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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number: 000-22891

1124 Columbia St., Suite 200

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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 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 þ          NO o

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     YES þ          NO o

      The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $362 million as of June 30, 2003, based upon the closing sale price on the Nasdaq National Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

      There were 55,507,468 shares of the registrant’s Common Stock outstanding as of March 3, 2004.

DOCUMENTS INCORPORATED BY REFERENCE:

      Part III incorporates information by reference to the Registrant’s Proxy Statement for its 2004 Annual Meeting of Stockholders.

CORIXA CORPORATION

FORM 10-K

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      In this Annual Report “Corixa” or the “company,” “we,” “us” and “our” refer to Corixa Corporation and our wholly owned subsidiaries.

      CORIXA®, BEXXAR®, MPL®, ENHANZYN® and the Corixa logo are registered trademarks and DUAL ACTION, DURABLE REMISSION^TM, TARGETED PRECISE DURABLE^TM, POWERED BY CORIXA^TM, the POWERED BY CORIXA logo and the BEXXAR logo are trademarks of Corixa Corporation. All other brand names, trademarks or service marks referred to in this Annual Report are the property of their respective owners.

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PART I

      Our disclosure and analysis in this Annual Report and the documents incorporated by reference contain forward-looking statements, which provide our current expectations or forecasts of future events. Forward-looking statements include, without limitation:

	•	information concerning possible or assumed future results of operations, trends in financial results and business plans, including those relating to earnings growth and revenue growth;
	•	statements about the level of our costs and operating expenses relative to our revenues, and about the expected composition of our revenues;
	•	statements about our product development schedule;
	•	statements about our expectations for regulatory approval of any of our product candidates;
	•	statements regarding expected payments under collaboration agreements;
	•	statements about our future capital requirements and the sufficiency of our cash, cash equivalents, investments and available equity line facilities and bank borrowings to meet these requirements;
	•	statements about our future operational and manufacturing capabilities;
	•	other statements about our plans, objectives, expectations and intentions; and
	•	other statements that are not historical facts.

      Words such as “believes,” “anticipates,” “expects” and “intends” may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the factors described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price” in this Annual Report. Other factors besides those described in this Annual Report could also affect actual results. You should carefully consider the factors described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price” in evaluating our forward-looking statements.

      You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Annual Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the SEC after the date of this Annual Report.

Overview

      We are a developer of innovative immunotherapeutic products designed to affect the immune system and treat debilitating and life-threatening conditions caused by cancer and infectious disease.

      Originally founded to pursue development of leading, proprietary antigen discovery technology, we are emerging as a product development company with multiple product candidates, many in late-stage human clinical trials. We are driven by an aggressive commercialization strategy that we believe will give us an opportunity for sustained and consistent commercial success. Our development efforts are focused on core areas of immunotherapy expertise, including monoclonal antibodies, vaccines and adjuvants, and small molecules called TLR4 agonists and antagonists that stimulate innate immunity.

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      In June, 2003 we received approval from the U.S. Food and Drug Administration, or FDA, of BEXXAR® therapeutic regimen for the treatment of patients with CD20 positive, follicular, non-Hodgkin’s lymphoma, or NHL, with and without transformation, whose disease is refractory to Rituximab and has relapsed following chemotherapy.

      We were originally incorporated in Delaware as WWE Corp. on Sept. 8, 1994. Our headquarters and our primary research and process development as well as clinical and regulatory operations are in Seattle, Washington, our adjuvant manufacturing operations are in Hamilton, Montana and our BEXXAR therapeutic regimen operations are in South San Francisco, California. We make available on our website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after filing or furnishing the information to the SEC. The Internet address for the information is http://www.shareholder.com/corixa/edgar.cfm.

Product Development

      Using three primary therapeutic approaches, we are developing innovative immunotherapeutic products that address a range of cancers and infectious diseases. Our primary therapeutic approaches include:

	•	antibody-based therapeutics;
	•	therapeutic vaccines for cancer and infectious disease, and adjuvants designed to increase the effectiveness of our and our partner’s vaccines; and
	•	TLR4 agonists and antagonists of innate immune responses.

      In addition to the BEXXAR therapeutic regimen, which has been approved for sale in the United States, two of our partners’ vaccine products that contain our adjuvants have been approved for sale: Berna Biotech’s prophylactic vaccine for the prevention of Hepatitis B infection contains our synthetic RC-529^TM adjuvant and has been approved for sale in Argentina, and Allergy Therapeutics Ltd.’s, or ATL’s, allergy vaccine, contains our MPL® adjuvant and has been approved for sale on a named patient basis in Germany, Spain, Italy and the U.K. In addition, together with our partners, we are conducting late-stage clinical trials for several product candidates targeting a range of cancers and infectious diseases.

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      The following table outlines our approved products and our significant product candidates that are at the clinical stage. These programs, as well as our programs in earlier stages of development are described more fully in the sections following the table below.

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      In the column entitled “Development Phase”:

	•	“Phase I” means products that are in, or have completed, Phase I clinical trials, performed to evaluate safety;
	•	“Phase II” means products that are in, or have completed, Phase II dose-ranging clinical testing, being tested to further determine safety and efficacy; and
	•	“Phase III” means products that are in, or have completed, Phase III clinical testing, being tested to determine efficacy.

Antibody-Based Therapeutics

      We maintain a highly focused discovery, development and commercialization program to provide viable monoclonal antibody candidates for the treatment of certain types of cancer. BEXXAR therapeutic regimen continues to be a focal point for us and our co-developers GlaxoSmithKline Inc., or GSK, and Amersham Health, a subsidiary of Amersham plc. Through a combination of internal discovery efforts and external collaborations, we, with our partners, intend to take select early-stage monoclonal antibody candidates into clinical testing over the next several years.

      BEXXAR Therapeutic Regimen. On June 30, 2003 we and GSK announced that the FDA approved BEXXAR therapeutic regimen for the treatment of patients with CD20 positive, follicular, NHL, with and without transformation, whose disease is refractory to Rituximab and has relapsed following chemotherapy.

      NHL is a form of cancer that affects the blood, bone marrow and lymphatic tissues. NHL currently is the sixth-leading cause of cancer-related deaths in the United States and is expected to claim the lives of 19,410 Americans this year. According to the American Cancer Society, or ACS, in 2004 there will be approximately 53,370 new diagnoses of NHL in the United States. The incidence of NHL increases with age, and there has been an increase in age-adjusted incidence of approximately 1 to 2% annually for the last four decades.

      BEXXAR therapeutic regimen is a dual-action therapy that pairs the tumor-targeting ability of a cytotoxic (cancer killing) anti-B1monoclonal antibody, or Tositumomab, and the therapeutic potential of radiation (Iodine-131) with patient-specific dosing. Combined, these agents form a radiolabeled monoclonal antibody called Iodine I 131 Tositumomab that is able to bind to the target antigen CD20 found on NHL cells, thereby initiating an immune response against the cancer and delivering a dose of radiation directly to tumor cells.

      The efficacy of the BEXXAR therapeutic regimen was examined in a multi-center, single-arm study of 40 patients with follicular NHL whose disease had relapsed following or had not responded to Rituximab. The median age of patients in the study was 57 (range: 35-78) and the median number of prior chemotherapies was 4 (range: 1-11). Eighty-eight percent of patients met the definition of Rituximab refractory (defined as no response or a response of less than 6 months in duration). In patients with Rituximab refractory disease, 63% of patients had a response to BEXXAR therapeutic regimen, with a median duration of response of 25 months. Twenty-nine percent of patients had a complete response (no clinical signs of disease) to BEXXAR therapeutic regimen. The median duration of complete responses has not been reached after a median follow up of 26 months.

      The results of this study were supported by demonstration of durable objective responses in four other single-arm studies enrolling 190 patients with Rituximab-naïve, follicular NHL, with or without transformation, who had relapsed following or were refractory to chemotherapy. In these studies, the overall response rates ranged from 47% to 64% and the median durations of response ranged from 12 to 18 months.

      The most common adverse reactions occurring in the clinical trials included neutropenia, thrombocytopenia and anemia that can be both prolonged and severe. Of 230 patients included in the safety data from five clinical trials, 63% had documented Grade 3 or 4 neutropenia, 53% had Grade 3 or 4 thrombocytopenia, and 29% had Grade 3 or 4 anemia. Twenty-seven percent of patients received one or more blood transfusions or blood cell growth factors, eight percent of patients experienced a serious infection and 12% experienced bleeding events; the majority were mild to moderate. The most common non-hematologic side effects included

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      The BEXXAR therapeutic regimen consists of four components administered in two steps over seven to fourteen days, usually on an outpatient basis. The first set of infusions includes the non-radioactive antibody, Tositumomab, used to improve the distribution in the body of the subsequent radioactive antibody and increase its uptake in the tumor, followed by a dosimetric infusion, containing the antibody and a trace amount of radioactive Iodine-131. The dosimetric step allows the rate of clearance of radioactivity from the body to be determined by the use of gamma camera counts obtained at three time points. Clearance is dependent on factors such as tumor size and bone marrow involvement. From these determinations, the patient-specific amount of radioactivity necessary to deliver the targeted therapeutic total body dose of radiation can be calculated. Seven to fourteen days after the dosimetric step, the patient returns for the therapeutic step, which includes two infusions, again beginning with the non-radioactive antibody, followed by the calculated patient-specific radioactivity needed to deliver the targeted total body dose of radiation.

      We and GSK in Canada, or GSK Canada, entered into an agreement in May 2003 whereby in the event of product approval GSK Canada will market BEXXAR therapeutic regimen in Canada. Under the terms of the agreement, GSK Canada is responsible for registration, marketing and sales of the product in Canada. We are responsible for the manufacture and supply of BEXXAR therapeutic regimen to GSK Canada for the Canadian market.

      On August 25, 2003, we announced that the Biologics and Genetic Therapies Directorate, or BGTD, of Health Canada accepted our New Drug Submission, or NDS, for BEXXAR therapeutic regimen under a Priority Review. Health Canada’s Priority Review is a status granted to eligible new drug submissions for human use with a shortened review target period in comparison to 300 days for non-priority review. Priority Review status may be granted to drug submissions intended for the treatment, prevention or diagnosis of serious, life-threatening or severely debilitating illnesses or conditions where there is no existing drug on the Canadian market with the same profile or where the new product represents a significant improvement in the benefit/risk profile over existing products.

      We and Amersham Health entered into an agreement in October 2001 whereby in the event of product approval in Europe Amersham Health will market BEXXAR therapeutic regimen in Europe. We and Amersham Health continue to pursue the registration of the product in Europe.

      Other Antibody-based Therapeutics. We are developing a monoclonal antibody-based cancer therapeutic in a collaborative effort with Medarex, Inc., or Medarex. In 2000, we initiated a collaboration with Medarex to discover and develop fully human monoclonal antibodies against selected targets from our library of proprietary cancer and infectious disease antigens. Medarex contributed its HuMAb-Mouse® technology to the multiyear collaboration, targeted to generate, screen and characterize fully human monoclonal antibodies directed against our antigens. In May 2002, we amended and restated this collaboration to cover the development and potential commercialization of monoclonal antibody products directed against one of our cancer antigens.

      We are also developing a monoclonal antibody-based therapeutic in collaboration with Purdue Pharma L.P., or Purdue Pharma, for the potential treatment of female reproductive tract cancer.

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Adjuvants and Vaccines

      An adjuvant is a formulated compound or additive that, when combined with a vaccine, boosts the body’s immune response to antigens contained in the vaccine. Our adjuvant technology is based on the fact that certain microbial products have long been recognized as potent immune system regulators and have been shown to induce a broad range of known cytokines, a class of substances that are produced by cells of the immune system and can affect the immune response. Modifications of these microbial products and their physical and biological delivery to the immune system can influence the way cytokines are expressed, as well as the recipient’s own physiological responses. Such responses mimic the normal, protective responses that are initiated during infection or injury. With our partners, we are evaluating our adjuvants in vaccines that are designed to be safer and more effective and to protect against a broad range of diseases.

      RC-529 Adjuvant. On September 8, 2003 we announced the Argentinean approval of SUPERVAX, Berna Biotech’s prophylactic vaccine containing our synthetic RC-529 adjuvant, for the prevention of Hepatitis B infection. Developed by Berna Biotech, the vaccine combines Berna Biotech’s Hansenula polymorpha-based recombinant Hepatitis B antigen with our RC-529 adjuvant. An adjuvant is a formulated compound or additive that, when combined with a vaccine, boosts the body’s immune response to the antigen(s).

      Clinical results for SUPERVAX showed seroprotection of more than 95% of the individuals vaccinated with SUPERVAX containing our RC-529 adjuvant after only two vaccinations, one month apart, Berna Biotech expects to launch SUPERVAX in Argentina in 2004.

      On August 14, 2003, we and Apovia AG announced a research, development and commercialization agreement for our synthetic RC-529 adjuvant. The multiyear agreement grants Apovia commercial rights to RC-529 adjuvant for use in an undisclosed therapeutic vaccine. Both companies will equally share research, development and commercialization costs, as well as any potential product revenue.

      MPL Adjuvant. Our flagship adjuvant, MPL adjuvant, is a derivative of the lipid A molecule found in gram-negative bacteria, one of the most potent immune system stimulants. We also own patented technology for extracting MPL adjuvant from bacterial cell walls. Several of our partners are evaluating MPL adjuvant in vaccines for development in allergy, cancer and infectious disease targets. MPL adjuvant has been administered to more than 12,000 patients in more than 33,000 doses as a vaccine adjuvant.

	•	Hepatitis B — GSK Fendrix®. On May 12, 2003, we announced that our partner, GSK, has filed for regulatory approval of Fendrix with the European Agency for the Evaluation of Medicinal Products, or EMEA. Fendrix is a novel vaccine designed to prevent infection from Hepatitis B in high-risk groups such as pre-haemodialysis and haemodialysis patients and it includes the GSK Hepatitis B antigen with the addition of our MPL adjuvant. The Fendrix filing represents the first regulatory filing for approval of an infectious disease vaccine that contains our proprietary MPL adjuvant.
	•	HPV — GSK CervarixTM. Cervical cancer is the second most common cause of cancer death in women worldwide, with approximately 500,000 new cases occurring annually. According to the World Health Organization, or the WHO, scientists believe that infections with oncogenic genotypes of HPV are responsible for most, if not all cervical cancers. In Phase II studies, Cervarix vaccine containing our MPL adjuvant demonstrated 100% effectiveness in preventing persistent infection by the two HPVs associated with the greatest incidence of cervical cancer: HPV 16 and HPV 18. GSK has reported that Cervarix has the potential to prevent more than 70% of cervical cancers. Two planned Phase III trials enrolling approximately 25,000 women are expected to begin in 2004.
	•	HSV — GSK SimplirixTM. Genital herpes is an infection caused by the herpes simplex virus. There are two types of HSV, HSV-1 and HSV-2, and both can cause genital herpes. According to the Centers for Disease Control and Prevention, 45 million people in the United States ages 12 and older, or 1 out of 5 of the total adolescent and adult population, are infected with HSV-2. Nationwide, since the late 1970s, the number of people with genital herpes infection has increased 30%.

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Thirteen clinical trials with more than 12,000 volunteers have been completed evaluating Simplirix vaccine containing our MPL adjuvant. Results from two double-blind, randomized trials demonstrated that Simplirix vaccine was highly effective in protecting women against HSV-1 and HSV-2 genital herpes. GSK is currently conducting another Phase III pivotal trial in young adult women in collaboration with the National Institutes of Health, or NIH.

	•	Allergies. Allergy Therapeutics Ltd., or ATL, incorporates MPL adjuvant as a component in ATL’s Pollinex Quattro, an allergy vaccine, which is in Phase III clinical trials in Europe. ATL specifically targets allergies caused by grasses, trees, weeds and pollens. ATL’s allergy vaccine has been approved for sale on a named patient basis in Germany, Spain, Italy and the U.K.

      ENHANZYN Adjuvant — Biomira Theratope®. The ENHANZYN adjuvant consists of the MPL adjuvant and mycobacterial cell wall skeleton, structural compounds from the bacterium’s cell wall. Biomira Inc., or Biomira, licensed ENHANZYN for use with its Theratope vaccines for the potential treatment and prevention of cancers in humans. Theratope has been used in a completed Phase III clinical trial for metastatic breast cancer and is in a Phase II clinical trial for treating colorectal cancer. In June 2003 Biomira announced that the Phase III clinical trial for metastatic breast cancer did not meet the two pre-determined statistical endpoints of time to disease progression and overall survival and Biomira has indicated that it intends to discuss plans for moving forward with the regulatory authorities in the second half of 2004.

      An important focus of our research and development in cancer and infectious disease vaccines is to target a therapeutic cellular immune response, or more specifically the activation of specialized T cells that recognize and kill pathogen-infected tissue or tumor cells. Most marketed vaccines today stimulate a humoral, or antibody, response involving specialized immune system cells known as B cells. While vaccines that rely on humoral immunity have proven useful in the setting of prophylaxis of infection, these vaccines have typically failed to generate a sufficiently robust cellular immune response to eliminate tumors and ongoing infections. We believe that an effective therapeutic immune response to particular cancers and infectious diseases is likely to require components of both a humoral and a cellular immune response.

      To induce cytotoxic T cells for therapy of cancer tumors, we focus our discovery efforts on three complementary technologies: proprietary tumor-specific antigens, vaccine adjuvants, and vaccine delivery systems. Since 1995, we have aggressively researched and discovered numerous tumor-specific antigens in the major solid and hematological tumors. Our ability to characterize the immunological properties of these antigens has allowed us to select the antigens that we believe will work most effectively in a vaccine. In the selection process, we focus on antigens that are recognized by the greatest percentage of individuals, that stimulate the most potent immune responses, and that are expressed by the greatest percentage of patients. We then screen the antigens as vaccine candidates with our proprietary adjuvants and vaccine delivery systems to identify the most promising vaccine formulations.

      Our primary focus in infectious disease vaccine development is to create vaccines that can be used as therapeutics. Therapeutic infectious disease vaccines require antigens that are specific to the pathogen of interest and that are capable of being recognized by the patient’s immune system. As with cancer vaccines, our approach combines the benefits of disease specific antigens, potent adjuvants to amplify recognition by the immune system, and novel delivery systems to enable site specific delivery of the antigen to lymphocytes and antigen-presenting cells, or cells that present processed antigens to the immune system. Our potential infectious disease vaccines may, in addition to enabling treatment of specific infections, also provide protection as prophylactic vaccines.

      HER-2/neu Breast Cancer Vaccine. Under our vaccine development collaboration with GSK, we have developed a potential breast cancer vaccine based on HER-2/neu, a well-established target in the development of tumor malignancy. According to the ACS, more than 200,000 people will be diagnosed with breast cancer this year and an estimated 40,000 will die in the United States alone. HER-2/neu is a protein that is normally expressed at very low levels by cells of the breast, ovaries, skin, lung, liver, intestines and prostate, but that is overexpressed in 25-30% of breast cancers. HER-2/neu is a growth factor receptor involved in

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      Under an FDA Investigational New Drug Application, or IND, filed in GSK’s name, we and GSK initiated a Phase I clinical trial in 2003 to test the safety of a new therapeutic breast cancer vaccine formulation that is designed to potentially trigger both an antibody and T cell response to tumors that overexpress the HER-2/neu protein. We are testing the vaccine in patients who have HER-2/neu positive breast cancer in remission, but who are at high risk for relapse. The clinical trial will test three dose levels of the vaccine to determine the safety of the vaccine and to begin to identify the optimal dose. We and GSK designed the vaccine formulation, which was derived in part from a series of Phase I clinical trials conducted by the University of Washington and us. The series of Phase I clinical trials tested HER-2/neu vaccine formulations, including peptide- and protein-based vaccines, in patients with breast and ovarian cancer. The prior HER-2/neu vaccine trials conducted at the University of Washington by Dr. Mary L. Disis validated that HER-2/neu vaccines can induce both antibody and T cell immune responses to HER-2/neu.

      Lung Cancer Vaccine. We and our partner, Zambon Group spa and its subsidiaries, collectively referred to herein as Zambon, are currently evaluating a vaccine candidate for the treatment of non-small cell lung cancer in a Phase I clinical trial initiated in 2003. According to the ACS, in the United States in 2003 an estimated 171,900 new cases of lung and bronchus cancer were diagnosed and an estimated 157,200 people died from such diseases. Current therapeutic options for patients diagnosed with lung cancer are limited, and metastasis of the cancer following surgery of the primary lesion is a common outcome. We have licensed rights to the vaccine candidate for Japan to Japan Tobacco, Inc., or JT.

      Tuberculosis Vaccine. On January 14, 2004, we and GSK announced that the FDA is allowing the initiation of a Phase I clinical study to evaluate the safety and immunogenicity of a novel, proprietary prophylactic vaccine designed to induce protection against tuberculosis. The trial will be conducted in the United States under an IND currently held by us and will be the first study of a recombinant tuberculosis vaccine to be conducted on human volunteers. Grants awarded in the late 1990s from the National Institute of Allergy and Infectious Diseases, or NIAID, part of the NIH, supported research that uncovered the most effective protein-adjuvant combination for this vaccine.

      Each year, according to the WHO, approximately 8 million people worldwide become sick with tuberculosis. According to the WHO statistics, an estimated 2 million die annually from the disease. The WHO estimates that between 2000 and 2020 nearly 1 billion people will be newly infected with tuberculosis, 150 million people will get sick and 36 million will die. According to the NIAID, an estimated 2 billion people are infected with tuberculosis, including approximately 15 million people in the United States. Any of these people may develop active tuberculosis during the course of their lives.

      The vaccine combines a proprietary, recombinant tuberculosis protein antigen and a GSK proprietary formulation that incorporates several adjuvants including our MPL adjuvant. MPL is our flagship adjuvant, which is present in multiple GSK vaccines now in late stage clinical development. The recombinant tuberculosis antigen is a fusion protein of antigenic domains taken from different Mycobacterium tuberculosis gene products that are recognized by immune system cells harvested from patients that had been infected with tuberculosis but who never showed signs of disease. The fusion protein adjuvant combination appears to have demonstrated protection against tuberculosis infection in a number of relevant animal species including mice, guinea pigs and monkeys.

      Leishmaniasis Vaccine. In January 2003, we initiated a Phase I clinical trial in the United States to test the safety and tolerability of an investigational vaccine to treat various forms of leishmaniasis. The investigational vaccine, identified as Leish-111f, consists of a fusion of three Leishmania proteins in combination with our proprietary MPL adjuvant. We designed the Phase I double-blind, randomized clinical trial to evaluate the safety of Leish-111f vaccine administered subcutaneously to healthy adult volunteers at three dose levels, as compared to adjuvant-alone and placebo-alone groups. The Phase I clinical trial will

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      Prostate Cancer Vaccine. Following completion of the discovery phase of our vaccine collaboration agreement with GSK, we and GSK have agreed to continue prostate cancer vaccine development and to potentially conduct proof-of-principle clinical trials. Under our new cancer vaccine collaboration with GSK, we have identified a potential prostate cancer vaccine based on our lead prostate cancer antigen. Other than skin cancers, prostate cancer is the most commonly diagnosed cancer in men in the United States. According to the ACS, in 2003 an estimated 220,900 patients would be diagnosed with prostate cancer and an estimated 28,900 would die in the United States alone.

      Hematologic Vaccines. We have continued our antigen discovery programs in leukemia by partnering our WT1 vaccine candidate for the treatment of hematologic, or blood-based, tumors with Kirin Brewery Company, Ltd, or Kirin. In December 2002, we granted Kirin exclusive rights to the WT1 vaccine candidate in Asia/ Australasia and co-development rights in North America. The ACS projects that 30,600 new cases of leukemia will be diagnosed in the United States in 2003, and predicts that leukemia will cause 21,900 deaths in the United States in 2003. Available treatments for hematologic tumors have improved recently through the introduction of novel biological antibody therapies. Our potential vaccine may provide an immunotherapeutic that recruits the immune system to identify and eliminate the tumor without the significant side effects of current chemotherapeutic regimens.

TLR4 Agonists and Antagonists

      The Innate Immune Response. We have developed a class of synthetic compounds that interact with a type of cell receptor that, when stimulated, initiates the body’s innate immune response. Innate immunity provides the first line of defense against a variety of pathogens. A key component of innate immunity is a family of cell-surface receptors that recognize “molecular signatures” presented by invading microorganisms and are involved in turning on and turning off critical aspects of the innate immune response. Our synthetic compounds present such molecular signatures to a class of these cell-surface receptors know as toll-like receptors, or TLRs.

      There are 10 kinds of TLRs, and each recognizes a different type of antigen. Our synthetic compounds are recognized by toll-like receptor 4, or TLR4, which can be found on a range of antigen-presenting cell types, including hematopoietic, or blood-forming, cells, many epithelial cells, and cells associated with vascular stability. We are exploring the use of these synthetic compounds as monotherapies based on their recognition by TLR4s, and their possible lack of toxicity associated with natural TLR4 immunostimulants such as lipopolysaccharide.

      We have discovered that some of our synthetic compounds act as agonists, or stimulants, of the TLR4 based innate immune response and some act as antagonists, or deactivators, of this innate immune response. The structure of each of our synthetic compounds differs slightly. Therefore, we have screened each TLR4 agonist and antagonist for its ability to protect the body from viral, bacterial, fungal and parasitic infection. The variety of our compounds may give our TLR4 agonist and antagonist program multiple applications for immunotherapy.

      We intend to pursue several indications using our TLR4 agonists and antagonists as stand alone immunotherapeutic agents. Potential applications for the agonists include chronic obstructive pulmonary disease, which is often triggered by respiratory viral infections such that treatment with antibiotics is often ineffective, upper airway resistance to biological warfare agents, seasonal or constitutive rhinitis, allergies and asthma. Potential applications for the antagonists include inflammatory bowel disease, or IBD, and cystic fibrosis.

      In June 2001, we were granted a $3.5 million contract for a Defense Advanced Research Projects Agency, or DARPA, sponsored program to develop methods of enhancing immune responses to infectious diseases, including agents of biological warfare. Pursuant to the DARPA program we have been studying the

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      In December 2003, the NIAID, part of the NIH, awarded us an $11.6 million five year contract to develop our proprietary synthetic molecules that act on TLR4. Our research will focus on drug candidates with the potential to generate protective immunity to a wide variety of infectious agents for the purpose of treating and preventing infectious disease.

      TLR4 Agonists.

	CRX-675. SAR is characterized by an overproduction of the cytokines in the nasal mucosa and associated with atopic or allergic sensitization. Administration of our TLR4 agonist CRX-675 has been shown in animal models to significantly decrease allergic rhinitis. We are planning to initiate a Phase I human clinical trial in 2004.
	Other. We are currently evaluating another TLR4 agonist candidate for use in the treatment of atopic diseases, or genetically determined hypersensitivity diseases such as hay fever and asthma. Our preclinical studies indicate that our TLR4 agonist candidate is absorbed into the body and is biologically active at mucosal, or mucous membrane, surfaces. The tolerability and effectiveness demonstrated by preclinical mucosal delivery models indicate that aqueous formulations of the agonist may have particular utility in treating or preventing atopic diseases of the respiratory tract.

      TLR4 Antagonist. Our TLR4 antagonist lead candidate has shown the ability to quantitatively block signaling through TLR4 and therefore has potential use as an anti-inflammatory compound in IBD and other indications. Several formulations of the antagonist, including an aqueous formula and stable emulsion formula may provide unique benefits. We are also exploring whether the antagonist may be formulated and delivered orally.

Corporate Partnerships

      As a developer of immunotherapies, we remain committed to existing collaborations and the pursuit of select partnerships with pharmaceutical, biopharmaceutical and diagnostic companies. We focus our partnership efforts on broadly partnering our core technologies at various stages in the research, development and commercialization processes. We target partners that have the expertise and capability to develop, manufacture and commercialize our products. In our corporate partnerships we seek to fund our research, development and commercialization expenses through research grants, milestone payments, collaborative agreement credit lines and option, technology or license fees. We also seek to retain significant downstream participation in product sales through either profit sharing or product royalties paid on annual net sales.

Antibody-Based Therapeutics

      GSK-BEXXAR Therapeutic Regimen. Through our wholly-owned subsidiary, Coulter Pharmaceutical, Inc., or Coulter, we are a party to a collaboration agreement with GSK for the development and commercialization of BEXXAR therapeutic regimen, which was approved in June, 2003 by the FDA for the treatment of patients with CD20 positive, follicular, NHL, with and without transformation, whose disease is refractory to Rituximab and has relapsed following chemotherapy. Under the agreement, as amended in April 2000, GSK’s territory was reduced to the United States and, upon regulatory approval of BEXXAR therapeutic regimen, GSK paid us a milestone payment. We and GSK are co-promoting BEXXAR therapeutic regimen in the United States, with each company contributing to the commercialization efforts and both companies sharing profits and losses equally. In addition, the agreement provides for the sharing of certain costs by us and GSK related to clinical and manufacturing development activities. Under the agreement, GSK provided us with a $15 million credit line that was fully drawn by Coulter in December 2000 and which we may choose to repay in cash or in shares of our common stock on or prior to the October 3, 2004 maturity date.

      GSK Canada-BEXXAR Therapeutic Regimen. In May 2003, we and GSK Canada entered into an agreement whereby in the event of product approval GSK Canada will market BEXXAR therapeutic regimen

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      Health Canada’s Priority Review is a status granted to eligible new drug submissions for human use with a shortened review target period in comparison to 300 days for non-priority. Priority Review status may be granted to drug submissions intended for the treatment, prevention or diagnosis of serious, life-threatening or severely debilitating illnesses or conditions where there is no existing drug on the Canadian market with the same profile or where the new product represents a significant improvement in the benefit/risk profile over existing products.

      Amersham Health-BEXXAR Therapeutic Regimen. In October 2001, we entered into an agreement whereby Amersham Health will market BEXXAR therapeutic regimen in Europe. We and Amersham Health will cooperate to register the product in Europe. We will initially be the holder of the Marketing Authorization Application, or MAA (the European equivalent of a Biologics License Application, or BLA), for BEXXAR therapeutic regimen in Europe, and after certain conditions have been met, including approval for commercial sale in Europe, we will transfer the MAA to Amersham Health. We will be responsible for generating clinical trial data to support the registration of BEXXAR therapeutic regimen in Europe and Amersham Health will be responsible for manufacture and sale of BEXXAR therapeutic regimen in Europe. Under the terms of a stock purchase agreement with Amersham Health, we had the option to sell up to a total of $15 million of shares of our common stock to Amersham Health. Following our partial option exercises in October 2001 and December 2002, on May 14, 2003, we completed the exercise of our option to sell up to $15 million of shares of our common stock to Amersham Health when we sold 721,814 shares of our common stock to Amersham Health at a price per share of $6.927 for a total purchase price of approximately $5 million. In addition, Amersham Health has agreed to pay us milestone payments upon regulatory approval in Europe as well as milestone payments based on achievement of certain sales volume targets. Amersham Health has also agreed to pay us royalties on all future product sales in Europe.

      Medarex. In 2000, we initiated a collaboration with Medarex to discover and develop fully human monoclonal antibodies against selected targets from our library of proprietary cancer and infectious disease antigens. Medarex contributed its HuMAb-Mouse technology to the multiyear collaboration, targeted to generate, screen and characterize fully human monoclonal antibodies directed against our antigens. In May 2002, we and Medarex amended and restated this collaboration. In May 2002, Medarex also acquired our proprietary Ultra-Potent Toxin, or UPT, technology for creating antibody-toxin conjugates and certain preclinical product development programs in the field of oncology and other disease indications. In return, we received $23.5 million in cash and shares of Medarex common stock. Medarex also purchased certain equipment from us to support Medarex’s continuing research efforts for an additional $2.5 million.

      Purdue Pharma. In September 2000, we entered into an agreement with Purdue Pharma to develop therapeutic antibodies directed against cell surface antigens identified by our tumor-antigen discovery programs. Under the terms of the agreement, Purdue Pharma has paid to us a total of $2.5 million in license fees. In addition, Purdue Pharma may be required to pay us success-based milestone payments and royalties on potential product sales. In November 2002, Purdue Pharma exercised an option under the agreement and licensed one of our antigens to use in its development of monoclonal antibodies to be used as anti-tumor agents in treatment of female reproductive tract cancer. Purdue Pharma has agreed to pay for development and commercialization of a monoclonal antibody based on our antigen and Purdue Pharma and an affiliate will retain worldwide rights.

      Abgenix. In March 2000, we entered into an agreement with Abgenix, Inc., or Abgenix, to discover and develop human monoclonal antibodies against selected targets from our library of proprietary cancer and infectious disease antigens. Under the agreement, when we and Abgenix determine antibodies to be worthy of clinical investigation, a closed auction will be held between the two parties for the rights to develop the specific antibody-based product. The party that obtains the right to develop and commercialize a particular product

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      Other Antibody Partnerships. In our current vaccine collaboration and license agreement with GSK, as well as in our agreement with Zambon, our partners have either an option, license or the right to develop novel antigens discovered under the respective collaborations as targets for therapeutic monoclonal antibodies. If our partners develop therapeutic monoclonal antibodies, they agreed to pay us additional funding, milestone payments and royalties on such products. In accordance with the terms of our vaccine collaboration and license agreement with GSK, we have licensed to GSK certain antibody targets in prostate, colon and breast cancer.

Adjuvants and Vaccines

      Berna Biotech. In February 2002, we entered into a license and supply agreement with Berna Biotech’s subsidiary, Rhein Biotech N.V., or Rhein, under which we granted Rhein a coexclusive, worldwide, license to our RC-529 adjuvant for use in developing a Hepatitis B vaccine. Under the agreement, Rhein paid us an up-front fee and has agreed to pay us milestone payments, annual license fees until commercial launch of a product and earned royalty payments or annual license fees after launch of a product.

      GSK. We have licensed our MPL adjuvant to GSK under three separate agreements for use in infectious disease vaccines, under one agreement for use in cancer vaccines and under one agreement for use in products to treat and prevent allergies. MPL is a component in several late stage GSK vaccine candidates including Fendrix, Cervarix and Simplirix. On May 12, 2003, GSK filed for regulatory approval of Fendrix, a prophylactic Hepatitis B vaccine that contains GSK’s Hepatitis B antigen and our MPL adjuvant, with the EMEA. In Phase II studies, GSK’s Cervarix vaccine, which contains our MPL adjuvant, demonstrated 100% effectiveness in preventing persistent infection by the two HPVs associated with the greatest incidence of cervical cancer: HPV 16 and HPV 18. GSK has reported that Cervarix has the potential to prevent more than 70% of cervical cancers. Two planned Phase III trials enrolling approximately 25,000 women are expected to begin in 2004. In addition, thirteen clinical trials with more than 12,000 volunteers have been completed evaluating GSK’s Simplirix vaccine, which contains our MPL adjuvant. Results from two double-blind, randomized trials demonstrated that Simplirix vaccine was highly effective in protecting women against HSV-1 and HSV-2 genital herpes. GSK is currently conducting another Phase III pivotal trial in young adult women in collaboration with the NIH.

      Under the first agreement, entered into in 1991, we granted GSK exclusive, worldwide rights to use MPL adjuvant in vaccines in a number of infectious disease fields, including Hepatitis B. Under the agreement, GSK has agreed to pay us transfer payments for supplies of MPL adjuvant and royalties upon commercialization of products developed under the agreement.

      Under the second agreement, entered into in 1992, we granted GSK the co-exclusive right to develop vaccines that include MPL adjuvant against several bacterial infections as well as combination vaccines that contain diphtheria, pertussis, tetanus, Haemophilus influenza and polio antigens. In addition to an annual license fee, GSK has agreed to pay us transfer payments for supplies of MPL adjuvant and royalties upon commercial sale of the vaccines.

      Under the third agreement, effective in 1995, we granted GSK rights to use MPL adjuvant in cancer vaccines. The license is non-exclusive, with the option for exclusivity for up to ten specific vaccine antigens. In addition to annual license fees, GSK has agreed to pay us transfer payments for clinical and commercial quantities of adjuvant and royalties on any commercial sales of therapeutic or prophylactic cancer vaccines incorporating MPL adjuvant.

      Under the fourth agreement, effective in 1996, we granted GSK rights to use MPL adjuvant in an additional group of vaccines against infectious diseases, including tuberculosis. The license is exclusive for HPV vaccines, co-exclusive for tuberculosis vaccines, and nonexclusive for additional infectious disease vaccines. In addition to annual license fees, GSK has agreed to pay us transfer payments for clinical and

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      Under the fifth agreement, effective in 1999, GSK has agreed to pay us annual license fees prior to, and minimum annual royalties subsequent to, regulatory approval of any allergy vaccine developed under the agreement. GSK will also purchase its clinical and commercial quantities of MPL adjuvant from us and pay royalties on any commercial sales of approved allergy vaccines.

      Allergy Therapeutics Ltd. In 1996 we entered into a license and supply agreement with ATL under which we licensed MPL adjuvant to ATL for use in products to treat and prevent allergies. Under our agreement with ATL, ATL has agreed to pay us annual license fees prior to, and minimum annual royalties subsequent to, regulatory approval of any allergy vaccine developed under the agreement. ATL will also purchase its clinical and commercial quantities of MPL adjuvant from us and pay royalties on any commercial sales of approved allergy vaccines.

      Biomira Inc. In 1990, we entered into a collaboration with Biomira covering the use of one of our formulations of ENHANZYN adjuvant in Biomira’s Theratope vaccines for the potential treatment of breast, lung and gastrointestinal cancers. In 1996, Biomira announced that final Phase II clinical data demonstrated that its Theratope vaccine for metastatic breast cancer provided a median survival of more than 26 months compared to less than 10 months achieved historically with chemotherapy. In June 2003 Biomira announced that its completed Phase III clinical trial for metastatic breast cancer did not meet the two pre-determined statistical endpoints of time to disease progression and overall survival and Biomira has indicated that it intends to discuss plans for moving forward with the regulatory authorities in the second half of 2004. Under our agreement with Biomira, Biomira has agreed to purchase the ENHANZYN adjuvant exclusively from us at an agreed upon transfer price.

      Wyeth. We are also a party to a license agreement and related supply agreement with Wyeth that was amended and restated effective September 28, 2001. Under the amended and restated license agreement we granted Wyeth co-exclusive use of RC-529 adjuvant and MPL adjuvant in certain infectious and autoimmune disease fields and non-exclusive use in one autoimmune disease field. Under the supply agreement, we will provide Wyeth commercial quantities of RC-529 adjuvant and MPL adjuvant for use in any vaccines that Wyeth may develop under the license agreement. Under the agreements, Wyeth has agreed to pay us an annual license fee until a threshold level of earned royalties is met, transfer payments for supplies of RC-529 adjuvant and MPL adjuvant and annual minimum and earned royalty payments when commercial sale of vaccines are made.

      GSK. Effective September 1998, we entered into a collaboration and license agreement with GSK’s wholly owned subsidiary, SmithKlineBeecham plc., along with GSK referred to collectively as GSK. Under the agreement, we granted GSK an exclusive worldwide license to develop, manufacture and sell vaccine products and certain dendritic cell therapy products that incorporate antigens discovered or in-licensed under this corporate partnership. We also granted GSK license rights to develop, manufacture and sell passive immunotherapy products, such as T cell or antibody therapeutics, and therapeutic drug monitoring products in each case that incorporate these antigens. GSK’s rights under the agreement are co-exclusive with us in Japan with respect to tuberculosis.

      The rights that we granted to GSK under the agreement covered:

	•	our cancer antigen discovery programs in breast, colon, ovarian and prostate cancer;
	•	our HER-2/neu breast and ovarian cancer vaccine program;
	•	our mammaglobin breast cancer vaccine program; and
	•	our infectious disease antigen discovery programs in C. pneumoniae, C. trachomatis and Mycobacterium tuberculosis.

      In January 2003, we and GSK entered into new agreements to further advance the development of multiple solid tumor vaccines. Following expiration of the funded research period for the cancer fields under

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      Under the original agreement, GSK will continue development of an alternative version of the prostate cancer vaccine at its own expense and has agreed to pay us milestones and royalties on potential product sales. Under the original agreement, GSK is also continuing the development of our HER-2/neu vaccine. A proprietary formulation of this vaccine has been manufactured by GSK and is the subject of a Phase I clinical trial.

      In a related, new agreement, we acquired vaccine and antibody development rights to all ovarian cancer antigens, whose discovery resulted from the original agreement, as well as all cancer diagnostic rights and T cell adoptive cancer immunotherapy rights, for all antigens discovered by us in the breast, prostate, colon and ovarian cancer fields.

      In the area of infectious disease, GSK will continue to fund our research and development efforts under the original agreement for the further development of chlamydia and tuberculosis vaccines at least through August 2004.

      Pursuant to the original agreement, GSK purchased 427,807 shares of our common stock at a premium to its fair market value. In addition, under the original agreement, we have an outstanding loan in the principal amount of $5 million, which amount was due on September 1, 2003. At GSK’s option, GSK may elect to receive repayment of this loan in cash or shares of our common stock at a specified premium to the five day average closing price of our common stock for the period immediately preceding September 1, 2003. GSK has not yet made its election regarding the form of repayment and accordingly the $5 million loan remains outstanding.

      To the extent that clinical and commercial milestones in the programs are achieved by GSK under the 1998 agreement or in connection with any program GSK repurchases under the 2003 agreement, GSK is required to pay us additional amounts. The individual amounts of such payments vary, depending on the milestones achieved and the types of product sold. GSK is also required, under the 1998 agreement and in connection with any program GSK repurchases under the 2003 agreement, to pay us future royalty payments on all product sales, which royalties vary depending on the types of products sold.

      Zambon Group and JT. During May and June 1999, we entered into corporate partnerships with Zambon and JT, respectively, for the research, development and commercialization of vaccine products aimed at preventing and treating lung cancer. Zambon has exclusive rights to develop and sell vaccine products in Europe, the former countries of the Soviet Union, Argentina, Brazil and Columbia and co-exclusive rights in China. Under the June 1999 agreement, we granted JT exclusive rights to develop and sell vaccine products outside of the territory licensed to Zambon, including the United States and Japan, and co-exclusive rights to develop and sell vaccine products in China. We also granted Zambon a nonexclusive license and JT an option to formulate vaccines that may result from the collaboration using our microsphere delivery system with our proprietary adjuvants. During 2002, the 3-year research terms of the agreements expired and the respective research funding obligations ceased. In November 2002, we and Zambon amended our agreement so that we jointly fund clinical testing of a non-small cell lung cancer vaccine. In January 2003, we amended and restated our agreement with JT so that we hold exclusive rights to all antigens discovered in our lung cancer vaccine

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      Kirin Brewery Company, Ltd. In December 2002, we entered into a multiyear development and commercialization agreement with Kirin for a potential cancer vaccine for the treatment of multiple forms of cancer, including leukemia, myelodysplasia and melanoma. Under the agreement we grant Kirin exclusive rights to develop and market vaccine products resulting from our WT1 vaccine candidate in Asia/ Australasia. We and Kirin have agreed to share WT1 vaccine commercialization rights and Kirin has agreed to fund one-half of the research and development costs in North America. We will retain marketing rights for the potential vaccine in Europe. Under the terms of the agreement, Kirin has agreed to co-fund development of our WT1 vaccine candidate and will pay us success-based milestone payments and royalties on future product sales in Asia/ Australasia.

TLR4 Agonists and Antagonists

      DARPA. In June 2001, we entered into a $3.5 million DARPA sponsored program to develop methods of enhancing immune responses to infectious diseases, including agents of biological warfare. The contract will expire in November 2004. In connection with the DARPA sponsored program we are conducting preclinical testing of our proprietary portfolio of synthetic compounds that contain TLR4 agonists, or in some cases, TLR4 antagonists. These drugs act on TLR4 to generate protective immunity to a wide variety of infectious agents. Certain TLRs are present in the upper airways and stimulation of these receptors may induce the immune system to prevent infections of various types, especially those transmitted by inhalation. Our scientists have already demonstrated that administration of some of these potential drugs by the intranasal route is highly efficient at protecting against influenza virus infection in experimental animal models.

      NIAID/ NIH. In December 2003, we entered into an $11.6 million five year contract from the NIAID to develop drug candidates with the potential to generate protective immunity to a wide variety of infectious agents. In connection with the NIAID sponsored program we will be conducting preclinical testing of our proprietary TLR4 targeted compounds. Our existing preclinical research has shown that an experimental nasal spray can suppress infection with influenza virus and another common virus, the respiratory syncitial virus, as well as a number of bacterial organisms that infect the airways. We have shown that a single intranasal dose can provide a window of protection that lasts approximately one week. We hope to develop a new type of vaccine that provides continuous protection within 12-24 hours after the first intranasal dose is delivered (other vaccines can take weeks to months to generate protection).

Other Partnered Programs

      Introgen. In July 1999, we entered into a license agreement with Introgen Therapeutics, Inc., or Introgen, under which we granted Introgen an exclusive license to the MDA-7 gene that induces apoptosis in a diverse group of cancer cells. Introgen’s INGN 241 product candidate, which includes the MDA-7 gene, is undergoing safety and efficacy testing in a Phase I/ II clinical trial to evaluate anti-tumor activity. This trial has demonstrated that in patients with various solid tumors, INGN 241 is well tolerated, produces the desired pharmacologic protein that is in turn biologically active, displays minimal toxicity and can lead to tumor regression.

      IDRI. In December 2003 we granted to IDRI an exclusive worldwide license to Leish-111f, our investigational vaccine for the treatment of various forms of leishmaniasis. Pursuant to a service agreement between us and IDRI, we will complete the Leish 111-f vaccine Phase I clinical trial in the United States that we initiated in January 2003. We currently anticipate that all U.S. Phase I clinical trial activities will be

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Other License Agreements

      Dana-Farber Cancer Institute, Inc. Pursuant to the April 1994 agreement between Coulter Corporation and Dana-Farber Cancer Institute, Inc., or DFCI, the 1995 assignment agreement between Coulter Corporation and us, and the December 1998 agreement regarding sublicenses among us, DFCI and Coulter Corporation, we have acquired an exclusive, worldwide, royalty-bearing sublicense to the B1 antibody for therapeutic applications and a non-exclusive license for diagnostic applications along with the right to use the hybridoma from which the B1 antibody was derived.

      University of Michigan. In November of 1994 we entered into a commercialization agreement with the University of Michigan pursuant to which the University of Michigan granted us an exclusive, worldwide, royalty-bearing license to technology related to using anti-CD20 antibodies in radioimmunotherapy of Lymphoma.

      In addition, we are party to other exclusive license agreements under which academic institutions grant licenses to us, including the following:

	•	DFCI for the use of certain microsphere technology;
	•	the University of Washington for the use of HER-2/neu technology in all fields;
	•	Massachusetts Institute of Technology for the use of WT1, a leukemia-related gene and protein, in therapeutic applications;
	•	Columbia University for use of MDA-7 in therapeutic and prophylactic applications; and
	•	Southern Research Institute, or SRI, for use of certain microsphere technology.

      Some of these agreements require us or other parties to achieve certain performance obligations to retain rights under the agreements or require us to make payments in order to obtain or maintain rights to the subject technology.

Patents and Proprietary Technology

      Our success depends in part on our ability to obtain, protect and enforce commercially valuable patents. We try to protect our proprietary positions by filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to developing our business. As of December 31, 2003, we owned, had licensed or had options to license 202 issued United States patents that expire at various times between July 2004 and June 2022, and had 207 patent applications pending with the United States Patent and Trademark Office.

      Our patent position is generally uncertain and involves complex legal and factual questions. Legal standards relating to the validity and scope of claims in the biotechnology and biopharmaceutical fields are still evolving. Accordingly, the degree of future protection for our patent rights is uncertain. The risks and uncertainties that we face with respect to our patents and the patents licensed to us include the following:

	•	the pending patent applications that we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents;
	•	the claims of any patents that are issued may not provide meaningful protection;
	•	we may be unable to develop additional proprietary technologies that are patentable;
	•	the patents licensed or issued to us may not provide a competitive advantage;
	•	other companies may challenge patents licensed or issued to us;

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	•	disputes may arise regarding the invention and corresponding ownership rights in inventions and know-how resulting from the joint creation or use of intellectual property by us, our licensors, corporate partners and other scientific collaborators; and
	•	other companies may design around our patented technologies.

      We have licensed several patent applications from SRI related to our microsphere encapsulation technology. One of these patent applications is currently the subject of opposition proceedings before the European Patent Office. In the opposition, the European Patent Office has revoked a previously issued European patent. Although SRI has appealed this decision, it is uncertain whether SRI will ultimately prevail in this opposition proceeding.

      Biogen Idec Inc., or Biogen Idec, has challenged the validity of our United States Patent Nos. 5,595,721, 5,843,398, 6,015,542, 6,090,365, 6,022,521, 6,251,362 and 6,287,537 related to BEXXAR therapeutic regimen by seeking declaratory judgment of invalidity of these patents. Biogen Idec is also seeking a declaratory judgment that its Zevalin product for the treatment of NHL is not infringing the patents. We, GSK and the Regents of the University of Michigan are parties to a lawsuit against Biogen Idec alleging patent infringement of our United States Patent Nos. 5,595,721, 6,015,542, 6,090,365 and 6,287,537 by Zevalin and seeking monetary damages and permanent injunctive relief. Claims in the patents at issue in the litigation cover composition of matter and methods-of-use in the treatment of NHL. On October 14, 2003, the United States District Court, Southern District of California granted Biogen Idec’s motion for summary judgment that the 5,595,721, 6,015,542, 6,090,365 and 6,287,537 patents are unenforceable due to inequitable conduct before the United States Patent and Trademark Office. On November 13, 2003 Corixa, GSK and the Regents of the University of Michigan filed a motion for reconsideration with the United States District Court, Southern District of California requesting that the court reconsider it’s October 14, 2003 order. On January 22, 2004, the United States District Court, Southern District of California granted the motion for reconsideration, vacated the October 14, 2003 order and denied Biogen Idec’s motion for summary judgment of inequitable conduct.

      On June 2, 2003, Biogen Idec moved to amend its complaint to add a claim for declaratory judgment relief of non-infringement and invalidity of our U.S. Patent No. 6,565,827. Issued Patent No. 6,565,827 covers composition of matter used in the treatment of NHL. On that same day, Biogen Idec also filed a separate lawsuit in the United States District Court, Southern District of California, seeking declaratory judgment of non-infringement and invalidity of this same patent. On August 11, 2003, the judge denied Biogen Idec’s motion to amend the complaint to include this patent in the originally filed lawsuit or, alternatively, to consolidate the first filed lawsuit with the one filed on June 2, 2003. Subsequently, on December 16, 2003, Biogen Idec filed with the United States District Court, Southern District of California, a notice of voluntary dismissal without prejudice for the June 2, 2003 lawsuit.

      In addition, on February 25, 2003, Biogen Idec filed a complaint in the United States District Court, Southern District of California, against us and GSK for patent infringement of United States Reissue Patent No. RE38,008, which claims, among other things, methods of enhancing the delivery of conjugated specific antibodies to solid tumor target cells.

      On March 1, 2004 we announced that we and GSK have reached a settlement with Biogen Idec regarding all outstanding patent litigation between us and Biogen Idec. The settlement, which serves as the basis for the dismissal of all patent litigation between the parties, provides for Biogen Idec to pay to us and GSK a $20 million upfront settlement payment, as well as a one-time milestone payment based on future Zevalin sales performance, and royalty payments on Zevalin sales from January 1, 2004 until the expiration of all BEXXAR therapeutic regimen patents that were the subject of the litigation. We and GSK will also enter into a worldwide, cross-license agreement with Biogen Idec relating to each party’s patents in suit.

      Under the publication provisions of the American Inventors Protection Act of 1999, pending United States patent applications will publish 18 months after the earliest claimed priority date and the file histories for these applications will be open for public inspection. Our patent applications and the related file histories that are subject to the American Inventors Protection Act will then be available for review by others, including

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      Patent applications filed in the United States prior to the effect of the American Inventors Protection Act of 1999, are presently maintained in secrecy until the patents are issued. Patent applications in certain foreign countries generally are not published until many months or years after they are filed. Scientific and patent publications often occur long after the date of the scientific developments disclosed in those publications. Accordingly, we cannot be certain that we or one of our corporate partners was the first to invent the subject matter covered by any patent application or that we or one of our corporate partners was the first to file a patent application for any such invention.

      Our success also depends in part on our ability to protect trade secrets that are not patentable or for which patents are difficult to enforce. To protect our proprietary rights, we rely primarily on confidentiality agreements with employees and third parties, and protective contractual provisions such as those contained in license agreements and research agreements. Nevertheless, other companies may inadvertently develop similar or alternative technologies or duplicate our technologies that are not protected by patents or otherwise obtain and use information that we regard as proprietary. Other parties may breach confidentiality agreements and other protective contracts we have entered into, and we may not become aware of, or have adequate remedies in the event of, any breach.

      Our success also depends in part on our ability to gain access to third party patent and proprietary rights and to operate our business without infringing on third party patent rights. We may be required to obtain licenses to patents or other proprietary rights from third parties to develop, manufacture and commercialize our product candidates. Licenses required under third-party patents or proprietary rights may not be available on terms acceptable to us, if at all. If we do not obtain the required licenses, we could encounter delays in product development while we attempt to redesign products or methods or we could be unable to develop, manufacture or sell products requiring these licenses at all.

      We attempt to protect our trademarks by filing for United States and foreign registrations for marks that are important to developing our business. However, the laws of some foreign countries do not allow for protection of our proprietary rights to the same extent as do the laws of the United States, and effective trademark protection may not be available in other jurisdictions. Our trademark, MPL adjuvant is currently the subject of opposition proceedings before the Office for the Harmonization in the Internal Market, which handles initial prosecution and opposition of European trademarks. We may not ultimately prevail in this opposition proceeding. As a result, we may not receive trademark protection for MPL adjuvant in Europe.

Government Regulation

      Any products that we develop are subject to regulation by federal, state and local governmental authorities in the United States, including the FDA, and by similar agencies in other countries. Any product that we develop must receive all relevant regulatory approvals or clearances before it may be marketed in a particular country.

      The regulatory process, which includes extensive preclinical studies and clinical trials of each clinical candidate in order to study its safety and efficacy, is uncertain, can take many years and requires the expenditure of substantial resources. We cannot assure you that the clinical trials of our product candidates under development will demonstrate the safety and efficacy of those product candidates to the extent necessary to obtain regulatory approval.

      The nature and extent of the governmental premarket review process for our potential products will vary, depending on the regulatory categorization of particular products. We believe that the FDA and comparable regulatory bodies in other countries will regulate our vaccine and other immunotherapeutic products and

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	•	preclinical laboratory and animal studies;
	•	submission to the FDA of an IND, which must become effective before clinical trials may commence;
	•	completion of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use;
	•	submission to the FDA of a BLA; and
	•	FDA review and approval of the BLA before the product is commercially sold or shipped.

      Preclinical tests include evaluating the product in the laboratory, as well as animal studies to assess the potential safety and efficacy of the product. Preclinical studies must be conducted by laboratories that comply with FDA regulations regarding good laboratory practices. The results of preclinical studies, together with manufacturing information, analytical data and proposed clinical trial protocols, are submitted to the FDA as part of an IND, which must become effective before the clinical trials can begin. The IND will automatically become effective 30 days after the FDA receives it, unless the FDA indicates prior to the end of the 30-day period that the proposed protocol raises concerns that must be resolved to the FDA’s satisfaction before the trials may proceed. If the FDA raises concerns, we may be unable to resolve the proposed protocol to the FDA’s approval in a timely fashion, if at all. In addition, the FDA may impose a clinical hold on an ongoing clinical trial if, for example, safety concerns arise, in which case the study cannot recommence without FDA authorization under terms sanctioned by the agency.

      Clinical trials involve administering the product to healthy volunteers or to patients being supervised by a qualified principal investigator. Clinical trials must be conducted according to good clinical practices under protocols that detail the trial’s objectives, inclusion and exclusion criteria, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical trial must be reviewed and approved by an independent institutional review board. The institutional review board will consider, among other things, ethical factors and the safety of human subjects. The institutional review board may require changes in a protocol, which may delay initiation or completion of a study.

      Clinical trials generally are conducted in three sequential phases that may overlap. In Phase I, the product is introduced into healthy human or patients; the product is tested to assess safety, metabolism, pharmacokinetics and pharmacological actions associated with increasing doses. Phase II usually involves studies in a limited patient population to assess the following:

	•	determine the efficacy for specific, targeted indications;
	•	determine dosage tolerance and optimum dosage; and
	•	further identify possible adverse reactions and safety risks.

      Once a compound is determined to be effective and to have an acceptable safety profile in Phase II clinical trials, Phase III trials are undertaken to evaluate further clinical efficacy in comparison to standard therapies, within a broader patient population, generally at geographically dispersed clinical sites. Phase I, Phase II or Phase III clinical trials may not be completed successfully within any specific period of time, if at all, with respect to any of our potential products. Furthermore, we, the FDA or an institutional review board may suspend a clinical trial at any time for various reasons, including a finding that the healthy individuals or the patients are being exposed to an unacceptable health risk.

      The results of pharmaceutical development, preclinical studies and clinical trials are submitted to the FDA in the form of a BLA for approval of the manufacture, marketing and commercial shipment of the product. The testing and approval process is likely to require substantial time, effort and resources, and we

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	•	deny the BLA if applicable regulatory criteria are not satisfied;
	•	require additional testing or information; or
	•	require postmarket testing and surveillance to monitor the safety or efficacy of the product.

      Delays in obtaining regulatory approvals:

	•	would adversely affect the marketing of any product we develop;
	•	could impose significant additional costs on us;
	•	would diminish any competitive advantages that we may attain; and
	•	could adversely affect our ability to receive royalties and generate revenues and profits.

      In addition, even if marketing approval is granted, the FDA may require post-marketing clinical trials, which typically entail extensive patient monitoring and may result in restricted marketing of an approved product for an extended period of time.

      Any diagnostic products developed by us or our corporate partners are likely to be regulated as medical devices. In the United States, medical devices are classified into one of three classes on the basis of the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness:

	•	Class I — (general controls) — e.g., labeling, premarket notification and adherence to GMP and quality system regulation, or QSR;
	•	Class II — (general controls and special controls) — e.g., performance standards and postmarket surveillance; and
	•	Class III — (premarket approval).

      Before a new device can be marketed, its manufacturer generally must obtain marketing clearance through either a premarket notification under Section 510(k) of the Federal Food, Drug and Cosmetic Act or approval of a premarket approval application, or PMA. A 510(k) clearance typically will be granted if a company establishes that its device is “substantially equivalent” to a legally marketed Class I or II medical device or to a Class III device for which the FDA has not yet required the submission of a PMA. A 510(k) clearance must contain information to support the claim of substantial equivalence, which may include laboratory test results or the results of clinical trials. Commercial distribution of a device subject to the 510(k) requirement may begin only after the FDA issues an order finding the device to be substantially equivalent to a predicate device. It generally takes from 4 to 12 months from the date of submission to obtain clearance of a 510(k) submission. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, that additional information is needed before a substantial equivalence determination may be made, or that the product must be approved through the PMA process. An FDA determination of “not substantially equivalent,” a request for additional information, or the requirement of a PMA could delay market introduction of products that fall into this category. Furthermore, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of any device, cleared through the 510(k) process would require new 510(k) submissions.

      If a device does not qualify for the 510(k) premarket notification procedure, a company must file a PMA. The PMA requires more extensive pre-filing testing than required for a 510(k) premarket notification and usually involves a significantly longer review process. A PMA must be supported by valid scientific evidence that typically includes extensive data, including preclinical and clinical trial data, to demonstrate the device’s safety and efficacy. If clinical trials are required, and the device presents a “significant risk,” an investigational device exemption application must be filed with the FDA and become effective prior to the commencement of clinical trials. If the device presents a “nonsignificant risk” to trial subjects, clinical trials may begin on the

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      A PMA may be denied if applicable regulatory criteria are not satisfied, and the FDA may impose certain conditions upon the applicant, such as postmarket testing and surveillance. The PMA review and approval process can be expensive, uncertain and lengthy, and approvals may not be granted on a timely basis, if at all.

      Regulatory approval, if granted, may entail limitations on the indicated uses for which the approved product may be marketed. These limitations could reduce the size of the potential market for the product. Product approvals, once granted, may be withdrawn if problems occur after initial marketing. Further, manufacturers of approved products are subject to ongoing regulation, including compliance with detailed FDA regulations governing GMP. Failure to comply with manufacturing regulations can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to renew marketing applications and criminal prosecution.

      For clinical investigation and marketing of products outside the United States, we and our corporate partners may be subject to regulation by regulatory authorities in other countries. The requirements governing the conduct of clinical trials, marketing authorization and pricing and reimbursement vary widely from country to country. The regulatory approval process in other countries entails requirements similar to those associated with FDA approval.

      Our research and development involves the controlled use of hazardous chemicals, radioactive and biological materials. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and related waste products including, among others, the Occupational Safety and Health Act, the Environmental Protection Act, the Nuclear Energy and Radiation Control Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation, and Liability Act, Title III of the Superfund Amendments and Reauthorization Act (Community Right-to-Know and Emergency Response Act), national restrictions on technology transfer, federal regulations on the protection of human subjects in clinical studies, the protection of animal welfare in preclinical studies, import, export and customs regulations and other present or possible future local, state or federal regulation. From time to time congressional committees and federal agencies have indicated an interest in implementing further regulation of biotechnology and its applications. Although we believe that our safety procedures for handling, storing and disposing of these materials and related waste comply with legally prescribed standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for damages or penalized with fines, and this liability could exceed our resources.

Competition

      The biotechnology and biopharmaceutical industries are intensely competitive. Many companies and institutions compete with us in developing alternative therapies to treat or prevent cancers and infectious diseases, including the following:

	•	pharmaceutical companies;
	•	biotechnology companies;
	•	academic institutions; and
	•	other research organizations.

      Moreover, technology controlled by third parties that may be advantageous to our business may be acquired or licensed by our competitors, thereby preventing us from obtaining technology on commercially reasonable terms, if at all.

      Biogen Idec’s product, Zevalin, received FDA approval for commercial sale in the United States in February 2002. Zevalin has been approved for the treatment of NHL, the indication for which we obtained approval to sell BEXXAR therapeutic regimen on June 30, 2003 in the United States. In addition, in January

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      Many of the companies developing competing technologies and products have significantly greater financial resources and expertise in research and development, manufacturing, preclinical and clinical development, obtaining regulatory approvals and marketing than we do. Other smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Academic institutions, government agencies and other public and private research organizations may also conduct research, seek patent protection and establish collaborative arrangements for research and development, manufacturing, preclinical and clinical development, obtaining regulatory approval and marketing of products similar to ours. These companies and institutions compete with us in recruiting and retaining qualified scientific and management personnel as well as in acquiring and developing technologies complementary to our programs. We face competition with respect to the following:

	•	product efficacy and safety;
	•	timing and scope of regulatory approvals;
	•	availability of resources;
	•	reimbursement coverage;
	•	product price; and
	•	patent position.

      Our ability to compete effectively and develop products that can be manufactured cost-effectively and marketed successfully will depend on our ability to perform the following:

	•	advance our technology platforms;
	•	license additional technology;
	•	maintain a proprietary position in our technologies and products;
	•	obtain required government and other public and private approvals on a timely basis;
	•	availability of reimbursement from third-party payors;
	•	attract and retain key personnel; and
	•	enter into corporate partnerships.

Manufacturing

      We have manufactured pharmaceutical-grade product to supply some of our previous and ongoing clinical trials. In addition, we have manufactured preclinical and clinical supplies of adjuvants and protein for our corporate partners, for government agencies and for numerous academic researchers. We believe that our existing facilities will be sufficient to accommodate manufacturing of initial production quantities of selected product candidates. Should we require additional capacity in the future, we have space to expand our manufacturing facility in Hamilton, Montana. We have no immediate plans to manufacture any radioimmunotherapeutic products in-house.

      However, our current manufacturing facilities may not be sufficient to support our needs for clinical quantities of our product candidates or commercial quantities of our current adjuvant products. We have limited experience producing commercial quantities of any product, or in producing clinical-grade or commercial amounts of our proprietary antigen-based products, including recombinant proteins or antibodies. Although we currently manufacture limited quantities of some antigens and several adjuvants, and are capable of clinical GMP manufacturing of both adjuvants and some finished vaccine products, we intend to rely on

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	•	accelerate the scale-up of manufacturing processes to commercial scale;
	•	reduce initial capital investment;
	•	result in competitive manufacturing costs; and
	•	provide access to a wide range of manufacturing technologies.

      We intend to use contract manufacturers for most of the preclinical and clinical requirements for BEXXAR therapeutic regimen and for all of our commercial needs with respect to BEXXAR therapeutic regimen. Our collaboration agreement with GSK provides for GSK participation in the planning, management and funding of manufacturing development. We have entered into an agreement with Boehringer Ingelheim Pharma KG, or BI Pharma KG, to produce Tositumomab, a key component for BEXXAR therapeutic regimen, for use in ongoing clinical trials and to meet commercial requirements, as well as provide for fill, finish and packaging services. We have committed to minimum annual order quantities of Tositumomab from BI Pharma KG. The minimum annual order for 2004 is approximately $2.9 million. BI Pharma KG has limited experience producing, labeling and packaging Tositumomab, and they may be unable to produce our requirement in commercial quantities or with acceptable quality. We have entered into an agreement with MDS Nordion, Inc., or Nordion, for radiolabeling the Tositumomab component of BEXXAR therapeutic regimen at Nordion’s centralized radiolabeling facility.

      Production of BEXXAR therapeutic regimen consists of (i) producing bulk Tositumomab by BI Pharma KG, (ii) filling and labeling of individual product vials with Tositumomab by another third-party supplier or BI Pharma KG, and (iii) radiolabeling of Tositumomab at Nordion. Although we plan to develop additional suppliers for these services, we expect to rely on our current suppliers for all or a significant portion of our requirements for BEXXAR therapeutic regimen for the foreseeable future. We are aware of only a limited number of manufacturers capable of producing Tositumomab in commercial quantities or radiolabeling the antibody with the (131)I radioisotope on a commercial scale. Establishing and qualifying a new facility to centrally radiolabel antibodies could take three years or longer and could involve significant expense. Radiolabeled antibody cannot be stockpiled against future shortages due to the 8-day half-life of the (131)I radioisotope. Accordingly, any change in our existing or planned contractual relationships with, or interruption in supply from, our producer of unlabeled antibody or our radiolabeler would harm our ability to complete our ongoing clinical trials and to market BEXXAR therapeutic regimen.

Marketing and Distribution

      Following the approval of BEXXAR therapeutic regimen in June of 2003, we began to build our direct sales force for BEXXAR therapeutic regimen and anticipate having such sales force in place by the middle of 2004. Our ability to market and sell BEXXAR therapeutic regimen will be contingent on recruiting, training and deploying the necessary sales force, as well as performance by GSK under our BEXXAR therapeutic regimen collaboration agreement. The unique properties of BEXXAR therapeutic regimen require tightly controlled distribution of the product. Due to its radioactive component, BEXXAR therapeutic regimen is shipped in shielded containers and must arrive at its destination within 24 to 48 hours of production. BEXXAR therapeutic regimen must also be temperature controlled during shipment. We rely on many third-party suppliers to process orders and to package, store and ship BEXXAR therapeutic regimen. We are working with suppliers to minimize risk and loss of inventory and provide efficient service to customers. These third party suppliers may be unable to handle BEXXAR therapeutic regimen in a manner that will minimize loss of or damage to inventory. We have entered into a contract for storing and shipping of BEXXAR therapeutic regimen in the United States. We may negotiate other contracts for handling of BEXXAR therapeutic regimen before it is delivered to the customer. We may be unable to maintain or establish relationships with third parties or build in-house distribution capabilities requirements for North America.

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      Under the terms of our May 2003 agreement with GSK Canada, GSK Canada is responsible for registration and, in the event of product approval, marketing and sales of BEXXAR therapeutic regimen in Canada. We are responsible for the manufacture and supply of BEXXAR therapeutic regimen to GSK Canada for the Canadian market.

      We and Amersham Health have agreed to register BEXXAR therapeutic regimen in Europe for the treatment of certain types of NHL and we have agreed that Amersham Health will market BEXXAR therapeutic regimen in Europe. We will be responsible for generation of clinical trial data to support registration in Europe. Amersham Health will be responsible for manufacture and sale of BEXXAR therapeutic regimen in Europe. BEXXAR therapeutic regimen will be registered under a different trade name in Europe. We may be unable to attain market approval in Europe. Following potential European approval, we may be unable to maintain or establish relationships with third parties to effectively commercialize BEXXAR therapeutic regimen in Europe.

Employees

      As of December 31, 2003, we had 334 employees, 53 of whom hold degrees at the doctorate level. Of these employees, 187 are engaged in, or directly support research and development activities, 51 are in production, and 96 are in administration and business positions. Each of our employees has signed a confidentiality agreement and none are covered by a collective bargaining agreement. We have never experienced employment-related work stoppages and consider our employee relations to be good.

      We conduct operations at three sites. Our headquarters are in Seattle, Washington, where we lease approximately 96,000 square feet of laboratory, discovery, research and development, manufacturing and general administration space. In South San Francisco, California, we maintain an additional 151,000 square feet of laboratory, research and development, and general administration space. We currently utilize approximately 26,000 square feet of our South San Francisco facility for our operations, and, during 2003 we subleased approximately 125,000 square feet of our South San Francisco facility. In addition, we own a 35-acre complex near Hamilton, Montana which includes a 60,000 square foot building containing laboratory, pilot plant, commercial manufacturing, marketing and administrative facilities. The lease for the Seattle facility expires in January 2005, with an option to renew for two additional 5-year periods. The lease for the South San Francisco facility expires in 2010, with an option to renew for two additional 5-year periods. We believe our existing facilities are adequate to meet our immediate needs and that suitable additional space will be available in the future on commercially reasonable terms as needed.

      On October 15, 2002, we entered into a lease agreement with Life Sciences Building, LLC to house our future headquarters at the Ninth and Stewart Lifesciences Building in Seattle, Washington. The lease provides us with approximately 138,000 square feet of office and laboratory space. The lease will commence on November 1, 2004 if certain improvements to the building are substantially completed and the term of the lease is 15 years. In January 2003 we guaranteed a portion of our obligations under the lease in the form of a letter of credit in the amount of approximately $4.5 million.

      On December 22, 2003, we and BN Builders, Inc., or BN Builders, entered into a standard form of agreement between owner and contractor pursuant to which BN Builders will construct the tenant improvements at our future headquarters located at the Ninth and Stewart Lifesciences Building in Seattle, Washington. The guaranteed maximum cost to us for the improvements to be completed under the agreement is approximately $17.5 million, including construction costs and contractor fees. Subject to adjustment under certain circumstances, the agreement requires BN Builders to achieve substantial completion of the tenant improvements by July 16, 2004.

      Biogen Idec has challenged the validity of our United States Patent Nos. 5,595,721, 5,843,398, 6,015,542, 6,090,365, 6,022,521, 6,251,362 and 6,287,537 related to BEXXAR therapeutic regimen by seeking declara-

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      On June 2, 2003, Biogen Idec moved to amend its complaint to add a claim for declaratory judgment relief of non-infringement and invalidity of our U.S. Patent No. 6,565,827. Issued Patent No. 6,565,827 covers composition of matter used in the treatment of NHL. On that same day, Biogen Idec also filed a separate lawsuit in the United States District Court, Southern District of California, seeking declaratory judgment of non-infringement and invalidity of this same patent. On August 11, 2003, the judge denied Biogen Idec’s motion to amend the complaint to include this patent in the originally filed lawsuit or, alternatively, to consolidate the first filed lawsuit with the one filed on June 2, 2003. Subsequently, on December 16, 2003, Biogen Idec filed with the United States District Court, Southern District of California, a notice of voluntary dismissal without prejudice for the June 2, 2003 lawsuit.

      In addition, on February 25, 2003, Biogen Idec filed a complaint in the United States District Court, Southern District of California, against us and GSK for patent infringement of United States Reissue Patent No. RE38,008, which claims, among other things, methods of enhancing the delivery of conjugated specific antibodies to solid tumor target cells.

      On March 1, 2004 we announced that we and GSK have reached a settlement with Biogen Idec regarding all outstanding patent litigation between us and Biogen Idec. The settlement, which serves as the basis for the dismissal of all patent litigation between the parties, provides for Biogen Idec to pay to us and GSK a $20 million upfront settlement payment, as well as a one-time milestone payment based on future Zevalin sales performance, and royalty payments on Zevalin sales from January 1, 2004 until the expiration of all BEXXAR therapeutic regimen patents that were the subject of the litigation. We and GSK will also enter into a worldwide, cross-license agreement with Biogen Idec relating to each party’s patents in suit.

      No matters were submitted to a vote of securities holders during the fourth quarter of 2003.

PART II

Price range of common stock

      Our common stock has been quoted on Nasdaq under the symbol “CRXA” since our initial public offering in October 1997. Prior to this date our common stock did not trade publicly.

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      The following table shows our high and low sales prices of our common stock as quoted on Nasdaq for each of the quarters indicated.

      As of March 3, 2004 we had 1,638 holders of record of our common stock.

Dividend Policy

      We have never paid cash dividends on our common stock and have no plans to do so in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

      The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes included in this Annual Report, as well as the section of this report

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(1)	See Note 1 of Notes to Consolidated Financial Statements for an explanation of the 2003 lease-related asset impairment charge.

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(2)	The $629.7 million reflects the amount of allocated in-process research and development, or IPR&D, that we acquired in the 2000 Coulter acquisition and the $37.6 million reflects the amount of IPR&D that we acquired in the 1999 Ribi ImmunoChem Research, Inc. and Anergen, Inc. acquisitions.
(3)	See Note 1 of Notes to Consolidated Financial Statements for an explanation of the 2002 goodwill impairment charge.
(4)	Effective January 1, 2000, we changed our method of accounting for nonrefundable up-front license fees based on the guidance provided in SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements.” See Note 1 of Notes to Consolidated Financial Statements.
(5)	See Note 1 of Notes to Consolidated Financial Statements for an explanation of the computation of the number of shares and the method used to calculate basic and diluted net loss per share.
(6)	Effective January 1, 2002, we adopted Statement of Financial Accounting Standards, or SFAS 141 “Business Combinations” and SFAS 142 “Goodwill and Other Intangible Assets.” See Note 1 of Notes to Consolidated Financial Statements.

      The following discussion should be read together with our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report.

Summary of Critical Accounting Policies

      The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements and accompanying notes. Management bases its estimates on historical information and assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and circumstances that may impact us in the future, actual results may differ from these estimates. We believe the following critical accounting policies affect the more significant judgments and estimates used in preparing our consolidated financial statements:

      Revenue associated with up-front license, technology access and research and development funding payments under collaborative agreements is recognized ratably over the relevant periods specified in the agreement, generally the research and development period. Generally, our collaborative agreements include a research and development phase that spans a specified time period. However, in certain cases the collaborative agreement specifies a research and development phase which culminates with the completion of a development work-plan but does not have a fixed date and requires us to estimate the time period over which the work plan will be performed and therefore, the period over which revenue should be recognized. Our estimated time periods are based on management’s estimate of the time required to achieve a particular development

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      On January 1, 2002, we adopted SFAS 142, “Goodwill and Other Intangible Assets.” Upon adoption, we performed a transitional impairment test on our recorded intangible assets that consisted primarily of acquisition related goodwill and lease intangibles. We also performed a subsequent interim impairment test on March 13, 2002, due to the presence of impairment indicators as described in Note 1 to the Consolidated Financial Statements. This impairment test involved a two-step approach. Step one required estimating the fair value of the company and comparing it to the carrying value of recorded and unrecorded assets. Since the carrying value of the recorded and unrecorded assets exceeded the estimated fair value, we performed the second step that required allocating the fair value to all of our assets and liabilities, including unrecorded intangibles, to determine the deemed fair value, if any, of goodwill. Both steps required us to make significant assumptions and estimates, including determining our fair value and the fair value of our assets and liabilities. In addition, this process required us to estimate future cash flows from our research and development projects in process and the applicable discount rates. We engaged an independent third-party valuation specialist to assist us in our impairment analysis. The analysis resulted in a $161.1 million goodwill impairment charge in the first quarter of 2002, which represented the write-off of all goodwill existing as of the date of the test. In the event that future acquisitions result in goodwill, we will be required to perform this test on at least an annual basis.

      In the second and third quarters of 2003 we subleased approximately 117,000 square feet of our leased facilities in South San Francisco. In accordance with Statement of Financial Accounting Standard, or SFAS, No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, or SFAS No. 144, long-lived assets must be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those long-lived assets might not be recoverable. Upon entering into the sublease agreements an estimate of the undiscounted future cash flows attributable to the subleases was performed and was determined to be less than the carrying amount of the intangible asset acquired lease, related leasehold improvements and furniture and fixtures. Because the carrying value exceeded the fair value, we recognized an impairment charge of $12.6 million and a $5.9 million in the second and third quarters of 2003, respectively, related to these assets.

      We are involved in certain legal proceedings as discussed in Note 12 to the Consolidated Financial Statements. We do not believe these legal proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows. We have not accrued for any legal contingencies, as the probable outcomes of the cases are not known.

Overview

      We are a developer of innovative immunotherapeutic products designed to affect the immune system and treat debilitating and life-threatening conditions caused by cancer and infectious disease.

      Originally founded to pursue development of leading, proprietary antigen discovery technology, we are emerging as a product development company with multiple product candidates, many in late-stage human clinical trials. We are driven by an aggressive commercialization strategy that we believe will give us an opportunity for sustained and consistent commercial success. Our development efforts are focused on core areas of immunotherapy expertise, including monoclonal antibodies, vaccines and adjuvants, and small molecules called TLR4 agonists and antagonists that stimulate innate immunity.

      In June, 2003 we received approval from the FDA of BEXXAR therapeutic regimen for the treatment of patients with CD20 positive, follicular, non-Hodgkin’s lymphoma, or NHL, with and without transformation, whose disease is refractory to Rituximab and has relapsed following chemotherapy. We and GSK are co-

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      We generate revenue from technology licenses, collaborative research and development arrangements, cost reimbursement contracts, co-promotion revenues under our agreement with GSK for BEXXAR therapeutic regimen and research adjuvants. Revenue under technology licenses and collaborative agreements typically consists of non-refundable and/or guaranteed technology license fees, collaborative research funding, technology access fees, and various milestone and future product royalty or profit-sharing payments.

      Revenue associated with up-front license, technology access and research and development funding payments under collaborative agreements is recognized ratably over the relevant periods specified in the respective agreements, generally the research and development period. Revenue from substantive at-risk milestones is recognized upon completion of the milestones and future product royalties are recognized when earned, as defined in the respective agreements. Revenue under cost reimbursement contracts is recognized as the related costs are incurred. Co-promotion revenue or expense under our agreement with GSK for BEXXAR therapeutic regimen is determined based on the calculation of joint profit or loss (as defined in the agreement). Revenue from adjuvant sales is recognized upon customer acceptance of the product. Payments received in advance of recognition as revenue are recorded as deferred revenue.

      For the years ended December 31, 2003, 2002 and 2001, approximately 95%, of our revenue resulted from collaborative agreements, and approximately 5% of our revenue resulted from funds awarded through government grants. As of December 31, 2003, we had total stockholders’ equity of $81.0 million.

      We have entered into, and intend to continue to enter into, collaborative agreements at various stages in the research and development process. We believe that this active corporate partnering strategy provides four distinct advantages:

	•	it focuses on our fundamental strength in immunotherapeutic product discovery and selected product development;
	•	it capitalizes on our corporate partners’ strengths in product development, manufacturing and commercialization;
	•	it may enable us to retain significant downstream participation in product sales; and
	•	it reduces our financing requirements.

      Our material collaborative agreements that continue to provide us with funding include the following:

	•	GSK. Effective September 1998, we entered into a comprehensive corporate partnership with GSK. Under the agreement we granted GSK an exclusive worldwide license to develop, manufacture and sell vaccine products and certain dendritic cell therapy products that incorporate antigens discovered or in-licensed under this corporate partnership. We also granted GSK license rights to develop, manufacture and sell passive immunotherapy products, such as T cell or antibody therapeutics, and therapeutic drug monitoring products, in each case that incorporate these antigens. GSK’s rights under the agreement are co-exclusive with us in Japan with respect to tuberculosis.

       The rights that we granted to GSK under the collaboration and license agreement covered:

	•	our cancer antigen discovery programs in breast, colon, ovarian and prostate cancer;
	•	our HER-2/neu breast and ovarian cancer vaccine program;
	•	our mammaglobin breast cancer vaccine program; and
	•	our infectious disease antigen discovery programs in C. pneumoniae, C. trachomatis and Mycobacterium tuberculosis.

		To the extent that clinical and commercial milestones in the programs are achieved, GSK is required to make payments to us. The individual amounts of such payments vary, depending on the milestones achieved and the types of product sold. GSK is also required to pay us future royalty payments on all

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		products sales, which royalties vary depending on the types of products sold. On August 31, 2002 the funded research and development period of our collaboration and license agreement with GSK terminated in all of the cancer fields covered by the agreement. GSK extended the funded research and development period for an additional 2 years through August 2004 for the research and development programs for tuberculosis and chlamydia vaccines. Under the terms of the extension, GSK is required to fund one-half of the actual cost of the tuberculosis program and the cost of the chlamydia program for a 2-year period.
		In January 2003, we and GSK entered into new agreements to further advance the development of multiple solid tumor vaccines. Following expiration of the funded research period for the cancer fields under the original agreement, one of the new agreements extends our and GSK’s collaborative efforts into vaccine development and potential proof-of-principle clinical trials. Under the terms of this new agreement, GSK granted us a worldwide, exclusive license to develop a vaccine candidate for prostate cancer and a vaccine candidate for breast cancer. As a part of this agreement, GSK retains the option to buy-back exclusive worldwide rights for either or both vaccine candidates following the completion of proof-of-principle clinical trials. If GSK exercises its buy-back rights, we have the option of participating in further development, up to and including a sharing of promotion rights in the United States. The buy-back price will be based on our research costs incurred under this new agreement, plus a premium of 25% and up to an additional $3.0 million depending on the stage of development at the time GSK exercises its buy-back option. In the event GSK does not exercise its buy-back option, we will be free to develop the vaccines alone or with other partners and have agreed to pay GSK success-based milestones and royalties in the event of product sales. Under our new agreement, we will be responsible for providing resources and development funding of up to $32 million to complete proof-of-principle clinical studies over a period of time in excess of five years. This funding will be used to pay for GMP grade material, production and clinical trials for prostate and breast cancer vaccine development efforts.
		Under the original agreement, GSK will continue development of an alternative version of the prostate cancer vaccine at its own expense and has agreed to pay us milestones and royalties on potential product sales. Under the original agreement, GSK is also continuing the development of our HER-2/neu vaccine. A proprietary formulation of this vaccine has been manufactured by GSK and an IND application has been approved for the product’s clinical testing in the United States. GSK has also agreed to pay us milestones and royalties on potential product sales of our HER-2/neu vaccine.
		In a related new agreement, we acquired vaccine and antibody development rights from GSK to all ovarian cancer antigens whose discovery resulted from the original agreement. In this related agreement we also acquired from GSK all cancer diagnostic rights and T cell adoptive cancer immunotherapy rights for all cancer antigens discovered by us in the breast, prostate, colon and ovarian cancer fields as well as for the HER-2/neu and mammaglobin antigens.
		GSK has the right to terminate any of these agreements in the event of our material default of such agreement, or our bankruptcy or insolvency. If we materially breach our original agreement with GSK, GSK may as an alternative to terminating the agreement, continue its licenses with a reduction in the amounts owed to us as potential milestones and royalties. Under our original agreement, GSK also has the right for any reason with 6 months prior notice to terminate its licenses in the breast, prostate and colon fields and for the HER-2/neu and mammaglobin antigens, although this termination right does not apply to the breast cancer vaccine candidate and prostate cancer vaccine candidate that GSK has licensed to us under one of the new agreements. Also under the original agreement, GSK has the right for any reason with 6 months prior notice to terminate its licenses in the tuberculosis and chlamydia fields after August 2004. In addition, under our original agreement, if an acquisition of us results in a material breach of that agreement, GSK would have the right to terminate that agreement and we and any of our employees that remain employees of us or our acquiror would be precluded from working in any of the disease fields covered by our original agreement with GSK for 2 years after such termination.

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		If we materially breach our new agreement for the development of a breast cancer vaccine candidate and prostate cancer vaccine candidate because of our failure to perform the development program, the rights to those vaccine candidates will revert to GSK and we will also be deemed to be in material breach of our new agreement under which we acquired from GSK the ovarian cancer rights and diagnostic and T cell product rights related to our cancer antigens that were included in our original agreement. If GSK terminates our new agreement that covers ovarian cancer, diagnostics and T cell products, because of our material breach, all of the rights under that agreement will revert to GSK with the exception of any rights we may have granted to any third parties before the termination, and we will be required to pay GSK twice the amount of revenues we receive from those third parties as would have paid had the agreement not been terminated for our material breach.
		We have a collaboration agreement with GSK for the development and commercialization of BEXXAR therapeutic regimen, which was approved in June, 2003 by the FDA for the treatment of patients with CD20 positive, follicular, NHL, with and without transformation, whose disease is refractory to Rituximab and has relapsed following chemotherapy. Under the agreement, as amended in April 2000, GSK’s territory was reduced to the United States and, upon regulatory approval of BEXXAR therapeutic regimen, GSK paid us a milestone payment. Under the terms of the agreement, both companies contribute to the commercialization efforts of BEXXAR therapeutic regimen in the United States and share profits and losses from GSK’s sales of BEXXAR therapeutic regimen equally. We recognize the costs we incur associated with BEXXAR therapeutic regimen related activities such as the cost of co-promotion revenue and sales and promotion costs in our statement of operations. We and GSK then prepare a quarterly calculation of the joint profit or loss which considers all revenue and costs associated with BEXXAR therapeutic regimen commercial activities incurred by us and GSK and the equal sharing of the joint profit or loss. If the quarterly joint profit or loss calculation results in a reimbursement to Corixa, we record that amount as revenue. If the quarterly joint profit or loss calculation results in a payment by Corixa, we record that amount as additional operating expense. Prior to commercialization, we recorded our share of the net reimbursement or payment from the joint profit or loss calculation in sales, general and administrative expenses. For the year ended December 31, 2003 our actual commercial costs related to BEXXAR therapeutic regimen and the payment resulting from the joint profit or loss calculation are included in sales, general and administrative expenses. BEXXAR sales were $1.2 million in 2003.
		Under the agreement, GSK provided us with a $15 million credit line that was fully drawn by Coulter in December 2000 (terms and conditions of the credit line are discussed further in Footnote 2 in the Notes to the Consolidated Financial Statements) and which we may choose to repay in cash or in shares of our common stock on or prior to the October 3, 2004 maturity date. Under the terms of the agreement, GSK has agreed to reimburse us for certain clinical and manufacturing development costs and pay us for the achievement of certain defined clinical development, regulatory and sales milestones. In 2003, we recognized revenue of $5.2 million for the reimbursement of clinical and other development costs from GSK.
		We have several license and supply agreements with GSK, granting GSK licenses to certain adjuvants for use in vaccines for infectious diseases, cancers and allergies that GSK is developing. These agreements grant GSK exclusive and co-exclusive license rights depending on the disease field and territory. Under the terms of the agreements, GSK pays annual license fees, milestones, transfer payments and future royalty payments.
		We have an outstanding loan from GSK in the principal amount of $5 million, which amount was due on September 1, 2003. At GSK’s option, GSK may choose to receive repayment of this loan in cash or shares of our common stock at a specified premium to the five day average closing price of our common stock for the period immediately preceding September 1, 2003. GSK has not yet made its election regarding the form of repayment and accordingly the $5 million loan remains outstanding.

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		Amounts receivable from GSK at December 31, 2003 and 2002 were $4.1 and $6.2 million, respectively. For the years ended December 31, 2003, 2002 and 2001, approximately 49%, 47% and 49% of our revenue resulted from collaborative agreements with GSK.

	•	Amersham Health. In October 2001, we entered into an agreement whereby Amersham Health has agreed to market BEXXAR therapeutic regimen in Europe. We and Amersham Health will cooperate to register BEXXAR therapeutic regimen in Europe. We will initially be the holder of the MAA for BEXXAR therapeutic regimen in Europe, and after certain conditions have been met, including approval for commercial sale in Europe, we will transfer the MAA to Amersham Health. We will be responsible for generating clinical trial data to support the registration of BEXXAR therapeutic regimen in Europe and Amersham Health will be responsible for the manufacture and sale of BEXXAR therapeutic regimen in Europe. Under the terms of a stock purchase agreement with Amersham Health, we had the option to sell up to a total of $15 million of shares of our common stock to Amersham Health. Upon execution of the agreement Amersham Health purchased 271,343 shares of our common stock for approximately $5 million at a price of $18.43 per share, which represented a forty percent premium of approximately $1.4 million to the then current market value of our common stock. The premium has been accounted for as a nonrefundable up-front license payment and was deferred and is being recognized as revenue ratably over the term of the agreement, consistent with our revenue recognition policy. Following our partial option exercises in October 2001 and December 2002, on May 14, 2003, we completed the exercise of our option to sell up to $15 million of shares of our common stock to Amersham Health when we sold 721,814 shares of our common stock to Amersham Health at a price per share of $6.927 for a total purchase price of approximately $5 million. In addition, Amersham Health has agreed to pay us milestone payments upon regulatory approval in Europe as well as milestone payments based on achievement of certain sales volume targets. Amersham Health has also agreed to pay us royalties on all future product sales in Europe. Amersham Health has the right to terminate our agreement for our material breach, insolvency, after October 2004 or if commercialization of BEXXAR therapeutic regimen in Europe is blocked because another product is or if the EMEA does not validate our MAA because the EMEA determines that the MAA is not sufficient.
	•	Wyeth. We have license and supply agreements with Wyeth, granting Wyeth licenses to certain adjuvants for use in vaccines for certain infectious and autoimmune disease fields that Wyeth is developing. These agreements grant Wyeth exclusive, co-exclusive and non-exclusive license rights depending on the disease field. Under the terms of the agreements, Wyeth pays annual license fees, milestones, transfer payments and future royalty payments. We recognized revenue related to our agreements with Wyeth of $2.5 million, $2.0 million and $906,000 in 2003, 2002 and 2001, respectively.
	•	Zambon Group and JT. During May and June 1999, we entered into corporate partnerships with Zambon and JT, respectively, for the research, development and commercialization of vaccine products aimed at preventing and treating lung cancer. Zambon has exclusive rights to develop and sell vaccine products in Europe, the countries of the former Soviet Union, Argentina, Brazil and Columbia and co-exclusive rights in China. Under the June 1999 agreement we granted JT exclusive rights to develop and sell vaccine products outside of the territory licensed to Zambon, including the United States and Japan, and co-exclusive rights to develop and sell vaccine products in China. We also granted Zambon a nonexclusive license and JT an option to formulate vaccines that may result from the collaboration using our microsphere delivery system with our proprietary adjuvants. During 2002, the 3-year research terms of the agreements expired and the respective research funding obligations ceased. In November 2002, we and Zambon amended our agreement so that we jointly fund clinical testing of a non-small cell lung cancer vaccine. In December 2002, we recorded a milestone payment of $1.0 million from Zambon in connection with the filing of our IND for a lung cancer vaccine candidate in the United States. In January 2003, we amended and restated our agreement with JT so that we hold exclusive rights to all antigens discovered in our lung cancer vaccine program, in all countries previously licensed to JT, with the exception of rights associated with commercialization of a non-small

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		cell, lung carcinoma vaccine candidate in Japan. Under the terms of our amended agreement with JT, JT will continue to hold an exclusive license to this vaccine candidate for development and commercialization in Japan, and we will hold all rights in North America and in those territories not previously licensed to Zambon. In connection with the restructuring of the JT agreement, we and JT have agreed to pay each other fees, milestones and royalties in the event that development milestones and product sales are achieved.
	•	Kirin. In December 2002, we entered into a multiyear development and commercialization agreement with Kirin for potential cancer vaccine for the treatment of multiple forms of cancer, including leukemia, myelodysplasia and melanoma. Under the agreement we granted Kirin exclusive rights to develop and market vaccine products resulting from our WT1 vaccine candidate in Asia/ Australasia. We and Kirin have agreed to share WT1 vaccine commercialization rights and Kirin has agreed to fund one-half of the research and development costs in North America. We will retain marketing rights for the potential vaccine in Europe. Upon effectiveness of the agreement, Kirin paid us $3 million in up-front license fees, which is being recognized as revenue over the estimated research and development term. Under the terms of the agreement, Kirin has agreed to co-fund development of WT1 vaccine candidate and pay us success-based milestone payments and royalties on future product sales in Asia/ Australasia. In connection with this agreement, we recognized revenue of $2.3 million in 2003.

Kirin has the right to terminate our agreement in the event of our material breach. If Kirin terminates our agreement because of our material breach within 18 months after the effective date of the agreement, Kirin may choose to have us pay a termination fee rather than pursue any other rights and remedies. Kirin may also choose not to terminate the agreement for our material breach, no matter when the breach occurs, but instead may keep its licenses intact rather than pursue any other rights and remedies, in which case all of Kirin’s payment obligations to us will be reduced. Kirin also has the right to terminate our agreement at any time in North America, Asia or both territories, and in any of these cases Kirin must pay us a termination fee. Both we and Kirin have the right to terminate the agreement before commercial launch of the first product if together we determine there are no products worthy of further development or if any product causes a serious adverse event. However, if Kirin chooses to terminate the agreement for development or adverse event reasons, we have the right to continue product development ourselves and depending on further development Kirin may be obligated to pay us a termination fee. If we choose to terminate the agreement for development or adverse event reasons, Kirin will have the right to continue product development and pay us royalties in the event of product sales. Kirin also has the right to terminate our agreement in the event product development and commercialization is prevented due to certain third party intellectual property positions. Kirin also has the right to terminate our agreement if no product has successfully completed clinical trials by ten years after the effective date, if no product has achieved regulatory approval in the United States or Japan by 12 years after the effective date, our performance is delayed by at least 18 months as a result of force majeure or we terminate or breach a third party license under which Kirin is a sublicensee and as a result Kirin is sued or Kirin’s rights under our agreement are materially diminished. In addition, Kirin also has the right to terminate the agreement for our bankruptcy or insolvency.

	•	Medicis and Zenyaku Kogyo. In August 2000, we entered into a multiyear development, commercialization and license agreement covering our psoriasis immunotherapeutic product, PVAC™ treatment, with Medicis. Under the agreement we provide Medicis exclusive rights to PVAC treatment in the United States and Canada. Medicis made a nonrefundable payment of $17 million upon effectiveness of the agreement.

		In August 1999, we entered into a corporate partnership with Zenyaku Kogyo for researching and developing PVAC treatment. Under the agreement we granted Zenyaku Kogyo exclusive rights to PVAC treatment in Japan. In May 2002 the 3-year research term of the agreement expired and Zenyaku Kogyo’s research funding obligation ceased. Under the terms of the agreement, Zenyaku Kogyo’s rights to PVAC treatment in Japan continue and they are required to make future milestone payments based on successful clinical and commercial progress, and a royalty stream on future product sales.

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		In December 2003 we announced that we have discontinued development of PVAC treatment due to phase II trial results that confirmed PVAC therapy failed to provide a statistically significant benefit versus placebo. We also terminated our license agreement with Medicis. In connection with the termination of the license agreement, Medicis has no additional funding obligations. As a result of discontinuing development of PVAC treatment, we recognized $5 million of revenue and $2.5 million of expense that was previously deferred and was related to the initial Medicis payment received in 2000.

      As of December 31, 2003, our accumulated deficit was approximately $1.2 billion, of which $679.4 million is attributable to the write-off of acquired IPR&D costs associated with our acquisitions, $221.2 million is attributable to goodwill related charges and $18.5 million is attributable to lease-related impairment charges. We may incur substantial additional operating losses over the next several years. Such losses have been and may continue to be principally the result of various costs associated with our discovery, research and development programs and the purchase of technology. As noted above, the funded research phase of certain of our collaborative agreements has expired and we may bear a larger portion of the related research program costs in the future. Additionally, as research programs progress from early stages into clinical development the costs continue to increase. Substantially all of our revenue to date has resulted from corporate partnerships, other research, development and licensing arrangements, research grants and interest income. Our ability to achieve a consistent, profitable level of operations depends in large part on entering into corporate partnerships for product discovery, research, development and commercialization, obtaining regulatory approvals for our products and successfully manufacturing and marketing our products once they are approved. Even if we are successful in the aforementioned activities our operations may not be profitable. In addition, payments under corporate partnerships and licensing arrangements are subject to significant fluctuations in both timing and amount. Therefore, our operating results for any period may fluctuate significantly and may not be comparable to the operating results for any other period.

Results of Operations

Revenue

      Our revenue was $50.7 million for 2003, $48.7 million in 2002 and $58.1 million in 2001. The 2003 increase compared with 2002 is primarily due to revenue received from our collaborative agreements with GSK, the majority of which results from milestone revenue received under our agreement for BEXXAR therapeutic regimen, revenue which had previously been deferred from our collaboration with Medicis of $5.0 million as a result of discontinuing development of PVAC in December 2003 and increased revenue of $2.3 million related to our WT-1 cancer vaccine agreement with Kirin. These increases were partially offset by the anticipated expiration of the funded research phases of certain of our collaborative agreements, including decreases of $6.9 million related to our vaccine development agreement with GSK, $4.0 million related to our lung cancer vaccine partnership with JT, $1.9 million related to our lung cancer vaccine partnership with Zambon, $1.4 million related to our therapeutic antibody agreement with Purdue Pharma. In addition, reimbursement revenue from our collaborative agreement for BEXXAR therapeutic regimen with GSK decreased $1.7 million and revenue from our collaborative agreement with Beaufour Ipsen related to our proprietary ANERGIX vaccine platform decreased approximately $1.0 million.

      The 2002 decrease compared with 2001 was primarily due to payments received in 2001, including a milestone payment for the achievement of certain clinical trial related milestones in connection with BEXXAR therapeutic regimen from our collaborative agreement with GSK, $2.3 million from our ex-vivo agreement with IDRI and $2.0 million related to the expiration of the research phase of our vaccine development collaborative agreement with GSK. These decreases were partially offset by increased revenue of approximately $2.7 million from our collaborative agreement with Beaufour Ipsen related to our proprietary ANERGIX vaccine platform. Revenue in 2002 included a milestone payment of $1 million from Zambon for the filing of our IND for a lung cancer vaccine in the United States.

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      Revenue under government grants and contracts was $2.4 million in 2003, $2.6 million in 2002 and $2.9 million in 2001.

      We expect revenue to fluctuate in the future depending on our ability to enter into new collaboration agreements, timing and amounts of payments under our existing collaboration agreements and our ability to commercialize our potential products.

Expenses

      Our research and development expenses were $95.6 million for 2003, $99.7 million in 2002 and $139.9 million in 2001. The 2003 decrease as compared with 2002 is due primarily to reduced early stage research and development expense of $7.2 million as we focus on programs with the highest chance of near term commercial success, a reduction in deferred compensation expense of $1.2 million related to options assumed in the Coulter acquisition and a reduction in South San Francisco facilities expense of $1.0 million due to buildings that we subleased in 2003. These decreases were partially offset by an increase in BEXXAR therapeutic regiment production cost of $4.9 million and $2.5 million resulting from fees paid to Genesis Research and Development Corporation, Ltd., or Genesis, that were previously deferred and amortized over the estimated development period prior to discontinuing development of PVAC in December 2003 and $1.7 million resulting from manufacturing development activities associated with our adjuvants and TLR4 product candidates.

      The 2002 decrease compared with 2001 was due primarily to a reduction in deferred compensation expense of $11.9 million related to options assumed in the Coulter acquisition, a reduction in the purchase of third-party manufactured materials of $8 million, payroll and personnel expenses of $8.2 million related to our workforce reduction in South San Francisco, and a decrease in clinical development activity of $5.8 million, offset by an increase of $3.9 million in facility expenses due in part to additional leased space in South San Francisco. We intend to offset South San Francisco facilities cost through subleases in the future. We expect research and development expenses to increase or remain stable in the future as we continue to pursue our clinical and preclinical activities.

      Our research and development activities can be divided into research and preclinical programs and clinical development programs to treat cancer and infectious disease. We estimate the costs associated with research and preclinical programs and clinical development programs approximate the following (in millions):

      Because of the large number of research projects we have ongoing at any one time, and the ability to utilize resources across several projects, the majority of our research and development costs are not directly tied to any individual project and are allocated among multiple projects. We manage our projects by reviewing scientific data and by supplementing this data with our cost allocations. Our cost allocations are based primarily on human resource time incurred on each project. The costs allocated to a project as a result do not necessarily reflect the actual costs of the project. Accordingly, we do not maintain actual cost incurred information for our projects on a project-by-project basis. Costs attributed to research and preclinical projects largely represent our pipeline generating activities. Costs associated with clinical development programs represent the advancement of these activities into product candidates.

      Most of our product development programs are at an early stage and may not result in any approved products. Product candidates that may appear promising at early stages of development may not reach the market for a number of reasons. Product candidates may be found ineffective or cause harmful side effects during clinical trials, may take longer to pass through clinical trials than had been anticipated, may fail to

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      We recorded deferred compensation of $29.2 million associated with the Coulter acquisition in 2000, which represents the intrinsic value of the unearned options of Coulter employees existing at the date of acquisition. Deferred compensation is being amortized on a graded vesting method over the remaining vesting period of the options, generally four years. We amortized $188,000, $1.3 million and $13.2 million of deferred compensation to research and development expense in 2003, 2002 and 2001, respectively. We expect deferred compensation expense to decrease in 2004 and future years due to employee attrition and the declining impact from using the graded vesting approach for calculating deferred compensation expense.

      Our sales, general and administrative expenses were $21.7 million for 2003, $18.4 million in 2002 and $22.7 million in 2001. The increase in 2003 as compared with 2002 is primarily due to the cost associated with the commercialization of BEXXAR therapeutic regimen and legal fees related to our patent infringement litigation with Biogen Idec.

      The decrease in 2002 as compared with 2001 was due primarily to reduced marketing and sales expenses of $1.7 million related to our workforce reduction in South San Francisco and a reduction in deferred compensation expense of $1.3 million related to options assumed in the Coulter merger. These decreases were partially offset by an increase in 2002 in facility expenses of $730,000 due in part to additional leased space in South San Francisco. We expect sales, general and administrative expenses to increase in the future to support the expansion of our business activities as we expand our sales and marketing capabilities.

      Our intangible amortization expense was $439,000 for 2003 and 2002 compared to $56.1 million for 2001. Effective January 1, 2002, we adopted SFAS 141, “Business Combinations” and SFAS 142, “Goodwill and Other Intangible Assets.” Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to an annual impairment test, or more frequently if impairment indicators arise. We will continue to amortize separable intangible assets that are not deemed to have indefinite useful lives. As such, we will continue to amortize the remaining acquired lease and adjuvant know-how over their useful lives.

      On March 12, 2002, we received a second complete review letter from the FDA regarding our BLA for BEXXAR therapeutic regimen. In the complete review letter, the FDA stated that additional clinical studies would be required to provide sufficient evidence of the safety and net clinical benefit of BEXXAR therapeutic regimen.

      Upon announcement on March 13, 2002 of the receipt of the complete review letter from the FDA, the value of our common stock declined. In management’s opinion, this decline in our stock price represented an indication of impairment of recorded goodwill. In accordance with SFAS 142, an interim test of goodwill impairment was performed as of March 13, 2002. The impairment test involves a two step approach. Under step one of the test we compared our estimated fair value based upon the market price of our common stock to the carrying value of our equity. Because the carrying value of our equity exceeded our fair value, we performed step-two of the test which involved allocating our fair value (the reporting unit) to all of our assets

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Interest Income

      Our interest income decreased to $3.4 million for 2003, from $4.3 million in 2002 and from $9.3 million in 2001. The decrease in 2003 as compared with 2002 is due primarily to lower yields on our investments in 2003. We expect interest income to be higher in future periods due to higher cash balances resulting from financing transactions completed in June 2003.

Interest Expense

      Our interest expense was $4.4 million in 2003 as compared with $2.3 million for each of the years ended December 31, 2002 and 2001. The increase in 2003 as compared with 2002 was primarily attributable to higher loan balances primarily due to the issuance of $100 million of convertible notes in June 2003. Outstanding debt at December 31, 2003, 2002 and 2001 was $133.8 million, $32.1 million and $33.4 million, respectively.

Other Income

      Our other income was $2.5 million for 2003 compared with $21.5 million in 2002 and $5.5 million in 2001. The decrease in 2003 as compared to 2002 is due primarily to the sale of specific preclinical assets and other equipment to Medarex in the second quarter of 2002 which resulted in other income of $22.0 million. Other income in 2003 includes a $2.5 million gain from additional consideration received from our 2002 asset sale to Medarex. Other income for 2001 included a gain of $4.5 million on the sale of our investment in Abgenix.

Cumulative Effect of Change in Accounting Principle

      Effective January 1, 2000, we changed our method of accounting for nonrefundable up-front license fees based on the guidance provided in SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” to recognize such fees over the term of the related research and development collaboration arrangement on a straight-line basis, as this method best matches the effort provided. The $6.3 million cumulative effect of the change in accounting principle, calculated as of January 1, 2000, was reported as a charge in the year ended December 31, 2000. The cumulative effect was initially recorded as deferred revenue and will be recognized as revenue over the remaining term of the research and development collaboration agreements. For the year ended December 31, 2000, the impact of the change in accounting was to increase net loss by $3.9 million, or $0.19 per share, comprised of the $6.3 million cumulative effect of the change as described above ($0.30 per share) less $2.4 million of the deferred revenue related to the cumulative effect adjustment that was recognized as revenue during the year ($0.11 per share). Revenue includes $1.5 million for 2002 and $2.4 million for 2001 that was previously recognized and included in the cumulative effect adjustment.

Liquidity and Capital Resources

      We have financed our operations primarily through funding from collaborative agreements and the issuance of equity and debt instruments. For the previous three years, we have received cash of approximately $159.6 million from collaborative research agreements and grants, approximately $96.3 million from the sale of convertible subordinated notes, approximately $28.4 million from the sale of 3.7 million newly issued shares of our common stock and 669,435 five-year warrants to purchase common stock in a private placement to select institutional and other accredited investors, approximately $42.8 million from the sale of 7.3 million newly issued shares of our common stock and 1.2 million five-year warrants to purchase our common stock in a private placement to select institutional and other accredited investors, $21 million from the sale of preclinical assets to Medarex, $17.9 million from bank loans, approximately $15 million from the issuance of

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      As of December 31, 2003, future funding available under terms of our existing agreements is approximately $42.3 million excluding milestone payments, which are contingent upon the success of the research. As of December 31, 2003, we had approximately $192.0 million in cash, cash equivalents and securities available-for-sale.

      The following are contractual commitments at December 31, 2003 associated with debt obligations, lease obligations and credit lines (in thousands):

      Included in short-term obligations is a $15 million line of credit that has been fully drawn and at our option may be paid in cash or in shares of our common stock on or prior to the October 2004 maturity date.

      We are responsible for providing resources and development funding of up to $32 million over a period in excess of five years related to a collaborative agreement with GSK. The funding will consist of our personnel and external costs associated with preclinical and clinical development activities.

      We are also required to pay dividends on our preferred stock. The dividend can be paid in cash or common stock, at our option. The maximum amount of cash that would be paid in a year would be $2.5 million and the maximum number of shares of common stock that would be issued is 146,828.

      In June 2003, we sold $100 million of 4.25% convertible subordinated notes due in 2008 to a qualified institutional buyer pursuant to Rule 144A under the Securities Act of 1933, as amended. The notes are convertible into our common stock at a conversion price of $9.175 subject to adjustment in certain circumstances. We will pay interest on the notes on January 1 and July 1 of each year, beginning on January 1, 2004. The notes mature on July 1, 2008.

      During 2003, we used $53.6 million of cash in our operations, compared with $45.0 million in 2002 and $65.8 million in 2001. The increase in cash used in operations in 2003 as compared to 2002 is due primarily to the cost associated with the commercialization of BEXXAR therapeutic regimen. Our investing activities used cash of $91.8 million in 2003, compared with cash provided of $9.5 million in 2002 and cash provided of $50.1 million in 2001. The increase in cash used by investing activities in 2003 was primarily due to the purchase of available-for-sale-securities. Our financing activities provided cash of $134.9 million in 2003 as compared to $49.5 million in 2002 and $1.9 million in 2001. The increase in 2003 of cash received from financing activities was due primarily to the net proceeds of approximately $96.3 million from our sale of 4.25% convertible subordinated notes.

      For 2003, 2002 and 2001, we invested $6.7 million, $6.3 million and $18.1 million, respectively, in property and equipment.

      We believe that our existing capital resources, together with committed payments under our existing corporate partnerships, bank credit agreements, equipment financing and interest income will be sufficient to fund our current and planned operations over at least the next 18 months. However, we intend to seek additional corporate partnerships, and also may seek additional funding through

	•	public or private equity financings, which could result in significant dilution to our stockholders;
	•	public or private debt financings; and

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	•	additional capital lease transactions.

      However, additional financing may be unavailable on acceptable terms, if at all. If sufficient capital is not available, we may be forced to limit some or all of our research and development programs and related operations, curtail commercialization of our product candidates and, ultimately, cease operations.

      Our future capital requirements will depend on many factors, including, among others:

	•	continued scientific progress in our discovery, research and product development programs;
	•	progress with preclinical studies and clinical trials;
	•	the magnitude and scope of our discovery, research and development programs;
	•	our ability to maintain existing, and establish additional, corporate partnerships and licensing arrangements;
	•	the time and costs involved in obtaining regulatory approvals;
	•	the time and costs involved in expanding and maintaining our manufacturing facilities;
	•	the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims;
	•	the potential need to develop, acquire or license new technologies and products; and
	•	other factors not within our control.

New Accounting Pronouncements

      In May 2003, the Financial Accounting Standards Board, or FASB, issued Statements of Financial Accounting Standards No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” or SFAS 150. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003. This Standard does not currently have any impact on our consolidated results of operations, financial position or disclosure.

      In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” or FIN No. 46. FIN No. 46 addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. The interpretation requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of operations of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. This interpretation applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. In December 2003, the FASB issued FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities an interpretation of ARB 51 (revised December 2003),” or FIN No. 46R, which includes significant amendments to previously issued FIN No. 46. Among other provisions, FIN No. 46R includes revised transition dates for public entities. We are now required to adopt the provisions of FIN No. 46R no later than the end of the first reporting period that ends after March 15, 2004. The adoption of this interpretation is not expected to have a material effect on our financial statements or results of operations.

      Effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003, EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” addresses the accounting by a vendor for contractual arrangements in which multiple revenue-generating activities will be performed by the vendor. In some situations, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of fair values to account separately for the different deliverables (that is, there are separate units of accounting). In other situations, some or all of the different deliverables are interrelated closely or there is not sufficient evidence of fair value to account separately for the different deliverables. EITF Issue 00-21 addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting.

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      The adoption of this Interpretation did not have a material impact on our consolidated results of operations, financial position or disclosure for the year-ended December 31, 2003. EIFT Issue 00-21 was effective for us beginning July 1, 2003.

      In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” or SFAS No. 146. SFAS No. 146, which is effective prospectively for exit or disposal activities initiated after December 31, 2002, applies to costs associated with an exit activity, including restructurings, or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS No. 146 requires that exit or disposal costs are recorded as an operating expense when the liability is incurred and can be measured at fair value. We accounted for our November 2003 restructuring, as discussed in Note 11, in accordance with SFAS No. 146.

Subsequent Events

      On March 1, 2004 we announced that we and GSK have reached a settlement with Biogen Idec regarding all outstanding patent litigation between us and Biogen Idec. The settlement, which serves as the basis for the dismissal of all patent litigation between the parties, provides for Biogen Idec to pay to us and GSK a $20 million upfront settlement payment, as well as a one-time milestone payment based on future Zevalin sales performance, and royalty payments on Zevalin sales from January 1, 2004 until the expiration of all BEXXAR therapeutic regimen patents that were the subject of the litigation. We and GSK will also enter into a worldwide, cross-license agreement with Biogen Idec relating to each party’s patents in suit.

      On March 4, 2004 NDC New Markets Investments IV, L.P., or NDC, of which Wells Fargo Community Development Corporation is a limited partner, pursuant to a promissory note and credit agreement provided a loan of approximately $14.6 million to us to support our construction costs at the Ninth and Stewart Lifesciences Building in Seattle. The term of the loan is seven years, during which we pay interest only with a balloon principal payment on March 1, 2011. The note bears interest at LIBOR plus 0.8%. NDC will forgive a portion of the loan if we are in compliance the terms and conditions of the note and the credit agreement. Pursuant to a security agreement, the loan from NDC is fully secured by cash and cash equivalents.

      Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our long-term debt. All of our cash equivalent and marketable fixed income securities are designated as available-for-sale and, accordingly, are presented at fair value on our balance sheets. We generally invest our excess cash in A-rated or higher short- to intermediate-term fixed income securities and money market mutual funds. Fixed rate securities may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates.

      At December 31, 2003, we had long-term obligations outstanding of approximately $108.1 million. Our payment commitments associated with these debt instruments are fixed during the corresponding terms and are comprised of interest payments, principal payments, or a combination thereof. The market value of our long-term debt will fluctuate with movements of interest rates, increasing in periods of declining rates of interest, and declining in periods of increasing rates of interest.

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      The table below summarizes the estimated effects on certain assets and liabilities based on hypothetical increases and decreases in interest rates. It is assumed the changes occur immediately and uniformly to each category of instrument containing interest rate risks. Significant variations in market interest rates could produce changes in the timing of repayments due to available prepayment options. The fair value of such instruments could be affected and, therefore, actual results might differ from those reflected in the following table:

*	Less than 1%

Important Factors That May Affect Our Businesses, Our Results of Operations and Our Stock Price.

      BEXXAR therapeutic regimen requires medical personnel to handle radioactive materials and requires patient-specific dosing calculations. Doctors may prefer to continue to treat NHL patients with conventional therapies, in this case chemotherapy and non-radiolabeled biologics. Oncologists and hematologists are not typically licensed to administer radioimmunotherapies such as BEXXAR therapeutic regimen and will need to engage a nuclear medicine physician or receive specialty training to administer BEXXAR therapeutic regimen. Nuclear Regulatory Commission regulations permit BEXXAR therapeutic regimen to be administered on an outpatient basis in most cases that we currently contemplate. Market acceptance could, however, be adversely affected to the extent hospitals are required under applicable state, local or individual hospital regulations to administer BEXXAR therapeutic regimen on an in-patient basis. In addition, continued expansion in the use of Rituxan® (Rituximab) for maintenance therapy of NHL could affect the ability of BEXXAR therapeutic regimen to gain market share.

      The affordability to patients and customers of BEXXAR therapeutic regimen depends substantially on whether government health administration authorities, private health insurers, health maintenance organizations, pharmacy benefit management companies and other healthcare funders will reimburse most of the cost of the product to our customers. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products like BEXXAR therapeutic regimen because third-party payors have very little experience upon which to model pricing and reimbursement decisions. Although we have received notification from several major third-party payors that they plan to reimburse our customers for BEXXAR therapeutic

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      In addition, federal and state governments in the United States, as well as foreign governments, continue to propose and pass new legislation designed to contain or reduce the costs of healthcare. Government cost-control initiatives could decrease the reimbursement for BEXXAR therapeutic regimen. For example, the U.S. Medicare program recently announced that it is considering whether to cut reimbursement for certain off-label uses for BEXXAR therapeutic regimen. Inadequate reimbursement levels would reduce the demand for BEXXAR therapeutic regimen or could force us to reduce the price of BEXXAR therapeutic regimen to customers, or a combination of both. Reduced demand for BEXXAR therapeutic regimen, or reduced price, could limit our co-promotion revenues from BEXXAR therapeutic regimen.

      BEXXAR therapeutic regimen contains a radiolabeled antibody, which is an antibody linked to an isotope. We have no existing internal capacity or experience with respect to manufacturing radiolabeled antibodies for large-scale clinical trials or commercial purposes. We have entered into agreements with Nordion for radiolabeling the Tositumomab component of BEXXAR therapeutic regimen at Nordion’s centralized radiolabeling facility and for supplying the (131) I radioisotope, which Nordion gets from a single-source supplier. Under our agreement with Amersham Health, Amersham Health is responsible for radiolabeling the European supply of the Tositumomab component of BEXXAR therapeutic regimen. Neither Nordion nor Amersham Health may be able to produce sufficient radiolabeled antibodies to meet our clinical requirements and, if BEXXAR therapeutic regimen is a commercial success in the United States, or is approved and is a commercial success in other countries, our commercial requirements in the United States or in such other countries may exceed the capacity of our current contract manufacturers. In addition, radiolabeled antibody cannot be stockpiled against future shortages due to the 8-day half-life of the (131) I radioisotope. Accordingly, any interruption in supply from Nordion, Amersham Health or another supplier could harm sales of BEXXAR therapeutic regimen in the United States and in other countries if and when it is approved for sale in such other countries.

      We have also entered into an agreement with BI Pharma KG to produce bulk Tositumomab and fill the individual product vials with Tositumomab. We have contracted with BI Pharma KG and a third-party supplier for labeling and packaging services. These manufacturers have limited experience producing, labeling and packaging Tositumomab, and they may be unable to produce our requirements in commercial quantities or with acceptable quality.

      We are aware of only a limited number of manufacturers capable of producing Tositumomab in commercial quantities or radiolabeling the antibody with the (131) I radioisotope on a commercial scale. To establish and qualify a new facility to centrally radiolabel antibodies could take three years or longer. Accordingly, if Nordion is unable to consistently produce sufficient radiolabeled antibodies to meet our commercial requirements, our ability to market BEXXAR therapeutic regimen in the United States could be harmed. Nordion’s BEXXAR therapeutic regimen radiolabeling facility will be shutdown for approximately two weeks each November and/or December for routine preventative maintenance. This annual shutdown will be scheduled but we anticipate that it may have a negative impact on sales of BEXXAR therapeutic regimen during the period encompassing the shutdown.

      The unique properties of BEXXAR therapeutic regimen require tightly controlled distribution of the product. We may be unable to maintain or establish relationships with third parties or build in-house distribution capabilities to meet requirements for product supply. If we are unable to establish or maintain these capabilities, we may not be able to successfully commercialize the product. Due to its radioactive component, BEXXAR therapeutic regimen is shipped in shielded containers and must arrive at its destination

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      Following the approval of BEXXAR therapeutic regimen in June of 2003, we began to build our direct sales force for BEXXAR therapeutic regimen and anticipate having such sales force in place by the middle of 2004. Our ability to market and sell BEXXAR therapeutic regimen will be contingent on recruiting, training and deploying the necessary sales force, as well as performance by GSK under our BEXXAR therapeutic regimen collaboration agreement. Developing an effective sales force will require a significant amount of our financial resources and time. We may be unable to establish and manage an effective sales force in a timely or cost-effective manner, if at all, and any sales force we do establish may not be capable of generating sales of BEXXAR therapeutic regimen or other product candidates.

      We intend to rely on our corporate partners to market our products outside the United States and, in the case of infectious disease products, worldwide. Our corporate partners may not have effective sales forces and distribution systems. If we are unable to maintain or establish relationships and are required to market any of our products directly, we will need to build a sales and marketing force with technical expertise and with supporting distribution capabilities. We may be unable to maintain or establish relationships with third parties or build in-house sales and distribution capabilities.

      We are at an early stage in the development of the majority of our product candidates. The development of safe and effective therapies for treating people with cancer and infectious diseases is highly uncertain and subject to numerous risks. Product candidates that may appear to be promising at early stages of development may not reach the market for a number of reasons. Product candidates may be found ineffective or cause harmful side effects during clinical trials, may take longer to progress through clinical trials than had been anticipated, may fail to receive necessary regulatory approvals, may prove impracticable to manufacture in commercial quantities at reasonable cost and with acceptable quality or may fail to achieve market acceptance.

      On June 30, 2003, we and GSK announced that the FDA had approved BEXXAR therapeutic regimen for the treatment of patients with CD20 positive, follicular, NHL, with and without transformation whose disease is refractory to Rituximab and has relapsed following chemotherapy. We also have an immunotherapeutic product that has been approved on a named-patient basis in Germany, Spain, Italy and the United Kingdom. The immunotherapeutic product incorporates MPL adjuvant, our proprietary adjuvant, which is added to the product to heighten the immune response to the product’s allergens. In addition, we have received approval in Argentina to sell RC-529 adjuvant as part of a prophylactic vaccine for the prevention of Hepatitis B infection. RC-529 adjuvant is added to the product to heighten the immune response to the product’s antigens.

      We may not be successful in obtaining regulatory approval for any of our other product candidates, or in commercializing BEXXAR therapeutic regimen or any product candidates for which approval is obtained.

      On November 6, 2003, we announced that, as part of a strategic restructuring, we would eliminate certain research programs and supporting resources in an effort to focus on priority programs that we believe have the greatest opportunity for near term commercial success. This restructuring reduced the scope and number of

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      Our restructuring resulted in an approximate 18% immediate reduction in our workforce, including the elimination of unfilled open positions, as well as existing positions. Following the workforce reduction, we had approximately 344 employees at facilities in Seattle, Washington, South San Francisco, California and Hamilton, Montana. Our restructuring plan may yield unanticipated consequences such as attrition beyond our planned reduction in workforce. This workforce reduction could place significant strain on our administrative, operational and financial resources and result in increased responsibilities for each of our management personnel. As a result, our ability to respond to unexpected challenges may be impaired and we may be unable to take advantage of new opportunities. In addition, many of the terminated employees possess specific knowledge or expertise, and that knowledge or expertise may prove to have been important to our operations. In that case, their absence may create significant difficulties. In addition, this headcount reduction may subject us to the risk of litigation, which could result in substantial costs to us and could divert management’s time and attention away from business operations.

      Any products that we develop are subject to regulation by federal, state and local governmental authorities in the United States, including the FDA, and by similar agencies in other countries. Any product that we develop must receive all relevant regulatory approvals or clearances before it may be marketed in a particular country.

      The approval process, which includes extensive preclinical studies and clinical trials of each product candidate in order to study its safety and efficacy, is uncertain, can take many years and requires the expenditure of substantial resources. Clinical trials of our product candidates may not demonstrate safety and efficacy to the extent necessary to obtain regulatory approvals for the indications being studied, if at all. Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. The failure to demonstrate adequately the safety and efficacy of any of our product candidates could delay or prevent regulatory approval of the product candidate.

      The timing and completion of current and planned clinical trials of our product candidates depend on, among other factors, the rate at which patients are enrolled, which is a function of many factors, including:

	•	the size of the patient population;
	•	the proximity of patients to the clinical sites;
	•	the number of clinical sites;
	•	the eligibility criteria for the study;
	•	the existence of competing clinical trials; and
	•	the existence of alternative available products.

      Data obtained from preclinical and clinical activities are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. In addition, we may encounter delays, or the FDA may reject our product candidates, based on changes in regulatory policy during the period of product development,

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	•	would adversely affect the marketing of any products we develop;
	•	could impose significant additional costs on us;
	•	would diminish any competitive advantages that we may attain; and
	•	could adversely affect our ability to receive royalties and generate revenues and profits.

      For example, we filed our BLA for BEXXAR therapeutic regimen in June 1999 and did not receive regulatory approval for BEXXAR therapeutic regimen until June 27, 2003. We may not be successful in obtaining regulatory approval for any of our other product candidates, or in commercializing any product candidates for which approval has been or is in the future obtained.

      Regulatory approval, if granted, may entail limitations on the indicated uses for which the approved product may be marketed. These limitations could reduce the size of the potential market for the product. For example, BEXXAR therapeutic regimen has only been approved for treatment of patients with CD20 positive, follicular, NHL, with and without transformation whose disease is refractory to Rituximab and has relapsed following chemotherapy. Product approvals, once granted, may be withdrawn if problems occur after initial marketing. Further, manufacturers of approved products are subject to ongoing regulation, including compliance with FDA regulations governing current good manufacturing practice, or cGMP. Failure to comply with manufacturing regulations, or other FDA regulations, can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to renew marketing applications and criminal prosecution.

      Our current manufacturing facilities may not be sufficient to support our needs for clinical quantities of our product candidates or commercial quantities of our current products. We have limited experience producing commercial quantities of any product or in producing clinical-grade amounts of our proprietary immunotherapeutic products, including recombinant proteins or antibodies. We currently manufacture only limited quantities of some antigens and several adjuvants. Moreover, our manufacturing facilities must continually adhere to cGMP regulations enforced by the FDA through its facilities inspection program. If our facilities cannot pass a pre-approval plant inspection, the FDA approval of our product candidates that we manufacture in-house may be delayed or denied.

      If we are unable to manufacture our product candidates in accordance with cGMP regulations, the consequent lack of supply of the product candidates could delay our clinical programs, limit our sales of commercial products or result in the breach or termination of our agreements to supply products or product candidates to third parties. We intend to rely on third-party contract manufacturers to produce larger quantities of recombinant protein or other cell culture-based biologicals for clinical trials and product commercialization. Either we or our contract manufacturers may be unable to manufacture our proprietary antigen vaccines or other immunotherapeutic products at a cost or in quantities necessary to make them commercially viable. Third-party manufacturers also may be unable to meet our needs with respect to timing, quantity or quality. If we are unable to contract for a sufficient supply of required products on acceptable terms, or if we encounter delays or difficulties in our relationships with these manufacturers, our preclinical and clinical testing would be delayed, thereby delaying submission of products for regulatory approval, or the market introduction and commercial sale of the products. Moreover, contract manufacturers that we may use must continually adhere to cGMP regulations enforced by the FDA through its facilities inspection program. If the facilities of those manufacturers cannot pass a pre-approval plant inspection, the FDA approval of our product candidates may be delayed or denied.

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      The manufacture and administration of BEXXAR therapeutic regimen requires the handling, use and disposal of (131) I isotope, a radioactive isotope of iodine. These activities must comply with various state and federal regulations. Violations of these regulations could significantly delay completion of clinical trials and commercialization of BEXXAR therapeutic regimen. For our ongoing clinical trials and for commercial-scale production, we currently rely on Nordion to radiolabel the Tositumomab with (131) I radioisotope at a single location in Canada. Violations of safety regulations could occur with Nordion and there is a risk of accidental contamination or injury. In the event of any regulatory noncompliance or accident, the supply of radiolabeled Tositumomab for use in clinical trials or commercial sales could be interrupted.

      Our research and development involves the controlled use of hazardous and radioactive materials and biological waste. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for damages or penalized with fines, and this liability could exceed our resources. We may have to incur significant costs to comply with future environmental laws and regulations.

      If we or others identify side effects after any of our products are on the market, or if manufacturing problems occur,

	•	regulatory approval may be withdrawn;
	•	reformulation of our products, additional clinical trials, changes in labeling of our products or changes to or re-approvals of our manufacturing facilities may be required;
	•	sales of the affected products may drop significantly;
	•	our reputation in the marketplace may suffer;
	•	lawsuits, including class action suits, may be brought against us; and
	•	this could result in the breach or termination of our agreements to supply product candidates to third parties.

      Any of the above occurrences could harm or prevent sales of the affected products or could increase the costs and expenses of commercializing and marketing these products.

      To date, almost all of our revenue has resulted from payments made under agreements with our corporate partners, and we expect that most of our revenue will continue to result from corporate partnerships until the successful commercialization of BEXXAR therapeutic regimen or the approval and commercialization of other products. Payments under corporate partnerships and licensing arrangements are subject to significant fluctuations in both timing and amount. We may not receive anticipated revenue under existing corporate partnerships, and we may be unable to enter into any additional corporate partnerships.

      Since our inception, we have generated only minimal revenue from diagnostic product sales and no significant revenue from therapeutic or prophylactic product sales. With the exception of BEXXAR therapeutic regimen, MPL adjuvant, which has been approved for sale as part of an immunotherapeutic product on a named-patient basis in Germany, Spain, Italy and the United Kingdom and RC-529 adjuvant,

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      As a result of our limited sources of revenue, our operating results have varied significantly from quarter to quarter and year to year in the past and we expect them to continue to fluctuate. Because of these fluctuations, we believe that period-to-period comparisons of our operating results are not meaningful. In addition, our operating results for a particular quarter or year may fall below the expectations of securities analysts and investors, which could result in a decrease in our stock price.

      We have experienced significant operating losses in each year since our inception on September 8, 1994. As of December 31, 2003, our accumulated deficit was approximately $1.2 billion, of which $679.4 million is attributable to the write-off of IPR&D costs associated with our acquisitions, $221.2 million is attributable to goodwill-related charges and $18.5 million is attributable to a lease-related impairment charge. We may incur substantial additional operating losses over at least the next several years. Operating losses have been and may continue to be principally the result of the various costs associated with our acquisition activities, including the expenses associated with the write-off of IRP&D, research and development programs, preclinical studies and clinical activities. We may never achieve profitability, and our ability to achieve a consistent, profitable level of operations depends in large part on our ability to successfully:

	•	commercialize BEXXAR therapeutic regimen;
	•	enter into corporate partnerships for product discovery, research, development and commercialization;
	•	obtain regulatory approvals for our product candidates; and
	•	manufacture and market our products once they are approved for sale.

      Even if we are successful in the above activities, our operations may not be profitable.

      We may be unable to raise on acceptable terms, if at all, any additional capital resources necessary to conduct our operations. If we are unable to raise any additional capital as may be required, we may be forced to limit some or all of our research and development programs and related operations or curtail commercialization of our product candidates. Our future capital requirements will depend on many factors, including:

	•	continued scientific progress in our discovery and research programs;
	•	progress with preclinical studies and clinical trials;
	•	the magnitude and scope of our discovery, research and development programs;
	•	our ability to maintain existing, and establish additional, corporate partnerships and licensing arrangements;
	•	the time and costs involved in obtaining regulatory approvals;
	•	the costs of building and maintaining a marketing and sales force;
	•	the costs of marketing a product;
	•	the time and costs involved in expanding and maintaining our manufacturing facilities;

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	•	the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, and the cost of any judgment that may be enforced against us for legal fees or other costs of other parties to such claims;
	•	the potential need to develop, acquire or license new technologies and products; and
	•	other factors beyond our control.

      We believe that our existing capital resources, together with committed payments under existing corporate partnerships, bank credit arrangements and interest and investment income, will be sufficient to fund our current and planned operations over at least the next 18 months. However, we intend to seek additional funding through corporate partnerships, and also may seek additional funding through:

	•	public or private equity financings;
	•	public or private debt financings; and
	•	capital lease transactions.