligations under the 2.25% notes, we would be required to seekadditional financing.

InJune 2001, we issued $175 million of our 4.50% notes. The 4.50% notes werescheduled to mature on July 1, 2006. Concurrent with the private placementof the 2.25% notes described above, we repurchased approximately $65.6 millionin aggregate principal amount of our 4.50% notes for cancellation during thesecond quarter of 2004. On July 1, 2004, we completed the redemption andcancellation of the remaining balance of our 4.50% notes of approximately $76.4million for approximately $77.7 million plus accrued interest of approximately$1.7 million.

***Other Liquidity Matters***

Asof December 31, 2005, we had federal net operating loss (NOL)carryforwards of approximately $462.2 million. These NOL carryforwards willexpire in the years 2006-2025 (as more fully described in Note 5 to theconsolidated financial statements), if not utilized. During 2000 we determinedthat an ownership change under Section 382 of the Internal Revenue Code of1986, as amended, occurred during 1998. The effect of this ownership change wasthe imposition of a $3.2 million annual limitation on the use of NOLcarryforwards attributable to periods before the change. This annual limitationwill result in the expiration of some NOL carryforwards before they becomeavailable for utilization. At December 31, 2005 the amount of NOL subjectto the limitation was $43.1 million and the amount not subject to limitationwas $419.1 million.

InJuly 2004, we entered into an amendment to a collaboration and licenseagreement with Gilead, referred to herein as the Gilead Amendment. Under theterms of the Gilead Amendment, we agreed to pay Gilead a total of $8.5 millionin eight equal quarterly installments of $1.063 million, payable at ourelection, in cash, registered shares of our common stock or a combinationthereof, in exchange for (i) a reduction of certain future royalty paymentobligations payable by us to Gilead, and (ii) an expansion of the scope ofcertain licenses from Gilead to us relating to certain intellectual propertyrights regarding anti-CTLA-4 products. The first of these payments was paid onAugust 2, 2004 through the issuance of 185,622 shares of our common stockto 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 onJanuary 3, 2006 in cash. The remaining payment will be made onApril 3, 2006.

InAugust 2004, we completed the acquisition of all of the outstandingcapital stock not already owned by us of Ability Biomedical. Pursuant to thistransaction, we acquired Ability Biomedical’s intellectual property related toIP-10, a protein believed to be associated with a variety of immune disorders,including multiple sclerosis, rheumatoid arthritis, inflammatory bowel disease,chronic obstructive pulmonary disease and type I diabetes.

Underthe terms of the share purchase agreement with Ability Biomedical, we made cashpayments totaling approximately $606 thousand and issued a total of 731,823shares of our common stock valued at approximately $4.3 million in exchange forall of Ability Biomedical’s issued and outstanding stock not already owned byus.

Uponachievement of certain development milestones with respect to our anti-IP-10antibody program, but no later than September 4, 2007, we may be requiredto pay the former shareholders of Ability Biomedical an additional amount ofapproximately $3.65 million in cash and/or common stock subject to fluctuationsin currency exchange rates. In lieu of such additional payment, we also havethe option to revert to the original joint collaboration agreement with theformer shareholders of Ability Biomedical whereby each party would beresponsible for 50% of the costs associated with the anti-IP-10 antibody.

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InSeptember 2004, we entered into a series of agreements with Pfizer. Thefirst agreement amended our existing collaborative research and license androyalty agreements with Pfizer to provide for the discovery and development ofup to 50 antibody products over ten years. The second and third agreements werea sublicense from us to Pfizer and a cross-license of certain patents andpatent applications, in each case solely relating to our respective anti-CTLA-4antibody programs. The fourth agreement was a stock purchase agreement alsorelated to the anti-CTLA-4 programs. Pursuant to certain of these agreements,Pfizer made a total initial cash payment to us of $80.0 million and purchased4,827,808 shares of our common stock at a purchase price equal to $6.21 pershare for an aggregate purchase price of $30.0 million. These shares wereissued in a private placement pursuant to an exemption from registrationprovided by Section 4(2) of the Securities Act of 1933, as amended, or theSecurities Act.  The purchase pricerepresented a small premium to market price at the time we entered into thecollaboration.  Pfizer agreed to atwo-year lock-up with respect to the sales of such stock.  We have no further obligation to registersuch stock.

InJanuary 2005, we announced the closing of a collaboration and co-promotionagreement and a related securities purchase agreement with BMS. Under the termsof the collaboration, we and BMS each granted the other certain intellectualproperty licenses and product rights on a worldwide basis in order to enable usto collaborate in research and development of certain therapeuticantibody-based products for the treatment of cancer and other diseases, and, inthe event that further development work is successful, to commercialize anyresulting products. In particular, the collaboration includes a grant by us toBMS of a license to commercialize ipilimumab, a fully human antibody productdeveloped using our UltiMAb Human Antibody Development System. Ipilimumab iscurrently under investigation for the treatment of a broad range of cancers.The collaboration also includes the grant by us to BMS of a sub-license toMDX-1379, a gp100 peptide vaccine licensed by us from the U.S. Public HealthService, for use with ipilimumab for the treatment of metastatic melanoma. Weand BMS are currently conducting a Phase III clinical trial with ipilimumab andMDX-1379 combination therapy in Stage III and Stage IV metastatic melanomapatients at multiple sites worldwide.

Aspart of the collaboration, we and BMS committed to an initial multi-year budgetof approximately $192.0 million to fund the development of ipilimumab as apotential treatment for a broad range of cancers. BMS is responsible for 65% ofall development costs related to clinical trials intended to support regulatoryapproval in both the U.S. and Europe, with the remaining 35% to be paid by us.We and BMS will share equally the costs of any clinical trials of productsintended solely for regulatory approval in the U.S., and BMS will be fullyresponsible for all development costs that relate solely to regulatory approvalin Europe and other parts of the world.

Underthe terms of the collaboration, we could receive up to $205.0 million from BMSif all regulatory milestones are met, plus up to an additional $275.0 millionin sales-related milestones. We will also have the option to co-promote anyproducts in the U.S., and, if we elect to exercise this option and haveparticipated in the funding of the applicable Phase II clinical trial(s), wewill receive 45% of any profits from commercial sales. In the event we choosenot to exercise our co-promotion rights, BMS will have exclusive commercialrights in the U.S. and will pay us royalties on commercial sales. Outside theU.S., BMS will have exclusive commercial rights and will pay us royalties oncommercial sales.

Pursuantto these agreements, BMS made an initial cash payment to us on January 21,2005 of $25.0 million. In addition, BMS purchased a total of 2,879,223unregistered shares of our common stock at a purchase price equal to $8.6829per share for an aggregate purchase price of $25.0 million. These shares wereissued in a private placement pursuant to the exemption from registrationprovided by Section 4(2) of the Securities Act of 1933. The purchaseprice represented a small premium to the market price on the date we enteredinto the collaboration. BMS agreed to a two-year lock-up period with respect toany sales of such stock. We have no future obligation to register such stock.

InOctober 2005, Celldex completed the acquisition of all of the issued andoutstanding shares of capital stock of Lorantis Limited (“Lorantis”), aprivately held biotechnology company based in Cambridge, U.K. and substantiallyall of the assets of Alteris Therapeutics, Inc. (“Alteris”), a privately heldbiotechnology company based in Philadelphia, PA.

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Thepurchase price of Lorantis consisted of 6.8 million shares of Celldex Class Acommon stock (valued at $34.0 million).

The purchase pricefor substantially 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 Alterisup to $5.0 million upon obtaining the first approval for commercial sale of anEGFRvIII product.  In addition, Celldexmay be required to pay an amount equal to 20% of any upfront fees or milestonepayments received from a certain unrelated third-party licensee, in the eventthat within 12 months of the closing, Celldex enters into a license agreementwith such third party for any EGFRvIII-derived product developed using thetechnology acquired from Alteris.

***Contractual Obligations***

Our material contractualobligations under lease, debt and research funding agreements for the next fiveyears, 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)             Our convertible notesmay be converted to common stock prior to the maturity date and, therefore, maynot require the use of our capital resources.

(3)             Research funding for “Lessthan 1 year” includes up to $40.1 million that we anticipate may be used underour collaboration 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-BalanceSheet Arrangements***

We do not have anyoff-balance sheet arrangements.

***FinancialUncertainties Related to Potential Future Milestone Payments***

EffectiveSeptember 4, 2002, we entered into a collaboration and license agreementwith Kirin, which provides for us to exchange with Kirin certain cross-licensesfor each other’s technology for the development and commercialization of humanantibody products. Pursuant to a letter of intent that was superseded by thecollaboration and license agreement, we and Kirin developed the KM-Mouse, aunique crossbred mouse that combines the traits of our HuMAb-Mouse with Kirin’sTC MouseTM. Under the collaboration and license agreement, we have exchangedcross-licenses with Kirin with respect to the KM-Mouse and otherantibody-generating

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mice. In addition,certain of the cross-licenses granted under the Collaboration and LicenseAgreement are subject to license, milestone and royalty payments by one partyto the other.

Through December 31,2005, we have 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,Kirin technology that (i) are currently in clinical trials, or(ii) we anticipate may enter clinical trials through the end of 2007, wemay be required to make milestone payments to Kirin aggregating up toapproximately $12.75 million with respect to such products, or a maximum ofapproximately $4.25 million per product. Our future milestone payment obligationsto Kirin may or may not be triggered, and may vary in size, depending on anumber of variables, almost all of which are currently unknown, including thefollowing:

**·**      whether or not a decision ismade to request a license from Kirin;

·       the type of licenserequested (research or commercial);

·       the success and timing ofdevelopment efforts and clinical trials of product candidates covered by anysuch licenses;

·       the type of productdeveloped (payment obligationsdiffer depending on whether a product is an *ex vivo*therapeutic, *in vivo* therapeutic,research reagent or diagnostic);and

·       other financial provisionsof the Kirin agreement that provide for variations in fee levels and netting ofcertain payments over specified periods of time that may impact the totalamount potentially payable to Kirin for any particular license fee or milestonepayment.

We have also entered intoa number of other agreements that contain licenses of third-party technologywhich may be used together with our own platform technologies for thegeneration, 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. ThroughDecember 31, 2005, we had made milestone payments of approximately $0.3million under these agreements. In addition, under the agreements we currentlyhave in place (other than with Kirin), based on a total of nine products we aredeveloping for which milestones are potentially due and that (i) are nowin clinical trials, or (ii) which we anticipate may enter clinical trialsbefore the end of 2007, we may be obligated to make future milestone paymentsaggregating up to approximately $59.9 million with respect to such products. Ingeneral, potential milestone payments for our antibody products may or may notbe triggered under these licenses, and may vary in size, depending on a numberof variables, almost all of which are currently uncertain. Typically, theevents that trigger these payments per product include:

·       submission ofIND(s) or foreign equivalents;

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

·       submission ofBLA(s) or foreign equivalents; and

·       receipt of marketingapproval(s) to sell products in a particular country or region.

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

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***FutureLiquidity Resources***

Our current sources ofliquidity are our cash, cash equivalents and marketable securities, interestand dividends earned on such cash, cash equivalents and marketable securities,contract and licensing revenue and sales of our products for research. Webelieve that such sources of liquidity will be sufficient to meet ouroperating, debt service, and capital requirements for at least the next 24months. To the extent our 2.25% notes are converted into shares of our 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. Wecannot assure you that we will be able to raise such additional funds. We maybe unable to raise sufficient funds to complete development of any of ourproduct candidates or to continue operations. As a result, we may face delay,reduction or elimination of research and development programs or preclinical orclinical trials, in which case our business, financial condition or results ofoperations may be materially harmed.

***RecentlyIssued Accounting Pronouncements***

In December 2004,the FASB issued Statement No. 123 (revised 2004), *Share-Based Payment,* which is a revisionof Statement No. 123, *Accounting forStock-Based Compensation.*Statement 123(R) supersedes APBOpinion No. 25, *Accounting for StockIssued to Employees,* and amends Statement No. 95, *Statement of Cash Flows.*Statement123(R) requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statements based ontheir fair values. Historically, in accordance with SFAS 123 andSFAS 148, *Accounting for Stock-BasedCompensation*—*Transition andDisclosure*, we had elected to follow the disclosure only provisionsof Statement No. 123 and, accordingly, continue to account for share basedcompensation under the recognition and measurement principles of APB OpinionNo. 25 and related interpretations. Under APB 25, when stock options areissued with an exercise price equal to the market price of the underlying stockprice on the date of grant, no compensation expense is recognized in thefinancial statements, and compensation expense in only disclosed in the footnotesto the financial statements. We are required to adopt StatementNo. 123(R)  beginning January 1, 2006. We have selected theBlack-Scholes option valuation method and the modified prospective transitionmethod available under Statement 123(R). Although we have not yet determinedthe impact of Statement 123(R), we believe the non-cash expense for 2006related to Statement 123(R) will be in the range of $17.0 million to $18.0million.

**Item 7A.**                 Quantitative and QualitativeDisclosures about Market Risks

We do not use derivativefinancial instruments in our investment portfolio. We regularly invest excessoperating cash in deposits with major financial institutions, money marketfunds, notes issued by the U.S. Government, as well as fixed income investmentsand U.S. bond funds both of which can be readily purchased or sold usingestablished markets. We believe that the market risk arising from our holdingsof these financial instruments is minimal. We do not have exposure to marketrisks associated with changes in interest rates as we have no variable interestrate debt outstanding. We do not believe we have any material exposure tomarket risks associated with interest rates, however, we may experiencereinvestment risk as fixed income securities mature and are reinvested insecurities bearing lower interest rates.

We may be exposed toexchange conversion differences in translating the foreign results of ourinvestment in Genmab to U.S. dollars. Depending upon the relative strengtheningor weakening of the U.S. dollar, the conversion difference could besignificant.

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**Item8.**                          ConsolidatedFinancial Statements and Supplementary Data

**Index toConsolidated Financial Statements**
|                                                                                                                             | **Page** |
|-----------------------------------------------------------------------------------------------------------------------------|----------|
| **Medarex, Inc.**                                                                                                      |     |
|                                                                                                                        |     |
| Report of Independent Registered Public Accounting  Firm                                                                    | F-2      |
|                                                                                                                        |     |
| Consolidated  Balance Sheets as of December 31, 2005 and 2004 (restated)                                               | F-3      |
|                                                                                                                        |     |
| Consolidated  Statements of Operations for the years ended December 31, 2005, 2004 and  2003 (restated)                | F-4      |
|                                                                                                                        |     |
| Consolidated  Statements of Shareholders’ Equity for the years ended December 31,  2005, 2004 and 2003 (restated) | F-5      |
|                                                                                                                        |     |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2005, 2004 and  2003 (restated)                | F-7      |
|                                                                                                                        |     |
| Notes to  Consolidated Financial Statements                                                                                 | F-8      |
| ** **                                                                                                                  |     |
| **Genmab A/S (A development stage company)**                                                                                |     |
| ** **                                                                                                                  |     |
| Report of Independent Registered Public Accounting  Firm                                                                    | F-50     |

 

F-1

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** **

**Reportof Independent Registered Public Accounting Firm**

The Board of Directors and Shareholders

Medarex, Inc.

Wehave audited the accompanying consolidated balance sheets of Medarex, Inc.and subsidiaries as of December 31, 2005 and 2004, and the related consolidatedstatements of operations, shareholders’ equity and cash flows for each of thethree years in the period ended December 31, 2005. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits. The financial statements of Genmab A/S (a corporation in which theCompany has an 22% interest at December 31, 2004), have been audited by otherauditors whose report for December 31, 2004 and the two year period then endedhas been furnished to us, and our opinion on the 2004 and 2003 consolidatedfinancial statements, insofar as it relates to the amounts included for GenmabA/S, is based solely on the report of the other auditors.  In the consolidated financial statements, theCompany’s investment in Genmab A/S represents 0.3% of total assets as ofDecember 31, 2004, and the Company’s equity in the net loss of Genmab A/Srepresents 10% in 2004 and 12% in 2003 of pre-tax loss.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluatingthe overall financial statement presentation. We believe that our audits andthe report of other auditors provide a reasonable basis for our opinion.

Inour opinion based on our audits and the report of other auditors, the financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Medarex, Inc. and subsidiaries atDecember 31, 2005 and 2004, and the consolidated results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2005 in conformity with U.S. generally accepted accountingprinciples.

Asdiscussed in Note 18, the consolidated financial statements have been restated.

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.”

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of Medarex, Inc.’s internal control over financial reportingas of December 31, 2005, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission, and our report dated March 3,2006, except for Note 18 as to which the date is February 2, 2007 expressed anunqualified opinion thereon.
|                                        | /s/ ERNST & YOUNG LLP |
|----------------------------------------|---------------------------|
| MetroPark, New Jersey                  |                      |
| March 3, 2006, except for Note 18 |                      |
| as to which the  date is               |                      |
| February 2, 2007                       |                      |

 

F-2

----

** **

**MEDAREX,INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except share data)**
| ** **                                                                                                                                                                                                                     | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                     | ** ** | **2005**             | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                                                     | ** ** | **(restated)**       | ** ** | **(restated)** | ** ** |
| 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                                                                                                                                                                                                           |       | 29,371               |       | 33,302 |   |
| Deferred  contract revenue - current                                                                                                                                                                                           |       | 20,872               |       | 15,260 |   |
| Total current  liabilities                                                                                                                                                                                                     |       | 55,182               |       | 53,560 |   |
|                                                                                                                                                                                                                           |       |                 |       |   |   |
| 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                                                                                                                                                                                                |       | 943,245              |       | 732,778 |   |
| 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                                                                                                                                                                                                           |       | (781,953             | )          | (633,941 | ) |
| Total shareholders’  equity                                                                                                                                                                                               |       | 159,245              |       | 106,235 |   |
| Total liabilities and  shareholders’ equity                                                                                                                                                                               |       | $                    | 486,876    |   | $ | 549,345 |   |

** **

F-3

----

** **

**MEDAREX,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Inthousands, 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                                                 |       | 136,940                                                     |       | 123,012 |   | 97,803 |   |
| General and  administrative                                               |       | 28,969                                                      |       | 25,259 |   | 23,840 |   |
| Acquisition of  in-process technology                                     |       | 8,447                                                       |       | 5,455 |   | 6,500 |   |
| Total costs and  expenses                                                 |       | 174,356                                                     |       | 153,726 |   | 128,146 |   |
| Operating loss                                                            |       | (122,901                                                    | )          | (141,252 | ) | (116,972 | ) |
|                                                                      |       |                                                        |       |   |   |   |   |
| Equity in net loss of  affiliate                                          |       | (6,323                                                      | )          | (19,791 | ) | (14,997 | ) |
| Interest, dividend  income and realized gains                             |       | 14,740                                                      |       | 9,228 |   | 11,301 |   |
| 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                                                              |       | (147,654                                                    | )          | (186,361 | ) | (133,845 | ) |
| Provision for income  taxes                                               |       | 358                                                         |       | 31 |   | 69 |   |
| Loss before cumulative  effect of change in accounting principle          |       | (148,012                                                    | )          | (186,392 | ) | (133,914 | ) |
| Cumulative effect of  change in accounting principle                      |       | —                                                      |       | — |   | (830 | ) |
| Net loss                                                                  |       | $                                                           | (148,012   | ) | $ | (186,392 | ) | $ | (134,744 | ) |
|                                                                      |       |                                                        |       |   |   |   |   |
| Basic and diluted net  loss per share:                                    |       |                                                        |       |   |   |   |   |
| Loss before cumulative  effect of change in accounting principle          |       | $                                                           | (1.34      | ) | $ | (2.29 | ) | $ | (1.71 | ) |
| Cumulative effect of  change in accounting principle                      |       | —                                                      |       | — |   | (0.01 | ) |
| Net loss                                                                  |       | $                                                           | (1.34      | ) | $ | (2.29 | ) | $ | (1.72 | ) |
|                                                                      |       |                                                        |       |   |   |   |   |
| Weighted average number of common shares outstanding - basic and  diluted |       | 110,309                                                     |       | 81,494 |   | 78,314 |   |

** **

**See notes to theseconsolidated financial statements.**

F-4

----

**MEDAREX,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

**(Dollarsin thousands)**
| ** **                                                                               | ** ** | **Common Stock**  | ** ** | **Capital in** | ** ** | **Treasury Stock**              | ** ** | ** **             | **Accumulated  Other**

**Comprehensive  Income (Loss)** | ** ** | **Accumulated  Deficit** | ** **                 | **Total  Shareholders’  Equity** | ** **     |       |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|--------------------------------------|------------|------------------------|---------------------------------------------------------------|------------|--------------------------|----------------------------|---------------------------------------|----------------|------------|
| ** **                                                                               | ** ** | **Number  of  Shares** | ** ** | **Amount**          | ** ** | **Excess  of  par  Value** | ** ** | **Number  of  Shares** | ** **                                                    | **Amount** | ** **               | **Deferred  Compensation** | ** **                            | ** **     | ** ** | ** ** |   |
| ** **                                                                               | ** ** | ** **             | ** ** | ** **          | ** ** | **(restated)**                       | ** ** | ** **             | ** **                                                    | ** ** | ** **               | ** **                 | ** **                            | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |   |
| Balance at December 31,  2002 (previously reported)                                      |       | 77,725,376             |       | $                   | 777        |                                 | $          | 630,279                |                                                          | (795,392   | )                        | $                          | (2,001                                | )              | $          | 1,311 |   | $ | 5,380 |   | $ | (283,603 | ) | $ | 352,143 |   |
| Adjustments to opening  shareholders’ equity                                        |       | —                 |       |                |       | 27,164                               |       |                   |                                                          |       |                     |                       |                                  | 1,057          |       | (29,202 | ) | (981 | ) |
| Balance at December 31,  2002 (restated)                                                 |       | 77,725,376             |       | 777                 |       | 657,443                              |       | (795,392               | )                                                             | (2,001     | )                        | 1,311                      |                                  | 6,437          |       | (312,805 | ) | 351,162 |   |
|                                                                                     |       |                   |       |                |       |                                 |       |                   |                                                          |       |                     |                       |                                  |           |       |   |   |   |   |
|  Issuance of common stock for exercise of  options and stock-based compensation     |       | 441,397                |       | 4                   |       | 5,857                                |       |                   |                                                          |       |                     | 442                        |                                  |           |       |   |   | 6,303 |   |
| 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                                                                                 |       |                   |       |                |       |                                 |       |                   |                                                          |       |                     |                       |                                  |           |       | (134,744 | ) | (134,744 | ) |
|  Other comprehensive income (loss)  foreign currency translation adjustment         |       |                   |       |                |       |                                 |       |                   |                                                          |       |                     |                       |                                  | 2,766          |       |   |   | 2,766 |   |
| Unrealized loss on  securities                                                           |       |                   |       |                |       |                                 |       |                   |                                                          |       |                     |                       |                                  | (576           | )          |   |   | (576 | ) |
| Comprehensive loss                                                                       |       |                   |       |                |       |                                 |       |                   |                                                          |       |                     |                       |                                  |           |       |   |   | (132,554 | ) |
| Balance at December 31,  2003 (restated)                                                 |       | 79,501,080             |       | 795                 |       | 671,338                              |       | (493,516               | )                                                             | (1,242     | )                        | 994                        |                                  | 8,627          |       | (447,549 | ) | 232,963 |   |
|                                                                                     |       |                   |       |                |       |                                 |       |                   |                                                          |       |                     |                       |                                  |           |       |   |   |   |   |
| Issuance of common stock  for exercise of options and stock based compensation           |       | 201,450                |       | 2                   |       | 2,712                                |       |                   |                                                          |       |                     | 138                        |                                  |           |       |   |   | 2,852 |   |
| 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                                                                                 |       |                   |       |                |       |                                 |       |                   |                                                          |       |                     |                       |                                  |           |       | (186,392 | ) | (186,392 | ) |
|                                                                                          |            |                        |            |                     |            |                                      |            |                        |                                                               |            |                          |                            |                                       |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-5

----

**MEDAREX,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

**(Dollarsin thousands)**
| ** **                                                                      | ** ** | **Common Stock**      | ** ** | **Capital in** | ** ** | **Treasury Stock**        | ** ** | ** **                 | ** ** | **Accumulated** | ** ** | ** **                 | ** ** | ** **                                   | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------|------------|--------------------------------|------------|----------------------------|------------|-----------------|------------|----------------------------|------------|----------------------------------------------|------------|
| ** **                                                                      | ** ** | **Number  of shares** | ** ** | **Amount**          | ** ** | **excess  of par  value** | ** ** | **Number  of shares** | ** ** | **Amount**      | ** ** | **Deferred  Compensation** | ** ** | **Other  Comprehensive  Income (Loss)** | ** ** | **Accumulated  deficit** | ** ** | **Total  shareholders’  equity** | ** ** |
| ** **                                                                      | ** ** | ** **                 | ** ** | ** **          | ** ** | **(restated)**                 | ** ** | ** **                 | ** ** | ** **      | ** ** | ** **                 | ** ** | **(restated)**                               | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Other comprehensive  income (loss)  -foreign currency translation adjustment    |       |                       |       |                |       |                           |       |                       |       |            |       |                       |       | 724                                          |       |   |   | 724 |   |
| Unrealized loss on  securities                                                  |       |                       |       |                |       |                           |       |                       |       |            |       |                       |       | (2,702                                       | )          |   |   | (2,702 | ) |
| Comprehensive loss                                                              |       |                       |       |                |       |                           |       |                       |       |            |       |                       |       |                                         |       |   |   | (188,370 | ) |
| Balance at December 31,  2004 (restated)                                        |       | 85,865,333                 |       | 859                 |       | 732,778                        |       | (191,640                   | )          | (482            | )          | 372                        |       | 6,649                                        |       | (633,941 | ) | 106,235 |   |
|                                                                            |       |                       |       |                |       |                           |       |                       |       |            |       |                       |       |                                         |       |   |   |   |   |
| Issuance of common stock  for exercise of options and stock based compensation  |       | 919,067                    |       | 9                   |       | 6,322                          |       |                       |       |            |       | (94                        | )          |                                         |       |   |   | 6,237 |   |
| 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 |   |
| Subsidiary stock  issuance                                                      |       |                       |       |                |       | 24,000                         |       |                       |       |            |       |                       |       |                                         |       |   |   | 24,000 |   |
| Net loss                                                                        |       |                       |       |                |       |                           |       |                       |       |            |       |                       |       |                                         |       | (148,012 | ) | (148,012 | ) |
|                                                                            |       |                       |       |                |       |                           |       |                       |       |            |       |                       |       |                                         |       |   |   |   |   |
| Other comprehensive  income (loss)  - foreign currency translation adjustment   |       |                       |       |                |       |                           |       |                       |       |            |       |                       |       | (610                                         | )          |   |   | (610 | ) |
| Unrealized loss on  securities                                                  |       |                       |       |                |       |                           |       |                       |       |            |       |                       |       | (8,390                                       | )          |   |   | (8,390 | ) |
| Comprehensive loss                                                              |       |                       |       |                |       |                           |       |                       |       |            |       |                       |       |                                         |       |   |   | (157,011 | ) |
| Balance at December 31, 2005 (restated)                                         |       | 111,773,230                |       | $                   | 1,118      |                           | $          | 943,245                    |       | (85,300         | )          | $                          | (215       | )                                            | $          | (599 | ) | $ | (2,351 | ) | $ | (781,953 | ) | $ | 159,245 |   |
|                                                                                 |            |                            |            |                     |            |                                |            |                            |            |                 |            |                            |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

See notes to theseconsolidated financial statements.

F-6

----

**MEDAREX,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

** **
| ** **                                                                   | ** ** | **2005**       | ** ** | **2004**       | ** ** | **2003**       | ** ** |
|------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                                                                   | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Operating  activities:                                                       |       |           |       |           |       |           |       |
| Net loss                                                                     |       | $              | (148,012   | )              | $          | (186,392       | )          | $ | (134,744 | ) |
| 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          |       | 6,847          |       | 5,623          |       |
| Loss on sale of equipment                                                    |       | —         |       | 105            |       | —         |       |
| Stock options and awards to employees                                        |       | 1,890          |       | 3,047          |       | 5,163          |       |
| 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                                                          |       | (6,088         | )          | 20,875         |       | 281            |       |
| 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 theseconsolidated financial statements.

F-7

----

**MEDAREX, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**December 31, 2005, 2004 and2003**

**(Dollars in thousands, unlessotherwise indicated, except share data)**

**1.****                 Organizationand Description of Business**

Medarex, Inc.(“Medarex” or the “Company”), incorporated in July 1987, is abiopharmaceutical company developing therapeutic products for cancer,inflammation, autoimmune disorders and other life-threatening and debilitatingdiseases based on its proprietary technology. The Company’s therapeuticproducts are currently under development and will need the approval of the U.S.Food and Drug Administration (“FDA”) prior to commercial distribution in theUnited States.

The Company’sfinancial statements consolidate all of its subsidiaries, including those thatit controls and those in which it holds a majority voting interest.  As of December 31, 2005, Medarex ownsapproximately 60% of the outstanding common stock of CelldexTherapeutics, Inc. (“Celldex”) (see Note 15).  As of December 31, 2005, the Company hassignificant investments in Genmab A/S (“Genmab”) (see Note 11) and IDM Pharma,Inc. (“IDM Pharma”) (see Note 12). The Company’s operations constitute onebusiness segment. All significant intercompany balances and transactions havebeen eliminated in consolidation.

The Company hasrestated its results for the years 1996 through 2002 as an adjustment to itsbeginning accumulated deficit as of January 1, 2003 and has restated itsconsolidated financial statements as of December 31, 2005 and 2004 and for theyears ended December 31, 2005, 2004 and 2003 to correct errors related tostock-based compensation not previously recorded for certain stock optiongrants (see Note 18) and other immaterial errors related to the amortization ofpremiums and discounts related to its marketable securities.

**2.****                 SignificantAccounting Policies**

***CashEquivalents***

The Companyconsiders all highly liquid investments with an original maturity of threemonths or less when purchased to be cash equivalents. The Company invests itscash in deposits with major financial institutions, money market funds andnotes issued by the U. S. government.

***MarketableSecurities and Long-Term Non-Marketable Investments***

Marketablesecurities consist of fixed income investments with a maturity of greater thanthree months and other highly liquid investments that can be readily purchasedor sold using established markets. Under SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities,” these investments areclassified as available-for-sale and are reported at fair value on the Company’sconsolidated balance sheet. Unrealized holding gains and losses are reportedwithin accumulated other comprehensive income as a separate component ofshareholders’ equity. Under the Company’s accounting policy, a decline in the fairvalue of marketable securities is deemed to be “other than temporary” and suchmarketable securities are generally considered to be impaired if their fairvalue is less than the Company’s cost basis for more than six months, or someother period in light of the particular facts and circumstances surrounding theinvestment. If a decline in the fair value of a marketable security below theCompany’s cost basis is determined to be other than temporary, such marketablesecurity is written down to its estimated fair value as a new cost basis andthe amount of the write-down is included in earnings as an impairment charge.

In addition, theCompany has investments in several of its partners whose securities are notpublicly traded. These investments are accounted for under the cost basis.Because these securities are not publicly traded, the Company values theseinvestments by using information acquired from industry trends, management ofthese companies, such companies’ financial statements, and other external sources.Specifically, the Company’s determination of any potential impairment of thevalue of privately held securities 

F-8

----

includes an analysis ofthe following for each company on a periodic basis: review of interim andyear-end financial statements, cash position and overall rate of cash used tosupport operations, the progress and development of technology and productplatform, the per share value of subsequent financings, and potential strategicalternatives. Based on the information acquired through these sources, theCompany records an investment impairment charge when it believes an investmenthas experienced a decline in value that is considered to be other thantemporary.

The Companyrecorded investment impairment charges of $0, $0.2 million and $0 related toinvestments in partners whose securities are publicly traded for the yearsended December 31, 2005, 2004 and 2003, respectively. In addition, theCompany recorded investment impairment charges of $33.3 million, $7.1 millionand $1.4 million in partners whose securities are privately held for the yearsended December 31, 2005, 2004 and 2003, respectively.  Approximately $29.3 million, $7.1 million and$0 of 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).

***SegregatedSecurities***

Segregatedsecurities primarily represent U.S. treasury security strips whichcollateralized interest payments related to the Company’s 4.25% convertiblesenior notes which were due August 15, 2010 and all of which were convertedinto shares of common stock in January 2005 (see Note 6).

***FinancialInstruments***

The fair values ofcash and cash equivalents, marketable securities, accounts payable, accruedliabilities and convertible subordinated notes payable are not materiallydifferent from their carrying amounts as of December 31, 2005 and 2004.Receivables from partners are concentrated primarily in the pharmaceutical andbiotechnology industries. Although the Company’s partners are concentratedprimarily within these two industries, management considers the likelihood ofmaterial credit risk as remote.

***Property,Buildings and Equipment***

Property,buildings and equipment are stated at cost. Depreciation is determined usingstraight-line methods over the estimated useful lives of the various assetclasses. Useful lives for buildings and building improvements, furniture andfixtures and machinery and equipment principally range from fifteen to thirtyyears, five years and three to five years, respectively. Leasehold improvementsare amortized over the estimated useful lives of the assets or the initiallease terms, whichever is shorter.

***Impairmentof Long-Lived Assets***

Long-lived assetsand certain 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 their estimated fair values. Long-livedassets and certain identifiable intangible assets to be disposed of arereported at the lower of carrying amount or fair value less cost to sell.

 

F-9

----

***Transactions inEquity Method Investee Stock***

Atthe time an equity method investee sells its stock to unrelated parties at aprice in excess of its book value, the Company’s net investment in that equitymethod investee increases proportionately to its equity basis in the equitymethod investee. If at that time the equity method investee is a newly-formedstart-up, a research and development or a development stage company, theCompany’s proportionate share of the equity method investees’ equity resultingfrom the additional equity raised is accounted for as an increase to capital inexcess of par value under Accounting Principles Board (“APB”) OpinionNo. 18 and Staff Accounting Bulletin (“SAB”) No. 51.

***Foreign CurrencyTranslation***

Investmentsin foreign affiliates accounted for under the equity method have beentranslated into U.S. dollars in accordance with the Financial AccountingStandards Board (“FASB”) Statement No. 52, *Foreign Currency Translation*. All asset and liabilityaccounts have been translated using the exchange rates in effect at the balancesheet date. Income statement amounts have been translated using the averageexchange rate for the year. The gains and losses resulting from the changes inexchange rates from year to year have been reported in other comprehensiveincome (loss). As of December 31, 2005, the accumulated unrealized foreignexchange translation gain included in other comprehensive income wasapproximately $4.9 million.

***RevenueRecognition***

TheCompany receives payments from customers and partners from the sale ofantibodies, for licenses to its proprietary technology for product development,for services and from the achievement of product development milestones. Thesepayments are generally non-refundable and are reported as deferred revenueuntil they are recognizable as revenue. The Company follows the followingprinciples in recognizing revenue:

·       The Company sellsantibodies primarily to partners in the United States and overseas. Revenuefrom these sales is recognized when the antibodies are shipped and the Companyhas no further obligations related to the development of the antibodies.

·       Fees received from thelicensing of the Company’s proprietary technologies for research anddevelopment performed by its customers and partners is recognized generallyover the term of the respective license period beginning after both the licenseperiod has begun and the technology has been delivered.

·       Fees received for productdevelopment services are recognized ratably over the period during which theservices are performed.

·       Milestone payments arerecognized as revenue upon the achievement of mutually agreed milestones,provided that (i) the milestone event is substantive and its achievementis not reasonably assured at the inception of the agreement, and(ii) there are no continuing performance obligations associated with themilestone payment.

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

F-10

----

·         Revenues derived from reimbursements of costsassociated with the development of product candidates are recorded incompliance with EITF Issue 99-19, “Reporting Revenue Gross as a PrincipalVersus Net as an Agent” (“EITF 99-19”). According to the criteria established by EITF 99-19, in transactionswhere the Company acts as a principal, with discretion to choose suppliers,bears credit risk and performs part of the services required in thetransaction, the Company believes it has met the criteria to record revenue forthe gross amount of the reimbursements.

·         Grant revenues are recognized as the Companyprovides the services stipulated in the underlying grant based on the time andmaterials incurred. Amounts received in advance of services provided arerecorded as deferred revenue and amortized as revenue when the services areprovided.

***Research andDevelopment***

Researchand development costs are expensed as incurred and primarily consist ofpersonnel costs, facilities (including depreciation), research and laboratorysupplies, funding of outside research, license and technology access fees,expenses related to antibody manufacturing and clinical trial expenses. Coststo acquire technologies that are utilized in research and development that haveno alternative future use are expensed as incurred.

***Use of Estimates***

Thepreparation of the financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Actual results could differ from those estimates.

***Stock-BasedCompensation***

AtDecember 31, 2005, the Company’s stock awards are governed by its 2005Equity Incentive Plan, as amended, which is described more fully in Note 8. TheCompany accounts for its stock awards plan under the recognition andmeasurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees,* and relatedInterpretations. The following table illustrates the effect on net loss pershare if the Company had applied the fair value recognition provisions of FASBStatement No. 123, *Accounting forStock-Based Compensation*, to stock-based employee compensation.
| ** **                                                                                  | ** ** | **Year ended December 31** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                  | ** ** | **(restated)**                            | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Net loss, as  reported                                                                      |       | $                                         | (148,012   | ) | $ | (186,392 | ) | $ | (134,744 | ) |
| Add: Non-cash  employee compensation                                                        |       | 1,890                                     |       | 3,047 |   | 5,163 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value method |       | (17,437                                   | )          | (17,204 | ) | (13,902 | ) |
| Pro forma net  loss                                                                         |       | $                                         | (163,559   | ) | $ | (200,549 | ) | $ | (143,483 | ) |
| Loss per share:                                                                             |       |                                      |       |   |   |   |   |
| Basic and diluted, as reported                                                              |       | $                                         | (1.34      | ) | $ | (2.29 | ) | $ | (1.72 | ) |
| Basic and  diluted, pro forma                                                               |       | $                                         | (1.48      | ) | $ | (2.46 | ) | $ | (1.83 | ) |

 

F-11

----

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***

TheCompany uses the asset and liability method to account for income taxes,including the recognition of deferred tax assets and deferred tax liabilitiesfor the anticipated future tax consequences attributable to differences betweenfinancial statements amounts and their respective tax bases. The Companyreviews its deferred tax assets for recovery. A valuation allowance isestablished when the Company believes that it is more likely than not that itsdeferred tax assets will not be realized. Changes in valuation allowances fromperiod to period are included in the Company’s tax provision in the period ofchange.

***Net Loss Per Share***

Basicand diluted net loss per share are calculated in accordance with SFASNo. 128, *Earnings Per Share*.Basic net loss per share is based upon the number of weighted average shares ofcommon stock 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 from theassumed exercise of outstanding stock options as well as the assumed conversionof convertible senior notes. Potentially dilutive securities have been excludedfrom the computation of diluted net loss per share for all years presented, astheir effect is antidilutive.  A summaryof such potentially dilutive securities is as follows:

|                    | ** ** | **Year ended December 31** | ** ** |
|--------------------|------------|-------------------------------------------|------------|
| ** **         | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Convertible  notes |       | 10,936,935                                |       | 29,161,546 |   | 13,818,457 |   |
| Stock options      |       | 16,803,728                                |       | 14,245,187 |   | 11,629,594 |   |
|               |       | 27,740,663                                |       | 43,406,733 |   | 25,448,051 |   |

 

***Asset RetirementObligations***

EffectiveJanuary 1, 2003, the Company changed its method of accounting for assetretirement obligations in accordance with SFAS No. 143, *Accounting for Asset Retirement Obligations*.Previously, the Company was not required to recognize amounts related to assetretirement obligations. Under SFAS No. 143, the Company now recognizesasset retirement obligations in the period in which they are incurred if areasonable estimate of fair value can be made. The associated asset retirementcosts are capitalized 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.Adoption of SFAS

F-12

----

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

***Reclassifications***

Certainprior year balances have been reclassified to conform with the current yearpresentation.

***Impact of RecentlyIssued Accounting Pronouncements***

InDecember 2004, the FASB issued Statement No. 123 (revised 2004), *Share-Based Payment*, which is a revisionof Statement No. 123, *Accounting forStock-Based Compensation*. Statement 123(R) supersedes APB OpinionNo. 25, *Accounting for Stock Issued toEmployees*, and amends Statement No. 95, *Statement of Cash Flows.*Statement123(R) requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statements based ontheir fair values. Historically, in accordance with SFAS 123 andSFAS 148, *Accounting for Stock-BasedCompensation*—*Transition andDisclosure*, the Company had elected to follow the disclosure onlyprovisions of Statement No. 123 and, accordingly, continues to account forshare-based compensation under the recognition and measurement principles ofAPB Opinion No. 25 and related interpretations. Under APB 25, when stockoptions are issued with an exercise price equal to the market price of theunderlying stock price on the date of grant, no compensation expense isrecognized in the financial statements, and compensation expense is onlydisclosed in the footnotes to the financial statements. The Company is requiredto adopt Statement No. 123(R) beginning January 1, 2006.  The Company selected the Black-Scholes optionvaluation method and the modified prospective transition method available underStatement 123(R). Although the Company has not yet determined the final impactof Statement 123(R), the Company believes the non-cash expense for 2006 relatedto Statement 123(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 |   |
|                                                                  |            |          |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company’savailable for sale investments have the following maturities atDecember 31, 2005:

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

 

F-13

----

Forthe years ended December 31, 2005, 2004 and 2003, realized gains totaled$3.3 million, $2.3 million and $2.1 million, respectively, and realized lossestotaled $0, $0 and $0.1 million, respectively. The cost of securities sold isbased on the specific identification method.

Unrealizedloss positions for which other-than-temporary impairments have not been recognizedat 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 | ) |

 

Unrealizedlosses in the portfolio relate to an equity security (approximately $5.1million) and various debt securities including U.S. treasury obligations, assetbacked securities and corporate bonds (approximately $2.2 million).  For the equity security, the unrealized losswas due to a temporary decline in the value of the security. For the debtsecurities, the unrealized losses were primarily due to increases in interestrates. The Company has concluded that unrealized losses in its investmentsecurities are not other-than-temporary and the Company has the ability to holdsecurities to maturity date or the recovery period.

**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 |   |

 

 

F-14

----

Accrued liabilities consist of the following as ofDecember 31:
| ** **                                   | ** ** | **2005**       | ** ** | **2004**       | ** ** |
|----------------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                                   | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Accrued convertible  debt redemption expense |       | $              | —     |           | $          | 10,151 |   |
| Accrued construction  and equipment costs    |       | 312            |       | 330            |       |
| Accrued interest                             |       | 450            |       | 2,793          |       |
| Accrued compensation                         |       | 8,206          |       | 7,056          |       |
| 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          |       |
|                                         |       | $              | 29,371     |           | $          | 33,302 |   |

 

**5.   Taxes**

The provision (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 taxprovision relates to foreign withholding taxes. The current state tax provisionis attributable to the New Jersey alternate minimum tax assessment.

F-15

----

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** | ** ** |
| ** **                                            | ** ** | **(restated)**                            | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Computed at  statutory rate                           |       | $                                         | (50,202    | ) | $ | (63,363 | ) | $ | (45,507 | ) |
| 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       |       | 62,502                                    |       | 75,187 |   | 56,064 |   |
|                                                  |       | $                                         | 358        |   | $ | 31 |   | $ | 69 |   |

 

The components ofdeferred tax assets and liabilities consist of the following as ofDecember 31:
| ** **                                             | ** ** | **2005**       | ** ** | **2004**       | ** ** |
|--------------------------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                                             | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Deferred tax  assets:                                  |       |           |       |           |       |
| Net operating loss carryforwards                       |       | $              | 180,029    |           | $          | 174,059 |   |
| Stock-based compensation                               |       | 11,701         |       | 11,249         |       |
| 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            |       |
|                                                   |       | 312,463        |       | 248,806        |       |
| Deferred tax asset valuation allowance                 |       | (312,463       | )          | (248,806       | )          |
| Net deferred tax  assets                               |       | $              | —     |           | $          | — |   |

 

At December 31,2005, approximately $28.5 million of gross deferred tax assets related to netoperating loss (“NOL”) carryforwards representing tax benefits associated withthe exercise of non-qualified stock options and the disqualifying disposition ofstock acquired with incentive stock options. Such benefits, when realized, arecredited to additional paid-in capital.

F-16

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At December 31,2005, the Company had federal NOL carryforwards of approximately $462.2million. The NOL carryforwards expire in 2006 ($0.8 million), 2007 ($4.0million), 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 ($37.5 million), 2021 ($19.2 million), 2022 ($87.6 million), 2023 ($109.8million), 2024 ($94.4 million) and 2025 ($48.9 million). The Company determinedthat an ownership change under Section 382 of the Internal Revenue Code of1986, as amended, occurred during 1998. The effect of the ownership change isthe imposition of a $3.2 million annual limitation on the use of NOLcarryforwards attributable to periods before the change. At December 31,2005, the amount of NOL subject to the limitation was $43.1 million and theamount not subject to limitation was $419.1 million.

The Company had federalresearch tax credit carryforwards at December 31, 2005 of approximately$11.7 million which expire between 2006 and 2025. As a result of the 1998ownership change under Section 382, the use of approximately $1.4 million ofthese carryforwards is subject to limitation.

At December 31, 2005**,**the Company had state NOL carryforwardsof approximately $304.3 million. These NOL carryforwards will expire in varyingamounts between 2006 and 2014.

**6.   ConvertibleNotes**

***4.50%Convertible Subordinated Notes***

On June 26, 2001,the Company completed a public offering of $175.0 million of 4.50% ConvertibleSubordinated Notes due 2006 (the “4.50% Notes”). The 4.50% Notes wereconvertible into shares of common stock at a ratio of 34.6789 shares per each$1,000 principal amount of the notes ($28.84 per share), subject to adjustment,and were scheduled to mature in 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 private placement pursuant to Rule 144A of theSecurities Act of 1933, as amended (the “Securities Act”), of $125.0 million of4.25% Convertible Senior Notes due August 15, 2010 (the “4.25% Notes”) toqualified institutional investors. The 4.25% Notes were initially convertibleinto shares of the Company’s common stock at the rate of 148.8261 per each$1,000 principal amount of notes, which is equivalent to an initial conversion priceof approximately $6.72 per share, subject to anti-dilution adjustments. As ofDecember 31, 2004, the Company had a total of 21,875,353 shares of commonstock reserved for issuance pursuant to the conversion of all of its 4.25%Notes.

In January 2004, theCompany and certain holders of its 4.50% Notes completed an exchange andcancellation of $33.0 million principal amount of the 4.50% Notes for theissuance of $21.986 million in aggregate principal of a new series of theCompany’s 4.25% Notes, in a limited number of transactions. As a result of thisexchange and cancellation, the Company’s total convertible debt was reduced by$11.014 million. In addition, the Company recorded a gain on the earlyextinguishment of debt of approximately $0.3 million in connection with theexchange and cancellation. Such gain is included within net loss on theextinguishment of debt for the year ended December 31, 2004 in the Company’sconsolidated statement of operations.

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The Company paid intereston the 4.25% Notes on February 15 and August 15 of 2004. Interestpayable per $1,000 principal amount of the 4.25% Notes for the period from theissue date to February 15, 2004 was approximately $23.85. Interest payableper $1,000 amount of the 4.25% Notes for the August 15, 2004 interestpayment was $21.25.

The Company received netproceeds from the private placement of the 4.25% Notes of approximately $121.3million (after deducting the initial purchasers’ discounts and offeringexpenses). As of December 31, 2004, the Company had purchased U.S.Treasury security strips to collateralize the notes in an amount sufficient topay the four interest payments on the 4.25% Notes due in 2005 and 2006. Suchamount has been classified as segregated securities in the current assets sectionof the Company’s December 31, 2004 consolidated balance sheet.

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, theCompany completed a private placement pursuant to Rule 144A of theSecurities Act of $150.0 million of 2.25% Convertible Senior Notes dueMay 15, 2011 (the “2.25% Notes”) to qualified institutional investors. The2.25% Notes are initially convertible into shares of the Company’s common stockat the rate of 72.9129 per each $1,000 principal amount of the 2.25% Notes,which is equivalent to an initial conversion price of approximately $13.72 pershare, subject to anti-dilution adjustments.

The Company pays intereston the 2.25% Notes on May 15 and November 15 of each year beginningon November 15, 2004. Interest payable per $1,000 principal amount of the2.25% Notes for the period from issue date to November 15, 2004 wasapproximately $12.00. Interest payable per $1,000 amount of the 2.25% Notes foreach subsequent interest payment is $11.25.

The Company received netproceeds from the private placement of the 2.25% Notes of approximately $145.2million (after deducting the initial purchasers’ discounts and offering expenses).

On or after May 20,2009, the Company may redeem the 2.25% Notes, in whole or in part, at itsoption at a redemption price expressed as a percentage of principal amount, of100.6% for the period between May 20, 2009 and May 15, 2010 and 100.3%for the 12 month period beginning 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 

F-18

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of the Company’s common stock for the five tradingdays immediately preceding the third trading day prior to the repurchase date.

**7.   DebtRepurchase and Cancellation**

During 2004 the Companyrepurchased, redeemed and cancelled the entire outstanding principal amount ofits 4.50% Notes ($142.0 million).

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 stockawards are governed by its 2005 Equity Incentive Plan, as amended (the “Plan”).The purchase price of stock options under the Plan is determined by theCompensation and Organization Committee of the Board of Directors of theCompany (the “Committee”). The term is fixed by the Committee, but no incentivestock option is exercisable after 10 years from the date of grant. Stockoptions generally vest over a four year period. At December 31, 2005, atotal of 4,081,085 shares were available for future grants under the Plan.

In January 2003, theCompany’s Board of Directors approved a stock option exchange program. Underthis program, “eligible employees” and “eligible officers” were given theopportunity to cancel one or more stock options previously granted to them inexchange for new stock options to be granted at least six months and one dayfrom the date the old options are cancelled (the “grant date”), provided thatthe individual is still employed by the Company on such date. “Eligibleemployees” refers to current Company employees who are not executive officersand who hold options to purchase the Company’s stock with an exercise price of$10.00 or more. “Eligible officers” refers to executive officers (excluding thePresident and Chief Executive Officer and the former Executive Vice President)who hold options to purchase the Company’s stock with an exercise price of$25.00 or more. Members of the Company’s Board of Director’s were not eligibleto participate in the program. The participation deadline for the program wasMarch 7, 2003. “Eligible Employees” and “Eligible Officers” elected toexchange a total of 2,309,401 shares of common stock underlying eligibleoptions. The number of shares subject to the new options was determined basedon the old options’ exercise price. Specifically, if the exercise price of theold options was between $10.00 and $24.99 per share, then the exchange ratiowas equal to 0.67 of a share. 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 ashare. The Company issued 1,313,919 replacement options with an exercise priceof $6.33 on September 8, 2003.

F-19

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A summary of the Company’sstock option activity and related information for the years endedDecember 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 |   |

 

Stock optionsoutstanding 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) the fair market value of the Company’s common stock on the grantdate. Participants in the deferred compensation programs elected to deferreceipt of the common stock portion of their bonuses until the earlier of threeyears from the grant date or the participant’s termination from the Company.The bonus portion deferred by each of the participants is matched on a 1:1basis by the Company and 25% of the match vested as of the respective grantdates. So long as a participant remains employed by the Company, an additional25% of the Company’s matching contribution vests on each anniversary of therespective grant dates for the next three years. All benefits under thedeferred compensation programs are distributed in a single payment and will bepaid exclusively in the form of shares of the Company’s common stock. TheCompany’s matching contribution was approximately $0.5 million, $0.3 millionand $0.1 million for the years ended, December 31, 2005, 2004 and 2003,respectively.

F-20

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**10.   CollaborationAgreements**

***Kirin***

EffectiveSeptember 4, 2002, the Company entered into a Collaboration and LicenseAgreement with Kirin which provides for the exchange by Kirin and the Companyof certain cross-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.

ThroughDecember 31, 2005, the Company has not made any milestone payments toKirin. However, approximately $2.8 million has been paid to Kirin as ofDecember 31, 2005 representing a payment due Kirin as a result of theCompany’s collaboration with Pfizer. Based on a total of three products theCompany is developing, which use or the Company believes may use Kirintechnology and that (i) are currently in clinical trials, or (ii) theCompany anticipates may enter clinical trials through the end of 2007, theCompany may be required to make milestone payments to Kirin aggregating up toapproximately $12.75 million with respect to such products, or a maximum ofapproximately $4.25 million per product. The Company’s future milestone paymentobligations to Kirin may or may not be triggered, and may vary in size,depending on a number of variables, almost all of which are currently unknown,including the following:

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

·       thetype of license requested (research or commercial);

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

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

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

Whether the Company maybe obligated to make milestone payments to Kirin in the future is subject tothe success of its efforts with respect to products the Company is developingthat utilize the Kirin technology and, accordingly, is inherently uncertain.

Unless terminatedearlier, the Collaboration and License Agreement 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 any commerciallicense with respect to a specific biologic target granted to it by the otherparty under the agreement at any time.

F-21

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***Bristol-Myers Squibb Collaboration***

InJanuary 2005, the Company announced the closing of a collaboration andco-promotion agreement and a related securities purchase agreement with BMS,pursuant to which the Company and BMS each granted the other certain intellectualproperty licenses and product rights on a worldwide basis in order to enablethe parties to collaborate in research and development of ipilimumab 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 the Company to BMS of alicense to commercialize ipilimumab, a fully human antibody product developedusing the Company’s UltiMAb Human Antibody Development System, that isantagonistic to cytotoxic T-lymphocyte antigen 4 (CTLA-4). Ipilimumab iscurrently under investigation for the treatment of a broad range of cancers andother diseases. The collaboration also includes the grant by the Company to BMSof a license to MDX-1379, a gp100 peptide vaccine, for use withipilimumab for the treatment of metastatic melanoma.

Aspart of the collaboration, the two companies have committed to an initialmulti-year budget of approximately $192.0 million to fund their development ofipilimumab as a potential treatment for a broad range of cancers. BMS will beresponsible for 65% of all development costs related to clinical trialsintended to support regulatory approval in both the United States and Europe,with the remaining 35% to be paid by the Company. The parties will shareequally the costs of any clinical trials of products intended solely forregulatory approval in the United States, and BMS will be fully responsible forall development efforts that relate solely to regulatory approval in Europe andother parts of the world.  Approximately$14.7 million of the Company’s revenue for the year ended December 31, 2005represented the reimbursement of 65% of the Company’s costs associated with thedevelopment of ipilimumab recorded in accordance with EITF 99-19.  The Company’s 35% share of the BMSdevelopment costs for the year ended December 31, 2005 was approximately $6.4million.

Underthe terms of the collaboration, the Company could receive up to $205.0 millionfrom BMS if all regulatory milestones are met, plus up to an additional $275.0million in sales-related milestones. The Company will also have the option toco-promote any products in the United States, and, if the Company elects toexercise this option and has participated in the funding of the applicablePhase III clinical trial(s), the Company will receive 45% of any profits fromcommercial sales in the United States. In the event the Company chooses not toexercise its co-promotion rights, BMS will have exclusive commercial rights inthe United States and will pay the Company royalties on any commercial sales.Outside the United States, BMS will have exclusive commercial rights and willpay the Company royalties on any commercial sales.

Pursuantto these agreements, BMS made an initial cash payment to the Company of $25.0million. In addition, BMS purchased a total of 2,879,223 unregistered shares ofthe Company’s common stock at a purchase price equal to $8.6829 per share foran aggregate 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***

InSeptember 2004, the Company entered into a series of agreements withPfizer, Inc. The first agreement amended the Company’s existingcollaborative research and license and royalty agreements with Pfizer toprovide for the discovery and development of up to 50 antibody products overten years. The second and third agreements were a sublicense from the Company toPfizer and a cross-license of certain patents and patent applications solelyrelating to the companies’ 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 the Company of $80.0 million and purchased

F-22

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4,827,808unregistered shares of the Company’s common stock at a purchase price equal to$6.21 per share for an aggregate purchase price of $30.0 million. The purchaseprice represented a small premium to market price at the time the Companyentered into the collaboration.

TheCompany accounts for revenue arrangements that include multiple deliverables inaccordance with Emerging Issues Task Force No. 00-21, *Accounting for Revenue Arrangements with MultipleArrangements*(EITF 00-21).

TheCompany has concluded that because the Pfizer collaboration contains multipledeliverables (licenses to technology and research services) EITF 00-21 applies.The Company considers the arrangement with Pfizer to be a single unit ofaccounting under EITF 00-21 for purposes of recognizing the initial $80.0million payment.  For the years endedDecember 31, 2005 and 2004, the Company recognized $9.3 million and $2.6 millionof revenue under the agreements with Pfizer.

***MedImmune***

InNovember 2004, the Company entered into an exclusive license andcollaboration agreement with MedImmune, Inc. to develop antibodiestargeting interferon-alpha and the type I interferon receptor 1. Thecollaboration focuses on two fully human antibodies, MEDI-545 (MDX-1103) andMDX-1333, that are currently in clinical and preclinical development,respectively, by MedImmune and the Company for the treatment of autoimmunediseases.

Underthe terms of the agreement, the Company received a payment of $15.0 millionfrom MedImmune and has the ability to receive potential milestone payments forproduct candidates developed by the collaboration that enter into clinicaldevelopment. MedImmune is fully responsible for all development costs up to thepoint of initiating pivotal trials of any product candidates. At that point,the Company has a choice for each potential product candidates. The Company canelect to enter into a profit sharing arrangement in the United States wherebythe Company will pay its proportionate share of the future development costsand reimburse MedImmune for a proportionate share of MedImmune’s previousdevelopment costs plus interest. In addition, the Company would also have the optionto enter into a co-promotion relationship with MedImmune in the United Statesfor each such product. In the alternative, the Company can elect to forego anyfurther funding for the product candidates, and MedImmune will be responsiblefor all costs of development and commercialization. In that case, the Companywill be entitled to milestone payments and substantial royalties on any salesin the United States. The Company is also entitled to milestone payments andsubstantial royalties on any product sales in the rest of the world.

***Gilead***

InJuly 2004, the Company entered into an amendment to a Collaboration andLicense Agreement with Gilead Sciences, Inc. (the successor in interest toNeXstar Pharmaceuticals, Inc.), referred to herein as the Gilead Amendment.Under the terms of the Gilead Amendment, the Company agreed to pay Gilead atotal of $8.5 million in eight equal quarterly installments of $1.063 million,payable at the Company’s election, in cash, registered shares of its commonstock or a combination thereof, in exchange for (i) a reduction of certainfuture royalty payment obligations, payable by the Company to Gilead, and(ii) an expansion of the scope of certain licenses from Gilead to theCompany relating to certain intellectual property rights regarding anti-CTLA-4products. The first of these payments was paid on August 2, 2004 throughthe issuance of 185,622 shares of the Company’s common stock to Gilead. Thesecond payment was made on October 1, 2004 in cash.  The third, fourth, fifth and sixth payments(all made in 2005) were also in cash. The seventh payment was made onJanuary 3, 2006 in cash. The remaining payment will be made onApril 3, 2006.

F-23

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***Kyowa Hakko Kogyo Co., Ltd.***

InOctober 2003, the Company entered into an Amended and Restated LicenseAgreement with Kyowa Hakko Kogyo Co., Ltd., (the “Kyowa License”). Under theterms of the Kyowa License, the Company received certain intellectual propertyrights relating to the development and commercialization of our Ultra-PotentToxinTM technology. As partial consideration for these rights, the Company paidKyowa a total of $4.0 million, $3.6 million of which was paid through theissuance of 552,020 shares of our common stock with the balance of $0.4 millionpaid in cash, representing applicable withholding taxes.

TheKyowa License was the result of the renegotiation of a pre-existing licenseagreement with respect to Ultra-Potent Toxin technology between Kyowa Hakko andCorixa Corporation (“Corixa”) which license agreement the Company acquired aspart of the purchase of certain assets of Corixa in May 2002. Under theterms of the Corixa Asset Purchase Agreement, upon the execution of the KyowaLicense, the Company was required to make a final payment to Corixa of $2.5million, which was paid through the issuance of 353,807 shares of the Company’scommon stock. The Company has no further obligation to Corixa in connectionwith the Asset Purchase Agreement.

Thetotal amount of the payments to Kyowa Hakko and Corixa in 2003 of $6.5 millionwas charged to operations as in-process research and development.

**11.**          Transactions with Genmab

InAugust 2000, the Company entered into a binding memorandum ofunderstanding, or the Genomics Agreement, with Genmab, pursuant to which theCompany granted Genmab rights to market its transgenic mouse technologies formulti-target (five or more targets) genomics partnerships to certainpharmaceutical and biotechnology companies whose headquarters are located inEurope.

TheGenomics Agreement had an initial term of five years with a right exercisableby Genmab to extend the term for an additional two years.  The initial term of the agreement expired inAugust 2005 and was not extended.  Foreach year of the agreement, the Company received $2.0 million per year fromGenmab. At Genmab’s option, these amounts were paid in either cash or capitalstock. During the years ended December 31, 2005, 2004 and 2003, theCompany recognized $1.3 million, $2.0 million and $2.0 million, respectively,of revenue from this agreement.

Asof January 1, 2003, the Company owned approximately 31.3% of the outstandingstock of Genmab.  In July 2003, theCompany received 246,914 shares of Genmab stock valued at $2.0 millionrepresenting payment for the fourth of five annual payments under the August 2000Genomics Agreement between the Company and Genmab (described above). TheCompany’s ownership percentage in Genmab increased to approximately 32.0% as aresult of the receipt of the 246,914 shares of Genmab stock.

InJuly 2004 Genmab completed a private placement of 5.6 million shares ofits stock. As a result of this private placement, the Company’s ownershippercentage of Genmab was reduced to approximately 24.7%. The difference betweenthe Company’s proportionate share of the equity and its carrying value at thetime the private 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 reflected asan increase to capital in excess of par value in the Company’s consolidatedfinancial statements as of and for the year ended December 31, 2004.

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Duringthe first quarter of 2005, the remaining basis of the Company’s investment inGenmab was reduced to zero and accordingly, recognition of the Company’s shareof Genmab’s net losses for the remainder of the first quarter of 2005, thesecond quarter of 2005 and a portion of the third quarter of 2005 wassuspended.

InAugust 2005, Genmab sold approximately 2.5 million shares of its stock to acorporate partner in connection with a global development and commercializationagreement. As a result of this sale of stock, the Company’s ownership percentagein Genmab was reduced to approximately 22.2%. The difference between theCompany’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 in Common Stock*,and Staff Accounting Bulletin No. 51, *Accounting for Sales ofStock by a Subsidiary*. This transaction is reflected as an increaseto 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 the increase in carrying value ofthe Company’s investment in Genmab of approximately $8.0 million in August 2005and in accordance with EITF 02-18, *Accounting for SubsequentInvestments in an Investee after Suspension of Equity Method Loss Recognition,*the Company was required to resume therecognition of its share of Genmab’s net losses 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).

TheChairman of the Company’s board of directors is also on the board of directorsof Genmab. In addition, the President and Chief Executive Officer of theCompany, who is also a member of the board of directors of the Company, and thePresident and Chief Executive Officer of Genmab are husband and wife. ThePresident and Chief Executive Officer of Genmab and the Chief ScientificOfficer of Genmab have consulting agreements with the Company. No services wererendered under these consulting agreements for the years endedDecember 31, 2005, 2004 and 2003.

Asof December 31, 2005, the market value of the Company’s investment inGenmab was approximately $157.2 million.

Summary financial information for Genmab is as followsas 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.**          Transactions withImmuno-Designed Molecules S.A. (“IDM”)

InDecember 2004, IDM completed a private placement of its equity securitiesat a per share price which was less than the Company’s cost basis in IDM. As aresult, the Company recorded  a non-cashinvestment impairment charge of approximately $7.0 million during the fourthquarter of 2004.

TheCompany’s equity ownership in IDM was approximately 8% as of December 31,2004. As of December 31, 2004, the Company held 503,400 Class A shares, 713,576Class B shares and 192,278 units, each

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unitcomprising one Class B share and 19 warrants allowing each to purchase oneconvertible or redeemable bond into one Class B share. If the warrantswere exercised and converted or redeemed, the Company would own an additional3,653,282 Class B shares of IDM. The warrants were exercisable betweenSeptember 2002 and September 2010, for bonds that in turn areconvertible into or redeemable in Class B shares six months after theexercise.

OnAugust 16, 2005 Epimmune, Inc. and IDM announced the completion of theirpreviously announced business combination. In connection with the business combination all of the Company’s Class Ashares, Class B shares and units of IDM were converted into approximately 2.6million shares of common stock of the combined entity, IDM Pharma, Inc. (“IDMPharma”), a publicly traded company.  Asof December 31, 2005, the Company’s investment in IDM Pharma is included withinmarketable securities in the Company’s consolidated balance sheet.

TheCompany’s President and Chief Executive Officer is on the board of directors ofIDM Pharma.

**13.**          Commitments andcontingencies

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 Company is alsoobligated under certain research and license agreements. A summary of theCompany’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 |   |

 

TheCompany incurred rent expense of $4.0 million in 2005, $3.9 million in 2004 and$3.5 million in 2003.

TheCompany has secured a bank letter of credit pursuant to the requirements of itsAnnandale, New Jersey lease. This letter of credit in the amount of $1.3million is fully cash collateralized and the cash is categorized as segregatedsecurities in the consolidated balance sheets.

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The Company has entered into a number of otheragreements that contain in-licenses of third-party technology (in addition toKirin—see Note 10) which may be used together with the Company’s own platformtechnologies for the generation, development and/or manufacture of its antibodyproducts. In addition, the Company has entered into other third-partyagreements that contain in-licenses associated with antibody products thattarget specific antigens. Many of these agreements contain milestones paymentsthat are due with respect to products using/targeting the licensedtechnology/antigen only if and when certain specified pre-commercializationevents occur. Not all of the Company’s products currently under developmenttrigger such milestone payments. Through December 31, 2005, the Companyhad made milestone payments under these agreements of approximately $0.3million. In addition, under the agreements the Company currently has in place(other than with Kirin), based on a total of nine products the Company isdeveloping for which milestones are potentially due and that (i) are nowin clinical trials, or (ii) which the Company anticipates may enterclinical trials before the end of 2007, the Company may be obligated to makefuture milestone payments aggregating up to approximately $59.9 million withrespect to such products. In general, potential milestone payments for antibodyproducts may or may not be triggered under these licenses, and may vary insize, depending on a number of variables, almost all of which are currentlyuncertain. Typically, the events that trigger these milestone payments perproduct include:

·       submission ofIND(s) or foreign equivalents;

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

·       submission ofBLA(s) or foreign equivalents; and

·       receipt of marketingapproval(s) to sell products in a particular country or region.

Inaddition, the licenses above may trigger royalty payments in connection withthe commercialization of certain of the Company’s products. Whether the Companywill be obligated to make milestone or royalty payments in the future issubject to the success of its product development efforts and, accordingly, isinherently uncertain.

In the ordinary course of its business, the Company isat times subject to various legal proceedings. The Company does not believethat any of the currently pending legal proceedings to which the company or anyof its subsidiaries is a party or of which any of their property is subject,individually or in the aggregate, will have a material adverse effect on itsoperations or financial condition.

**14.**          Segment Information

TheCompany is an integrated monoclonal antibody-based company with antibodydiscovery, development and clinical manufacturing capabilities. The operationsof the Company and its subsidiaries constitute one business segment.

Revenue from partners representing 10% or more oftotal revenues for the years ended December 31, 2005, 2004 and 2003 is asfollows:

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

 

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**15.**          Celldex Therapeutics,Inc.

In March 2004, the Company assigned or licensed toCelldex certain intellectual property related to the Company’s vaccinetechnology, including the rights to MDX-1307, one of the Company’s productcandidates for the treatment of cancer, as well as the Investigational New DrugApplication (“IND”), associated with this product candidate which becameeffective in February 2004.

In order to complement its technology and its internalclinical pipeline, in October 2005, Celldex completed the acquisition of all ofthe issued and outstanding shares of capital stock of Lorantis Limited (“Lorantis”),a privately held biotechnology company based in Cambridge, U.K. andsubstantially all of the assets of Alteris Therapeutics, Inc. (“Alteris”), aprivately held biotechnology company based in Philadelphia, PA.  As a result of the Lorantis acquisition andthe Alteris asset acquisition, the Company’s ownership percentage of Celldexwas reduced from 100% to approximately 60%.

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

The purchase price for substantially all of theAlteris assets consisted of 1.2 million shares of Celldex common stock (valuedat $6.0 million) and approximately $1.6 million in cash.  Celldex may be required to pay Alteris up to$5.0 million upon obtaining the first approval for commercial sale of anEGFRvIII product.  In addition, Celldexmay be required to pay an amount equal to 20% of any upfront fees or milestonepayments received from a certain unrelated third-party licensee, in the eventthat within 12 months of the closing, Celldex enters into a license agreementwith such third party for any EGFRvIII-derived product developed using thetechnology acquired from Alteris.

Thetotal cost of the Lorantis acquisition was $34.6 million, of which $0.5 millionrepresented transaction costs.  The totalcost of the Alteris asset acquisition was $8.2 million, of which $0.6 millionrepresented transaction costs.  Theseamounts have 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 |   |

 

Thetotal in-process research and development of $8.4 million was determined not tobe technologically feasible and had no alternative future uses.  The developed technology is being amortizedover its estimated useful life of 11 years.

Thevalue of the acquired in-process research and development was determined byestimating the related probability-adjusted net cash flows, which were thendiscounted to a present value 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 projectedcash flows for such projects were based on estimated revenues and operatingprofits related to such projects considering the development of each of thetechnologies acquired, the time and resources needed to develop thetechnologies, the estimated life of each potential commercialized product andassociated risks, including the inherent difficulties and uncertainties indeveloping a drug compound and obtaining FDA and other regulatory approvals.

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Theresults of operations for the Lorantis acquisition and the Alteris assetacquisition are included in the consolidated statement of operations fromOctober 12, 2005.

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

|                                       | ** ** | **Year Ended December 31** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Total revenue                         |       | $                                         | 51,593     |   | $ | 12,525 |   |
| Net loss                              |       | (147,628                                  | )          | (192,130 | ) |
| Basic and diluted net  loss per share |       | $                                         | (1.34      | ) | $ | (2.36 | ) |

 

Thepro-forma information does not include the write-off of in-process technologyof $8.4 million which is not expected to recur in the future.  The pro-forma unaudited financial results arenot necessarily indicative of the results of operations that would haveoccurred had the Lorantis acquisition and the Alteris asset acquisition takenplace at the beginning of the periods presented nor are they intended to beindicative of results that may occur in the future.

**16.   Acquisitionof Ability Biomedical Corporation**

OnAugust 5, 2004, the Company completed the acquisition of all of theoutstanding capital stock not already owned by the Company of AbilityBiomedical Corporation, a privately held Canadian biotechnology company.Pursuant to such acquisition, the Company acquired Ability Biomedical’sintellectual property related to IP-10, a protein believed to be associatedwith a variety of immune disorders, including multiple sclerosis, rheumatoidarthritis, inflammatory bowel disease, chronic obstructive pulmonary diseaseand type I diabetes.

Thepurchase price consisted of 731,823 shares of Medarex common stock (valued atapproximately $4.3 million), cash payments of approximately $0.6 million andtransaction costs of approximately $0.2 million. In addition, the Company hadowned shares of Ability Biomedical prior to the acquisition, which were valuedat approximately $0.6 million, therefore the total cost of the acquisition was$5.7 million. During the 60-day period following the issuance of shares of theCompany’s common stock to the Ability Biomedical shareholders in connectionwith the acquisition, certain shareholders sold all of the shares issued tothem 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.

Uponachievement of certain development milestones with respect to the Company’santi-IP-10 antibody program, but no later than September 4, 2007, theCompany may be required to pay the former shareholders of Ability Biomedical anadditional amount of approximately $3.65 million in cash and/or common stocksubject to fluctuations in currency exchange rates. In lieu of such additionalpayment, the Company also has the option to revert to the original jointcollaboration agreement with the former shareholders of Ability Biomedicalwhereby each party would be responsible for 50% of the costs associated withthe anti-IP-10 antibody.

 

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The total cost of theacquisition was $5.7 million. This amount has been allocated as follows:

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

 

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

**17.**          Employee Benefit Plans

***Employee StockPurchase Plan***

In May 2002, the Company adopted an EmployeeStock Purchase Plan (the “ESPP”) which currently authorizes the issuance of1,500,000 shares of its common stock pursuant to purchase rights granted toeligible employees of the Company. The ESPP provides a means by which employeespurchase common stock of the Company through payroll deductions of up to 10% oftheir base compensation. At the end of each of two purchase periods during thecalendar year, the Company uses accumulated payroll deductions to purchase, onbehalf of participating employees, shares of common stock at a price equal tothe lower of 85% of the fair market value of a share of common stock(i) on July 1, 2004 or (ii) at the end of each six monthpurchase period. The purchase periods under the ESPP end on June 30 andDecember 31 of each year. Generally all employees, including executiveofficers, who work at least 20 hours per week and five months per year mayparticipate in the ESPP. Employees who are deemed to own greater than 5% of thecombined voting power of all classes of stock of the Company are not eligiblefor 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 were issuedunder the ESPP resulting in net proceeds to the Company of $1.4 million, $1.1million and $1.0 million, respectively. As of December 31, 2005, the Company had reserved 766,184 shares ofcommon stock for issuance pursuant to the ESPP.

***Employee SavingsPlan***

The Company maintains a 401(k) savings plan. Employeesmay contribute up to 15% of their annual salaries. The Company may makematching contributions of up to 4% of a participant’s annual salary. During2005, 2004 and 2003, the Company made contributions to the plan totaling $0.7million, $0.6 million and $0.6 million, respectively.

**18.**          Restatement ofConsolidated Financial Statements

Subsequent to the filing of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005, the Company concludedthat certain of its previously issued financial statements should be restatedto correct errors related to stock-based compensation not previously recordedfor certain equity grants. Accordingly, for the years 1996 through 2002, theCompany has corrected these errors by restating its beginning accumulateddeficit as of January 1, 2003 and has restated its consolidated financialstatements as of December 31, 2005 and 2004, and for the years ended December31, 2005, 2004 and 2003.  There was noimpact on revenue or net cash used in operating activities as

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a result of this compensation expense, nor was thereany impact on income tax expense for any period given the Company’s sustainedhistory of losses.

Previously filed annual reports on Form 10-K andquarterly reports on Form 10-Q for all periods from 2000 up to and includingSeptember 30, 2005 affected by the restatements have not been amended andshould not be relied upon.

In May 2006, the Company received a letter from theUnited States Securities and Exchange Commission, or SEC, informing the Companythat the SEC was conducting an informal inquiry into the Company’s stock optiongrant practices and requesting certain information and documentation relatedthereto.  The Company also received agrand jury subpoena from the U.S. Attorney’s Office, District of New Jersey,requesting substantially similar information and documentation as the SEC hadrequested.

In June 2006, the Company’s Board of Directorsinitiated an investigation (the “Investigation”) of the Company’s stock optiongrant practices from 1996 through June 30, 2006 (the “relevant period”) anddesignated one of its independent directors to oversee the Investigation.  In September 2006, the Company’s Board ofDirectors elected two new members, who were appointed, together with thepreviously designated director, to a Special Investigation Committee, tocomplete the Investigation.  The SpecialInvestigation Committee retained outside legal counsel that had not previouslybeen involved with the Company’s stock option plans and the outside legal counselretained forensic accounting consultants to assist in the Investigation and theanalysis of the measurement dates for equity awards during the relevant period.

As a result of the findings of the SpecialInvestigation Committee, management has concluded that incorrect measurementdates were used for financial accounting purposes for certain equity awardsmade in prior periods.  Management hasdetermined that the cumulative non-cash stock-based compensation expense andrelated payroll tax liabilities resulting from revised measurement dates withregard to past equity awards was approximately $36.6 million and recordednon-cash, stock-based compensation expense and related payroll tax liabilitieswith regard to past equity awards of approximately $2.0 million, $2.0 millionand $4.5 million for the years ended December 31, 2005, 2004 and 2003,respectively, and approximately $28.1 million prior to fiscal year 2003.  In addition to the adjustments related tostock based compensation and related payroll taxes, the Company is alsocorrecting immaterial errors identified in prior years related to theamortization of premiums and discounts related to its marketablesecurities.  The total effect of all ofthese adjustments was to increase previously reported basic and diluted netloss per share by $0.02 and $0.08 for the years ended December 31, 2005 and2003, respectively.  The adjustments didnot impact basic and diluted net loss per share for the year ended December 31,2004.

As a result of the grants described below, the Companyis required to record non-cash compensation expense in accordance with APB No.25, “Accounting for Stock Issued to Employees,” or APB No. 25.  Stock based compensation expense wascalculated as the excess of the fair market value of the Company’s stock on themeasurement dates less the exercise price of the option multiplied by thenumber of equity awards granted.  Stockbased compensation is recognized ratably over the vesting period of the equityawards.  Prior to September 2001, the Company’sstock options had a vesting period of 1 year or less.  Beginning in September 2001, the Companychanged the vesting period for employee stock option grants to 4 years.

Based upon the information obtained in theInvestigation, through July 2002, the Company had a practice, in manyinstances, of selecting dates for its stock option grants and restricted stockgrants as of the date when the stock price was the lowest during the month ofgrant, without disclosing this practice in its public filings and withoutproperly measuring the compensation expense on a date that the terms of theequity awards were finalized.  The termsof these grants are discussed in further detail below.  Subsequent to July 2002, while the practiceof selecting dates as described above ceased by the Company in response to newlegal and regulatory reporting requirements, there were two annual equitygrants for rank and file employees for which the measurement dates differ fromthe grant dates

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recorded in the Company’s books and records, which theInvestigation revealed were primarily a result of administrative delays, withno apparent intent to achieve favorable exercise prices.

The Company analyzed the evidence gathered in theInvestigation related to the equity awards including electronic and hard copydocuments and interviews.  Equity awardswere organized into categories based upon recipient and the process by whichthe equity award was finalized.  Basedupon the specific facts and circumstances, the Company applied the controllingaccounting standards to determine the proper accounting measurement date withrespect to every grant during the period from 1996 through July 2002 withineach of the following categories:

Equity Awards Issued From1996 through July 2002

*Officer Annual Equity Awards*

Officers received equity awards on an annual basis(although the dates of such awards varied from year to year).  The Company’s Stock Option Committee wouldapprove the number of equity awards to be granted to officers, however, theStock Option Committee did not select or consider an exercise price whenapproving the number of annual equity awards during its Stock Option Committeemeetings.  The Company’s procedure forestablishing the exercise prices of such awards, at the time, would be forcertain former officers to select the lowest price for the Company’s commonstock during the month of the grant of such annual awards.  The former officers believed they had thediscretionary authority to select such exercise prices and this procedure wasfollowed by the Company during the period from 1996 through July 2002. Once theprice was selected, the Form 4 filing process was started by the Company andunanimous written consents (“UWCs”) were prepared and circulated for executionby the members of the Stock Option Committee in situations where UWCs wereused. UWCs for three grants could not be located in the Company’s files.  The UWCs, which included the exercise pricesselected by the former officers, were subsequently approved, in all instances,by the Stock Option Committee when the UWCs were signed, withoutexception.  Since the Company’s practicewas to select, at the conclusion of the month in which the grant wasdesignated, the date corresponding to the lowest price for the Company’s stockfor the month, the Company has concluded that the most appropriate measurementdate is the last business day of the month in which the designated grant dateoccurred since at that point both the exercise price and the number of equityawards was determinable.

For all officer annual stock option awards, of whichthere were seven, and one officer stock award, during the relevant period, atotal of approximately 3.9 million stock options and/or stock awards were madeto officers where the selected grant dates coincided with a date when the stockprice was the lowest during the month in which the grant was dated.  Accordingly, the Company determined the totalstock based compensation expense, after accounting for forfeitures, associatedwith these seven officer annual stock option awards and one officer stock awardwas approximately $8.9 million.

*Director Equity Awards*

There was no specific pattern regarding equity awardsto directors except that each non-executive director received an equity awardwhen he/she joined the Company’s Board of Directors.  In certain circumstances, certain directorsreceived annual equity awards on the date of the Company’s Annual Meeting ofShareholders in connection with previously agreed upon arrangements.  There were four designated grant dates inwhich a total of approximately 0.8 million stock options were made to directorswhen the stock price was the lowest during the month in which the designatedgrant occurred.  The Company determinedthe total stock based compensation expense associated with these four directorawards was approximately $5.9 million and is detailed as follows:

·       Twoof the four grants were issued at the same time as the officer annual awardsdescribed above and therefore, the Company has concluded that the most appropriatemeasurement date for these two grants is the

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last business day of themonth in which the designated grant date occurred since at that point both theexercise price and the number of equity awards was determinable consistent withthe determination of measurement dates for officer annual awards describedabove.  The Company determined the totalstock based compensation expense associated with these two awards wasapproximately $0.5 million.

·       Onegrant was accounted for using variable accounting because the original grantprice was modified when a Form 4 filing date was missed and the grant wascancelled and reissued subsequently at a lower price.  In that situation, Form 4s for two stockoption recipients were not filed on time and the Company cancelled and issuednew stock options with an exercise price representing the lowest price of theCompany’s stock in the following month. Total variable stock based compensation expense associated with thisgrant was approximately $0.3 million.

·       Theremaining grant was approved at a meeting of the Company’s Board of Directorswhere the Board of Directors specified a designated grant date that precededthe date of the Board of Directors meeting. The Company’s stock price on the designated grant date was lower thanthe Company’s stock price on the date of approval.  The Company used the date of approval by theCompany’s Board of Directors as the measurement date resulting in stock basedcompensation expense of approximately $5.1 million.

*Rank and File Employee Annual Equity Awards*

Rank and file employees generally received equityawards on an annual basis (although the dates of such awards varied from yearto year).  The designated grant dates forsuch awards were the same as officer annual equity awards with the exception ofone date where the grant of annual equity awards to rank and file employeesoccurred approximately one month after the date of the officers annual equityaward.  During the period from 1996through July 2002, on an annual basis, management would allocate a pool ofstock options previously discussed with and agreed to by the Chairman of theStock Option Committee to individual employees. Once the allocation of the total awards was finalized by management, aUWC was prepared (which included the selected grant date and exercise price)and forwarded to the Stock Option Committee for execution. Attached to the UWCwas a list of the optionees and the number of options allocated by managementto the optionees.  The Stock OptionCommittee rarely discussed individual rank and file employee equity awards,leaving it to management to make such allocations since it was generallyunderstood that the allocation process was delegated to management and it wasalso generally understood that it was management’s responsibility to performthis function.  The Stock OptionCommittee did not dispute, challenge or question management’s allocations ofany of the annual equity awards to rank and file employees.  The Company has concluded that theappropriate measurement date for rank and file annual equity awards is the UWCcreation date, as both the exercise price and number of equity awards for eachemployee were known with finality at such date.

For all rank and file annual equity awards, of whichthere were six, during the relevant period, a total of approximately 3.1million stock options and/or stock awards were made where the price of theCompany’s stock on the accounting measurement date was higher than the award’sexercise price.  Five grants had the sameexercise price as the officers annual equity awards described above, however,the accounting measurement date was always later than the accountingmeasurement date for officer annual equity awards since the process ofallocating the pool of options granted to rank and file employees was typicallyfinalized a few weeks after the exercise price was determined.  The remaining designated grant had adifferent exercise price as this equity award occurred approximately one monthafter the date of the officers annual equity award.  The Company determined the total stock basedcompensation expense, after accounting for forfeitures, associated with allrank and file annual awards was approximately $15.2 million during the relevantperiod.

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----

*New Hire Employee Equity Awards*

Generally, all new employees received an equity awardas of the respective employee’s first day of employment.  In one instance, the designated grant dateused by the Company for a new officer’s equity award of approximately 0.3million stock options and/or stock awards was not the same as the measurementdate.  In this instance, the designatedgrant date was the stated effective date of the officer’s employment agreementwhich preceded the officer’s first day of employment.  Since the controlling accounting literatureat the time required compensation cost to be measured as of the officer’s firstday of employment, the Company determined that approximately $5.1 million ofstock-based compensation should have been measured on the date employment beganby the officer.  Other than this oneinstance, there were no equity awards where the measurement date used by theCompany was inappropriate.

Equity Awards IssuedSubsequent to July 2002

For the period subsequent to July 2002 through 2005there were two rank and file annual equity awards where option lists werefinalized two days after the designated grant date resulting in stock basedcompensation expense of approximately $0.6 million.

Additional Stock BasedCompensation

A summary of additional stock based compensation bytype is as follows:
| ** **                          | ** ** | **Additional Stock Based Compensation Expense By Type** | ** **                                                                                 |
|-------------------------------------|------------|---------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|
| ** **                          | ** ** | **2005**                                                                              | ** **                                                                                 | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                          | ** ** | ** **                                                                            | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                                                                            | ** **                                                                                 |
| Officer annual equity  awards       |       | $                                                                                     | 811                                                                                        |   | $ | 929 |   | $ | 924 |   | $ | 636 |   | $ | 3,105 |   |
| Director equity awards              |       | 36                                                                                    |                                                                                       | 65 |   | 32 |   | (202 | ) | 3,738 |   |
| Rank and file annual  equity awards |       | 849                                                                                   |                 | 850 |   | 3,395 |   | 1,973 |   | 1,829 |   |
| New hire employee  equity awards    |       | —                                                                                |                                                                                       | — |   | 39 |   | 49 |   | 3,937 |   |
| Payroll tax liabilities             |       | 312                                                                                   |                                                                                       | 106 |   | 67 |   | 54 |   | 161 |   |
| Total                               |       | $                                                                                     | 2,008                                                                                      |   | $ | 1,950 |   | $ | 4,457 |   | $ | 2,510 |   | $ | 12,770 |   |

** **
| ** **                          | ** ** | **Additional Stock Based Compensation Expense By Type** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **2000**                                                                              | ** ** | **1999** | ** ** | **1998** | ** ** | **1997** | ** ** | **1996** | ** ** |
| ** **                          | ** ** | ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                                                                            | ** ** |
| Officer annual equity  awards       |       | $                                                                                     | 1,555      |   | $ | 371 |   | $ | 274 |   | $ | 209 |   | $ | 99 |   |
| Director equity awards              |       | 1,445                                                                                 |       | 381 |   | 232 |   | 201 |   | — |   |
| Rank and file annual  equity awards |       | 5,746                                                                                 |       | — |   | 193 |   | 214 |   | 136 |   |
| New hire employee  equity awards    |       | 1,043                                                                                 |       | — |   | — |   | — |   | — |   |
| Payroll tax liabilities             |       | 698                                                                                   |       | 68 |   | — |   | — |   | — |   |
| Total                               |       | $                                                                                     | 10,487     |   | $ | 820 |   | $ | 699 |   | $ | 624 |   | $ | 235 |   |

 

Aspart of this restatement, the Company recorded payroll tax liabilities relatingto stock options that were incorrectly characterized as incentive stockoptions, or ISOs.  The Company recorded aliability for payroll taxes in the event such grants would not be treated asISOs under principles of the Internal Revenue Code, or IRC, and the regulationsthereunder.  These payroll taxliabilities, which have been classified within research and development expenseand general and administrative expense are not material to the consolidatedfinancial statements for any period.

 

F-34

----

Thefollowing set forth the effects of the restatement on the Company’sconsolidated balance sheets as of December 31, 2005 and 2004 and the Company’sconsolidated statements of operations and consolidated statements of cash flowsfor the years ended December 31, 2005, 2004 and 2003.
| ** **                                                                                                                                                                                                                            | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                            | ** ** | **As  Reported**                | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| **ASSETS**                                                                                                                                                                                                                            |       |                            |       |   |   |   |   |
| Current assets                                                                                                                                                                                                                        |       |                            |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                            |       | $                               | 90,602     |   |   |   | $ | 90,602 |   |
| Marketable  securities                                                                                                                                                                                                                |       | 260,705                         |       |   |   | 260,705 |   |
| Prepaid expenses  and other current assets                                                                                                                                                                                            |       | 31,608                          |       |   |   | 31,608 |   |
| Total current  assets                                                                                                                                                                                                                 |       | 382,915                         |       |   |   | 382,915 |   |
| Property, buildings and  equipment:                                                                                                                                                                                                   |       |                            |       |   |   |   |   |
| Land                                                                                                                                                                                                                                  |       | 6,795                           |       |   |   | 6,795 |   |
| Buildings and  leasehold improvements                                                                                                                                                                                                 |       | 82,338                          |       |   |   | 82,338 |   |
| Machinery and  equipment                                                                                                                                                                                                              |       | 54,130                          |       |   |   | 54,130 |   |
| Furniture and fixtures                                                                                                                                                                                                                |       | 4,553                           |       |   |   | 4,553 |   |
|                                                                                                                                                                                                                                  |       | 147,816                         |       |   |   | 147,816 |   |
| Less:  accumulated depreciation and amortization                                                                                                                                                                                      |       | (61,832                         | )          |   |   | (61,832 | ) |
|                                                                                                                                                                                                                                  |       | 85,984                          |       |   |   | 85,984 |   |
| Investment in Genmab                                                                                                                                                                                                                  |       | 3,255                           |       |   |   | 3,255 |   |
| Investments in, and  advances to, other partners                                                                                                                                                                                      |       | 6,400                           |       |   |   | 6,400 |   |
| Segregated securities                                                                                                                                                                                                                 |       | 2,033                           |       |   |   | 2,033 |   |
| Other assets                                                                                                                                                                                                                          |       | 6,289                           |       |   |   | 6,289 |   |
| Total assets                                                                                                                                                                                                                          |       | $                               | 486,876    |   | — |   | $ | 486,876 |   |
|                                                                                                                                                                                                                                  |       |                            |       |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                                                        |       |                            |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                  |       |                            |       |   |   |   |   |
| Trade accounts  payable                                                                                                                                                                                                               |       | $                               | 4,939      |   |   |   | $ | 4,939 |   |
| Accrued  liabilities                                                                                                                                                                                                                  |       | 29,059                          | (1)        | $ | 312 |   | 29,371 |   |
| Deferred  contract revenue - current                                                                                                                                                                                                  |       | 20,872                          |       |   |   | 20,872 |   |
| Total current  liabilities                                                                                                                                                                                                            |       | 54,870                          |       | 312 |   | 55,182 |   |
| Deferred contract  revenue — long-term                                                                                                                                                                                           |       | 106,827                         |       |   |   | 106,827 |   |
| Other long-term  liabilities                                                                                                                                                                                                          |       | 4,032                           |       |   |   | 4,032 |   |
| 2.25% Convertible senior  notes due May 15, 2011                                                                                                                                                                                      |       | 150,000                         |       |   |   | 150,000 |   |
| Minority interest                                                                                                                                                                                                                     |       | 11,590                          |       |   |   | 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 shares outstanding at December 31, 2005 and 85,865,333 shares  issued and 85,673,693 shares outstanding at December 31, 2004 |       | 1,118                           |       |   |   | 1,118 |   |
| Capital in excess  of par value                                                                                                                                                                                                       |       | 941,549                         | (1)        | 1,696 |   | 943,245 |   |
| Treasury stock,  at cost, 85,300 shares in 2005 and 191,640 shares in 2004                                                                                                                                                            |       | (215                            | )          |   |   | (215 | ) |
| Deferred  compensation                                                                                                                                                                                                                |       | (599                            | )          |   |   | (599 | ) |
| Accumulated  other comprehensive income                                                                                                                                                                                               |       | (2,351                          | )          |   |   | (2,351 | ) |
| Accumulated deficit                                                                                                                                                                                                                   |       | (779,945                        | )(1)       | (2,008 | ) | (781,953 | ) |
| Total  shareholders’ equity                                                                                                                                                                                                      |       | 159,557                         | (1)        | (312 | ) | 159,245 |   |
| Total  liabilities and shareholders’ equity                                                                                                                                                                                      |       | $                               | 486,876    |   | — |   | $ | 486,876 |   |
|                                                                                                                                                                                                                                       |            |                                 |            |  |  |  |  |  |  |  |

----

(1)          December 31, 2005 asreported amounts for accrued liabilities, capital in excess of par value,accumulated deficit and total shareholders’ equity include adjustments for theyears 1996 through 2004.

F-35

----

 
| ** **                                  | ** ** | **Year Ended  December 31, 2005** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **As  Reported**                                 | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|                                        |       |                                             |       |   |   |   |   |
| Contract and  license revenues              |       | $                                                | 30,226     |   |   |   | $ | 30,226 |   |
| Contract and  license revenues from Genmab  |       | 4,067                                            |       |   |   | 4,067 |   |
| Reimbursement of  development costs         |       | 17,162                                           |       |   |   | 17,162 |   |
| Total revenues                              |       | $                                                | 51,455     |   |   |   | $ | 51,455 |   |
| Costs and  expenses:                        |       |                                             |       |   |   |   |   |
| Research and development                    |       | 135,847                                          |       | $ | 1,093 |   | 136,940 |   |
| General and administrative                  |       | 28,054                                           |       | 915 |   | 28,969 |   |
| Acquisition of in-process technology        |       | 8,447                                            |       |   |   | 8,447 |   |
| Total costs and expenses                    |       | 172,348                                          |       | 2,008 |   | 174,356 |   |
| Operating loss                              |       | (120,893                                         | )          | (2,008 | ) | (122,901 | ) |
| Equity in net loss of affiliate             |       | (6,323                                           | )          |   |   | (6,323 | ) |
| Interest and dividend income                |       | 14,740                                           |       |   |   | 14,740 |   |
| Impairment loss on investments in partners  |       | (33,347                                          | )          |   |   | (33,347 | ) |
| Interest expense                            |       | (4,233                                           | )          |   |   | (4,233 | ) |
| Minority interest — Celldex            |       | 4,410                                            |       |   |   | 4,410 |   |
| Loss before provision for income taxes      |       | (145,646                                         | )          | (2,008 | ) | (147,654 | ) |
| Provision for income taxes                  |       | 358                                              |       |   |   | 358 |   |
| Net loss                                    |       | $                                                | (146,004   | ) | $ | (2,008 | ) | $ | (148,012 | ) |
|                                        |       |                                             |       |   |   |   |   |
| Basic and  diluted net loss per share:      |       | $                                                | (1.32      | ) | $ | (0.02 | ) | $ | (1.34 | ) |
| Weighted average  common shares outstanding |       |                                             |       |   |   |   |   |
| —basic and  diluted                    |       | 110,309                                          |       |   |   | 110,309 |   |

 

F-36

----

 
| ** **                                                                   | ** ** | **Year Ended  December 31, 2005** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **As  Reported**                                 | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| ** **                                                                   |       |                                             |       |   |   |   |   |
| Operating  activities:                                                       |       |                                             |       |   |   |   |   |
| Net loss                                                                     |       | $                                                | (146,004   | ) | $ | (2,008 | ) | $ | (148,012 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                             |       |   |   |   |   |
| Depreciation                                                                 |       | 12,737                                           |       |   |   | 12,737 |   |
| Amortization                                                                 |       | 5,627                                            |       |   |   | 5,627 |   |
| Stock options and awards to employees                                        |       | 194                                              |       | 1,696 |   | 1,890 |   |
| Write-off of deferred offering costs - Celldex                               |       | 978                                              |       |   |   | 978 |   |
| Acquisition of in-process technology                                         |       | 8,447                                            |       |   |   | 8,447 |   |
| Equity in net loss of Genmab                                                 |       | 6,323                                            |       |   |   | 6,323 |   |
| Impairment losses on investments in partners                                 |       | 36,120                                           |       |   |   | 36,120 |   |
| Gain on sale of partners’ stock                                         |       | (3,315                                           | )          |   |   | (3,315 | ) |
| Minority interest - Celldex                                                  |       | (4,410                                           | )          |   |   | (4,410 | ) |
| Changes in  operating assets and liabilities                                 |       |                                             |       |   |   |   |   |
| Other current assets                                                         |       | (24,900                                          | )          |   |   | (24,900 | ) |
| Trade accounts payable                                                       |       | (59                                              | )          |   |   | (59 | ) |
| Accrued liabilities                                                          |       | (6,400                                           | )          | 312 |   | (6,088 | ) |
| Deferred contract revenue                                                    |       | 25,748                                           |       |   |   | 25,748 |   |
| Net cash used in operating activities                                        |       | (88,914                                          | )          | — |   | (88,914 | ) |
| Investing  activities:                                                       |       |                                             |       |   |   |   |   |
| Purchase of property and equipment                                           |       | (9,312                                           | )          |   |   | (9,312 | ) |
| Investment in Lorantis, net of acquired cash                                 |       | 29,742                                           |       |   |   | 29,742 |   |
| Investment in Alteris, net of acquired cash                                  |       | (2,208                                           | )          |   |   | (2,208 | ) |
| Purchase of marketable securities                                            |       | (56,108                                          | )          |   |   | (56,108 | ) |
| Sales and maturities of marketable securities                                |       | 121,999                                          |       |   |   | 121,999 |   |
| Net cash provided by investing activities                                    |       | 84,113                                           |       | — |   | 84,113 |   |
| Financing  activities:                                                       |       |                                             |       |   |   |   |   |
| Cash received from sales of securities and exercise  of stock options, net   |       | 31,061                                           |       |   |   | 31,061 |   |
| Principal payments under capital lease obligations                           |       | (9                                               | )          |   |   | (9 | ) |
| Net cash provided by financing activities                                    |       | 31,052                                           |       | — |   | 31,052 |   |
| Effect of  exchange rate differences on cash and cash equivalents            |       | (492                                             | )          |   |   | (492 | ) |
| Net increase in cash and cash equivalents                                    |       | 25,759                                           |       |   |   | 25,759 |   |
| Cash and cash  equivalents at beginning of period                            |       | 64,843                                           |       |   |   | 64,843 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                                | 90,602     |   | — |   | $ | 90,602 |   |
| Supplemental  disclosures of cash flow information                           |       |                                             |       |   |   |   |   |
| Cash paid during the year for:                                               |       |                                             |       |   |   |   |   |
| Income taxes                                                                 |       | $                                                | 365        |   |   |   | $ | 365 |   |
| Interest                                                                     |       | $                                                | 5,717      |   |   |   | $ | 5,717 |   |
|                                                                         |       |                                             |       |   |   |   |   |
|                                                                              |            |                                                  |            |  |  |  |  |  |  |  |

 

F-37

----

 
| ** **                                                                                                                                                                                                                            | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                            | ** ** | **As  Reported**                | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| **ASSETS**                                                                                                                                                                                                                            |       |                            |       |   |   |   |   |
| Current assets                                                                                                                                                                                                                        |       |                            |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                             |       | $                               | 64,843     |   |   |   | $ | 64,843 |   |
| Marketable securities                                                                                                                                                                                                                 |       | 309,664                         |       |   |   | 309,664 |   |
| Segregated securities                                                                                                                                                                                                                 |       | 12,301                          |       |   |   | 12,301 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                             |       | 6,708                           |       |   |   | 6,708 |   |
| Total current assets                                                                                                                                                                                                                  |       | 393,516                         |       |   |   | 393,516 |   |
| Property,  buildings and equipment:                                                                                                                                                                                                   |       |                            |       |   |   |   |   |
| Land                                                                                                                                                                                                                                  |       | 6,795                           |       |   |   | 6,795 |   |
| Buildings and leasehold improvements                                                                                                                                                                                                  |       | 77,995                          |       |   |   | 77,995 |   |
| Machinery and equipment                                                                                                                                                                                                               |       | 45,898                          |       |   |   | 45,898 |   |
| Furniture and fixtures                                                                                                                                                                                                                |       | 4,290                           |       |   |   | 4,290 |   |
|                                                                                                                                                                                                                                  |       | 134,978                         |       |   |   | 134,978 |   |
| Less: accumulated depreciation and amortization                                                                                                                                                                                       |       | (45,098                         | )          |   |   | (45,098 | ) |
|                                                                                                                                                                                                                                  |       | 89,880                          |       |   |   | 89,880 |   |
| Investment in  Genmab                                                                                                                                                                                                                 |       | 1,657                           |       |   |   | 1,657 |   |
| Investment in  IDM                                                                                                                                                                                                                    |       | 41,206                          |       |   |   | 41,206 |   |
| Investments in,  and advances to, other partners                                                                                                                                                                                      |       | 10,482                          |       |   |   | 10,482 |   |
| Segregated  securities                                                                                                                                                                                                                |       | 1,700                           |       |   |   | 1,700 |   |
| Other assets                                                                                                                                                                                                                          |       | 10,904                          |       |   |   | 10,904 |   |
| Total assets                                                                                                                                                                                                                          |       | $                               | 549,345    |   | — |   | $ | 549,345 |   |
| ** **                                                                                                                                                                                                                            |       |                            |       |   |   |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                        |       |                            |       |   |   |   |   |
| Current  liabilities:                                                                                                                                                                                                                 |       |                            |       |   |   |   |   |
| Trade accounts payable                                                                                                                                                                                                                |       | $                               | 4,998      |   |   |   | $ | 4,998 |   |
| Accrued liabilities                                                                                                                                                                                                                   |       | 33,196                          | (2)        | $ | 106 |   | 33,302 |   |
| Deferred contract revenue - current                                                                                                                                                                                                   |       | 15,260                          |       |   |   | 15,260 |   |
| Total current liabilities                                                                                                                                                                                                             |       | 53,454                          |       | 106 |   | 53,560 |   |
| Deferred contract  revenue — long-term                                                                                                                                                                                           |       | 86,691                          |       |   |   | 86,691 |   |
| Other long-term  liabilities                                                                                                                                                                                                          |       | 5,873                           |       |   |   | 5,873 |   |
| 4.25%  Convertible senior notes due August 15, 2010                                                                                                                                                                                   |       | 146,986                         |       |   |   | 146,986 |   |
| 2.25%  Convertible senior notes due May 15, 2011                                                                                                                                                                                      |       | 150,000                         |       |   |   | 150,000 |   |
| Commitments and  contingencies                                                                                                                                                                                                        |       | —                          |       |   |   | — |   |
| Shareholders’  equity:                                                                                                                                                                                                           |       |                            |       |   |   |   |   |
| Preferred stock, $1.00 par value, 2,000,000 shares authorized;  none issued and outstanding                                                                                                                                           |       | —                          |       |   |   | — |   |
| Common stock. $.01 par value; 200,000,000 shares  authorized; 111,773,230 shares issued and 111,687,930 shares outstanding at  December 31, 2005 and 85,865,333 shares issued and 85,673,693 shares  outstanding at December 31, 2004 |       | 859                             |       |   |   | 859 |   |
| Capital in excess of par value                                                                                                                                                                                                        |       | 730,934                         | (2)        | 1,844 |   | 732,778 |   |
| Treasury stock, at cost, 85,300 shares in 2005 and 191,640  shares in 2004                                                                                                                                                            |       | (482                            | )          |   |   | (482 | ) |
| Deferred compensation                                                                                                                                                                                                                 |       | 372                             |       |   |   | 372 |   |
| Accumulated other comprehensive income                                                                                                                                                                                                |       | 8,716                           | (2)        | (2,067 | ) | 6,649 |   |
| Accumulated deficit                                                                                                                                                                                                                   |       | (634,058                        | )(2)       | 117 |   | (633,941 | ) |
| Total shareholders’ equity                                                                                                                                                                                                       |       | 106,341                         | (2)        | (106 | ) | 106,235 |   |
| Total liabilities  and shareholders’ equity                                                                                                                                                                                      |       | $                               | 549,345    |   | — |   | $ | 549,345 |   |
|                                                                                                                                                                                                                                       |            |                                 |            |  |  |  |  |  |  |  |

----

(2)          December 31, 2004 asreported amounts for accrued liabilities, capital in excess of par value,accumulated other comprehensive income and accumulated deficit includeadjustments for the years 1996 through 2003.

F-38

----

 
| ** **                                  | ** ** | **Year Ended  December 31, 2004** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **As  Reported**                  | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|                                        |       |                              |       |   |   |   |   |
| Contract and license revenues               |       | $                                 | 9,119      |   |   |   | $ | 9,119 |   |
| Contract and license revenues from Genmab   |       | 3,355                             |       |   |   | 3,355 |   |
| Total revenues                              |       | 12,474                            |       |   |   | 12,474 |   |
| Costs and expenses:                         |       |                              |       |   |   |   |   |
| Research and  development                   |       | 122,007                           |       | $ | 1,005 |   | 123,012 |   |
| General and  administrative                 |       | 24,314                            |       | 945 |   | 25,259 |   |
| Acquisition of  in-process technology       |       | 5,455                             |       |   |   | 5,455 |   |
| Total costs and  expenses                   |       | 151,776                           |       | 1,950 |   | 153,726 |   |
| Operating loss                              |       | (139,302                          | )          | (1,950 | ) | (141,252 | ) |
| Equity in net loss of  affiliate            |       | (19,791                           | )          |   |   | (19,791 | ) |
| Interest and dividend  income               |       | 7,161                             |       | 2,067 |   | 9,228 |   |
| Impairment loss on  investments in partners |       | (7,309                            | )          |   |   | (7,309 | ) |
| Interest expense                            |       | (12,845                           | )          |   |   | (12,845 | ) |
| Debt conversion expense                     |       | (10,151                           | )          |   |   | (10,151 | ) |
| Net loss on  extinguishment of debt         |       | (4,241                            | )          |   |   | (4,241 | ) |
| Loss before provision  for income taxes     |       | (186,478                          | )          | 117 |   | (186,361 | ) |
| Provision for income  taxes                 |       | 31                                |       |   |   | 31 |   |
| Net loss                                    |       | $                                 | (186,509   | ) | $ | 117 |   | $ | (186,392 | ) |
|                                        |       |                              |       |   |   |   |   |
| Basic and diluted net loss per share:       |       | $                                 | (2.29      | ) | $ | (0.00 | ) | $ | (2.29 | ) |
| Weighted average common shares outstanding  |       |                              |       |   |   |   |   |
| —basic and diluted                     |       | 81,494                            |       |   |   | 81,494 |   |
|                                        |       |                              |       |   |   |   |   |

 

 

F-39

----

| ** **                                                                  | ** ** | **Year Ended  December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                  | ** ** | **As  Reported**                                 | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|                                                                        |       |                                             |       |   |   |   |   |
| Operating activities:                                                       |       |                                             |       |   |   |   |   |
| Net loss                                                                    |       | $                                                | (186,509   | ) | $ | 117 |   | $ | (186,392 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities |       |                                             |       |   |   |   |   |
| Depreciation                                                                |       | 12,020                                           |       |   |   | 12,020 |   |
| Amortization                                                                |       | 8,914                                            |       | (2,067 | ) | 6,847 |   |
| Loss on sale of  equipment                                                  |       | 105                                              |       |   |   | 105 |   |
| Stock options  and awards to employees                                      |       | 1,203                                            |       | 1,844 |   | 3,047 |   |
| Non-cash revenue  - Genmab                                                  |       | (1,166                                           | )          |   |   | (1,166 | ) |
| License fees  paid with stock                                               |       | 2,560                                            |       |   |   | 2,560 |   |
| Acquisition of  in-process technology                                       |       | 5,455                                            |       |   |   | 5,455 |   |
| Equity in net  loss of Genmab                                               |       | 19,791                                           |       |   |   | 19,791 |   |
| Impairment  losses on investments in partners                               |       | 7,309                                            |       |   |   | 7,309 |   |
| Gain on exchange  of convertible debt                                       |       | (325                                             | )          |   |   | (325 | ) |
| Loss on  redemption of convertible debt                                     |       | 4,566                                            |       |   |   | 4,566 |   |
| Gain on sale of  partners’ stock                                       |       | (1,664                                           | )          |   |   | (1,664 | ) |
| Changes in operating  assets and liabilities                                |       |                                             |       |   |   |   |   |
| Other current  assets                                                       |       | (458                                             | )          |   |   | (458 | ) |
| Trade accounts  payable                                                     |       | 2,801                                            |       |   |   | 2,801 |   |
| Accrued  liabilities                                                        |       | 20,769                                           |       | 106 |   | 20,875 |   |
| Deferred  contract revenue                                                  |       | 98,649                                           |       |   |   | 98,649 |   |
| Net cash used in  operating activities                                      |       | (5,980                                           | )          | — |   | (5,980 | ) |
| Investing activities:                                                       |       |                                             |       |   |   |   |   |
| Purchase of  property and equipment                                         |       | (9,074                                           | )          |   |   | (9,074 | ) |
| Proceeds from  sale of land and equipment                                   |       | 600                                              |       |   |   | 600 |   |
| Increase in  investments and advances to affiliates and partners            |       | (581                                             | )          |   |   | (581 | ) |
| Decrease  (increase) in segregated cash                                     |       | 3,195                                            |       |   |   | 3,195 |   |
| Purchase of  marketable securities                                          |       | (270,500                                         | )          |   |   | (270,500 | ) |
| Sales and  maturities of marketable securities                              |       | 242,573                                          |       |   |   | 242,573 |   |
| Net cash used in  investing activities                                      |       | (33,787                                          | )          | — |   | (33,787 | ) |
| Financing activities:                                                       |       |                                             |       |   |   |   |   |
| Cash received  from sales of securities and exercise of stock options, net  |       | 31,850                                           |       |   |   | 31,850 |   |
| Proceeds from  sale of convertible subordinated notes, net                  |       | 145,217                                          |       |   |   | 145,217 |   |
| Repurchase of  4.50% convertible notes                                      |       | (144,585                                         | )          |   |   | (144,585 | ) |
| Deferred  offering costs - Celldex                                          |       | (692                                             | )          |   |   | (692 | ) |
| Debt exchange  costs                                                        |       | (100                                             | )          |   |   | (100 | ) |
| Principal  payments under capital lease obligations                         |       | (78                                              | )          |   |   | (78 | ) |
| Net cash  provided by financing activities                                  |       | 31,612                                           |       | — |   | 31,612 |   |
| Net increase in  cash and cash equivalents                                  |       | (8,155                                           | )          |   |   | (8,155 | ) |
| Cash and cash  equivalents at beginning of period                           |       | 72,998                                           |       |   |   | 72,998 |   |
| Cash and cash  equivalents at end of period                                 |       | $                                                | 64,843     |   | — |   | $ | 64,843 |   |
| Supplemental  disclosures of cash flow information                          |       |                                             |       |   |   |   |   |
| Cash paid during  the year for:                                             |       |                                             |       |   |   |   |   |
| Income taxes                                                                |       | $                                                | 3          |   |   |   | $ | 3 |   |
| Interest                                                                    |       | $                                                | 10,789     |   |   |   | $ | 10,789 |   |
|                                                                             |            |                                                  |            |  |  |  |  |  |  |  |

** **

F-40

----

** **
| ** **                                                       | ** ** | **Year Ended  December 31, 2003** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                       | ** ** | **As  Reported**                                 | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|                                                             |       |                                             |       |   |   |   |   |
| Sales                                                            |       | $                                                | 25         |   |   |   | $ | 25 |   |
| Contract and  license revenues                                   |       | 5,833                                            |       |   |   | 5,833 |   |
| Contract and  license revenues from Genmab                       |       | 5,316                                            |       |   |   | 5,316 |   |
| Total revenues                                                   |       | 11,174                                           |       |   |   | 11,174 |   |
| Costs and  expenses:                                             |       |                                             |       |   |   |   |   |
| Cost of sales                                                    |       | 3                                                |       |   |   | 3 |   |
| Research and development                                         |       | 95,459                                           |       | $ | 2,344 |   | 97,803 |   |
| General and administrative                                       |       | 21,727                                           |       | 2,113 |   | 23,840 |   |
| Acquisition of in-process technology                             |       | 6,500                                            |       |   |   | 6,500 |   |
| Total costs and expenses                                         |       | 123,689                                          |       | 4,457 |   | 128,146 |   |
| Operating loss                                                   |       | (112,515                                         | )          | (4,457 | ) | (116,972 | ) |
| Equity in net loss of affiliate                                  |       | (14,997                                          | )          |   |   | (14,997 | ) |
| Interest and dividend income                                     |       | 12,311                                           |       | (1,010 | ) | 11,301 |   |
| Impairment loss on investments in partners                       |       | (1,400                                           | )          |   |   | (1,400 | ) |
| Interest expense                                                 |       | (11,777                                          | )          |   |   | (11,777 | ) |
| Loss before provision for income taxes                           |       | (128,378                                         | )          | (5,467 | ) | (133,845 | ) |
| Provision for income taxes                                       |       | 69                                               |       |   |   | 69 |   |
| Loss before cumulative effect of change in  accounting principle |       | (128,447                                         | )          | (5,467 | ) | (133,914 | ) |
| Cumulative effect if change in accounting principle              |       | (830                                             | )          |   |   | (830 | ) |
| Net loss                                                         |       | $                                                | (129,277   | ) | $ | (5,467 | ) | $ | (134,744 | ) |
| Basic and  diluted net loss per share:                           |       |                                             |       |   |   |   |   |
| Loss before cumulative effect of change in  accounting principle |       | $                                                | (1.64      | ) | $ | (0.08 | ) | $ | (1.71 | ) |
| Cumulative effect of change in accounting principle              |       | (0.01                                            | )          | — |   | (0.01 | ) |
| Net loss                                                         |       | $                                                | (1.65      | ) | $ | (0.08 | ) | $ | (1.72 | ) |
| Weighted average  common shares outstanding                      |       |                                             |       |   |   |   |   |
| —basic and diluted                                          |       | 78,314                                           |       |   |   | 78,314 |   |
|                                                             |       |                                             |       |   |   |   |   |

** **

F-41

----

** **
| ** **                                                                  | ** ** | **Year Ended  December 31, 2003** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                  | ** ** | **As  Reported**                                 | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| ** **                                                                  |       |                                             |       |   |   |   |   |
| Operating  activities:                                                      |       |                                             |       |   |   |   |   |
| Net loss                                                                    |       | $                                                | (129,277   | ) | $ | (5,467 | ) | $ | (134,744 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities |       |                                             |       |   |   |   |   |
| Cumulative effect of change in accounting principle                         |       | 830                                              |       |   |   | 830 |   |
| Depreciation                                                                |       | 10,650                                           |       |   |   | 10,650 |   |
| Amortization                                                                |       | 4,613                                            |       | 1,010 |   | 5,623 |   |
| Stock options and awards to employees                                       |       | 773                                              |       | 4,390 |   | 5,163 |   |
| Non-cash revenue - Genmab                                                   |       | (834                                             | )          |   |   | (834 | ) |
| Acquisition of in-process technology                                        |       | 6,100                                            |       |   |   | 6,100 |   |
| Equity in net loss of Genmab                                                |       | 14,997                                           |       |   |   | 14,997 |   |
| Impairment losses on investments in partners                                |       | 1,400                                            |       |   |   | 1,400 |   |
| Gain on sale of partners’ stock                                        |       | (1,530                                           | )          |   |   | (1,530 | ) |
| Changes in  operating assets and liabilities                                |       |                                             |       |   |   |   |   |
| Other current assets                                                        |       | 3,799                                            |       |   |   | 3,799 |   |
| Trade accounts payable                                                      |       | (489                                             | )          |   |   | (489 | ) |
| Accrued liabilities                                                         |       | 214                                              |       | 67 |   | 281 |   |
| Deferred contract revenue                                                   |       | (497                                             | )          |   |   | (497 | ) |
| Net cash used in operating activities                                       |       | (89,251                                          | )          | — |   | (89,251 | ) |
| Investing  activities:                                                      |       |                                             |       |   |   |   |   |
| Purchase of property and equipment                                          |       | (8,890                                           | )          |   |   | (8,890 | ) |
| Increase in investments and advances to affiliates  and partners            |       | (1,000                                           | )          |   |   | (1,000 | ) |
| Decrease (increase) in segregated cash                                      |       | (15,896                                          | )          |   |   | (15,896 | ) |
| Purchase of marketable securities                                           |       | (121,191                                         | )          |   |   | (121,191 | ) |
| Sales and maturities of marketable securities                               |       | 124,407                                          |       |   |   | 124,407 |   |
| Net cash used in investing activities                                       |       | (22,570                                          | )          | — |   | (22,570 | ) |
| Financing  activities:                                                      |       |                                             |       |   |   |   |   |
| Cash received from sales of securities and exercise  of stock options, net  |       | 2,091                                            |       |   |   | 2,091 |   |
| Proceeds from sale of convertible subordinated  notes, net                  |       | 121,239                                          |       |   |   | 121,239 |   |
| Principal payments under capital lease obligations                          |       | (323                                             | )          |   |   | (323 | ) |
| Net cash provided by financing activities                                   |       | 123,007                                          |       | — |   | 123,007 |   |
| Net increase in cash and cash equivalents                                   |       | 11,186                                           |       |   |   | 11,186 |   |
| Cash and cash  equivalents at beginning of period                           |       | 61,812                                           |       |   |   | 61,812 |   |
| Cash and cash  equivalents at end of period                                 |       | $                                                | 72,998     |   | — |   | $ | 72,998 |   |
| Non-cash  investing and financing activities:                               |       |                                             |       |   |   |   |   |
| Issuance of common stock for intangible assets                              |       | $                                                | 7,100      |   |   |   | $ | 7,100 |   |
| Supplemental  disclosures of cash flow information                          |       |                                             |       |   |   |   |   |
| Cash paid during the year for:                                              |       |                                             |       |   |   |   |   |
| Income taxes                                                                |       | $                                                | 108        |   |   |   | $ | 108 |   |
| Interest                                                                    |       | $                                                | 11,841     |   |   |   | $ | 11,841 |   |
|                                                                             |            |                                                  |            |  |  |  |  |  |  |  |

 

Thefollowing table sets forth the amount of stock-based compensation expense andrelated payroll tax liabilities for the years 1996 through 2002.  The cumulative amount of stock-basedcompensation expense and related payroll

F-42

----

 

tax liabilities forthese years is approximately $28.1 million and is included as an adjustment toaccumulated deficit as of January 1, 2003.

 

| Year Ended  December 31, | ** ** | **Increase to Previously  Reported Net Loss** |
|------------------------------------|------------|-------------------------------------------------------------------|
| 1996                               |       | $(235)                                                            |
| 1997                               |       | (624)                                                             |
| 1998                               |       | (699)                                                             |
| 1999                               |       | (820)                                                             |
| 2000                               |       | (10,487)                                                          |
| 2001                               |       | (12,770)                                                          |
| 2002                               |       | (2,510)                                                           |

 

TheCompany has restated the pro forma expense under FASB Statement No. 123 in Note2 to the consolidated financial statements of this Form 10-K/A to reflect theimpact of these adjustments for the years ended December 31, 2005, 2004 and2003.  The Company has also restated theaccrued liabilities detail in Note 4 and the deferred asset income taxdisclosures in Note 5 to the consolidated financial statements to reflect theimpact of these adjustments.

**19.**          Subsequent Events

OnFebruary 1, 2006, Genmab completed the private placement of 5.75 million sharesof its stock.  As a result of thisprivate placement, 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*.

**20.**          Quarterly FinancialInformation—Unaudited

Thefollowing tables set forth a summary of the Company’s consolidated statementsof operations for each of the quarterly periods in the years ended December 31,2005 and 2004:

F-43

----

**2005**
| ** **                                       | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **(restated)**     | ** ** | **(restated)**    | ** ** | **(restated)**         | ** ** | **(restated)**        | ** ** |
| Revenues:                                        |       |               |       |              |       |                   |       |                  |       |
| Sales                                            |       | $                  | —     |              | $          | —                 |       | $                     | —     |   | $ | — |   |
| Contract and license revenues                    |       | 5,932              |       | 10,208            |       | 6,479                  |       | 7,607                 |       |
| Sales, contract and license revenues from Genmab |       | 600                |       | 1,508             |       | 1,142                  |       | 817                   |       |
| Reimbursement of development costs               |       | 1,979              |       | 6,821             |       | 3,045                  |       | 5,317                 |       |
| Total revenues                                   |       | 8,511              |       | 18,537            |       | 10,666                 |       | 13,741                |       |
| Costs and  expenses:                             |       |               |       |              |       |                   |       |                  |       |
| Research and development                         |       | 29,395             |       | 36,015            |       | 31,247                 |       | 40,282                |       |
| General and administrative                       |       | 5,914              |       | 6,369             |       | 6,396                  |       | 10,289                |       |
| Acquisition of in-process technology             |       | —             |       | —            |       | —                 |       | 8,447                 |       |
| Total costs and expenses                         |       | 35,309             |       | 42,384            |       | 37,643                 |       | 59,018                |       |
| Operating loss                                   |       | (26,798            | )          | (23,847           | )          | (26,977                | )          | (45,277               | )          |
| Equity in net loss of affiliate                  |       | (1,657             | )          | —            |       | (1,816                 | )          | (2,850                | )          |
| Interest and dividend income                     |       | 2,508              |       | 2,722             |       | 6,233                  |       | 3,277                 |       |
| Impairment loss on investments in partners       |       | (20,264            | )          | (9,001            | )          | —                 |       | (4,082                | )          |
| Interest expense                                 |       | (1,075             | )          | (1,052            | )          | (1,053                 | )          | (1,053                | )          |
| Minority interest — Celldex                 |       | —             |       | —            |       | —                 |       | 4,410                 |       |
| Loss before provision for income taxes           |       | (47,286            | )          | (31,178           | )          | (23,613                | )          | (45,575               | )          |
| Provision for income taxes                       |       | 58                 |       | 138               |       | 90                     |       | 72                    |       |
| Net loss                                         |       | $                  | (47,344    | )                 | $          | (31,316                | )          | $                     | (23,703    | ) | $ | (45,647 | ) |
| Basic and  diluted net loss per share            |       | $                  | (0.44      | )                 | $          | (0.28                  | )          | $                     | (0.21      | ) | $ | (0.41 | ) |
| Weighted average  common shares outstanding      |       |               |       |              |       |                   |       |                  |       |
| —basic and diluted                          |       | 106,999            |       | 111,059           |       | 111,406                |       | 111,688               |       |
|                                             |       |               |       |              |       |                   |       |                  |       |

 

Theimpact of the stock-based compensation and related payroll tax adjustments werenot significant to any of the interim balance sheets for the year endedDecember 31, 2004.

Basicand diluted net loss per share are computed independently for each of thequarters presented.  Therefore, the sumof basic and diluted net loss per share information may not equal annual basicand diluted net loss per share.

 

F-44

----

**2004**

 
| ** **                                        | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **(restated)**     | ** ** | **(restated)**    | ** ** | **(restated)**         | ** ** | **(restated)**        | ** ** |
| Revenues:                                         |       |               |       |              |       |                   |       |                  |       |
| Sales                                             |       | $                  | —     |              | $          | —                 |       | $                     | —     |   | $ | — |   |
| Contract and  license revenues                    |       | 1,106              |       | 1,203             |       | 2,499                  |       | 4,312                 |       |
| Sales, contract  and license revenues from Genmab |       | 823                |       | 707               |       | 1,183                  |       | 641                   |       |
| Reimbursement of  development costs               |       | —             |       | —            |       | —                 |       | —                |       |
| Total revenues                                    |       | 1,929              |       | 1,910             |       | 3,682                  |       | 4,953                 |       |
| Costs and expenses:                               |       |               |       |              |       |                   |       |                  |       |
| Research and  development                         |       | 23,238             |       | 31,742            |       | 42,886                 |       | 29,277                |       |
| General and  administrative                       |       | 6,065              |       | 6,353             |       | 7,787                  |       | 8,253                 |       |
| Acquisition of  in-process technology             |       | —             |       | —            |       | 5,439                  |       | 16                    |       |
| Total costs and  expenses                         |       | 29,303             |       | 38,095            |       | 56,112                 |       | 37,546                |       |
| Operating loss                                    |       | (27,374            | )          | (36,185           | )          | (52,430                | )          | (32,593               | )          |
| Equity in net  loss of affiliate                  |       | (4,766             | )          | (5,606            | )          | (4,106                 | )          | (5,313                | )          |
| Interest and  dividend income                     |       | 4,252              |       | 2,382             |       | 2,261                  |       | 333                   |       |
| Impairment loss  on investments in partners       |       | (316               | )          | —            |       | —                 |       | (6,993                | )          |
| Interest expense                                  |       | (3,635             | )          | (3,951            | )          | (2,504                 | )          | (2,755                | )          |
| Debt conversion  expense                          |       |               |       | —            |       | —                 |       | (10,151               | )          |
| Net loss on  extinguishment of debt               |       | 326                |       | (2,165            | )          | (2,402                 | )          | —                |       |
| Loss before  provision for income taxes           |       | (31,513            | )          | (45,525           | )          | (59,181                | )          | (57,472               | )          |
| Provision  (benefit) for income taxes             |       | 6                  |       | 3                 |       | 182                    |       | (160                  | )          |
| Net loss                                          |       | $                  | (31,519    | )                 | $          | (45,528                | )          | $                     | (59,363    | ) | $ | (57,312 | ) |
| Basic and diluted net  loss per share             |       | $                  | (0.40      | )                 | $          | (0.57                  | )          | $                     | (0.73      | ) | $ | (0.67 | ) |
| Weighted average common  shares outstanding       |       |               |       |              |       |                   |       |                  |       |
| —basic and  diluted                          |       | 77,953             |       | 79,523            |       | 80,904                 |       | 85,814                |       |

 

Theimpact of the stock-based compensation and related payroll tax adjustments werenot significant to any of the interim balance sheets for the year endedDecember 31, 2004.

Basicand diluted net loss per share are computed independently for each of thequarters presented.  Therefore, the sumof basic and diluted net loss per share information may not equal annual basicand diluted net loss per share.

F-45

----

Thefollowing tables present the effects of the adjustments made to the Company’spreviously reported quarterly financial information for the years endedDecember 31, 2005 and 2004:

 
| ** **                                  | ** ** | **Three Months Ended  March 31, 2005** | ** ** | **Three Months Ended  June 30, 2005** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                  | ** ** | **As  Reported**                                           | ** ** | **Adjustments**                                           | ** ** | **As  Restated** | ** ** | **As  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| Total revenues                              |       | $                                                          | 8,511      |                                                      |       |   | $ | 8,511 |   | $ | 18,537 |   |   |   | $ | 18,537 |   |
| Costs and  expenses:                        |       |                                                       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Research and development                    |       | 29,126                                                     |       | 269                                                       |       | 29,395 |   | 35,751 |   | 263 |   | 36,014 |   |
| General and administrative                  |       | 5,735                                                      |       | 179                                                       |       | 5,914 |   | 6,117 |   | 252 |   | 6,369 |   |
| Acquisition of in-process technology        |       | —                                                     |       | —                                                    |       | — |   | — |   |   |   |   |   |
| Total costs and expenses                    |       | 34,861                                                     |       | 448                                                       |       | 35,309 |   | 41,868 |   | 515 |   | 42,383 |   |
| Operating loss                              |       | (26,350                                                    | )          | (448                                                      | )          | (26,798 | ) | (23,331 | ) | (515 | ) | (23,846 | ) |
| Equity in net loss of affiliate             |       | (1,657                                                     | )          |                                                      |       | (1,657 | ) | — |   |   |   | — |   |
| Interest and dividend income                |       | 2,508                                                      |       |                                                      |       | 2,508 |   | 2,722 |   |   |   | 2,722 |   |
| Impairment loss on investments in partners  |       | (20,264                                                    | )          |                                                      |       | (20,264 | ) | (9,001 | ) |   |   | (9,001 | ) |
| Interest expense                            |       | (1,075                                                     | )          |                                                      |       | (1,075 | ) | (1,052 | ) |   |   | (1,052 | ) |
| Minority interest — Celldex            |       | —                                                     |       |                                                      |       | — |   | — |   |   |   | — |   |
| Loss before provision for income taxes      |       | (46,838                                                    | )          | (448                                                      | )          | (47,286 | ) | (30,662 | ) | (515 | ) | (31,177 | ) |
| Provision for income taxes                  |       | 58                                                         |       |                                                      |       | 58 |   | 138 |   |   |   | 138 |   |
| Net loss                                    |       | $                                                          | (46,896    | )                                                         | $          | (448 | ) | $ | (47,344 | ) | $ | (30,800 | ) | $ | (515 | ) | $ | (31,315 | ) |
| Basic and  diluted net loss per share       |       | $                                                          | (0.44      | )                                                         | $          | (0.00 | ) | $ | (0.44 | ) | $ | (0.28 | ) | $ | (0.00 | ) | $ | (0.28 | ) |
| Weighted average  common shares outstanding |       |                                                       |       |                                                      |       |   |   |   |   |   |   |   |   |
| —basic and  diluted                    |       | 106,999                                                    |       |                                                      |       | 106,999 |   | 111,059 |   |   |   | 111,059 |   |

 

F-46

----

 
| ** **                                  | ** ** | **Three Months Ended  September 30, 2005** | ** ** | **Three Months Ended  December 31, 2005** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                  | ** ** | **As  Reported**                                               | ** ** | **Adjustments**                                               | ** ** | **As  Restated** | ** ** | **As  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| Total revenues                              |       | $                                                              | 10,666     |                                                          |       |   | $ | 10,666 |   | $ | 13,741 |   |   |   | $ | 13,741 |   |
| Costs and  expenses:                        |       |                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| Research and development                    |       | 30,925                                                         |       | 322                                                           |       | 31,247 |   | 40,045 |   | 237 |   | 40,282 |   |
| General and administrative                  |       | 6,110                                                          |       | 286                                                           |       | 6,396 |   | 10,092 |   | 197 |   | 10,289 |   |
| Acquisition of in-process technology        |       | —                                                         |       |                                                          |       | — |   | 8,447 |   |   |   | 8,447 |   |
| Total costs and expenses                    |       | 37,035                                                         |       | 608                                                           |       | 37,643 |   | 58,584 |   | 434 |   | 59,018 |   |
| Operating loss                              |       | (26,369                                                        | )          | (608                                                          | )          | (26,977 | ) | (44,843 | ) | (434 | ) | (45,277 | ) |
| Equity in net loss of affiliate             |       | (1,816                                                         | )          |                                                          |       | (1,816 | ) | (2,850 | ) |   |   | (2,850 | ) |
| Interest and dividend income                |       | 6,233                                                          |       |                                                          |       | 6,233 |   | 3,277 |   |   |   | 3,277 |   |
| Impairment loss on investments in partners  |       | —                                                         |       |                                                          |       | — |   | (4,082 | ) |   |   | (4,082 | ) |
| Interest expense                            |       | (1,053                                                         | )          |                                                          |       | (1,053 | ) | (1,053 | ) |   |   | (1,053 | ) |
| Minority interest — Celldex            |       | —                                                         |       |                                                          |       | — |   | 4,410 |   |   |   | 4,410 |   |
| Loss before provision for income taxes      |       | (23,005                                                        | )          | (608                                                          | )          | (23,613 | ) | (45,141 | ) | (434 | ) | (45,575 | ) |
| Provision for income taxes                  |       | 90                                                             |       |                                                          |       | 90 |   | 72 |   |   |   | 72 |   |
| Net loss                                    |       | $                                                              | (23,095    | )                                                             | $          | (608 | ) | $ | (23,703 | ) | $ | (45,213 | ) | $ | (434 | ) | $ | (45,647 | ) |
| Basic and  diluted net loss per share       |       | $                                                              | (0.21      | )                                                             | $          | (0.00 | ) | $ | (0.21 | ) | $ | (0.40 | ) | $ | (0.00 | ) | $ | (0.41 | ) |
| Weighted average  common shares outstanding |       |                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| —basic and  diluted                    |       | 111,406                                                        |       |                                                          |       | 111,406 |   | 111,688 |   |   |   | 111,688 |   |

 

F-47

----

 
| ** **                                  | ** ** | **Three Months Ended  March 31, 2004** | ** ** | **Three Months Ended  June 30, 2004** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                  | ** ** | **As  Reported**                                           | ** ** | **Adjustments**                                           | ** ** | **As  Restated** | ** ** | **As  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
| Total revenues                              |       | $                                                          | 1,929      |                                                      |       |   | $ | 1,929 |   | $ | 1,910 |   |   |   | $ | 1,910 |   |
| Costs and  expenses:                        |       |                                                       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Research and development                    |       | 22,988                                                     |       | 250                                                       |       | 23,238 |   | 30,124 |   | 1,618 |   | 31,742 |   |
| General and administrative                  |       | 5,808                                                      |       | 257                                                       |       | 6,065 |   | 5,495 |   | 858 |   | 6,353 |   |
| Acquisition of in-process technology        |       | —                                                     |       |                                                      |       | — |   | — |   |   |   | — |   |
| Total costs and expenses                    |       | 28,796                                                     |       | 507                                                       |       | 29,303 |   | 35,619 |   | 2,476 |   | 38,095 |   |
| Operating loss                              |       | (26,867                                                    | )          | (507                                                      | )          | (27,374 | ) | (33,709 | ) | (2,476 | ) | (36,185 | ) |
| Equity in net loss of affiliate             |       | (4,766                                                     | )          |                                                      |       | (4,766 | ) | (5,606 | ) |   |   | (5,606 | ) |
| Interest and dividend income                |       | 4,304                                                      |       | (52                                                       | )          | 4,252 |   | 1,881 |   | 501 |   | 2,382 |   |
| Impairment loss on investments in partners  |       | (316                                                       | )          |                                                      |       | (316 | ) | — |   |   |   | — |   |
| Interest expense                            |       | (3,635                                                     | )          |                                                      |       | (3,635 | ) | (3,951 | ) |   |   | (3,951 | ) |
| Gain (loss) on extinguishment of debt       |       | 326                                                        |       |                                                      |       | 326 |   | (2,165 | ) |   |   | (2,165 | ) |
| Loss before provision for income taxes      |       | (30,954                                                    | )          | (559                                                      | )          | (31,513 | ) | (43,550 | ) | (1,975 | ) | (45,525 | ) |
| Provision for income taxes                  |       | 6                                                          |       |                                                      |       | 6 |   | 3 |   |   |   | 3 |   |
| Net loss                                    |       | $                                                          | (30,960    | )                                                         | $          | (559 | ) | $ | (31,519 | ) | $ | (43,553 | ) | $ | (1,975 | ) | $ | (45,528 | ) |
| Basic and diluted  net loss per share       |       | $                                                          | (0.40      | )                                                         | $          | (0.00 | ) | $ | (0.40 | ) | $ | (0.55 | ) | $ | (0.02 | ) | $ | (0.57 | ) |
| Weighted average  common shares outstanding |       |                                                       |       |                                                      |       |   |   |   |   |   |   |   |   |
| —basic and  diluted                    |       | 77,953                                                     |       |                                                      |       | 77,953 |   | 79,523 |   |   |   | 79,523 |   |

 

F-48

----

 
| ** **                                  | ** ** | **Three Months Ended  September 30, 2004** | ** ** | **Three Months Ended  December 31, 2004** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                  | ** ** | **As  Reported**                                               | ** ** | **Adjustments**                                               | ** ** | **As  Restated** | ** ** | **As  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|                                        |       |                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| Total revenues                              |       | $                                                              | 3,682      |                                                          |       |   | $ | 3,682 |   | $ | 4,953 |   |   |   | $ | 4,953 |   |
| Costs and  expenses:                        |       |                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| Research and development                    |       | 40,583                                                         |       | 2,303                                                         |       | 42,886 |   | 28,312 |   | 965 |   | 29,277 |   |
| General and administrative                  |       | 5,682                                                          |       | 2,105                                                         |       | 7,787 |   | 7,329 |   | 924 |   | 8,253 |   |
| Acquisition of in-process technology        |       | 5,439                                                          |       |                                                          |       | 5,439 |   | 16 |   |   |   | 16 |   |
| Total costs and expenses                    |       | 51,704                                                         |       | 4,408                                                         |       | 56,112 |   | 35,657 |   | 1,889 |   | 37,546 |   |
| Operating loss                              |       | (48,022                                                        | )          | (4,408                                                        | )          | (52,430 | ) | (30,704 | ) | (1,889 | ) | (32,593 | ) |
| Equity in net loss of affiliate             |       | (4,106                                                         | )          |                                                          |       | (4,106 | ) | (5,313 | ) |   |   | (5.313 | ) |
| Interest and dividend income                |       | 2,209                                                          |       | 52                                                            |       | 2,261 |   | (1,233 | ) | 1,566 |   | 333 |   |
| Impairment loss on investments in partners  |       | —                                                         |       |                                                          |       | — |   | (6,993 | ) |   |   | (6,993 | ) |
| Interest expense                            |       | (2,504                                                         | )          |                                                          |       | (2,504 | ) | (2,755 | ) |   |   | (2,755 | ) |
| Gain (loss) on extinguishment of debt       |       | (2,402                                                         | )          |                                                          |       | (2,402 | ) | — |   |   |   | — |   |
| Debt conversion expense                     |       | —                                                         |       |                                                          |       | — |   | (10,151 | ) |   |   | (10,151 | ) |
| Loss before provision for income taxes      |       | (54,825                                                        | )          | (4,356                                                        | )          | (59,181 | ) | (57,149 | ) | (323 | ) | (57,472 | ) |
| Provision (benefit) for income taxes        |       | 182                                                            |       |                                                          |       | 182 |   | (160 | ) |   |   | (160 | ) |
| Net loss                                    |       | $                                                              | (55,007    | )                                                             | $          | (4,356 | ) | $ | (59,363 | ) | $ | (56,989 | ) | $ | (323 | ) | $ | (57,312 | ) |
| Basic and  diluted net loss per share       |       | $                                                              | (0.68      | )                                                             | $          | (0.05 | ) | $ | (0.73 | ) | $ | (0.66 | ) | $ | (0.00 | ) | $ | (0.67 | ) |
| Weighted average  common shares outstanding |       |                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| —basic and  diluted                    |       | 80,904                                                         |       |                                                          |       | 80,904 |   | 85,814 |   |   |   | 85,814 |   |

** **

F-49

----

**Report ofIndependent Registered Public Accounting Firm**

To theBoard of Directors and Shareholders of Genmab A/S:

In our opinion, the accompanying consolidated balancesheet and the related consolidated statements of operations, shareholders’equity and cash flows (not presented herein) present fairly, in all materialrespects, the financial position of Genmab A/S and its subsidiaries (adevelopment stage company) at December 31, 2004, and the results of theiroperations and their cash flows for the years ended December 31, 2004 and 2003and, cumulatively, for the period from June 11, 1998 (date of inception)to December 31, 2004 in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits. We conducted our audits ofthese statements in accordance with standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.
| PricewaterhouseCoopers                     |
|--------------------------------------------|
| Statsautoriseret Revisionsinteressentskab  |
| Copenhagen, Denmark, February 8, 2005 |
|                                       |
| /s/ JENS  RØDER                       |   |
| State Authorized Public Accountant         |

 

F-50

----

**Item9.**                          Changesin and Disagreements with Accountants on Accounting and Financial Disclosures

None.

**Item 9A. Controls and Procedures**

*Special Investigation CommitteeReview into Stock Option Grant Practices and Restatement*

As discussed in the Explanatory Note preceding PartI and in Note 18 to the consolidated financial statements of this Form 10-K/A, inJune 2006, the Company’s Board of Directors initiated an Investigation of theCompany’s stock option grant practices from 1996 through June 30, 2006, which wasconducted by the Special Investigation Committee.

Basedupon information obtained in the Investigation, through July 2002, the Companyhad a practice, in many instances, of selecting dates for its stock optiongrants and restricted stock grants as of the date when the stock price was thelowest during the month of grant, without disclosing this practice in itspublic filings and without properly measuring the compensation expense on adate that the terms of the equity awards were finalized.  Subsequent to July 2002, while the Companyhad made changes in its equity award granting practices in response to legaland regulatory requirements, there were two annual rank and file equity grantsfor which the measurement dates differ from the grant dates recorded in theCompany’s books and records by a couple of days, which the Investigation revealedwere primarily a result of administrative delays, with no apparent intent toachieve favorable exercise prices.

FromJuly 2002 through 2005, the Company implemented improvements to procedures andprocesses to provide greater internal control over the equity award grantingand administration function in compliance with the Sarbanes-Oxley Act of 2002(“SOX”).  These improvements included:

·                  Documenting andassessing the design and operation of internal controls

·                  Segregatingresponsibilities, adding reviews and redefining roles and responsibilities

·                  Identifying keycontrols, developing test plans, and testing controls in the equity awardgranting and administration function

·                  Certifyingstock administration and other controls for SOX Section 404 compliance in 2005and 2004

*Evaluation of Disclosure Controls and Procedures:*  Our principal executive officer and principalfinancial officer reviewed and evaluated our disclosure controls and procedures(as defined in Exchange Act Rule 13a-15(e)) as of the end of the period coveredby this amended 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 a timelyfashion.

*Management’s Annual Report on Internal Control OverFinancial Reporting:**  *Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)under the Securities Exchange Act of 1934. Our internal control over financialreporting is designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  Ourinternal control over financial reporting includes those policies andprocedures that: (i) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of Medarex; (ii) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that our receiptsand expenditures are being made only in accordance with authorizations of ourmanagement and our directors; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof our assets that could have a material effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

74

----

Ourmanagement assessed the effectiveness of our internal control over financialreporting 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 onits assessment and those criteria, our management has concluded that despitethe control deficiencies resulting in the restatement of our previously issuedconsolidated financial statements, we maintained effective internal controlover financial reporting as of December 31, 2005**. **Management considered, among other things,the materiality of the changes in the restatement of the consolidated financialstatements for the year ended December 31, 2005

Ourindependent auditors have issued an attestation report on our management’sassessment of Medarex’s internal control over financial reporting as stated intheir report which follows.

*Changes in Internal Controls Over Financial Reporting:**  *Such evaluation did not identify anysignificant 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.

InJanuary 2007, we adopted a new policy and procedure for the granting of stockoptions and other equity-based incentives. This new policy and procedure was designed to ensure consistency in thegranting and administration of equity awards and includes:

·                  Specificprocedures for:

·                  Equity grants tonew officers, employees and members of the Board of Directors;

·                  Annual equitygrants to current officers, employees and members of the Board of Directors;and

·                  Off-cyclegrants to current officers, employees and members of the Board of Directors;

·                  Amethodology for establishing accounting measurement dates for the foregoinggrants;

·                  Proceduresfor the communication, documentation and implementation of equity awards by thestock option administrator; and

·                  Trainingfor individuals involved in the administration and implementation of equityaward procedures.

75

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**Reportof Independent Registered Public Accounting Firm**

The Board of Directors and Shareholders

Medarex, Inc.

 

Wehave audited management’s assessment, included in the accompanying Management’sAnnual Report on Internal Control Over Financial Reporting in Item 9A thatMedarex, Inc. maintained effective internal control over financialreporting as of December 31, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria).Medarex, Inc.’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon our audit.

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the company’s assets that could have a materialeffect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Inour opinion, management’s assessment that Medarex, Inc. maintainedeffective internal control over financial reporting as of December 31,2005, is fairly stated, in all material respects, based on the COSO criteria.Also, in our opinion, Medarex, Inc. maintained, in all respects, effectiveinternal control over financial reporting as of December 31, 2005, based onthe COSO criteria.  As discussed in Note18, the consolidated financial statements have been restated.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Medarex, Inc. and subsidiaries as ofDecember 31, 2005 and 2004, and the related consolidated statements ofoperations, shareholders’ equity and cash flows for each of the three years inthe period ended December 31, 2005 and our report dated March 3,2006, except for Note 18 as to which the date is February 2, 2007  expresses an unqualified opinion thereon.
|                                         |   | /s/ Ernst & Young LLP |
|-----------------------------------------|--------|-------------------------------------|
| MetroPark, New  Jersey                  |   |                                |
| March 3,  2006, except for Note 18 |   |                                |
| as to which the date is                 |   |                                |
| February 2, 2007                        |   |                                |

 

76

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**Item 9B.  OtherInformation**

**None**

**PART III**

**Item 10.**                   Directors and Executive Officers ofthe Registrant

**Identificationof Directors and Executive Officers**

Theinformation required by this Item will be reported in our definitive ProxyStatement for the Annual Meeting of Shareholders which we expect will be filedon 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**

Theinformation required by this Item will be reported in the Proxy Statement underthe heading “Ownership of Company Stock—Section 16(a) Beneficial OwnershipReporting Compliance,” and is incorporated herein by reference.

**Code ofEthics**

Theinformation required by this Item will be reported in the section entitled“Proposal 1—Election of Directors—Corporate Governance—Standards of Integrity”in the Proxy Statement and is incorporated herein by reference.

**Item 11.**                   Executive Compensation

Theinformation required by this Item will be reported in the Proxy Statement underthe headings “Proposal 1—Election of Directors—Executive Compensation,”“Proposal 1—Election of Directors—Information Regarding the Board and itsCommittees—Compensation of Directors,” and “Proposal 1—Election of Directors—StockPrice Performance Graph,” and is incorporated herein by reference.

**Item 12.**                   Security Ownership of CertainBeneficial Owners and Management and Related Shareholder Matters

Theinformation required by this Item will be reported in the Proxy Statement underthe headings “Ownership of Company Stock—Medarex Stock Owned by PrincipalShareholders and Management,” “Equity Compensation Plan Information” and“Equity Compensation Plans Not Approved by Shareholders,” and is incorporatedherein by reference.

**Item 13.**                   Certain Relationships and RelatedTransactions

Theinformation required by this Item will be reported in the Proxy Statement underthe heading “Proposal 1—Election of Officers—Certain Relationships and RelatedTransactions,” and is incorporated herein by reference.

**Item 14.**                   Principal Accountant Fees andServices

Theinformation required by this Item will be reported in the Proxy Statement underthe heading “Proposal 2—Ratification of the Appointment of IndependentRegistered Public Accounting Firm,” and is incorporated herein by reference.

 

77

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**PART IV**

**Item15.**                   Exhibits,Financial Statement Schedules 
| Item  Number    | ** ** | ** **                                                                                                                                                                                                                                                                                                                                      |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (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.                                                                                                                                                                                                                                           |
| 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.                                                                                                                                               |

 

78

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| 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.                                                             |
| 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.                                                                     |

 

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(1)             Incorporated byreference to the identically numbered exhibit to the Registrant’s RegistrationStatement on Form S-1 (File No. 33–39956) filed onApril 12, 1991.

(2)             Incorporated byreference to Exhibit No. 10.1 to the Registrant’s Statement onForm S-3, as Amended (File No. 333–108325) filed onJanuary 30, 2004.

(8)             Incorporated byreference to the identically numbered exhibit to the Registrant’s Annual Reporton Form 10–K filed on March 15, 1993.

(9)             Incorporated byreference to the identically numbered exhibit to the Registrant’s Annual Reporton Form 10–K filed on February 23, 1996.

(10)       Incorporated by referenceto the identically numbered exhibit to the Registrant’s Quarterly Report onForm 10–Q filed on May 17, 1993.

(11)       Incorporated by referenceto the identically numbered exhibit to the Registrant’s Quarterly Report onForm 10–Q filed on August 13, 1993.

(23)       Incorporated by referenceto Exhibit Number 10.44 to Cell Genesys, Inc.’s Annual Report onForm 10–K/A filed on April 30, 1997.

(24)       Incorporated by referenceto Exhibit Number 10.45 to Cell Genesys, Inc.’s Annual Report onForm 10–K/A filed on April 30, 1997.

(25)       Incorporated by referenceto Exhibit Number 10.46 to Cell Genesys, Inc.’s Annual Report onForm 10–K/A filed on April 30, 1997.

(28)       Incorporated by referenceto Exhibit Number 2.1 to the Registrant’s Current Report on Form 8–Kfiled on June 17, 1997.

(30)       Incorporated by referenceto Exhibit Number 10.82 to the Registrant’s Quarterly Report onForm 10–Q filed on August 13, 1999.

(36)       Incorporated by referenceto Exhibit Number 10.80 to the Registrant’s Current Report on Form 8–Kfiled on August 11, 1999.

(37)       Incorporated by referenceto Exhibit Number 10.81 to the Registrant’s Current Report on Form 8–Kfiled on August 11, 1999.

(39)       Incorporated by referenceto Exhibit Number 10.83 to the Registrant’s Quarterly Report onForm 10–Q filed on August 13, 1999.

(40)       Incorporated by referenceto Exhibit Number 10.84 to the Registrant’s Quarterly Report on Form 10–Qfiled on August 13, 1999.

(41)       Incorporated by referenceto Exhibit Number 10.85 to the Registrant’s Quarterly Report onForm 10–Q filed on August 13, 1999.

(52)       Incorporated by referenceto Exhibit Number 10.10 to the Registrant’s Current Report on Form 8–Kfiled on January 26, 2000.

(56)       Incorporated by referenceto Exhibit Number 3.1 to the Registrant’s Quarterly Report on Form 10–Qfiled on August 12, 2003.

(57)       Incorporated by referenceto Exhibit Number 10.1 to the Registrant’s Registration Statement onForm S–8 (File Number 333-39084) filed on June 12, 2000.

(58)       Incorporated by referenceto Exhibit No. 10.1 to Registrant’s Registration Statement onForm S–8 (File Number 333-55222) filed on February 8, 2001.

(59)       Incorporated by referenceto Exhibit No. 10.1 to Registrant’s Registration Statement onForm S–8 (File Number 333-55224) filed on February 8, 2001.

(60)       Incorporated by referenceto Exhibit No. 10.1 to Registrant’s Registration Statement onForm S–8 (File Number 333-72154) filed on October 24, 2001.

(61)       Incorporated by referenceto Exhibit No. 10.1 to Registrant’s Registration Statement onForm S–8 (File Number 333-91394) filed on June 28, 2002.

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(62)       Incorporated by referenceto Exhibit No. 10.1 to Registrant’s Registration Statement on Form S–8(File Number 333-101698) filed on December 6, 2002.

(63)       Incorporated by referenceto Exhibit No. 10.1 to Registrant’s Current Report on Form 8–Kfiled on September 18, 2002.

(64)       Incorporated by referenceto Exhibit No. 99.2 to Registrant’s Current Report on Form 8–Kfiled on July 29, 2005.

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

(66)       Incorporated by referenceto Exhibit 99.2 to Registrant’s Current Report on Form 8–K filed onNovember 8, 2004.

(67)       Incorporated by referenceto Exhibit 99.3 to Registrant’s Current Report on Form 8–K filed onNovember 8, 2004.

(68)       Incorporated by referenceto Exhibit 99.5 to Registrant’s Current Report on Form 8–K filed onNovember 8, 2004.

(69)       Incorporated by referenceto Exhibit 99.6 to Registrant’s Current Report on Form 8–K filed onNovember 8, 2004.

(70)       Incorporated by referenceto Exhibit 99.1 to Registrant’s Current Report on Form 8–K filed onNovember 8, 2004.

(71)       Incorporated by referenceto Exhibit 99.4 to Registrant’s Current Report on Form 8–K filed onNovember 8, 2004.

(72)       Incorporated by referenceto Exhibit 99.1 to Registrant’s Current Report on Form 8–K filed onJanuary 24, 2005.

(73)       Incorporated by referenceto Exhibit 99.2 to Registrant’s Current Report on Form 8–K filed onJanuary 24, 2005.

(74)  Incorporated by reference to Exhibit 4.1 toRegistrant’s Current Report on Form 8–K filed on May 25, 2001.

(75)  Incorporated by reference to Exhibit 4.3 toRegistrant’s Current Report on Form 8–K filed on May 4, 2004.

(76)  Incorporated by reference to Exhibit 4.2 toRegistrant’s Current Report on Form 8–K filed on May 4, 2004.

(77)        Incorporated by referenceto the identically numbered exhibit to Registrant’s Annual Report on Form 10–Kfiled on March 16, 2005.

(78)       Incorporated by referenceto Exhibit 99.1 to Registrant’s Current Report on Form 8–K filed on January 20,2006.

(79)       Incorporated by referenceto Exhibit 99.2 to Registrant’s Current Report on Form 8–K filed on January 20,2006.

(80)       Incorporated by referenceto Exhibit 99.3 to Registrant’s Current Report on Form 8–K filed on January 20,2006.

*                    Thiscertification accompanies this Annual Report on Form 10–K pursuant to Section906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by theCompany for purposes of Section 18 of the Securities Exchange Act of 1934, asamended. A signed original of this certification has been provided to the Companyand will be retained by the Company and furnished to the Securities andExchange Commission or its staff upon request.

**             Confidentialtreatment has been granted with respect to specified portions of thisexhibit.  Omitted portions have beenfiled separately with the Securities and Exchange Commission.

†           Management contract or compensatory plan orarrangement required to be filed (and/or incorporated by reference) as anexhibit to this Annual Report on Form 10–K pursuant to 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 February 9, 2007.
|        | Medarex, Inc. |
|--------|---------------|
|   |          |   |
|   | By:           | /s/ IRWIN LERNER |
|   |          | Irwin Lerner |
|   |          | *Interim President and Chief Executive Officer* |

 

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Irwin Lerner, Chairman of the Board, Interim President and ChiefExecutive Officer, and Christian S. Schade, Senior Vice President and ChiefFinancial Officer, and each of them, his true and lawful attorneys-in-fact andagents, with the full power of substitution and resubstitution, for him and inhis name, place and stead, in any and all capacities, to sign any amendments tothis report, and to file the same, with exhibits thereto and other documents inconnection therewith, with the Securities and Exchange Commission, grantingunto each said attorney-in-fact and agent full power and authority to do andperform each and every act in person, hereby ratifying and confirming all thatsaid attorney-in-fact and agent, or either of them, or their or his substituteor substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities indicated and on the dates indicated.

**PrincipalExecutive Officer and Director:**
| Chairman of the Board, Interim        |       | /s/ IRWIN LERNER         |       | Date: February 9, 2007 |
|---------------------------------------|------------|--------------------------|------------|------------------------|
| President and Chief Executive Officer | ** ** | **Irwin Lerner**         |       |                   |
| ** **                            | ** ** | ** **               | ** ** | ** **             |
| **Principal Financial and**           | ** ** | ** **               | ** ** | ** **             |
| **Accounting Officer**                |       | /s/ Christian S. Schade  |       | Date: February 9, 2007 |
| Senior Vice President                 |       | **Christian S. Schade**  |       |                   |
| and Chief Financial Officer           | ** ** | ** **               | ** ** | ** **             |
| Senior Vice President and             | ** ** | ** **               | ** ** | ** **             |
| Chief Financial Officer               | ** ** | ** **               | ** ** | ** **             |
|                                  | ** ** | ** **               | ** ** | ** **             |
| **Directors:**                        |       | /s/ Patricia M. Danzon   |       | Date: February 6, 2007 |
| ** **                            | ** ** | **Patricia M. Danzon**   |       |                   |
| ** **                            |       |                     |       |                   |
| ** **                            |       | /s/ Robert C. Dinerstein |       | Date: February 7, 2007 |
| ** **                            | ** ** | **Robert C. Dinerstein** |       |                   |
| ** **                            |       |                     |       |                   |
| ** **                            |       | /s/ Abhijeet J. Lele     |       | Date: February 5, 2007 |
| ** **                            | ** ** | **Abhijeet J. Lele**     |       |                   |
| ** **                            |       |                     |       |                   |
| ** **                            |       | /s/ Ronald J. Saldarini  |       | Date: February 5, 2007 |
| ** **                            | ** ** | **Ronald J. Saldarini**  |       |                   |
| ** **                            |       |                     |       |                   |
| ** **                            |       | /s/ Charles R. Schaller  |       | Date: February 7, 2007 |
| ** **                            | ** ** | **Charles R. Schaller**  |       |                   |
| ** **                            |       |                     |       |                   |
| ** **                            |       | /s/ Julius A. Vida       |       | Date: February 5, 2007 |
| ** **                            | ** ** | **Julius A. Vida**       | ** ** | ** **             |

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