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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended September 30, 2002

OR

For the transition period from                              to                             .

Commission file number: 000-24207

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

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

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

        As of October 31, 2002 there were 87,574,527 shares of the Registrant's Common Stock outstanding.

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

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

See accompanying notes.

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

See accompanying notes.

4

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

See accompanying notes.

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ABGENIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002

1.    Basis of Presentation and Summary of Significant Accounting Policies

        Basis of Presentation—The unaudited condensed consolidated financial statements of Abgenix, Inc. (the "Company" or "Abgenix") included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information or footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2001, and accompanying notes included in the Company's Annual Report as filed on Form 10-K with the Securities and Exchange Commission. The results of operations for the three and nine months ended September 30, 2002, are not necessarily indicative of the results to be expected for the full year or for any other future period.

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

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Research license fees: Fees to license the use of the Company's proprietary technologies in research performed by the customer are generally recognized only after both the license period has commenced and the technology has been delivered. If Abgenix is obligated to provide significant assistance to enable the customer to practice the license, then the revenue is recognized over the period of such obligation.



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Product license fees: Fees to license the production, use and sale of an antibody generated by the Company's proprietary technologies are generally recognized only after both the license period has commenced and the technology has been delivered. If Abgenix is obligated to provide significant assistance to enable the customer to practice the license, then the revenue is recognized over the period of such obligation.



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Option fees: Fees for granting options to obtain product licenses to develop a product are recognized as revenue when the option is exercised or when the option period expires, whichever occurs first. If the option fee is commingled with the license fee in the contract, and if the fees related to the license are recognized as revenue up-front, the Company estimates the relative fair value of the option component and recognizes the revenue attributed to the option component separately in accordance with its revenue recognition policy.



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Fees for research services performed by Abgenix are recognized ratably over the entire period the services are performed. In the case of co-development arrangements, fees received for research services provided are recorded as contract revenues in the period the services are rendered.



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Milestone payments are recognized as revenue when the milestone is achieved.

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

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

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

        Upon adoption of the new Business Combination rules, acquired workforce no longer meets the definition of an identified intangible asset. As a result, the net balance of $120,000 has been reclassified to goodwill in 2002. During the three and nine months ended September 30, 2002, no goodwill was acquired, impaired or written off.

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

        Reclassifications—Certain prior period balances have been reclassified to conform to the current period presentation.

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2.    Comprehensive Income (Loss)

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

3.    Identified Intangible Assets

        During the three and nine months ended September 30, 2002, no identified intangible assets were acquired, impaired or written off.

        Identified intangible assets as of September 30, 2002 and December 31, 2001 consisted of the following (in thousands):

        Amortization of acquisition-related intangibles was $1.8 million and $5.3 million, respectively, for the three and nine months ended September 30, 2002, and $1.4 million and $4.3 million, respectively, for the three and nine months ended September 30, 2001. Amortization of other intangible assets was $46,000 and $139,000, respectively, for the three and nine months ended September 30, 2002, and $17,000 for the three and nine months ended September 30, 2001. All of the company's acquired identified intangibles other than goodwill are subject to amortization.

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        Expected amortization expense related to identified intangible assets for the three-month period from October 1, 2002, to December 31, 2002, and each of the fiscal years thereafter is as follows (in thousands):

4.    Convertible Subordinated Notes

        In March 2002, the Company issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of Abgenix common stock at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5% and the Company is obligated to pay interest by March 15 and September 15 of each year. The Company made its first payment of $1.8 million on September 11, 2002. The notes will mature on March 15, 2007, and are redeemable at the Company's option on or after March 20, 2005, or earlier if the price of the Company's common stock exceeds specified levels. In addition, the holders of the notes may require the Company to repurchase the notes if the Company undergoes a change in control.

5.    Impairment of Investments

        The Company purchased an aggregate amount of $80.0 million of common stock of CuraGen Corporation and ImmunoGen, Inc. as strategic investments. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as available-for-sale and are reported at fair value on the Company's balance sheet. Unrealized holding gains and losses for available-for-sale securities generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under the Company's accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. At March 31, 2002, the Company's investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months, at which time the Company deemed that an impairment of these investments had occurred. Additionally, at June 30, 2002, these same investments were trading below their March 31, 2002 values, at which time the Company determined that a further impairment had occurred. Accordingly, the Company recorded impairment charges of $34.7 million and $30.4 million, in the first and second quarters of 2002, respectively, which are recorded in the Company's results of operations. The amount of the charge in the first quarter was based on the difference between the market price of the securities as of March 31, 2002, and the Company's original cost basis. The amount of the charge in the second quarter was based on the difference between the market price of these securities as of June 30, 2002, and the Company's cost basis as of March 31, 2002. At September 30, 2002, the CuraGen investment was trading below its June 30, 2002 values; however, the Company judged that this loss may be temporary and therefore did not record further impairment charges on the investment. As of September 30, 2002, these investments were recorded at fair value in long-term investments on the balance sheet, and the net unrealized holding loss of $2.8 million, which reflects the difference between the market price of these securities as of September 30, 2002, and the Company's cost basis as of June 30, 2002, are reported as a component of stockholders' equity. If the Company deems these investments further impaired at the end of any future period, the Company may incur an additional impairment charge on these investments.

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        In addition, the Company invested $15.0 million in MDS Proteomics Inc., a privately held company, in connection with the Company's collaboration with that company. Because MDS Proteomics is a private company and its securities are not publicly traded, the value of this investment is inherently more difficult to estimate than an investment in a publicly traded company. As of June 30, 2002, the Company estimated that the value of its investment had declined to $7.9 million and that an impairment of this investment had occurred. Accordingly, the Company recorded an impairment charge of $7.1 million in the second quarter of 2002. The amount of the charge in the second quarter was based on the difference between the estimated value as determined by Abgenix management and the Company's original cost basis. The Company did not record further impairment charges in the third quarter of 2002. As of September 30, 2002, the cost basis of this investment reflected the new estimated value at June 30, 2002, which is recorded in long-term investments on the balance sheet. If the Company deems its investment in MDS Proteomics further impaired at the end of any future period, the Company may incur an additional impairment charge on this investment.

6.    Segment Information

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

        Revenues from four customers represented 35%, 31%, 16% and 14%, respectively, of contract revenues for the three months ended September 30, 2002, compared with the same period in 2001, in which three customers represented 49%, 19%, and 17%, respectively, of contract revenues. Revenues from three customers represented 53%, 13% and 11%, respectively, of contract revenues for the nine months ended September 30, 2002, compared with the same period in 2001, in which three customers represented 49%, 22%, and 10%, respectively, of contract revenues.

7.    Recent Accounting Pronouncement

        In June 2002, the Financial Accounting Standards Board issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses accounting for restructuring, discontinued operations, plant closing, or other exit or disposal activity. SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, and earlier adoption is encouraged. The Company adopted SFAS 146 in the fourth quarter of 2002. The Company does not expect the adoption of SFAS 146 to be significant to the results of operations for the fourth quarter of 2002.

8.    Subsequent Event—Restructuring Plan

        In October 2002, the Company announced a restructuring plan. The restructuring plan is expected to result in a reduction in force of approximately 15%. Accordingly, the company anticipates recording a restructuring charge during the fourth quarter of 2002 of approximately $2.0 million, comprised primarily of involuntary termination benefits.

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

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

Overview

        We are a biopharmaceutical company that develops and intends to commercialize antibody therapeutic products for the treatment of a variety of disease conditions, including cancer, inflammatory and autoimmune disorders, transplant-related diseases, cardiovascular disease and infectious diseases. We have proprietary technologies that facilitate rapid generation of highly specific, antibody therapeutic product candidates that contain fully human protein sequences and that bind to disease targets appropriate for antibody therapy. In this Quarterly Report on Form 10-Q we refer to these candidates as fully human antibody therapeutic product candidates. We developed our XenoMouse® technology, a technology using genetically modified mice to generate fully human antibodies. We also own a technology that enables the rapid identification of antibodies with desired function and characteristics, referred to as SLAM™ technology. In our XenoMax™ technology, we use SLAM technology to select and isolate antibodies with particular function and characteristics from antibody-producing cells generated by XenoMouse animals. We believe XenoMax technology enhances our capabilities in product development and flexibility in manufacturing. We intend to use our technologies to build a large and diversified product portfolio that we expect to develop and commercialize through joint development and licensing arrangements with pharmaceutical companies and others, and through internal product development programs. We have entered into a variety of contractual arrangements with multiple pharmaceutical, biotechnology and genomics companies involving our XenoMouse and XenoMax technologies. Two of our customers, Pfizer, Inc. and Amgen, Inc., have initiated clinical trials with fully human antibodies generated from XenoMouse animals. In addition, as of September 30, 2002, we had four proprietary antibody product candidates in clinical trials, one of which we are co-developing with Amgen and Immunex Corp., a wholly-owned subsidiary of Amgen, and one of which we are co-developing with SangStat Medical Corporation, in each case under joint development and commercialization agreements.

        As of September 30, 2002, we had entered into contracts covering numerous antigen targets with thirty-one customers to use our XenoMouse and XenoMax technologies to generate and/or develop the resulting fully human antibodies. As of September 30, 2002, we had also entered into one agreement in which we licensed our SLAM technology to one party on a non-exclusive basis for the purpose of generating and using antibodies other than antibodies derived from XenoMouse technology or other technology that involves the use of non-human animals, and on a co-exclusive basis for the purpose of antigen discovery. We do not currently intend to license our SLAM technology for use by any other parties. Pursuant to our XenoMouse contracts, we and our customers intend to generate antibody product candidates for the treatment of cancer, inflammation, autoimmune diseases, transplant rejection, cardiovascular disease, growth factor modulation, neurological diseases and infectious diseases. Also, with the opening of our manufacturing facility later this year, we plan to enter into contracts for antibody manufacturing services. We expect that substantially all of our revenues for the foreseeable future will result from payments under these and other contracts. We have also licensed

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technology from third parties for use in conjunction with our proprietary technology. The terms of our current contractual arrangements vary, but can generally be categorized as follows:

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Antigen Target Sourcing Contracts—We have entered into several target sourcing contracts with genomics and biopharmaceutical companies that may enable us to generate a pipeline of proprietary fully human antibody product candidates. Typically, pursuant to these contracts we generate fully human antibodies to the antigen targets provided or identified by our collaborators. The contracts typically contain provisions that allow either Abgenix or our collaborator to evaluate and select particular antibodies from the pool of generated antibodies for further development and commercialization. The party selecting an antibody for further development or commercialization will generally pay to the other party license fees, milestone payments and royalty payments on any eventual product sales, in exchange for rights to develop and commercialize the product. In connection with these arrangements, we may also agree to purchase the common stock of a collaborator for strategic reasons. For example, we have made equity investments in CuraGen Corporation and MDS Proteomics Inc. in connection with our collaborations with these parties.



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Proprietary Product Development—In each of July and August 2000, we entered into a joint development and commercialization agreement. Pursuant to one of these agreements, we are co-developing ABX-EGF, a fully human antibody we created, with Amgen and Immunex. Under the agreement, Immunex paid us an initial license fee at signing and a second license fee in May 2001. We are obligated to pay 50% of the development costs and are entitled to 50% of any profits from sales of collaboration products. We also share responsibility for product development. We will be responsible for completing the ongoing Phase 1 trial and any additional Phase 1 trials that are initiated, and both companies share responsibility for the execution of Phase 2 trials across a variety of indications. Amgen will have primary responsibility for Phase 3 clinical trials and will market any potential products, while we will have co-promotion rights. The other agreement is with SangStat for ABX-CBL, an antibody we developed. Under that agreement, SangStat paid us an initial license fee in 2000, a second milestone payment in 2001, and a final milestone payment in 2002. We and SangStat will share equally in all development costs and any profits from sales of collaboration products. We and SangStat also share responsibility for product development, including the ongoing Phase 2/3 clinical trials. SangStat will market any potential product and we will be responsible for manufacturing ABX-CBL.

We intend to build our product portfolio by using our XenoMouse and XenoMax technologies to generate antibodies to antigen targets that we source, entering into additional development and commercialization agreements with pharmaceutical and biotechnology companies and, in some cases, self funding clinical activities to determine preliminary safety and efficacy. We plan to enter into additional agreements to use our XenoMax technology to assist our licensees and collaborators in isolating antibodies with desired function and characteristics. These arrangements may involve sharing of costs and profits.

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Technology Out-Licensing—We have licensed our XenoMouse technology to third parties for the purpose of generating antibody product candidates to one or more specific antigen targets provided by the customer. We have also licensed our SLAM technology for use by one party. In some cases in which we license XenoMouse technology, we provide our mice to the customers who then carry out immunizations with their specific antigen targets. In other cases, we immunize the mice with the customers' antigen targets for additional compensation. The customer generally has an option for a period of time to acquire a product license for any antibody identified using XenoMouse technology that the customer wishes to develop and commercialize. The financial terms of these agreements may include license fees, option fees and milestone payments paid to us by the customers. Based on our agreements, these payments and fees would average from approximately $7.0 million to $10.0 million per antigen target if

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our customer takes the antibody into development and ultimately to commercialization. Additionally, our license agreements entitle us to receive royalties on any future product sales by the customer. We may also agree to purchase the common stock of some of our customers, or they may agree to purchase our common stock, in connection with these licensing arrangements.

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Technology In-Licensing—We also license technology from other parties that we use in conjunction with our proprietary technology to develop, manufacture and commercialize therapeutic antibody candidates. The other party may also agree to produce antibody therapeutic candidates for us using its own technology. For example, Gliatech, Inc. has granted us a license to develop and commercialize fully human antibody therapeutic candidates against the complement protein properdin. These agreements often also obligate us to pay license fees, and milestone payments and royalty fees to the counterparty upon the occurrence of specified conditions, including upon our sale of products derived from use of the licensed technology. We may also agree to purchase common stock of the other party for strategic reasons in connection with these arrangements. For example, we purchased shares of common stock of ImmunoGen, Inc. in connection with our agreement with that company.

        As of September 30, 2002, we had four proprietary antibody therapeutic product candidates that were in clinical trials, two of which were being co-developed with collaborators, as follows:

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ABX-EGF—Generated using XenoMouse technology, ABX-EGF is a fully human antibody therapeutic product candidate for the treatment of a variety of cancers. We are co-developing this candidate with Amgen and Immunex under a joint development and commercialization agreement. The status of clinical trials for ABX-EGF is as follows:



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Various cancers—We initiated a Phase 1 clinical trial for ABX-EGF in cancer in July 1999 and enrollment is ongoing.



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Renal cell cancer—We initiated a Phase 2 clinical trial evaluating the effect of ABX-EGF as monotherapy in patients with renal cell cancer in April 2001 and enrollment is ongoing.



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Non-small cell lung cancer—Immunex initiated a Phase 2 clinical trial for ABX-EGF in non-small cell lung cancer in combination with standard chemotherapy, compared to standard chemotherapy alone, in July 2001 and enrollment is ongoing.



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Colorectal cancer—Immunex initiated a Phase 2 clinical trial evaluating the effect of ABX-EGF as monotherapy in patients with metastatic colorectal cancer who have previously failed chemotherapy in December 2001 and enrollment is ongoing. Immunex initiated a separate Phase 2 clinical trial evaluating the effect of ABX-EGF in combination with standard chemotherapy, as first-line treatment in patients with metastatic colorectal cancer in January 2002, in which enrollment is ongoing.



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Prostate cancer—We initiated a Phase 2 clinical trial evaluating the effect of ABX-EGF in patients with hormone resistant prostate cancer without metastasis in January 2002, in which enrollment is ongoing.




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ABX-CBL—We developed ABX-CBL, an in-licensed mouse antibody, for the treatment of a transplant-related disease known as graft versus host disease, or GVHD. We have completed a Phase 2 clinical trial for ABX-CBL and initiated a Phase 2/3 clinical trial in December 1999, in which enrollment was completed in July 2002. In August 2000, we entered into a joint development and commercialization agreement with SangStat for ABX-CBL.



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ABX-MA1—Generated using XenoMouse technology, ABX-MA1 is a fully human antibody therapeutic product candidate for the treatment of a variety of cancers. We filed an Investigational New Drug Application, or IND, in December 2001 and initiated a Phase 1

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clinical trial for ABX-MA1 in metastatic melanoma in February 2002, in which enrollment is ongoing.

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ABX-IL8—Generated using XenoMouse technology, ABX-IL8 is a fully human antibody therapeutic product candidate for the treatment of inflammatory diseases and cancer, including psoriasis, chronic obstructive pulmonary disease, or COPD, and metastatic melanoma. The status of clinical trials for ABX-IL8 is as follows:



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Psoriasis—We have completed Phase 1, Phase 1/2 and Phase 2a clinical trials, and, in May 2002, a Phase 2b clinical trial. After analyzing the results of the Phase 2b trial, we reached the conclusion that the results did not warrant continuing to develop ABX-IL8 as a treatment for psoriasis. Accordingly, we have terminated this program.



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Chronic obstructive pulmonary disease—We initiated a Phase 2a clinical trial in September 2001. After analyzing the results of the psoriasis Phase 2b trial, we decided in June 2002 to conclude this study as quickly as possible, consistent with patient safety follow-up.



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Metastatic melanoma—We filed an IND in December 2001 and initiated a Phase 2 clinical trial in February 2002, in which enrollment was expected to begin in the second quarter of 2002. After analyzing the results of the psoriasis Phase 2b trial, we decided that we would not proceed with this study.

        We have jointly agreed to develop and commercialize two of these proprietary antibody therapeutic product candidates. We intend to enter into additional joint development agreements for other product candidates earlier in the product development lifecycle then when we entered into our existing joint development agreements. We will expend significant capital to conduct clinical trials or share in the costs of conducting clinical trials, for our proprietary product candidates. We expect that this will substantially increase our capital needs over the next few years and increase our operating losses.

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

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Pfizer—We generated a XenoMouse-derived fully human antibody therapeutic product candidate for treating cancer that Pfizer has advanced into clinical trials.



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Amgen—We generated a XenoMouse-derived fully human antibody therapeutic product candidate that binds to an undisclosed antigen target that Amgen has advanced into clinical trials.

Results of Operations

Three Months and Nine Months Ended September 30, 2002 and 2001

Contract Revenues.

        Contract revenues totaled $2.6 million and $16.1 million, respectively, in the three and nine months ended September 30, 2002, compared to $4.1 million and $16.6 million, respectively, in the comparable 2001 periods. Because they depend to a large extent on the success or failure of research and development efforts undertaken by our collaborators and licensees, our period-to-period contract revenues can fluctuate significantly and are inherently difficult to predict. Over the next several years, we expect revenue from antibody manufacturing services and product development to exceed revenues from technology licenses.

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        The primary components of contract revenues for both periods were as follows:

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Proprietary Product Development

We recognized a total of $0.4 million and $2.9 million, respectively, in the three and nine months ended September 30, 2002, compared to $2.7 million and $11.7 million, respectively, in the comparable 2001 periods, pursuant to our joint development and commercialization agreements for the development of ABX-EGF and ABX-CBL. In both periods, these revenues included reimbursement of development costs. In 2001 this revenue also included milestone and license fees. The license fees were recognized ratably over the contractual performance periods. Under the ABX-EGF agreement, this was the 17-month period ended December 31, 2001. Under the ABX-CBL agreement, this was the 6-month period ended January 31, 2001.

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Technology Licensing

We recognized a total of $2.2 million and $13.2 million, respectively, in the three and nine months ended September 30, 2002, compared to $1.4 million and $4.9 million, respectively, in the comparable 2001 periods, from licensing our proprietary technologies. Revenues consisted primarily of the following:

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Celltech R&D Ltd.—In the three months ended March 31, 2002, we recognized $8.4 million under an agreement with Celltech in which we granted a license of our SLAM technology. We received payments totaling $16.8 million in the fourth quarter of 2001 representing a research license fee and service fees for the transfer of technology, net of $0.2 million in shared closing costs. We recognized these fees over the six-month period ended March 31, 2002, during which we fulfilled our obligations to provide Celltech with the applicable protocols, technical information and training to enable Celltech to effectively utilize the SLAM technology.



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Additionally, in the three and nine months ended September 30, 2002 and 2001, we recognized various fees, such as research license and service fees, product license fees, product development and research milestone payments, and option fees, under agreements related to the licensing of our XenoMouse technology. We received fees primarily from Pfizer, Amgen and CuraGen in the three and nine-month periods ended September 30, 2002 and 2001.

Interest and Other Income.

        Interest and other income consist primarily of interest from cash, cash equivalents and marketable securities. Interest and other income decreased to $5.1 million and $15.5 million, respectively, in the three and nine months ended September 30, 2002, compared to $6.3 million and $24.3 million, respectively, in the same periods in 2001. The decrease was due to lower interest rates and lower average cash, marketable securities and cash equivalent balances. Interest income is expected to decrease in the fourth quarter of 2002, as average cash balances decrease.

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Research and Development Expenses.

        Research and development expenses increased to $29.6 million and $97.5 million, respectively, in the three and nine months ended September 30, 2002 from $24.4 million and $65.2 million, respectively, in the same periods in 2001. Management separates research and development expenditures into amounts related to preclinical research and development, amounts related to clinical development programs and amounts related to facilities as follows:

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Preclinical Research and Development Costs

Preclinical research and development costs include costs associated with preclinical research, development and testing of our product candidates, such as the costs of Abgenix personnel, costs charged by outside contractors and the costs of technology in-licensing. Research costs increased to $15.2 million and $42.1 million, respectively, in the three and nine months ended September 30, 2002, from $7.5 million and $21.9 million, respectively, in the same periods in 2001. The increase was due to the increased level of product development activities, including activities related to new target validation, process sciences and bioinformatics. Additionally, the increase was due to building the infrastructure for manufacturing, including quality assurance and quality control, and developing new technology, including our SLAM technology. We expect preclinical research and development costs in the fourth quarter of 2002 to be comparable to these costs in the third quarter of 2002. We will incur costs as we continue to build our manufacturing infrastructure and support our preclinical activities related to clinical trials, which will be offset in part by cost reductions related to the restructuring we announced in October 2002. Major components of the increase in the three and nine months ended September 30, 2002, from the same periods in 2001 were as follows:

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Costs of Abgenix Personnel—Costs of Abgenix personnel to support preclinical research and development activities increased 62% and 76%, respectively, in the three and nine months ended September 30, 2002, from the same periods in 2001. Personnel costs include salary, fringe benefits, recruiting and relocation costs.



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Cost of Outside Contractors—The increase in preclinical research and development costs for the nine months ended September 30, 2002, from the same periods in 2001 included costs associated with the development of our cell lines for our product candidates, primarily performed by an outside contractor, Lonza Biologics. In addition, for the nine months ended September 30, 2002, the increase included a $1.7 million charge in the second quarter of 2002 related to an option fee. The option was for the right to enter into exclusive negotiations with Lonza for an additional manufacturing supply agreement. After evaluation of our capacity needs, we notified Lonza that we had decided to discontinue negotiations, and therefore expensed the option fee, which had previously been capitalized.



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Third-Party Development—We paid fees to Gliatech related to pre-clinical studies Gliatech is performing to develop and commercialize fully human antibody therapeutic candidates against the complement protein properdin.




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Clinical Costs

As of September 30, 2002, we were conducting clinical trials for four product candidates. Clinical costs include costs of conducting clinical trials, such as research fees and drug supply costs charged by outside contractors and costs of Abgenix personnel. Clinical costs decreased to $7.5 million in the three months ended September 30, 2002, from $11.3 million in the same period in 2001. Clinical costs increased to $31.6 million in the nine months ended September 30, 2002, from $29.8 million in the same period in 2001. The decrease in the three months ended September 30, 2002 was primarily related to the decrease in clinical trials being conducted for ABX-IL8 as compared to 2001. The increase in the nine-month period in 2002 compared to

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2001 was primarily due to the write-down of clinical trial supplies resulting from the discontinuance of clinical trials for ABX-IL8. Excluding the clinical trial supplies write-down, clinical costs would have decreased for the nine months ended September 30, 2002 primarily due to the decrease in the clinical trials being conducted for ABX-IL8. Pursuant to our joint development and commercialization agreements, we share equally in the costs of developing and commercializing ABX-EGF and ABX-CBL with Amgen and SangStat, respectively. We expect costs associated with conducting clinical trials to increase in the fourth quarter of 2002 compared to the third quarter of 2002 as we add patients to our various ABX-EGF clinical trials. Major components of the changes in the three and nine months ended September 30, 2002, were as follows:

•

Clinical Research Fees and Drug Supply Costs—Clinical research fees, including clinical investigator site fees, monitoring costs, and data management costs, and drug supply costs decreased 56% in the three months ended September 30, 2002 from the same period in 2001. The decrease, as compared to the same period in 2001, was primarily due to the winding down of clinical trials for ABX-IL8 beginning in the second quarter of 2002. Clinical research fees and drug supply costs increased 65% in the nine months ended September 30, 2002 from the same period in 2001. The increase was primarily due to a $6.7 million charge in the second quarter of 2002 for previously capitalized clinical trial supplies for ABX-IL8.



•

Costs of Abgenix Personnel—Costs of Abgenix personnel to support clinical activities decreased 5% in the three months ended September 30, 2002, from the same period in 2001, and increased 20% in the nine months ended September 30, 2002 from the same period in 2001. Personnel costs include salary, fringe benefits, recruiting and relocation costs.




•

Facility Costs

Facility costs allocated to research and development increased to $6.9 million and $23.8 million, respectively, in the three and nine months ended September 30, 2002, respectively, from $5.6 million and $13.5 million, respectively, in the same periods in 2001. In order to accommodate our increased personnel and research and development activities, we acquired new facilities and related leasehold improvements, furniture and fixtures. As a result, all of our facility-related costs, primarily personnel costs, rent, and depreciation, increased in the three and nine months ended September 30, 2002, from the same periods in 2001. We expect facility costs allocated to research and development to increase in the fourth quarter of 2002 as a result of our recent capital expansion. We expect that the primary sources of this increase will be related to operating our new manufacturing facility.

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

Goodwill and Amortization of Identified Intangible Assets.

        Our identified intangible assets consist primarily of existing technology (including patents and certain royalty rights) that we acquired through the acquisitions of Hesed Biomed Inc. in November 2001, Abgenix Biopharma Inc. (formerly known as ImmGenics Pharmaceuticals, Inc.) and IntraImmune Therapies, Inc. in November 2000, and the acquisition of JT America's interest in Xenotech in December 1999. Amortization of intangible assets increased to $1.8 million and $5.4 million, respectively, in the three and nine months ended September 30, 2002, compared to

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$1.5 million and $4.3 million, respectively, in the same periods in 2001. The increase was due to the amortization of the new technology acquired in our acquisition of Hesed Biomed. Beginning January 1, 2002, upon our adoption of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets," we no longer amortize goodwill, but will perform impairment tests annually, or earlier if indications of impairment exist. We have conducted an initial impairment test on our goodwill and concluded that no impairment charge was required. In the three and nine months ended September 30, 2001, the amortization of goodwill was $655,000 and $1.9 million, respectively. All other intangible assets will continue to be amortized over their estimated useful lives.

General and Administrative Expenses.

        General and administrative expenses include compensation, professional services, consulting and other expenses related to information systems, legal, finance and human resources and an allocation of facility costs. General and administrative expenses increased to $8.9 million and $22.9 million, respectively, in the three and nine months ended September 30, 2002, compared to $6.4 million and $14.3 million, respectively, in the same periods in 2001. The primary reason for the increase in 2002 as compared to 2001, was the increase in consulting and personnel expenses related to our information systems, including the implementation of a new enterprise resource planning system. Another significant reason for the increase was the depreciation expense related to the enterprise resource planning system, which was launched at the beginning of the third quarter of 2002. For the nine months ended September 30, 2002, the increase was also due to the rise in legal costs to support the increased activities of Abgenix, including activities related to intellectual property, securities filings, licensing, financing activities and other contractual matters. Excluding restructuring charges, we expect personnel, consulting, professional services and other administrative costs to approximate the same levels in the fourth quarter of 2002 as in the third quarter of 2002.

Impairment of Investments.

        We purchased an aggregate amount of $80.0 million of common stock of CuraGen and ImmunoGen as strategic investments. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as available-for-sale and are reported at fair value on our balance sheet. Unrealized holding gains and losses for available-for-sale securities generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under our accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. At March 31, 2002, our investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months, at which time we deemed that an impairment of these investments had occurred. Additionally, at September 30, 2002, these same investments were trading below their March 31, 2002 values, at which time we determined that a further impairment had occurred. Accordingly, we recorded impairment charges of $34.7 million and $30.4 million, in the first and second quarters of 2002, respectively, which are recorded in our results of operations. The amount of the charge in the first quarter was based on the difference between the market price of the securities as of March 31, 2002, and our original cost basis. The amount of the charge in the second quarter was based on the difference between the market price of these securities as of June 30, 2002, and our cost basis as of March 31, 2002. At September 30, 2002, the CuraGen investment was trading below its June 30, 2002 values, however we judged that this loss may be temporary and therefore did not record further impairment charges on the investment. As of September 30, 2002, these investments were recorded at fair value in long-term investments on the balance sheet, and the net unrealized holding

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loss of $2.8 million, which reflects the difference between the market price of these securities as of September 30, 2002, and our cost basis as of June 30, 2002, are reported as a component of stockholders' equity. If we deem these investments further impaired at the end of any future period, we may incur an additional impairment charge on these investments.

        In addition, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with the collaboration with that company. Because MDS Proteomics is a private company and its securities are not publicly traded, the value of our investment is inherently more difficult to estimate than an investment in a publicly traded company. As of September 30, 2002, we estimated that the value of our investment had declined to $7.9 million and that an impairment of our investment had occurred. Accordingly, we recorded an impairment charge of $7.1 million in the second quarter of 2002. The amount of the charge in the second quarter was based on the difference between the estimated value as determined by our management and our original cost basis. We did not record further impairment charges in the third quarter of 2002. As of September 30, 2002, the cost basis of this investment reflected the new estimated value at June 30, 2002, which is recorded in long-term investments on the balance sheet. If we deem the investment in MDS Proteomics further impaired at the end of any future period, we may incur an additional impairment charge on this investment.

Interest Expense.

        Interest expense consists of interest and amortization of issuance costs on our convertible debt, and interest on our equipment leaseline financing. Interest expense increased to $1.2 million and $3.7 million, respectively, in the three and nine months ended September 30, 2002, compared to $1,000 and $0.3 million, respectively, in the same periods ended September 30, 2001. The increase was primarily due to our issuance of $200.0 million of convertible debt in March 2002, which accrues interest at an annual rate of 3.5% and on which the first interest payment of $1.8 million was made on September 11, 2002. A portion of the debt was used for the construction of our new manufacturing facility; therefore, $0.6 million of the $1.8 million interest expense was capitalized. For each future quarterly period, we expect to accrue approximately $1.8 million of interest expense related to our convertible debt until the debt matures, until we redeem or repurchase the debt or until all or part of the debt is converted into shares of our common stock.

Liquidity and Capital Resources

        At September 30, 2002, we had cash, cash equivalents and marketable securities of approximately $463.6 million. In March 2002, we received approximately $194.0 million of net proceeds from our issuance of $200.0 million of convertible debt. We invest our cash equivalents and marketable securities primarily in highly liquid, interest bearing, investment grade and government securities in order to preserve principal.

        Cash Used in Operating Activities.    Net cash used in operating activities was $98.5 million and $26.5 million in the nine months ended September 30, 2002 and 2001, respectively. The increase in cash used in operating activities in the nine months ended September 30, 2002, compared to the same period in 2001 reflected primarily the following:

•

An increase of $32.3 million in funding of research and development and manufacturing costs related to the development of new products.



•

An increase of $8.6 million in general and administrative expenses primarily related to an increase in consulting and personnel expenses related to our information systems, including the implementation of a new enterprise resource planning system.

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•

A decrease of $11.2 million in cash from interest income due to lower interest rates and lower average cash balances, and a decrease of $4.6 million in customer payments due primarily to the timing of payments received under our contracts.



•

A reduction in accounts payable and accrued liabilities of $1.6 million in the nine months ended September 30, 2002 as compared to an increase of $14.0 million in the same period of 2001.



•

An increase of $6.1 million for prepaid expenses, primarily prepaid clinical trial supplies, in the nine months ended September 30, 2002 as compared to an increase of $0.3 million in the same period of 2001.

        Cash Used in Investing Activities.    Net cash used in investing activities was $8.3 million and $107.2 million in the nine months ended September 30, 2002 and 2001, respectively. Cash was provided by and used in investing activities as follows:

•

Capital expenditures of $124.8 million and $44.1 million in the nine months ended September 30, 2002 and 2001, respectively. The investments in 2002 reflect primarily investment in leasehold improvements in our new office facility and process science laboratory and construction in progress for our new manufacturing facility. Additionally, they reflect investments in computer hardware and software, including the acquisition of a new enterprise resource planning system. The investments in 2001 reflect primarily investment in leasehold improvements related to our office space and computer equipment.



•

Maturities and sales, net of purchases, of marketable securities of $119.5 million and $26.8 million during the nine months ended September 30, 2002 and 2001, respectively.



•

Payments of $0.2 million and $72.7 million to the holders of Abgenix Biopharma special shares in connection with our acquisition of Abgenix Biopharma during the nine months ended September 30, 2002 and 2001, respectively.



•

A loan of $2.8 million to our landlord in the third quarter of 2002, as the final disbursement under a loan agreement entered into in August 2001.



•

Investment of $15.0 million in MDS Proteomics in June 2001.

        Cash Provided by Financing Activities.    During the nine months ended September 30, 2002, net cash provided by financing activities was $195.8 million, consisting of $194.0 million net proceeds from our issuance of convertible subordinated notes, as described below, and $1.8 million proceeds from the exercise of stock options and the issuance of stock under our employee stock purchase plan. During the nine months ended September 30, 2001, net cash provided by financing activities was $2.8 million, consisting of $3.1 million proceeds from the exercise of stock options and the issuance of stock under our employee stock purchase plan, offset by $0.3 million in payments on long-term debt.

        In March 2002, we issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of our common stock at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5% and we are obligated to pay interest by March 15 and September 15 of each year. We made our first interest payment of $1.8 million on September 11, 2002. The notes will mature on March 15, 2007, and are redeemable at our option on or after March 20, 2005, or earlier if the price of our common stock exceeds specified levels. In addition, the holders of the notes may require us to repurchase the notes if we undergo a change in control. Proceeds from the sale of the notes, net of commissions payable to the initial purchasers of the notes but before subtracting other offering expenses payable by us, were $194.0 million.

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

        Financing Uncertainties Related to Our Business Plan.    We plan to continue to make significant expenditures to establish and staff our own manufacturing facility and support our research and development activities, including pre-clinical product development and clinical trials. Recently, we also announced that we are restructuring and reducing our staff, as a result of which we expect to incur a charge of approximately $2.0 million in the fourth quarter of 2002. We will also continue to look for opportunities to acquire new technology through in-licensing, collaborations or acquisitions. During the fourth quarter of 2002, we estimate that we will spend approximately $39.5 million on leasehold improvements and equipment for our new manufacturing and research and development facilities. Additionally, during the same period we expect to spend up to approximately $8.1 million on new computer hardware and software, including additions and enhancements to our new enterprise resource planning system.

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

        The amounts of the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources to a significant extent. As of September 30, 2002, four of our proprietary product candidates, ABX-EGF ABX-CBL, ABX-MA1 and ABX-IL8, were in various stages of clinical trials. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate. We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

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

•

the number of patients that ultimately participate in the trial;



•

the duration of patient follow-up that seems appropriate in view of the results;



•

the number of clinical sites included in the trials; and



•

the length of time required to enroll suitable patient subjects.

        We test our potential product candidates in numerous pre-clinical studies to identify disease indications for which they may be product candidates. We may conduct multiple clinical trials to cover

21

a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for one or more indications for a given product candidate in order to focus our resources on more promising product candidates or indications. For example, in January 2002 and May 2002, we announced that clinical trials of our proprietary product candidate ABX-IL8 as a treatment for rheumatoid arthritis and psoriasis, respectively, did not support further clinical studies of that product candidate. The failure of our clinical trials can also result in additional research and development expenses. For example, we recorded a charge of $6.7 million for the three months ended June 30, 2002, related to our decision in the second quarter of 2002 to wind down our clinical trials of ABX-IL-8.

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

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

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

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

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

•

the retention of existing and establishment of further collaboration, licensing and other agreements, if any;



•

the cost of establishing and operating our manufacturing facility;



•

the cost of conducting commercialization activities and arrangements;



•

the time and expense involved in seeking regulatory approvals;



•

competing technological and market developments;



•

the time and expense of filing and prosecuting patent applications and enforcing or defending against patent claims;



•

our investment in, or acquisition of, other companies;



•

the amount of product in-licensing in which we engage; and



•

other factors not within our control.

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

        History of Net Losses.    We have incurred net losses in each of the last five years of operation, including net losses of $35.9 million in 1997, $16.8 million in 1998, $20.5 million in 1999, $8.8 million in 2000, $60.9 million in 2001 and $170.0 million in the nine months ended September 30, 2002. As of September 30, 2002, our accumulated deficit was $329.5 million. Our losses to date have resulted principally from:

•

research and development costs relating to the development of our XenoMouse and XenoMax technologies and antibody therapeutic product candidates;



•

costs associated with certain agreements with Japan Tobacco, Inc. and certain 1997 settlement and cross-licensing agreements with GenPharm International, Inc.;



•

in-process research and development costs and amortization of intangible assets associated with our acquisitions of Hesed Biomed, Abgenix Biopharma, IntraImmune and Japan Tobacco's interest in Xenotech;



•

general and administrative costs relating to our operations; and



•

impairment charges related to our strategic investments in CuraGen, ImmunoGen and MDS Proteomics.

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

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

Critical Accounting Policies

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

Accounting for Equity Investments.

        We are exposed to equity price risk on our strategic investments in CuraGen, ImmunoGen and MDS Proteomics and we may elect to make additional similar investments in the future. As of September 30, 2002, we had a cost basis of $9.6 million in CuraGen common stock, which reflected the public trading price on that date of $4.22 per share. We also had a cost basis on September 30, 2002, of $2.6 million in ImmunoGen common stock, which reflected the public trading price on that date of $3.24 per share. We typically do not attempt to reduce or eliminate our market exposure on these types of investments. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as available-for-sale and are reported at fair value on our balance sheet. Unrealized holding gains and losses on available-for-sale securities generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under our accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. We purchased

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$15 million of CuraGen common stock in December 1999 at price of $17.90 per share and $50 million of CuraGen common stock in November 2000 at a price of $34.69 per share. We purchased $15 million of ImmunoGen common stock in September 2000 at a price of $19.00 per share. At March 31, 2002, our investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months at which time we deemed that an impairment of these investments had occurred. Additionally, at June 30, 2002, these same investments were trading below their March 31, 2002 values, at which time we determined that a further impairment had occurred. Accordingly, we recorded impairment charges of $34.7 million and $30.4 million, in the first and second quarters of 2002, respectively, which are recorded in our results of operations. The amount of the charge in the first quarter was based on the difference between the market price of the securities as of March 31, 2002, and our original cost basis. The amount of the charge in the second quarter was based on the difference between the market price of these securities as of June 30, 2002, and our cost basis as of March 31, 2002. At September 30, 2002, the CuraGen investment was trading below its June 30, 2002 values, however we judged that this loss may be temporary and therefore did not record further impairment charges on the investment. As of September 30, 2002, these investments were recorded at fair value in long-term investments on the balance sheet, and the net unrealized holding loss of $2.8 million, which reflects the difference between the market price of these securities as of September 30, 2002, and our cost basis as of June 30, 2002, is reported as a component of stockholders' equity. The public trading prices of the shares of both companies have fluctuated significantly since we purchased them and could continue to do so. If these shares continue to trade below their new cost bases in future periods, we may incur additional impairment charges relating to these investments. The amounts of these charges, if any, will equal our unrealized loss on these securities as of the end of the relevant periods.

        In addition, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with our collaboration with that company. Because MDS Proteomics is a private company and its securities are not publicly traded, the value of our investment is inherently more difficult to estimate than an investment in a publicly traded company. As of June 30, 2002, we estimated that the value of our investment had declined to $7.9 million and that an impairment of our investment had occurred. Accordingly, we recorded an impairment charge of $7.1 million on our investment in the second quarter of 2002. The amount of the charge in the second quarter was based on the difference between the estimated value as determined by our management and our original cost basis. We did not record further impairment charges in the third quarter of 2002. As of September 30, 2002, the cost basis of this investment reflected the new estimated value at June 30, 2002, which is recorded in long-term investments on the balance sheet.

Accounting for Goodwill.

        On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized, and instead, be tested for impairment on a periodic basis. We completed a goodwill impairment review as of the beginning of 2002 and found no impairment. Under our accounting policy, we have adopted an annual goodwill impairment test date as of the beginning of the fourth quarter of 2002. Following this approach, we will use the carrying values available as of September 30, 2002, assess if they have a potential impairment and complete the measurement of impairment, if required. For a brief period of time during the third quarter, our common stock traded at a price that represented a market capitalization less than our book value. Should this condition persist for a significant portion of the fourth quarter of 2002, or should the extent of the reduction in the market capitalization become significant, this condition may signify a potential impairment of our goodwill. If we determine that a potential impairment of our goodwill exists, we will perform the impairment measurement procedures under SFAS No. 142, which may result in a charge for the impairment of goodwill in the fourth quarter of 2002. As of September 30, 2002, the carrying value of our goodwill was approximately $34.8 million.

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Accounting for Clinical Trial Supplies.

        We pay fees to outside contractors for the manufacture of our antibody therapeutic product candidates. Such fees are capitalized as prepaid expense if management determines that the clinical trial supplies have alternative future uses in clinical trials for multiple indications of a product candidate and are expensed upon the use of the materials, primarily as they are used in clinical trials. We would immediately expense previously capitalized costs if the asset were not expected to have an alternative future use, such as use in a clinical trial. In the second quarter of 2002, as a result of our decision to wind down our clinical trials of ABX-IL-8, we recorded a charge of $6.7 million relating to clinical trial supplies that we had previously capitalized. As of September 30, 2002, the balance of prepaid clinical trial supplies was $14.7 million. We may incur additional expenses related to clinical supply writedowns depending on the outcome of ongoing clinical trials.

Contractual Obligations and Commercial Commitments

        As of September 30, 2002, future minimum payments for certain contractual obligations for years subsequent to December 31, 2001 were as follows:

*

Amounts represent total of minimum payments for the entire period.

        In March 2002, we issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of our common stock at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5%, and we are obligated to pay interest on March 15 and September 15 of each year, beginning on September 15, 2002. The notes will mature on March 15, 2007 and are redeemable at our option on or after March 20, 2005, or earlier if the price of our common stock exceeds specified levels. In addition, the holders of the notes may require us to repurchase the notes if we undergo a change in control. Therefore, in March 2007, or earlier if we undergo a change in control, we may use a significant portion of our cash balance to repay the $200.0 million principal amount of our convertible debt. If our cash balance at any time is insufficient to meet our obligations under the notes, we would have to seek additional financing, if available, to support our obligations under the notes. In addition, we expect to make interest payments on the notes of $5.8 million in 2002, $7.0 million per year for years of 2003 through 2006, and $1.2 million in 2007, assuming all the notes remain outstanding until their maturity date.

        Other significant commercial commitments include the following:

•

Purchase commitments totaling $36.1 million to contractors related to the purchase of equipment and design and construction of our new office and manufacturing facility;



•

Purchase commitments totaling $0.4 million to Lonza in non-cancelable orders related to future deliveries of our product candidates for use in our clinical trials over approximately the next twelve months;



•

A monthly suite fee of approximately $1.0 million to Lonza for our exclusive use of a cell culture production suite within one of Lonza's facilities over the five-year period ending August 2006;

26

•

An annual maintenance fee of $50,000 for our exclusive worldwide rights to commercialize ABX-CBL. In addition, we commit at least $1.0 million annually to the development of ABX-CBL until ABX-CBL receives regulatory approval as a commercial product in any country and to pay royalties on potential product sales. If we fail to fulfill this commitment, we would lose the CBL license and not be able to continue the development of ABX-CBL;



•

A commitment to share equally all the development costs for ABX-CBL pursuant to our joint development and commercialization agreement with SangStat. Development costs are determined by the development plan agreed upon by a joint steering committee. We and SangStat share responsibility for product development;



•

A commitment to share equally all development costs for ABX-EGF pursuant to our joint development and commercialization agreement with Amgen and Immunex. Development costs are determined by the development plan agreed upon by a joint steering committee. We and Amgen share responsibility for product development; and



•

Research and development and pre-launch marketing commitments to Gliatech of at least $2.0 million annually, including approximately $2.1 million over the thirteen-month period ending October 31, 2003, for pre-clinical studies, in connection with a license, development and commercialization agreement. In addition, we have committed to make payments for the achievement of certain development milestones and to pay royalties based on potential product sales, if any.

Recent Accounting Pronouncement

        In June 2002, the Financial Accounting Standards Board issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses accounting for restructuring, discontinued operations, plant closing, or other exit or disposal activity. SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, and earlier adoption is encouraged. We adopted SFAS 146 in the fourth quarter of 2002. We do not expect the adoption of SFAS 146 to be significant to the results of operations for the fourth quarter of 2002.

Additional Factors That Might Affect Future Results

Risks Related to our Finances

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

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

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

        We have incurred net losses in each of the last five years of operation, including net losses of $35.9 million in 1997, $16.8 million in 1998, $20.5 million in 1999, $8.8 million in 2000, $60.9 million in

27

2001 and $170.0 million in the nine months ended September 30, 2002. As of September 30, 2002, our accumulated deficit was $329.5 million. Our losses to date have resulted principally from:

•

research and development costs relating to the development of our XenoMouse technology and antibody product candidates;



•

costs associated with certain agreements with Japan Tobacco and certain 1997 settlement and cross-licensing agreements with GenPharm;



•

in-process research and development costs and amortization of intangible assets associated with our acquisitions of Hesed Biomed, Abgenix Biopharma, IntraImmune and Japan Tobacco's interest in Xenotech;



•

general and administrative costs relating to our operations; and



•

impairment charges related to our strategic investments in CuraGen, ImmunoGen, and MDS Proteomics.

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

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

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

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

•

enter into further co-development, licensing or other agreements;



•

successfully complete preclinical development or clinical trials;



•

obtain required regulatory approvals;



•

successfully manufacture or market product candidates; or



•

generate additional revenues or profitability.

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

28

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

        We will continue to expend substantial resources to support research and development, including costs associated with preclinical development and clinical trials. In the nine months ended September 30, 2002, we spent $97.5 million on research and development and in the years ended December 31, 2001, 2000 and 1999, we spent $96.2 million, $50.1 million and $21.1 million, respectively, on research and development. Regulatory and business factors will require us to expend substantial funds in the course of completing required additional development, preclinical testing and clinical trials of, and attaining regulatory approvals for, product candidates. The amounts of the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. Our future liquidity and capital requirements will depend on many factors, including:

•

the scope and results of preclinical development and clinical trials;



•

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



•

continued scientific progress in our research and development programs;



•

the size and complexity of these programs;



•

the cost of establishing manufacturing capabilities and meeting good manufacturing practice regulations;



•

the cost of conducting commercialization activities and arrangements;



•

the time and expense involved in seeking regulatory approvals;



•

competing technological and market developments;



•

the time and expense of filing and prosecuting patent applications, and enforcing and defending against patent claims;



•

our investment in, or acquisition of, other companies;



•

the amount of product or technology in-licensing in which we engage; and



•

other factors not within our control.

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

29

Our strategic investments expose us to equity price risk and our investments in those companies may be deemed impaired, which would affect our results of operations.

        We are exposed to equity price risk on our strategic investments in CuraGen, ImmunoGen and MDS Proteomics, and we may elect to make additional similar investments in the future. As of September 30, 2002, we had a cost basis of $9.6 million in CuraGen common stock, which reflected the public trading price on that date of $4.22 per share. We also had a cost basis on September 30, 2002, of $2.6 million of ImmunoGen common stock, which reflected the public trading price on that date of $3.24 per share. We typically do not attempt to reduce or eliminate our market exposure on these types of investments. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as available-for-sale and are reported at fair value on our balance sheet. Unrealized holding gains and losses on available-for-sale securities generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under our accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. We purchased $15 million of CuraGen common stock in December 1999 at price of $17.90 per share and $50 million of CuraGen common stock in November 2000 at a price of $34.69 per share. We purchased $15 million of ImmunoGen common stock in September 2000 at a price of $19.00 per share. At March 31, 2002, our investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months, at which time we deemed that an impairment of these investments had occurred and recorded an impairment charge of $34.7 million in our results of operations in the first quarter or 2002. Additionally, at June 30, 2002, these same investments were trading below their March 31, 2002 values, at which time we determined that a further impairment had occurred and recorded an impairment charge of $30.4 million on our results of operations in the second quarter or 2002. The amount of the charge in the first quarter was based on the difference between the market price of the securities as of March 31, 2002, and our original cost basis. The amount of the charge in the second quarter was based on the difference between the market price of these securities as of June 30, 2002, and our cost basis as of March 31, 2002. As of June 30, 2002, the cost basis of these investments reflected the public trading prices on June 30, 2002, which is recorded in long-term investments on the balance sheet. The public trading prices of the shares of both companies have fluctuated significantly since we purchased them and could continue to do so. If the public trading prices of these shares continue to trade below their new cost bases in future periods, we may incur additional impairment charges relating to these investments. The amounts of these charges, if any, will equal our unrealized loss on these securities as of the end of the relevant periods.

        In addition, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with our collaboration with that company. Because MDS Proteomics is a private company and its securities are not publicly traded, the value of our investment is inherently more difficult to estimate than an investment in a publicly traded company. As of June 30, 2002, we estimated that the value of our investment had declined to $7.9 million and that an impairment of our investment had occurred. Accordingly, we recorded an impairment charge of $7.1 million on this investment in the second quarter of 2002. The amount of the charge in the second quarter was based on the difference between the estimated value as determined by our management and our original cost basis. We did not record further impairment charges in the third quarter of 2002. As of September 30, 2002, the cost basis of this investment reflected the current estimated value at June 30, 2002, which is recorded in long-term investments on the balance sheet.

30

Risks Related to the Development and Commercialization of our Products

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

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

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

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

•

delays in product development, clinical testing or manufacturing;



•

unplanned expenditures in product development, clinical testing or manufacturing;



•

failure in clinical trials or failure to receive regulatory approvals;



•

emergence of superior or equivalent product development technologies or products;



•

inability to manufacture on our own, or through others, product candidates on a clinical or commercial scale;



•

inability to market products due to third-party proprietary rights;



•

election by our customers not to pursue product development;



•

failure by our customers to develop products successfully; and



•

failure to achieve market acceptance.

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

        In addition, our decision in May 2002 to terminate or wind down our clinical programs for developing ABX-IL8 has reduced the diversity of our product portfolio. We hope to be able to make up for this loss of diversity through the number of potential new product candidates we have in preclinical development. However, to the extent that we are unable to maintain a broad and diverse

31

range of product candidates, our success would depend more heavily on one or a few product candidates.

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

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

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

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

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

        Completion of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the product candidate. However, we estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

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

•

the number of patients that ultimately participate in the trial;



•

the duration of patient follow-up that seems appropriate in view of the results;



•

the number of clinical sites included in the trials; and



•

the length of time required to enroll suitable patient subjects.

32

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

        Our product candidates may fail to demonstrate safety or efficacy in clinical trials. Such failure could delay the development of other product candidates or hinder our ability to obtain additional financing. In addition, failures in our clinical trials can lead to additional research and development charges. Any delays in, or termination of, our clinical trials could materially harm our business, financial condition and results of operations.

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

        To date we have relied on a single contract manufacturer, Lonza Biologics, to produce ABX-CBL, ABX-IL8 and ABX-EGF under good manufacturing practice regulations, for use in our clinical trials. We may also rely on other contract manufacturers from time to time to produce our product candidates for use in our clinical trials. For example, Fred Hutchinson Cancer Research Center produces ABX-MA1 for use in our clinical trials. While our Fremont manufacturing facility is expected to be operational by the end of 2002, thus creating additional capacity, which we will control, we cannot assure you that this facility will open when expected. In November 2000, we entered into a manufacturing supply agreement with Lonza, under which Lonza is making available exclusively to us, for a period of five years, a cell culture production suite, with associated purification capacity, within Lonza's facility. The agreement includes an option to extend the initial five-year term. The dedicated cell culture production suite is operational and became available to us in the third quarter of 2001. Although we have gained access through this agreement to production capacity and scheduling flexibility similar to owning the production capability, Lonza retains responsibility for, and control over, staffing and operating the facility. In July 2001, we entered into an agreement granting us an option to negotiate an additional manufacturing supply agreement that would have provided us with additional capacity. In July 2002, after evaluation of our revised capacity needs, we notified Lonza that we had decided not to continue these negotiations.

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

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

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

        We are building our own manufacturing facility for the manufacture of product candidates for clinical trials and to support the potential early commercial launch of a limited number of products, in

33

each case, in compliance with FDA and European good manufacturing practices. In May 2000, we signed a long-term lease for a building to contain this manufacturing facility. Construction is nearly completed and we expect this facility to be operational by the end of 2002. The costs of the facility, including design fees, permits, validation, leasehold improvements and equipment, will approximate $140.0 million. Completion of this facility may take longer than expected, and the planned and actual construction costs of building and qualifying the facility for regulatory compliance may be higher than expected. In addition, if the commercial launch of one or more of our product candidates proves successful, we will likely need to use one or more third-party facilities to produce these products in sufficient quantities. The process of manufacturing antibody therapeutic products is complex. We have no experience in the clinical or commercial scale manufacturing of our existing product candidates, or any other antibody therapeutic products. Also, we will need to manufacture such antibody therapeutic products in a facility and by a process that comply with FDA, European and other regulations. It may take a substantial period of time to begin producing antibodies in compliance with those regulations. Our manufacturing operations will be subject to ongoing, periodic unannounced inspection by the FDA and state agencies to ensure compliance with good manufacturing practices. Our inability to establish and maintain a manufacturing facility within our planned time and cost parameters could materially harm the development and sales of our products and our financial performance.

        We also may encounter problems with the following:

•

production yields;



•

quality control and assurance;



•

availability of qualified personnel;



•

on-going compliance with FDA regulations;



•

production costs; and



•

development of advanced manufacturing techniques and process controls.

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

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

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

        Our strategy for the development and commercialization of antibody therapeutic products depends, in large part, upon the formation of collaboration agreements with third parties. Potential third parties include pharmaceutical and biotechnology companies, technology companies, academic institutions and

34

other entities. We must enter into these agreements to successfully develop and commercialize product candidates. These agreements are necessary in order for us to:

•

access proprietary antigens for which we can generate fully human antibody products;



•

fund our research and development activities;



•

fund preclinical development, clinical trials and manufacturing;



•

seek and obtain regulatory approvals; and



•

successfully commercialize existing and future product candidates.

        Our ability to continue our current collaborations and to enter into additional third party collaborations is dependent in large part on our ability to successfully demonstrate that our XenoMouse technology is an attractive method of developing fully human antibody therapeutic products. We have generated only a limited number of fully human antibody therapeutic product candidates pursuant to our collaboration agreements and only five fully human antibody therapeutic product candidates generated with XenoMouse technology have entered clinical testing. We announced in May 2002 that one of these product candidates has not met our expectations. In addition, our current expectation of the number of INDs to be filed by our collaborators this year is lower than our previous estimates. Our failure to maintain our existing collaboration agreements or to enter into additional agreements could materially harm our business, financial condition and results of operations.

        Our dependence on licensing, collaboration and other agreements with third parties subjects us to a number of risks. These agreements may not be on terms that prove favorable to us, and we typically afford our collaborators significant discretion in electing whether to pursue any of the planned activities. Licensing and other contractual arrangements may require us to relinquish our rights to certain of our technologies, products or marketing territories. We cannot control the amount or timing of resources our collaborators may devote to the product candidates, and collaborators may not perform their obligations as expected. Additionally, business combinations or significant changes in a collaborator's business strategy may adversely affect a collaborator's willingness or ability to complete its obligations under the arrangement. Even if we fulfill our obligations under an agreement, typically our collaborators can terminate the agreement at any time following proper written notice. The termination or breach of agreements by our collaborators, or the failure of our collaborators to complete their obligations in a timely manner, could materially harm our business, financial condition and results of operations. If we are not able to establish further collaboration agreements or any or all of our existing agreements are terminated, we may be required to seek new collaborators or to undertake product development and commercialization at our own expense. Such an undertaking may:

•

limit the number of product candidates that we will be able to develop and commercialize;



•

reduce the likelihood of successful product introduction;



•

significantly increase our capital requirements; and



•

place additional strain on our management's time.

        Existing or potential collaborators may pursue alternative technologies, including those of our competitors, or enter into other transactions that could make a collaboration with us less attractive to them. For example, if an existing collaborator purchases a company that is one of our competitors, that company could be less willing to continue its collaboration with us. In addition, a company that has a strategy of purchasing companies with attractive technologies might have less incentive to enter into a collaboration agreement with us. Moreover, disputes may arise with respect to the ownership of rights to any technology or products developed with any current or future collaborator. Lengthy negotiations with potential new collaborators or disagreements between us and our collaborators may lead to delays in or termination of the research, development or commercialization of product candidates or result in time-consuming and expensive litigation or arbitration. The decision by our collaborators to pursue

35

alternative technologies or the failure of our collaborators to develop or commercialize successfully any product candidate to which they have obtained rights from us could materially harm our business, financial condition and results of operations.

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

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

•

adversely affect the successful commercialization of any drugs that we or our customers develop;



•

impose costly procedures on us or our customers;



•

diminish any competitive advantages that we or our customers may attain; and



•

adversely affect our receipt of revenues or royalties.

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

•

delays;



•

warning letters;



•

fines;



•

product recalls or seizures;



•

injunctions;



•

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



•

total or partial suspension of production;



•

civil penalties;



•

withdrawals of previously approved marketing applications; and



•

criminal prosecutions.

36

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

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

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

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

•

establishment and demonstration of clinical efficacy and safety;



•

cost-effectiveness of our product candidates;



•

their potential advantage over alternative treatment methods;



•

reimbursement policies of government and third-party payors; and



•

marketing and distribution support for our product candidates, including the efforts of our collaborators where they have marketing and distribution responsibilities.

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

37

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

        Although we have been marketing our XenoMouse technology to potential customers and collaborators for several years, we do not have marketing, sales or distribution experience or capability with respect to our therapeutic product candidates. We intend to enter into arrangements with third parties to market and sell most of our therapeutic product candidates when we commercialize them, which may be as early as 2005. We may not be able to enter into these marketing and sales arrangements with others on acceptable terms, if at all. To the extent that we enter into marketing and sales arrangements with other companies, our revenues, if any, will depend on the efforts of others. These efforts may not be successful. If we are unable to enter into third-party arrangements, we will need to develop a marketing and sales force, which may need to be substantial in size, in order to achieve commercial success for any product candidate approved by the FDA. We may not successfully develop marketing and sales capabilities or have sufficient resources to do so. If we do develop such capabilities, we will compete with other companies that have experienced and well-funded marketing and sales operations. Our failure to enter into successful marketing arrangements with third parties and our inability to conduct such activities ourselves would materially harm our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

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

        Our success depends in part on our ability to:

•

obtain patents;



•

protect trade secrets;



•

operate without infringing the proprietary rights of others; and



•

prevent others from infringing our proprietary rights.

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

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

38

developed by, our competitors. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed.

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

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

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

        GlaxoSmithKline, plc, or Glaxo, has a family of patents relating to certain methods for generating monoclonal antibodies that Glaxo is asserting against Genentech, Inc. in litigation that was commenced in 1999. On May 4, 2001, Genentech announced that a jury had determined that Genentech had not infringed Glaxo's patents and that all of the patent claims asserted against Genentech are invalid. We understand that Glaxo has filed a notice of appeal with the Court of Appeals for the Federal Circuit. If any of the claims of these patents are finally determined in the litigation to be valid, and if we were to use manufacturing processes covered by the patents to make our products, we may then need to obtain a license should one be available. Should a license be denied or unavailable on commercially reasonable terms, we may have difficulty commercializing one or more of our products in any territories in which these claims were in force.

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

        Genentech owns a U.S. patent that issued in June 1998 relating to inhibiting the growth of tumor cells that involves an antibody that binds to an epidermal growth factor receptor, or an anti-EGF receptor antibody, in combination with a cytotoxic factor, which is a substance having a toxic effect on cells. ImClone Systems, Inc. owns or is licensed under a U.S. patent that issued in April 2001, relating to inhibiting the growth of tumor cells that involves an anti-EGF receptor antibody in combination with an anti-neoplastic, or anti-tumor, agent. We do not believe based on our review that either the Genentech or ImClone patent would be successfully asserted against any planned commercial sales of ABX-EGF. We believe that currently all of our activities relating to anti-EGF receptor monoclonal antibodies are within the exemption provided by the U.S. patent laws for uses reasonably related to

39

obtaining FDA approval of a drug. We do not expect the scope of our product development plans to change in the future prior to filing an application for a biologic license with the FDA. If a court determines that the claims of either the Genentech patent or the ImClone patent cover our activities with ABX-EGF and are valid, such a decision may require us to obtain a license to Genentech's or ImClone's patent, as the case may be, to label and sell ABX-EGF for certain combination therapies. Our failure to obtain a license, or to obtain a license on commercially reasonable terms, could impede our commercialization of ABX-EGF in the United States.

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

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

•

enforce patents that we own or license;



•

protect trade secrets or know-how that we own or license; or



•

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

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

Risks Related to Our Industry

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

        The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. We are aware of several pharmaceutical and biotechnology companies that are actively engaged in research and development in areas related to antibody therapy. These companies have commenced clinical trials of antibody therapeutic product candidates or have successfully commercialized antibody therapeutic products. Many of these companies are addressing the same diseases and disease indications as we or our customers are. Also, we compete with companies that offer antibody generation services to companies that have antigens. These competitors have specific expertise or technology related to antibody development and introduce new or modified technologies from time to time. These companies include GenPharm, a wholly owned subsidiary of Medarex, Inc., Medarex's collaborator, Kirin Brewing Co. Ltd.; Genmab A/S; Cambridge Antibody

40

Technology Group plc; Protein Design Labs, Inc.; MorphoSys AG; Xenerex Biosciences Inc., a subsidiary of Avanir Pharmaceuticals; XLT Biopharmaceuticals Ltd.; and Alexion Pharmaceuticals, Inc.

        Some of our competitors have received regulatory approval of or are developing or testing product candidates that may compete directly with our product candidates. For example, SangStat, Novartis AG, Pharmacia Corporation and Roche market organ transplant rejection products that may compete with ABX-CBL, which is in clinical trials. In addition, MedImmune, Inc. has a potential antibody product candidate in clinical trials for graft versus host disease that may compete with ABX-CBL. We are aware that ImClone, AstraZeneca, plc, Glaxo and a collaboration of OSI Pharmaceuticals, Inc., Genentech and Roche have potential antibody and small molecule product candidates in clinical development that may compete with ABX-EGF, which is also in clinical trials. In September 2002, an FDA advisory panel voted to recommend for approval AstraZeneca's small molecule product candidate Iressa, which may compete with ABX-EGF. Furthermore, we are also aware that AstraZeneca has received approval for Iressa in Japan for the treatment of advanced non-small cell lung cancer.

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

•

developing products;



•

undertaking preclinical testing and human clinical trials;



•

obtaining FDA and other regulatory approvals of products; and



•

manufacturing and marketing products.

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

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

•

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



•

new small molecules; or



•

other classes of therapeutic agents.

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

41

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

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

Other Risks Related to Our Company

Our restructuring plan may not achieve the results we intend and may harm our business.

        In October 2002, we announced a restructuring plan, which includes a reduction in headcount of approximately 15%. The planning and implementation of our restructuring has placed, and may continue to place, a significant strain on our managerial, operational and other resources. The restructuring may negatively affect our employee turnover, recruiting and retention, and may not enable us to reduce our costs to the extent expected.

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

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

•

the potential inability to identify target companies best suited to our business plan;



•

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



•

incurrence of expenses attendant to transactions that may or may not be consummated; and



•

difficulties in managing and coordinating operations at multiple venues, which, among other things, could divert our management's attention from other important business matters.

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

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

        For us to pursue product development, marketing and commercialization plans, we may need to hire additional qualified scientific personnel. We will also need to hire personnel with expertise in clinical testing, government regulation, manufacturing, marketing and finance. Attracting and retaining qualified personnel will be critical to our success. We may not be able to attract and retain personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical

42

and healthcare companies, universities and non-profit research institutions. Our inability to attract and retain qualified personnel might materially harm our business, financial condition and results of operations.

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

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

•

issue preferred stock without any vote or further action by the stockholders;



•

eliminate the right of stockholders to act by written consent without a meeting;



•

specify procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings; and



•

eliminate cumulative voting in the election of directors.

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

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

        The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to liability claims resulting from such use or sale of our products. Consumers, healthcare providers, pharmaceutical companies or others selling such products might make claims of this kind. We may experience financial losses in the future due to product liability claims. We have obtained limited product liability insurance coverage for our clinical trials, under which the coverage limits are $10.0 million per occurrence and $10.0 million in the aggregate. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for product candidates in development. We may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If third parties bring a successful product liability claim or series of claims against us for uninsured liabilities or in excess of insured liabilities, our business, financial condition and results of operations may be materially harmed.

43

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

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

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

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

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

        The market price and trading volume of our common stock are volatile, and we expect such volatility to continue for the foreseeable future. For example, during the period between October 1, 2001 and September 30, 2002, our common stock closed as high as $37.46 per share and as low as $5.79 per share. This may impact your decision to buy or sell our common stock. Factors affecting our stock price include:

•

our financial results;



•

fluctuations in our operating results;



•

announcements of technological innovations or new commercial therapeutic products by us or our competitors;



•

published reports by securities analysts;



•

developments in our clinical trials and in clinical trials for potentially competitive product candidates;



•

government regulation;



•

changes in reimbursement policies;



•

developments in patent or other proprietary rights;



•

developments in our relationship with customers;



•

public concern as to the safety and efficacy of our products; and



•

general market conditions.

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

        A company is required to register as an investment company under the Investment Company Act of 1940, or the 1940 Act, if, among other things, and subject to various exceptions:

•

it is or holds itself out to be engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or

44

•

it is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 percent of the value of such company's total assets (exclusive of Government securities and cash items) on an unconsolidated basis.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

        Interest Rate Risk.    The objective of our investment activities is to preserve principal, while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid, investment grade and government debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in short-term securities and our goal is to maintain an average maturity of approximately one year. A hypothetical 1.0% per annum increase in interest rates would result in a decrease in the fair market value of our debt securities of approximately $6.1 million at September 30, 2002, and approximately $5.6 million at December 31, 2001.

        Equity Price Risk.    We are exposed to equity price risk on strategic investments, such as those we have made in CuraGen, ImmunoGen and MDS Proteomics. We typically do not attempt to reduce or eliminate our market exposure on these securities. With respect to CuraGen and ImmunoGen, each of whose common stock is publicly traded, the market price of these securities was approximately $12.2 million and $64.1 million as of September 30, 2002 and December 31, 2001, respectively. Due to decreases in the market price, we recorded impairment charges of $34.7 million for the three months ended March 31, 2002, and of $30.4 million for the three months ended June 30, 2002, related to our investments in CuraGen and ImmunoGen. At September 30, 2002, we experienced a further net unrealized holding loss of $2.8 million, which was reported as a component of stockholders' equity. The trading prices of shares of CuraGen and ImmunoGen have fluctuated significantly since we purchased these securities. Each additional 10% decrease in market value of these securities would result in a decrease in value of approximately $1.2 million from the fair value of those investments at September 30, 2002. Additional price declines could cause us to record additional impairment charges in future periods.

        An adverse movement of equity market prices generally would also have an impact on the valuation of our non-publicly traded strategic equity securities, such as MDS Proteomics. Such a movement and the related underlying economic conditions would negatively impact the prospects of any company we invest in, its ability to raise capital and the likelihood of our being able to realize our investment through liquidity events such as a public offering, merger or private sale. For the three months ended June 30, 2002, we incurred a $7.1 million charge related to a write-down of our investment in MDS Proteomics, and we may incur future writedowns of these securities. At September 30, 2002, our strategic investment in MDS Proteomics had a carrying amount of $7.9 million.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        Based on their evaluation of our disclosure controls and procedures, as that term is defined by Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, within 90 days of the filing date of this report, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures are effective in ensuring that all material information required to be included in this quarterly report on Form 10-Q has been made known to them in a timely fashion.

Changes in Internal Controls

        There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were any corrective actions required with regard to significant deficiencies and material weaknesses subsequent to that date.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

        Not applicable.

ITEM 2. Changes in Securities and Use of Proceeds

        Not applicable.

ITEM 3. Defaults upon Senior Securities

        Not applicable.

ITEM 4. Submission of Matters to Vote of Security Holders

        Not applicable.

ITEM 5. Other Information

        In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for disclosing the non-audit services approved by the Audit Committee of Board of Directors to be performed by Ernst & Young LLP, our external auditor. Non-audit services are services other than those provided in connection with an audit or a review of our financial statements. The Audit Committee has approved engagements of Ernst & Young LLP for the following non-audit services: (1) tax compliance services for Abgenix, Inc. and its subsidiaries; (2) tax planning services for Abgenix, Inc. and Abgenix Biopharma; (3) tax consulting services; and (4) accounting consulting services.

ITEM 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

(1)

Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form S-1 (File No. 333-49415).

(2)

Incorporated by reference to the same exhibit filed with Abgenix's Annual Report on Form 10-K for the year ended December 31, 2001.

(b)

Reports on Form 8-K

        We filed a Form 8-K on August 14, 2002, reporting under Item 9—Regulation FD Disclosure, the written certifications that accompanied our Quarterly Report on Form 10-Q for the period ended June 30, 2002.

        We are filing a Form 8-K on November 14, 2002, reporting under Item 9—Regulation FD Disclosure, the written certifications that accompany this Quarterly Report on Form 10-Q.

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SIGNATURES

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

Dated: November 14, 2002

48

CERTIFICATIONS

I, Raymond M. Withy, Ph.D., certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Abgenix, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: November 14, 2002

49

I, Kurt Leutzinger, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Abgenix, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: November 14, 2002

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QuickLinks

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 3. Defaults upon Senior Securities
ITEM 4. Submission of Matters to Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K