UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2004

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Period From                     to                    

Commission File Number: 0-19986

CELL GENESYS, INC.

500 Forbes Boulevard, South San Francisco, California 94080
(Address of principal executive offices and zip code)

(650) 266-3000
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 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 x No o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

     As of October 29, 2004, the number of outstanding shares of the Registrant’s Common Stock was 44,970,741.

CELL GENESYS, INC.
TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Cell Genesys, Inc.

See accompanying notes

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Cell Genesys, Inc.

See accompanying notes

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Cell Genesys, Inc.

See accompanying notes

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Cell Genesys, Inc.

1. Organization and Basis of Presentation

     Cell Genesys, Inc. (“Cell Genesys” or “the Company”) has focused its research and product development efforts on biological therapies for patients with cancer. The Company’s objective is to develop and commercialize cell-based cancer vaccines, oncolytic virus therapies and antiangiogenesis therapies to treat different types of cancer. Cell Genesys’ current clinical-stage programs include GVAX^® cancer vaccines and oncolytic virus therapies.

     The consolidated financial statements include the accounts of Cell Genesys and its majority-owned subsidiary, Ceregene, Inc. through August 3, 2004, after which, as a result of a decline in relative ownership, Ceregene was no longer consolidated, but is accounted for under the equity method. All significant intercompany balances and transactions have been eliminated.

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004 or any other period.

     The condensed consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Report on Form 10-K for the year ended December 31, 2003.

2. Stock-Based Compensation

     In accordance with the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations and to adopt the “disclosure only” alternative described in SFAS 123. Under APB 25, when the exercise price of the Company’s employee stock options equals or exceeds the fair market value on the date of the grant or the fair value of the underlying stock on the date of the grant as determined by the Company’s Board of Directors, no compensation expense is recognized.

     The following table illustrates, pursuant to SFAS 123 and as amended by SFAS No. 148, the effect on net loss and related net loss per common share had compensation costs for stock-based employee compensation plans been determined based upon the fair value method prescribed under SFAS 123:

3. Net Loss Per Share

     Basic net loss per common share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common share would include the impact of potentially dilutive securities. As the Company’s potentially dilutive securities (stock options and redeemable convertible preferred stock) were anti-dilutive for all periods reported, they have been excluded from the computation of shares used in computing diluted net loss per common share.

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4. Comprehensive Income (Loss)

     Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes to stockholders’ equity of the Company that are excluded from net loss. Other comprehensive income (loss) includes solely unrealized gains or losses on the Company’s available-for-sale securities, including the Company’s holdings of Abgenix, Inc. common stock, net of tax. The following table presents the calculation of comprehensive income (loss):

5. Ceregene Series B Financing

     Ceregene, Inc., formerly a majority-owned subsidiary of Cell Genesys, announced on August 4, 2004 the initial closing of a $32.0 million Series B preferred stock financing. The Company participated in the financing through the conversion of a bridge loan into shares of Ceregene’s Series B preferred stock. As of immediately following that financing, the Company owned approximately 25% of Ceregene’s capital stock on a fully diluted basis. The financial position or operating results for Ceregene have not been consolidated by Cell Genesys subsequent to August 3, 2004. As of and for the two months ended September 30, 2004, the Company’s investment in Ceregene was accounted for under the equity method of accounting as a result of the Company’s reduced ownership position in Ceregene. As of September 30, 2004, the Company’s cost basis in its investment in Ceregene had been reduced to zero; consequently, the Company does not expect to recognize future losses from Ceregene under the equity method of accounting. At the time of the deconsolidation, the Company recorded a liability of approximately $0.2 million for a Cell Genesys guarantee of certain secured indebtedness of Ceregene. The guarantee extends into the year 2006. The liability that the Company initially recognized for the guarantee will be reduced, by a credit to earnings, as the Company is released from the risk under the guarantee.

     Commencing August 4, 2004, Ceregene is considered to be a related party. For the two months ended September 30, 2004, the Company recorded revenue of $0.5 million from Ceregene under a contract manufacturing arrangement.

6. Accrued Facility Exit Costs

     As of December 31, 2003, the Company had accrued facility exit costs of $9.5 million associated with the move of its corporate headquarters to South San Francisco, California in March 2003 and the related vacancy in Foster City, California. Based upon updated estimates of the rental market for comparable laboratory and office space, the Company subsequently revised its estimate of accrued facility exit costs and recorded an additional $1.8 million of general and administrative expense during the nine months ended September 30, 2004. The Company will actively pursue subleasing of its former headquarter facilities in Foster City, California, until these leases expire in January 2006.

7. Subsequent Event

     On October 14, 2004, the Company entered into a purchase agreement with initial purchasers relating to the private placement of $110.0 million aggregate principal amount of its 3.125% Convertible Senior Notes due 2011. The Company granted the initial purchasers a 30-day option to purchase up to an additional $35.0 million principal amount of the notes. The initial closing for the base amount of $110.0 million under the agreement occurred on October 20, 2004.

     Under certain circumstances, the Company may redeem some or all of the notes on or after November 1, 2009 at a redemption price equal to 100% of the principal amount of the notes. Holders of the notes may require the Company to repurchase some or all of their notes if a fundamental change (as defined in the indenture) occurs, at a repurchase price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest (and additional amounts, if any) to, but not including, the repurchase date.

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     The Company expects to receive approximately $106.0 million in proceeds after deducting the initial purchasers’ discount of approximately $3.6 million and estimated offering expenses (approximately $139.9 million if the initial purchasers’ option is exercised in full). The Company has used the proceeds from the initial closing of the notes to repay approximately $95.0 million of outstanding indebtedness under certain term loan credit facilities and intends to use the remainder of the proceeds for general corporate purposes. The private placement was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and Rule 144A promulgated thereunder. The notes are convertible into the Company’s common stock, initially at the conversion price of $9.10 per share, equal to a conversion rate of approximately 109.8901 shares per $1,000 principal amount of notes, subject to adjustment.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Statements made in this Item other than statements of historical fact, including statements about us and our subsidiaries and our respective clinical trials, research programs, product pipelines, current and potential corporate partnerships, licenses and intellectual property, the adequacy of capital reserves and anticipated operating results and cash expenditures, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. As such, they are subject to a number of uncertainties that could cause actual results to differ materially from the statements made, including risks associated with the success of research and product development programs, the issuance and validity of patents, the development and protection of proprietary technologies, the ability to raise capital, operating expense levels and the ability to establish and retain corporate partnerships. Reference is made to discussions about risks associated with product development programs, intellectual property and other risks that may affect us under “Other Factors Affecting Future Operations” below. We do not undertake any obligation to update forward-looking statements. The following should be read in conjunction with our condensed consolidated financial statements located elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2003 and in other documents filed by us from time to time with the Securities and Exchange Commission.

Overview

     We are a biotechnology company focused on the research, development and commercialization of biological therapies for patients with cancer. We are currently developing cell-based cancer vaccines, oncolytic virus therapies and antiangiogenesis therapies to treat different types of cancer. Our clinical stage cancer programs involve cell- or viral-based products that have been genetically modified during product development to impart disease-fighting characteristics that are not found in conventional therapeutic agents. As part of our GVAX^® cancer vaccines program, we are conducting a Phase 3 clinical trial in prostate cancer, are in ongoing Phase 2 clinical trials in lung cancer, pancreatic cancer and leukemia, and are in a Phase 1/2 clinical trial for multiple myeloma. In our oncolytic virus therapies program, which we are developing in part through a global alliance with Novartis AG, we are conducting a Phase 1/2 clinical trial of CG7870 in combination with radiation therapy in early-stage prostate cancer patients and a Phase 1/2 clinical trial of CG7870 in combination with chemotherapy in advanced-stage prostate cancer patients. We also have preclinical oncolytic virus therapy programs as well as preclinical antiangiogenesis therapy programs evaluating potential therapies for multiple types of cancer. Additionally, as of August 4, 2004, we own approximately 25% of our subsidiary, Ceregene, Inc., a privately held company, which is focused on gene therapies for neurological disorders. Until August 4, 2004, Ceregene was a majority-owned subsidiary and consolidated into our financial statements. After that date, as a result of a Series B financing which reduced our ownership position to approximately 25%, Ceregene is no longer consolidated, but is accounted for under the equity method of accounting. Finally, we continue to hold approximately 6.6 million shares of common stock of our former subsidiary, Abgenix, Inc. (Nasdaq: ABGX), which is focused on the development and commercialization of antibody therapies.

Third Quarter 2004 and Other Recent Highlights:

§		Announced that enrollment has been initiated for a multicenter Phase 3 clinical trial of GVAX® prostate cancer vaccine in patients with metastatic hormone-refractory prostate cancer. This trial, referred to as VITAL-1, is based on the findings from two previously conducted Phase 2 trials in over 100 patients with advanced prostate cancer. The trial will compare GVAX® prostate cancer vaccine to docetaxel (Taxotere®) chemotherapy and is expected to enroll approximately 600 patients at more than 50 medical centers across the United States. In May 2004 we received a Special Protocol Assessment (SPA) from the U.S. Food and Drug Administration (FDA) for this Phase 3 trial which provided FDA confirmation that the trial design would adequately support a product registration application.
§		Announced the launch of a multicenter Phase 1/2 clinical trial of CG7870 administered intravenously and in combination with Taxotere® chemotherapy in patients with advanced prostate cancer. The trial is the second Phase 1/2 study in CG7870, the other trial involving intraprostatically-administered CG7870 in combination with radiation therapy in newly diagnosed, intermediate risk prostate cancer patients. These trials are designed to expand on the encouraging results in preclinical studies that have shown synergistic antitumor activity when CG7870 is used in combination with other therapies. Up to approximately 70 patients are expected to be enrolled in the new study at up to 5 medical centers across the United States.
§		Reported encouraging additional data published in the Journal of Experimental Medicine from a Phase 1 clinical trial of GVAX® pancreatic cancer vaccine that provided evidence that patient-specific immune responses can be generated following vaccination with a non patient-specific GVAX® cancer vaccine product. The article described detailed analyses of the immune response to the vaccine in three out of 14 patients who remain alive and disease-free for at least 6.5 years. The three long-term survivors demonstrated strong T cell responses to mesothelin, a tumor-associated molecule found on GVAX® pancreatic cancer vaccine cells, and that the specificity of the T cell response to mesothelin was unique to each responding patient. We believe these findings are important because they provide further scientific proof-of-concept for our GVAX® cancer vaccine strategy, which is focused on non patient-specific, “off-the-shelf” products.

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§		Announced the initiation of a Phase 1 clinical trial of our GVAX® prostate cancer vaccine in combination with Medarex’s fully human anti-CTLA-4 antibody, MDX-010, in patients with advanced prostate cancer. The trial is expected to enroll up to approximately 45 patients at the University Hospital Vrije Universiteit Cancer Center in Amsterdam. This trial was prompted by preclinical studies that demonstrated increased levels of antitumor responses when CTLA-4 blockade was combined with cancer vaccination.
§		Announced the pricing of $110.0 million of Convertible Senior Notes due in 2011, with a coupon rate of 3.125% and a conversion premium of 30%, or $9.10 per share of common stock, the initial closing under which occurred on October 20, 2004. We used the net proceeds from the offering primarily to repay two outstanding bank loans totaling $95.0 million, thereby eliminating existing restrictions on approximately $60.0 million of the Company’s current cash balance.

Critical Accounting Policies

     We consider certain accounting policies related to revenue recognition, lease accounting and income taxes to be critical policies. There have been no material changes in our critical accounting policies related to revenue recognition or income taxes from what was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 4, 2004.

Lease accounting

     We record our obligations under facility operating lease agreements as rent expense. As of December 31, 2003, we had accrued facility exit costs of $9.5 million associated with the move of our corporate headquarters to South San Francisco, California in March 2003 and the related vacancy in Foster City, California. Based upon updated estimates of the rental market for comparable laboratory and office space, we subsequently revised our estimate of accrued facility exit costs during the first two quarters of 2004, and recorded $1.8 million of general and administrative expense as of the nine months ended September 30, 2004. There was no additional accrual made for the three months ended September 30, 2004. We will actively pursue subleasing of our former headquarter facilities in Foster City, California, until these leases expire in 2006.

Results of Operations

Revenue

     Revenues were $3.2 million and $8.3 million for the three and nine months ended September 30, 2004 compared to $15.7 million and $16.8 million for the corresponding periods in 2003, as shown in the following table (in thousands):

     Revenues for the three and nine months ended September 30, 2004 include $1.4 million and $4.4 million, respectively, from Novartis recognized in connection with our global alliance for the development and commercialization of oncolytic virus therapies. Revenues for the three and nine months ended September 30, 2004 include $1.0 million and $2.0 million, respectively, in connection with our gene activation technology license agreement with Aventis for gene activated erythropoietin. Other revenues for the three and nine months ended September 30, 2003 were primarily derived from $14.1 million related to the final settlement reached with Japan Tobacco regarding clinical and patent-related milestone and wind down payments. We recognized $1.0 million of revenues earned by our then majority-owned subsidiary, Ceregene, Inc., during the nine months ended September 30, 2004.

Research and development expenses

     Research and development expenses were $21.7 million and $68.4 million for the three and nine months ended September 30, 2004 compared to $20.4 million and $64.0 million for the corresponding periods in 2003. The increases in 2004 compared to 2003 are primarily attributed to our expanding clinical trials and other product development activities in both our GVAX^® cancer vaccines and oncolytic virus therapy programs. We expect that our research and development expenditures and headcount will continue to increase in future years to support expanded, more advanced and more numerous clinical trials, including our recently initiated Phase 3 clinical trial of GVAX^® prostate cancer vaccine, additional manufacturing and office facilities and additional product development activities. The rate of future increase depends on a number of factors, including progress in research and development and clinical trials. Additional information concerning our product candidates and their phases of development can be found in our Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 4, 2004 and in the Third Quarter 2004 and Other Recent Highlights section included under Item 2 of this Quarterly Report on Form 10-Q.

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General and administrative expenses

     General and administrative expenses were $3.8 million and $14.4 million for the three and nine months ended September 30, 2004 compared to $6.4 million and $18.4 million for the corresponding periods in 2003. The decreases in general and administrative expenses in 2004 compared to 2003 are primarily due to rent exit costs of approximately $2.7 million and facility startup expenses of approximately $0.8 million incurred in the 2003 periods in connection with the move of our corporate headquarters to South San Francisco, California in March 2003. Future spending for general and administrative costs is expected to increase in order to support our growing infrastructure needs, particularly in the areas of manufacturing and other facilities.

Gain on sale of Abgenix common stock

     During the three and nine months ended September 30, 2004 we recorded gains of $0.2 million and $12.2 million associated with the sale of 19,210 and 819,210 shares of Abgenix common stock, respectively. At September 30, 2004 we continued to hold approximately 6.6 million shares of Abgenix common stock, which had a fair market value of approximately $65.3 million as of that date, but which has declined in value since September 30, 2004. We recorded gains of $2.6 million and $9.9 million associated with the sale of 200,000 shares and 1,000,000 shares of Abgenix common stock during the three and nine months ended September 30, 2003.

Interest and other income

     Interest and other income was $0.3 million and $1.9 million for the three and nine months ended September 30, 2004 compared to $0.9 million and $4.2 million for the corresponding periods in 2003. In March 2004, we reinvested a portion of our investment portfolio in money market funds and U.S. government securities and reduced the level of investment in corporate bonds. The decreases in interest and other income in 2004 compared to 2003 are attributed to lower average cash balances and also to lower investment returns realized after the reinvestment of our investment portfolio in March 2004.

Interest expense

     Interest expense was $2.3 million and $6.7 million for the three and nine months ended September 30, 2004 compared to $1.4 million and $3.1 million for the corresponding periods in 2003. The increases in 2004 compared to 2003 are primarily attributed to interest expense from the capital lease obligation for our headquarters facility in South San Francisco, California, which we occupied in March 2003, and due to increased debt obligations, including a $35.0 million loan from Silicon Valley Bank which we borrowed on September 30, 2003. We capitalized interest expense of $0.2 million and $0.8 million during the three and nine months ended September 30, 2003 in connection with the construction of our manufacturing facility in Hayward, California. No interest expense was capitalized during 2004.

     On October 20, 2004, we issued and sold $110.0 million aggregate principal amount of 3.125% Convertible Senior Notes due 2011. We have granted the initial purchasers of the notes a 30-day option to purchase up to an additional $35.0 million principal amount of the notes. We used the proceeds from the transaction to repay all our outstanding bank debt, totaling $95.0 million. As a result, interest expense in the future is expected to be slightly lower, with reduced interest rate partially offset by a higher debt balance.

Income taxes

     During the nine months ended September 30, 2004 we recorded non-cash tax expense of $3.7 million related to the realized gain on the sale of 819,210 shares of Abgenix common stock. During the nine months ended September 30, 2003 we recorded a non-cash tax benefit of $15.3 million related to net operating losses that we concluded were realizable based on our estimate at that time of future taxable income, including future taxable income that might result from future sales of holdings of our Abgenix common stock, and thus our ability to carry-forward these losses to offset that potential future taxable income. If our investment in Abgenix were to suffer an additional decline in value, we may be required to reverse tax benefits in future periods that were previously recorded.

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Liquidity and Capital Resources

     At September 30, 2004, we had approximately $152.6 million in cash, cash equivalents and short-term investments, of which $63.5 million was classified as restricted cash, primarily related to one of our then-outstanding debt financings which we have since repaid. We have historically maintained our financial position through strategic management of our resources including our holdings in Abgenix common stock, the availability of debt financing and by relying on funding from various corporate collaborations and licensing agreements. At September 30, 2004 we continued to hold approximately 6.6 million shares of Abgenix common stock, which had a fair market value of approximately $65.3 million as of that date, but which has declined in value since September 30, 2004. Additionally, in February 2003, our shelf registration statement was declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, which initially allowed us to offer up to $150.0 million of securities on short notice in one or more public offerings. We used this shelf registration in March 2004 to complete a public offering of 4,250,000 shares of our common stock along with an additional 637,500 shares of common stock pursuant to the exercise of the entire over-allotment option by the underwriters, resulting in gross proceeds of $61.1 million. Although up to $88.9 million may still be offered under the shelf registration, there can be no assurance that we will be able to issue any of the remaining securities under this shelf registration on acceptable terms, or at all.

     On October 14, 2004, following the end of the quarter, the Company entered into a purchase agreement with initial purchasers relating to the private placement of $110.0 million aggregate principal amount of its 3.125% Convertible Senior Notes due 2011. The Company granted the initial purchasers a 30-day option to purchase up to an additional $35.0 million principal amount of the notes. The initial closing for the base amount of $110.0 million under the agreement occurred on October 20, 2004. The Company used the net proceeds primarily to repay bank debt totaling $95.0 million, thereby eliminating restrictions on $60.0 million of cash.

     Net cash used in operating activities was $73.3 million for the nine months ended September 30, 2004 compared to $24.1 million for the corresponding period in 2003. This increase was due primarily to the receipt in the 2003 period of $15.0 million from a license agreement with Transkaryotic Therapies, Inc. and to our increased expenses in 2004. Cash requirements for operating activities are expected to increase in future periods, due in part to costs related to the Phase 3 trial that we recently initiated and to other clinical trials that we expect to initiate in 2004 and 2005. The timing of these cash requirements may vary from period to period depending on our research and development activities, including our planned preclinical and clinical trials, obligations related to our existing manufacturing and headquarter facilities, potential income tax obligations and future requirements to establish manufacturing and marketing capabilities for any products that we may develop.

     Net cash provided by investing activities was $45.5 million for the nine months ended September 30, 2004 compared to $11.2 million used in investing activities for the corresponding period in 2003. The difference was primarily due to purchases and sales of short-term investments in the 2004 period as a result of the restructuring of our investment portfolio when we moved our investments from corporate debt securities into money market funds and U.S. government securities, and the investment of proceeds of our common stock offering in March 2004. Capital expenditures decreased to $3.7 million during the nine months ended September 30, 2004 from $25.4 million during the corresponding period in 2003. This decrease was a result of the completion of major manufacturing construction during 2003 and a return to a more usual baseline level of capital expenditures to fund replacements and improvements of existing facilities in 2004. Finally, net cash provided by investing activities in the 2004 period includes $12.9 million in proceeds from the sale of 819,210 shares of Abgenix common stock, compared to $10.9 million in proceeds from the sale of 1,000,000 shares of Abgenix common stock in the 2003 period.

     Net cash provided by financing activities was $58.0 million for the nine months ended September 30, 2004 compared to $55.0 million for the corresponding period in 2003. In March 2004, we completed a public offering of 4,250,000 shares of our common stock along with an additional 637,500 shares of common stock pursuant to the exercise of the entire over-allotment option by the underwriters. The shares were priced at $12.50 per share resulting in gross proceeds of $61.1 million. We received net proceeds from this offering of $57.2 million. The $55.0 million net cash provided by financing activities for the nine months ended September 30, 2003 was primarily due to the $35.0 million asset-backed financing from Silicon Valley Bank under a five-year term loan agreement and $18.5 million related to the issuance of an aggregate of 1,999,840 shares of our common stock to Novartis/GTI in July 2003.

     We have financed our operations primarily through the sale of equity securities, funding under collaborative arrangements, sales of Abgenix common stock and secured debt financing. During the nine months ended September 30, 2004, we received $12.9 million in proceeds from the sale of 819,210 shares of Abgenix common stock, compared to $10.9 million in proceeds from the sale of 1,000,000 shares of Abgenix common stock during the comparable period in 2003. Our retained ownership of Abgenix common stock represents a material portion of our working capital. The common stock price of Abgenix has proven to be volatile, which has a direct impact on our liquidity and capital resources and our income tax obligations. To the extent that we continue to hold a substantial amount of these shares, our working capital position can be expected to continue to fluctuate in future periods. The value of our investment in Abgenix common stock was $65.3 million at September 30, 2004, but has declined in value since September 30, 2004.

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     Ceregene, Inc., formerly our majority-owned subsidiary, announced on August 4, 2004 the initial closing of a $32.0 million Series B preferred stock financing. We participated in the financing through the conversion of a bridge loan into shares of Ceregene’s Series B preferred stock. As of immediately following that financing, we owned approximately 25% of Ceregene’s capital stock on a fully diluted basis.

     In July 2003, we received $28.5 million from Novartis in connection with a global alliance for the development and commercialization of oncolytic virus therapies, of which $9.8 million remained dedicated to the further development of these products at September 30, 2004. We expect to fully spend these remaining funds in mid-2005.

     On October 20, 2004, we issued and sold $110.0 million aggregate principal amount of 3.125% Convertible Senior Notes due 2011. We have granted the initial purchasers of the notes a 30-day option to purchase up to an additional $35.0 million principal amount of the notes. We received approximately $106.0 million in proceeds after deducting the initial purchasers’ discount and estimated offering expenses, and we expect to receive approximately $139.9 million in aggregate proceeds if the initial purchasers’ option is exercised in full. The Company has used the proceeds from the sale of the notes to repay approximately $95.0 million of outstanding indebtedness under certain term loan credit facilities and the Company intends to use the remainder of the proceeds for general corporate purposes.

     Under certain circumstances, we may redeem some or all of the notes on or after November 1, 2009 at a redemption price equal to 100% of the principal amount of the notes. Holders of the notes may require us to repurchase some or all of their notes if a fundamental change (as defined in the indenture) occurs, at a repurchase price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest (and additional amounts, if any) to, but not including, the repurchase date. The notes are convertible into the Company’s common stock, initially at the conversion price of $9.10 per share, equal to a conversion rate of approximately 109.8901 shares per $1,000 principal amount of notes, subject to adjustment.

     Our capital requirements depend on numerous factors, including: the progress of our research and development programs and our preclinical and clinical trials; clinical and commercial scale manufacturing requirements; the extent of funding from collaborative partners; the acquisition of new products or technologies; potential income tax obligations; and the cost and outcome of litigation, patent interference proceedings or other legal proceedings. Our ongoing development programs and any increase in the number and size of programs and trials will reduce our current cash resources and create further need to raise additional capital. Therefore, we will continue to consider financing alternatives, including potential equity and debt financings, in addition to periodic sales of our holdings of Abgenix stock.

     While we believe that our current liquidity position will be sufficient to meet our cash needs for at least the next year, we will need to raise substantial additional funds in order to complete our pending and planned trials over their multi-year course before we obtain product revenue, if any, from such products. Accordingly, we may entertain the possibility of raising additional capital to preserve our liquidity, depending on a number of conditions, including conditions in the capital markets. The sources of liquidity available to us include the sale of Abgenix common stock, payments from potential partners and/or licensees of our potential products and technologies, and private or public placement of our equity securities, warrants, debt securities or depositary shares. We regularly consider the conditions of capital markets, dilution, stockholder value and tax consequences of each type of financing on stockholders. Certain of the financing options available to us may have negative consequences to stockholders such as dilution. Given the volatile nature of the capital markets, decisions to raise capital may require actions that would impose a negative consequence in order to reduce or minimize a more significant negative consequence to stockholders.

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OTHER FACTORS AFFECTING FUTURE OPERATIONS

     Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones facing our company. Additional risks not currently known to us or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline, and our ability to repay our convertible notes could be impaired, due to any of these risks, and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2003, including our consolidated financial statements and related notes.

Risks Related to Our Company

Our products are in developmental stage, are not approved for commercial sale and might not ever receive regulatory approval or become commercially viable.

     All of our potential cancer vaccines, oncolytic virus therapies and antiangiogenesis therapy products are in research and development. We have not generated any revenues from the sale of products. We do not expect to generate any revenues from product sales for at least the next several years. Our products currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercial use. Our research and development efforts may not be successful, and any of our future products may not be ultimately commercially successful. Even if developed, our products may not receive regulatory approval or be successfully introduced and marketed at prices that would permit us to operate profitably.

Our cancer vaccines and oncolytic virus therapies must undergo exhaustive clinical testing and may not prove to be safe or effective. If any of our proposed products are delayed or fail, we may have to curtail our operations.

     There are many reasons that potential products that appear promising at an early stage of research or development do not result in commercially successful products. Clinical trials may be suspended or terminated if safety issues are identified, if our investigators or we fail to comply with regulations governing clinical trials or for other reasons. Although we are testing some of our proposed products and therapies in human clinical trials, we cannot guarantee that we, the FDA or the Institutional Review Boards at our research institutions will not suspend or terminate any of our clinical trials, that we will be permitted to undertake human clinical trials for any of our other products or that adequate numbers of patients can be recruited for our clinical trials. Also, the results of this testing might not demonstrate the safety or efficacy of these products. Even if clinical trials are successful, we might not obtain regulatory approval for any indication. Preclinical and clinical data can be interpreted in many different ways, and FDA officials could interpret data that we consider promising differently, which could halt or delay our clinical trials or prevent regulatory approval. Finally, even if our products proceed successfully through clinical trials and receive regulatory approval, there is no guarantee that an approved product can be manufactured in commercial quantities at reasonable cost or that such a product will be successfully marketed.

     Our programs utilize new technologies. Existing preclinical and clinical data on the safety and efficacy of our programs are limited. Our GVAX^® cancer vaccines and oncolytic virus therapies are currently being tested in human clinical trials to determine their safety and efficacy. None of our other products or therapies under development is in human clinical trials. The results of preclinical or earlier stage clinical trials do not necessarily predict safety or efficacy in humans. Our products in later stage clinical trials may fail to show desired safety and efficacy, despite having progressed through preclinical or early clinical trials. Serious and potentially life-threatening side effects may be discovered during preclinical and clinical testing of our potential products or thereafter, which could delay, halt or interrupt clinical trials of our products, and could result in the FDA or other regulatory authorities denying approval of our drugs for any or all indications. In the case of patient-specific therapies such as our GVAX^® lung cancer vaccine, the risks of any surgical procedure that may be required to prepare the vaccine must be considered in the evaluation of the product’s safety profile. All surgical procedures, particularly those in advanced disease settings, involve some element of risk to the patient, which must be evaluated in the context of the patient’s condition and therapeutic alternatives. Our ongoing clinical studies are now designed to exclude patients at higher risk of post-operative complications. Nonetheless, in past and current clinical trials involving patients with very advanced stages of lung cancer, a small number of patients with progressive disease have died during the period following surgical removal of their tumor and prior to administration of GVAX^® vaccine. Such events will continue to be included in an ongoing assessment of the overall risk/benefit profile of this product and could adversely influence the continuation of the current study and the products’ future development.

     Clinical trials are very costly and time-consuming, especially the typically larger Phase 3 trials such as the recently initiated VITAL-1 trial of our GVAX^® prostate cancer vaccine. We cannot exactly predict if and when our current clinical trials will be completed. We also cannot exactly predict when other planned clinical trials, including additional Phase 3 trials of our GVAX^® cancer vaccines, will begin or be completed. The VITAL-1 trial of our GVAX^® prostate cancer vaccine is our first Phase 3 clinical trial. Though we anticipate commencing our second Phase 3 clinical trial of GVAX^® prostate cancer vaccine in early 2005, we cannot guarantee that we will be able to begin the Phase 3 clinical trial within that timeframe. Many factors affect patient enrollment in clinical trials, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new therapies approved for the conditions that we are investigating. In addition to delays in patient enrollment, other unforeseen developments, including delays in obtaining regulatory approvals to commence a study, delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites, lack of effectiveness during clinical trials, unforeseen safety issues, uncertain dosing issues, inability to monitor patients adequately during or after treatment, our or our investigators’ failure to comply with FDA regulations governing clinical trials, and an inability or unwillingness of medical investigators to follow our clinical protocols, could prevent or delay completion of a clinical trial and increase its costs, which could also prevent or delay any eventual commercial sale of the therapy that is the subject of the trial. Each of our Phase 3 clinical trials of GVAX^® prostate cancer vaccine will compare GVAX^® vaccine to a Taxotere^® chemotherapy regimen, which is the currently approved standard of care for this patient group. However, there can be no assurance that this chemotherapy regimen will continue to be commonly used to treat these patients in the future. Should another chemotherapy regimen be shown to be more effective than the Taxotere^® chemotherapy regimen, we may need to conduct additional comparative clinical trials in the future.

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We have not been profitable in our operations (absent the gains on sales of Abgenix common stock and certain upfront or non-recurring license fees). We expect to continue to incur substantial losses and negative cash flow from operations and may not become profitable in the future.

     We have incurred an accumulated deficit since our inception. At September 30, 2004, our accumulated deficit was $217.5 million. Our accumulated deficit would be substantially higher absent the gains we have realized on sales of our Abgenix common stock. For the nine months ended September 30, 2004, we recorded a net loss of $71.0 million, which included $12.2 million in gains on sales of our Abgenix common stock. We expect to incur substantial operating losses for at least the next several years and potentially longer. This is due primarily to the expansion of research and development programs, clinical trials and manufacturing activities and, to a lesser extent, general and administrative expenses, at a time when we have yet to realize any product revenues. We also have substantial lease obligations related to our new manufacturing and headquarter facilities. We expect that losses will fluctuate from quarter to quarter and that these fluctuations may be substantial. We cannot guarantee that we will successfully develop, manufacture, commercialize or market any products, or that we will ever achieve profitability.

We will need substantial additional funds to continue operations, and our ability to generate funds depends on many factors beyond our control.

     We will need substantial additional funds for existing and planned preclinical and clinical trials, to continue research and development activities, for lease obligations related to our manufacturing and headquarter facilities, for principal and interest payments related to our debt financing obligations and to establish marketing capabilities for any products we may develop. At some point in the future, we will also need to raise additional capital to further fund our operations. Our future capital requirements will depend on, and could increase as a result of, many factors, such as:

•		the progress and scope of our internally funded research, development and commercialization activities;
•		our ability to establish new collaborations and the terms of those collaborations;
•		competing technological and market developments;
•		the time and cost of regulatory approval;
•		the extent to which we choose to commercialize our future products through our own sales and marketing capabilities;
•		the costs we incur in obtaining and enforcing patent and other proprietary rights or gaining the freedom to operate under the patents of others;
•		our success in acquiring and integrating complementary products, technologies or businesses; and
•		the extent to which we choose to expand and develop our manufacturing capacities, including manufacturing capacities necessary to meet potential commercial requirements.

     If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research, development or clinical activities.

We plan to raise additional funds through collaborative business relationships, sales of some portion or all of our investment in Abgenix common stock, additional equity or debt financings, or otherwise, but we may not be able to do any of the foregoing on favorable terms, or at all.

     Because of our long-term capital requirements, we may seek to access the public or private debt and equity markets, by selling our holdings of Abgenix common stock and/or our own debt or equity securities. Additional funding may not be available to us, and, if available, may not be on acceptable terms. Opportunities for out licensing technologies or for third-party collaborations may not be available to us on acceptable terms, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research, development or clinical activities. In addition, we may decide to raise additional capital when conditions are favorable, even when we do not have an immediate need for additional capital at that time. If we raise additional funds by issuing equity securities, stockholders will incur immediate dilution.

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     Alternatively, we may need to seek funds through arrangements with collaborative partners or others that require us to relinquish rights to technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Either of these events could have a material adverse effect on our business, results of operations, financial condition or cash flow. Currently, we do not have collaborative partners for the further development of our GVAX^® cancer vaccines. Although we are in active discussions with potential partners for our GVAX^® prostate cancer vaccine, we may not be successful in entering into collaborative partnerships on favorable terms, if at all. Certain of our oncolytic virus therapy products are being developed under our global strategic alliance with Novartis, and Novartis has future commercialization rights for these products. Also, we can give no assurance that our alliance with Novartis will continue, as Novartis periodically has the option of terminating the alliance at its discretion.

Our ability to manufacture our products is uncertain, which may delay or impair our ability to develop, test and commercialize our products.

     We have built our own manufacturing facilities to operate according to the FDA’s current Good Manufacturing Practices (cGMP) regulations for the manufacture of products for clinical trials and to support the potential commercial launch of our product candidates. We are under significant lease obligations for each of our facilities. We may be unable to establish and maintain our manufacturing facilities within our planned time and budget, which could have a material adverse effect on our product development timelines. Our manufacturing facilities will be subject to ongoing, periodic inspection by the FDA and state agencies to ensure compliance with cGMP. Our failure to follow and document our adherence to such cGMP regulations or other regulatory requirements may lead to significant delays in the availability of products for commercial use or clinical study, may result in the termination or hold on a clinical study, or may delay or prevent filing or approval of marketing applications for our products. We also may encounter problems with the following:

•		achieving consistent and acceptable production yield and costs;
•		meeting product release specifications;
•		quality control and assurance;
•		shortages of qualified manufacturing personnel;
•		shortages of raw materials;
•		shortages of key contractors; and
•		ongoing compliance with FDA and other regulations.

     Failure to comply with applicable regulations could also result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could harm our business.

     Developing advanced manufacturing techniques and process controls is required to fully utilize our expanded facilities. The manufacturing techniques and process controls, as well as the product release specifications, required for our GVAX^® cancer vaccines and oncolytic virus therapies are more complex and less well-established than those required for other biopharmaceutical products, including small molecules, therapeutic proteins and monoclonal antibodies. We may not be able to develop these techniques and process controls to manufacture our products effectively to meet the demands of regulatory agencies, clinical testing and commercial production.

     In addition, during the course of the development and testing of our products, we may make and have made improvements to processes, formulations or manufacturing methods or employ different manufacturing facilities. Such changes may be made to improve the product’s potential efficacy, make it easier to manufacture at scale, reduce variability or the chance of contamination of the product, or for other reasons. As a result, certain of the products we are currently testing in clinical trials, including our most advanced products, are not identical to those used in previous clinical trials from which we have reported clinical data. We may be required to conduct certain laboratory studies to demonstrate the comparability of our products if we introduce additional manufacturing changes. We cannot guarantee that the results of studies using the current versions of our products will be as successful as the results of earlier studies conducted using different versions of our products.

     If we are unable to manufacture our products for any reason, our options for outsourcing manufacturing are currently limited. We are unaware of available contract manufacturing facilities on a worldwide basis in which our GVAX^® product candidates can be manufactured under cGMP regulations, a requirement for all pharmaceutical products. It would take a substantial period of time for a contract manufacturing facility that has not been producing our particular products to begin producing them under cGMP regulations.

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     Our manufacturing facilities are subject to licensing requirements of the United States Drug Enforcement Administration (DEA), the California Department of Health Services and the Tennessee Department of Commerce and Insurance, Board of Pharmacy, referred to as the Tennessee Board of Pharmacy. While not yet subject to license by the FDA, these facilities are subject to inspection by the FDA, as well as by the DEA, the California Department of Health Services and the Tennessee Board of Pharmacy. Failure to maintain these licenses or to meet the inspection criteria of these agencies would disrupt our manufacturing processes and have a material adverse effect on our business, results of operations, financial condition and cash flow.

     In order to produce our products in the quantities that we believe will be required to meet anticipated market demand, we will need to increase, or “scale up,” the production process by a significant factor over the current level of production. If we are unable to do so, or if the cost of this scale up is not economically feasible for us, we may not be able to produce our products in a sufficient quantity to meet the requirements for product launch or future demand.

If our proposed products are not effectively protected by issued patents or if we are not otherwise able to protect our proprietary information, we will be more vulnerable to competitors, and our business could be adversely affected.

     We rely heavily on the development and protection of our intellectual property portfolio. The patent positions of pharmaceutical and biotechnology firms, including ours, are generally uncertain and involve complex legal and factual questions. As of September 30, 2004 we had approximately 318 patents issued or granted to us or available to us based on licensing arrangements and approximately 315 applications pending in our name or available to us based on licensing arrangements. Although we are prosecuting patent applications, we cannot be certain whether any given application will result in the issuance of a patent or, if any patent is issued, whether it will provide significant proprietary protection or whether it will be invalidated. Also, depending upon their filing date, patent applications in the United States are confidential until patents are published or issued. Publication of discoveries in scientific or patent literature tends to lag behind actual discoveries by several months. Accordingly, we cannot be sure that we were the first creator of inventions covered by pending patent applications or that we were the first to file patent applications for these inventions. In addition, to the extent we license our intellectual property to other parties, we may incur expenses as a result of contractual agreements in which we indemnify these licensing parties against losses incurred if our intellectual property infringes upon the rights of others.

Our intellectual property may be challenged by our competitors in the future, which may have a material adverse effect on our business, results of operations, financial condition and cash flow.

     Our commercial success depends in part on not infringing the patents or proprietary rights of others and not breaching licenses granted to us. We are aware of competing intellectual property relating to both our programs in cancer vaccines and oncolytic virus therapies. While we currently believe we have freedom to operate in these areas, others may challenge our position in the future. We may be required to obtain licenses to third-party technologies or genes necessary in order to market our products. Any failure to license any technologies or genes required to commercialize our technologies or products at reasonable cost may have a material adverse effect on our business, results of operations, financial condition and cash flow.

We may have to engage in litigation, which could result in substantial cost, to enforce our patents or to determine the scope and validity of other parties’ proprietary rights.

     To determine the priority of inventions, the United States Patent and Trademark Office (USPTO) frequently declares interference proceedings. In Europe, patents can be revoked through opposition proceedings. These proceedings could result in an adverse decision as to the priority of our inventions.

     We are involved in several interference and opposition proceedings related to our current product portfolio and certain of our technologies. We have filed an appeal of the final decision from the USPTO relating to an interference proceeding pending since 1996 with Applied Research Systems Holding N.V. (ARS) concerning a patent and patent application related to gene activation technology. ARS has also appealed the decision. The result of the appeal is uncertain at this time. We are not currently involved in any other interference proceedings. We are also currently involved in European opposition proceedings, some of which relate to our current product portfolio and certain of our core technologies.

     We cannot predict the outcome of these proceedings. An adverse result in any of these proceedings could have an adverse effect on our intellectual property position in these areas and on our business as a whole. If we lose in any such proceeding, our patents or patent applications that are the subject matter of the proceeding may be invalidated or may not be permitted to issue as patents. Consequently, we may be required to obtain a license from the prevailing party in order to continue the portion of our business that relates to the proceeding. Such license may not be available to us on acceptable terms or on any terms, and we may have to discontinue that portion of our business. We may be involved in other interference and/or opposition proceedings in the future. We believe that there will continue to be significant litigation in the industry regarding patent and other intellectual property rights.

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Our competitive position may be adversely affected by our limited ability to protect and control unpatented trade secrets, know-how and other technological innovation.

     Our competitors may independently develop similar or better proprietary information and techniques and disclose them publicly. Also, others may gain access to our trade secrets, and we may not be able to meaningfully protect our rights to our unpatented trade secrets.

     We require our employees and consultants to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to an individual during the course of the employment or consulting relationship generally must be kept confidential. In the case of employees, the agreements provide that all inventions relating to our business conceived by the employee while employed by us are our exclusive property. These agreements may not provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information.

Our competitors may develop therapies for the diseases that we are targeting that are more advanced or more effective than ours, which could adversely affect our competitive position, or they may commercialize products more rapidly than we do, which may adversely affect our competitive position.

     There are many companies pursuing programs for the treatment of cancer. Some of these competitors are large pharmaceutical companies, such as Sanofi, Aventis and Bristol-Myers Squibb, which have greater experience and resources than we do in developing products, in undertaking preclinical testing and human clinical trials of new pharmaceutical products, in obtaining FDA and other regulatory approvals of products, and in manufacturing and marketing new therapies. We are also competing with other biotechnology companies with similar experience and resources to ours, but which may have programs that are in a more advanced stage of clinical testing than ours, such as Dendreon Corporation, Antigenics, Inc. and CancerVax, Inc.

     Some competitors are pursuing product development strategies that are similar to ours, particularly with respect to our cancer vaccine and oncolytic virus therapy programs. Certain of these competitors’ products are in more advanced stages of product development and clinical trials. We compete with other clinical-stage companies and institutions for clinical trial participants, which could reduce our ability to recruit participants for our clinical trials. Delay in recruiting clinical trial participants could adversely affect our ability to bring a product to market prior to our competitors. Our competitors may develop technologies and products that are more effective than ours, or that would render our technology and products less competitive or obsolete.

     Our competitive position and those of our competitors can vary based on the performance of products in clinical trials. In addition, our competitors may obtain patent protection or FDA approval and commercialize products more rapidly than we do, which may impact future sales of our products. We also may not have the access that some of our competitors have to biological materials necessary to support the research, development or manufacturing of planned therapies. If we are permitted by the FDA to commence commercial sales of products, we will also be competing with respect to marketing capabilities and manufacturing efficiency, areas in which we have limited or no experience. We expect that competition among products approved for sale will be based, among other things, on:

•		product efficacy;
•		price;
•		safety;
•		reliability;
•		availability;
•		patent protection; and
•		sales, marketing and distribution capabilities.

     Our competitive position also depends upon our ability to attract and retain qualified personnel, develop proprietary products or processes, and secure sufficient funding for the often-lengthy period between product conception and commercial sales.

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To the extent we depend on strategic partners to sell, market or distribute our products, we will have reduced control over the success of the sales, marketing and distribution of our future products.

     We have no experience in sales, marketing or distribution of biopharmaceutical products. We may in the future rely on sales, marketing and distribution expertise of potential corporate partners for our initial products. The decision to market future products directly or through corporate partners will be based on a number of factors, including:

•		market size and concentration;
•		size and expertise of the partner’s sales force in a particular market; and
•		our overall strategic objectives.

     If we choose to rely on strategic partners for the sale, marketing or distribution of our future products, we will have less control over the success of our products and will depend heavily upon our partners’ abilities and dedication to our products. We cannot assure you that these future strategic partnerships will be available on favorable terms, if at all, nor can we assure you that they will enhance our business.

We may in the future be exposed to product liability claims, which could adversely affect our business, results of operations, financial condition and cash flow.

     Clinical trials or marketing of any of our potential products may expose us to liability claims resulting from the use of our products. These claims might be made by clinical trial participants, consumers, health care providers or sellers of our products. We currently maintain product liability insurance with respect to each of our clinical trials. We may not be able to maintain insurance or obtain sufficient coverage at a reasonable cost, given the increasing cost of insurance in today’s insurance market. An inability to maintain insurance at an acceptable cost, or at all, could prevent or inhibit the clinical testing or commercialization of our products or otherwise affect our financial condition. A claim, particularly resulting from a clinical trial, on any of our insurance policies or a product recall could have a material adverse effect on our business, results of operations, financial condition and cash flow.

Our business, financial condition and results of operations could suffer as a result of future strategic acquisitions and investments.

     We may engage in future acquisitions or investments that could dilute our existing stockholders or cause us to incur contingent liabilities, commitments, debt or significant expense. From time to time, in the ordinary course of business, we may evaluate potential acquisitions or investments in related businesses, products or technologies, although we currently have no commitments or agreements for any such acquisitions or investments. We may not be successful with any strategic acquisition or investment. Any future acquisition or investment could harm our business, financial condition and results of operations.

     If we engage in future acquisitions, we may not be able to fully integrate the acquired companies and their intellectual property or personnel. Our attempts to do so may place additional burdens on our management and infrastructure. Future acquisitions will also subject us to a number of risks, including:

•		the loss of key personnel and business relationships;
•		difficulties associated with assimilating and integrating the new personnel and operations of the acquired companies;
•		the potential disruption of our ongoing business;
•		the expense associated with maintenance of diverse standards, controls, procedures, employees and clients;
•		the diversion of resources from the development of our own proprietary technology; and
•		our inability to generate revenue from acquired technology sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist activity and other events beyond our control, which could result in a material adverse effect on our business.

     Our facilities in California have, in the past, been subject to electrical blackouts as a result of a shortage of available electrical power. Future blackouts could disrupt the operations of our facilities. In addition, we do not carry sufficient business interruption insurance to compensate us for actual losses from interruption of our business that may occur, and any losses or damages incurred by us could have a material adverse effect on our business. We are vulnerable to a major earthquake and other calamities. Most of our facilities are located in seismically active regions. We have not undertaken a systematic analysis of the potential consequences to our business and financial results from a major earthquake and do not have a recovery plan for fire, earthquake, power loss, terrorist activity or similar disasters. We are unable to predict the effects of any such event, but the effects could be seriously harmful to our business.

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We depend on our key technical and management personnel to advance our technology, and the loss of these personnel could impair the development of our products.

     We rely and will continue to rely on our key management and scientific staff, all of whom are employed at-will. The loss of key personnel or the failure to recruit necessary additional qualified personnel could have a material adverse effect on our business and results of operations. There is intense competition from other companies, research and academic institutions and other organizations for qualified personnel. We may not be able to continue to attract and retain the qualified personnel necessary for the development of our business. We will need to continue to recruit experts in the areas of clinical testing, manufacturing, marketing and distribution and to develop additional expertise in our existing personnel. If we do not succeed in recruiting necessary personnel or developing this expertise, our business could suffer significantly.

We depend on clinical trial arrangements with public and private medical institutions to advance our technology, and the loss of these arrangements could impair the development of our products.

     We have arrangements with a number of public and private medical institutions for the conduct of human clinical trials for our GVAX^® cancer vaccine programs and oncolytic virus therapies. The early termination of any of these clinical trial arrangements or the failure of these institutions to comply with the regulations and requirements governing clinical trials would hinder the progress of our clinical trial program. If any of these relationships are terminated, the clinical trials might not be completed, and the results might not be evaluable.

Inventions or processes discovered by our outside scientific collaborators may not become our property, which may affect our competitive position.

     We rely on the continued availability of outside scientific collaborators performing research. These relationships generally may be terminated at any time by the collaborator, typically by giving 30 days notice. These scientific collaborators are not our employees. As a result, we have limited control over their activities and can expect that only limited amounts of their time will be dedicated to our activities. Our arrangements with these collaborators, as well as those with our scientific consultants, provide that any rights we obtain as a result of their research efforts will be subject to the rights of the research institutions for which they work. In addition, some of these collaborators have consulting or other advisory arrangements with other entities that may conflict with their obligations to us. For these reasons, inventions or processes discovered by our scientific collaborators or consultants may not become our property.

Our stock price is influenced by the market price of Abgenix stock, which has been volatile.

     Our retained ownership of Abgenix common stock represents a material portion of the total assets on our balance sheet. The common stock price of Abgenix has proven to be highly volatile. During the first nine months of 2004, the per share price of Abgenix common stock fluctuated between a high closing price of $18.55 and low closing price of $7.77. The value of our holdings of Abgenix common stock was $65.3 million at September 30, 2004 compared to $91.9 million at December 31, 2003. Movements in the price of Abgenix common stock, up or down, may exert corresponding influences on the market price of our stock.

Our stock price has fluctuated in the past and is likely to continue to be volatile in the future.

     The stock prices of biopharmaceutical and biotechnology companies, including ours, have historically been highly volatile. Since January 1, 2002, our stock price has fluctuated between a high closing price of $22.99 on January 3, 2002 and a low closing price of $6.38 on November 2, 2004. The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The following factors, among others, may affect our stock price:

•		announcements of data from, or material developments in, our clinical trials or those of our competitors, including delays in the commencement of a clinical trial;
•		fluctuations in our financial results;
•		announcements of technological innovations or new therapeutic products by us or our competitors, including innovations or products by our competitors that may require us to redesign, and therefore delay, our clinical trials to account for those innovations or products;
•		announcements of changes in governmental regulation affecting us or our competitors;
•		announcements of regulatory approval or disapproval of our or our competitors’ products;
•		announcements of new collaborative relationships by us or our competitors;
•		developments in patent or other proprietary rights affecting us or our competitors;

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•		public concern as to the safety of products developed by us or other biotechnology and pharmaceutical companies;
•		general market conditions;
•		fluctuations in the price of Abgenix common stock;
•		material developments related to our minority interest in Ceregene, Inc.;
•		fluctuations in price and volume in the stock market in general, or in the trading of the stock of biopharmaceutical and biotechnology companies in particular, that are unrelated to our operating performance;
•		issuances of securities in equity, debt or other financings or issuances of common stock upon conversion of our remaining Series B redeemable convertible preferred stock;
•		sales of common stock by existing stockholders; and
•		the perception that such issuances or sales could occur.

Our stockholders may be diluted by the conversion of outstanding convertible senior notes or Series B redeemable convertible preferred stock.

     On October 20, 2004, we issued and sold $110.0 million aggregate principal amount of 3.125% Convertible Senior Notes due 2011. We have granted the initial purchasers of the notes a 30-day option to purchase up to an additional $35.0 million principal amount of the notes. The notes are convertible into our common stock, initially at the conversion price of $9.10 per share, equal to a conversion rate of approximately 109.8901 shares per $1,000 principal amount of notes, subject to adjustment. The holders of the notes may choose at any time to convert their notes into common stock. The number of shares of common stock issuable upon conversion of the notes, and therefore the dilution of existing common stockholders, could increase as a result of an event triggering the antidilution rights of the notes, including certain acquisitions of the Company in which 10% or more of the consideration paid for our common stock in the transaction is in the form of cash or securities that are not freely tradable.

     As of September 30, 2004, 152 shares of Series B redeemable convertible preferred stock, referred to as the Series B preferred, issued in January 2000 remained outstanding and were convertible into an aggregate of 223,538 shares of common stock as of that date. The holders of the Series B preferred may choose at any time to convert their shares into common stock. The number of shares of common stock issuable upon conversion of the Series B preferred is determined by dividing the market value of the shares to be converted by the lower of:

•		a fixed conversion price of $13.38 per share (subject to antidilution provisions); or
•		the average of certain trading prices during the ten trading days preceding such date of conversion.

     The market value of the Series B preferred is based on the outstanding carrying value from the original issuance plus the deemed dividend earned over the holding period. As of September 30, 2004, the aggregate market value for all outstanding Series B preferred was approximately $2.0 million. The number of shares of common stock issuable upon conversion of the Series B preferred, and therefore the dilution of existing common stockholders, could increase as a result of either an event triggering the antidilution rights of the Series B preferred or a decline in the market price of our common stock immediately prior to conversion of the Series B preferred. The issuance of our notes in October 2004 triggered the antidilution rights of the Series B preferred because the conversion price of the notes was lower than the fixed conversion price of the Series B preferred in effect immediately prior to the issuance of the notes. As a result of the issuance of the initial $110.0 million aggregate principal amount of notes, the fixed conversion price of the Series B preferred decreased from $14.53 per share to $13.38 per share, and the fixed conversion price will be further decreased if the initial purchasers exercise their 30-day option to purchase up to an additional $35.0 million principal amount of the notes. In the event the holders of the remaining outstanding Series B preferred do not convert their shares, the shares will automatically be converted on January 18, 2005 according to the formula described above.

     Conversion of our convertible senior notes or Series B preferred would result in issuance of additional shares of common stock, diluting existing common stockholders.

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Our stockholders may be diluted by the exercise of outstanding stock options or other issuances of our common stock.

      Substantially all shares of common stock for which our outstanding stock options are exercisable are, once they have been purchased, eligible for immediate sale in the public market. Issuance of common stock or the exercise of stock options would dilute existing investors.

We have adopted anti-takeover defenses that could make it difficult for another company to acquire control of us or could limit the price investors might be willing to pay for our stock.

     Certain provisions of our certificate of incorporation, bylaws, debt instruments and Delaware law could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These provisions include the adoption of a Stockholder Rights Plan, commonly known as a “poison pill.” Under the Stockholder Rights Plan, we made a dividend distribution of one preferred share purchase right for each share of our common stock outstanding as of August 21, 1995 and each share of our common stock issued after that date. In July 2000, we made certain technical changes to amend the plan and extended the term of such plan until 2010. The rights are exercisable only if an acquirer purchases 15 percent or more of our common stock or announces a tender offer for 15 percent or more of our common stock. Upon exercise, holders other than the acquirer may purchase our stock at a discount. Our Board of Directors may terminate the rights plan at any time or under certain circumstances redeem the rights. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, the plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding such acquisition. These provisions and certain provisions of the Delaware General Corporation Law may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in our management or in the control of our company, including transactions in which our stockholders might otherwise receive a premium over the fair market value of our common stock.

Due to the potential value of our strategic investments, we could be determined to be an investment company, and if such a determination were made, we would become subject to significant regulation that would adversely affect our business.

     Our non-controlling positions in Abgenix and Ceregene, along with investments of our available cash resources in certain types of fixed-income securities, could be considered “investment securities” under the Investment Company Act of 1940 (Investment Company Act), raising a question of whether we are an investment company required to register and be regulated under the Investment Company Act. Regulation under the Investment Company Act, or a determination that we failed to register when required to do so, could materially and adversely affect our business. We believe that we are primarily engaged in the research, development and commercialization of biological cancer therapies and that any investment securities are ancillary to our primary business. Nevertheless, to address any uncertainty in this regard, we have reinvested a portion of our portfolio in money market funds and U.S. government securities and limited the level of investment in corporate bonds and other instruments that could be considered “investment securities.” In addition, over time we plan to reduce the level of our investment securities by periodic sales of our holdings in Abgenix. These dispositions may be effected under unfavorable market conditions. The lower rates of return realized after the reinvestment of our investment portfolio, and any required dispositions of non-controlling investments, could adversely affect our future reported results.

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Risks Related to Our Industry

In order for our products to be offered to the public, they must undergo extensive clinical testing and receive approval from the FDA, which could delay or prevent the commercialization of our products.

     Human therapeutic products must undergo rigorous preclinical and clinical testing and other premarket approval procedures by the FDA and similar authorities in foreign countries. Preclinical tests include laboratory evaluation of potential products and animal studies to assess the potential safety and efficacy of the product and its formulations. Clinical trials involve the administration of the investigational new drug to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials must be conducted in accordance with FDA Good Clinical Practices under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. The developer of the drug must provide information relating to the characterization and controls of the product before administration to the patients participating in the clinical trials. This requires developing approved assays of the product to test before and after administration to the patient. In addition, developers of pharmaceutical products must provide periodic data regarding clinical trials to the FDA, and the FDA may issue a clinical hold upon a trial if the FDA does not believe, or cannot confirm, that the trial can be conducted without unreasonable risk to the trial participants. We cannot assure you that the FDA will not issue a clinical hold with respect to any of our clinical trials in the future. The results of the preclinical testing and clinical testing, together with chemistry, manufacturing and controls information, are submitted to the FDA in the form of a new drug application for a pharmaceutical product, and in the form of a biologics license application for a biological product, requesting approval to commence commercial sales.

     In responding to a new drug application or a biologics license application, the FDA may grant marketing approvals, request additional information or further research, or deny the application if it determines that the application does not satisfy its regulatory approval criteria. Regulatory approval of a new drug application, new drug application supplement or biologics license application is never guaranteed, and the approval process typically takes several years and is extremely expensive. The FDA has substantial discretion in the drug and biologics approval processes. Despite the time and expense incurred, failure can occur at any stage, and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional preclinical or clinical studies. Approvals may not be granted on a timely basis, if at all, and if granted may not cover all the clinical indications for which we may seek approval. Also, an approval might contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use.

Even if our products are approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.

     Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products including unanticipated adverse events of unanticipated severity or frequency, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures or detention, injunctions or the imposition of civil or criminal penalties.

We are subject to federal, state and local laws and regulations, and complying with these may cause us to incur significant costs.

     We are subject to laws and regulations enforced by the FDA, the DEA, the California Department of Health Services, the Tennessee Board of Pharmacy and other regulatory statutes including:

	•		the Occupational Safety and Health Act;
	•		the Environmental Protection Act;
	•		the Toxic Substances Control Act;
	•		the Resource Conservation and Recovery Act; and
	•		other current and potential future federal, state or local laws and regulations.

     In particular with respect to environmental laws, product development activities involve the use of hazardous materials, and we may incur significant costs as a result of the need to comply with these laws. Our research and development activities involve the controlled use of hazardous materials, chemicals, viruses and radioactive compounds. 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 the standards prescribed by applicable laws and regulations, we cannot completely eliminate the risk of contamination or injury, by accident or as the result of intentional acts of terrorism, from these materials. In the event of an accident, we could be held liable for any damages that result, and any resulting liability could exceed our resources. We may also be required to incur significant costs to comply with environmental laws and regulations in the future.

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Failure to comply with foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices could prevent us from selling our products in foreign markets, which may adversely affect our operating results and financial condition.

     For marketing drugs and biologics outside the United States, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country and may require additional testing. The time required to obtain approvals outside the United States may differ from that required to obtain FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other countries or by the FDA. Failure to comply with these regulatory requirements or obtain required approvals could impair our ability to develop foreign markets for our products and may have a material adverse effect on our results of operations and financial condition.

Reimbursement from third-party payors may become more restricted in the future, which may reduce demand for our products.

     There is uncertainty related to the extent to which third-party payors will cover and pay for newly approved drugs. Sales of our future products will be influenced by the willingness of third-party payors to provide reimbursement. In both domestic and foreign markets, sales of our potential products will depend in part upon coverage and payment amounts from third-party payors, including:

	•		government agencies;
	•		private health care insurers and other health care payors such as health maintenance organizations;
	•		self-insured employee plans; and
	•		Blue Cross/Blue Shield and similar plans.

     There is considerable pressure to reduce the cost of biotechnology and pharmaceutical products. Reimbursement from government agencies, insurers and large health organizations may become more restricted in the future. Our potential products represent a new mode of therapy, and while the cost-benefit ratio of the products may be favorable, we expect that the costs associated with our products will be substantial. Our proposed products, if successfully developed, may not be considered cost-effective by third-party payors. Insurance coverage might not be provided by third-party payors at all or may be provided only after substantial delay. Even if such coverage is provided, the approved third-party payment amounts might not be sufficient to permit widespread acceptance of our products.

The continuing efforts of governmental and third-party payors to contain or reduce the costs of healthcare may impair our future revenues and profitability.

     The pricing of our future products may be influenced in part by government controls. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement more rigorous provisions relating to government payment levels. While we cannot predict whether the government will adopt any such legislative or regulatory proposals, the announcement or adoption of these proposals could have a material adverse effect on our business, results of operations, financial condition and cash flow.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In the normal course of business, our financial position is subject to a variety of risks, including market risk associated with interest rate movements. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. However, as mentioned under the “Liquidity and Capital Resources” and “Other Factors Affecting Future Operations” sections of the Management’s Discussion and Analysis of Financial Condition and Results of Operations above, we are also subject to risk associated with our retained ownership in Abgenix common stock.

     We have not entered into any financial instruments that would give rise to foreign currency exchange risk or commodity pricing risk. We have exposure related to the value of the number of shares of Abgenix common stock we hold, which was approximately 6.6 million shares as of September 30, 2004. In March 2004, we reinvested a portion of our investment portfolio in money market funds and U.S. government securities and reduced the level of investment in corporate bonds. We do not currently hold any derivative financial instruments nor have we entered into hedging transactions or activities.

     The following table provides information about our financial instruments that are sensitive to changes in interest rates. For investment securities and debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Additionally, we have assumed that our available-for-sale securities, composed primarily of government securities and money market funds, are similar enough to aggregate those securities for presentation purposes. The average interest rate was calculated using the weighted average fixed rates under all these instruments with Wells Fargo Bank, Sterling Capital Management, JP Morgan, Fleet National Bank, General Electric Capital Corporation and Silicon Valley Bank.

Interest Rate Sensitivity
Principal Amount by Expected Maturity and Average Interest Rate
(dollars in thousands)

(1)

In connection with our issuance of our 3.125% convertible senior notes due 2011, we fully repaid both our variable interest rate debt financing and our fixed interest rate debt financing concurrent with the initial closing on October 20, 2004.

(2)

Interest rate based upon LIBOR rate index plus a spread of 0.625 percent, and can be reset on a quarterly or semi-annual basis.

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Item 4. CONTROLS AND PROCEDURES

     An evaluation was performed under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures were effective as of September 30, 2004 to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Controls over Financial Reporting

     There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2004, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

          None.

Item 6. EXHIBITS

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in South San Francisco, California, on November 5, 2004.

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Exhibit Index