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

FORM 10-K

(Mark one)  

ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                            to                             

Commission file number: 000-24207

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

Delaware
(State or other jurisdiction of
incorporation or organization)		   94-3248826
(IRS employer Identification number)

6701 Kaiser Drive, Fremont, CA
(Address of principal executive office)
 
94555
(Zip Code)

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

Securities registered pursuant to Section 12(b) if the Act: None
Securities registered pursuant to Section 12(g) of the act: Common Stock, $0.0001 par value;

Preferred Stock Purchase Rights
(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 in 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        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. ý

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

        The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 28, 2002 was $759,314,800. The number of shares of Common Stock, $0.0001 par value, outstanding on February 28, 2003, was 87,747,845.

        Documents incorporated by reference: Portions of the Proxy Statement for Registrant's Annual Meeting of Shareholders to be held June 27, 2003 (the Proxy Statement), are incorporated herein by reference into Part III.


TABLE OF CONTENTS

 
    
   Pages
Item 1.   Business   3
Item 2.   Properties   48
Item 3.   Legal Proceedings   48
Item 4.   Submission of Matters to a Vote of Security Holders   48
Item 5.   Market for the Registrant's Common Equity and Related Stockholder Matters   48
Item 6.   Selected Financial Data   49
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   50
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk   65
Item 8.   Financial Statements and Supplementary Data   67
Item 9.   Change in and Disagreements with Accountants on Accounting and Financial Disclosure   91
Item 10.   Directors and Executive Officers of the Registrant   91
Item 11.   Executive Compensation   91
Item 12.   Security Ownership of Certain Beneficial Owners and Management   91
Item 13.   Certain Relationships and Related Transactions   91
Item 14.   Controls and Procedures   91
Item 15.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K   92
    Signatures   99
    Certifications   101

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PART I

Item 1. Business.

        The following description of our business should be read in conjunction with the information included elsewhere in this Annual Report on Form 10-K. The description contains certain forward-looking statements that involve risks and uncertainties. When used in this Annual Report on Form 10-K, the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and similar expressions as they relate to us are included to identify forward-looking statements. Our actual results could differ materially from the results discussed in the forward-looking statements as a result of certain of the risk factors set forth below and in the documents incorporated herein by reference, and those factors described under "Additional Factors that Might Affect Future Results". In this Annual Report on Form 10-K, references to "Abgenix," "we," "us" and "our" are to Abgenix, Inc. and its subsidiaries.

Abgenix

        We are a biopharmaceutical company that is focused on the discovery, development and manufacture of human therapeutic antibodies for the treatment of a variety of disease conditions, including cancer, inflammation, metabolic disease, transplant-related diseases, cardiovascular disease and infectious diseases.

        We have proprietary technologies that facilitate rapid generation of highly specific, antibody therapeutic product candidates that contain fully human protein sequences and that bind to disease targets appropriate for antibody therapy. In this Annual Report on Form 10-K we refer to these candidates as fully human antibody therapeutic product candidates. We developed our XenoMouse® technology, a technology using genetically modified mice to generate fully human antibodies. We also own a technology that enables the rapid identification of antibodies with desired function and characteristics, referred to as SLAM™ technology. In our XenoMax™ technology, we use SLAM technology to select and isolate antibodies with particular function and characteristics from antibody-producing cells generated by XenoMouse animals. We believe XenoMax technology enhances our capabilities in product development and flexibility in manufacturing. We intend to use our technologies to build a large and diversified product portfolio that we expect to develop and commercialize through joint development and licensing arrangements with pharmaceutical companies and others, and through internal product development programs. We have entered into a variety of contractual arrangements with multiple pharmaceutical, biotechnology and genomics companies involving our XenoMouse and XenoMax technologies. Two of our customers, Pfizer, Inc. and Amgen, Inc., have initiated clinical trials with fully human antibodies generated from XenoMouse animals. In addition, under a joint development and commercialization agreement we are co-developing ABX-EGF, our leading proprietary antibody product candidate, with Amgen and Immunex Corporation, a wholly-owned subsidiary of Amgen.

Overview of Product Development

Preclinical Research

        Our product development activities begin with preclinical research and development. Our preclinical research and development efforts have been focused on:

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        We identify antigen targets largely through licensing or collaboration agreements with other companies that have ownership interests or intellectual property rights in antigen targets that are of interest to us, or have particular methods of identifying potential antigen targets. We also conduct our own preclinical antigen target validation research. We generate and screen antibodies through use of our XenoMouse and XenoMax technologies. After we have identified antibodies of interest, we conduct in vitro experiments and in vivo experiments using animal models to provide further data about the potential therapeutic value of the antibodies for treatment of a variety of diseases or indications. Our preclinical activities also include improvement of production methods and support of collaborations.

Proprietary Product Development and Customer Product Development

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

        "Phase 1" indicates safety and proof of concept testing in a limited patient population and toxicology testing in animal models. "Phase 2" indicates safety, dosing and efficacy testing in a limited patient population. "Phase 3" indicates safety and efficacy testing with a larger patient population.

        We agreed to jointly develop and commercialize ABX-EGF. We intend to enter into additional joint development agreements for other product candidates earlier in the product development lifecycle than when we entered into previous joint development agreements. We will expend significant capital to conduct clinical trials or share in the costs of conducting clinical trials, for our proprietary product candidates. We expect that this will substantially increase our operating expenses over the next few years in comparison to prior periods.

        In addition to ABX-EGF, we have three other proprietary antibody therapeutic products that are in clinical trials. These products are further described under the caption Proprietary Product Development Programs.

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

Overview of Production Services

        Our antibody production services, also referred to as production services, include closely integrated process sciences and manufacturing capabilities for the manufacture of therapeutic product candidates. Within our pilot plant, our process sciences services include cell line development, optimization and production scale up. The resulting process can be transitioned to our manufacturing facility, portions of which are now operational. This facility is designed to manufacture product candidates for clinical trials and to support the early commercial launch of a limited number of products in compliance with applicable FDA good manufacturing practices. With both process sciences and manufacturing capabilities, we offer integrated antibody production services.

Overview of Technology Licensing

        We license our XenoMouse technology to pharmaceutical and biotechnology companies interested in developing antibody-based products. In some cases, we provide our mice to the customer who then carries out immunizations with its specific antigens. In other cases, we immunize the mice with the customer's antigens for additional compensation. Using our XenoMax technology, we can provide our customers a larger pool of high-quality antibodies from which to choose optimal therapeutic product candidates. The customer generally has an option for a period of time to acquire a product license for any antibody identified using our XenoMouse or XenoMax technology that the customer wishes to develop and commercialize.

Background

The Normal Antibody Response

        The human immune system protects the body against a variety of infections and other illnesses. Specialized cells, which include B-cells and T-cells, work in concert with the other components of the immune system to recognize, neutralize and eliminate from the body numerous foreign substances, infectious organisms and malignant cells. In particular, B-cells generally produce protein molecules, known as antibodies, which are capable of recognizing substances potentially harmful to the human body. Such substances are called antigens. Upon being bound by an antibody, antigens can be neutralized or blocked from interacting with and causing damage to the body. In order to effectively neutralize or eliminate an antigen without harming normal cells, the immune system must be able to generate antibodies that bind tightly (i.e., with high affinity) to one specific antigen (i.e., with specificity).

        All antibodies have a common core structure composed of four subunits, two identical light (L) chains and two identical heavy (H) chains, named according to their relative size. The heavy and light chains are assembled within the B-cell to form an antibody molecule that consists of a constant region and a variable region. As shown in the diagram below, one can represent an antibody molecule schematically in the form of a "Y" structure.

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GRAPHIC

        The base of the "Y," together with the part of each arm immediately next to the base, is called the constant region because its structure tends to be very similar across all antibodies. In contrast, the variable regions are at the end of the two arms and are unique to each antibody with respect to their three-dimensional structures and protein sequences. Because variable regions define the specific binding sites for a variety of antigens, there is a need for significant structural diversity in this portion of the antibody molecule. The immune system achieves such diversity primarily through a unique mode of assembly involving a complex series of recombination steps for various gene segments of the variable region, including the V, D and J segments (see the diagram below).

GRAPHIC

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        The human body is repeatedly exposed to a variety of different antigens. Accordingly, the immune system must be able to generate a diverse repertoire of antibodies that are capable of recognizing these multiple antigen structures with a high degree of specificity. The immune system has evolved a two-step mechanism in order to accomplish this objective. The first step, immune surveillance, is achieved through the generation of diverse circulating B-cells, each of which assembles different antibody gene segments in a semi-random fashion to produce and display on its surface a specific antibody. As a result, the body generates a large number of distinct, albeit lower affinity, circulating antibodies so as to recognize essentially any foreign antigen that enters the body. While capable of recognizing the antigens as foreign, these lower affinity antibodies are generally incapable of effectively neutralizing them.

        This limitation of the immune surveillance process is generally overcome by the normal immune system in a second step called "affinity maturation." Triggered by the initial binding to a specific antigen, the immune system then primes the small fraction of B-cells that recognize this antigen to progressively generate antibodies with higher and higher affinity through a process of repeated mutation and selection. As a result, the reactive antibodies develop increasingly higher specificity and affinity with the latter being potentially a hundred to a thousand times higher than those generated in the immune surveillance process. These more specific, higher affinity antibodies have a greater likelihood of effectively neutralizing or eliminating the antigen while minimizing the potential of damaging healthy cells.

Antibodies as Products

        Recent advances in the technologies for creating and producing antibody products, coupled with a better understanding of how antibodies and the immune system function in key disease states, have led to renewed interest in the commercial development of antibodies as therapeutic products. According to a survey by the Pharmaceutical Research and Manufacturers of America, antibodies accounted for over 20% of all biopharmaceutical products in clinical development in February 2000. We are currently aware of twelve antibody therapeutic products approved for marketing in the United States. These products are Orthoclone, ReoPro, Rituxan, Zenapax, Herceptin, Synagis, Remicade, Simulect, Mylotarg, Campath, Zevalin and Humira. These products are currently being marketed for a wide range of medical disorders such as transplant rejection, cardiovascular disease, cancer and infectious diseases.

        We believe that, as products, antibodies have several potential clinical and commercial advantages over traditional therapies. These advantages include the following:

Limitations of Current Approaches to Development of Antibody Therapeutic Products

        Despite the early recognition of antibodies as promising therapeutic agents, a number of commercial and technical limitations have thus far hampered most approaches to developing antibodies as products. Researchers aimed their initial efforts at the development of hybridoma cells from mice. Such hybridoma cells are immortalized mouse antibody-secreting B-cells. Researchers derive these hybridoma cells from normal mouse B-cells that have been fused with a perpetually-growing cell so that they are capable of reproducing over an indefinite period of time. They are then cloned to produce a

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homogeneous population of identical cells that produce antibodies called monoclonal antibodies that are identical in their structure and functional characteristics.

        While mouse monoclonal antibodies can be generated to bind to a number of antigens, they contain mouse protein sequences and tend to be recognized as foreign by the human immune system. As a result, the human body quickly eliminates them and they have to be administered frequently. When patients are repeatedly treated with mouse antibodies, they will begin to produce antibodies that effectively neutralize the mouse antibody, a reaction referred to as a Human Anti-Mouse Antibody, or HAMA, response. In many cases, the HAMA response prevents the mouse antibodies from having the desired therapeutic effect and may cause the patient to have an allergic reaction. The potential use of mouse antibodies is thus best suited to situations where the patient's immune system is compromised or where only short-term therapy is required. In such settings, the patient is often incapable of producing antibodies that neutralize the mouse antibodies or has insufficient time to do so.

        Recognizing the limitations of mouse monoclonal antibodies, researchers have developed a number of approaches to make them appear more human-like to a patient's immune system. For example, improved forms of mouse antibodies, referred to as "chimeric" and "humanized" antibodies, are genetically engineered and assembled from portions of mouse and human antibody gene fragments. While these chimeric and humanized antibodies are more human-like, they still retain a varying amount of the mouse antibody protein sequence, and accordingly may continue to trigger the HAMA response.

        Additionally, the humanization process can be expensive and time consuming, requiring at least two months and sometimes over a year of secondary manipulation after the initial generation of the mouse antibody. Once the humanization process is complete, the remodeled antibody gene must then be expressed in a recombinant cell line appropriate for antibody manufacturing, adding additional time before the production of preclinical and clinical material can be initiated. In addition, the combination of mouse and human antibody gene fragments can result in a final antibody product that is sufficiently different in structure from the original mouse antibody that a decrease in specificity or a loss of affinity results.

LOGO

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Human Antibodies

        The HAMA response can potentially be avoided through the generation of antibody therapeutic products with fully human protein sequences. Such fully human antibodies may increase the market acceptance and expand the use of antibody therapeutics. Researchers have developed several antibody technologies to produce antibodies with 100% human protein sequences (see the diagram above). One approach to generating human antibodies, called "phage display" technology, involves the cloning of human antibody genes into bacteriophages, viruses that infect bacteria, in order to display antibody fragments on the surfaces of bacteriophage particles. This approach attempts to mimic in vitro the immune surveillance and affinity maturation processes that occur in the body. Because phage display technology cannot take advantage of the naturally occurring in vivo affinity maturation process, the antibody fragments initially isolated by this approach are typically of moderate affinity. In addition, further genetic engineering is required to convert the antibody fragments into fully assembled antibodies and significant manipulation, taking from several months to a year, may be required to increase their affinities to a level appropriate for human therapy. Before pre-clinical or clinical material can be produced, the gene encoding the antibody derived from phage display technology must, as with a humanized antibody, be introduced into a recombinant cell line.

        Two additional approaches involving the isolation of human immune cells have been developed to generate human antibodies. One such approach is the utilization of immunodeficient mice that lack both B- and T-cells. Researchers transplant human B-cells and other immune tissue into these mice which are then subsequently immunized with target antigens to stimulate the production of human antibodies. However, this process is generally limited to generating antibodies only to nonhuman antigens or antigens to which the human B-cell donor had previously responded. Accordingly, this approach may not be suitable for targeting many key diseases such as cancer, and inflammatory and autoimmune disorders for which appropriate therapy might require antibodies to human antigens. The other approach involves collecting human B cells that have been producing desired antibodies from patients exposed to a specific virus or pathogen. As with the previous approach, this process may not be suitable for targeting diseases where antibodies to human antigens are required, and therefore is generally limited to infectious disease targets which will be recognized as foreign by the human immune system.

The Abgenix Solution—XenoMouse and XenoMax Technologies

        Our approach to generating human antibodies with fully human protein sequences is to use genetically engineered strains of mice in which mouse antibody gene expression is suppressed and functionally replaced with human antibody gene expression, while leaving intact the rest of the mouse immune system. Rather than engineering each antibody product candidate, these transgenic mice capitalize on the natural power of the mouse immune system in surveillance and affinity maturation to produce a broad repertoire of high affinity antibodies. By introducing human antibody genes into the mouse genome, transgenic mice with such traits can be bred indefinitely. Importantly, these transgenic mice are capable of generating human antibodies to human antigens because the only human products expressed in the mice (and therefore recognized as "self") are the antibodies themselves. The mouse thus recognizes any other human tissue or protein as a foreign antigen and the mouse will mount an immune response. Abnormal production of certain human proteins, such as cytokines and growth factors or their receptors, has been implicated in various human diseases. Neutralization or elimination of these abnormally produced or regulated human proteins with the use of human antibodies could ameliorate or suppress the target disease. Therefore, the ability of these transgenic mice to generate human antibodies against human antigens could offer an advantage to drug developers compared with some of the other approaches described previously. A challenge with this approach, however, has been to introduce enough of the human antibody genes in appropriate configuration into the mouse genome

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to ensure that these mice are capable of recognizing the broad diversity of antigens relevant for human therapies.

        To make our transgenic mice a robust tool capable of consistently generating high affinity antibodies that can recognize a broad range of antigens, we equipped the XenoMouse with approximately 80% of the human heavy chain antibody genes and a significant amount of the human light chain genes. We believe that the complex assembly of these genes together with their semi-random pairing allows XenoMouse animals to recognize a diverse repertoire of antigen structures. XenoMouse technology further capitalizes on the natural in vivo affinity maturation process to generate high affinity, fully human antibodies. In addition, we have developed multiple strains of XenoMouse animals, each of which is capable of producing a different class of antibody to perform different therapeutic functions. We believe that our various XenoMouse strains will provide maximum flexibility for drug developers in generating antibodies of the specific type best suited for a given disease indication.

        We obtain the antibodies generated by XenoMouse animals by extracting the antibody-producing B cells. We can transform these B-cells into hybridomas to generate the quantities of antibodies needed for standard methods of assaying and selecting antibodies for further development. Hybridoma technology captures only about 1% of the antibodies originally generated by the mouse. Alternatively, we can submit the B-cells to our proprietary Selected Lymphocyte Antibody Method (SLAM) technology, which we acquired through our November 2000 acquisition of Abgenix Biopharma Inc. SLAM technology cultures the B-cells directly and rapidly assays them over a period of several days using a microplate-based, high throughput system. Using SLAM, we can typically increase the number of different antigen-reactive monoclonal antibodies identified in a single experiment by 100 to 1000-fold compared to hybridoma technology.

        We use the term XenoMax technology to refer to the use of XenoMouse technology together with SLAM technology. Our XenoMax technology enhances the speed and capability of generating fully human, high affinity antibodies. XenoMax technology allows researchers to rapidly scan the majority of the immune repertoire of an immunized XenoMouse animal, and to identify B-cells that produce antibodies with the desired functional properties and optimal affinities. Using rapid microplate-based assays to measure and rank antibodies according to design goals (e.g., potency, affinity, specificity), XenoMax technology can identify individual B-cells producing extremely high-quality antibodies. It can also recover the antibody encoding genes. Within three to five weeks after immunizing XenoMouse animals, XenoMax technology can produce a ranked set of recombinant antibody candidates resulting from the harvested B-cells. We believe XenoMax technology can speed product development timelines by allowing researchers to move directly into pre-clinical assessment of panels of suitable recombinant candidate antibody products, each ready for manufacturing scale-up. XenoMax technology samples up to 2 million B-cells per immunized XenoMouse animal, dramatically increasing the number of antibodies from which to choose optimal therapeutic product candidates. In contrast to phage display technology, antibodies derived from XenoMax technology retain their native pairing of heavy and light chains, and do not require in vitro affinity and /or potency maturation.

        Other approaches to generating fully human antibodies from mice that we understand are being pursued by competitors include: (i) transgenic mice containing heavy human chain and human light chain genes on a "minilocus" (which are mice that possess a relatively small number of representative human heavy and light chain genes in their genome), (ii) "transchromosomic" mice that contain large numbers of human heavy chain and light chain genes on one or more separate, or extra, chromosomes, and (iii) "UltiMab™" mice that are generated as a result of breeding "minilocus" containing mice with "transchromosomic" mice. "Transchromosomic" mice were developed by Kirin Brewing Co., Ltd. It is our understanding that "UltiMab" mice were developed by a collaboration between Medarex, Inc. and Kirin Brewing Co. and are currently used by Medarex, Kirin, GenPharm International, Inc. and

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GenMab A/S. Also, Xenerex Biosciences, a subsidiary of Avanir Pharmaceuticals, uses a technology in which human B cells and T cells are implanted in mice with compromised immune systems.

        In addition to the generation of human antibodies from mice, we understand that competitors such as Cambridge Antibody Technology Group plc, MorphoSys AG and Dyax Corporation utilize phage display technology for the generation of human antibodies from phage display libraries derived from human samples. BioSite Incorporated, through a collaboration with Medarex, generates human antibody phage display libraries from immunized "UltiMab" mice. It is our understanding that these libraries are not used for deriving therapeutic antibody products.

Our Technology Advantages

        We believe that our technologies offer the following advantages:

        Producing antibodies with fully human protein sequences.    Our XenoMouse technology, unlike chimeric and humanization technologies, allows the generation of antibodies with 100% human protein sequences. We do not expect antibodies created using XenoMouse technology to cause a HAMA response even when administered repeatedly to patients without compromised immune systems. For this reason, we expect antibodies produced using XenoMouse technology to offer a better safety profile and to be eliminated less quickly from the human body, reducing the frequency of dosing.

        Generating a diverse antibody response to essentially any disease target appropriate for antibody therapy.    Because we have introduced a substantial majority of human antibody genes into XenoMouse animals, the technology has the potential to generate high affinity antibodies that recognize more antigen structures than some other transgenic technologies. In addition, through immune surveillance, we expect XenoMouse technology to be capable of generating antibodies to almost any medically relevant antigen, human or otherwise. For a given antigen target, having multiple antibodies to choose from could be important in selecting the optimal antibody product.

        Generating high affinity antibodies that do not require further engineering.    XenoMouse technology uses the natural in vivo affinity maturation process to generate antibody product candidates, usually in two to four months. These antibody product candidates may have affinities as much as a hundred to a thousand times higher than those seen in phage display. In contrast to antibodies generated using humanization and phage display technology, we and our customers can produce XenoMouse antibodies without the need for any subsequent engineering, a process that at times has proven to be challenging and time consuming. By avoiding the need to further engineer antibodies, we reduce the risk that an antibody's structure and therefore functionality will be altered between the initial antibody selected and the final antibody placed into production.

        Enabling more efficient product development.    XenoMouse technology can potentially produce multiple product candidates more quickly than humanization and phage display technology and we and our customers can conduct pre-clinical testing on several antibodies in parallel to identify the optimal product candidate that will be tested in clinical trials.

        Providing flexibility in choosing manufacturing processes.    Once we have identified an antibody with the desired characteristics, we can produce preclinical material either directly from hybridomas or from recombinant cell lines. Humanized and phage display antibodies, having been engineered, cannot be produced in hybridomas. In addition to potential timesaving, production in hybridomas avoids the need to license certain third party intellectual property rights covering certain processes for production of antibodies in recombinant cell lines.

        Enhancing the speed and capability of generating fully human, high affinity antibodies.    Our XenoMax technology allows researchers to rapidly scan the majority of the immune repertoire of an immunized XenoMouse animal to identify B-cells that produce antibodies with the desired functional

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properties and optimal affinities. We believe XenoMax technology can speed product development timelines by allowing researchers to move directly into preclinical assessment of panels of suitable recombinant candidate antibody products, each ready for manufacturing scale-up.

        Providing an integrated production platform.    Our integrated production platform has been designed to minimize the risks associated with process, scale and site changes. We believe that our platform, which integrates a comprehensive range of process sciences services, including cell line, cell culture, purification, formulation and assay development, and our manufacturing facility can enable us to rapidly advance product candidates from cell line generation to production. This integrated approach may reduce the variability and risk associated with technology transfer and improve production quality and efficiency.

Abgenix Strategy

        Our objective is to be a leader in the discovery, development and manufacture of antibody-based biopharmaceutical products. Key elements of our strategy to accomplish this objective include the following:

        Building a large and diversified product portfolio by applying our technology to antigens we source.    Utilizing our XenoMouse and XenoMax technologies, our strategy is to develop antibody therapeutic product candidates by using antibodies that we generate under antigen sourcing contracts. This strategy includes sourcing antigens by entering into contractual agreements with leading academic researchers and companies involved in the identification and development of novel antigens, such as those we have entered with several genomics and biopharmaceutical companies. Sourcing antigen targets is a cost effective means for us to gain access to targets that might not otherwise be available to us. Using this strategy, we believe we can create a package that includes antigen rights, human antibodies, and preclinical and clinical data for use by us in self-funded product development efforts or for marketing to potential contract parties to establish collaborations for joint development of proprietary product candidates. We are targeting serious medical conditions, including cancer, inflammation, metabolic diseases, transplant rejection, cardiovascular disease, growth factor modulation, neurological diseases and infectious diseases.

        Establishing collaborations for proprietary product candidates.    Another key strategy is to build our product portfolio and generate revenues by licensing proprietary product candidates, including co-development arrangements, such as the product contracts we have with Amgen and Immunex for ABX-EGF. These proprietary product collaborations involve antibodies made to antigen targets that we source. After generating antibody product candidates and performing limited pre-clinical and clinical development, we intend to license these product candidates, and enter joint development and commercialization agreements. For most of our products, we may enter into proprietary product contracts before entering the Phase 2 clinical development stage, which would allow the contract parties to complete development and to market the product. In some limited circumstances, we may develop the product through later stage clinical trials and license the product candidate to a contract party for marketing. By licensing and entering into co-development arrangements, we can pursue multiple product candidates in the development stage, enabling us to spread our risk of product development, make cost-effective use of available human and capital resources and generate licensing and milestone revenues in the short term.

        Leveraging XenoMouse and XenoMax technology through licensing and other contracts.    We will continue to diversify our product portfolio and generate revenues by entering into contracts with pharmaceutical and biotechnology companies interested in using our XenoMouse and XenoMax technologies to develop antibody-based products. We have established agreements with over thirty customers covering numerous antigen targets. To date, many of these parties have entered into new or expanded agreements with us that allow them to specify additional antigens for antibody development.

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We expect to enter into additional XenoMouse and XenoMax agreements over time. These agreements typically allow our customer to generate fully human antibodies to one or more specific antigen targets provided by the customer. In some cases, we have provided our mice to the customer who then carries out immunizations with its specific antigen target. In other cases, we immunize the mice with the customer's antigen target for additional compensation. Customers generally have an option for a period of time to acquire product licenses for any antibody product they wish to develop and commercialize.

        Production Services.    With our new manufacturing facility and our existing pilot plant, we intend to offer integrated process sciences and manufacturing services to existing and new collaborators and customers. We will offer these production services to existing customers to further enable their own development efforts, including services related to antibody product candidates that we have developed with them pursuant to existing agreements. Further, we intend to utilize available capacity to manufacture proprietary products that we are co-developing with current collaborators or that will be the subject of future co-development agreements. Finally, we also intend to offer production services to current XenoMouse and XenoMax customers and to new customers for the manufacture of their product candidates for clinical trials and to support the potential early commercial launch of a limited number of their products. We have entered into one such production services agreement, with CuraGen Corporation under which we will provide process sciences and manufacturing services for an antibody product candidate that CuraGen selected from a pool of antibodies we generated pursuant to our existing antigen sourcing contract with CuraGen.

Proprietary Product Development Programs

        We are currently developing antibody therapeutics for a variety of indications. The table below sets forth the current development status of our proprietary product candidates:

Proprietary Product Candidate
   Indication
   Status
ABX-EGF   Various cancers   Phase 1
    Renal cell cancer   Phase 2
    Non-small cell lung cancer   Phase 2(1)
    Colorectal cancer   Phase 2(1)
    Colorectal cancer (with chemotherapy)   Phase 2(1)
    Prostate cancer   Phase 2
ABX-MA1   Metastatic melanoma   Phase 1
ABX-IL8   Chronic obstructive pulmonary disease   Phase 2a(2)
ABX-CBL   Graft versus host disease   Phase 2/3(3)
(1)
Clinical trial managed by Amgen and Immunex.

(2)
In June 2002, we decided to conclude the Phase 2a clinical trial for chronic obstructive pulmonary disease based on a review of the results of our Phase 2 clinical trials in rheumatoid arthritis and psoriasis.

(3)
In February 2003, we completed a preliminary analysis of the Phase 2/3 clinical trial of ABX-CBL and concluded that the study did not meet its primary endpoint. While the Phase 2/3 clinical trial will continue until data collection is complete, we and SangStat do not plan to further develop ABX-CBL and we are winding down this clinical trial.

ABX-EGF

        Tumor cells that overexpress the epidermal growth factor receptor, or EGFr, on their surface often depend on EGFr's activation for growth. EGFr is overexpressed in a variety of cancers including lung, breast, ovarian, bladder, prostate, colorectal, kidney and head and neck. The activation of EGFr is

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triggered by the binding to EGFr by epidermal growth factor, or EGF, or Transforming Growth Factor alpha, or TGFa, both of which are expressed by the tumor or by neighboring cells. We believe that blocking the ability of EGF and TGFa to bind with EGFr may offer a treatment for certain cancers. ABX-EGF, a fully human monoclonal antibody generated using XenoMouse technology, binds to EGFr with high affinity and has been shown to inhibit tumor cell proliferation in vivo and cause eradication of EGF dependent human tumors established in mouse models. We are conducting pre-clinical studies and assessing which tumor types to pursue as possible targets for treatment with ABX-EGF. Published studies have shown that ABX-EGF can inhibit growth of EGF-dependent human tumors cells in mouse models. ABX-EGF has also demonstrated the ability to reverse cancer cell growth and cause eradication of established tumors in mice even when administered after significant tumor growth has occurred. Furthermore, in these models where tumors were eradicated, researchers did not observe any relapse of the tumor after discontinuation of the antibody treatment.

        Clinical Status.    In July 1999, we initiated a Phase 1 dose-escalating human clinical trial examining the safety, pharmacokinetics and biological activity of multiple doses of ABX-EGF as monotherapy in patients with a variety of advanced cancers. We first reported data on this ongoing study in November 2001 and presented updated information at the annual meeting of the American Society for Clinical Oncology in May 2002. Forty-six patients had been recruited to this study at that time. ABX-EGF appeared to be well tolerated at weekly doses ranging up to 3.5 mg/kg. We did not observe any allergic reactions, clinically significant infusion-related reactions or human anti-human antibody formation. At doses greater than or equal to 2.0 mg/kg, typical EGF receptor mediated skin rashes were seen in 100% of patients. Six patients who had received ABX-EGF (doses of 0.1 or 0.75, 2.5 or 3.5 mg/kg) achieved a partial response, minor response or disease stabilization.

        On the basis of preliminary results from the ongoing Phase 1 clinical study, we and Immunex initiated five Phase 2 studies in April, July and December 2001 and January 2002. The first Phase 2 study is evaluating the effect of ABX-EGF monotherapy in patients with renal cell cancer. An interim analysis of this study was reported at the annual meeting of the American Society of Clinical Oncology in May 2002. A total of 88 patients with metastatic renal cell cancer had been included and treated in this ABX-EGF monotherapy study at the time. ABX-EGF was given weekly in doses of 1.0, 1.5, 2.0, and 2.5 mg/kg to cohorts of approximately 20 patients each. ABX-EGF was administered for eight weeks or until patients demonstrated progressive disease. Eighty-nine percent of patients included in this study had received prior systemic therapy and the majority of patients had received more than one prior systemic regimen. ABX-EGF was generally well tolerated. No allergic reactions, clinically significant infusion-related reactions, or human anti-human antibody formation were observed. A dose-related typical EGFr mediated skin rash was observed with an incidence of 100% at a dose level of 2.5 mg/kg. Single agent biological activity was seen in this heavily pre-treated patient population with three partial responses, two minor response and 50 percent stable disease reported.

        We are conducting the second Phase 2 study in patients with non small cell lung cancer receiving either standard chemotherapy with carboplatin and paclitaxel alone or in combination with ABX-EGF. The third Phase 2 study is evaluating the effect of ABX-EGF monotherapy in patients with metastatic colorectal cancer who have previously failed chemotherapy. The fourth Phase 2 study is evaluating the effect of ABX-EGF monotherapy in patients with hormone resistant prostate cancer without metastasis. The fifth Phase 2 study is evaluating the effect of ABX-EGF in combination with standard chemotherapy, as first-line treatment in patients with metastatic colorectal cancer.

ABX-MA1

        Melanoma is the most serious cancer of the skin. Currently, it is the seventh most common cancer in the United States. The projected 2003 incidence rate in the U.S. is 54,200 and the projected mortality rate is 7,600. Melanoma can spread in the body through the blood and lymphatic system. Organ involvement by metastasis, most commonly to the lungs and liver, is the leading cause of death

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from the disease. Melanomas that have not spread beyond the site at which they developed are curable by surgical excision. Melanoma that has spread to distant sites is infrequently curable with surgery, although long-term survival is occasionally achieved by resection of metastases. Radiation therapy may provide symptomatic relief for metastases to brain, bones and viscera. Although advanced melanoma is relatively resistant to standard chemotherapy, some biologic therapies, such as interferon alfa and interleukin-2 have been reported to produce a low percentage of objective responses.

        ABX-MA1 targets a protein called MUC18, a cell surface adhesion molecule that is highly expressed on metastatic melanoma cells but not on normal skin cells. MUC18 has been demonstrated to play a critical role in melanoma growth and metastasis by regulating the adhesion and interaction between melanoma cells and surrounding skin cells and new blood vessel cells. In preclinical studies, binding of the MUC18 antigen by ABX-MA1 inhibited primary melanoma tumor growth and the formation of tumor metastases. MUC18 is also expressed on sarcomas, including smooth muscle and blood vessel-derived sarcomas, prostate cancer and renal cell cancers.

        Clinical Status.    In December 2001, we filed an IND and in February 2002 we initiated a Phase 1 clinical trial of ABX-MA1 for the treatment of metastatic melanoma. Enrollment is ongoing.

ABX-IL8

        IL-8, an inflammatory cytokine produced at sites of inflammation, attracts and activates white blood cells that mediate the inflammation process. A number of pre-clinical studies suggest that excess IL-8 may contribute to the pathology and clinical symptoms associated with some inflammatory disorders. Clinical studies have demonstrated significantly increased levels of IL-8 in tissues or body fluids of patients with certain inflammatory diseases, including psoriasis, reperfusion injury and inflammatory bowel disease. Antibodies to IL-8 have been shown to block immune cell infiltration and the associated pathology in animal models of several of these diseases. Using our XenoMouse technology, we have generated ABX-IL8, a proprietary fully human monoclonal antibody that binds to IL-8 with high affinity. We are currently evaluating ABX-IL8 for possible use in the treatment of chronic obstructive pulmonary disease.

        Chronic obstructive pulmonary disease.    Chronic obstructive pulmonary disease (COPD) is a chronic and debilitating disease marked by inflammation and progressive destruction of lung tissue resulting in shortness of breath, persistent cough, recurrent infections and chronic debilitation. COPD is currently the fourth-leading cause of death in the world and has been estimated to affect over 15 million people in the United States, 60 percent of whom have a severe form of the disease. Studies have correlated elevated levels of IL-8 in the broncho-aveolar fluid and lung tissue of COPD patients with inflammatory cells such as neutrophils, which have been implicated in the chronic destruction of lung tissue in patients with COPD. Pre-clinical studies have shown that antibodies to IL-8 have blocked the migration of neutophils.

        Clinical Status.    In September 2001, we submitted an IND to initiate a Phase 2a double-blind, placebo-controlled study designed to evaluate the efficacy and safety of ABX-IL8 in COPD. We designed the study to include a total of 150 patients across approximately 20 clinical sites in the United States. Patients received a total of three doses of ABX-IL8 administered monthly over a two-month period. Efficacy analyses focused on change in airflow, shortness of breath and disease-related quality of life. After studying the results of our Phase 2 clinical trials in rheumatoid arthritis and psoriasis, we announced in January 2002 and May 2002 that these results did not support further clinical trials of ABX-IL8. Further, based on a review of those results, we decided in June 2002 to conclude the COPD study as quickly as possible, consistent with patient safety follow-up.

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ABX-CBL

        The CBL antigen is selectively over-expressed on activated immune cells including T-cells, B-cells and certain macrophages. We obtained an exclusive license to ABX-CBL, a mouse antibody, in February 1997. In August 2000, we entered into a joint development and commercialization agreement with SangStat for ABX-CBL.

        The goal for the development program was to reduce unwanted immune responses that occur in graft versus host disease, or GVHD, a life-threatening complication that frequently occurs following an allogeneic bone marrow transplant, or BMT. BMTs are used in the treatment of patients with leukemia, certain other serious cancers and immune system disorders. An allogeneic BMT procedure involves transferring marrow, the graft, from a healthy person into an immunosuppressed patient, the host. Often a portion of the graft recognizes the host's own cells as foreign, becomes activated and attacks them, resulting in GVHD. It typically involves damage to multiple organ systems, including the skin, liver and intestines and is the primary cause of death in allogeneic BMT patients. Current treatments consist of corticosteroids and other drug treatments to suppress the grafted immune cells. Approximately 2,000 patients per year in the United States contract steroid-resistant GVHD.

        Clinical Status.    In December 1999, we initiated a Phase 2/3 clinical trial to evaluate the survival benefit from ABX-CBL in patients with GVHD. The results of this study indicate that ABX-CBL demonstrated a survival rate at 180 days in patients with acute steroid-resistant GVHD that was similar to the drug administered in the study's control arm. The study was designed to demonstrate superior survival with ABX-CBL, and, therefore, did not meet its primary endpoint. We and SangStat do not plan further development of ABX-CBL.

Summary of Contractual Arrangements

Overview

        As of February 28, 2003, we had entered into contracts covering numerous antigen targets with over thirty customers to use our XenoMouse and XenoMax technologies to generate and/or develop the resulting fully human antibodies. Also as of February 28, 2003, we had entered into a contract with one customer to provide process sciences and manufacturing services related to an antibody product candidate that we developed with the customer pursuant to an antigen sourcing contract. Pursuant to our XenoMouse contracts, we and our customers intend to generate antibodies for development as product candidates for the treatment of cancer, inflammation, autoimmune diseases, transplant rejection, cardiovascular disease, growth factor modulation, neurological diseases, metabolic diseases and infectious diseases. We also plan to enter into additional contracts to provide antibody process sciences and manufacturing services. We expect that substantially all of our revenues for the foreseeable future will result from payments under these and other contracts. We have also licensed technology from third parties for use in conjunction with our proprietary technologies. The terms of our current contractual arrangements vary, but can generally be categorized as follows:

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Summary of Payment Terms of Contractual Arrangements

        We derive our contract revenues from our target sourcing contracts, our proprietary product development agreements and our technology out-licensing contracts. We also expect to generate contract revenue from production services agreements. Generally, contract revenues consist of license, option, milestone, service and royalty payments. To date, we have received license, option and milestone payments from various parties but have yet to receive any production service payments or royalty payments.

        Pursuant to our target sourcing contracts and our technology out-licensing contracts, in 2002, we have recognized individual license, option and milestone payments that represented between approximately 0.08% and 4.63% of our recognized contract revenues for 2002 (not including revenues we recognized from Celltech Ltd.).

        Under our proprietary co-development agreement with Amgen and Immunex, we recognized revenues of $3.2 million in 2002, which represented approximately 17% of our contract revenues for that year. Under our proprietary co-development agreement with SangStat, we recognized revenues of $2.0 million in 2002, which represented approximately 10% of our contract revenues for that year. We expect that the estimated payments we may receive from SangStat for 2003 will be less than the payments we received for 2002 as a result of discontinuing the development of ABX-CBL.

        We expect to receive future license, option and milestone payments from our customers and collaborators; however, the amount and timing of these payments, if any, is uncertain because they depend to a large extent on the success of the research and development efforts of these parties.

        To date we have entered into one production services contract. Pursuant to this agreement, which we entered into in January 2003, we will be paid for the production services we provide pursuant to a work plan.

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        While most of our target sourcing, proprietary product development and technology out-licensing contracts entitle us, under certain circumstances, to royalty payments, we have not received any royalty payments to date and do not anticipate receiving any such payments for a least a few years. We have entered into a production services contract that entitles us, under certain circumstances, to royalty payments. We will not be entitled to royalty payments unless our customers or collaborators are successful in developing and commercializing products derived from our technology. The likelihood that we or our collaborators will be successful is dependent on the outcome of research and development efforts and regulatory decisions with respect to our product candidates, and is therefore uncertain and speculative.

Summary of Expense Terms of Contractual Arrangements

        We have incurred expenses, including license, option or milestone payments, under our in-license agreements and we may incur future expenses of this sort under our target sourcing contracts. We may also incur future expenses in the form of royalty fees under one or more of these agreements.

        Under our in-licensing agreements and target sourcing contracts, in 2002, we made individual license, option or milestone payments that represented between approximately 0.01% and 0.09% of our research and development expenses for 2002.

        While most of our technology in-licensing and proprietary product development contracts include provisions for the payment of royalties by us under certain circumstances, we have not made any royalty payments to date and believe we are at least a few years away from selling any products that would require us to make any royalty payments. Whether we will ever be obligated to make royalty payments to third parties is subject to the future success of our research and development efforts, as well as the favorable decisions of regulators and, accordingly, is inherently uncertain.

Circumstances that Trigger Milestone Payments under Contractual Arrangements

        Under our target sourcing contracts, milestone payments with respect to therapeutic products may become payable, to us or by us, in the following circumstances:

        Under these contracts, milestone payments with respect to diagnostic products may become payable, to us or by us, in the following circumstances:

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        Our proprietary co-development agreement with Immunex provides for no milestone payments by either party. Under our proprietary co-development agreement with SangStat, SangStat is obligated to make milestone payments to us upon the completion of certain clinical trials. Because we have decided to discontinue development of ABX-CBL, we do not expect any further milestone payments.

        Under our technology out-licensing agreements, milestone payments may become payable to us in the following circumstances:

        Under our technology in-licensing agreements, milestone payments may become payable by us in the following circumstances:

Termination Provisions of Contractual Arrangements

        Our agreements generally do not have definite termination dates; rather, these agreements typically terminate upon the expiration of the underlying royalty obligations. Whether these royalty obligations will be triggered and, if so, when, is dependent on the successful development and commercialization of products from the subject technology.

        Our target sourcing contracts generally terminate upon the expiration of all royalty obligations, if any, due under the relevant contract.

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        Under our out-licensing agreements, the licensee typically can terminate the agreement at any time and we generally can terminate upon a breach by the licensee. Absent early termination, our out-licensing agreements typically continue in effect until the expiration of the licensee's payment obligations.

        In some cases, we can terminate in-licensing agreements after a certain period of time. Other in-licensing agreements do not provide for early termination by us (except in the case of the other party's breach), but provide that the agreement terminates upon the expiration of all of our royalty payment obligations.

Xenotech and the XenoMouse Technology

        In 1989, Cell Genesys started our business and operations as a subsidiary. In June 1991, Cell Genesys entered into several agreements with Japan Tobacco, Inc. for the purpose of forming Xenotech. In connection with the formation of Xenotech, both Cell Genesys and Japan Tobacco contributed cash, and Cell Genesys contributed the exclusive right to certain of its technology for the research and development of genetically modified strains of mice that can produce fully human antibodies. Cell Genesys assigned its rights in Xenotech to us in connection with our formation as an independent company in 1996. Through 1998, we made capital contributions to Xenotech, and provided research and development to Xenotech related to the development of XenoMouse technology in exchange for cash payments.

        Under several agreements with Japan Tobacco that became effective December 31, 1999, we acquired Japan Tobacco's fifty percent interest in the Xenotech joint venture and became the sole owner of Xenotech and the XenoMouse technology. Under these agreements, Japan Tobacco acquired a license to use certain existing XenoMouse technology and future XenoMouse technology that we develop and a license to certain new technology related to the generation of mouse models of certain human diseases, in exchange for cash payments and future royalty obligations.

Gene Therapy Rights Agreement with Cell Genesys

        In connection with the formation of Abgenix by Cell Genesys, Abgenix entered into the Gene Therapy Rights Agreement, or GTRA, which provides Cell Genesys with certain rights to commercialize products based on antibodies generated with XenoMouse technology in the field of gene therapy. Under the GTRA, Cell Genesys has certain rights to direct us to make antibodies to two antigens per year and has an option for a license to commercialize antibodies binding to such antigens in the field of gene therapy. The GTRA obligates Cell Genesys to make certain payments to us for these rights, including reimbursement of license fees and royalties on future product sales. The GTRA also prohibits us from granting any third-party licenses for antibody products based on antigens where the primary field of use is gene therapy. In the case of third-party licenses granted by us where gene therapy is a secondary field, the GTRA obligates us to share with Cell Genesys a portion of the cash milestone payments and royalties resulting from any products in the field of gene therapy.

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Intellectual Property

        We rely on patents and trade secrets to protect our intellectual property rights. We own seven issued patents in the United States, one granted patent in Europe, three granted patents in Japan and several granted patents in other foreign countries. In addition we have 39 pending patent applications in the United States and 156 pending patent applications abroad relating to XenoMouse technology. Our wholly-owned subsidiary, Xenotech, owns three issued U.S. patents, one Australian patent and several granted patents in other foreign countries and has two issued U.S. patents and three pending foreign patent applications related to methods of treatment of bone disease in cancer patients, and has one U.S. patent relating to genetic manipulation. Our wholly owned subsidiary Abgenix Biopharma, owns one issued U.S. patent and has one pending patent in Canada and Europe relating to the SLAM technology. Our wholly owned subsidiary IntraImmune Therapies, Inc. has three pending applications in the United States and nine pending applications in other foreign countries related to intrabody technology, which may give antibodies access to intracellular targets. In addition, we have nine issued U.S. patents, several granted patents in other foreign countries, seven pending patent applications in the United States and eighteen pending patent applications abroad that we jointly own with Japan Tobacco relating to antibody technology or genetic manipulation. While we rely on U.S. and foreign patent laws to protect our proprietary technology, any patents, if issued, may provide us with little protection, especially in foreign countries.

        We also attempt to protect our technologies by maintaining trade secrets and proprietary know-how. However, the agreements we enter into for these purposes may not be enforced or our counter parties may breach them. In addition, these agreements may not prevent third parties from discovering our trade secrets or know-how or independently developing the same or similar technologies.

        Scientists have conducted research for many years in the antibody and transgenic animal fields. This has resulted in a substantial number of issued patents and an even larger number of pending patent applications. Patent applications in the United States are, in most cases, maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Our technologies may unintentionally infringe the patents or violate other proprietary rights of third parties. Such infringement or violation may prevent us and our contract parties from pursuing product development or commercialization. Such a result would materially harm our business, financial condition and results of operations.

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

        Genentech, Johnson & Johnson, Glaxo and Transkaryotic Therapies, Inc. each owns or controls a U.S. patent that relates to recombinant cell lines or methods of generating recombinant cell lines for the production of antibodies. If we were to use a production system covered by any of these patents, we may then need to obtain a license should one be available. Under these circumstances, our failure

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to obtain a license at all or on commercially reasonable terms could impede commercialization of one or more of our products in any territories in which these patent claims were in force.

        Genentech, owns a U.S. patent that issued in June 1998 relating to inhibiting the growth of tumor cells that involves an anti-EGF receptor antibody in combination with a cytotoxic factor. ImClone Systems, Inc. owns or is licensed under a U.S. patent that issued in April 2001, relating to inhibiting the growth of tumor cells that involves an anti-EGF receptor antibody in combination with an anti-neoplastic agent. However, we do not believe that either the Genentech or ImClone patent would be successfully asserted against any planned commercial sales of ABX-EGF. We believe that currently all of the Company's activities relating to anti-EGFr receptor monoclonal antibodies are within the exemption provided by the U.S. patent laws for uses reasonably related to obtaining FDA approval of a drug. We do not expect the scope of our product development plans to change in the future prior to filing an application for a biologic license with the FDA. If a court determines that the claims of either the Genentech patent or the ImClone patent cover our activities with ABX-EGF and are valid, such a decision may require us to obtain a license to Genentech's or ImClone's patent, as the case may be, to label and sell ABX-EGF for certain combination therapies. Our failure to obtain a license at all or on commercially reasonable terms could impede our commercialization of ABX-EGF in the United States.

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

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

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

Patent Cross-License with GenPharm

        In March 1997, we along with Cell Genesys, Xenotech and Japan Tobacco, signed a comprehensive patent cross-license with GenPharm. Under the cross-license, we have licensed on a non-exclusive basis certain patents, patent applications, third-party licenses and inventions pertaining to the development and use of certain transgenic rodents, including mice that produce fully human antibodies. We use our

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XenoMouse technology to generate fully human antibody products and have not licensed the use of, and do not use, any transgenic rodents developed or used by GenPharm. All of our financial obligations in connection with the cross-license were recognized in 1997.

Government Regulation

        Our product candidates under development are subject to extensive and rigorous domestic government regulation. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. If we market our products abroad, they also are subject to extensive regulation by foreign governments. Non-compliance with applicable requirements can result in fines, warning letters, recall or seizure of products, clinical study holds, total or partial suspension of production, refusal of the government to grant approvals, withdrawal of approval, and civil and criminal penalties.

        We believe our antibody therapeutic products will be classified by the FDA as "biologic products" as opposed to "drug products." The steps ordinarily required before a biological product may be marketed in the United States include:

        Preclinical testing includes laboratory evaluation of product chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of each product. Laboratories that comply with FDA regulations regarding good laboratory practices must conduct preclinical safety tests. We submit the results of the preclinical tests, together with manufacturing information, analytical data and clinical study plans, to the FDA as part of the IND and the FDA reviews those results before the commencement of clinical trials. Unless the FDA objects to an IND, the IND will become effective 30 days following its receipt by the FDA. If we submit an IND, our submission may not result in FDA authorization to commence clinical trials. Also, the lack of an objection by the FDA does not mean it will ultimately approve an application for marketing approval. Furthermore, we may encounter problems in clinical trials that cause us or the FDA to delay, suspend or terminate our trials.

        Clinical trials involve the administration of the investigational product to humans under the supervision of a qualified principal investigator. We must conduct clinical trials in accordance with Good Clinical Practice under protocols submitted to the FDA as part of the IND. In addition, each clinical trial must be approved and conducted under the auspices of an Institutional Review Board and with patient informed consent. The Institutional Review Board will consider, among other things, ethical factors, the safety of human subjects and the possibility of liability of the institution conducting the trial.

        We conduct clinical trials in three sequential phases that may overlap. Phase 1 clinical trials may be performed in healthy human subjects or, depending on the disease, in patients. The goal of a Phase 1 clinical trial is to establish initial data about safety and tolerance of the biologic agent in humans. In Phase 2 clinical trials, we seek evidence about the desired therapeutic efficacy of a biologic agent in limited studies of patients with the target disease. We make efforts to evaluate the effects of various dosages and to establish an optimal dosage level and dosage schedule. We also gather additional safety data from these studies. The Phase 3 clinical trial program consists of expanded, large-

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scale, multi-center studies of persons who are susceptible to or have developed the disease. The goal of these studies is to obtain definitive statistical evidence of the efficacy and safety of the proposed product and dosage regimen.

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

        Completion of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the product candidate. Many factors may delay our commencement and rate of completion of clinical trials including:

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

        Only four of our product candidates, ABX-EGF, ABX-MA1, ABX-CBL and ABX-IL8, have been in clinical trials. With respect to ABX-EGF and ABX-MA1, we have not obtained enough data from these clinical trials to date to demonstrate safety and efficacy under applicable FDA guidelines. As a result, such data will not support an application for regulatory approval without further clinical trials. With respect to ABX-CBL and ABX-IL8, the results of the clinical trials we conducted did not support further clinical studies. Clinical trials that we conduct or that third parties conduct on our behalf for any product candidate may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals. Regulatory authorities may not permit us to undertake any additional clinical trials for our product candidates.

        Our product candidates may fail to demonstrate safety and efficacy in clinical trials. For example, in January 2002 and May 2002, respectively, we announced that clinical trials of our proprietary product candidate ABX-IL8 as treatment for rheumatoid arthritis and psoriasis did not support further clinical studies of that product candidate. Additionally, in February 2003, we completed a preliminary analysis of the Phase 2/3 clinical trial of ABX-CBL and concluded that the study did not meet its primary endpoint and did not support further clinical studies of that product candidate. These and other potential failures may delay development of other product candidates, and hinder our ability to conduct related preclinical testing and clinical trials. As a result of such failures, we may also be unable to obtain additional financing. The failure of clinical trials can also result in research and development charges, such as those we incurred in the second quarter of 2002 in connection with our decision to wind down our clinical trials for ABX-IL8. Any delays in, or termination of, our clinical trials would materially harm our business, financial condition and results of operations.

        We have ongoing research projects that may produce product candidates, and we have not submitted INDs or begun clinical trials for these projects. We may not successfully complete our pre-clinical or clinical development efforts. We may not file further INDs and we may not commence clinical trials as planned.

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        We and our third-party manufacturers also are required to comply with the applicable FDA current good manufacturing practice regulations and other regulatory requirements. Good manufacturing practice regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA and the facilities must pass an inspection by the FDA before they can be used in commercial manufacturing of any product. Manufacturing facilities in California, including our facility, are also subject to the licensing requirements of and inspection by the California Department of Health Services. We or our third-party manufacturers may not be able to comply with the applicable good manufacturing practice requirements and other regulatory requirements. If we or our third-party manufacturers fail to comply, our business, financial condition and results of operations will be materially harmed.

        For clinical investigation and marketing outside the United States, we may be subject to the regulatory requirements of other countries, which vary from country to country. The regulatory approval process in other countries includes requirements similar to those associated with FDA approval set forth above.

Competition

        The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. We are aware of several pharmaceutical and biotechnology companies that are actively engaged in research and development in areas related to antibody therapy. These companies have commenced clinical trials of antibody therapeutic product candidates or have successfully commercialized antibody therapeutic products. Many of these companies are addressing the same diseases and disease indications as we or our customers are. Also, we compete with companies that offer antibody generation services to companies that have antigens. These competitors have specific expertise or technology related to antibody development and introduce new or modified technologies from time to time. These companies include GenPharm; Kirin Brewing Co.; GenMab; Cambridge Antibody Technology Group; Protein Design Labs, Inc.; MorphoSys; Xenerex Biosciences; XLT Biopharmaceuticals Ltd.; and Alexion Pharmaceuticals, Inc.

        Some of our competitors have received regulatory approval of or are developing or testing product candidates that may compete directly with our product candidates. For example, ImClone, AstraZeneca, Glaxo and a collaboration of OSI Pharmaceuticals, Inc., Genentech, and Roche have potential antibody and small molecule product candidates in clinical development that may compete with ABX-EGF, which is also in clinical trials. Furthermore, we are aware that AstraZeneca has received licensing approval in Japan for its experimental cancer drug Iressa, which may compete with ABX-EGF.

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

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

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

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

Pharmaceutical Pricing and Reimbursement

        In both domestic and foreign markets, sales of our product candidates will depend in part upon the availability of reimbursement from third-party payors. Third-party payors include government health administration authorities, managed care providers, private health insurers and other organizations. These third-party payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. We may need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of our products. These studies may require us to incur significant costs. Our product candidates may not be considered cost-effective. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Domestic and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. Accordingly, legislation and regulations affecting the pricing of pharmaceuticals may change before our proposed products are approved for marketing. Adoption of such legislation could further limit reimbursement for pharmaceuticals. The failure of the government and third party payors to provide adequate coverage and reimbursement rates for our product candidates would adversely affect the market acceptance of our products. The failure of our products to receive market acceptance would materially harm our business, financial condition and results of operations.

Manufacturing

        We are completing construction of our own manufacturing facility for the manufacture of product candidates for clinical trials and to support the potential early commercial launch of a limited number of products, in each case, in compliance with FDA good manufacturing practices. In May 2000, we signed a long-term lease for the building that contains this manufacturing facility. Construction is substantially complete and portions of this facility are now operational. We are also conducting validation of the facility and expect to complete a significant stage of validation in the second quarter of 2003. The costs of this facility, including design fees, permits, validation, leasehold improvements and equipment, will be approximately $142.0 million. Completion of this facility may take longer than expected, and the planned and actual construction costs of building and qualifying the facility for regulatory compliance may be higher than expected. The process of manufacturing antibody products is complex. While the managers of the facility gained extensive manufacturing experience in prior positions with other companies, we have no experience in the clinical or commercial scale

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manufacturing of our existing product candidates, or any other antibody therapeutic products. We will also need to manufacture such antibody therapeutic products in a facility and by a process that comply with FDA, European and other regulations. It may take a substantial period of time to begin producing antibodies in compliance with those regulations. Our manufacturing operations will be subject to ongoing, periodic unannounced inspection by the FDA and state agencies to ensure compliance with good manufacturing practices. Our inability to complete and maintain a manufacturing facility within our planned time and cost parameters could materially harm the development and sales of our products and our business, financial condition and results of operations.

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

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

Employees

        As of December 31, 2002, we employed 387 persons, all of whom we employed on a full-time basis. Approximately 302 employees were engaged in research and development, and 85 supported administration, legal, finance, management information systems and human resources.

        Our success will depend in large part upon our ability to attract and retain employees. We face competition in this regard from other companies, research and academic institutions, government entities and other organizations. We believe that we maintain good relations with our employees.

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Executive Officers

        The names and ages of our executive officers as are as follows:

Name
   Age
   Position(s)
Raymond M. Withy, Ph.D.   47   Director, President and Chief Executive Officer
C. Geoffrey Davis, Ph.D.   51   Chief Scientific Officer
Kurt Leutzinger   52   Chief Financial Officer
Gisela M. Schwab, M.D.   46   Chief Medical Officer
Susan L. Thorner   54   Vice President, General Counsel and Secretary

        Raymond M. Withy, Ph.D. has served as a member of our Board since November 2001, as Chief Executive Officer since May 2002 and as our President and Chief Operating Officer since January 2001. From January 2000 to December 2000 he served as our Chief Business Officer and from June 1996 to January 2000 as our Vice President, Corporate Development. He also serves as a director of Xenotech. From May 1993 to June 1996, Dr. Withy served in various positions at Cell Genesys, most recently as Director of Business Development. From 1991 to May 1993, Dr. Withy was a private consultant to the biotechnology industry in areas of strategic planning, business development and licensing. From 1984 to 1991, Dr. Withy was an Associate Scientific Director at Genzyme Corporation, a biotechnology company. Dr. Withy received a B.S. degree in Chemistry and Biochemistry and a Ph.D. degree in Biochemistry, both from the University of Nottingham.

        C. Geoffrey Davis, Ph.D. has served as our Chief Scientific Officer since January 2000 and from June 1996 until December 2000 as our Vice President, Research. From January 1995 to June 1996, Dr. Davis was Director of Immunology at the Xenotech Division of Cell Genesys. From November 1991 to December 1994, he served at Repligen Corporation, a biotechnology company, first as Principal Investigator and then as Director of Immunology. Dr. Davis received a B.A. degree in Biology from Swarthmore College and a Ph.D. degree in Immunology from the University of California, San Francisco.

        Kurt Leutzinger has served as our Chief Financial Officer since July 1997. From June 1987 to July 1997, Mr. Leutzinger was a Vice President of General Electric Investments and a portfolio manager of the General Electric Pension Fund. At General Electric, he was responsible for private equity investments with a focus on medical technology. Mr. Leutzinger received a B.A. degree in Economics from Fairleigh Dickinson University and an M.B.A. degree in Finance from New York University and is a certified public accountant.

        Gisela M. Schwab, M.D. has served as our Chief Medical Officer since January 2002 and from November 1999 until December 2001 as our Vice President, Clinical Development. From September 1992 to October 1999, Dr. Schwab held various positions at Amgen Inc., a biotechnology company, most recently as Director, Clinical Research and Therapeutic Area Team Leader for Oncology/Hematology. Dr. Schwab received an M.D. degree from the University of Heidelberg in Germany. She is board certified in Hematology and Oncology and has performed research in molecular biology at the National Cancer Institute in Bethesda, Maryland, and at the French National Institute for Health and Research in Paris.

        Susan L. Thorner joined us as our Vice President, General Counsel and Secretary in February 2001. From August 1999 to February 2001, Ms. Thorner was Special Counsel at the law firm of Farella Braun & Martel. From August 1998 to August 1999, Ms. Thorner was Director of Legal Affairs at Ross Stores, Inc. and from August 1994 to August 1998 held various positions, most recently Director of Corporate Law, at Apple Computer, Inc. Ms. Thorner was previously a partner at two law firms, Morrison & Foerster in San Francisco and Hughes Hubbard & Reed in New York City. Ms. Thorner received her J.D. degree from Harvard Law School.

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Additional Factors That Might Affect Future Results

Risks Related to our Finances

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

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

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

        We have incurred net losses in each of the last five years of operation, including net losses of $16.8 million in 1998, $20.5 million in 1999, $8.8 million in 2000, $60.9 million in 2001 and $208.9 million in 2002. As of December 31, 2002, our accumulated deficit was $368.3 million. Our losses to date have resulted principally from:

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

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

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

        We expect that substantially all of our revenues for the foreseeable future will result from payments under licensing and other contractual arrangements and from interest income. To date, payments under licensing and other agreements have been in the form of option fees, reimbursement for research and development expenses, license fees and milestone payments. Payments under our

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existing and any future customer agreements will be subject to significant fluctuation in both timing and amount. Our revenues may not be indicative of our future performance or of our ability to continue to achieve such milestones. Our revenues and results of operations for any period may also not be comparable to the revenues or results of operations for any other period. We may not be able to:

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

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

        We will continue to expend substantial resources to support research and development, including costs associated with preclinical development and clinical trials. In the years ended December 31, 2002, 2001, and 2000, we incurred expenses of $128.5 million, $96.2 million and $50.1 million, respectively, on research and development. Regulatory and business factors will require us to expend substantial funds in the course of completing required additional development, preclinical testing and clinical trials of, and attaining regulatory approvals for, product candidates. The amounts of the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. Our future liquidity and capital requirements will depend on many factors, including:

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

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

        We are exposed to equity price risk on our strategic investments in CuraGen, ImmunoGen and MDS Proteomics, and we may elect to make additional similar investments in the future. As of December 31, 2002, we had a carrying value of $10.6 million in CuraGen common stock, which reflected the public trading price on that date of $4.65 per share. We also had a carrying value on December 31, 2002, of $2.4 million of ImmunoGen common stock, which reflected the public trading price on that date of $3.10 per share. We typically do not attempt to reduce or eliminate our market exposure on these types of investments. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as available-for-sale and are reported at fair value on our balance sheet. Unrealized holding gains and losses on available-for-sale securities generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under our accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. We purchased $15.0 million of CuraGen common stock in December 1999 at price of $17.90 per share and $50.0 million of CuraGen common stock in November 2000 at a price of $34.69 per share. We purchased $15.0 million of ImmunoGen common stock in September 2000 at a price of $19.00 per share. During 2002, our investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months, and therefore we deemed that an impairment of these investments had occurred. Accordingly, we recorded impairment charges totaling $67.3 million in the year ended December 31, 2002, which were based on the differences between the market price and cost basis or new adjusted cost basis of these securities. As of December 31, 2002, these investments were recorded at fair value in long-term investments on the balance sheet, and any net unrealized holding gains and losses, to the extent not recognized as an impairment charge as discussed above, were reported as a component of stockholders' equity. The public trading prices of the shares of both companies have fluctuated significantly since we purchased them and could continue to do so. If the public trading prices of these shares continue to trade below their new cost bases in future periods, we may incur additional impairment charges relating to these investments. The amounts of these charges, if any, will equal our unrealized loss on these securities as of the end of the relevant periods.

        In addition, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with our collaboration with that company. Because MDS Proteomics is a private company and its securities are not publicly traded, the value of our investment is inherently more difficult to estimate than an investment in a publicly traded company. In 2002, we estimated that the value of our

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investment had declined to $7.9 million and that an impairment of our investment had occurred. Accordingly, we recorded an impairment charge of $7.1 million on this investment in the year ended December 31, 2002. The amount of the charge was based on the difference between the estimated value as determined by our management and our original cost basis. As of December 31, 2002, the cost basis of this investment reflected the current estimated value at June 30, 2002, which is recorded in long-term investments on the balance sheet. If we deem the investment in MDS Proteomics further impaired at the end of any future period, we may incur an additional impairment charge on this investment.

Risks Related to the Development and Commercialization of our Products

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

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

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

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

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

        In addition, our decisions to terminate or wind down our clinical programs for developing ABX-IL8 and ABX-CBL have reduced the diversity of our product portfolio. We hope to be able to make up for this loss of diversity through the number of potential new product candidates we have in preclinical development. However, to the extent that we are unable to maintain a broad and diverse range of product candidates, our success would depend more heavily on one or a few product candidates.

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

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

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

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

Clinical Phase
   Estimated
Completion Period
Phase 1   1 - 2 Years
Phase 2   1 - 2 Years
Phase 3   2 - 4 Years

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

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

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

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

        Our product candidates may fail to demonstrate safety or efficacy in clinical trials. For example, we completed analysis of the Phase 2b clinical trials of ABX-IL8 in psoriasis and concluded that the results did not warrant continued development in psoriasis and decided not to proceed with studies in other disease indications. Similarly we completed a preliminary analysis of the Phase 2/3 clinical trial of ABX-CBL and concluded that the study did not meet its primary endpoint. Therefore, we and SangStat do not plan any further development of ABX-CBL. Such failure could delay the development of other product candidates or hinder our ability to obtain additional financing. In addition, failures in our clinical trials can lead to additional research and development charges. Any delays in, or termination of, our clinical trials could materially harm our business, financial condition and results of operations.

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

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

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

        Third-party manufacturers may encounter difficulties in scaling up production, including problems involving production yields, quality control and assurance, shortage of qualified personnel, compliance

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with FDA and other applicable regulations, production costs, and development of advanced manufacturing techniques and process controls. If we continue to use third-party manufacturers, they may not perform as agreed or may not remain in the contract manufacturing business for the time required by us to successfully produce and market our product candidates. Any failure of third-party manufacturers to deliver the required quantities of our product candidates for clinical use on a timely basis and at commercially reasonable prices, and our failure to find replacement manufacturers or successfully implement our own manufacturing capabilities, would materially harm our business, financial condition and results of operations.

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

        We are completing construction of our own manufacturing facility for the manufacture of product candidates for clinical trials and to support the potential early commercial launch of a limited number of products, in each case, in compliance with FDA and European good manufacturing practices. In May 2000, we signed a long-term lease for the building that contains this manufacturing facility. Construction is substantially complete and portions of the facility are operational. We are also conducting validation of the facility and expect to complete a significant stage of validation in the second quarter of 2003. The costs of this facility, including design fees, permits, validation, leasehold improvements and equipment, will be approximately $142.0 million. Completion of this facility may take longer than expected, and the planned and actual construction costs of building and qualifying the facility for regulatory compliance may be higher than expected. In addition, if the commercial launch of one or more of our product candidates proves successful, we will likely need to use one or more third-party facilities to produce these products in sufficient quantities. The process of manufacturing antibody therapeutic products is complex. While the managers of the facility have gained extensive manufacturing experience in prior positions with other companies, we have no experience in the clinical or commercial scale manufacturing of our existing product candidates, or any other antibody therapeutic products. Also, we will need to manufacture such antibody therapeutic products in a facility and by a process that comply with FDA, European and other regulations. It may take a substantial period of time to begin producing antibodies in compliance with those regulations. Our manufacturing operations will be subject to ongoing, periodic unannounced inspection by the FDA and state agencies to ensure compliance with good manufacturing practices. Our inability to complete and maintain a manufacturing facility within our planned time and cost parameters could materially harm the development and sales of our products and our financial performance.

        We also may encounter problems with the following:

        We continually evaluate our options for commercial production of our antibody therapeutic products, which include use of third-party manufacturers, use of our own commercial scale manufacturing facility or entering into a manufacturing joint venture relationship with a third party. We are aware of only a limited number of companies on a worldwide basis that operate manufacturing facilities in which our product candidates can be manufactured under good manufacturing practice regulations, a requirement for all pharmaceutical products. It may take a substantial period of time for

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a contract manufacturing facility that has not been producing antibodies to begin producing antibodies under good manufacturing practice regulations. We may not be able to contract with any of these companies on acceptable terms, if at all.

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

The successful growth of revenues from our manufacturing services depends to a large extent on our ability to find third-parties to agree to use our services and our ability to provide those services successfully.

        Our strategy for enhancing contract revenues depends, in part, on entering into agreements to provide antibody production services to third parties. Potential third parties include our existing collaborators, as well as other pharmaceutical and biotechnology companies, technology companies, academic institutions and other entities. We must enter into these agreements to successfully develop this aspect of our business. To date, we have entered into one production services agreement and we cannot assure you that we will be able to enter into additional agreements.

        We may not be able to secure manufacturing agreements on favorable terms. If we do obtain such agreements, we may encounter difficulties in performing as agreed. We may encounter difficulties in scaling up production, including problems involving production yields, quality control and assurance, shortage of qualified personnel, compliance with FDA and other applicable regulations, production costs, and development of advanced manufacturing techniques and process controls. The failure to deliver the required quantities of product on a timely basis and at commercially reasonable prices could materially harm our business, financial condition and results of operations.

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

        Our strategy for the development and commercialization of antibody therapeutic products depends, in large part, upon the formation of collaboration agreements with third parties. Potential third parties include pharmaceutical and biotechnology companies, technology companies, academic institutions and other entities. We must enter into these agreements to successfully develop and commercialize product candidates. These agreements are necessary in order for us to:

        Our ability to continue our current collaborations and to enter into additional third party collaborations is dependent in large part on our ability to successfully demonstrate that our XenoMouse technology is an attractive method of developing fully human antibody therapeutic products. We have generated only a limited number of fully human antibody therapeutic product candidates pursuant to our collaboration agreements and only five fully human antibody therapeutic product candidates generated with XenoMouse technology have entered clinical testing. We have announced that one of these product candidates has not met our expectations. Our failure to maintain

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our existing collaboration agreements or to enter into additional agreements could materially harm our business, financial condition and results of operations.

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

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

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

        Our product candidates under development are subject to extensive and rigorous domestic government regulation. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. If we market our products abroad, they will also be subject to extensive regulation by foreign governments. Neither the FDA nor any other regulatory agency has approved any of our product candidates for sale in the United States or any foreign market. The regulatory review and approval process, which includes preclinical studies and clinical trials of each product candidate, is lengthy, expensive and uncertain. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish the

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product candidate's safety and efficacy. The approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance, and may involve ongoing requirements for post-marketing studies. Regulatory requirements are subject to frequent change. Delays in obtaining regulatory approvals may:

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

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

        We and our third-party manufacturers also are required to comply with the applicable FDA current good manufacturing practice regulations and other regulatory requirements. Good manufacturing practice regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA and the facilities must pass an inspection by the FDA before we can use them in commercial manufacturing of any product. Manufacturing facilities in California, including our facility, are also subject to the licensing requirements of and inspection by the California Department of Health Services. We or our third-party manufacturers may not be able to comply with the applicable good manufacturing practice requirements and other regulatory

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requirements. The failure of us or our third-party manufacturers to comply with these requirements would materially harm our business, financial condition and results of operations.

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

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

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

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

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

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our inability to conduct such activities ourselves would materially harm our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

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

        Our success depends in part on our ability to:

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

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

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

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

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

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

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

        Genentech owns a U.S. patent that issued in June 1998 relating to inhibiting the growth of tumor cells that involves an antibody that binds to an epidermal growth factor receptor, or an anti-EGF receptor antibody, in combination with a cytotoxic factor, which is a substance having a toxic effect on cells. ImClone Systems, Inc. owns or is licensed under a U.S. patent that issued in April 2001, relating to inhibiting the growth of tumor cells that involves an anti-EGF receptor antibody in combination with an anti-neoplastic, or anti-tumor, agent. We do not believe based on our review that either the Genentech or ImClone patent would be successfully asserted against any planned commercial sales of ABX-EGF. We believe that currently all of our activities relating to anti-EGF receptor monoclonal antibodies are within the exemption provided by the U.S. patent laws for uses reasonably related to obtaining FDA approval of a drug. We do not expect the scope of our product development plans to change in the future prior to filing an application for a biologic license with the FDA. If a court determines that the claims of either the Genentech patent or the ImClone patent cover our activities with ABX-EGF and are valid, such a decision may require us to obtain a license to Genentech's or ImClone's patent, as the case may be, to label and sell ABX-EGF for certain combination therapies. Our failure to obtain a license, or to obtain a license on commercially reasonable terms, could impede our commercialization of ABX-EGF in the United States.

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

        Extensive litigation regarding patents and other intellectual property rights has been common in the biotechnology and pharmaceutical industries. The defense and prosecution of intellectual property suits, United States Patent and Trademark Office interference proceedings, and related legal and administrative proceedings in the United States and internationally involve complex legal and factual

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questions. As a result, such proceedings are costly and time-consuming to pursue and their outcome is uncertain. Litigation may be necessary to:

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

Risks Related to Our Industry

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

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

        Some of our competitors have received regulatory approval of or are developing or testing product candidates that may compete directly with our product candidates. ImClone, AstraZeneca, plc, Glaxo and a collaboration of OSI Pharmaceuticals, Inc., Genentech and Roche have potential antibody and small molecule product candidates in clinical development that may compete with ABX-EGF, which is also in clinical trials. In September 2002, an FDA advisory panel voted to recommend for approval AstraZeneca's small molecule product candidate Iressa, which may compete with ABX-EGF. Furthermore, we are also aware that AstraZeneca has received licensing approval for Iressa in Japan for the treatment of advanced non-small cell lung cancer.

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

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

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

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

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

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

Other Risks Related to Our Company

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

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

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

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

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

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

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

        We grant stock options as a method of attracting and retaining employees, to motivate performance and to align the interests of management with those of our stockholders. Due to the decline in the trading price of our common stock during 2001 and 2002, a substantial portion of the stock options held by our employees have an exercise price that is higher than the current trading price of our common stock. We may elect to reprice or otherwise adjust the terms of these stock options, grant additional stock options at the current lower market price, pay higher cash compensation, or some combination of these alternatives to retain and attract qualified employees, but we cannot be sure that any of these actions would be successful. If we issue additional stock options, this would dilute existing stockholders.

        As a result of these factors, we may have difficulty attracting and retaining qualified personnel, which could materially harm our business, financial condition and results of operations.

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

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

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

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

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

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

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

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

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

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

        The market price and trading volume of our common stock are volatile, and we expect such volatility to continue for the foreseeable future. For example, during the period between December 31, 2001 and December 31, 2002, our common stock closed as high as $33.64 per share and as low as $5.79 per share. This may impact your decision to buy or sell our common stock. Factors affecting our stock price include:

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

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

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

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Available Information

        Our Internet address is http://www.abgenix.com. We make available free of charge on or through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.


Item 2. Properties

        We currently lease approximately 516,000 square feet of office, laboratory and manufacturing facilities in Fremont, California and British Columbia, Canada. Our leases expire in the years 2010 through 2015 and each includes an option to extend, other than the lease for our facility in Canada. We believe that our current facilities are adequate for our needs for the foreseeable future and that, should it be needed, suitable additional space will be available to accommodate expansion of our operations on commercially reasonable terms.


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 the Company's stockholders during the quarter ended December 31, 2002.


PART II

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

Price Range of Common Stock

        Our common stock trades on the Nasdaq National Market under the symbol "ABGX." The following table lists quarterly information on the price range of our common stock based on the high and low reported closing prices for our common stock as reported on the Nasdaq National Market for the periods indicated below. These prices do not include retail markups, markdowns or commissions. As of February 28, 2003, there were 235 holders of record of our common stock.

 
   High
   Low
Fiscal 2001:            
  First Quarter   $ 52.31   $ 16.75
  Second Quarter     46.15     18.06
  Third Quarter     44.10     20.29
  Fourth Quarter     37.46     23.08
Fiscal 2002:            
  First Quarter   $ 32.82   $ 18.05
  Second Quarter     18.98     9.32
  Third Quarter     10.21     5.79
  Fourth Quarter     9.62     5.99

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Item 6. Selected Consolidated Financial Data

 
   Year Ended December 31,
  
 
   2002
   2001
   2000
   1999
   1998
  
 
   (in thousands, except per share data)

  
Consolidated Statement of Operations Data:                                
Revenues:                                
  Contract revenue   $ 19,293   $ 34,064   $ 26,601   $ 12,285   $ 2,498  
  Revenue under collaborative agreements from related parties     —     —     —     —     1,344  
  Interest and other income     20,145     29,542     32,848     3,045     961  
   
 
 
 
 
 
    Total revenues     39,438     63,606     59,449     15,330     4,803  
   
 
 
 
 
 
Costs and expenses:                                
  Research and development     128,494     96,234     50,137     21,106     17,588  
  Amortization of intangible assets, related to research and development     7,251     8,602     3,992     —     —  
  General and administrative     31,625     19,367     8,859     5,164     3,405  
  Restructuring charges     1,751     —     —     —     —  
  Impairment of investments     74,385     —     —     —     —  
  In-process research and development charge     —     —     5,215     —     —  
  Equity in (income) losses of investments     —     —     —     (546 )   107  
  Non-recurring termination fee     —     —     —     8,667     —  
  Interest expense     4,830     259     39     438     530  
   
 
 
 
 
 
    Total costs and expenses     248,336     124,462     68,242     34,829     21,630  
   
 
 
 
 
 
Loss before income tax     (208,898 )   (60,856 )   (8,793 )   (19,499 )   (16,827 )
  Foreign income tax expense     —     —     —     1,000     —  
   
 
 
 
 
 
Net loss   $ (208,898 ) $ (60,856 ) $ (8,793 ) $ (20,499 ) $ (16,827 )
   
 
 
 
 
 
Basic and diluted net loss per share   $ (2.39 ) $ (0.71 ) $ (0.11 ) $ (0.35 ) $ (0.75 )
   
 
 
 
 
 
Shares used in computing basic and diluted net loss per share     87,237     86,111     80,076     58,148     22,412  
   
 
 
 
 
 

 
   December 31,
  
 
   2002
   2001
   2000
   1999
   1998
  
 
   (in thousands)

  
Consolidated Balance Sheet Data*:                                
Cash, cash equivalents and marketable securities   $ 396,549   $ 493,733   $ 692,884   $ 56,908   $ 16,744  
Working capital     381,790     470,810     621,481     56,112     13,101  
Total assets     841,997     837,876     936,800     148,541     24,220  
Long-term debt, less current portion     200,000     —     —     421     2,180  
Accumulated deficit     (368,347 )   (159,449 )   (98,593 )   (89,800 )   (69,301 )
Total stockholders' equity     601,639     790,970     839,675     137,060     16,959  
*
Certain prior-year balances have been reclassified to conform to the current-year presentation.

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

        The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements based upon current expectations that involve risks and uncertainties. When used in this Annual Report on Form 10-K, the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and similar expressions as they relate to Abgenix are included to identify forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below and under "Additional Factors that Might Affect Future Results" set forth in Item 1 of Part I of this Annual Report on Form 10-K and elsewhere in this Annual Report on Form 10-K.

        We are a biopharmaceutical company that develops and intends to manufacture and commercialize antibody therapeutic products for the treatment of a variety of disease conditions. We have proprietary technologies that facilitate rapid generation of highly specific, fully human antibody product candidates that bind to disease targets appropriate for antibody therapy. We developed our XenoMouse® technology, a technology utilizing genetically modified mice to generate fully human antibodies, and we also own a technology that enables the rapid identification of antibodies with desired function and characteristics, referred to as SLAM™ technology. In our newly developed XenoMax™ technology, we use SLAM technology to select and isolate antibodies with particular function and characteristics from antibody-producing cells generated by XenoMouse animals. We intend to use our technologies to build a large and diversified product portfolio that we expect to develop and commercialize through licensing arrangements with pharmaceutical companies and others, through joint development and through internal product development programs.

Results of Operations

Years Ended December 31, 2002, 2001 and 2000

        Contract revenues totaled $19.3 million, $34.1 million and $26.6 million in 2002, 2001 and 2000, respectively. Because they depend to a large extent on the success or failure of research and development efforts undertaken by our collaborators and licensees, our year-to-year contract revenues can fluctuate significantly and are inherently difficult to predict. With our new manufacturing facility and our existing pilot plant, we are now offering integrated process sciences and manufacturing services, which we refer to as production services. We expect total contract revenues in 2003 to be at similar levels as 2002, with a new contribution from production services and a lesser contribution from product development. Over the next few years, we expect revenue from production services to increase, and over the next several years we expect revenue from product development to decrease.

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

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        Interest and other income consist primarily of interest from cash, cash equivalents and marketable securities. Interest and other income totaled $20.1 million in 2002, $29.5 million in 2001 and $32.8 million in 2000. The decreases were due to lower interest rates and lower average cash, marketable securities and cash equivalent balances. We expect interest income to decrease in future periods, as average cash balances decrease.

        Research and development expenses increased to $128.5 million in 2002 from $96.2 million in 2001 and from $50.1 million in 2000. Management separates research and development expenditures into amounts related to pre-clinical research and development, amounts related to clinical development programs and amounts related to facilities as follows:

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

        Our identified intangible assets consist primarily of existing technology (including patents and certain royalty rights) we acquired through the acquisitions of Hesed Biomed in 2001, Abgenix Biopharma and IntraImmune in 2000, and JT America's interest in Xenotech in 1999. Amortization of intangible assets totaled $7.3 million, $8.6 million and $4.0 million in 2002, 2001 and 2000, respectively. Beginning January 1, 2002, upon the adoption of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets," we no longer amortize goodwill, but will perform impairment tests annually, or earlier if indications of impairment exist. We have conducted an initial and an annual impairment test on our goodwill in 2002 and concluded that no impairment charge was required. The amortization of goodwill was $2.5 million and $448,000 in 2001 and 2000, respectively. All other intangible assets will continue to be amortized over their estimated useful lives. The decrease in amortization in 2002 from 2001 was a result of ceasing to amortize goodwill, partially offset by the full year's amortization of the new technology acquired in the Hesed Biomed acquisition. The increase in amortization in 2001 from 2000 was a result of the acquisitions in 2001 and 2000.

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        General and administrative expenses include compensation, professional services, consulting and other expenses related to information systems, legal, finance, and an allocation of facility costs. General and administrative expenses increased to $31.6 million in 2002 from $19.4 million in 2001 and from $8.9 million in 2000. The primary reason for the increase in 2002 as compared to 2001, was the increase in consulting and personnel expenses related to our information systems, including the implementation of a new enterprise resource planning system. Another significant reason for the increase was the depreciation expense related to the enterprise resource planning system, which was launched at the beginning of the third quarter of 2002. The increase in 2001 compared to 2000 primarily reflected increased personnel, legal, and consulting costs in support of the increased activities of the Company, which have included costs associated with building the infrastructure for human resources and recruiting efforts, finance and information systems and our legal department. The increase in 2001 also reflected the general and administrative costs associated with Abgenix Biopharma, our Canadian subsidiary acquired in November 2000. We expect personnel, consulting, professional services and other administrative costs to approximate the same levels in 2003 as in 2002.

        In October 2002, we announced a restructuring plan, which consisted primarily of a 15% reduction in employees. A restructuring charge of $1.8 million was recorded in 2002 to account for severance, medical and other benefits associated with this restructuring. As of December 31, 2002, approximately $1.1 million of severance benefits were accrued and are expected to be paid to terminated employees over the next nine months. On an annual basis, we expect the reduction in salaries cost associated with this restructuring to be approximately $5.0 million.

        We purchased an aggregate amount of $80.0 million of common stock of CuraGen and ImmunoGen as strategic investments. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as available-for-sale and are reported at fair value on our balance sheet. Unrealized holding gains and losses for available-for-sale securities generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under our accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. During 2002, our investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months, and therefore we deemed that an impairment of these investments had occurred. Accordingly, we recorded impairment charges totaling $67.3 million in the year ended December 31, 2002, which were based on the differences between the market price and cost basis or new adjusted cost basis of these securities. As of December 31, 2002, these investments were recorded at fair value in long-term investments on the balance sheet, and any net unrealized holding gains and losses, to the extent not recognized as an impairment charge as discussed above, are reported as a component of stockholders' equity. If we deem these investments further impaired at the end of any future period, we may incur an additional impairment charge on these investments.

        In addition, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with the collaboration with that company. Because MDS Proteomics is a private company and its securities are not publicly traded, the value of our investment is inherently more difficult to estimate than an investment in a publicly traded company. In 2002, we estimated that the value of our investment had declined to $7.9 million and that an impairment of our investment had occurred.

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Accordingly, we recorded an impairment charge of $7.1 million in the year ended December 31, 2002. The amount of the charge was based on the difference between the estimated value as determined by our management and our original cost basis. As of December 31, 2002, the cost basis of this investment reflected the new estimated value at June 30, 2002, which is recorded in long-term investments on the balance sheet. If we deem the investment in MDS Proteomics further impaired at the end of any future period, we may incur an additional impairment charge on this investment.

        The in-process research and development charge of $5.2 million in 2000 relates to our acquisition of Abgenix Biopharma. We accounted for this acquisition using the purchase method of accounting. The total purchase price was $77.2 million, including transaction costs.

        We performed a valuation in which we allocated the total purchase price of Abgenix Biopharma among the acquired assets. We used the income approach to develop the value for the existing technology and the in-process research and development, as applicable. The income approach incorporates the calculation of the present value of future economic benefits such as cash earnings, cost savings, and tax deductions. The rate utilized to discount the net cash flows to their present value was 40%. We utilized the cost approach to value the assembled workforce. The cost approach measures the benefits related to an asset by the cost to reconstruct or replace it with another of like utility.

        Abgenix Biopharma's SLAM technology is patented in the United States and patent applications are pending in Canada and Europe. SLAM is technologically feasible and we have licensed the technology to a customer. At the time of our acquisition of Abgenix Biopharma, its assembled workforce was comprised of 27 employees, primarily scientists, with specific experience and knowledge of the Abgenix Biopharma SLAM technology and other technologies in process. The combined allocated value of these two intangible assets is $36.0 million. Upon adoption of SFAS No. 141, assembled workforce no longer met the definition of an intangible asset. As a result, the net balance for assembled workforce was reclassified as goodwill.

        Abgenix Biopharma's primary in-process research and development activities focused on two efforts: agonist antibodies and antibodies that induce apoptosis. Agonist antibodies trigger a biological process, rather than simply block a biological pathway. Antibodies that induce apoptosis trigger a process that cause the death of the cell they bind to, for use in treating diseases like cancer. We estimated these two efforts to be 31% and 57% complete as of the date of acquisition, based on the estimated costs to complete of approximately $120,000 and $250,000, respectively. Remaining efforts on these projects are significant and include most phases of product design, development and testing. As a result of the developmental work and additional testing required to produce these products in accordance with all clinical, technical and functional specifications of the FDA and other governmental authorities, these products have yet to achieve technological feasibility. As such, at the date of the acquisition the in-process technology had no alternative future use and did not otherwise qualify for capitalization. The value assigned to each acquired in-process research and development project is $3.3 million for agonist antibodies and $1.9 million for antibodies that induce apoptosis.

        The estimates used in valuing in-process research and development were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accordingly, actual results may vary from the projected results. Any such variance may result in a material adverse effect on our financial condition and results of operations.

        Interest expense was related to interest and amortization of issuance costs on our convertible debt, and interest on our equipment leaseline financing and loan facility. Interest expense increased to

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$4.8 million in 2002 from $259,000 in 2001 and $39,000 in 2000. The increase was primarily due to our issuance of $200.0 million of convertible debt in March 2002, which accrues interest at an annual rate of 3.5%, payable semi-annually and on which the first interest payment was made on September 11, 2002. Interest expense of $1.9 million related to the convertible debt was capitalized in 2002. For each future annual period, we expect to pay approximately $7.0 million of interest related to our convertible debt until the debt matures, until we redeem or repurchase the debt or until all or part of the debt is converted into shares of our common stock.

Liquidity and Capital Resources

        At December 31, 2002, we had cash, cash equivalents and marketable securities of approximately $396.5 million. In March 2002, we received proceeds of approximately $194.0 million, net of commissions, from our issuance of $200.0 million of convertible debt. We invest our cash equivalents and marketable securities primarily in highly liquid, interest bearing, investment grade and government securities in order to preserve principal. We have also invested in certain marketable equity securities of ImmunoGen and CuraGen for strategic reasons. These securities had a fair value of $13.0 million at December 31, 2002.

        Cash Used in Operating Activities.    Net cash used in operating activities was $118.7 million, $26.0 million and $1.4 million in 2002, 2001 and 2000, respectively. This reflects an increase of $92.7 million in 2002 and an increase of $24.6 million in 2001. The increases reflected primarily the following:

        Cash Provided by (Used in) Investing Activities.    Net cash provided by investing activities was $30.5 million in 2002. Net cash used in investing activities was $45.8 million and $567.9 million in 2001 and 2000, respectively. Cash was provided by and used in investing activities primarily as follows:

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        Cash Provided by Financing Activities.    Net cash provided by financing activities was $196.5 million, $4.3 million and $723.2 million in 2002, 2001 and 2000, respectively. In 2002, cash provided by financing activities consisted of $194.0 million net proceeds from our issuance of convertible subordinated notes, as described below, and $2.5 million proceeds from the exercise of stock options and the issuance of stock under our employee stock purchase plan. In 2001, cash provided by financing activities consisted of $4.6 million proceeds from the exercise of stock options and the issuance of stock under our employee stock purchase plan, offset by $0.3 million in payments on long-term debt. In 2000, cash provided by financing activities consisted of $717.1 million proceeds from the sale of 9,936,000 shares of our common stock in a follow-on public offering in February 2000 and from the sale of 3,300,000 shares of our common stock in a private placement in November 2000, $0.7 million proceeds from Cell Genesys for the exercise of warrants, and $7.3 million from the exercise of stock options and our employee stock purchase plan, offset by $1.9 million in payments on long-term debt.

        In March 2002, we issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of our common stock at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5% and we are obligated to pay interest on March 15 and September 15 of each year. We made our first interest payment of $3.7 million on September 11, 2002. The notes will mature on March 15, 2007 and are redeemable at our option on or after March 20, 2005, or earlier if the price of our common stock exceeds specified levels. In addition, the holders of the notes may require us to repurchase the notes if we undergo a change in control. Proceeds from the sale of the notes, net of commissions payable to the initial purchasers of the notes but before subtracting other offering expenses payable by us, were $194.0 million.

        In March 2000 and February 2001, we obtained stand-by letters of credit for $2.0 million and $3.0 million, respectively, from a commercial bank as security for our obligations under two facility leases. These were increased in January 2002 to $2.5 and $3.2 million, respectively, in connection with amendments to our facility leases. In September 2001, we obtained a stand-by letter of credit for 1.0 million Canadian dollars from a commercial bank as security for our obligations under a facility lease in Canada. The stand-by letters of credit are secured by an investment account, in which we must

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maintain a $7.0 million balance. Additionally, in 1997 we leased $2.0 million of our laboratory and office equipment from a financing company. The lease bore interest at approximately 12.5% to 13.0%, and matured in September 2001. We also had a construction financing line with a bank in the amount of $4.3 million that was used to finance construction of leasehold improvements at our first facility. We paid off the line in May 2000.

        Financing Uncertainties Related to Our Business Plan.    We plan to continue to make significant expenditures to establish and staff our own manufacturing facility and support our research and development activities, including pre-clinical product development and clinical trials. In October 2002, we announced a restructuring plan, consisting primarily of a 15% reduction in employees. As a result of that plan we incurred a restructuring charge of $1.8 million in the fourth quarter of 2002. We also intend to continue to look for opportunities to acquire new technology through in-licensing, collaborations or acquisitions. During 2003, we estimate that we will spend approximately $33.1 million on leasehold improvements and equipment to complete our new manufacturing and research and development facilities. Additionally, during the same period we expect to spend up to approximately $1.0 million on new computer hardware and software.

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

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

Clinical Phase
   Estimated
Completion Period
Phase 1   1-2 Years
Phase 2   1-2 Years
Phase 3   2-4 Years

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

        We test our potential product candidates in numerous pre-clinical studies to identify disease indications for which they may be product candidates. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for one or more indications for a given product candidate in order to focus our resources on more promising product candidates or indications.

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For example, in January 2002 and May 2002, we announced that clinical trials of our proprietary product candidate ABX-IL8 as a treatment for rheumatoid arthritis and psoriasis, respectively, did not support further clinical studies of that product candidate. Additionally in February 2003, we announced that the clinical trial of our proprietary product candidate, ABX-CBL as a treatment for graft versus host disease, did not support further clinical studies of that product candidate. The failure of clinical trials can also result in additional research and development expenses. For example, we recorded a charge of $6.7 million for the three months ended June 30, 2002, related to our decision in the second quarter of 2002 to wind down our clinical trials of ABX-IL-8.

        An important element of our business strategy is to pursue the research and development of a diverse range of product candidates for a variety of disease indications. We also intend to enter co-development agreements, similar to our agreements with Amgen and Immunex for ABX-EGF and SangStat for ABX-CBL, and enter into additional joint development agreements earlier in the development lifecycle of product candidates than we did in our existing co-development agreements. Our strategy is designed to diversify the risks associated with our research and development spending. The decisions to terminate or wind down our clinical programs for developing ABX-IL8 and ABX-CBL have reduced the diversity of our product portfolio. We believe that this effect is temporary, in view of the number of potential product candidates we have in preclinical development. To the extent, however, that we are unable to maintain a diverse and broad range of product candidates, our dependence on the success of one or a few product candidates would increase.

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

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

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

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

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

        History of Net Losses.    We have incurred net losses in each of the last five years of operation, including net losses of $16.8 million in 1998, $20.5 million in 1999, $8.8 million in 2000, $60.9 million in 2001 and $208.9 million in 2002. As of December 31, 2002, our accumulated deficit was $368.3 million. Our losses to date have resulted principally from:

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

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        Net Operating Loss Carryforwards.    As of December 31, 2002, we had federal net operating loss carryforwards of approximately $314.0 million. Our net operating loss carryforwards exclude losses incurred prior to our formation in July 1996. Further, we have capitalized the amounts associated with the 1997 settlement and cross-license that have been expensed for financial statement accounting purposes and we are amortizing those amounts over a period of approximately 15 years for tax purposes. The net operating loss and credit carryforwards will expire in the years 2006 through 2022, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

Critical Accounting Policies

        The financial results that we report are impacted by the application of several accounting policies that require us to make subjective and complex judgments. We are required to estimate the effect of matters that are inherently uncertain. Changes in our estimates or judgments could materially impact our results of operations, financial condition and cash flows in future years. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. We believe our most critical accounting policies include revenue recognition, accounting for our equity investments, accounting for goodwill, and accounting for clinical trial supplies.

Revenue Recognition.

        We derive our contract revenue from license, option, service and milestone fees received from customers. As described below, within the framework of generally accepted accounting principles, significant management judgments and estimates must be made and applied in connection with the revenue recognized in any accounting period. If our management made different judgments or utilized different estimates, material differences could result in the amount and timing of our revenue in any period.

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Accounting for Equity Investments.

        We are exposed to equity price risk on our strategic investments in CuraGen, ImmunoGen and MDS Proteomics and we may elect to make additional similar investments in the future. As of December 31, 2002, we had a carrying value of $10.6 million in CuraGen common stock, which reflected the public trading price on that date of $4.65 per share. We also had a carrying value on December 31, 2002, of $2.4 million in ImmunoGen common stock, which reflected the public trading price on that date of $3.10 per share. We typically do not attempt to reduce or eliminate our market exposure on these types of investments. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as available-for-sale and are reported at fair value on our balance sheet. Unrealized holding gains and losses on available-for-sale securities generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under our accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. We purchased $15.0 million of CuraGen common stock in December 1999 at price of $17.90 per share and $50.0 million of CuraGen common stock in November 2000 at a price of $34.69 per share. We purchased $15.0 million of ImmunoGen common stock in September 2000 at a price of $19.00 per share. During 2002, our investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months, and therefore we deemed that an impairment of these investments had occurred. Accordingly, we recorded impairment charges totaling $67.3 million in the year ended December 31, 2002, which were based on the differences between the market price and cost basis or new adjusted cost basis of these securities. As of December 31, 2002, these investments were recorded at fair value in long-term investments on the balance sheet, and any net unrealized holding gains and losses, to the extent not recognized as an impairment charge as discussed above, were reported as a component of stockholders' equity. The public trading prices of the shares of both companies have fluctuated significantly since we purchased them and could continue to do so. If these shares continue to trade below their new cost bases in future periods, we may incur additional impairment charges relating to these investments. The amounts of these charges, if any, will equal our unrealized loss on these securities as of the end of the relevant periods.

        In addition, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with our collaboration with that company. Because MDS Proteomics is a private company and its securities are not publicly traded, the value of our investment is inherently more difficult to estimate than an investment in a publicly traded company. In 2002, we estimated that the value of our investment had declined to $7.9 million and that an impairment of our investment had occurred. Accordingly, we recorded an impairment charge of $7.1 million on our investment in the year ended December 31, 2002. The amount of the charge was based on the difference between the estimated value as determined by our management and our original cost basis. As of December 31, 2002, the cost basis of this investment reflected the new estimated value at June 30, 2002, which is recorded in long-term investments on the balance sheet. If we deem the investment in MDS Proteomics further impaired at the end of any future period, we may incur an additional impairment charge on this investment.

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Accounting for Goodwill.

        On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized, and instead, be tested for impairment on a periodic basis. Under our accounting policy, we have adopted an annual goodwill impairment test date as of the beginning of the fourth quarter of 2002. Following this approach, we use the carrying values available as of September 30, assess if they have a potential impairment, and complete the measurement of impairment, if required. Because we have determined that we have one reporting unit under SFAS No. 142, our market capitalization is considered to be a reasonable proxy for the fair value of the reporting unit. However, the market capitalization is not the sole measure of the fair value of the reporting unit. For a brief period during the fourth quarter of 2002, our common stock had traded at a price that represented a market capitalization less than our book value. However this condition did not persist for a significant portion of the fourth quarter of 2002 and as of December 31, 2002, our common stock had traded at a price that represented a market capitalization higher than our book value. As of December 31, 2002, we determined that the fair value of the reporting unit was higher than its carrying value and an impairment charge was not recognized.

        While a decline in stock price and market capitalization is not specifically cited in SFAS No. 142 as a goodwill impairment indicator, we consider whether current business and market conditions suggest that the fair value of the reporting unit has likely declined below its carrying value. If we determine that a potential impairment of our goodwill exists, we will perform the impairment measurement procedures under SFAS No. 142 which may result in a charge for the impairment of goodwill in future periods. Furthermore, a change in our determination of reporting units may also result in a charge for the impairment of goodwill in future periods. A change in the determination of reporting units may occur should we reorganize into reporting units for which each unit individually constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that unit. As of December 31, 2002, the carrying value of our goodwill was approximately $34.8 million.

Accounting for Clinical Trial Supplies.

        We pay fees to outside contractors for the manufacture of our antibody therapeutic product candidates. Such fees are capitalized as prepaid expense if management determines that the clinical trial supplies have alternative future uses in clinical trials for multiple indications of a product candidate and are expensed upon the use of the materials, primarily as they are used in clinical trials. We would immediately expense previously capitalized costs if the asset were not expected to have an alternative future use, such as use in a clinical trial. In the second quarter of 2002, as a result of our decision to wind down our clinical trials of ABX-IL-8, we recorded a charge of $6.7 million relating to clinical trial supplies that we had previously capitalized. Also, in the fourth quarter of 2002, as a result of deciding to use a new methodology for manufacturing ABX-EGF to be used for certain future clinical trials, we recorded a charge of $4.3 million, relating to clinical trial supplies manufactured under the previous methodology. As of December 31, 2002, the balance of prepaid clinical trial supplies was $12.1 million. We may incur additional expenses related to clinical supply writedowns depending on the outcome of ongoing clinical trials.

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Contractual Obligations and Commercial Commitments

        Future minimum payments for certain contractual obligations for years subsequent to December 31, 2002 are as follows:

 
   Total
   2003
   2004-
2005*
   2006-
2007*
   2008 and
Thereafter
 
   (in thousands)
Contractual Obligations                              
  Operating leases   $ 154,978   $ 12,471   $ 26,875   $ 28,765   $ 86,867
  Convertible debt     200,000     —     —     200,000     —
   
 
 
 
 
    Total   $ 354,978   $ 12,471   $ 26,875   $ 228,765   $ 86,867

        *Amounts represent total of minimum payments for the entire period.

        In March 2002, we issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of our common stock at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5%, and we are obligated to pay interest on March 15 and September 15 of each year. We made our first interest payment of $3.7 million on September 11, 2002. The notes will mature on March 15, 2007 and are redeemable at our option on or after March 20, 2005, or earlier if the price of our common stock exceeds specified levels. In addition, the holders of the notes may require us to repurchase the notes if we undergo a change in control. Therefore, in March 2007, or earlier if we undergo a change in control, we may use a significant portion of our cash balance to repay the $200.0 million principal amount of our convertible debt. If our cash balance at any time is insufficient to meet our obligations under the notes, we would have to seek additional financing, if available, to support our obligations under the notes. In addition, we expect to make interest payments on the notes of $7.0 million per year for years of 2003 through 2006, and $1.2 million in 2007, assuming all the notes remain outstanding until their maturity date.

        Other significant commercial commitments include the following:

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Recent Accounting Pronouncements

        In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses accounting for restructuring, discontinued operations, plant closing, or other exit or disposal activity. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, and earlier adoption is encouraged. We adopted SFAS No. 146 in the fourth quarter of 2002. Due to the nature of our restructuring activities in 2002, the impact of the adoption was not material. We do not expect the adoption of SFAS No. 146 to be significant to the results of operations for the years after 2002.

        In November 2002, the FASB issued Financial Interpretation No. 45 (or FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We have certain agreements with customers and collaborators that contain indemnification provisions. Pursuant to such provisions, we typically indemnify the customer or collaborator against certain third-party claims. We are not aware of any facts that would be likely to give rise to an adverse judgment under these indemnification provisions.

        In November 2002, the FASB issued Emerging Issues Task Force (EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently evaluating the effect that the adoption of EITF Issue No. 00-21 may have on our consolidated financial statements.


Item 7A. Quantitative and Qualitative Disclosure About Market Risk

        Interest Rate Risk.    The company is exposed to interest rate sensitivity on its investments in debt securities and its outstanding fixed rate debt. The objective of our investment activities is to preserve principal, while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid, investment grade and government debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in

65

interest rates, we invest in short-term securities and our goal is to maintain an average maturity of approximately one year. In addition, during 2002 the Company has $200.0 million of outstanding 3.5% convertible subordinated notes due in 2007. The fair value of these convertible subordinated notes may fluctuate with changes in market interest rates, as well as changes in the market price of our common stock. A hypothetical 1.0% per annum decrease in interest rates as of December 31, 2002 would have an adverse net change in the fair value of our interest rate sensitive assets and liabilities of approximately $6.3 million. A hypothetical 1% per annum increase in interest rates as of December 31, 2001 would have an adverse net change in the fair value of our interest rate sensitive assets of approximately $5.6 million.

        Equity Price Risk.    We are exposed to equity price risk on strategic investments, such as those we have made in CuraGen, ImmunoGen and MDS Proteomics. We typically do not attempt to reduce or eliminate our market exposure on these securities. With respect to CuraGen and ImmunoGen, each of whose common stock is publicly traded, the market price of these securities was approximately $13.0 million and $64.1 million as of December 31, 2002 and 2001, respectively. Due to decreases in the market price, we recorded impairment charges of $67.3 million in 2002 related to our investments in CuraGen and ImmunoGen. The trading prices of shares of CuraGen and ImmunoGen have fluctuated significantly since we purchased these securities. Each additional 10% decrease in market value of these securities would result in a decrease in value of approximately $1.3 million from the fair value of those investments at December 31, 2002. Additional price declines could cause us to record additional impairment charges in future periods.

        An adverse movement of equity market prices generally would also have an impact on the valuation of our non-publicly traded strategic equity securities, such as MDS Proteomics. Such a movement and the related underlying economic conditions would negatively impact the prospects of any company we invest in, its ability to raise capital and the likelihood of our being able to realize our investment through liquidity events such as a public offering, merger or private sale. In 2002, we incurred a $7.1 million charge related to a write-down of our investment in MDS Proteomics, and we may incur future writedowns of these securities. At December 31, 2002, our strategic investment in MDS Proteomics had a carrying amount of $7.9 million.

66


Item 8. Financial Statements and Supplementary Data


INDEX TO FINANCIAL STATEMENTS

 
   Page
Abgenix, Inc., Audited Consolidated Financial Statements    

Report of Ernst & Young LLP, Independent Auditors
 
68

Consolidated Balance Sheets as of December 31, 2002 and 2001
 
69

Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000
 
70

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000
 
71

Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000
 
72

Notes to Consolidated Financial Statements
 
73

67

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Abgenix, Inc.

        We have audited the accompanying consolidated balance sheets of Abgenix, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. 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 in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Abgenix, Inc. at December 31, 2002 and 2001, and the consolidated 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.

        As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets.

Palo Alto, California
January 30, 2003

68


ABGENIX, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 
   December 31,
  
 
   2002
   2001
  
ASSETS  
Current assets:              
  Cash and cash equivalents   $ 207,974   $ 99,663  
  Marketable securities     188,575     394,070  
  Interest receivable     2,004     3,977  
  Accounts receivable, net     2,640     3,454  
  Prepaid expenses and other current assets     16,538     14,474  
   
 
 
    Total current assets     417,731     515,638  
Property and equipment, net     244,419     86,467  
Long-term investments     20,939     79,119  
Goodwill     34,780     34,780  
Identifiable intangible assets, net     92,349     99,526  
Deposits and other assets     31,779     22,346  
   
 
 
    $ 841,997   $ 837,876  
   
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:              
  Accounts payable   $ 21,557   $ 17,446  
  Deferred revenue     3,416     11,751  
  Accrued liabilities     8,907     13,473  
  Acquisition liabilities     —     2,158  
  Accrued interest payable     2,061     —  
   
 
 
    Total current liabilities     35,941     44,828  
Deferred rent     4,417     2,078  
Convertible subordinated notes     200,000     —  
Commitments              
Stockholders' equity:              
  Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued or outstanding     —     —  
  Common stock, $0.0001 par value; 220,000,000 shares authorized; 87,655,342 and 86,835,165 shares issued and outstanding at December 31, 2002 and 2001, respectively     9     9  
  Additional paid-in capital     965,821     961,456  
  Accumulated other comprehensive income (loss)     4,156     (11,046 )
  Accumulated deficit     (368,347 )   (159,449 )
   
 
 
    Total stockholders' equity     601,639     790,970  
   
 
 
    $ 841,997   $ 837,876  
   
 
 

See Accompanying Notes

69


ABGENIX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 
   Year ended December 31,
  
 
   2002
   2001
   2000
  
Revenues:                    
  Contract revenue   $ 19,293   $ 34,064   $ 26,601  
  Interest and other income     20,145     29,542     32,848  
   
 
 
 
    Total revenues     39,438     63,606     59,449  
   
 
 
 
Costs and expenses:                    
  Research and development     128,494     96,234     50,137  
  Amortization of intangible assets, related to research and development     7,251     8,602     3,992  
  General and administrative     31,625     19,367     8,859  
  Restructuring charges     1,751     —     —  
  Impairment of investments     74,385     —     —  
  In-process research and development charge     —     —     5,215  
  Interest expense     4,830     259     39  
   
 
 
 
    Total costs and expenses     248,336     124,462     68,242  
   
 
 
 
Net loss   $ (208,898 ) $ (60,856 ) $ (8,793 )
   
 
 
 

Basic and diluted net loss per share
 
$
(2.39
)
$
(0.71
)
$
(0.11
)
   
 
 
 

Shares used in computing basic and diluted net loss per share
 
 
87,237
 
 
86,111
 
 
80,076
 
   
 
 
 

See Accompanying Notes

70


ABGENIX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share and per share data)

 
   Common Stock
    
    
    
    
    
  
 
    
    
   Accumulated
Other
Comprehensive
Income (Loss)
    
    
  
 
   Number of
Shares
   Amount
   Additional
Paid-in
Capital
   Deferred
Compensation
   Accumulated
Deficit
   Total
Stockholders'
Equity
  
Balance at December 31, 1999   68,669,092   $ 7   $ 213,510   $ (670 ) $ 14,013   $ (89,800 ) $ 137,060  
Change in unrealized losses on available-for-sale securities   —     —     —     —     (14,718 )   —     (14,718 )
Net loss   —     —     —     —     —     (8,793 )   (8,793 )
                                     
 
Comprehensive loss                                       (23,511 )
                                     
 
Issuance of common stock upon exercise of warrants   486,668     —     730     —     —     —     730  
Issuance of common stock at $52.50 per share (net of issuance costs and commissions of $25,217)   9,936,000     1     496,422     —     —     —     496,423  
Issuance of common stock at $70.00 per share (net of issuance costs and commissions of $10,310)   3,300,000     1     220,689     —     —     —     220,690  
Issuance of common stock upon exercise of stock options   2,799,324     —     6,490     —     —     —     6,490  
Issuance of common stock pursuant to the employee stock purchase plan   210,464     —     762     —     —     —     762  
Amortization of deferred compensation   —     —     —     436     —     —     436  
Compensation related to grant of stock options to consultants   —     —     595     —     —     —     595  
   
 
 
 
 
 
 
 
Balance at December 31, 2000   85,401,548     9     939,198     (234 )   (705 )   (98,593 )   839,675  
Change in unrealized losses on available-for-sale securities   —     —     —     —     (10,341 )   —     (10,341 )
Net loss   —     —     —     —     —     (60,856 )   (60,856 )
                                     
 
Comprehensive loss                                       (71,197 )
                                     
 
Issuance of common stock pursuant to the replacement stock options related to the acquisition of Abgenix Biopharma   87,742     —     3,502     —     —     —     3,502  
Issuance of common stock at $29.79 per share in connection with the acquisition of Hesed Biomed   475,930     —     14,178     —     —     —     14,178  
Assumption of warrants for common stock in connection with the acquisition of Hesed Biomed   —     —     354     —     —     —     354  
Issuance of common stock upon exercise of stock options   800,546     —     2,828     —     —     —     2,828  
Issuance of common stock pursuant to the employee stock purchase plan   69,399     —     1,396     —     —     —     1,396  
Amortization of deferred compensation   —     —     —     234     —     —     234  
   
 
 
 
 
 
 
 
Balance at December 31, 2001   86,835,165     9     961,456     —     (11,046 )   (159,449 )   790,970  
Change in unrealized losses on available-for-sale securities   —     —     —     —     15,202     —     15,202  
Net loss   —     —     —     —     —     (208,898 )   (208,898 )
                                     
 
Comprehensive loss                                       (193,696 )
                                     
 
Issuance of common stock at $29.79 per share in connection with the acquisition of Hesed Biomed   61,506     —     1,832     —     —     —     1,832  
Assumption of warrants for common stock in connection with the acquisition of Hesed Biomed   2,680     —     49     —     —     —     49  
Issuance of common stock upon exercise of stock options   548,367     —     725     —     —     —     725  
Issuance of common stock pursuant to the employee stock purchase plan   207,624     —     1,759     —     —     —     1,759  
   
 
 
 
 
 
 
 
Balance at December 31, 2002   87,655,342   $ 9   $ 965,821   $ —   $ 4,156   $ (368,347 ) $ 601,639  
   
 
 
 
 
 
 
 

See Accompanying Notes

71


ABGENIX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
   Year ended December 31,
  
 
   2002
   2001
   2000
  
Operating activities                    
Net loss   $ (208,898 ) $ (60,856 ) $ (8,793 )
Adjustments to reconcile net loss to net cash used in operating activities:                    
  Depreciation     12,978     5,176     1,956  
  Amortization of goodwill     —     2,548     448  
  Amortization of identified intangible assets     7,251     6,054     3,544  
  Impairment of investments     74,385     —     —  
  Amortization of debt issuance costs     954     —     —  
  Stock options issued to consultants     —     —     595  
  In-process research and development charge     —     —     5,215  
  Changes for certain assets and liabilities:                    
    Interest receivable     1,973     5,816     (8,690 )
    Accounts receivable     814     (57 )   753  
    Prepaid expenses and other current assets     (2,064 )   (2,509 )   (6,288 )
    Deposits and other assets     (1,676 )   (5,080 )   (1,042 )
    Accounts payable     4,111     11,107     3,891  
    Deferred revenue     (8,335 )   4,773     3,211  
    Accrued liabilities     (4,626 )   5,477     3,371  
    Accrued interest payable     2,061     —     —  
    Deferred rent     2,339     1,511     417  
   
 
 
 
Net cash used in operating activities     (118,733 )   (26,040 )   (1,412 )
   
 
 
 

Investing activities
 
 
 
 
 
 
 
 
 
 
Purchases of marketable securities     (141,771 )   (1,032,726 )   (1,089,518 )
Maturities of marketable securities     173,382     1,167,564     609,637  
Sales of marketable securities     172,846     1,488     —  
Purchases of property and equipment     (170,930 )   (73,156 )   (13,809 )
Investment in note receivable     (2,750 )   (14,000 )   —  
Purchases of technology licenses     —     (2,942 )   —  
Purchases of long-term investments     —     (15,101 )   (65,000 )
Payments for acquisition liabilities     (266 )   (72,822 )   —  
Acquisition of Hesed Biomed, net of cash acquired     —     (4,124 )   —  
Acquisition of IntraImmune, net of cash acquired     —     —     (9,253 )
   
 
 
 
Net cash provided (used) in investing activities     30,511     (45,819 )   (567,943 )
   
 
 
 

Financing activities
 
 
 
 
 
 
 
 
 
 
Net proceeds from issuances of convertible subordinated notes     194,000     —     —  
Net proceeds from issuances of common stock     2,533     4,596     725,095  
Payments on long-term debt     —     (316 )   (1,864 )
   
 
 
 
Net cash provided by financing activities     196,533     4,280     723,231  
   
 
 
 
Net increase (decrease) in cash and cash equivalents     108,311     (67,579 )   153,876  
Cash and cash equivalents at the beginning of the year     99,663     167,242     13,366  
   
 
 
 
Cash and cash equivalents at the end of the year   $ 207,974   $ 99,663   $ 167,242  
   
 
 
 

Supplemental disclosures of cash flow information
 
 
 
 
 
 
 
 
 
 
Cash paid during the year for interest, net of capitalized interest   $ 2,794   $ 259   $ 132  
   
 
 
 

Non-cash investing and financing activities
 
 
 
 
 
 
 
 
 
 
Acquisition of Abgenix Biopharma in exchange for a liability to Abgenix Biopharma shareholders   $ —   $ —   $ 75,429  
   
 
 
 
Common stock and warrants issued for acquisition of Hesed Biomed   $ 1,881   $ 14,532   $ —  
   
 
 
 

See Accompanying Notes

72


ABGENIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Organization

        Abgenix, Inc. (Abgenix or the Company), is a biopharmaceutical company that focuses on discovery, development and manufacturing of human therapeutic antibody products for the treatment of a variety of disease conditions. The Company has proprietary technologies that facilitate rapid generation of highly specific, fully human antibody therapeutic product candidates that bind to disease targets appropriate for antibody therapy.

        In November 2001, the Company acquired Hesed Biomed Inc. (Hesed Biomed). In November 2000, in two separate transactions, the Company acquired Abgenix Biopharma Inc. (Abgenix Biopharma, formerly known as ImmGenics Pharmaceuticals, Inc.) and IntraImmune Therapies, Inc. (IntraImmune).

        Accounts denominated in foreign-currency have been remeasured using the U.S. dollar as the functional currency. Significant intercompany accounts and transactions have been eliminated.

Recent Accounting Pronouncements

        In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses accounting for restructuring, discontinued operations, plant closing, or other exit or disposal activity. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, and earlier adoption is encouraged. The Company adopted SFAS No. 146 in the fourth quarter of 2002. Due to the nature of the Company's restructuring activities in 2002, the impact of the adoption was not material. The Company does not expect the adoption of SFAS No. 146 to be significant to the results of operations for the years after 2002.

        In November 2002, the FASB issued Financial Interpretation No. 45 (or FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has certain agreements with customers and collaborators that contain indemnification provisions. Pursuant to such provisions, we typically indemnify the customer or collaborator against certain third-party claims. We are not aware of any facts that would be likely to give rise to an adverse judgment under these indemnification provisions.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS No. 148 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, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee

73


compensation and the effect of the method used on reported results. The additional disclosure requirements of FAS 148 are effective for fiscal years ending after December 15, 2002. The Company has elected to continue to follow the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," to account for employee stock options. See below in Note 1 under the caption Stock-Based Compensation for additional disclosures required under SFAS No. 148.

        In November 2002, the FASB issued Emerging Issues Task Force (EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of EITF Issue No. 00-21 may have on its consolidated financial statements.

Cash Equivalents, Marketable Securities and Long-Term Investments

        The Company considers all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents.

        Marketable securities consist of highly liquid debt securities with a maturity of greater than three months when purchased and marketable equity securities. The Company's marketable securities have been classified as "available-for-sale," and are carried at fair value based on quoted market prices. Unrealized gains and losses are reported as accumulated other comprehensive income(loss), which is a separate component of stockholders' equity. Unrealized losses on available-for-sale securities that are deemed to be other than temporary are included in earnings. Securities with unrealized losses for more than six months are presumed to be impaired, absent compelling evidence to the contrary. In addition, securities with unrealized losses for less than six months may be deemed impaired in certain circumstances.

        The Company also has a minority equity investment in a privately held company. The investment is included in long-term investments on the Company's balance sheet and is carried at cost. The Company monitors this investment for impairment and makes appropriate reductions in its carrying value when necessary.

Property and Equipment

        The Company records property and equipment at cost and provides depreciation using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the remaining life of the facility lease, manufacturing equipment is depreciated over 15 years, and all other assets are generally depreciated over two to five years. Furniture and equipment leased under capital leases is amortized over the shorter of the useful lives or the lease term. Depreciation of leased assets is included in depreciation expense and accumulated depreciation of the Company's owned assets.

Intangible Assets

        Intangible assets consist primarily of acquired existing technology (including patents and royalty rights), goodwill, and assembled workforce. Amortization is computed on a straight-line basis over the economic lives of the respective assets, estimated at 15 years for the existing technology and goodwill and three years for the assembled workforce.

74


        Effective January 1, 2002, the Company completed the adoption of SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. As required by SFAS No. 142, the Company discontinued amortizing the remaining balances of goodwill as of January 1, 2002. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. All other intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In conjunction with the implementation of SFAS No. 142, the Company has completed an initial and an annual goodwill impairment test in 2002 and found no impairment. While a decline in stock price and market capitalization is not specifically cited in SFAS No. 142 as a goodwill impairment indicator, the Company considers whether current business and market conditions suggest that the fair value of the reporting unit has likely declined below its carrying value. If the Company determines that a potential impairment of our goodwill exists, the Company will perform the impairment measurement procedures under SFAS No. 142 which may result in a charge for the impairment of goodwill in future periods. Furthermore, a change in the Company's determination of reporting units may also result in a charge for the impairment of goodwill in future periods. A change in the determination of reporting units may occur should the Company reorganize into reporting units for which each unit individually constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that unit.

        Upon adoption of the new Business Combination rules, acquired workforce no longer meets the definition of an identified intangible asset. As a result, the net balance of $120,000 has been reclassified to goodwill in 2002. During the year ended December 31, 2002, no goodwill was acquired, impaired or written off.

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

 
   Year Ended December 31,
  
 
   2002
   2001
   2000
  
Reported net loss   $ (208,898 ) $ (60,856 ) $ (8,793 )
Goodwill and workforce amortization     —     2,548     448  
   
 
 
 
Adjusted net loss   $ (208,898 ) $ (58,308 ) $ (8,345 )
   
 
 
 

Reported basic and diluted loss per share
 
$
(2.39
)
$
(0.71
)
$
(0.11
)
Goodwill and workforce amortization     —     0.03     0.01  
   
 
 
 
Adjusted basic and diluted loss per share   $ (2.39 ) $ (0.68 ) $ (0.10 )
   
 
 
 

Long-Lived Assets

        The carrying value of the Company's long-lived assets is reviewed for impairment whenever events or changes in circumstances indicate that the asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Long-lived assets include property and equipment, long-term investments, goodwill and other intangible assets and long-term notes.

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Revenue Recognition

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

Research and Development

        Research and development expenses consist primarily of compensation and other expenses related to research and development personnel; costs associated with pre-clinical testing and clinical trials of the Company's product candidates, including the costs of manufacturing the product candidates; expenses for research and services rendered under co-development agreements; and facilities expenses. Expenses for research services rendered under co-development arrangements exceed fees received from such co-developers as reimbursements.

        All research and development costs are charged to expense when incurred. However, fees paid for the manufacture of antibody therapeutic product candidates are capitalized as a prepaid expense and are expensed upon the use of the materials, primarily as they are used in a clinical trial, or when materials are otherwise no longer expected to have a future benefit.

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Stock-Based Compensation

        The Company accounts for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company does not recognize compensation expense for employee stock options granted at fair market value. For purposes of disclosures pursuant to SFAS No. 123 as amended by SFAS No. 148, the estimated fair value of options is amortized to expense over the options' vesting period. The following table illustrates what net loss would have been had the Company accounted for its stock-based awards under the provisions of SFAS No. 123. Pro forma amounts may not be representative of future years.

 
   December 31,
  
 
   2002
   2001
   2000
  
 
   (in thousands,
except per share amounts)

  
Net loss   $ (208,898 ) $ (60,856 ) $ (8,793 )
Stock-based employee compensation cost included in the determination of net income     —     234     436  
Stock-based employee compensation cost that would have been included in the determination of net income if the fair value based method had been applied to all awards     (80,733 )   (76,888 )   (40,988 )
   
 
 
 
Pro forma net loss as if the fair value based method had been applied to all awards   $ (289,631 ) $ (137,510 ) $ (49,345 )
   
 
 
 
Basic and diluted net loss per share   $ (2.39 ) $ (0.71 ) $ (0.11 )
   
 
 
 
Pro forma basic and diluted loss per share as if the fair value based method had been applied to all awards   $ (3.32 ) $ (1.60 ) $ (0.62 )
   
 
 
 

Net Loss Per Share

        Basic earnings per share is calculated based on the weighted average number of shares outstanding during the period. The impact of common stock options and warrants was excluded from the computation of diluted earnings per share, as their effect is antidilutive for the periods presented.

Use of Estimates

        The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Stockholders' Equity

        The accompanying financial statements have been restated to reflect both a two-for-one common stock split effective on April 6, 2000 and a two-for-one common stock split effective on July 7, 2000.

Reclassifications

        Certain prior-year balances have been reclassified to conform to the current-year presentation.

2.    ACQUISITIONS

Hesed Biomed

        In November 2001, the Company acquired Hesed Biomed, a privately held biotechnology company with significant intellectual property and technology in the field of catalytic antibodies. Abgenix

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acquired all of the common stock of Hesed Biomed for 537,436 shares of Abgenix common stock and warrants for the purchase of 18,729 shares of Abgenix common stock and cash. The total purchase price was valued at $21.6 million, including transaction costs. As a contingency for liabilities of the former Hesed Biomed arising after the acquisition date, 61,506 shares of the Company's common stock were not issued until November 2002. The value of these contingency shares at the time of acquisition was $1.9 million and was included in acquisition liabilities on the balance sheet at December 31, 2001. There were no acquisition liabilities remaining as of December 31, 2002. This acquisition was accounted for as the purchase of technology.

Abgenix Biopharma

        In November 2000, the Company acquired all of the voting stock of Abgenix Biopharma, a privately held Canadian biotechnology company with proprietary technology for accelerating antibody product discovery. This acquisition was accounted for using the purchase method of accounting. The total purchase price was $77.1 million, including transaction costs. Under the terms of the agreement, Abgenix Biopharma special shares were issued to former common and preferred shareholders and debenture holders of Abgenix Biopharma. The holders of the Abgenix Biopharma special shares had the right to put their shares to the Company for cash at $4.97 per share until September 30, 2002, as amended. In February 2001, the Company notified the holders of the special shares that the purchase price would be settled in cash. As of December 31, 2001, approximately 13.7 million Abgenix Biopharma special shares had been exchanged for $68.1 million and approximately 42,000 special shares were still outstanding and as of December 31, 2002, all of the Abgenix Biopharma special shares had been exchanged for $68.1 million.

        In connection with the acquisition, the Company agreed to exchange Abgenix Biopharma stock options held by employees and directors of Abgenix Biopharma for stock options of the Company, based on a certain exchange ratio. This exchange ratio entitled the holder of each Abgenix Biopharma option to receive a replacement option for Company shares having a total value (less the total exercise price) not exceeding the total value of Abgenix Biopharma shares underlying the Abgenix Biopharma option (less the total exercise price), as fixed in November 2000 when the Abgenix Biopharma options were terminated. Replacement options covering a total of 247,155 shares of common stock of the Company were issued in exchange for the Abgenix Biopharma options. The replacement options were fully vested at the time of the exchange. Pursuant to the Company's stock option plan, the Company also offered the employees and certain former directors of Abgenix Biopharma a cash buy-out election. As of December 31, 2001, 87,742 stock options had been exercised and the remainder had been cashed out and cancelled.

IntraImmune

        In November of 2000, the Company acquired IntraImmune, a privately held research company with technologies to give antibodies access to intracellular targets. The total cash purchase price was $9.3 million, including transaction costs. This acquisition was accounted for using the purchase method of accounting.

Purchase Price Allocation

        The Company performed an allocation of the total purchase price of Hesed Biomed, Abgenix Biopharma and IntraImmune among the acquired assets. The income approach was used to develop the value for the existing technology and the in-process research and development, as applicable. The income approach incorporates the calculation of the present value of future economic benefits such as cash earnings, cost savings, and tax deductions. The cost approach was utilized to value the assembled workforce. The cost approach measures the benefits related to an asset by the cost to reconstruct or replace it with another of like utility.

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        Abgenix Biopharma's Selected Lymphocyte Antibody Method (SLAM) technology is patented in the United States with applications outstanding in Canada and Europe. This technology is technologically feasible and has been licensed to a customer. The existing technology of IntraImmune is also patented and has been determined to be technologically feasible.

        The in-process development activities of Abgenix Biopharma included two distinct research projects. The Company determined the amounts to be allocated to in-process technology based on whether technological feasibility had been achieved and whether there was any alternative future use for the technology. The Company concluded that the in-process technology had no alternative future use after taking into consideration the potential for both usage of the technology in different products and for resale of the technology. The rate utilized to discount the net cash flows to their present value was 40%, for the in-process research and development. Hesed Biomed and IntraImmune had no in-process development activities at the time of acquisition. The purchase of Hesed Biomed was deemed to be the purchase of technology and not a business, therefore no allocation of the purchase price was made to goodwill. Beginning January 1, 2002, upon the adoption of SFAS No. 142, the Company no longer amortizes goodwill, but will perform impairment tests annually, or earlier if indicators of potential impairment exist.

        The purchase price allocations for Hesed Biomed, Abgenix Biopharma and IntraImmune were as follows:

 
   Hesed Biomed
   Abgenix Biopharma
   IntraImmune
 
   Amount
   Useful
Lives
   Amount
   Useful
Lives
   Amount
   Useful
Lives
 
   (dollars in thousands)
Purchase price allocation:                              
  Tangible net assets (liabilities)   $ 556   n/a   $ 5,508   n/a   $ (704 ) n/a
  Intangible assets acquired:                              
    Existing technology     21,040   15 years     35,851   15 years     2,700   15 years
    Assembled workforce     —   n/a     195   3 years     —   n/a
    Goodwill     —   n/a     30,323   15 years     7,257   15 years
  In-process research and development     —   n/a     5,215   n/a     —   n/a
   
     
     
   
Total purchase price allocation   $ 21,596       $ 77,092       $ 9,253    
   
     
     
   

Pro Forma Unaudited Financial Information for All Acquisitions

        The following unaudited pro forma financial information presents the results of operations of the Company, Abgenix Biopharma, and IntraImmune for the year ended December 31, 2000, as if the acquisitions had been consummated as of the beginning of 2000. The purchase of Hesed Biomed was accounted for as the purchase of technology and therefore pro forma financial information for prior periods is not presented.

 
   December 31, 2000
  
 
   (in thousands)

  
Total revenues   $ 60,301  
Net loss   $ (16,639 )
Net loss per share   $ (0.21 )

        The pro forma financial information includes the effect of the amortization of intangible assets acquired, using a 3-year life for the assembled workforce and a 15-year life for the existing technology and goodwill. Due to their non-recurring nature, the in-process research and development charge attributable to the Abgenix Biopharma transaction has been excluded from the pro forma financial information. The pro forma condensed financial information is presented for illustrative purposes only.

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This information is not necessarily indicative of the Company's financial position or results of operations for future periods or the results that actually would have been realized had the acquisition and certain transactions occurred as of the beginning of the periods presented.

3.    INVESTMENTS

Marketable Securities

        The following is a summary of marketable securities at December 31, 2002 and 2001:

 
   2002
   2001
 
   Amortized
Cost
   Unrealized
Gain/(Loss)
   Estimated
Fair Value
   Amortized
Cost
   Unrealized
Gain/(Loss)
   Estimated
Fair Value
 
  
(in thousands)

  
(in thousands)
U.S. corporate obligations   $ 53,749   $ 1,069   $ 54,818   $ 166,352   $ 2,998   $ 169,350
Non-U.S. corporate obligations     6,152     120     6,272     —     —     —
Asset-backed securities     48,420     1,105     49,525     86,690     1,235     87,925
Commercial paper     1,544     1     1,545     84,159     152     84,311
Obligations of the U.S. government and its agencies     72,795     1,538     74,333     61,448     489     61,937
Non-U.S. government obligations     7,026     (1 )   7,025     —     —     —
Municipal obligations     1,500     —     1,500     14,700     —     14,700
Money market funds     204,641     —     204,641     74,693     —     74,693
Marketable equity securities     12,723     324     13,047     80,000     (15,920 )   64,080
   
 
 
 
 
 
Total   $ 408,550   $ 4,156   $ 412,706   $ 568,042   $ (11,046 ) $ 556,996
   
 
 
 
 
 
Classified as:                                    
  Cash equivalents               $ 203,615               $ 92,266
  Marketable securities                 188,575                 394,070
  Deposits and other assets                 7,469                 6,580
  Long-term investments                 13,047                 64,080
               
             
                $ 412,706               $ 556,996
               
             

        The Company's available for sale debt securities have the following maturities at December 31, 2002:

Due in one year or less   $ 173,349
Due after one year but less than five years     21,669
   
    $ 195,018
   

        The unrealized gains and losses as of December 31, 2002 and 2001 were reported as accumulated other comprehensive income/(loss), which is a separate component of stockholders' equity. There was no material gross realized gain or loss in 2002, 2001 and 2000.

Other Investment

        In August 2001, the Company entered a $16.8 million loan agreement. The first disbursement of $14.0 million was made in October 2001 and the final disbursement of $2.8 million was made in July 2002. The amount is included in deposits and other assets on the balance sheet. The loan bears interest at a rate of 8.5% per year and is payable monthly. The loan matures in August 2011 and the entire principal balance and accrued interest are due on the maturity date.

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4.    COMPREHENSIVE INCOME/(LOSS)

        Other comprehensive gains/(losses) consist of unrealized gains or losses on available-for-sale securities. The components of comprehensive loss, net of tax, were as follows:

 
   December 31,
  
 
   2002
   2001
   2000
  
 
   (in thousands)

  
Net loss   $ (208,898 ) $ (60,856 ) $ (8,793 )
Other comprehensive income (loss):                    
  Unrealized holding losses arising during period     (52,075 )   (10,341 )   (14,718 )
  Less: reclassification adjustment for losses recognized in net loss     67,277     —     —  
   
 
 
 
Net unrealized gains (losses) on securities     15,202     (10,341 )   (14,718 )
   
 
 
 
Comprehensive loss   $ (193,696 ) $ (71,197 ) $ (23,511 )
   
 
 
 

5.    IDENTIFIED INTANGIBLE ASSETS

        During the year ended December 31, 2002, no identified intangible assets were acquired, impaired or written off.

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

 
   Gross
Assets
   Accumulated
Amortization
   Net
As of December 31, 2002:                  
Acquisition-related developed technology   $ 106,183   $ 16,612   $ 89,571
Other intangible assets     3,016     238     2,778
   
 
 
Identified intangible assets   $ 109,199   $ 16,850   $ 92,349
   
 
 

As of December 31, 2001:
 
 
 
 
 
 
 
 
 
Acquisition-related developed technology   $ 106,183   $ 9,546   $ 96,637
Other intangible assets     3,016     127     2,889
   
 
 
Identified intangible assets   $ 109,199   $ 9,673   $ 99,526
   
 
 

        Amortization of acquisition-related intangibles was $7.1 million, $6.0 million and $3.5 million for 2002, 2001 and 2000, respectively. Amortization of other intangible assets was $185,000, $53,000 and zero for 2002, 2001 and 2000, respectively. All of the Company's acquired identified intangibles other than goodwill are subject to amortization.

        Expected amortization expense related to identified intangible assets for each of the fiscal years after December 31, 2002 is as follows (in thousands):

 
   Year Ending December 31,
    
    
 
   2003
   2004
   2005
   2006
   2007
   Thereafter
   Total
Acquisition-related intangibles   $ 7,076   $ 7,076   $ 7,077   $ 7,077   $ 7,076   $ 54,189   $ 89,571
Other intangible assets   $ 182   $ 182   $ 183   $ 183   $ 182   $ 1,866   $ 2,778

6.    CONVERTIBLE SUBORDINATED NOTES

        In March 2002, the Company issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of Abgenix common stock at a

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conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5% and the Company is obligated to pay interest by March 15 and September 15 of each year. The Company made its first payment of $3.7 million on September 11, 2002. The notes will mature on March 15, 2007, and are redeemable at the Company's option on or after March 20, 2005, or earlier if the price of the Company's common stock exceeds specified levels. In addition, the holders of the notes may require the Company to repurchase the notes if the Company undergoes a change in control. As of December 31, 2002, the fair value of the notes was $137.0 million. The fair value was based on the quoted market price at December 31, 2002.

7.    RESTRUCTURING CHARGES

        In October 2002, the Company announced a restructuring plan, which consisted primarily of a 15% reduction in employees. A restructuring charge of $1.8 million was recorded in 2002 to account for severance, medical and other benefits associated with this restructuring. As of December 31, 2002, approximately $1.1 million of severance benefits were accrued and are expected to be paid to terminated employees over the next nine months.

8.    IMPAIRMENT OF INVESTMENTS

        The Company purchased an aggregate amount of $80.0 million of common stock of CuraGen Corporation and ImmunoGen, Inc. as strategic investments. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as available-for-sale and are reported at fair value on the Company's balance sheet. Unrealized holding gains and losses for available-for-sale securities generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under the Company's accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. During 2002, the Company's investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months, and therefore the Company deemed that an impairment of these investments had occurred. Accordingly, the Company recorded impairment charges totaling $67.3 million in the year ended December 31, 2002, which were based on the differences between the market price and cost basis or new adjusted cost basis of these securities. As of December 31, 2002, these investments were recorded at fair value in long-term investments on the balance sheet, and any net unrealized holding gains and losses, to the extent not recognized as an impairment charge as discussed above, were reported as a component of stockholders' equity. If the Company deems these investments further impaired at the end of any future period, the Company may incur an additional impairment charge on these investments.

        In addition, the Company invested $15.0 million in MDS Proteomics Inc., a privately held company, in connection with the Company's collaboration with that company. Because MDS Proteomics is a private company and its securities are not publicly traded, the value of this investment is inherently more difficult to estimate than an investment in a publicly traded company. In 2002, the Company estimated that the value of its investment had declined to $7.9 million and that an impairment of this investment had occurred. Accordingly, the Company recorded an impairment charge of $7.1 million in the year ended December 31, 2002. The amount of the charge was based on the difference between the estimated value as determined by Abgenix management and the Company's original cost basis. As of December 31, 2002, the cost basis of this investment reflected the new estimated value at June 30, 2002, which is recorded in long-term investments on the balance sheet. If the Company deems its investment in MDS Proteomics further impaired at the end of any future period, the Company may incur an additional impairment charge on this investment.

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9.    BALANCE SHEET COMPONENTS

 
   December 31,
  
 
   2002
   2001
  
 
   (in thousands)

  
Accounts receivable:              
  Accounts receivable   $ 3,457   $ 3,704  
  Less: Allowances     (817 )   (250 )
   
 
 
    Accounts receivable, net   $ 2,640   $ 3,454  
   
 
 

Property and equipment:
 
 
 
 
 
 
 
  Furniture, machinery and equipment   $ 59,499   $ 25,843  
  Leasehold improvements     72,418     14,549  
   
 
 
      131,917     40,392  
  Less: Accumulated depreciation     (22,968 )   (10,073 )
  Construction-in-progress     135,470     56,148  
   
 
 
    Property and equipment, net   $ 244,419   $ 86,467  
   
 
 

Accrued liabilities:
 
 
 
 
 
 
 
  Accrued product development costs   $ 2,856   $ 2,757  
  Accrued employee benefits     1,447     3,019  
  Accrued clinical costs     1,388     5,991  
  Other accrued liabilities     3,216     1,706  
   
 
 
    Accrued liabilities   $ 8,907   $ 13,473  
   
 
 

10.  RELATED PARTY TRANSACTIONS

        At December 31, 2002 and 2001, the Company had notes receivable from certain officers and employees totaling $1.3 million and $875,000, respectively, which are included in deposits and other assets on the balance sheet. The notes were issued in connection with employee relocation agreements. The notes begin to accrue interest beginning from July 2003 through June 30, 2008 and bear interest at rates ranging from 1.19% to 6.70%. The notes are secured by personal assets, and have due dates ranging from June 30, 2008 through June 30, 2012, or 30 days from the date of termination of employment, if earlier.

11.  COMMITMENTS

Facility Leases

        The Company has several operating leases for its office, research and development and manufacturing facilities in California and British Columbia, Canada. The leases expire between 2010 and 2015, most of them with options to extend for nine to ten years. Future minimum payments under noncancelable operating leases at December 31, 2002 are as follows (in thousands):

Year ending December 31,      
  2003   $ 12,471
  2004     13,214
  2005     13,661
  2006     14,121
  2007     14,644
  Thereafter     86,867
   
Total lease payments   $ 154,978
   

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        Rent expense was $13.6 million, $8.8 million and $2.5 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Property and Equipment

        The Company contracted with developers and designers for the construction of its new manufacturing facility. The facility was leased in 2000 (see above). As of December 31, 2002, the Company had committed approximately $9.8 million related to completing construction and the purchase of equipment for this new facility.

Letters of Credit and Capital Lease

        In March 2000 and February 2001, the Company obtained stand-by letters of credit for $2.0 million and $3.0 million, respectively, from a commercial bank as security for its obligations under two facility leases. These were increased in January 2002 to $2.5 and $3.2 million, respectively, in connection with amendments to the Company's facility leases. In September 2001, the Company obtained a stand-by letter of credit for 1.0 million Canadian dollars from a commercial bank as security for its obligations under a facility lease in Canada. The letters of credit are secured by $7.0 million of cash and marketable securities in an investment account that the Company must maintain for the term of the lease. The investment account is classified as deposits and other assets on the balance sheet.

        In March 1997, the Company entered into a lease agreement with a financing company under which the Company financed $1.9 million of its laboratory and office equipment. The last lease schedule was paid in full in September 2001 and all of the equipment was purchased and owned by the Company as of December 31, 2001. The interest rates ranged from 12.5% to 13.0% as of December 31, 2000.

License and Collaboration Agreements

        In 1997, the Company entered into a license agreement for exclusive worldwide rights to commercialize one of the Company's product candidates. The Company paid an initial license fee and is further obligated to pay an annual maintenance fee of $50,000, to commit at least $1.0 million annually to the development of the product candidate, until it receives regulatory approval in any country and to pay royalties on potential product sales. The Company is also obligated to issue 100,000 shares of its common stock upon the submission of a Product License Application for the first indication of the product.

        In July and August 2000, the Company entered into separate collaboration agreements with Immunex and SangStat to develop and commercialize two of the Company's product candidates. Under the terms of the agreements, the Company has agreed to share responsibility for product development and to share equally in the costs of developing and commercializing the product candidates. Development costs are determined by the respective development plans agreed upon by the joint steering committees. In February 2003, the Company and SangStat announced that because the Phase 2/3 clinical trial for the product candidate did not meet its primary endpoint the Company and SangStat would discontinue further development of the product candidate.

        In November 2001, the Company entered into an agreement with Gliatech under which Gliatech granted the Company an exclusive world-wide license to develop and commercialize certain fully human antibody therapeutic candidates. The Company paid an initial license fee and is further obligated to pay research fees of $4.1 million over the two-year period ending October 2003. The Company is also obligated to make payments to Gliatech for achievement of certain development milestones and to pay royalties based on potential product sales, if any.

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Product Manufacturing

        In December 2000, the Company entered into a five-year manufacturing supply agreement with a third party, Lonza Biologics (Lonza) for the manufacture of its product candidates. Under the agreement, Lonza will provide a cell culture production suite within one of its facilities, for the Company's exclusive use. The agreement includes an option to extend the initial five-year term. The dedicated cell culture production suite with associated purification capacity underwent refurbishment and was made available to the Company in the third quarter of 2001. Under the agreement, at the time the suite was made available, payments of approximately $3.0 million plus a 15% raw material charge became due quarterly for five years and certain performance fees may be due annually. In May 2000, prior to the negotiation of this manufacturing supply agreement, the Company paid Lonza $3.8 million for the option to reserve manufacturing capacity.

        In July 2001, the Company entered into an agreement giving it the right to enter into exclusive negotiations with Lonza for an additional manufacturing supply agreement for large-scale manufacturing. In July 2002, after evaluation of its capacity needs, the Company notified Lonza that it had decided to discontinue negotiations, and therefore expensed the option fee of $1.7 million, which was previously capitalized and recorded in deposits and other assets on the balance sheet.

12.  STOCKHOLDERS' EQUITY

Common Stock

        Initial Public Offering—In July 1998, the Company completed an initial public offering of 10,000,000 shares of its common stock to the public, at a price of $2.00 per share. On July 27, 1998, the Company's underwriters exercised an option to purchase 1,500,000 additional shares of common stock at a price of $2.00 per share to cover over-allotments. The Company received net proceeds from the offerings of approximately $20.1 million. Upon the closing of the initial public offering, each of the outstanding 31,377,408 shares of redeemable convertible preferred stock was automatically converted into one share of common stock.

        Genentech—In January 1999, Genentech acquired 1,981,424 shares of the Company's common stock for an aggregate purchase price of $8.0 million.

        Follow-on Public Offering—In March 1999, the Company completed a follow-on public offering of 12,000,000 shares of its common stock to the public, at a price of $3.75 per share. On April 7, 1999 the Company's underwriters exercised an option to purchase 832,000 additional shares of common stock at a price of $3.75 per share to cover over-allotments. The Company received net proceeds from the offerings of approximately $44.5 million.

        Private Placement—In November 1999, the Company completed a private placement of 7,112,000 shares of its common stock to qualified institutional and other accredited investors at a net price of $10.50 per share The Company received net proceeds of $71.1 million.

        Follow-on Public Offering—In February 2000, the Company completed a follow-on public offering in which the Company sold 8,640,000 shares and a stockholder sold 3,360,000 shares of the Company's common stock to the public at a price of $52.50 per share. On February 29, 2000, the Company's underwriters exercised an option to purchase 1,800,000 additional shares, of which 1,296,000 shares were sold by the Company and 504,000 shares were sold by a stockholder at a price of $52.50 per share. The Company received net proceeds from the offerings of $496.5 million after the underwriters' discount and estimated costs of offering.

        Private Placement—In November 2000, the Company completed a private placement of 3,300,000 shares of its common stock to qualified institutional and other accredited investors at a net price of $70.00 per share. The Company received net proceeds of $221.0 million.

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        Acquisition for Common Stock—In November 2001, the Company acquired Hesed Biomed in exchange for 475,930 shares of common stock, valued at $29.79 per share. (See Note 2 above and Warrants below.)

Stockholder Rights Plan

        On June 2, 1999, our Board of Directors declared a dividend of one right, or Right, to purchase one one-thousandth share of our Series A Participating Preferred Stock, or Series A Preferred, for each of our outstanding shares of common stock, the Common Shares. On June 14, 1999, we entered into a Preferred Shares Rights Agreement, or Rights Agreement, with ChaseMellon Shareholder Services, L.L.C., the predecessor to Mellon Investor Services LLC, as Rights Agent, which was amended and restated on November 19, 1999, and on May 9, 2002. The dividend was payable to stockholders of record as of the close of business on the record date, June 14, 1999. As amended, each Right entitles the registered holder to purchase from us one one-thousandth of a share of Series A Preferred at an exercise price of $175.00, the Purchase Price. Each one one-thousandth of a share of Series A Preferred has rights and preferences substantially equivalent to those of one Common Share.

        The Rights will separate from the Common Shares and become exercisable upon the earlier of: (i) 10 days following a public announcement that a person or group has acquired 15% or more of the outstanding Common Shares, or (ii) 10 business days (or such later date as may be determined by our Board of Directors) following the announcement of a tender offer or exchange offer for 15% or more of the Common Shares. Unless the Rights are earlier redeemed by our Board of Directors at a price of $0.01 per Right, if a person or group acquires 15% or more of the Common Shares, each Right will entitle its holder to receive, upon exercise, Common Shares having a value equal to two times the Purchase Price. Similarly, unless the Rights are earlier redeemed, in the event that, after a person or group becomes the beneficial owner of 15% or more of the Common Shares, (i) the Company is acquired in a merger, or (ii) 50% or more of the Company's assets or earning power are sold, proper provision must be made so that each holder of a Right which has not been exercised will have the right to receive, upon exercise, shares of common stock of the acquiring company having a value equal to two times the Purchase Price. After the acquisition of 15% or more of the Common Shares but prior to such a merger or sale, the Board of Directors may exchange each Right for one Common Share.

Warrants

        In connection with loan guarantees it received in 1997, the Company issued warrants to purchase a total of 486,668 shares of Abgenix common stock, at an exercise price of $1.50 per share. The original terms were such that the warrants were exercisable immediately and expired in three years. The fair value of the above warrants was determined at the time to be insignificant for accounting purposes. These warrants were exercised in January 2000.

        In connection with the acquisition of Hesed Biomed in November 2001, the Company assumed obligations under outstanding warrants for the purchase of 18,731 shares of common stock. At December 31, 2002, 16,051 shares of these warrants were outstanding and expire on various dates from October 2005 through February 2010. (See Note 2.)

13.  STOCK OPTION AND BENEFIT PLANS

Incentive Stock Plans

        The Company has three stock option plans, which allow for the granting of incentive and non-qualified stock options to employees, outside directors and consultants of the Company. There are 26,365,000 shares of common stock authorized for issuance under the plans. The Company grants shares of common stock for issuance under the plans at no less than the fair value of the stock. Options granted under the plans generally have a term of ten years and vest over four years.

86


        Information with respect to activity under the plans is as follows:

 
   Option Shares
Available for
Grant
   Option Shares
Outstanding
   Weighted
Average
Exercise Price
Balances at December 31, 1999   6,603,064   7,956,308   $ 3.06
Authorized   1,200,000   —     —
  Options granted   (5,610,930 ) 5,610,930   $ 48.89
  Options exercised   —   (2,799,324 ) $ 2.32
  Options canceled   256,551   (256,551 ) $ 16.10
   
 
     
Balances at December 31, 2000   2,448,685   10,511,363   $ 27.40
Authorized   3,000,000   —     —
  Options granted   (3,616,917 ) 3,616,917   $ 33.33
  Options exercised   —   (888,288 ) $ 3.60
  Options canceled   416,907   (416,907 ) $ 35.55
   
 
     
Balances at December 31, 2001   2,248,675   12,823,085   $ 30.46
Authorized   4,000,000   —     —
  Options granted   (1,669,541 ) 1,669,541   $ 19.15
  Options exercised   —   (548,367 ) $ 1.32
  Options canceled   1,185,278   (1,185,278 ) $ 39.66
   
 
     
Balances at December 31, 2002   5,764,412   12,758,981   $ 29.38
   
 
     

        In addition to the amounts disclosed in the table above, in June 2001, the Company granted and immediately canceled 159,413 options under the 1999 stock option plan in relation to the cash buy-out of outstanding options held by Abgenix Biopharma employees.

        The following table summarizes information about options outstanding at December 31, 2002:

 
   Options Outstanding
   Options Exercisable
Range of
Exercise Prices
   Number
of Options
   Weighted
Average
Exercise Price
   Remaining
Contractual
Life, in Years
   Number
of Options
   Weighted
Average
Exercise Price
$  0.15 - $  2.50   1,169,792   $ 0.91   4.49   1,169,792   $ 0.91
$  3.59 - $  9.75   2,559,375   $ 5.68   6.63   2,111,155   $ 5.24
$11.00 - $31.81   3,717,292   $ 26.74   8.12   1,803,737   $ 29.33
$32.28 - $42.00   3,168,433   $ 35.99   7.85   1,862,891   $ 36.22
$44.78 - $59.93   797,077   $ 49.01   7.86   485,275   $ 49.33
$75.17 - $80.81   1,347,012   $ 79.22   7.66   826,794   $ 79.23
   
           
     
    12,758,981   $ 29.38   7.36   8,259,644   $ 26.87
   
           
     

        From inception to December 31, 1997, options to purchase a total of 7,446,976 shares of common stock were granted at prices ranging from $0.15 to $1.25 per share. Deferred compensation of $1,776,000 was recorded for these option grants based on the deemed fair value of common stock (ranging from $0.30 to $1.63 per share). In the first quarter of 1998, the Company granted options to purchase 1,040,700 shares of common stock at $1.50 per share for which deferred compensation of approximately $520,000 was recorded based on the deemed fair value of common stock at $2.00 per share. During the second, third and fourth quarters of 1998, the Company granted an additional 205,504 options to employees to purchase shares of common stock at prices ranging from $1.25 to $2.50 per share. No deferred compensation expense was recorded as the options were granted at the then current market price of the stock on the date of the grant. The Company amortized $234,000, $436,000 and $500,000 of the deferred compensation balance during the years ended December 31, 2001, 2000,

87


and 1999 respectively. The deferred compensation was fully amortized in 2001 and therefore there was no amortization of deferred compensation in 2002.

        Additionally, the Company granted 18,000 and 6,000 options to purchase shares of common stock in 2000 and 1999, respectively to independent consultants. The prices of the options range from $2.13 to $79.75 per share. No options were granted to consultants in 2002 or 2001. The options granted in 2000 were issued fully vested. The prior options vest over periods ranging from one to two years. Compensation expense related to these options, of $595,000 and $666,000 was recorded in 2000 and 1999, respectively.

Pro Forma Information

        Pro forma information regarding net loss and net loss per share is required by SFAS No. 123, and has been provided in Note 1. The information has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 2002, 2001 and 2000, respectively: risk-free interest rate of 3.07%, 4.61% and 5.08%; no dividend yield in 2002, 2001 or 2000; volatility factor of 1.05, 1.00 and 1.10; and an expected life of the option of 5.54 years in 2002, 5.73 years in 2001 and 6.0 years in 2000. These same assumptions were applied in the determination of the option values related to stock options granted to non-employees, except for the option life for which the term of the consulting contracts, 1 to 5 years, were used. The value has been recorded in the financial statements.

        The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

        The weighted-average fair values of options granted during the years ended December 31, 2002, 2001 and 2000 were $15.34, $27.15 and $40.55 per share. All options granted in 1997 and 1996 were granted at exercise prices below the deemed fair value of the underlying common stock. All options granted after 1997 were granted at exercise prices at the then current market value of the stock.

Employee Stock Purchase Plans

        The Company's employee stock purchase plan enables eligible employees to purchase common stock at 85% of the closing sale price on the first or the last day of each 6 month purchase period, whichever is lower. Employees may authorize periodic payroll deductions of up to 15% of eligible compensation for common stock purchases, with certain limitations. The number of shares which may be issued under the plan is 1,000,000, plus an annual increase equal to the lesser of 1,000,000, 1% of the Company's outstanding capitalization or a lesser amount determined by the Board. The maximum number of shares that can be issued over the 10-year term of the plan is 10,000,000. As of December 31, 2002, 2,096,092 shares had been authorized under the plan and 738,111 shares had been issued.

        The Company's Canadian employee stock purchase plan enables certain eligible employees to purchase common stock at the average market price on the first or the last day of each 6 month purchase period, whichever is lower. Eligible employees may authorize periodic payroll deductions of up to 15% of eligible compensation for common stock purchases, with certain limitations. The number of shares that may be issued under this plan is 200,000. As of December 31, 2002, 200,000 shares had been authorized under this plan and no shares had been issued.

88


Benefit Plan

        The Company has available a 401(k) retirement plan in the United States. Eligible employees may contribute up to 15% of their compensation. The Company does not match contributions and therefore no expense has been recorded. The Company also has available a retirement plan in Canada. Eligible employees may contribute an unlimited amount of their compensation.

14.  INCOME TAXES

        Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets as of December 31, 2002 and 2001 are as follows:

 
   December 31,
  
 
   2002
   2001
  
 
   (in thousands)

  
Deferred tax assets:              
  Net operating loss carryforwards   $ 110,400   $ 70,800  
  Investment reserve     29,800     —  
  Capitalized research and development     12,500     6,900  
  Research credit carryforwards     22,000     15,900  
  Other     16,200     10,300  
   
 
 
Total deferred tax assets     190,900     103,900  
Valuation allowance     (176,700 )   (89,700 )
   
 
 
    Net deferred tax assets     14,200     14,200  
Deferred tax liabilities:              
  Purchased intangibles     (13,200 )   (14,200 )
  Other     (1,000 )   —  
   
 
 
    Net deferred taxes   $ —   $ —  
   
 
 

        Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $87.0 million and $38.2 million during the years ended December 31, 2002 and 2001, respectively. Approximately $45.8 million of the valuation allowance for deferred tax assets relates to benefits of stock option deductions, the benefit of which will be credited to equity when realized. As of December 31, 2002, the Company had net operating loss carryforwards for federal income tax purposes of approximately $314.0 million, which expire in the years 2006 through 2022, and federal research and development tax credits of approximately $12.8 million, which expire in the years 2006 through 2022. Utilization of the Company's net operating loss and tax credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of these carryforwards before utilization.

15.  SEGMENT INFORMATION

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

        Revenues from four customers represented 44%, 17%, 12%, and 10%, of contract revenues for the year ended December 31, 2002. Revenues from four customers represented 31%, 25%, 14%, and 12%, of contract revenues for the year ended December 31, 2001. Revenues from five customers represented 38%, 13%, 12%, 11%, and 11%, of contract revenues for the year ended December 31, 2000.

89


16.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

        Unaudited quarterly financial information is as follows:

 
   Quarter Ended
  
 
   Mar 31,
   June 30,
   Sep 30,
   Dec 31,
  
 
   (in thousands, expect per share data)

  
2001                          
Contract revenues   $ 4,176   $ 8,354   $ 4,073   $ 17,461  
Interest and other income   $ 10,306   $ 7,664   $ 6,292   $ 5,279  
   
 
 
 
 
Total revenues   $ 14,482   $ 16,018   $ 10,365   $ 22,740  
   
 
 
 
 
Net loss   $ (7,644 ) $ (14,787 ) $ (22,641 ) $ (15,785 )
   
 
 
 
 
Basic and diluted net loss per share   $ (0.09 ) $ (0.17 ) $ (0.26 ) $ (0.18 )
   
 
 
 
 

2002
 
 
 
 
 
 
 
 
 
 
 
 
 
Contract revenues   $ 10,998   $ 2,501   $ 2,635   $ 3,158  
Interest and other income   $ 5,271   $ 5,121   $ 5,068   $ 4,685  
   
 
 
 
 
Total revenues   $ 16,269   $ 7,622   $ 7,703   $ 7,843  
   
 
 
 
 
Impairment of investments   $ (34,653 ) $ (37,498 ) $ —   $ (2,234 )
   
 
 
 
 
Net loss   $ (56,451 ) $ (79,709 ) $ (33,855 ) $ (38,883 )
   
 
 
 
 
Basic and diluted net loss per share   $ (0.65 ) $ (0.92 ) $ (0.39 ) $ (0.44 )
   
 
 
 
 

90


Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

        Not applicable.


PART III

Item 10. Directors and Executive Officers of the Registrant

        The information required by this item concerning the Company's directors is incorporated by reference to the Company's Proxy Statement related to the 2003 Annual Meeting of Stockholders (the 2003 Proxy Statement.)

        The information required by this item concerning the Company's executive officers is set forth in Part I of this Form 10-K.


Item 11. Executive Compensation

        The information required by this item is incorporated by reference to the Company's 2003 Proxy Statement.


Item 12. Security Ownership of Certain Beneficial Owners and Management

        The information required by this item is incorporated by reference to the Company's 2003 Proxy Statement.


Item 13. Certain Relationships and Related Transactions

        The information required by this item is incorporated by reference to the Company's 2003 Proxy Statement.


Item 14. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

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

91


PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports of Form 8-K.

(a)
The following documents are filed as part of this Report:

1.
Financial Statements

Number
   Description
3.1   Amended and Restated Certificate of Incorporation of Abgenix, as currently in effect.

3.2
(30)
Amended and Restated Bylaws of Abgenix, as currently in effect.

4.1
(1)
Specimen Common Stock Certificate.

4.2
(33)
Indenture dated March 4, 2002, between State Street Bank and Trust Company of California, N.A. and Abgenix, Inc.

4.3
(33)
Registration Rights Agreement dated March 4, 2002 between Credit Suisse First Boston Corporation, Banc of America Securities LLC and Robertson Stephens, Inc. and Abgenix, Inc.

4.4
(31)
Amended and Restated Preferred Shares Rights Agreement, dated as of May 9, 2002, between Abgenix, Inc. and Mellon Investor Services, LLC, including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively.

4.5
(1)
Amended and Restated Stockholder Rights Agreement dated January 12, 1998 among Abgenix and certain holders of Abgenix's capital stock.

4.6
(25)
Form of Stock Purchase Agreement between Abgenix, Inc. and the purchasers in the private placement in November 2000.

10.1
(1)
Form of Indemnification Agreement between Abgenix and each of its directors and officers.

10.2
 
Amended and Restated 1996 Incentive Stock Plan.

10.3
(1)
1998 Employee Stock Purchase Plan and form of agreement thereunder.

 
 
 

92


10.4
 
Amended and Restated 1998 Director Option Plan.

10.5
(32)
Amended and Restated 1999 Nonstatutory Stock Option Plan.

10.6
(32)
Canadian Employee Stock Purchase Plan.

10.7
(3)
Joint Venture Agreement dated June 12, 1991 between Cell Genesys and JT Immunotech USA Inc.

10.8
(6)
Amendment No. 1 dated January 1, 1994 to Joint Venture Agreement.

10.9
(9)
Amendment No. 2 dated June 28, 1996 to Joint Venture Agreement.

10.10
(3)
Collaboration Agreement dated June 12, 1991 among Cell Genesys, Xenotech, Inc. and JT Immunotech USA Inc.

10.11
(5)
Amendment No. 1 dated June 30, 1993 to Collaboration Agreement.

10.12
(13)
Amendment No. 2 dated January 1, 1994 to Collaboration Agreement.

10.13
(7)
Amendment No. 3 dated July 1, 1995 to Collaboration Agreement.

10.14
(9)
Amendment No. 4 dated June 28, 1996 to Collaboration Agreement.

10.15
(2)
Amendment No. 5 dated November 1997 to Collaboration Agreement.

10.16
(3)
Limited Partnership Agreement dated June 12, 1991 among Cell Genesys, Xenotech, Inc. and JT Immunotech USA Inc.

10.17
(6)
Amendment No. 2 dated January 1, 1994 to Limited Partnership Agreement.

10.18
(8)
Amendment No. 3 dated July 1, 1995 to Limited Partnership Agreement.

10.19
(10)
Amendment No. 4 dated June 28, 1996 to Limited Partnership Agreement.

10.20
(4)
Field License dated June 12, 1991 among Cell Genesys, JT Immunotech USA Inc. and Xenotech, L.P.

10.21
(10)
Amendment No. 1 dated March 22, 1996 to Field License.

10.22
(10)
Amendment No. 2 dated June 28, 1996 to Field License.

10.23
(3)
Expanded Field License dated June 12, 1991 among Cell Genesys, JT Immunotech USA Inc. and Xenotech, L.P.

10.24
(10)
Amendment No. 1 dated June 28, 1996 to Expanded Field License.

10.25
(2)
Amended and Restated Anti-IL-8 License Agreement dated March 19, 1996 among Xenotech, L.P., Cell Genesys and Japan Tobacco Inc.

10.26
(9)
Master Research License and Option Agreement dated June 28, 1996 among Cell Genesys, Japan Tobacco Inc. and Xenotech, L.P.

10.27
(2)
Amendment No. 1 dated November 1997 to the Master Research License and Option Agreement.

10.28
(2)
Stock Purchase and Transfer Agreement dated July 15, 1996 by and between Cell Genesys and Abgenix.

10.29
(1)
Governance Agreement dated July 15, 1996 between Cell Genesys and Abgenix.

10.30
(1)
Amendment No. 1 dated October 13, 1997 to the Governance Agreement.

 
 
 

93


10.31
(1)
Amendment No. 2 dated December 22, 1997 to the Governance Agreement.

10.32
(2)
Gene Therapy Rights Agreement effective as of November 1, 1997 between Abgenix and Cell Genesys.

10.33
(2)
Patent Assignment Agreement dated July 15, 1996 by Cell Genesys in favor of Abgenix.

10.34
(11)
Lease Agreement dated July 31, 1996 between John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Arrillaga Family Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended, and Abgenix.

10.35
(2)
License Agreement dated February 1, 1997 between Ronald J. Billing, Ph.D. and Abgenix.

10.36
(12)
Release and Settlement Agreement dated March 26, 1997 among Cell Genesys, Abgenix, Xenotech, L.P., Japan Tobacco Inc. and GenPharm International, Inc.

10.37
(12)
Cross License Agreement effective as of March 26, 1997, among Cell Genesys, Abgenix, Xenotech, L.P., Japan Tobacco Inc. and GenPharm International, Inc.

10.38
(12)
Interference Settlement Procedure Agreement, effective as of March 26, 1997, among Cell Genesys, Abgenix, Xenotech, L.P., Japan Tobacco Inc. and GenPharm International, Inc.

10.39
(2)
Agreement dated March 26, 1997 among Xenotech, L.P., Xenotech, Inc., Cell Genesys, Abgenix, Japan Tobacco Inc. and JT Immunotech USA Inc.

10.40
(2)
Contractual Research Agreement dated December 22, 1997 between Pfizer, Inc. and Abgenix.

+10.41
(22)
Amendment No. 1 dated May 26, 1998 to Contractual Research Agreement between Abgenix and Pfizer, Inc.

+10.42
(22)
Amendment No. 2 dated October 22, 1998 to Contractual Research Agreement between Abgenix and Pfizer, Inc.

10.43
(2)
Contractual Research Agreement effective as of January 28, 1998 between Schering-Plough Research Institute and Abgenix.

10.44
(16)
Amendment No. 2 effective January 28, 1999 to Contractual Research Agreement between Schering-Plough Research Institute and Abgenix.

10.45
(16)
Amendment No. 3 effective February 12, 1999 to the Contractual Research Agreement between Schering-Plough Research Institute and Abgenix.

10.46
(1)
Excerpts from the Minutes of a Meeting of the Board of Directors of Abgenix, dated October 23, 1996.

10.47
(1)
Excerpts from the Minutes of a Meeting of the Board of Directors of Abgenix, dated October 22, 1997.

10.48
(2)
Exclusive Worldwide Product License dated November 1997 between Xenotech, L.P. and Abgenix.

10.49
(2)
Research License and Option Agreement effective as of April 6, 1998 between Abgenix and Genentech, Inc.

 
 
 

94


10.50
(2)
Amendment No. 1 effective as of June 18, 1998 to Research License and Option Agreement between Abgenix and Genentech, Inc.

10.51
(14)
Research Collaboration Agreement dated July 15, 1998 between Millennium BioTherapeutics, Inc. and Abgenix.

+10.52
(22)
Research Collaboration Agreement dated September 29, 1998 between Millennium BioTherapeutics, Inc. and Abgenix.

10.53
(22)
Amendment No. 1 effective as of November 29, 1998 to the Research Collaboration Agreement between Millennium BioTherapeutics, Inc. and Abgenix.

+10.54
(22)
Research License and Option Agreement dated October 30, 1998 between Millennium BioTherapeutics, Inc. and Abgenix.

10.55
(16)
Research Collaboration Agreement dated December 22, 1998 between Centocor, Inc. and Abgenix.

+10.56
(22)
Memorandum of Understanding between Research Corporation Technologies, Inc. and Abgenix.

+10.57
(22)
Research License and Option Agreement dated January 4, 1999 between AVI BioPharma, Inc. and Abgenix.

10.58
(16)
Multi-Antigen Research License and Option Agreement dated January 27, 1999 between Genentech and Abgenix.

+10.59
(21)
Multi-Antigen Research License and Option Agreement by and between Abgenix, Inc. and Japan Tobacco Inc. effective December 31, 1999.

+10.60
(21)
Amended and Restated Field License by and among Abgenix, Inc., JT America Inc. and Xenotech L.P. effective December 31, 1999.

10.61
(21)
Agreement to Terminate the Collaboration Agreement by and among Abgenix, Inc., JT America Inc., and Xenotech L.P. effective December 31, 1999.

+10.62
(21)
Agreement to Terminate the Interest of Japan Tobacco Inc. in the Master Research License and Option Agreement by and among Abgenix, Inc., Japan Tobacco Inc. and Xenotech L.P. effective December 31, 1999.

+10.63
(21)
Amendment of the Expanded Field License by and among Abgenix, Inc., JT America Inc. and Xenotech L.P. effective December 31, 1999.

10.64
(21)
Limited Partnership Interest and Stock Purchase Agreement between Abgenix, Inc. and JT America Inc. made December 20, 1999.

+10.65
(21)
License Agreement by and between Abgenix, Inc. and Japan Tobacco Inc. effective December 31, 1999.

10.66
(23)
Lease Agreement dated February 24, 2000 between Ardenwood Corporate Park Associates, a California Limited Partnership and Abgenix, Inc.

10.67
(23)
Lease Agreement dated May 19, 2000 between Ardenwood Corporate Park Associates, a California Limited Partnership and Abgenix, Inc.

10.68
(25)
Acquisition Agreement dated as of September 25, 2000 among Abgenix, Inc., Abgenix Canada Corporation and ImmGenics Pharmaceuticals Inc.

 
 
 

95


+10.69
(26)
License Agreement among BR Centre Limited, Ingenix Biomedical Inc. and Dr. John W. Schrader, dated May 9, 1994.

+10.70
(26)
License Agreement Amendment among BR Centre Limited, Ingenix Biomedical Inc. and Dr. John W. Schrader, dated May 9, 1994.

10.71
(26)
Assignment Agreement among BR Centre Limited and The University of British Columbia Foundation, dated March 10, 1998.

10.72
(27)
Lease Agreement dated February 8, 2001 between AMB Property, L.P., a Delaware limited partnership, and Abgenix, Inc.

++10.73
(27)
Product Supply Agreement by and between Lonza Biologics PLC and Abgenix, Inc. dated November 30, 2000.

10.74
(29)
Lease dated September 1, 2001 among Townline Ventures 17 Ltd., Abgenix Biopharma Inc. and Abgenix, Inc.

+10.75
(29)
License Agreement among Medical Research Council, Agricultural and Food Research Council Institute of Animal Physiology and Genetics Research of Babraham Hall, Marianne Bruggemann and Cell Genesys, Inc., dated March 29, 1994.

10.76
(29)
First Amendment, dated as of November 30, 2001, to the Lease Agreement, dated as of February 8, 2001, between AMB Property, L.P. and Abgenix, Inc.

10.77
(33)
First Amendment, dated August 31, 2001, to the Lease Agreement, dated February 24, 2000, between Ardenwood Corporate Park Associates, a California Limited Partnership, and Abgenix, Inc.

10.78
(33)
First Amendment, dated August 31, 2001, to the Lease Agreement, dated May 19, 2000, between Ardenwood Corporate Park Associates, a California Limited Partnership, and Abgenix, Inc.

10.79
(33)
Second Amendment, dated November 7, 2001, to the Lease Agreement, dated May 19, 2000, between Ardenwood Corporate Park Associates, a California Limited Partnership, and Abgenix, Inc.

10.80
(33)
Amendment No. 1, dated January 22, 2002, to the Lease Agreement, dated July 31, 1996, between John Arrillaga, Trustee, or his Successor Trustee UTA dated 7/20/77 (John Arrillaga Survivors Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended, and Abgenix, Inc.

10.81
(33)
Lease Agreement dated January 22, 2002 between John Arrillaga, Trustee, or his Successor Trustee UTA dated 7/20/77 (John Arrillaga Survivors Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended, and Abgenix, Inc.

21.1
(30)
List of subsidiaries.

23.1
 
Consent of Ernst & Young LLP, Independent Auditors.

24.1
 
Power of Attorney. (See page 99)

99.1
 
Certification of Raymond M. Withy, Ph.D. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
 
 

96


99.2
 
Certification of Kurt Leutzinger Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
+
Confidential treatment granted for portions of these exhibits. Omitted portions have been filed separately with the Commission.

++
Confidential treatment has been requested for portions of the exhibit. Omitted portions have been filed seperately with the Commission.

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

(2)
Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form S-1 (File No. 333-49415), portions of which have been granted confidential treatment.

(3)
Incorporated by reference to the same exhibit filed with Cell Genesys' Registration Statement on Form S-1 (File No. 33-46452), portions of which have been granted confidential treatment.

(4)
Incorporated by reference to the same exhibit filed with Cell Genesys' Registration Statement on Form S-1 (File No. 33-46452).

(5)
Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, portions of which have been granted confidential treatment.

(6)
Incorporated by reference to the same exhibit filed with Cell Genesys' Annual Report on Form 10-K for the year ended December 31, 1993, portions of which have been granted confidential treatment.

(7)
Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, portions of which have been granted confidential treatment.

(8)
Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.

(9)
Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, portions of which have been granted confidential treatment.

(10)
Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.

(11)
Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.

(12)
Incorporated by reference to the same exhibit filed with Cell Genesys' Annual Report on Form 10-K for the year ended December 31, 1996, as amended, portions of which have been granted confidential treatment.

(13)
Incorporated by reference to the same exhibit filed with Cell Genesys' Annual Report on Form 10-K for the year ended December 31, 1993.

(14)
Incorporated by reference to the same exhibit filed with Abgenix's Current Report on Form 8-K filed with the Commission on July 17, 1998, portions of which have been granted confidential treatment.

97

(15)
Incorporated by reference to the same exhibit filed with Abgenix's Current Report on Form 8-K filed with the Commission on November 24, 1998.

(16)
Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form S-1 (File No. 333-71289), portions for which Abgenix has requested confidential treatment.

(17)
Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form S-1 (File No. 333-71289).

(18)
Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form 8-A (File No. 000-24207).

(19)
Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form S-8 (File No. 333-90707).

(20)
Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form S-3 (File No. 333-91699).

(21)
Incorporated by reference to the same exhibits filed with Abgenix's Current Report on Form 8-K filed with the Commission on January 27, 2000.

(22)
Incorporated by reference to the same exhibits filed with Abgenix's Registration Statement on Form S-1 (File No. 333-70631).

(23)
Incorporated by reference to the same exhibits filed with Abgenix's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

(24)
Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form S-8 (File No. 333-45426).

(25)
Incorporated by reference to the same exhibits filed with Abgenix's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.

(26)
Incorporated by reference to the same exhibits filed with Abgenix's Annual Report on Form 10-K for the year ended December 31, 2000.

(27)
Incorporated by reference to the same exhibits filed with Abgenix's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.

(28)
Incorporated by reference to the same exhibits filed with Abgenix's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

(29)
Incorporated by reference to the same exhibits filed with Abgenix's Registration Statement on Form S-1 (File Number 333-49858).

(30)
Incorporated by reference to the same exhibits filed with Abgenix's Annual Report on Form 10-K for the year ended December 31, 2001.

(31)
Incorporated by reference to the same exhibits filed with Abgenix's Amendement No. 2 to its Registration Statement on Form 8-A (File Number 000-24207).

(32)
Incorporated by reference to the same exhibits filed with Abgenix's Registration Statement on Form S-8 (File Number 333-88232).

(33)
Incorporated by reference to the same exhibits filed with Abgenix's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.

(b)
Reports on Form 8-K.

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

(c)
Exhibits.

        See Item 15(a)3 above.

(d)
Financial Statement Schedule.

        See Item 15(a)2 above.

98


SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Abgenix has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on the 28th day of March, 2003.

    ABGENIX, INC.

 
 
By:
/s/  RAYMOND M. WITHY      
Raymond M. Withy, Ph.D.
 President and Chief Executive Officer


POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Raymond M. Withy and Kurt Leutzinger, and each one of them, acting individually and without the other, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.

Signature
   Title
   Date

 
 
 
 
 
/s/   R. SCOTT GREER      
R. Scott Greer		   Chairman of the Board   March 28, 2003

/s/  RAYMOND M. WITHY, PH.D.      
Raymond M. Withy, Ph.D.
 
President, Chief Executive Officer and Director (Principal Executive Officer)
 
March 28, 2003

/s/  KURT LEUTZINGER      
Kurt Leutzinger
 
Chief Financial Officer (Principal Financial and Accounting Officer)
 
March 28, 2003

/s/  M. KATHLEEN BEHRENS, PH.D.      
M. Kathleen Behrens, Ph.D.
 
Director
 
March 28, 2003

/s/  RAJU S. KUCHERLAPATI, PH.D.      
Raju S. Kucherlapati, Ph.D.
 
Director
 
March 28, 2003

 
 
 
 
 

99


/s/  KENNETH B. LEE, JR.      
Kenneth B. Lee, Jr.
 
Director
 
March 28, 2003

/s/  MARK B. LOGAN      
Mark B. Logan
 
Director
 
March 28, 2003

100


CERTIFICATIONS

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

Dated: March 28, 2003    

 
 
/s/ RAYMOND M. WITHY
Raymond M. Withy, Ph.D.
 President and Chief Executive Officer
(Principal Executive Officer)

101


CERTIFICATIONS

I, Kurt Leutzinger, certify that:

Dated: March 28, 2003    

 
 
/s/ KURT LEUTZINGER
Kurt Leutzinger
 Chief Financial Officer
(Principal Financial and Accounting Officer)

102


ABGENIX, INC.

INDEX TO EXHIBITS*

EXHIBIT
   ITEM
3.1   Amended and Restated Certificate of Incorporation of Abgenix, as currently in effect.

10.2
 
Amended and Restated 1996 Incentive Stock Option Plan.

10.4
 
Amended and Restated 1998 Director Option Plan.

23.1
 
Consent of Ernst & Young LLP, Independent Auditors.

24.1
 
Power of Attorney (See page 99).

99.1
 
Certification of Raymond M. Withy, Ph.D. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2
 
Certification of Kurt Leutzinger Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
Only exhibits actually filed are listed. Item 15(a)(3) of this Report on Form 10-K sets forth exhibits incorporated by reference.

103



QuickLinks

TABLE OF CONTENTS
PART I
PART II
INDEX TO FINANCIAL STATEMENTS
ABGENIX, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
ABGENIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
ABGENIX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share and per share data)
ABGENIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
ABGENIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART III
PART IV
SIGNATURES
POWER OF ATTORNEY
CERTIFICATIONS
CERTIFICATIONS
ABGENIX, INC. INDEX TO EXHIBITS