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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2002

OR

For the transition period from _____________ to ______________.

Commission File No. 0-19312

MEDAREX, INC.
(Exact Name of Registrant as Specified in Its Charter.)

Indicate by check x whether 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.

Indicate by check x whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

The number of shares of common stock, $.01 par value, outstanding as of November 1, 2002 was 76,381,480 shares.

MEDAREX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

See notes to these unaudited consolidated  financial statements.

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MEDAREX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

See notes to these unaudited consolidated  financial statements.

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MEDAREX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

See notes to these unaudited consolidated financial statements.

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MEDAREX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

1.     Organization and Basis of Presentation

          The accompanying unaudited consolidated financial statements have been prepared from the books and records of Medarex, Inc. and Subsidiaries (the “Company”) in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for the year. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2001.

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

2.     Net Income (Loss) per Share

          Basic and diluted earnings per share are calculated in accordance with the Financial Accounting Standards Board (“FASB”) SFAS No. 128, “Earnings per Share”. Basic earnings per share is based upon the number of weighted average shares of common stock outstanding. Diluted earnings per share is based upon the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding. Potential shares of common stock result from the assumed exercise of outstanding stock options, which are included under the treasury stock method. For the nine months ended September 30, 2001, the effect of the conversion of the subordinated notes has been excluded from the computation of diluted income per share, as its effect is antidilutive. For the nine months and three months ended September 30, 2002 and the three months ended September 30, 2001, all potentially dilutive securities have been excluded from the computation, as their effect is antidilutive.

          The computation of basic and diluted earnings per share is as follows:

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MEDAREX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

2.     Net Income (Loss) per Share (cont’d)

3.     Marketable Securities

          Marketable securities consist of fixed income investments with a maturity of greater than three months and other highly liquid investments that can be readily purchased or sold using established markets.  Under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” these investments are classified as available-for-sale and are reported at fair value on the Company’s consolidated balance sheet.  Unrealized holding gains and losses are reported within accumulated other comprehensive income as a separate component of shareholders’ equity. Under the Company’s accounting policy, a decline in the fair value of marketable securities is deemed to be “other than temporary” and such marketable securities are generally considered to be impaired if their fair value is less than the Company's cost basis for more than six months, or some other period in light of the particular facts and circumstances surrounding the investment.  If a decline in the fair value of a marketable security below the Company’s cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge.   At June, 2002, the Company’s investments in the equity securities of Tularik, Inc., Oxford GlycoSciences Plc, and Seattle Genetics, Inc. had traded below the Company’s original cost basis for more than six months, at which time the Company deemed that an impairment of these investments had occurred.  At September 30, 2002, the Company’s investment in Northwest Biotherapeutics, Inc. common stock had traded below the Company’s original cost basis for more than six months, at which time the Company determined that an impairment of this investment had occurred.  Accordingly, the Company recorded impairment charges of $7,971 and $3,880, for the nine and three month periods ended September 30, 2002, respectively, which are recorded in the Company’s results of operations.  If the Company deems these investments further impaired at the end of any future period, the Company may incur an additional impairment charge on these investments.

4.     Contingencies

          The Company has a contingent commitment to pay up to $1,000 to Essex Chemical Corporation (“Essex”) without interest in installments equal to 20% of the Company’s net after tax earnings on an annual basis in future years. The Company’s contingent commitment, as amended, to pay up to $1,000 out of future earnings may be satisfied, at the Company’s option, through the payment of cash or shares of the Company’s Common Stock having an aggregate fair market value equal to the amount owed, provided that

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MEDAREX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

such shares are registered with the Securities and Exchange Commission. The Company accrued $667 related to this liability during 2000 which remains accrued at September 30, 2002.

          In the ordinary course of our business, the Company is at times subject to various legal proceedings. The Company does not believe that any of its current legal proceedings, individually or in the aggregate, will have a material adverse effect on its operations or financial condition.

5.     Asset Acquisition

          On May 23, 2002, the Company and its newly created subsidiary Medarex Belgium, S.A. entered into an Asset Purchase Agreement with Corixa Corporation, Coulter Pharmaceutical, Inc., a wholly owned subsidiary of Corixa Corporation and Corixa Belgium S.A., a wholly-owned subsidiary of Corixa Corporation (collectively referred to as “Corixa”). Under the terms of the Asset Purchase Agreement, the Company acquired certain selected assets and business operations of Corixa, including certain preclinical product candidates and programs related to the research and development of therapeutic products for the treatment of autoimmune diseases, cancer and infectious diseases. In addition, the Company agreed to retain approximately 30 Corixa employees related to such product candidates and programs and agreed to sublease approximately 30,000 square feet of laboratory and office space at Corixa’s South San Francisco, California facility.

          Under the terms of the Asset Purchase Agreement, the Company acquired the assets for $21,000 (excluding transaction cost of $405) payable in six equal monthly installments of $3,500 either in cash, or at the Company’s election, in shares of its common stock. As of September 30, 2002, a total of 2,054,235 shares of common stock with a fair value of $15,750 were issued to Corixa along with cash of $1,750 as payment for the first five monthly installments. The remaining $3,500, representing the last monthly installment, is included as a current liability in the Company’s September 30, 2002 consolidated balance sheet. In the event that, during any month during the six-month period following the closing of the transaction, Corixa sells all of the shares of the common stock delivered as payment for the preceding monthly installment and the proceeds of such sale are less than $3,500, the Company must pay the difference to Corixa in cash. If such sale proceeds are greater than $3,500 Corixa must pay the Company an amount equal to 50% of any such excess in cash. In the event that, during any month during the six-month period, Corixa does not sell all of the shares of common stock delivered as payment of the preceding monthly installment, then there will be no such adjustments. As of September 30, 2002, the Company paid $854 and accrued approximately $846, which was paid in October 2002, representing the difference between the proceeds received by Corixa from the sale of the Company’s common stock and the total amount due under the first four monthly installments. The total difference of approximately $1,700 relating to the first four monthly installments is included as a charge to earnings in the Company’s consolidated statement of operations for the nine months ended September 30, 2002.

          The Company also purchased from Corixa certain equipment and laboratory supplies for $2,500, of which approximately $2,100 has been capitalized with the remaining $400 charged to expense.

          As part of this transaction, Corixa may receive up to an additional $6,000 in future consideration in cash or, at the Company’s election, in shares of common stock, based upon certain contingencies.

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MEDAREX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

          The total cost of the asset acquisition was $21,405, of which $405 represented transaction costs.  This amount has been allocated as follows based upon an independent third party valuation:

6.     Licensing, Research and Development Agreements

          As contemplated by a December 1999 binding letter of intent, effective September 4, 2002, the Company entered into a Collaboration and License Agreement with Kirin Brewery Co., Ltd., which provides for the exchange by Kirin and the Company of certain cross-licenses for each other’s technology for the development and commercialization of human antibody products. The License Agreement supercedes the binding letter of intent. Pursuant to the letter of intent, the Company and Kirin developed the KM-Mouse^™, a unique crossbred mouse which combines the traits of the Company’s HuMAb-Mouse^® with Kirin’s TC Mouse^™. Under the License Agreement, the Company and Kirin are exchanging cross-licenses with respect to the KM-Mouse and other antibody-generating mice. In addition, each of the cross-licenses granted under the License Agreement are subject to certain license, milestone and royalty payments by each party to the other. 

7.     Investments in Genmab

          As a result of a series of transactions, including an initial public offering by Genmab A/S, a Danish biotechnology company (“Genmab”), of its ordinary shares in October 2000, the Company owned approximately a 33% interest in Genmab as of December 31, 2000. In December 2001, 88,600 shares of Genmab stock owned by the Company were awarded as a bonus to the President and Chief Executive Officer of the Company, reducing the Company’s ownership percentage in Genmab to approximately 32.6%. In June 2002, the Company’s ownership percentage was further reduced to approximately 31.2% as a result of the issuance by Genmab of new shares to a corporate partner. Due to the size of the Company’s equity interest in Genmab, the Company currently accounts for its interest in Genmab under the equity method of accounting, which provides that the Company must include a portion of Genmab’s income and losses equal to the Company’s percentage equity interest in Genmab in the Company’s financial statements. During the nine and three-month periods ended September 30, 2001, the value of the Company’s investment in Genmab was adjusted to reflect the Company’s share of Genmab’s loss ($3,714) and ($1,955), respectively, and an unrealized gain (loss) of ($1,139) and $5,560, respectively, related to foreign exchange translation. During the nine and three-month periods ended September 30, 2002, the value of the Company’s investment in Genmab was further adjusted to reflect the Company’s share of Genmab’s net loss ($11,318) and ($4,053), respectively, and an unrealized gain (loss) of $6,782 and ($697), respectively, related to foreign exchange translations. Such foreign exchange translation adjustments are included within accumulated other comprehensive income in the Company’s consolidated balance sheet.

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MEDAREX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

          On September 24, 2002, Genmab issued a press release in which it announced that its HuMax-CD4 product, a fully human antibody that targets the CD4 receptor on cells known as T-cells, was found not to be effective in combination with methotrexate in a Phase II study of 155 patients with active rheumatoid arthritis.  Following Genmab’s September 24, 2002 press release, the market value of Genmab’s stock decreased by approximately 60%, and accordingly, the Company recorded an impairment charge of approximately $30,971 in the third quarter of 2002.  If the Company deems this investment to be further impaired at the end of any future period, the Company may incur an additional impairment charge on this investment.

          Summary financial information for Genmab is as follows:

8.     Comprehensive Income (Loss)

          Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes changes in the fair value of our marketable securities and the foreign exchange translation of our equity position in Genmab. The following table sets forth the components of comprehensive income:

9.     Segment Information

          The Company is an integrated monoclonal antibody-based company with antibody discovery, development and manufacturing capabilities. The operations of the Company and its wholly owned subsidiaries constitute one business segment.

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MEDAREX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share data)

          Revenue from customers representing 10% or more of total revenues is as follows:

          No other single customer accounted for more than 10% of the Company’s total revenues for the nine and three months ended September 30, 2001 and 2002, respectively.

10.   Write-off of Facility Costs

          During the second quarter of 2002, the Company made a determination to delay indefinitely the planned construction of a large-scale manufacturing facility at its Bloomsbury, New Jersey location and, instead, to pursue late-stage clinical and commercial supply agreements with third party manufacturers with available capacity to meet the Company’s current internal production timetables. As of September 30, 2002, the Company had not yet entered into any such supply agreements. As a result of this decision, the Company recorded a charge of $11,294, representing the write-off of design, engineering and other pre-construction costs. Furthermore, the Company has expanded its existing clinical manufacturing capacity in its Annandale, New Jersey facility, which it expects will meet all near-term production demands. During the second quarter of 2002, the Company also completed the renovation of its Bloomsbury development facility, which currently accommodates approximately 150 employees for antibody research, development and manufacturing.

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

          This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our projections, estimates, expectations or beliefs concerning among other things, financial items that relate to management’s future plans or objectives or to our future economic and financial performance. Forward-looking statements involve known and unknown risks and uncertainties and are indicated by words such as “anticipates”, “expects”, “intends”, “believes”, “plans”, “could”, “potential” and similar words and phrases. These risks and uncertainties include, but are not limited to, our early stage of product development, history of operating losses and accumulated deficit, additional financing requirements and access to capital funding, dependence on strategic alliances, government regulation of the biopharmaceutical industry and other risks that may be detailed from time to time in our periodic reports and registration statements filed with the Securities and Exchange Commission. All forward-looking statements included in this Quarterly Report are based on information available to us, as of the date hereof, and we do not assume any obligation to update any such forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements. Among the factors that could cause actual results to differ materially are the factors detailed in “Item 5” below. References to our products, business, financial results or financial condition should be considered to refer to us and our subsidiaries unless the context otherwise requires.

Basis of Financial Statement Presentation

          Dollars reported in thousands, except per share data.

          We are a biopharmaceutical company focused on the discovery and development of human antibody-based therapeutic products using our proprietary technology platform, the UltiMAb Human Antibody Development System^SM. We believe this unique combination of human antibody technologies enables us to rapidly create and develop high affinity, fully human antibodies to a wide range of potential disease targets for therapeutic antibody products, including products for the treatment and/or diagnosis of cancer, inflammation, auto-immune and other life-threatening and debilitating diseases.

          With our UltiMAb^™ platform, which includes our HuMAb-Mouse®, Kirin Brewery Co., Ltd.’s TC Mouse^™ and the KM-Mouse^™, a unique cross-bred mouse we developed in partnership with Kirin, we believe that we have assembled a unique family of human antibody technologies for creating the entire spectrum of high-affinity, fully human antibodies. We intend to leverage our product development capabilities with those of our partners, while also gaining access to novel therapeutic targets and complementary development, sales and marketing infrastructure. As of September 30, 2002, we have 42 partnerships with pharmaceutical and biotechnology companies to jointly develop and commercialize products or to otherwise acquire the rights to use our proprietary technology in their development of new products, including industry leaders such as Amgen, Inc., Centocor, Inc. (a subsidiary of Johnson & Johnson), Eli Lilly & Company, Human Genome Sciences, Inc., Immunex Corporation, Novartis Pharma AG, Novo Nordisk A/S, and Schering AG. Some of these are licensing partnerships, with the potential to provide us with licensing fees, milestone payments and royalty payments; others are collaborative partnerships and provide for the sharing of product development costs, as well as any revenues, expenses and profits associated with products that might be sold commercially.

          Our licensing partners typically obtain licenses to one or more of our antibody generating technologies which allow these partners to develop and commercialize antibody-based products. We could

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receive license fees, milestones and royalties in connection with each of these products. Under these licenses, there is usually an initial period during which our corporate partner may elect to enter into a research license for antibodies to a particular designated target. Subsequently, our licensing partner may elect to obtain a commercial license for monoclonal antibodies to a particular target. As of September 30, 2002, 21 of our total partnerships were licensing partnerships, and we expect to continue adding additional licensing partnerships in the future.

          We are also pursuing an “Applied Genomics” strategy in order to gain access to new target antigens as they are identified, while also sharing the risks and rewards of the related antibody development and commercialization. To this end, we have established a number of collaborative partnerships with leading companies in the fields of genomics and proteomics to jointly develop and commercialize human antibody products. Typically, our collaborators will provide target antigens, and we will generate antibodies against those antigens using our UltiMAb Human Antibody Development System. We and our collaborators typically agree to share equally the costs of clinical development and manufacturing as well as our revenues, expenses and profits associated with the products. As of September 30, 2002, 21 of our total partnerships were collaborative partnerships, and we expect to continue adding additional collaborations in the future.

          Revenue—Our revenue is principally derived through licensing our human antibody technology to pharmaceutical and biotechnology companies. The terms of these agreements typically include potential license fees and a series of milestone payments commencing upon initiation of clinical trials and continuing through commercialization. These payments may total $7,000 to $10,000 per product if the antibody receives approval from the FDA and equivalent foreign agencies. In the event a product is commercialized, we are also entitled to royalties on product sales. Additional revenue is earned from antibodies manufactured and then sold to corporate partners as well as from government grants.

          Research and Development Expenses—Research and development expenses consist primarily of compensation expense, facilities, preclinical and clinical trials and supply expense relating to antibody product development and to the breeding, caring for and continued development of our HuMAb-Mouse and KM-Mouse, as well as to the performance of contract services for our collaborative partners.

          General and Administrative Expenses—General and administrative expenses consist primarily of compensation, facility, travel, legal fees and other expenses relating to our general management, financial, administrative and business development activities.

Critical Accounting Policies

          The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our consolidated financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the accounting policies that require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements to be as follows:

          Revenue Recognition.     Historically, a significant portion of our revenue has been recognized pursuant to collaboration and license agreements with our partners. Revenue is recognized as research services are performed over the related funding periods for each agreement. Deferred revenue may result when the level of effort we are required to expend during a specific period is less in comparison than the

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funds we received under the respective agreements or when funds received are refundable under certain circumstances. Milestone payments are recognized as revenue upon achievement of specific milestones. Non-refundable upfront payments received in connection with our licensing partnerships are deferred and recognized as revenue on a straight-line basis over the relevant periods of the respective agreements.

          Investments.     All marketable securities are classified as available-for-sale securities and are carried at fair value. Marketable securities include publicly traded debt and equity securities accounted for under the cost method. These securities trade on listed exchanges; therefore, fair value is readily available. Under our accounting policy, a decline in the fair value of a marketable security is deemed to be “other than  temporary” and such marketable security is generally considered to be impaired if its fair value is less than our cost basis of such securities for more than six months, or some other period in light of the particular facts and circumstances surrounding the investment. If a decline in the in the fair value of a marketable security below our cost basis is determined to be other than temporary, such marketable security is written down to the estimated fair value as a new cost basis and the amount of the write down is included in earnings as an impairment charge.

          In addition, in connection with our collaborative partnering business, we make strategic investments in the securities of companies that are privately held. These securities are carried at original investment cost. Because these securities are not listed on a financial exchange, we value these investments by using information acquired from industry trends, the management of these companies, financial statements, and other external sources. Based on the information acquired through these sources, we record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary.

          Future adverse changes in market conditions or adverse changes in operating results of underlying investments that may not be reflected in an investment’s current carrying value, may also require an impairment charge in the future.

          Valuation of Long-Lived and Intangible Assets.     We assess the impairment of identifiable intangible assets and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following:

          •     A significant underperformance relative to expected historical or projected future operating results;

          •     A significant change in the manner of our use of the acquired asset or the strategy for our overall business; and/or

          •     A significant negative industry or economic trend.

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

          Acquired In-Process Technology.     In-Process Technology expense is determined based on an analysis using risk-adjusted cash flows expected to be generated by products that may result from in-process technologies which have been acquired. This analysis includes forecasting future cash flows that are expected to result from the progress made on each in-process project prior to the acquisition date. Cash flows are estimated by first forecasting, on a product-by-product basis, net revenues expected from the sales of the first generation of each in-process project and risk adjusting these revenues to reflect the probability

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of advancing to the next stage of the FDA approval process. The forecast data in the analysis is based on internal product level forecast information maintained by us in the ordinary course of business. The inputs used in analyzing In-Process Technology is based on assumptions, which we believe to be reasonable but which are inherently uncertain and unpredictable. These assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Appropriate operating expenses are deducted from forecasted net revenues on a product-by-product basis to establish a forecast of net returns on the completed portion of the in-process technology. Finally, net returns are discounted to a present value using discount rates that incorporate the weighted average cost of capital relative to the biotech industry and our company as well as product specific risks associated with the acquired in-process research and development products. The product specific risk factors include the product’s phase of development, type of antibody under development, likelihood of regulatory approval, manufacturing process capability, scientific rationale, preclinical safety and efficacy data, target product profile, and development plan. In addition to the product specific risk factors, a discount rate is used for the valuation, which represents a considerable risk premium to our weighted average cost of capital. The valuations used to estimate In-Process Technology require us to use significant estimates and assumptions that if changed, may result in a different valuation for In-Process Technology. A valuation for our acquisition of assets from Corixa Corporation was completed by an independent third-party in accordance with SEC guidelines.

Results of Operations

          Nine months ended September 30, 2001 and 2002

          Revenue increased by $4,895, from $28,589 to $33,484, during the nine-month period ended September 30, 2002, a 17% increase as compared to the nine-month period ended September 30, 2001. The increase relates principally to $8,550 of sales of MDX-CD4 to Genmab A/S, partially offset by $4,500 in lower contract and license revenues from Kirin.  As a result of Genmab’s recently announced decision to wind down its anti-CD4 program for rheumatoid arthritis, we anticipate that sales of MDX-CD4 (and corresponding cost of sales) will be significantly lower in the future. In addition, we expect contract and license revenues to be lower in the future as a result of the completion in September 2002 of the revenue recognition associated with the transfer of technology to IDM in July 2000.

          Cost of sales increased by $5,234, from $495 to $5,729, during the nine-month period ended September 30, 2002, a 1,057% increase as compared to the nine-month period ended September 30, 2001. The increase primarily reflects the production cost of MDX-CD4 that was sold to Genmab in 2002.

          Research and development expenses are largely comprised of personnel costs, those expenses related to facilities for our clinical research, development and clinical trial manufacturing efforts, third party research costs, research supply costs and license and technology access fees. Research and development expenses for our products in development increased by $32,803, from $23,714 to $56,517, during the nine-month period ended September 30, 2002, a 138% increase as compared to the nine-month period ended September 30, 2001. The increases relate primarily to costs associated with the following:

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          We also expect expenses related to clinical trials to increase in the future as we continue to develop our therapeutic product pipeline. As part of our partnering strategy, a significant portion of the research and development expenses incurred in connection with products using our technology is expected to be borne by our partners. We believe this allows us to participate in the research and development of substantially more potential product candidates than we could develop on our own if we bore the entire cost of development. Products using our technology are currently in various stages of development from preclinical to Phase III. The successful development and commercialization of these product candidates is dependent on many factors, including among other things, the efforts of our partners, unforeseen delays in, or expenditures relating to, preclinical development, clinical testing, manufacturing or regulatory approval, failure to receive

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regulatory approval or market acceptance, the emergence of competitive products and the inability to produce or market our products due to third-party proprietary rights.

          General and administrative expenses include compensation and other expenses related to finance and administrative personnel, legal services and business development. General and administrative expenses for the nine-month period ended September 30, 2002, increased by $5,221, from $11,801 to $17,022, a 44% increase as compared to the nine-month period ended September 30, 2001. The increase is primarily attributable to higher personnel costs of $2,460, consulting expenses of $1,000 and depreciation expense of $481. General and administrative expenses are expected to increase in the future as our products are developed and we expand our business activities.

          Write off of facility costs relates to a determination we made during the second quarter of 2002 to delay indefinitely the planned construction of a large scale manufacturing facility at our Bloomsbury, New Jersey location and to pursue late-stage clinical and commercial supply agreements with third party manufacturers with available capacity to meet our current internal production timetables. As of September 30, 2002, we had not yet entered into any such supply agreements. As a result of this decision, we recorded a charge of $11,294 during the nine-month period ended September 30, 2002, representing the write-off of design, engineering and other pre-construction costs. Furthermore, we have expanded our existing clinical manufacturing capacity in our Annandale, New Jersey facility, which we expect will meet all near-term production demands. We now expect our capital expenditures to be approximately $36,000 in 2002 rather than $60,000, as originally contemplated in the first quarter of 2002, but this is subject to change.

          Acquisition of in-process technology relates to our acquisition of certain assets of Corixa in May 2002.   The total cost of the acquisition (including transaction costs), discussed more fully under the section herein entitled “Liquidity and Capital Resources,” was $21,405. Based upon an independent third party valuation, $16,312 of this amount was charged to operations as acquisition of in-process technology in the second quarter of 2002.

          Equity in net loss of affiliate for the nine-month period ended September 30, 2002, increased by $7,604, from $3,714 to $11,318, a 205% increase as compared to nine-month period ended September 30, 2001. This increase was primarily the result of Genmab’s increased activity in the research, development and expansion of its business. Due to the size of our equity investment in Genmab (approximately 31.2%), Genmab is an affiliated company and is accounted for using the equity method of accounting which provides that we must include a portion of Genmab’s income and losses equal to our percentage equity interest in Genmab in our financial statements. We expect equity in net loss of Genmab to increase in the near future due to Genmab’s publicly stated intention to make additional investments in research and development to develop its own product pipeline.

          Interest and dividend income for the nine-month period ended September 30, 2002, decreased by $4,595, from $18,885 to $14,290 a 24% decrease as compared to the nine-month period ended September 30, 2001. The decrease reflects lower interest income due to decreasing interest rates received on our investments partially offset by our higher average cash balances as the result of proceeds received from the June 26, 2001 public offering of our 4.50% convertible subordinated notes due in 2006.

          Impairment loss on investment in Genmab of $30,971 resulted from an approximate 60% decrease in the market value of Genmab stock following Genmab’s September 24, 2002 press release in which it announced that its HuMax-CD4 product, a fully human antibody that targets CD4 receptor on cells known as T-cells was found not to be effective in combination with methotrexate in a Phase II study of 155 patients with active rheumatoid arthritis.  We recorded an impairment charge in the third quarter of 2002 as a result

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of the decrease in the market of the Genmab stock. If we deem this investment to be further impaired at the end of any future period, we may incur an additional impairment charge on this investment.

          Impairment loss on investments in other corporate partners of $7,971 during the nine-month period ended September 30, 2002 represents a write-down of the value of our investments in Oxford GlycoSciences Plc, Northwest Biotherapeutics, Inc., Seattle Genetics, Inc. and Tularik, Inc. as part of our collaborations with these partners. During the first nine months of 2002, the decline in the value of these investments was determined to be other than temporary.   If we deem these investments to be further impaired at the end of any future period, we may incur an additional impairment charges on these investments.

          Additional payments related to asset acquisition of $1,700 represents additional payments to Corixa in connection with the first four monthly installments required under the Corixa Asset Purchase Agreement. Under the terms of this agreement, under certain circumstances, we are required to pay to Corixa an amount equal to the difference between the proceeds received by Corixa from the sale of any shares of our common stock delivered as payment of any installment of the purchase price of the assets and the total amount of the purchase price installment due under the agreement. We anticipate additional charges in the fourth quarter of 2002 related to payment of the final two installments of the purchase price.

          Interest expense during the nine-month period ended September 30, 2002 increased by $4,414 from $2,376 to $6,790, a 186% increase, as compared to the nine-month period ended September 30, 2001. This increase reflects interest expense incurred on our 4.50% convertible subordinated notes issued on June 26, 2001 and due in 2006. Interest on the notes is due on January 1 and July 1 of each year.

          Three months ended September 30, 2001 and 2002

          Revenue increased by $3,173 during the three-month period ended September 30, 2002, from $11,456 to $14,629, a 28% increase as compared to the three-month period ended September 30, 2001. The increase relates principally to higher sales revenues of MDX-CD4 to Genmab of $5,972 partially offset by lower contract and license revenues from Kirin of $1,500 and Genmab of $1,229. As a result of Genmab’s recently announced decision to wind down its anti-CD4 program for rheumatoid arthritis, we anticipate that sales of MDX-CD4 (and corresponding cost of sales) to Genmab will be significantly lower in the future. In addition, we expect contract and license revenues to be lower in the future as a result of the completion in September 2002 of the revenue recognition associated with the transfer of technology to IDM in July 2000.

          Cost of sales increased by $3,562 during the three-month period ended September 30, 2002, from $361 to $3,923, a 987% increase as compared to the three-month period ended September 30, 2001. The increase primarily reflects the production cost of MDX-CD4 that was sold to Genmab in the third quarter of 2002.

          Research and development expenses are largely comprised of personnel costs, those expenses related to facilities for our clinical research, development and clinical trial manufacturing efforts, third party research costs and supply costs. Research and development expenses for our products in development increased by $9,744 during the three-month period ended September 30, 2002, from $11,158 to $20,902, an 87% increase as compared to the three-month period ended September 30, 2001. The increases relate primarily to costs associated with the following:

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          As stated earlier herein, we expect expenses related to clinical trials to increase in the future as we continue to develop our therapeutic product pipeline.

          General and administrative expenses include compensation and other expenses related to finance and administrative personnel, legal services and business development. General and administrative expenses for the three-month period ended September 30, 2002, increased by $1,136, from $4,690 to $5,826, a 24% increase as compared to the three-month period ended September 30, 2001. The increase is primarily attributable to higher personnel costs ($806), consulting expenses ($215), legal fees ($155) and insurance costs ($155). General and administrative expenses are expected to increase in the future as our products are developed and we expand our business activities.

          Equity in net loss of affiliate for the three-month period ended September 30, 2002, increased by $2,098, from $1,955 to $4,053, a 107% increase as compared to the three-month period ended September 30, 2001. This increase was primarily the result of Genmab’s increased activity in research, development and expansion of its business. Genmab is an affiliated company and is accounted for using the equity method. We expect equity in net loss of Genmab to increase in the near future due to the Genmab’s publicly stated intention to make additional investments in research and development to develop its own product pipeline.

          Interest and dividend income for the three-month period ended September 30, 2002, decreased by $1,830, from $6,423 to $4,593, a 28% decrease as compared to the three-month period ended September 30, 2001. The decrease reflects lower interest rates received on our investments, partially offset by our higher

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average cash balances as the result of proceeds received from the June 26, 2001 public offering of our 4.50% convertible subordinated notes due in 2006.

          Impairment loss on investment in Genmab of $30,971 resulted from an approximate 60% decrease in the market value of Genmab stock following Genmab’s September 24, 2002 press release in which it announced that its HuMax-CD4 product, a fully human antibody that targets CD4 receptor on cells known as T-cells was found not to be effective in combination with methotrexate in a Phase II study of 155 patients with active rheumatoid arthritis.  The Company recorded an impairment charge in the third quarter of 2002 as a result of the decrease in the market value of the Genmab stock.  If we deem this investment to be further impaired at the end of any future period, we may incur an additional impairment charge on this investment.

          Impairment loss on investments in other corporate partners of $3,880 during the three-month period ended September 30, 2002 represents a write-down of the value of the common stock of Northwest Biotherapeutics, Inc. as part of our collaboration.  During the third quarter of 2002, the decline in the value of this investment was determined to be “other than temporary.”

          Additional payments related to asset acquisition of $1,419 represents additional payments to Corixa in connection with the second, third and fourth monthly installments required under the Corixa Asset Purchase Agreement. Under the terms of this agreement, under certain circumstances, we are required to pay to Corixa an amount equal to the difference between the proceeds received by Corixa from the sale of any shares of our common stock delivered as payment of any installment of the purchase price of the assets and the total amount of the purchase price installment due under the agreement. We anticipate additional charges in the fourth quarter of 2002 related to payment of the final two installments of the purchase price.

          Interest expense during the three-month period ended September 30, 2002 increased by $14 from $2,249 to $2,263 as compared to the three-month period ended September 30, 2001. This increase reflects interest expense on our 4.50% convertible subordinated notes issued on June 26, 2001 and due in 2006. Interest on the notes is due on January 1 and July 1 of each year.

Liquidity and Capital Resources

          As of September 30, 2002, we had cash, cash equivalents and marketable securities of $369,678.  We invest our cash equivalents and marketable securities primarily in highly liquid, interest bearing, investment grade and government securities in order to preserve capital.

          We require cash to fund our operations, make capital expenditures and strategic investments, and to pay debt service on our convertible note issue.  Since inception, we have financed our operations through the sale of our securities in public and private placements, sales of our products for research purposes and technology transfer and license fees. We expect to continue to fund our cash requirements from these sources in the future.

          Cash Used in Operations.     Net cash used in operating activities for the nine months ended September 30, 2002 was $55,992 compared with net cash used in operating activities of $181 for the nine months ended September 30, 2001. The increase in cash used in operating activities compared to the same period in 2001 relates primarily to the following significant increases: 

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As indicated in the section herein entitled “Results of Operations”, the increase in research and development expenditures results from higher personnel costs, those expenses related to facilities for our clinical research, development and manufacturing efforts, third party research costs, research supply costs and license and technology access fees.  The increase in cash used in operations also resulted from reduced investment income and interest paid to our convertible noteholders.

          Cash Provided by Investing Activities.     Investing activities for the nine months ended September 30, 2002 provided $93,602 of cash as compared to a use of $157,965 of cash for the corresponding period in 2001. The decrease in cash provided by investing activities was primarily the result of the following factors:

          Cash Provided by Financing Activities.     Net cash provided by financing activities for the nine months ended September 30, 2002 was $198 as compared to $169,480 for the nine months ended September 30, 2001. This decrease in cash provided by financing activities is due to the $175,000 4.50% convertible subordinated notes due 2006 which were issued during the second quarter of 2001.

          Other Liquidity Matters.     In November 2000, we purchased our Milpitas, California facility for approximately $14,600. We previously leased this facility. This property contains approximately 57,000 square feet of laboratory and office space and, as of September 30, 2002, we had cumulatively expended approximately $25,000 on renovating and expanding this facility.

          In January 2001, we purchased a facility and adjacent land in Bloomsbury, New Jersey for approximately $9,200. The Bloomsbury facility is situated on approximately 106 acres of land and currently contains space for approximately 165,000 square feet of laboratory and office space. We currently are using 75,000 square feet as laboratory and office space. We have completed the initial phase of the Bloomsbury facility and have cumulatively expended approximately $55,000. We had originally intended to build a large-scale clinical and commercial manufacturing facility on this property, but during the second quarter of 2002, we made a determination to delay indefinitely planned construction at the Bloomsbury location and to pursue late-stage clinical and commercial supply agreements with third party manufacturers with available capacity to meet our current internal production timetables. For the balance of 2002, we expect to expand our research facility in Milpitas, California and continue the expansion of the existing laboratory and development capacity in Bloomsbury and Annandale, New Jersey. We currently expect the total costs for this expansion in 2002 to be up to approximately $36,000, rather than $60,000, as originally contemplated in the first quarter of 2002, but this is subject to change.

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          In July 2002, we entered into a lease for 36,676 square feet of laboratory and office space in Sunnyvale, California. We plan to spend $4,400 on leasehold improvements for this space and expect to occupy this space during the fourth quarter of 2002. This space will replace the Corixa facility in South San Francisco that is presently occupied by 30 employees retained in connection with our acquisition of certain assets of Corixa, discussed more fully below.

          In connection with our merger with Essex Medical Products in 1987, we issued promissory notes to Essex Chemical Corporation in the principal amount of $100 and committed to pay 20% of our net after-tax income until a total of $1,000 has been paid, contingent upon the occurrence of certain events. On June 6, 1991, we repaid the $100 of notes, plus accrued interest to Essex. As the result of our net income in 2000 we accrued $667 payable to Essex, which remains accrued at September 30, 2002. At our option, this obligation may be satisfied by the payment of shares of our common stock having a fair market value equal to the amount owed, provided such shares are registered for sale with the SEC.

          In July 2000, we entered into an agreement with Immuno-Designed Molecules S.A. whereby we licensed to IDM certain of our technologies in exchange for equity units in IDM. As a result of this transaction, we realized a gain from the transfer of technology of approximately $40,500 (based upon an independent valuation). In accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, we will recognize this gain over a 24-month period as contract revenue. Accordingly, during the nine months ended September 30, 2002, we recognized the remaining amount of $14,332 as contract revenue.  As of September 30, 2002, there is no additional revenue to recognize regarding this transaction.

          On May 23, 2002, we entered into an Asset Purchase Agreement with Corixa. Under the terms of the Asset Purchase Agreement, we acquired certain selected assets and business operations of Corixa, including certain preclinical product candidates and programs related to the research and development of therapeutic products for the treatment of autoimmune diseases, cancer and infectious diseases. In addition, we agreed to retain approximately 30 Corixa employees related to such product candidates and programs and agreed to sublease approximately 30,000 square feet of laboratory and office space at Corixa’s South San Francisco facility. This sublease is for a six month period with an option to renew for an additional six months.

          Under the terms of the Asset Purchase Agreement, we acquired the Corixa assets for $21,000 (excluding transaction cost of $405) payable in six equal monthly installments of $3,500 either in cash, or at our election, in shares of common stock. As of September 30, 2002, a total of 2,054,235 shares of common stock with a fair value of $15,750 were issued to Corixa along with cash of $1,750 as payment for the first five monthly installments. The remaining $3,500, representing the last monthly installment, is included as a current liability in our September 30, 2002 consolidated balance sheet. In the event that, during any month during the six-month period following the closing of the transaction, Corixa sells all of the shares of the common stock delivered as payment for the preceding monthly installment and the proceeds of such sale are less that $3,500, we must pay the difference to Corixa in cash. If such sale proceeds are greater than $3,500, Corixa must pay us an amount equal to 50% of any such excess in cash. In the event that, during any month during the six-month period, Corixa does not sell all of the shares of common stock delivered as payment of the preceding monthly installment, then there will be no such adjustments.  For the three and nine-months periods ended September 30, 2002, we expensed approximately $1,419 and $1,700, respectively, representing the cash shortfall experienced by Corixa, of which $846 was accrued as of September 30, 2002 and paid in October 2002. Such amounts are reflected as “Additional payments related to asset acquisition”

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in our consolidated statement of operations for the nine and three-month periods ended September 30, 2002. We anticipate additional charges in the fourth quarter of 2002 related to payment of the final two installments of the purchase price.

          We also purchased from Corixa certain equipment and laboratory supplies for $2,500 of which approximately $2,100 has been capitalized with the remaining $400 charged to expense.

          As part of this transaction, Corixa may receive up to an additional $6,000 in future consideration in cash or, at our election, in shares of common stock, based upon certain contingencies.

          During the third quarter of 2002, we terminated all consulting arrangements with members of our board of directors and adopted new compensation arrangements for board members.  Each board member other than the Chairman will now receive an annual retainer of $20 and 14,000 stock options.  The Chairman of our board will receive an annual retainer of $40 and 28,000 stock options.  In addition, board members will receive nominal fees for participation on board committees and attendance at board meetings.

          Future Liquidity Resources.     Our current sources of liquidity are cash, cash equivalents and marketable securities, interest and dividends earned on such cash, sales of our products for research, and contract and licensing revenue. We believe that such sources of liquidity will be sufficient to meet our operating, debt service, and capital requirements for at least the next 24 months. However, we may require additional financing within this time and may raise funds through public or private financings, line of credit arrangements, collaborative relationships and/or other methods.

          Our future capital requirements will depend on numerous factors, including interest income, the expansion of our research and development activities, including pre-clinical and clinical product development and clinical trails.  This will include amounts spent on proprietary and co-development of product candidates.

          We intend to use our available cash to finance these programs, but we may also pursue other financing alternatives to meet these requirements. The use of cash on hand or other financial alternatives will depend on several factors including the future success of our products in clinical development, the prevailing interest rate environment, and the access to capital as the condition of the financial markets changes.

Recently Issued Accounting Pronouncements

          In September 2001, the Financial Accounting Standards Board, or FASB, issued Statement No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have infinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The January 1, 2002 adoption of Statement No. 142 did not have any impact on our consolidated financial position or results of operations as we currently have no goodwill or intangible assets with indefinite useful lives.

          In August 2001, the FASB issued Statement of Financial Accounting Standards, or Statement No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Statement 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-

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lived assets. Since the requirement is to recognize the obligation when incurred, approaches that have been used in the past to accrue the asset retirement obligation over the life of the asset are no longer acceptable. Statement 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) and to depreciate that cost over the life of the asset. The liability is increased at the end of each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. Enterprises are required to adopt Statement 143 for fiscal years beginning September 15, 2002. We are currently reviewing the impact of Statement 143 and do not believe adoption of this Statement will have a material impact on our operating results or financial position.

          In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. Statement No. 144 supersedes Statement No.121 and identifies the methods to be used in determining fair value. The January 1, 2002 adoption of Statement No. 144 did not have any impact on our consolidated financial position or results of operations.

Item 3.     Quantitative and Qualitative Disclosures About Market Risks.

          We do not currently use derivative financial instruments in our investment portfolio. However, we regularly invest excess operating cash in deposits with major financial institutions, money market funds, notes issued by the U.S. Government, as well as fixed income investments and U.S. bond funds both of which can be readily purchased or sold using established markets. We believe that the market risk arising from our holdings of these financial instruments is minimal. We do not have exposure to market risks associated with changes in interest rates, as we have no variable interest rate debt outstanding. We do not believe we have any material exposure to market risks associated with interest rates.

          We have been and may continue to be exposed to exchange conversion differences in translating the foreign results from operations of our investment in Genmab to U.S. dollars. Depending upon the strengthening or weakening of the U.S. dollar, the conversion difference could be significant to our recording of our investment in Genmab. Foreign exchange translation gains or losses have been and will continue to be recorded within “accumulated other comprehensive income” in the equity section of our balance sheet.

Item 4.     Controls and Procedures

          Based upon an evaluation within the 90 days prior to the filing date of this report, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended, are effective, as of the evaluation date, in  timely alerting  them to  material  information relating to our Company  required to be included in our  reports filed or submitted under the Exchange Act.  Since the date of the evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect such controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Part II—Other Information

Item 1.     Legal Proceedings

          In the ordinary course of our business, we are at times subject to various legal proceedings. We do not believe that any of our current legal proceedings, individually or in the aggregate, will have a material adverse effect on our operations or financial condition.

Item 5.     Other Information

Additional factors that might affect future results. Dollars reported in thousands, except per share data.

Our product candidates are in early stages of development.

          Our human antibody technology is a new approach to the generation of antibody-based therapeutic products. Product candidates employing our human antibody technology are in early stages of development. Only a limited number of fully human antibody product candidates employing our human antibody technology have been generated pursuant to our collaborations. Investigational New Drug Applications, or INDs, have been submitted to the United States Food and Drug Administration, or FDA, for only a subset of these candidates, and clinical trials have not yet commenced for all of these candidates. Only one of these product candidates is currently in the Phase III clinical trial stage. In addition, we are not aware of any commercialized fully human monoclonal antibody therapeutic products that have been generated from any technologies similar to ours. Product candidates employing our human antibody technology may not advance beyond the early stages of product development or demonstrate clinical safety and effectiveness.

          Our human antibody technology may not generate antibodies against all the antigens to which it is exposed in an efficient and timely manner, if at all. If our human antibody technology fails to generate antibody product candidates, or if we or our partners do not succeed in the development of products employing our antibody technology, those product candidates may not be approved or commercialized and our business will suffer.

Our products are still under development, and no revenues have been generated from their sale.

          We have entered into corporate partnerships with a number of companies and are seeking additional alliances that will support the costs of developing our portfolio of antibody-based product candidates. The success of these products is dependent upon the efforts of our corporate partners in developing these products in the future. Neither we nor our corporate partners know if any of these products will be effective.

Successful development of our products is uncertain.

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

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

          Because we and our collaborative partners have not begun commercial sales of our products, our revenue and profit potential are unproven and our limited operating history makes it difficult for an investor to evaluate our business and prospects. Our technology may not result in any meaningful benefits to our current or potential collaborative partners. Further, due to our limited operating history, we have difficulty accurately forecasting our revenue. Our business and prospects should be considered in light of the heightened risks and unexpected expenses and problems we may face as a company in an early stage of development in a new and rapidly evolving industry. We have decided, in consultation with our partners, to discontinue our clinical development programs for MDX-33 and MDX-44, respectively.  MDX-33 is a humanized anitbody targeting CD64 that is designed for the treatment of ideopathic thrombocytopenia purpura, or ITP.  MDX-44 is a humanized antibody targeting CD64 that has been studied in connection with atopic dermatitis.

We have incurred large operating losses and these losses may continue.

          We have incurred large operating losses and these losses may continue. In particular, as of September 30, 2002, we had an accumulated deficit of approximately $243,987. Our losses have resulted principally from: 

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          We do not know when or if we or our partners will complete any pending or future product development efforts, receive regulatory approval or successfully commercialize any approved products. We may continue to incur substantial operating losses even if our revenues increase. As a result, we cannot predict the extent of future losses or the time required for us to achieve profitability, if at all.

Our operating results may vary significantly from period-to-period.

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

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

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

Clinical trials required for our product candidates are expensive and time-consuming and their outcome is uncertain.

          In order to obtain FDA approval to market a new drug product, the company or our licensees must demonstrate proof of safety and efficacy in humans, as well as quality manufacturing capability. For biological products, purity and potency must also be demonstrated. To meet these requirements, we or our licensees will have to conduct extensive preclinical testing and "adequate and well-controlled" clinical trials. Conducting clinical trials is a lengthy, time-consuming and expensive process. The length of time may vary substantially according to the type, complexity, novelty and intended use of the product candidate, and often can be several years or more. Delays associated with products for which we are directly conducting preclinical or clinical trials may cause us to incur additional operating expenses. Moreover, we will continue to be subject to the preclinical testing and clinical trials of certain product candidates conducted by our licensees and collaborative partners over which we have no control. The commencement and rate of completion of clinical trials may be delayed by many factors, including:

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          Even if we obtain positive results from preclinical or clinical trials, we may not achieve the same success in future trials. Clinical trials may not demonstrate statistically sufficient safety and effectiveness to obtain the requisite regulatory approvals for product candidates employing our human antibody technology. The failure of clinical trials to demonstrate safety, effectiveness, potency and/or purity for our desired indications could harm the development of that product candidate as well as other product candidates, and our business and results of operations will suffer.

Success in early clinical trials may not be indicative of results obtained in later trials.

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

          In addition, regulatory delays or rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of product development. For example, the FDA recently announced that it is moving several product categories currently regulated by the agency's Center for Biologics Evaluation and Research, or (CBER) to the agency's Center for Drug Evaluation and Research, or (CDER). These product categories include monoclonal antibodies as well as cytokines, growth factors, enzymes, interferons and certain proteins. The effect that this reorganization at the FDA will have on clinical trials and product approval outcomes or timing is uncertain, but could cause delays or other currently unforeseeable effects.

Product candidates employing our antibody technology may fail to gain market acceptance.

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

          In addition, many of our activities involve genetic engineering in animals and animal testing. These types of activities have been the subject of controversy and adverse publicity. Animal rights groups and various other organizations and individuals have attempted to stop genetic engineering activities and animal testing by lobbying for legislation and regulation in these areas.

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          If products employing our technology do not achieve significant market acceptance, our business will suffer.

The successful commercialization of our antibody products will depend on obtaining coverage and reimbursement for use of these products from third-party payors.

          Sales of pharmaceutical products largely depend on the reimbursement of patients’ medical expenses by government health care programs and private health insurers. Without the financial support of the governments or third-party payors, the market for products employing our human antibody technology will be limited. These third-party payors are increasingly challenging the price and examining the cost effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. We may need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of our products. Such studies may require us to provide a significant amount of resources. Our project candidates may not be considered cost-effective. Third-party payors may not reimburse sales of products employing our human antibody technology, or enable us or our corporate partners to sell them at profitable prices.

          Third-party payors control health care costs by limiting both coverage and the level of reimbursement for new health care products. In the future, the United States government may institute price controls and further limits on Medicare and Medicaid spending. Internationally, medical reimbursement systems vary with differing degrees of regulation. Pricing controls and reimbursement limitations could affect the payments we receive from sales of products employing our human antibody technology. These variations could harm our ability and the ability of our corporate partners to sell products employing our human antibody technology in commercially acceptable quantities at profitable prices.

We have limited manufacturing capabilities.

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

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

          We may also encounter problems with the following: