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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from                              to                             

Commission file number: 0-32405

Seattle Genetics, Inc.

(Exact name of registrant as specified in its charter)

21823 30^th Drive SE

Bothell, Washington 98021

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (425) 527-4000

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

None

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

Common Stock, Par Value $0.001

(Title of Class)

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 than 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 ¨

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $51,012,954 as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price on the Nasdaq National Market reported for such date. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

There were 30,770,177 shares of the registrant’s common stock issued and outstanding as of March 14, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the definitive proxy statement for the registrant’s Annual Meeting of Stockholders to be held on May 14, 2003.

Table of Contents

SEATTLE GENETICS, INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

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PART I

Item 1. Business.

Overview

Seattle Genetics discovers and develops monoclonal antibody-based drugs to treat cancer and other human diseases. Our product candidates encompass three technologies: genetically engineered monoclonal antibodies, monoclonal antibody-drug conjugates (ADCs) and antibody-directed enzyme prodrug therapy (ADEPT). These technologies enable us to develop monoclonal antibodies that can kill cancer cells on their own as well as to increase the potency of monoclonal antibodies by enhancing their tumor cell-killing ability. Using our technologies and our expertise in cancer, we have constructed a diverse portfolio of product candidates.

Our two most advanced product candidates, SGN-30 and SGN-15, are currently being tested in clinical trials:

Additionally, we have three product candidates currently in preclinical development, SGN-40, SGN-35 and SGN-17/19:

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Our technologies also provide us with an opportunity to partner with other companies that are developing monoclonal antibodies. These collaborations may accelerate our ability to commercialize product candidates, leverage our technology to enhance the product candidates of other biotechnology and pharmaceutical companies and enhance our financial position by generating collaboration revenues. When establishing strategic collaborations, we select high-quality partners and endeavor to retain significant product rights. Presently, we have collaborations with Eos Biotechnology, Inc., Celltech Group and Genentech, Inc. for our ADC technology and with Genencor International for SGN-17/19 and our ADEPT technology.

We also have active discovery programs to identify and evaluate novel tumor antigens, new monoclonal antibodies targeted to tumor cells and improved highly potent, cell-killing drugs and stable linkage systems for generating ADCs. In addition to our internal discovery programs, we identify and obtain in-licenses for lead agents and product candidates from external sources, including academic institutions and other biotechnology companies. Our existing in-licenses include technology from Bristol-Myers Squibb, the University of Miami, Arizona State University, Mabtech AB and Proacta Therapeutics, among others.

Monoclonal Antibodies for Cancer Therapy

Cancer is the second leading cause of death in the United States, resulting in over 555,000 deaths annually. The American Cancer Society estimates that over 17 million new cases of cancer have been diagnosed in the United States since 1990 and that 1.3 million new cases of cancer will be diagnosed in 2003. According to the National Cancer Institute, one in three people in the United States will develop cancer in their lifetime, and half of them will die within five years. Within the next decade, it is expected that cancer will surpass heart disease as the leading cause of death in the United States.

Monoclonal antibodies have been tested for many years as cancer therapeutics. Some monoclonal antibodies have significant antitumor activity as single agents. However, many are not potent enough on their own to represent effective therapeutic agents. To address this limitation, additional approaches to using monoclonal antibodies as cancer therapies have emerged. First, monoclonal antibodies that are administered in combination with chemotherapy can achieve antitumor activity that is often greater than when either therapy is administered alone. Second, monoclonal antibodies that are directly linked to cell-killing payloads such as drugs, toxins, or radionuclides can more effectively kill cancer cells than monoclonal antibodies alone.

There are a growing number of monoclonal antibodies that have been approved for the treatment of cancer. These include three genetically engineered monoclonal antibodies (Rituxan^®, Herceptin^®, and Campath^®), a radionuclide-conjugated monoclonal antibody (Zevalin^®) and an antibody-drug conjugate (Mylotarg^®). Together, these five products generated sales of more than $1.6 billion in 2002. Sales of Rituxan alone are expected to exceed $1 billion in 2003. Additionally, there are many monoclonal antibodies in preclinical development and clinical trials that are likely to increase the number of monoclonal antibody-based commercial products in the future.

Our Monoclonal Antibody Technologies

Three distinct but related technologies form our core business and provide the potential for discovery and development of an array of monoclonal antibody-based therapeutics:

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Genetically Engineered Monoclonal Antibodies.

Some monoclonal antibodies have therapeutic potential on their own. These antibodies operate either by directly sending a cell-killing signal or by activating an immune response that leads to cell death. Antibodies such as these can be effective in regressing tumors and have the advantage of low systemic toxicity. For example, antibodies targeted to antigens such as CD20 (Rituxan), HER2 (Herceptin) and CD52 (Campath) are FDA-approved and are collectively generating over a billion dollars in annual sales.

Our monoclonal antibodies have been genetically engineered to minimize non-human sequences, thereby lowering the potential for patients to develop a neutralizing immune response and extending the duration for use in therapy. In general, there are three types of genetically engineered monoclonal antibodies being developed for human therapeutic use: chimeric, humanized and fully-human. A chimeric antibody contains a mixture of mouse and human sequences, usually 30 percent mouse and 70 percent human. Rituxan, the largest selling antibody product for cancer therapy, is a chimeric antibody. Humanized antibodies contain over 90 percent human sequences, while fully-human monoclonal antibodies contain 100 percent human sequences. We have chimeric and humanized monoclonal antibodies in our product development pipeline and have access to fully-human monoclonal antibodies for potential future product candidates through our relationship with Medarex. Our two most advanced genetically engineered monoclonal antibody product candidates are SGN-30, which is a chimeric monoclonal antibody that is currently in a phase I/II clinical trial, and SGN-40, which is a humanized monoclonal antibody that is currently in preclinical development.

Antibody-Drug Conjugates (ADCs).

ADCs are monoclonal antibodies that are linked to potent cell-killing drugs. For our ADCs, we utilize monoclonal antibodies that internalize upon binding to their cell-surface receptors. The environment inside the cell causes the cell-killing drug to be released from the monoclonal antibody, allowing it to have the desired effect. Until released, the cell-killing drug is inactive, thereby sparing normal cells. Our ADC technology can be applied to genetically engineered monoclonal antibodies that are chimeric, humanized or fully-human and that bind strongly to and internalize within cancer cells. An important component of ADCs are the conditional linkers that hold and then release the drugs from the monoclonal antibodies. We have a variety of linker technologies including enzyme-cleavable linkers that are very stable in blood. Our highly potent cell-killing drugs, such as Auristatin E, are synthetically produced and readily scaleable. Because the variants of Auristatin E that we have developed are synthetic, the drug and linker can be prepared simultaneously as a drug-linker system, significantly simplifying the manufacturing process versus natural product drugs that are more difficult to produce and link to antibodies. We are also continually evaluating a variety of new stable linkers and potent, cell-killing drugs, including additional variants of Auristatin E and a class of potent drugs called minor groove binders, for use in our ADC program.

Our lead ADC product candidates are SGN-15 and SGN-35. SGN-15, which is composed of the chimeric BR96 monoclonal antibody chemically linked by a hydrazone linker to the chemotherapeutic drug doxorubicin, is currently in multiple phase II clinical trials. SGN-35, which utilizes our next generation ADC technology, is currently in preclinical development. Additionally, we are exploring numerous other monoclonal antibodies for potential use as ADCs, both internally and in conjunction with our ADC collaborators, Eos Biotechnology, Celltech and Genentech.

Antibody Directed Enzyme Prodrug Therapy (ADEPT).

ADEPT represents a novel approach to minimize drug exposure to normal tissues through the combination of two relatively non-toxic agents to achieve potent antitumor activity specifically within tumor tissue. With ADEPT technology, we utilize non-internalizing monoclonal antibodies that remain bound to the cell surface, as distinguished from the internalizing antibodies used with our ADC technology. ADEPT administration is a two-step process. In the first step, a protein containing the cloned variable regions of a monoclonal antibody

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genetically fused to an enzyme is administered and accumulates on tumor tissue. In the second step, relatively inactive forms of anti-cancer drugs (termed prodrugs) are administered and subsequently are converted by the enzyme attached to the tumor cell into potent cell-killing drugs that can penetrate into tumor tissue and induce antitumor responses. This method of drug delivery results in higher drug concentrations within tumors relative to normal tissues, thus minimizing the toxic effects of the drug on normal tissues.

Our lead ADEPT product candidate is SGN-17/19, which we are developing preclinically in partnership with Genencor International for patients with metastatic melanoma. SGN-17/19 concentrates the potent cell-killing properties of the drug melphalan towards cells expressing the p97 antigen. Because melphalan is administered as a relatively inactive prodrug that is activated primarily at the tumor site, its effect against tumor tissue can be maximized while the toxicity to normal tissues is reduced.

Our Strategy

Our primary goal is to utilize our expertise in antibody technologies to advance our product pipeline and discover new product candidates for the treatment of cancer and other human diseases. We also license our technology and collaborate with other biotechnology and pharmaceutical companies that are developing monoclonal antibodies. Our overall corporate strategy includes initiatives to:

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Development Programs

We currently have two product candidates in clinical trials: SGN-30 in a phase I/II trial and SGN-15 in multiple phase II trials. We are conducting preclinical development of several other product candidates, including SGN-40, SGN-35 and SGN-17/19. We are also actively engaged in research and discovery of new monoclonal antibodies, antigen targets, linker systems, high-potency drugs and enzymes that can be incorporated into our development portfolio.

The following table summarizes the status of our product candidates currently in clinical trials:

In addition, we have the following product candidates currently in preclinical development:

Product Candidates in Clinical Trials

SGN-30

Preclinical Profile.

SGN-30 is a monoclonal antibody targeting the CD30 antigen that is expressed on many hematologic malignancies, including Hodgkin’s disease and some types of non-Hodgkin’s lymphoma. CD30 is an attractive target for cancer therapy because it has minimal expression on normal tissues. In preclinical models of hematologic malignancies, SGN-30 has demonstrated potent antitumor activity on its own at doses that are well tolerated in toxicology studies.

We are also investigating possible applications of SGN-30 in immunologic diseases, including lupus and multiple sclerosis. In immunologic disease, the body’s immune system malfunctions and attacks its own healthy cells. Many therapies for immunologic disease rely on suppressing the immune system to prevent further damage to normal tissues, but have the unwanted side effect of making the patient more susceptible to infection. The CD30 antigen is expressed only on activated T and B cells but is absent on these cells when in resting state. Since resting T-cells and B-cells make up 99 percent of those types of cells circulating in the body, SGN-30 may be able to prevent or reduce a damaging immune response without globally suppressing the patient’s immune system, thus leaving the patient better able to fight off infection. Preclinical studies of SGN-30 in immunologic disease are ongoing internally and with outside collaborators.

Clinical Results and Status.

The American Cancer Society estimates that 7,600 cases of Hodgkin’s disease and 53,400 cases of non-Hodgkin’s lymphoma, many of which express CD30, will be diagnosed in the United States during 2003.

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Advances made in the use of combined chemotherapy and radiotherapy for malignant lymphomas over the past half-century have resulted in durable remission rates for front-line therapy in early stage disease. However, the therapeutic options for refractory or relapsed patients are very limited, and there are significant opportunities for new treatments in this patient population.

In July 2002, we completed a single-dose phase I clinical trial of SGN-30 in patients with CD30-expressing hematologic malignancies at three sites in the United States. The objectives of this trial were to establish safety and pharmacokinetic profiles, evaluate effects on lymphocytes and to determine whether a single dose of SGN-30 induced an immune response. We treated 13 patients in this study at escalating doses of between one and 15 milligrams per kilogram of SGN-30. We did not find significant toxicities in any of the patients and observed antitumor responses in two out of ten evaluable patients, one with Hodgkin’s disease and one with anaplastic large cell lymphoma. Additionally, we found minimal immune response, no lymphocyte depletion and no infectious complications.

In November 2002, we initiated a multi-dose phase I/II clinical trial of SGN-30, again targeting patients with CD30-expressing hematologic malignancies. The objectives of this trial, which will be conducted at ten sites in the United States, are to establish safety and pharmacokinetic profiles, evaluate effects on lymphocytes, determine whether patients develop an immune response and assess antitumor activity of a multi-dose regimen of SGN-30. In the phase I portion of the study, we are treating cohorts of six patients at four predetermined dose levels of SGN-30: 2, 4, 8 and 12 milligrams per kilogram. We will use the data from the phase I component of the study to determine a dose for the phase II component. The study is designed to accrue up to 75 patients: up to 30 in the phase I component and the remainder in the phase II component. We expect to complete the phase I component and initiate the phase II component of this study during the second half of 2003.

SGN-15

Preclinical Profile.

SGN-15 is an ADC composed of a monoclonal antibody chemically linked by a hydrazone linker to the chemotherapeutic drug doxorubicin. The antibody component of SGN-15 binds to a Lewis^y-related carbohydrate antigen that is highly expressed on many solid tumors, including those of the breast, lung, pancreas, ovary and prostate, as well as on some normal cells in the gastrointestinal tract. SGN-15 works by binding to the cell and, upon internalization, releasing its payload of doxorubicin. SGN-15 has demonstrated potent antitumor activity in multiple preclinical models of solid tumors. Additional preclinical studies of SGN-15 in combination with Taxotere and Gemzar have established non-overlapping toxicity profiles and synergistic antitumor activity.

Clinical Results and Status.

Our clinical development strategy for SGN-15 is focused on designing trials for patients in whom front-line therapies have failed. This approach is intended to accelerate the development pathway as rapidly as possible toward regulatory approval. The current status of our SGN-15 clinical trials is as follows:

Prostate Cancer.    Prostate cancer is the second leading cause of cancer-related deaths among men in the United States and strikes 80 percent of males who reach the age of 80. Although surgery and radiation are established therapies for localized prostate cancer, there are no curative therapies available for advanced stage disease. Most patients with prostate cancer will receive hormone therapy sometime in the course of their disease, many of whom will eventually become resistant to such therapy and progress to hormone refractory prostate cancer (HRPC). The treatment of HRPC patients with conventional chemotherapy has been disappointing with minimal impact on the disease in terms of survival.

In November 2000, we initiated a phase II trial of SGN-15 in combination with Taxotere for the treatment of patients with HRPC. The trial was designed to evaluate the antitumor activity of the combination therapy, including measurements of tumor size, serum prostate-specific antigen (PSA) level, quality of life and disease-free and overall survival rates. Patients entering the trial were randomly assigned to one of two equal-sized groups. One group of patients receives treatment with the combination of SGN-15 and Taxotere, and the other group receives Taxotere alone.

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We have treated over 60 patients in the prostate cancer study. The study has demonstrated minimal toxicity of the combination of SGN-15 and Taxotere and objective antitumor responses in some patients, especially those whose tumors express higher levels of the Lewis^y antigen. Presently, we are not accruing patients to our prostate cancer study while we conduct an interim analysis of data to determine our future strategy for SGN-15 in prostate cancer.

Non-Small Cell Lung Cancer.    Lung cancer is the leading cause of all cancer-related deaths worldwide and accounted for an estimated 154,000 deaths in the United States during 2002. Approximately 80 percent of lung cancer is non-small cell lung carcinoma (NSCLC). Due to the lack of early symptoms, most NSCLC patients are already in the advanced stages of the disease at the time of diagnosis. Advanced stage and metastatic NSCLC remains an incurable disease with current therapies. Combination chemotherapy regimens have produced clinical response or stabilization in many cases, but have had little effect on overall survival. Response rates with standard chemotherapy are only approximately 25 percent and median survival is less than six months from time to progression. Consequently, there remains a significant unmet clinical need for patients with advanced stage NSCLC.

In August 2001, we initiated a phase II trial investigating SGN-15 in combination with Taxotere for patients with NSCLC who have failed front-line treatments. This trial was designed to evaluate safety and antitumor activity of the combination therapy, as measured by reduction in tumor size, time to progression, quality of life and overall survival rates. Two-thirds of patients enrolled in this study receive the combination of SGN-15 and Taxotere and one-third of the patients receive Taxotere alone.

We have treated over 50 patients in the lung cancer trial, none of whom have experienced any significant toxicities related to SGN-15, including no gastrointestinal toxicities. In addition, we have observed antitumor activity in multiple patients in this study. As a result of the minimal toxicity observed, we are conducting intra-patient dose escalation of SGN-15 in recently enrolled lung cancer patients to evaluate the tolerability and antitumor activity of higher doses.

Ovarian Cancer.    Ovarian cancer is the fifth most frequent cause of cancer death in women and the leading cause of gynecologic cancer in the United States. The five-year survival rate of women diagnosed with advanced disease is 25 percent. Although most advanced stage patients initially respond to front-line chemotherapy, the relapse rate is approximately 85 percent. Once relapse occurs there is no known curative therapy. Thus, there is a significant opportunity for the development of new therapeutic approaches that provide high levels of antitumor activity with little systemic toxicity.

In August 2002, we launched a phase II trial of SGN-15 in combination with Gemzar for the treatment of patients with recurrent or refractory ovarian cancer. This trial was designed to evaluate safety and antitumor activity of the combination therapy, as measured by the reduction in tumor size, time to progression and overall survival rates. Two-thirds of the patients enrolled in this study receive the combination of SGN-15 and Gemzar and one-third of the patients receive Gemzar alone. Because SGN-15 plus Gemzar is a new chemotherapeutic combination, we are currently treating an initial safety cohort of six patients. We expect to complete the safety cohort and initiate the randomized phase II portion of the study by late 2003.

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Product Candidates in Preclinical Development

SGN-40 (formerly SGN-14)

We are currently conducting preclinical development of SGN-40, a monoclonal antibody that targets the CD40 antigen. CD40 is a cell surface receptor that is highly expressed on a variety of hematologic malignancies such as multiple myeloma, non-Hodgkin’s lymphoma, many types of leukemia, as well as Kaposi’s sarcoma. CD40 is also expressed on various types of solid tumors including lung, gastric, ovarian, renal and bladder cancer. SGN-40 has been shown to induce direct antitumor activity in multiple preclinical models of human cancer at doses that are well tolerated in toxicology experiments. SGN-40 may also be applicable for the treatment of immunologic disease.

We previously partnered SGN-40 with Genentech, but in October 2002 Genentech informed us that it would not continue development of SGN-40. We entered into license agreements with Genentech in March 2003 providing us with rights to develop SGN-40 on our own. We are currently evaluating preclinical data and developing our strategy, with a goal of advancing SGN-40 into clinical trials by early 2004.

SGN-35

SGN-35 is an ADC composed of an anti-CD30 monoclonal antibody linked by our proprietary, stable linker to a synthetic variant of the highly potent, cell-killing drug Auristatin E using our next generation ADC technology. In preclinical models, SGN-35 has induced complete regressions of tumors at doses lower than 1 milligram per kilogram. We are currently conducting preclinical development of SGN-35 for the treatment of patients with hematologic malignancies such as Hodgkin’s disease and some types of non-Hodgkin’s lymphoma, and expect to initiate clinical trials in 2004. As with SGN-30, we are also considering possible applications of SGN-35 to treat immunologic diseases such as lupus and multiple sclerosis due to the limited expression profile of CD30 on activated T and B cells.

SGN-17/19

SGN-17/19 is an ADEPT product candidate that we are developing for the treatment of metastatic melanoma. SGN-17 is a fusion protein containing components of the L49 monoclonal antibody and the enzyme ß-lactamase. The L49 antibody component binds to the p97 cell surface antigen, which is non-internalizing and highly expressed on melanoma, as well as some ovarian, breast and lung carcinomas. SGN-19 is a prodrug form of the chemotherapeutic drug melphalan that has been inactivated through the addition of a chemical group that can be removed by the enzyme ß-lactamase. When SGN-17 is injected systemically, it accumulates on the tumor tissue and remains bound at the cell surface. SGN-19 is then administered systemically and converted to melphalan by the enzyme ß-lactamase, resulting in localized release of melphalan on the surface of cancer cells. Through genetic engineering efforts in 2001 and 2002, we have made considerable advances in the production of the SGN-17 component. At present, the yield of active SGN-17 is suitable for scale-up to a clinical grade manufacturing process. We have also made improvements to the formulation and chemical synthesis of SGN-19 throughout the last year.

In January 2002, we entered into a collaboration agreement with Genencor International to jointly develop SGN-17/19 and discover and develop a class of cancer therapeutics based on tumor-targeted enzymes that activate prodrugs. The collaboration utilizes our ADEPT technology along with Genencor’s targeted enzyme prodrug therapy (TEPT) platform, epitope mapping (i-mune^™) technology, and protein engineering and expression capabilities.

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Discovery and Research Programs

In addition to our pipeline of product candidates and antibody-based technologies, we have internal discovery and research programs directed towards identifying novel antigen targets and monoclonal antibodies and developing new classes of potent, cell-killing drugs.

Novel Targets.    We utilize a variety of genomic tools and biologic assays to identify novel antigen targets to which we can generate specific new monoclonal antibodies. We focus on genes that are highly expressed in cancer to identify molecules that are located on the surface of cancer cells that may serve as targets for monoclonal antibodies. In 2002, we submitted three new patent applications covering five novel therapeutic antigen targets that are expressed by cancer cells.

Novel Monoclonal Antibodies.    We are actively engaged in internal efforts to discover and develop antibodies with novel specificities and activities. We supplement these internal efforts by evaluating opportunities to in-license antibodies from academic groups and other biotechnology companies. We also have access to fully-human monoclonal antibodies through our collaboration with Medarex. These monoclonal antibodies may represent product candidates on their own or may be utilized as part of our ADC or ADEPT technologies. In 2002, we created panels of new cancer-reactive monoclonal antibodies that are currently undergoing screening to identify those with the highest cancer specificity.

New Cell-Killing Drugs.    We focus our efforts on two drug classes, antimitotic agents and DNA minor groove binders, both of which possess potent cell-killing properties. We are evaluating multiple variants of both drug classes as a component of our next generation ADC technology. Additionally, we were awarded a Small Business Innovation Research grant in September 2002 to support ongoing research on tumor-selective anti-cancer prodrugs. These prodrugs are activated by enzymes that are more prevalent in tumors than in normal tissues, which can result in tumor-selective cell-killing.

Corporate Collaborations

Part of our business strategy is to establish corporate collaborations with biotechnology and pharmaceutical companies and academic institutions. We seek collaborations to advance the development and commercialization of our own product candidates. We also utilize our technologies to improve the efficacy of other companies’ monoclonal antibodies, which may partially offset expenditures on our internal research and development activities. When partnering, we seek to retain significant downstream participation in product sales through either profit-sharing or product royalties paid on annual net sales. Our principal corporate collaborations are listed below.

ADC Collaborations

We have entered into agreements with several collaborators to allow them to use our proprietary ADC technology with their monoclonal antibodies:

Eos Biotechnology.    In June 2001, we entered into an ADC collaboration with Eos Biotechnology, pursuant to which Eos has paid us several technology access fees and service and reagent fees. In early February 2003, Eos announced an agreement to be acquired by Protein Design Labs, Inc. Following public announcement of the acquisition, we have been in communication with Protein Design Labs regarding future activities under this collaboration. This collaboration may result in additional future payments to us in the form of technology access and maintenance fees, milestone payments and royalties on net sales of any resulting products. Eos (or Protein Design Labs) will also be responsible for all costs associated with the development, manufacturing and marketing of any products generated as a result of this agreement.

Celltech Group.    In March 2002, we entered into an ADC collaboration with Celltech. Under the terms of the multi-year agreement, Celltech paid us an up front technology access fee, is paying service and reagent fees

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and may additionally make milestone payments and pay royalties on net sales of any resulting products. Celltech will be responsible for all costs associated with the development, manufacturing and marketing of any products generated as a result of this agreement.

Genentech.    In April 2002, we entered into an ADC collaboration with Genentech. Under the terms of the multi-year agreement, Genentech paid a $2.5 million up front fee, is paying technology access fees and research fees, and may pay progress-dependent milestone payments and royalties on net sales of any resulting products. Genentech is responsible for research, product development, manufacturing and commercialization of any products resulting from the collaboration. As part of the collaboration, Genentech also purchased $3.5 million of our common stock, which increased Genentech’s total equity ownership in Seattle Genetics to approximately 5.4%. If an additional benchmark is achieved under the collaboration agreement, we have an option, at our sole discretion, to sell additional equity to Genentech at fair market value.

Co-Development and Co-Funding Agreements

Genencor International.    In January 2002, we formed a strategic alliance with Genencor International to jointly discover and develop a class of cancer therapeutics based on tumor-targeted enzymes that activate prodrugs. The agreement provides for us to receive specific fees and milestones and for Genencor to receive certain milestone payments. As part of the collaboration, we also sold Genencor $3.0 million of our common stock in a private placement. Under the terms of the multi-year agreement, the two companies are utilizing our antibody-directed enzyme prodrug therapy (ADEPT) technology and are jointly developing SGN-17/19, our lead product candidate for the treatment of metastatic melanoma. In addition, the collaboration includes access to Genencor’s targeted enzyme prodrug therapy (TEPT) platform, epitope mapping technology (the i-mune assay) and protein engineering and expression capabilities. The two companies will share costs for SGN-17/19 and any other joint products that enter development. In addition, the companies may jointly use Genencor’s i-mune assay technology, which allows for the prediction of amino acid sequences that are capable of causing adverse immune responses, for any monoclonal antibody or protein therapeutic developed in the collaboration. Based on the i-mune predictions, specific sequences of ADEPT or TEPT-based product candidates can be modified, resulting in therapeutic agents that may be administered over longer durations, thus possibly leading to enhanced efficacy in cancer patients.

Medarex.    In February 2001, we entered into a collaboration agreement with Medarex to produce fully-human monoclonal antibodies to certain breast cancer and melanoma antigen targets identified by us over the following three years. As part of this agreement, Medarex bought $2.0 million of our common stock concurrent with our initial public offering in March 2001. In November 2001, we entered into an additional agreement with Medarex that allows us to immunize Medarex mice and to generate antibodies. We have the right to obtain a non-exclusive research license and/or exclusive commercial licenses with respect to antibodies developed from this program.

In-Licenses

Bristol-Myers Squibb.    In March 1998, we obtained rights to some of our technologies and product candidates, portions of which are exclusive, through a license agreement with Bristol-Myers Squibb. Through this license, we secured rights to monoclonal antibody-based cancer targeting technologies, including 26 different patents, eight monoclonal antibodies, chemical linkers, a ribosome-inactivating protein and enabling technologies. We also received a substantial supply of vialed, clinical-grade SGN-15, which has been used in our clinical trials. Under the terms of the license agreement, we are required to pay royalties on net sales of future products incorporating the licensed technology. Our obligation to pay royalties terminates on a product-by-product basis upon the later of ten years after first commercial sale or the last to expire of the licensed patents. The agreement is also subject to earlier termination upon breach of any material obligations by the other party.

Mabtech AB.    In June 1998, we obtained exclusive worldwide rights to a monoclonal antibody that targets the CD40 antigen from Mabtech AB, located in Sweden. Under the terms of this license, we are required to make

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a progress-dependent milestone payment and pay royalties on net sales of products incorporating technology licensed from Mabtech.

Genentech.    In June 1999, we licensed our anti-CD40 antibody program to Genentech, including our SGN-40 product candidate and associated technology. In October 2002, we received notification from Genentech that they would not continue development of SGN-40. Genentech has agreed to transfer the anti-CD40 technology created during the collaboration back to us, and we are currently conducting preclinical development of SGN-40 on our own. Pursuant to license agreements executed in March 2003, Genentech is entitled to receive an up front license fee, a progress-dependent milestone payment and royalties on net sales of anti-CD40 products that use Genentech’s technology.

University of Miami.    In September 1999, we entered into an exclusive license agreement with the University of Miami, Florida, covering an anti-CD30 monoclonal antibody that is the basis of SGN-30 and the antibody component of SGN-35. Under the terms of this license, we made an up front payment and are required to make progress-dependent milestone payments, certain annual maintenance fee payments and pay royalties on net sales of products incorporating technology licensed from the University of Miami for a period of ten years after the first commercial sale of a product.

Arizona State University.    In February 2000, we entered into a license agreement with Arizona State University for a worldwide, exclusive license to the cell-killing agent Auristatin E. We use variants of Auristatin E as a component of our ADC technology. Under the terms of this license, we are required to make annual maintenance fee payments, progress-dependent milestone payments and pay royalties on net sales of products incorporating technology licensed from Arizona State University until the last to expire of the licensed patents on a country-by-country basis.

ICOS Corporation.    In October 2000, we entered into a license agreement with ICOS Corporation for non-exclusive rights to use the CHEF expression system. We have used this system to manufacture SGN-30 and the BR96 antibody component of SGN-15, and we may also use it for other monoclonal antibodies in the future. Under the terms of this agreement, we are required to make progress-dependent milestone payments and pay royalties on net sales of products manufactured using the CHEF expression system until the last to expire of ICOS’ licensed patents.

CLB-Research and Development.    In July 2001, we entered into an exclusive option and license agreement for certain monoclonal antibodies that target cancer and immunologic disease from CLB-Research and Development, located in the Netherlands. In January 2003, we exercised our option to obtain a worldwide, exclusive license to the antibodies. Under the terms of this agreement, we have made up front and option exercise payments and are required to make progress-dependent milestone payments and pay royalties on net sales of products incorporating the antibodies for a period of ten years after the first commercial sale.

Proacta Therapeutics.    In October 2001, we entered into an exclusive option and license agreement with Proacta Therapeutics, based in New Zealand, for rights to a class of potent, cell-killing drugs called minor groove binders that directly target DNA. In October 2002, we exercised our option to obtain worldwide, exclusive development, manufacturing and commercialization rights to any products utilizing the drugs. Under the terms of the agreement with Proacta, we paid up front and option exercise fees, and are required to pay license fees, progress-dependent milestone payments and royalties upon commercialization of the drugs for a period of ten years after the first commercial sale.

Patents and Proprietary Technology

We seek appropriate patent protection for our proprietary technologies by filing patent applications in the United States and other countries. As of December 31, 2002, we owned or held exclusive or partially exclusive licenses to over 20 issued United States patents and 16 pending United States patent applications.

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Our patents and patent applications are directed to product candidates, monoclonal antibodies, therapeutic antigen targets, linker technologies, ADC technologies, immunotoxin technologies, ADEPT and enabling technologies. Although we believe our patents and patent applications provide us with a competitive advantage, the patent positions of biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions. We and our corporate collaborators or licensors may not be able to develop patentable products or processes or obtain patents from pending patent applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect the technology owned by or licensed to us or our corporate collaborators.

Our success will depend significantly on our and our licensors’ abilities to:

Our commercial success depends significantly on our ability to operate without infringing patents and proprietary rights of third parties. A number of pharmaceutical and biotechnology companies, universities and research institutions may have filed patent applications or may have been granted patents that cover technologies similar to the technologies owned, optioned by or licensed to us or our corporate collaborators. Our or our corporate collaborators’ current patents, or patents that issue on pending applications, may be challenged, invalidated, infringed or circumvented, and the rights granted in those patents may not provide proprietary protection to us. We cannot determine with certainty whether patents or patent applications of other parties may materially affect our or our corporate collaborators’ ability to make, use or sell any products.

We also rely on trade secrets and proprietary know-how, especially when we do not believe that patent protection is appropriate or can be obtained. Our policy is to require each of our employees, consultants and advisors to execute a confidentiality and inventions assignment agreement before beginning their employment, consulting or advisory relationship with us. These agreements generally provide that the individual must keep confidential and not disclose to other parties any confidential information developed or learned by the individual during the course of their relationship with us except in limited circumstances. These agreements also generally provide that we shall own all inventions conceived by the individual in the course of rendering services to us.

Government Regulation

Our products are subject to extensive regulation by numerous governmental authorities, principally the U.S. Food and Drug Administration (FDA), as well as numerous state and foreign agencies. We need to obtain clearance of our potential products by the FDA before we can begin marketing the products in the United States. Similar approvals are also required in other countries.

Product development and approval within this regulatory framework is uncertain, can take many years and requires the expenditure of substantial resources. The nature and extent of the governmental review process for our potential products will vary, depending on the regulatory categorization of particular products and various other factors. In particular, the FDA recently announced a reorganization intended to consolidate review of new pharmaceutical products within the FDA’s Center for Drug Evaluation and Research (CDER). Prior to this reorganization, the FDA’s Center for Biologics Evaluation and Research (CBER) reviewed new biological products such as monoclonal antibodies, while CDER reviewed new drug products and combination drug/biological products such as our antibody-drug conjugates and ADEPT product candidates. We do not believe the FDA’s reorganization will significantly affect the review process for our product candidates, but we are monitoring events within the FDA to keep pace with current developments.

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The necessary steps before a new pharmaceutical product may be sold in the United States ordinarily include:

Clinical trials generally are conducted in three sequential phases that may overlap. In phase I, the initial introduction of the product into humans, the product is tested to assess safety, metabolism, pharmacokinetics and pharmacological actions associated with increasing doses. Phase II usually involves trials in a limited patient population to determine the efficacy of the potential product for specific, targeted indications, determine dosage tolerance and optimum dosage and further identify possible adverse reactions and safety risks. Phase III trials are undertaken to evaluate further clinical efficacy in comparison to standard therapies within a broader patient population, generally at geographically dispersed clinical sites. Phase I, phase II or phase III testing may not be completed successfully within any specific period of time, if at all, with respect to any of our products candidates. Furthermore, the FDA, an institutional review board or we may suspend a clinical trial at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The results of preclinical studies, pharmaceutical development and clinical trials are submitted to the FDA in the form of a marketing authorization application for approval of the manufacture, marketing and commercial shipment of the pharmaceutical product. The testing and approval process is likely to require substantial time, effort and resources, and there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny a marketing authorization application if applicable regulatory criteria are not satisfied, require additional testing or information, or require post-market testing and surveillance to monitor the safety or efficacy of the product. In addition, after marketing approval is granted, the FDA may require post-marketing clinical trials, which typically entail extensive patient monitoring and may result in restricted marketing of an approved product for an extended period of time.

Competition

The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Many third parties compete with us in developing therapies to treat a variety of cancers including hematologic malignancies, carcinomas and melanoma. They include pharmaceutical companies, biotechnology companies, academic institutions and other research organizations.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approval and marketing than we do. In addition, many of these competitors are active in seeking patent protection and licensing arrangements in anticipation of collecting royalties for use of technology that they have developed. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, as well as in acquiring technologies complementary to our programs.

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We expect that competition among products approved for sale will be based, among other things, on efficacy, reliability, product safety, price and patent position. Our ability to compete effectively and develop products that can be manufactured cost-effectively and marketed successfully will depend on our ability to:

We are aware of specific companies that have competitive technologies, including Wyeth, Immunogen and Medarex, all of which have antibody-drug conjugate technology. Wyeth markets the antibody-drug conjugate Mylotarg for patients with acute myelogenous leukemia. While we are not developing lead agents for that specific disease, Wyeth may apply their antibody-drug conjugate technology to other monoclonal antibodies that may compete with our lead product candidates. Immunogen has several antibody-drug conjugates in development that may compete with our product candidates. Immunogen has also established partnerships with other pharmaceutical and biotechnology companies to allow them to utilize Immunogen’s technology. During 2002, Medarex completed a purchase of antibody-drug conjugation technology from Corixa Corporation that may compete with our ADC technology. Medarex is also developing an anti-CD30 antibody for hematologic malignancies that may be competitive with SGN-30. We believe that our technology competes favorably with the technologies that are in use at Wyeth, Immunogen and Medarex.

Manufacturing

We received clinical-grade SGN-15 from Bristol-Myers Squibb for our previous and ongoing clinical trials and have entered into agreements with contract manufacturers to supplement our supplies of SGN-15 as necessary, including ICOS Corporation, Albany Molecular Research, Inc. and Gensia-Sicor Pharmaceuticals, Inc. For SGN-30, we have contracted with ICOS to manufacture preclinical and clinical supplies. For SGN-40, Genentech manufactured substantial quantities of clinical grade material that are being transferred to us. In addition, we currently and will in the future continue to rely on other third parties to perform additional steps in the manufacturing process, including synthesis of our next generation drug-linker systems, conjugation, vialing and storage of our product candidates.

We believe that our contract manufacturing relationships with ICOS, Albany Molecular, Gensia-Sicor and other potential contract manufacturers with whom we are in discussions, together with existing supplies of SGN-15 from Bristol-Myers Squibb and supplies of SGN-40 from Genentech, will be sufficient to accommodate clinical trials through phase II and in some cases into the early stages of phase III of our current product candidates. However, we may need to obtain additional manufacturing arrangements, if available on commercially reasonable terms, or increase our own manufacturing capability to meet our future needs, both of which would require significant capital investment. We may also enter into collaborations with pharmaceutical or larger biotechnology companies to enhance the manufacturing capabilities for our product candidates.

Employees

As of December 31, 2002, we had 97 employees, 30 of whom hold doctoral level degrees. Of these employees, 78 are engaged in or directly support research, development and clinical activities and 19 are in administrative and business development positions. Each of our employees has signed a confidentiality agreement and none are covered by a collective bargaining agreement. We have never experienced employment-related work stoppages and consider our employee relations to be good.

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Website

Our website address is www.seattlegenetics.com. We make available, free of charge, through a hyperlink on our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. Information contained on our website is not part of this report.

Item 2. Properties.

Our headquarters are in Bothell, Washington, where we lease approximately 63,900 square feet under a lease expiring May 2010. We may renew the lease, at our option, for two consecutive seven-year periods. We have built out and currently occupy approximately 48,000 square feet as laboratory, discovery, research and development and general administration space, with the remaining space available for future expansion.

Item 3. Legal Proceedings.

We are not a party to any material legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth quarter of 2002.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock is traded on the Nasdaq National Market under the symbol SGEN.

The following table sets forth the high and low sales prices for our common stock, as quoted on the Nasdaq National Market, for each of the quarters indicated.

As of March 14, 2003, there were 155 holders of record of our common stock and, according to our estimates, approximately 5,400 beneficial owners of our common stock.

We have not paid any cash dividends on our common stock since our inception. We do not intend to pay any cash dividends in the foreseeable future, but intend to retain all earnings, if any, for use in our business operations.

We completed our initial public offering of our common stock pursuant to a Registration Statement on Form S-1 under the Securities Act of 1933 (File No. 333-50266) on March 6, 2001. All 7,000,000 shares of common stock offered in the final prospectus were sold at a price per share of $7.00. The managing underwriters of our initial public offering were JP Morgan, CIBC World Markets and Banc of America Securities LLC. The aggregate gross proceeds of the shares offered and sold were $49.0 million, resulting in net proceeds to us of approximately $44.4 million after deducting underwriting discounts and commissions and other offering expenses of $4.6 million. From the effective date of our initial public offering through December 31, 2002, we have used approximately $33.7 million of the proceeds, including $2.2 million for clinical trials, $9.9 million for contract manufacturing costs, $7.1 million for purchases of property and equipment and approximately $14.5 million for preclinical research and development activities and general corporate purposes. The remainder of the net proceeds from the offering are invested in a variety of high quality interest-bearing instruments, consisting of U.S. government and agency securities, high-grade U.S. corporate bonds, taxable municipal bonds, mortgage-backed securities, commercial paper and money market accounts.

In January 2002, we formed a strategic alliance with Genencor International, Inc. to jointly discover and develop a class of cancer therapeutics based on tumor-targeted enzymes that activate prodrugs. In conjunction with forming this strategic alliance, Genencor purchased approximately $3 million, or 573,614 shares, of our common stock in a private placement exempt from registration under Rule 506 of Regulation D and Section 4(2) of the Securities Act pursuant to a purchase agreement entered into at the time of sale.

In April 2002, we entered into an ADC collaboration with Genentech, Inc., in connection with which Genentech purchased approximately $3.5 million, or 697,544 shares, of our common stock in a private placement exempt from registration under Rule 506 of Regulation D and Section 4(2) of the Securities Act pursuant to a purchase agreement entered into at the time of sale.

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Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with the financial statements and notes to our financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this Form 10-K. The selected Statements of Operations data for the years ended December 31, 2002, 2001 and 2000 and Balance Sheet data as of December 31, 2002 and 2001 have been derived from our audited financial statements appearing elsewhere in this Form 10-K. The selected Statements of Operations data for the years ended December 31, 1999 and 1998 and Balance Sheet data as of December 31, 2000, 1999, and 1998 have been derived from our audited financial statements that are not included in this Form 10-K. Historical results are not necessarily indicative of future results.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion of our financial condition and results of operations contains 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. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict, potential or continue, the negative of terms like these or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks outlined under the caption “Important Factors That May Affect Our Business, Results of Operations and Stock Price” set forth at the end of this Item 7 and those contained from time-to-time in our other filings with the SEC. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

We focus on the discovery and development of monoclonal antibody-based drugs to treat cancer and other human diseases. We have three monoclonal antibody-based technologies: genetically engineered monoclonal antibodies; monoclonal antibody-drug conjugates (ADCs); and antibody-directed enzyme prodrug therapy (ADEPT). Our technologies enable us to develop monoclonal antibodies that can kill cells on their own as well as to increase the potency of monoclonal antibodies by enhancing their tumor cell-killing ability. Using our expertise in cancer and monoclonal antibody technologies, we have constructed a diverse portfolio of product candidates. Our technologies also provide us with an opportunity to partner with other companies that are developing monoclonal antibodies.

We have two monoclonal antibody-based product candidates in clinical trials, SGN-30 and SGN-15. SGN-30 is being developed to treat patients with hematologic malignancies. SGN-15 targets a variety of solid tumors, including prostate, ovarian and lung. We also have three product candidates presently undergoing preclinical development: SGN-40 (formerly SGN-14), SGN-35 and SGN-17/19. SGN-40 is in preclinical development for the treatment of hematologic malignancies and some types of solid tumors such as bladder and renal cancer. SGN-35, which utilizes our next generation ADC technology, is in preclinical development for hematological malignancies. This technology utilizes proprietary stable linkers that can significantly reduce the toxic side effects caused by the systemic release of drugs associated with less stable linker technology. These linkers attach our antibodies to synthetic, highly potent, cell-killing drugs we have developed, including variants of Auristatin E, which are scaleable for commercial development. SGN-17/19, which utilizes our ADEPT technology, is being developed preclinically in collaboration with Genencor International for patients with metastatic melanoma.

Since our inception, we have incurred substantial losses and, as of December 31, 2002, we had an accumulated deficit of $56.6 million. These losses and accumulated deficit have resulted from the significant costs incurred in the development of our monoclonal antibody-based technologies, clinical trial costs, manufacturing expenses of preclinical and clinical grade materials, general and administrative costs and non-cash stock-based compensation expenses associated with stock options granted to employees and consultants prior to our initial public offering in March 2001. Operating expenses increased to $26.9 million in 2002 from $23.9 million in 2001 and $10.0 million in 2000. We expect that our losses will increase for the foreseeable future as we continue to expand our research, development, clinical trial activities and infrastructure in support of these activities.

In January 2002, we entered into an agreement with Genencor International, Inc. to jointly discover and develop a class of cancer therapeutics based on our ADEPT program. The companies have agreed to jointly fund certain preclinical and clinical development costs and have the right to jointly commercialize any resulting

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products within the field. The companies may also pay each other specific fees and milestone payments. As part of the collaboration, Genencor paid $3 million to acquire 573,614 shares of our common stock at fair value. In July 2002, we received a license fee under this collaboration agreement from Genencor.

In March 2002, we entered into an agreement with Celltech Group to use our ADC technology with Celltech’s monoclonal antibodies and antibody fragments directed against specific diseases, including immunological targets. Under the terms of the multi-year agreement, Celltech paid an up front technology access fee and may make progress-dependent milestone payments. In addition, Celltech is paying research and reagent fees and will pay royalties on net sales of any resulting products. Celltech will be responsible for product development, manufacturing and marketing of any products generated through the collaboration.

In April 2002, we entered into an agreement with Genentech, Inc. to license our ADC technology for use with Genentech’s antibodies targeted to certain diseases. Under the terms of the multi-year agreement, Genentech paid a $2.5 million up front fee and is paying technology access fees and research fees. Genentech may also pay progress-dependent milestone payments and will pay royalties on net sales of any resulting products. Genentech is responsible for research, product development, manufacturing and commercialization of any products resulting from the collaboration. As part of the collaboration, Genentech purchased 697,544 shares of our common stock at fair value on April 19, 2002 in a private placement for an aggregate purchase price of approximately $3.5 million. This stock purchase increased Genentech’s total equity ownership in Seattle Genetics to 1,663,530 shares, or approximately 5.4% of our outstanding common stock. If an additional benchmark is achieved under the collaboration agreement, we have an option, at our sole discretion, to sell additional equity to Genentech at fair value.

During September 2002, Seattle Genetics was awarded a Small Business Innovation Research (SBIR) grant from the National Institutes of Health (NIH) through the National Cancer Institute. The $128,800 grant was awarded under Phase I of the SBIR Program of the NIH to develop anti-cancer prodrugs that can be activated by tumor-associated enzymes. The amount awarded is being recognized over a one year period as the research is performed.

We do not currently have any commercial products for sale. To date, our revenues have been derived principally from our collaboration and license agreements and Small Business Innovative Research grants. In the future, we believe our revenues will consist of milestone payments, technology licensing fees and sponsored research fees under existing and future collaborative arrangements, royalties from collaborations with current and future strategic partners and commercial product sales. Because a substantial portion of our revenues for the foreseeable future will depend on achieving development and clinical milestones, our results of operations may vary substantially from year-to-year and quarter-to-quarter. We believe that period-to-period comparisons of our operating results are not meaningful and you should not rely on them as indicative of our future performance.

Results of Operations

Years Ended December 31, 2002 and 2001

Revenues.    Revenues increased 514% to $1.7 million in 2002 from $274,000 in 2001. Revenues in 2002 were derived from the earned portion of technology access fees of approximately $836,000, from service and reagent fees of approximately $707,000 and from two Small Business Innovative Research (SBIR) grants of approximately $141,000. Revenues in 2001 were derived from service and reagent fees of approximately $138,000, the earned portion of technology-access fees of approximately $83,000 and a SBIR grant of approximately $53,000.

Research and development expenses.    Research and development expenses, excluding non-cash stock-based compensation expenses, increased 29% to $19.8 million in 2002 from $15.4 million in 2001. This increase was principally due to increases in personnel expenses of approximately $1.8 million, increases in rent and occupancy costs related to our new headquarters and operations facility of approximately $1.3 million, increased

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usage of laboratory materials and supplies of approximately $995,000 and increases in clinical trial costs of approximately $548,000. These expenses were offset by decreases in manufacturing for clinical grade materials of approximately $943,000 and shared development funding under our collaboration agreement with Genencor of approximately $340,000. The number of research and development personnel increased to 78 at December 31, 2002 from 54 at December 31, 2001. We anticipate that our research and development expenses will continue to grow in the foreseeable future as we expand our research, development, contract manufacturing, shared development funding and clinical trial activities; however, those expenses may fluctuate quarter to quarter based on the timing of manufacturing campaigns, accrual of patients in clinical trials and collaborative activities.

General and administrative expenses.    General and administrative expenses, excluding non-cash stock-based compensation expenses, increased 29% to $4.2 million in 2002 from $3.3 million in 2001. This increase was primarily due to additional administrative personnel. The number of general and administrative personnel increased to 19 at December 31, 2002 from 15 at December 31, 2001. We anticipate that general and administrative expenses will increase as our costs related to adding personnel in support of our general and administrative operations increase.

Non-cash stock-based compensation expense.    Non-cash stock-based compensation expense decreased 46% to $2.8 million in 2002 from $5.2 million in 2001. This decrease is attributable to the accelerated amortization of deferred stock-based compensation, which will decrease in later years as the options vest, and to adjustments to options subject to variable accounting. Variable accounting treatment will result in charges or credits, recorded to non-cash stock-based compensation, dependent on fluctuations in the market value of our common stock. We anticipate that non-cash stock-based compensation expense will decrease based upon scheduled amortizations in accordance with Financial Accounting Standards Board Interpretation No. 28 using an accelerated basis over the vesting period of the individual options.

Investment income, net.    Investment income decreased 30% to $2.0 million in 2002 from $2.9 million in 2001. This decrease is due to lower average balances of cash and cash equivalents, short-term and long-term investments and restricted investments at lower average interest yields in 2002, compared to higher average balances and higher average interest yields in 2001.

Net loss.    Net loss increased 12% to $23.2 million in 2002 from $20.7 million in 2001 as a result of the factors mentioned above.

Years Ended December 31, 2001 and 2000

Revenues.    Revenues increased 178% to $274,000 in 2001 from $99,000 in 2000. Revenues in 2001 were derived from service and reagent fees of approximately $138,000, the earned portion of technology-access fees of approximately $83,000 and a SBIR grant of approximately $53,000. In 2000, revenues were derived exclusively from a Small Business Innovative Research grant.

Research and development expenses.    Research and development expenses, excluding non-cash stock-based compensation expenses, increased 211% to $15.4 million in 2001 from $4.9 million in 2000. This increase was principally due to contract manufacturing expenses of approximately $5.8 million, increases in rent and occupancy costs related to our new headquarters and operations facility of approximately $1.7 million, increases in personnel expenses of $1.7 million and clinical trial costs of approximately $534,000. The number of research and development personnel increased to 54 at December 31, 2001 from 35 at December 31, 2000.

General and administrative expenses.    General and administrative expenses, excluding non-cash stock-based compensation expenses, increased 76% to $3.3 million in 2001 from $1.9 million in 2000. This increase was primarily due to additional administrative personnel and other increases attributable to being a public company, including costs related to investor relations programs and directors’ and officers’ insurance. The number of general and administrative personnel increased to 15 at December 31, 2001 from 11 at December 31, 2000.

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Non-cash stock-based compensation expense.    Non-cash stock-based compensation expense increased 65% to $5.2 million in 2001 from $3.1 million in 2000. The increase is attributable to increasing levels of stock option grants and the difference between the deemed fair values as compared to the related exercise prices, reduced by an adjustment to the unvested stock options granted to nonemployees which are subject to variable accounting.

Investment income, net.    Investment income increased 44% to $2.9 million in 2001 from $2.0 million in 2000. The increase was due to higher average balances of cash and cash equivalents, short-term and long-term investments and restricted investments primarily from the net proceeds of our initial public offering on March 6, 2001 offset by generally lower interest rates.

Net loss.    Net loss increased 164% in 2001 to $20.7 million from $7.8 million in 2000 as a result of the factors mentioned above.

Liquidity and Capital Resources

We have financed our operations primarily through funding from the issuance of equity securities and collaborative agreements. For the last three years, we have received cash of approximately $46.4 million from the net proceeds from our initial public offering and concurrent private placement on March 6, 2001, approximately $9.5 million from private equity financings, approximately $6.5 million from investment income, net and approximately $5.4 million from collaborative research and license agreements, including government grants. At December 31, 2002, cash, cash equivalents, short-term and long-term investments totaled $44.2 million and restricted investments totaled approximately $980,000. Our cash, cash equivalents, short term and long-term investments and restricted investments are held in a variety of interest-bearing instruments, consisting of U.S. government and agency securities, high-grade U.S. corporate bonds, taxable municipal bonds, mortgage-backed securities, commercial paper and money market accounts.

Net cash used in operating activities in both 2002 and 2001 was $14.1 million. Net cash used in operating activities in 2000 was $4.5 million. Our net losses of $23.2 million in 2002, $20.7 million in 2001 and $7.8 million in 2000 were adjusted for non-cash charges, which were primarily related to amortization of deferred stock compensation, depreciation and changes in operating assets and liabilities. Changes in operating assets and liabilities include deferred revenue. Expenditures in all periods were a result of clinical trials, contract manufacturing, preclinical research and development and general administrative expenses in support of our operations. In 2002 and 2001, we financed a portion of the net cash used to support operating activities from various collaborative sources. These sources include technology access and license fees, and shared development funding received under our collaboration agreements with Eos Biotechnology, Celltech, Genentech and Genencor International. We expect cash used in operating activities to increase in the future as we increase our number of employees, expand our contract manufacturing initiatives and increase the patient enrollments in our clinical trials. However, we may experience quarterly fluctuations in cash used in operations based on the timing of manufacturing campaigns and cash provided from collaboration activities.

Net cash provided by investing activities for the year ended 2002 was $8.4 million compared to net cash used in investing activities of $27.4 million in 2001 and $25.7 million in 2000. Cash provided by investing activities in 2002 included $10.1 million from sales and maturities of investments, net of the purchase of investments. This compared to $22.0 million from the purchase of investments, net of sales and maturities of investments in 2001 and $25.0 million in 2000. Purchases of property and equipment were $1.7 million for the year ended 2002 compared to $5.5 million in 2001 and $729,000 in 2000. Capital expenditures in 2002 included laboratory equipment of approximately $793,000 and computers, leasehold improvements, furniture and fixtures of approximately $912,000 in support of employee growth. Capital expenditures in 2001 included leasehold improvements of approximately $3.7 million, laboratory equipment of approximately $2.1 million and furniture and fixtures of approximately $762,000, all in connection with our new headquarters and operations facility. We expect that our future capital expenditures will decrease in 2003 compared to 2002 capital expenditures.

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Net cash provided by financing activities was $6.6 million in 2002 compared to $47.2 million in 2001 and $2.5 million in 2000. Financing activities in 2002 consisted primarily of the receipt of $3.0 million from the private placement of common stock with Genencor and $3.5 million from the private placement of common stock with Genentech. Financing activities in 2001 included net proceeds of $44.4 million from our initial public offering, $2.0 million from our concurrent private placement and from repayment of notes receivable from stockholders. Financing activities during 2000 consisted primarily of $2.5 million from the collection of subscriptions receivable and $500,000 from the sale of additional Series B convertible preferred stock.

We expect to incur substantial costs as we continue to develop and commercialize our product candidates. We anticipate that our rate of spending will accelerate as a result of the increased costs and expenses associated with clinical trials, regulatory filings, manufacturing, and research and development collaborations. However, we may experience fluctuations in incurring these costs from quarter to quarter based on the timing of manufacturing campaigns, accrual of patients to clinical trials and collaborative activities. Our future expenditures and capital requirements will depend on numerous factors, including the progress of our research and development activities, the cost of filing and enforcing any patent claims and other intellectual property rights, competing technological and market developments and our ability to establish license and collaboration agreements.

The following are future minimum contractual commitments for the years subsequent to December 31, 2002 (in thousands):

Our license and collaboration agreements also provide for payments upon the achievement of development or regulatory milestones and the payment of royalties based on commercial product sales. We do not expect to pay any royalties on net sales of products under any of these agreements for at least the next several years. The milestone payments could be substantially higher and the royalties could be payable earlier if we file or receive regulatory approvals or achieve commercial sales sooner than expected.

As part of the terms of our office and laboratory lease, we have restricted approximately $980,000 of our investments as collateral for certain obligations under the lease. These investment securities are restricted as to withdrawal and are managed by a third party. The lease terms provide for changes in the amounts pledged as restricted securities based upon our market capitalization, stockholders’ equity or cash and investments balance. In the event that our market capitalization, stockholders’ equity or cash and investments balance fall below specific thresholds, we will be obligated to increase our restricted investment balance to approximately $3.4 million.

We believe that our current cash and investment balances will be sufficient to enable us to meet our anticipated expenditures and operating requirements for at least the next 12 months. We intend to seek additional funding through some or all of the following methods: corporate collaborations, licensing arrangements and public or private equity financings. However, additional capital may not be available on favorable terms or at all. If we are unable to raise additional funds should we need them, we may be required to delay, reduce or eliminate some of our development programs and some of our clinical trials, which may adversely affect our business and operations.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations”, or SFAS No. 143, which addresses financial accounting and reporting for obligations associated with the retirement of tangible

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long-lived assets and the associated asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not expect the adoption of this statement to have a significant impact on our financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force, or EITF, Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 states that a liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred, except for a liability for one-time termination benefits that are incurred over a period of time. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect the adoption of this statement to have a significant impact on our financial position or results of operations.

In November 2002, the Emerging Issues Task Force (EITF) finalized its consensus on EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which provides guidance on the timing and method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently assessing the impact of EITF 00-21 and will adopt this standard in the second quarter of 2003.

In November 2002, the FASB issued Financial Accounting Standards Board Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statement Nos. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The disclosure provisions of FIN 45 are effective for financial statements of periods that end after December 15, 2002. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. We do not expect the adoption of this FASB Interpretation to have a significant impact on our financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123.” This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement requires that companies having a year-end after December 15, 2002 follow the prescribed format and provide the additional disclosures in their annual reports. The accompanying financial statements include the required disclosures. We do not believe there will be a significant impact on our financial position or results of operations from the adoption of this new standard unless we were to make a change in our accounting policy and account for all stock option grants as compensation expense.

In January 2003, the FASB issued Interpretations No. 46, or FIN 46, “Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have (i) the characteristics of a controlling financial interest or (ii) sufficient at-risk equity. FIN No. 46 applies to a broad rang of unconsolidated investee entities (e.g. joint ventures, partnerships and cost basis investments) and, effective for financial statements issued after January 31, 2003, adds certain disclosure requirements. Adoption of this FASB interpretation is not expected to have a material impact on our financial position or results of operations.

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Critical Accounting Policies

The preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.

Collaboration and License Agreements.    Revenues from the sale of products and services are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fees are fixed and determinable and collectibility is reasonably assured. Revenues from up front payments, technology license fees and milestone payments received for the delivery of products and services representing the culmination of a separate earnings process are recognized when due and the amounts are judged to be collectible. Revenues from up front payments, technology license fees and milestone payments received in connection with other rights and services, which represent continuing obligations to us, are deferred and recognized ratably over the period term of the agreement.

Stock-based Compensation.    We grant stock options to employees for a fixed number of shares with an exercise price equal to the fair value of our common stock on the date of grant. We recognize no compensation expense on these employee stock option grants. We also have, in the past, granted stock options for a fixed number of shares to employees with an exercise price less than the fair value of our common stock on the date of grant. We recognize the difference between the exercise price and fair value as compensation expense, which is amortized on an accelerated basis over the vesting period of the stock options (the “intrinsic value” method). For certain stock options granted to nonemployees, we recognize as expense the estimated fair value of such options as calculated by the Black-Scholes option pricing model, which is re-measured during the service period. Fair value is determined using allowable methodologies and the expense is amortized over the vesting period of each option or the recipient’s contractual arrangement, if shorter. Changes in the fair value of our common stock during the service period will cause fluctuations in recognized compensation expense for variable options.

Investments.    Our investments are diversified among high-credit quality debt securities in accordance with our investment policy. We classify our investments as available-for-sale, which are reported at fair market value with the related unrealized gains and losses included as a component of stockholders’ equity. Realized gains and losses and declines in value of investments judged to be other than temporary are included in other income (expense). The fair value of our investments is subject to volatility. To date, the carrying values of our investments have not been written down due to declines in value judged to be other than temporary. Declines in the fair value of our investments judged to be other than temporary could adversely affect our future operating results.

Income Taxes.    We have net deferred tax assets at December 31, 2001 totaling approximately $10.4 million, which are fully offset by a valuation allowance due to our determination that the criteria for recognition have not been met. We believe that a full valuation allowance will be required on losses reported in future periods. In the event we were to determine that we would be able to realize our net deferred tax assets in the future, an adjustment to the deferred tax asset would be made, increasing income (or decreasing losses) in the period in which such a determination was made.

On an ongoing basis, we evaluate our estimates, including those related to collaboration and license agreements, stock-based compensation, investments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions and conditions.

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Subsequent Events

We have a 401(k) Plan for all of our employees. Effective February 1, 2003, we implemented a 401(k) matching program whereby we contribute fifty cents for each dollar a participant contributes, with a maximum contribution of 50% of the first 4% of a participant’s earnings not to exceed 50% of the prescribed annual limit.

In March 2003, we entered into license agreements with Genentech pursuant to which we have the right to pursue the development and commercialization of SGN-40 on our own, subject to payment of an up front license fee, a progress-dependent milestone payment and royalties on net sales of products that use Genentech’s technology.

In March 2003, we agreed to secure the majority of our property and equipment as collateral for certain obligations under our office and laboratory lease.

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

You should carefully consider the risks described below, together with all of the other information included in this annual report on Form 10-K and the information incorporated by reference herein. If we do not effectively address the risks we face, our business will suffer and we may never achieve or sustain profitability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

This annual report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this annual report on Form 10-K.

We have a history of net losses. We expect to continue to incur net losses and may not achieve or maintain profitability for some time, if at all. Our limited operating history may make it difficult to evaluate our business and an investment in our common stock.

We incorporated in July 1997 and have a limited operating history upon which an investor may evaluate our operations and future prospects. We have incurred net losses in each of our years of operation and, as of December 31, 2002, we had an accumulated deficit of approximately $56.6 million. We expect to make substantial expenditures to further develop and commercialize our product candidates and anticipate that our rate of spending will accelerate as the result of the increased costs and expenses associated with research, development, clinical trials, manufacturing, regulatory approvals and commercialization of our potential products. In the near term, we expect our revenues to be derived from milestone payments, technology licensing fees and sponsored research fees under existing and future collaborative arrangements. In the longer term, our revenues may also include royalties from collaborations with current and future strategic partners and commercial product sales. However, our revenue and profit potential is unproven and our limited operating history makes our future operating results difficult to predict.

Our product candidates are at an early stage of development and, if we are not able to successfully develop and commercialize them, we may not generate sufficient revenues to continue our business operations.

All of our product candidates are in early stages of development. Significant further research and development, financial resources and personnel will be required to develop commercially viable products and obtain regulatory approvals. Currently, SGN-30 and SGN-15 are our only product candidates in clinical trials. We are also conducting preclinical development, either alone or in collaboration with others, of SGN-40, SGN-35 and SGN-17/19. We expect that much of our efforts and expenditures over the next few years will be devoted to these clinical and preclinical product candidates. We have no products that have received regulatory approval for commercial sale.

Our ability to commercialize our product candidates depends on first receiving FDA approval. Thereafter, the commercial success of these product candidates will depend upon their acceptance by physicians, patients

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and other key decision-makers as therapeutic and cost-effective alternatives to currently available products. If we fail to gain approval from the FDA or to produce a commercially successful product, we may not be able to earn sufficient revenues to continue as a going concern.

We will continue to need significant amounts of additional capital that may not be available to us.

We expect to make additional capital outlays and to increase operating expenditures over the next several years as we hire additional employees and support our preclinical development and clinical trial activities. We believe that our existing cash and investment securities will be sufficient to fund our operations for at least the next 12 months. However, changes in our business may occur that would consume available capital resources sooner than we expect. If adequate funds are not available to us, we will be required to delay, reduce the scope of or eliminate one or more of our development programs. We do not know whether additional financing will be available when needed, or that, if available, we will obtain financing on terms favorable to our stockholders or us. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.

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

Before we can obtain regulatory approval for the commercial sale of any product candidate that we wish to develop, we are required to complete preclinical development and extensive clinical trials in humans to demonstrate its safety and efficacy. Each of these trials requires the investment of substantial expense and time. We are currently conducting multiple clinical trials of our two most advanced product candidates, and expect to commence additional trials of these and other product candidates. There are numerous factors that could delay each of these clinical trials or prevent us from completing these trials successfully.

Ongoing and future clinical trials of our product candidates may not show sufficient safety or efficacy to obtain requisite regulatory approvals. In October 2002, we decided to discontinue clinical trials of SGN-10 and close our SGN-10 program. We have also completed and closed our clinical trials of SGN-15 in combination with Taxotere for the treatment of colon and breast cancer. We still have only limited clinical data in our ongoing clinical trials of SGN-15 and have seen evidence of gastrointestinal toxicity. Commercialization of our product candidates will ultimately depend upon successful completion of additional research and development and testing in both preclinical models and clinical trials. At the present time, SGN-30 and SGN-15 are our only product candidates in clinical trials and SGN-40, SGN-35 and SGN-17/19 are our only product candidates in preclinical development. As a result, any delays or difficulties we encounter with these product candidates may impact our ability to generate revenue and cause our stock price to decline significantly.

Furthermore, success in preclinical and early clinical trials does not ensure that large-scale trials will be successful nor does it predict final results. Acceptable results in early trials may not be repeated in later trials. A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Negative or inconclusive results or adverse medical events during a clinical trial could cause it to be redone or terminated. In addition, failure to construct appropriate clinical trial protocols could result in the test or control group experiencing a disproportionate number of adverse events and could cause a clinical trial to be redone or terminated. The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by the FDA or another regulatory authority may also vary significantly based on the type, complexity and novelty of the product involved, as well as other factors.

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We may choose to, or may be required to, delay, suspend, repeat or terminate our clinical trials if patient enrollment cannot be achieved on a timely basis or if the trials are not conducted in accordance with regulatory requirements, the results are negative or inconclusive or the trials are not well designed.

Clinical trials must be conducted in accordance with the FDA’s guidelines and are subject to oversight by the FDA and institutional review boards at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced under the FDA’s current Good Manufacturing Practices, and may require large numbers of test patients. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the existence of competing clinical trials and the availability of alternative or new treatments. We depend on medical institutions to conduct our clinical trials and to the extent they fail to enroll patients for our clinical trials or are delayed for a significant time in achieving full enrollment, we may be affected by increased costs, program delays or both, which may harm our business.

In addition, we or the FDA might delay or halt our clinical trials of a product candidate for various reasons, including: deficiencies in the conduct of the clinical trials; the product candidate may have unforeseen adverse side effects; the time required to determine whether the product candidate is effective may be longer than expected; fatalities arising during a clinical trial due to medical problems that may not be related to clinical trial treatments; the product candidate may not appear to be more effective than current therapies; we may have insufficient patient enrollment in the clinical trials; the quality or stability of the product candidate may fall below acceptable standards; or we may not be able to produce sufficient quantities of the product candidate to complete the trials.

Due to these and other factors, our current product candidates or any of our other future product candidates could take a significantly longer time to gain regulatory approval than we expect or may never gain approval, which could reduce or eliminate our revenue by delaying or terminating the potential commercialization of our product candidates.

Our antibody-drug conjugate (ADC) technology is still at an early-stage of development and has not yet entered human clinical trials

Our next generation ADC technology, utilizing proprietary stable linkers and highly potent cell-killing drugs, is still at an early stage of development. This ADC technology is used in our SGN-35 product candidate and is the basis of our collaborations with Eos Biotechnology, Celltech and Genentech. We and our corporate collaborators are still conducting toxicology, pharmacology, pharmacokinetics and other preclinical studies of these antibody-drug conjugates, and significant additional studies will be required before any of these ADC product candidates enter human clinical trials. Any failures or setbacks in our ADC program could have a detrimental impact on our internal product candidate pipeline and our ability to maintain and/or enter into new corporate collaborations regarding this technology, which would negatively affect our business and financial position.

We currently rely on third-party manufacturers and other third parties for production of our drug products and our dependence on these manufacturers may impair the development of our product candidates.

We do not currently have the ability to manufacture the drug products that we need to conduct our clinical trials. For SGN-15, we presently rely on drug products that were produced and vialed by Bristol-Myers Squibb and contract manufacturers retained by Bristol-Myers Squibb. We have entered into, and intend to continue to enter into, agreements with contract manufacturers to supplement our supplies of SGN-15 as necessary, including ICOS Corporation, Albany Molecular Research, Inc. and Gensia-Sicor Pharmaceuticals, Inc. For our second product candidate in clinical trials, SGN-30, we have contracted with ICOS to manufacture preclinical and clinical supplies. In addition, we currently and will in the future continue to rely on other third parties to perform additional steps in the manufacturing process, including conjugation, vialing and storage of our product candidates.

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For the foreseeable future, we expect to continue to rely on contract manufacturers and other third parties to produce, vial and store sufficient quantities of our product candidates for use in our clinical trials. If our contract manufacturers or other third parties fail to deliver our product candidates for clinical use on a timely basis, with sufficient quality, and at commercially reasonable prices, and we fail to find replacement manufacturers or to develop our own manufacturing capabilities, we may be required to delay or suspend clinical trials or otherwise discontinue development and production of our product candidates.

Contract manufacturers have a limited number of facilities in which our product candidates can be produced. We currently rely on contract manufacturers to produce our product candidates under FDA current Good Manufacturing Practices to meet acceptable standards for our clinical trials. Such standards may change, affecting the ability of contract manufacturers to produce our product candidates on the schedule we require for our clinical trials. Contract manufacturers may not perform or may discontinue their business before the time required by us to successfully produce and market our product candidates.

In some circumstances we rely on collaborators to assist in the research and development activities necessary for the commercialization of our product candidates. If we are not able to locate suitable collaborators or if our collaborators do not perform as expected, we may not be able to commercialize our product candidates.

We have established and intend to continue to establish alliances with third-party collaborators to develop and market some of our current and future product candidates and to license our antibody-drug conjugate technology. These collaborations provide us cash and revenues through technology access and license fees, sponsored research fees, equity sales and potential milestone and royalty payments. We use these funds to partially fund the development costs of our internal pipeline of product candidates. Collaborations can also create and strengthen our relationships with leading biotechnology and pharmaceutical companies and may provide synergistic benefits by combining our technologies with the technologies of our collaborators.

We currently have a collaboration with Genencor regarding our ADEPT technology and co-development of our SGN-17/19 product candidate for the treatment of metastatic melanoma. In addition we have licensed our ADC technology to Eos Biotechnology, Celltech and Genentech. Under certain conditions, these collaborators may terminate their agreements with us and discontinue use of our technologies. For example, Genentech recently terminated its rights to develop SGN-40, which we are now pursuing on our own.

We cannot control the amount and timing of resources our collaborators may devote to products incorporating our technology. Additionally, our relationships with our collaborators divert significant time and effort of our scientific staff and management team and require effective allocation of our resources to multiple internal and collaborative projects. Our collaborators may separately pursue competing products, therapeutic approaches or technologies to develop treatments for the diseases targeted by us or our collaborators. Even if our collaborators continue their contributions to the collaborative arrangements, they may nevertheless determine not to actively pursue the development or commercialization of any resulting products. Our collaborators may fail to perform their obligations under the collaboration agreements or may be slow in performing their obligations. If any of our collaborators terminate or breach our agreements with them, or otherwise fail to complete their obligations in a timely manner, it may have a detrimental effect on our financial position by reducing or eliminating the potential for us to receive technology access and license fees, milestones and royalties, as well as possibly requiring us to devote additional efforts and incur costs associated with pursuing internal development of product candidates. Furthermore, if our collaborators do not prioritize and commit substantial resources to programs associated with our product candidates, we may be unable to commercialize our product candidates, which would limit our ability to generate revenue and become profitable. In the future, we may not be able to locate third party collaborators to develop and market our product candidates and we may lack the capital and resources necessary to develop all our product candidates alone.

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We depend on a small number of collaborators for most of our current revenue. The loss of any one of these collaborators could result in a substantial decline in our revenue.

We have collaborations with a limited number of companies. To date, almost all of our revenue has resulted from payments made under agreements with our corporate collaborators, and we expect that most of our future revenue will continue to come from corporate collaborations until the approval and commercialization of one or more of our product candidates. The failure of our collaborators to perform their obligations under their agreements with us, including paying license or technology fees, milestone payments or royalties, could have a material adverse effect on our financial performance. Payments under our existing and future collaboration agreements are also subject to significant fluctuations in both timing and amount, which could cause our revenue to fall below the expectations of securities analysts and investors and cause a decrease in our stock price.

We rely on license agreements for certain aspects of our product candidates and technology. Failure to maintain these license agreements could prevent us from developing or commercializing our product candidates and technology.

We have entered into agreements with third-party commercial and academic institutions to license technology for use in our ADC technology and product candidates. Currently, we have license agreements with Bristol-Myers Squibb, Arizona State University, Proacta Therapeutics, Mabtech AB and the University of Miami, among others. Some of these license agreements contain diligence and milestone-based termination provisions, in which case our failure to meet any agreed upon diligence requirements or milestones may allow the licensor to terminate the agreement. Many of our license agreements grant us exclusive licenses to the underlying technologies. If our licensors terminate our license agreements or if we are unable to maintain the exclusivity of our exclusive license agreements, we may be unable to continue to develop and commercialize our product candidates.

If we are unable to protect our proprietary technology, trade secrets or know-how, we may not be able to operate our business profitably. Similarly, if we fail to sustain and further build our intellectual property rights, competitors may be able to develop competing therapies.

Our success depends, in part, on our ability to maintain protection for our products and technologies under the patent laws or other intellectual property laws of the United States, France, Germany, Japan, United Kingdom and Italy, as well as other countries. We have filed several patent applications with the U.S. Patent and Trademark Office for our technologies that are currently pending. We also have exclusive or partially-exclusive rights to issued U.S. patents, foreign counterpart patents and patent applications in the countries listed above relating to our monoclonal antibody-based technology. Our rights to these patents are derived from worldwide licenses from Bristol-Myers Squibb, Arizona State University and Proacta Therapeutics, among others. In addition, we have licensed or optioned rights to pending U.S. patent applications and foreign counterpart patents and patent applications to third parties.

The standards which the U.S. Patent and Trademark Office uses to grant patents are not always applied predictably or uniformly and can change. Consequently, the pending patent applications may not be allowed and, if allowed, may not contain the type and extent of patent claims that will be adequate to conduct our business as planned. Additionally, any issued patents may not contain claims that will permit us to stop competitors from using similar technology. Similarly, the standards that courts use to interpret patents are not always applied predictably or uniformly and may evolve, particularly as new technologies develop. As a result, the protection, if any, given by our patents if we attempt to enforce them or if they are challenged in court is uncertain. In addition, we rely on certain proprietary trade secrets and know-how. We have taken measures to protect our unpatented trade secrets and know-how, including the use of confidentiality and assignment of inventions agreements with our employees, consultants and certain contractors. It is possible, however, that these persons may breach the agreements or that our competitors may independently develop or otherwise discover our trade secrets.

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We may incur substantial costs and lose important rights as a result of litigation or other proceedings relating to patent and other intellectual property rights.

The defense and prosecution of intellectual property rights, U.S. Patent and Trademark Office interference proceedings and related legal and administrative proceedings in the United States and elsewhere involve complex legal and factual questions. These proceedings are costly and time-consuming. If we become involved in any litigation, interference or other administrative proceedings, we will incur substantial expense and it will divert the efforts of our technical and management personnel. An adverse determination may subject us to significant liabilities or require us to seek licenses that may not be available from third parties on commercially reasonable terms, if at all. We may be restricted or prevented from developing and commercializing our product candidates in the event of an adverse determination in a judicial or administrative proceeding, or if we fail to obtain necessary licenses.

If we lose our key personnel or are unable to attract and retain additional qualified personnel, our future growth and ability to compete would suffer.

We are highly dependent on the efforts and abilities of the principal members of our managerial and scientific staff, particularly Dr. Clay B. Siegall, our President and Chief Executive Officer, and Dr. H. Perry Fell, our Chairman of the Board and Chief Strategy Officer. Additionally, we have several scientific personnel with significant and unique expertise in monoclonal antibodies and related technologies. The loss of the services of principal members of our managerial or scientific staff may prevent us from achieving our business objectives.

The competition for qualified personnel in the biotechnology field is intense, and we rely heavily on our ability to attract and retain qualified scientific, technical and managerial personnel. Our future success depends upon our ability to attract, retain and motivate highly skilled employees. In order to commercialize our products successfully, we will be required to expand our workforce, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business development and sales and marketing. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, as well as academic and other research institutions. To the extent we are not able to attract and retain these individuals on favorable terms, our business may be harmed.

We face intense competition and rapid technological change, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.

The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. We are aware of several pharmaceutical and biotechnology companies that are actively engaged in research and development in areas related to antibody therapy. Some of these companies have commenced clinical trials of antibody products or have successfully commercialized antibody products. Many of these companies are developing products for the same disease indications as we are. Some of these competitors have received regulatory approval or are developing or testing product candidates that do or may in the future compete directly with our product candidates. For example, Genentech, Immunogen, IDEC Pharmaceuticals, Medarex and Wyeth are developing and/or marketing products that may compete with ours. Other potential competitors include large, fully integrated pharmaceutical companies and more established biotechnology companies, which have significant resources and expertise in research and development, manufacturing, testing, obtaining regulatory approvals and marketing. Also, academic institutions, government agencies and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and marketing. It is possible that these competitors will succeed in developing technologies that are more effective than our product candidates or that would render our technology obsolete or noncompetitive.

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If our competitors develop superior products, manufacturing capability or marketing expertise, our business may fail.

Our business may fail because we face intense competition from major pharmaceutical companies and specialized biotechnology companies engaged in the development of other products directed at cancer. Many of our competitors have greater financial and human resources expertise and more experience in the commercialization of product candidates. Our competitors may, among other things: develop safer or more effective products; implement more effective approaches to sales and marketing; develop less costly products; obtain quicker regulatory approval; have access to more manufacturing capacity; form more advantageous strategic alliances; or establish superior proprietary positions. In addition, if we receive regulatory approvals, we may compete with well-established, FDA approved therapies that have generated substantial sales over a number of years. We anticipate that we will face increased competition in the future as new companies enter our market and scientific developments surrounding other cancer therapies continue to accelerate.

We have no experience in commercializing products on our own and, to the extent we do not develop this ability or contract with a third party to assist us, we may not be able to successfully sell our product candidates.

We do not have a sales and marketing force and may not be able to develop this capacity. If we are unable to establish sales and marketing capabilities, we will need to enter into sales and marketing agreements to market our products in the United States. For sales outside the United States, we plan to enter into third-party arrangements. In these foreign markets, if we are unable to establish successful distribution relationships with pharmaceutical companies, we may fail to realize the full sales potential of our product candidates.

Additionally, our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any approved product candidate will depend on a number of factors, including: establishment and demonstration of clinical efficacy and safety; cost-effectiveness of a product; its potential advantage over alternative treatment methods; and marketing and distribution support for the product.

Moreover, government health administrative authorities, private health insurers and other organizations are increasingly challenging both the need for and the price of new medical products and services. Consequently, uncertainty exists as to the reimbursement status of newly approved therapeutics and diagnostics. For these and other reasons, physicians, patients, third-party payors and the medical community may not accept and utilize any product candidates that we develop and even if they do, reimbursement may not be available for our products to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development.

Our stock price may be volatile and our shares may suffer a decline in value.

The market prices for securities of biotechnology companies have in the past been, and are likely to continue in the future to be, very volatile. For example, during 2002 our common stock price fluctuated between $2.45 and $7.50 per share. As a result of fluctuations in the price of our common stock, you may be unable to sell your shares at or above the price you paid for them. The market price of our common stock may be subject to substantial volatility in response to many risk factors listed in this section, and others beyond our control, including: announcements regarding the results of discovery efforts and preclinical and clinical activities by us or our competitors; changes in our existing corporate partnerships or licensing arrangements; establishment of new corporate partnering or licensing arrangements by us or our competitors; our ability to raise capital; developments or disputes concerning our proprietary rights; issuance of new or changed analysts’ reports and recommendations regarding us or our competitors; share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; changes in government regulations; and economic or other external factors.

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We face product liability risks and may not be able to obtain adequate insurance to protect us against losses.

We currently have no products that have been approved for commercial sale. However, the current and future use of our product candidates by us and our corporate collaborators in clinical trials, and the sale of any approved products in the future, may expose us to liability claims. These claims might be made directly by consumers or healthcare providers or indirectly by pharmaceutical companies, our corporate collaborators or others selling such products. We may experience financial losses in the future due to product liability claims. We have obtained limited general commercial liability insurance coverage for our clinical trials. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any of our product candidates. However, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our assets may not be sufficient to cover such claims and our business operations could be impaired.

We may engage in future acquisitions that increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities and subject us to other risks.

We actively evaluate various strategic transactions on an ongoing basis, including licensing or acquiring complementary products, technologies or businesses. Any potential acquisitions may entail numerous risks, including increased operating expenses and cash requirements, assimilation of operations and products, retention of key employees, diversion of our management’s attention and uncertainties in our ability to maintain key business relationships of the acquired entities. In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business.

Our existing stockholders have significant control of our management and affairs, which they could exercise against your best interests.

Our executive officers and directors and greater than five percent stockholders, together with entities that may be deemed affiliates of, or related to, such persons or entities, beneficially own approximately 61 percent of our outstanding common stock. As a result, these stockholders, acting together, may be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control, including a merger, consolidation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control, which might affect the market price of our common stock.

Anti-takeover provisions could make it more difficult for a third party to acquire us.

Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of Seattle Genetics without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. Further, certain provisions of our charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Seattle Genetics, which could have an adverse effect on the market price of our stock. In addition, our charter documents provide for a classified board, which may make it more difficult for a third party to gain control of our Board of Directors. Similarly, state anti-takeover laws in Washington related to corporate takeovers may prevent or delay a change of control of Seattle Genetics.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

In accordance with our policy, we do not use derivative financial instruments in our investment portfolio. We invest in high quality interest-bearing instruments, consisting of U.S. government and agency securities, high-grade U.S. corporate bonds, taxable municipal bonds, mortgage-backed securities, commercial paper and money market accounts. Such securities are subject to interest rate risk and will rise and fall in value if market interest rates change; however, we do not expect any material loss from such interest rate changes.

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Item 8. Financial Statements and Supplementary Data

Seattle Genetics, Inc.

Index to Financial Statements

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Seattle Genetics, Inc

Report of Independent Accountants

To the Board of Directors and Stockholders

of Seattle Genetics, Inc.

In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Seattle Genetics, Inc. at December 31, 2001 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Seattle, Washington

January 24, 2003, except for note 13,

as to which the date is March 27, 2003

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Balance Sheets

The accompanying notes are an integral part of these financial statements.

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Seattle Genetics, Inc.

Statements of Operations

The accompanying notes are an integral part of these financial statements.

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Seattle Genetics, Inc.

Statements of Stockholders’ Equity (Deficit)