UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2003

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

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

(510) 284-6500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes ý No o

As of July 31, 2003 there were 87,958,739 shares of the Registrant’s Common Stock outstanding.

TABLE OF CONTENTS

PART I. Financial Information

ITEM 1.		Financial Statements

		Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002

		Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002

		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002

		Notes to Condensed Consolidated Financial Statements

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

ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk

ITEM 4.		Controls and Procedures

PART II. Other Information

ITEM 1.		Legal Proceedings

ITEM 2.		Changes in Securities and Use of Proceeds

ITEM 3.		Defaults upon Senior Securities

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

ITEM 5.		Other Information

ITEM 6.		Exhibits and Reports on Form 8-K

SIGNATURES

CERTIFICATIONS

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ABGENIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

	June 30, 2003			December 31, 2002

ASSETS
Current assets:
Cash and cash equivalents	$	34,598		$	207,974
Marketable securities	272,811			188,575
Interest receivable	2,616			2,004
Accounts receivable, net	760			2,640
Prepaid expenses and other current assets	20,027			16,538
Total current assets	330,812			417,731
Property and equipment, net	258,192			244,419
Long-term investments	23,367			20,939
Goodwill	34,780			34,780
Identified intangible assets, net	87,299			92,349
Deposits and other assets	30,026			31,779
	$	764,476		$	841,997

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,205		$	21,557
Deferred revenue	5,092			3,416
Accrued liabilities	10,484			8,907
Contract cancellation obligation	28,037			—
Accrued interest payable	2,061			2,061
Total current liabilities	54,879			35,941
Deferred rent	5,454			4,417
Convertible subordinated notes	200,000			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; 87,946,535 and 87,655,342 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively	9			9
Additional paid-in capital	967,222			965,821
Accumulated other comprehensive income	5,084			4,156
Accumulated deficit	(468,172		)	(368,347		)
Total stockholders’ equity	504,143			601,639
	$	764,476		$	841,997

See accompanying notes.

ABGENIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002

Revenues:
Contract revenue	$	2,350		$	2,501		$	8,506		$	13,499
Interest and other income	2,779			5,121			5,974			10,392
Total revenues	5,129			7,622			14,480			23,891
Costs and expenses:
Research and development	20,748			38,940			41,935			67,919
Manufacturing start-up costs	41,262			—			52,845			—
Amortization of identified intangible assets, related to research and development	1,791			1,815			3,606			3,622
General and administrative	6,504			7,220			13,354			13,927
Impairment of investments	—			37,498			—			72,151
Interest expense	1,485			1,858			2,481			2,432
Total costs and expenses	71,790			87,331			114,221			160,051
Loss before income tax expense	(66,661		)	(79,709		)	(99,741		)	(136,160		)
Foreign income tax expense	—			—			84			—
Net loss	$	(66,661	)	$	(79,709	)	$	(99,825	)	$	(136,160	)

Basic and diluted net loss per share	$	(0.76	)	$	(0.92	)	$	(1.14	)	$	(1.57	)

Shares used in computing basic and diluted net loss per share	87,873			87,063			87,841			86,983

See accompanying notes.

ABGENIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2003			2002
Operating activities
Net loss	$	(99,825	)	$	(136,160	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	12,554			4,513
Amortization of identified intangible assets	3,607			3,622
Impairment of identified intangible asset	1,443			—
Amortization of debt issuance cost	594			372
Impairment of investments	—			72,151
Loss on sale of equipment	29			—
Changes for certain assets and liabilities:
Interest receivable	(612		)	463
Accounts receivable	1,880			1,691
Prepaid expenses and other current assets	(3,489		)	(2,116		)
Deposits and other assets	1,159			(1,366		)
Accounts payable	(12,352		)	4,714
Deferred revenue	1,676			(8,252		)
Accrued liabilities	1,577			3,639
Contract cancellation obligation	28,037			—
Deferred rent	1,037			1,227
Net cash used in operating activities	(62,685		)	(55,502		)

Investing activities
Purchases of marketable securities	(203,598		)	(105,768		)
Maturities of marketable securities	30,744			96,696
Sales of marketable securities	87,118			52,314
Purchases of property and equipment	(26,367		)	(86,365		)
Sales of equipment	11			—
Payments for acquisition liabilities	—			(155		)
Net cash used in investing activities	(112,092		)	(43,278		)

Financing activities
Net proceeds from issuance of convertible subordinated notes	—			194,000
Net proceeds from issuances of common stock	1,401			1,648
Net cash provided by financing activities	1,401			195,648
Net increase (decrease) in cash and cash equivalents	(173,376		)	96,868
Cash and cash equivalents at beginning of period	207,974			99,663
Cash and cash equivalents at end of period	$	34,598		$	196,531

See accompanying notes.

ABGENIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation - The unaudited condensed consolidated financial statements of Abgenix, Inc. (the “Company” or “Abgenix”) included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information or footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2002, and accompanying notes included in the Company’s Annual Report as filed on Form 10-K with the Securities and Exchange Commission. The results of operations for the three and six months ended June 30, 2003, are not necessarily indicative of the results to be expected for the full year or for any other future period.

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 license fees: Fees to license the use of the Company’s proprietary technologies in research performed by the customer are generally recognized only after both the license period has commenced and the technology has been delivered. If Abgenix is obligated to provide significant assistance to enable the customer to practice the license, then the revenue is recognized over the period of such obligation.

• Product license fees: Fees to license the production, use and sale of an antibody generated by the Company’s proprietary technologies are generally recognized only after both the license period has commenced and the technology has been delivered. If Abgenix is obligated to provide significant assistance to enable the customer to practice the license, then the revenue is recognized over the period of such obligation.

• Option fees: Fees for granting options to obtain product licenses to develop a product are recognized as revenue when the option is exercised or when the option period expires, whichever occurs first.

• Research services: Fees for research services performed by Abgenix are recognized ratably over the entire period the services are performed. In the case of co-development arrangements, fees received for research services provided are recorded as contract revenues in the period the services are rendered.

• Milestones: Incentive milestone payments are recognized as revenue when the milestone is achieved. Incentive milestone payments are triggered either by the results of the Company’s research efforts or by events external to Abgenix, such as regulatory approval to market a product. Incentive milestone payments are substantially at risk at the inception of the contract, and the values assigned thereto are commensurate with the type of milestone achieved. Upon achievement of an incentive milestone event, the Company has no future performance obligations related to the payment.

Stock-Based Compensation - The Company accounts for stock-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion 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 Statement of Financial Accounting Standards (SFAS 123), as amended by SFAS 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 123. Pro forma amounts may not be representative of future periods.

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(in thousands, except per share amounts)

Net loss as reported	$	(66,661	)	$	(79,709	)	$	(99,825	)	$	(136,160	)
Stock-based employee compensation costs that would have been included in the determination of net loss if the fair value based method had been applied to all awards	(15,971		)	(21,130		)	(31,892		)	(41,264		)
Pro forma net loss as if the fair value based method had been applied to all awards	$	(82,632	)	$	(100,839	)	$	(131,717	)	$	(177,424	)

Basic and diluted net loss per share as reported	$	(0.76	)	$	(0.92	)	$	(1.14	)	$	(1.57	)

Pro forma basic and diluted loss per share	$	(0.94	)	$	(1.16	)	$	(1.50	)	$	(2.04	)

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 the three and six months ended June 30, 2003 and 2002;

	Three Months Ended June 30,		Six Months Ended June 30,
	2003	2002	2003	2002
Risk-free interest rate	2.75%	3.07%	2.91%	3.07%
Dividend yield	0.0%	0.0%	0.0%	0.0%
Volatility factors of the expected market price of our Common Stock	1.01	1.05	1.04	1.05
Weighted-average expected life of option (years)	5.51	5.54	5.52	5.54

These same assumptions were applied in the determination of the option values related to stock options granted to non-employees, except the option life, for which the term of the consulting contracts, 1 to 5 years, was used. The value of stock options granted to non-employees 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 three and six months ended June 30, 2003 were $7.03 and $6.35 per share, respectively, and were $15.34 and $15.34 per share,

respectively, for the three and six months ended June 30, 2002. All options granted were at exercise prices at the then current fair market value of the stock.

Net Loss Per Share - Basic net loss 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 net loss per share, as their effect is antidilutive for all periods presented.

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

2. Comprehensive Income (Loss)

Other comprehensive income (loss) consists of unrealized gains or losses on available-for-sale securities. The components of comprehensive loss were as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002

Net loss	$	(66,661	)	$	(79,709	)	$	(99,825	)	$	(136,160	)
Other comprehensive income:
Unrealized holding gains (losses) arising during period	3,678			(28,478		)	928			(50,003		)
Less: reclassification adjustment for losses recognized in net loss	—			30,390			—			65,043
Net unrealized gains on securities	3,678			1,912			928			15,040

Comprehensive loss	$	(62,983	)	$	(77,797	)	$	(98,897	)	$	(121,120	)

3. Goodwill and Identified Intangible Assets

During the quarter ended March 31, 2003, the Company made a decision to discontinue the development of therapeutic antibodies to the complement protein properdin. Accordingly, the Company recorded an impairment charge of approximately $1.4 million related to the license to develop and commercialize antibodies to properdin. The impairment charge was included in research and development expenses on the Company’s statement of operations.

Identified intangible assets consisted of the following (in thousands):

	Gross Assets		Accumulated Amortization			Net
As of June 30, 2003:
Acquisition-related developed technology	$	106,183	$	(20,151	)	$	86,032
Other intangible assets	1,442		(175		)	1,267
Identified intangible assets	$	107,625	$	(20,326	)	$	87,299

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

Amortization of acquisition-related intangibles was approximately $1.8 million and $3.5 million, respectively, for each of the three and six month periods ended June 30, 2003 and 2002. Amortization of

other intangible assets was $22,000 and $68,000, respectively, for the three and six months ended June 30, 2003 and $46,000 and $93,000, respectively, for the three and six months ended June 30, 2002. All of the Company’s acquired identified intangibles other than goodwill are subject to amortization.

Expected amortization expense related to identified intangible assets for the six-month period from July 1, 2003, to December 31, 2003, and each of the fiscal years thereafter is as follows (in thousands):

	Periods Ending December 31,
	2003			2004		2005		2006		2007		Thereafter		Total
Acquisition-related intangibles	$		3,538	$	7,076	$	7,077	$	7,077	$	7,076	$	54,188	$	86,032
Other intangible assets	$	45		$	90	$	90	$	90	$	90	$	862	1,267

4. Segment Information

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

Information about customers who provided 10% or more of contract revenues for the period is as follows:

Period		Number of customers and percentage of contract revenues for each of the customers who provided 10% or more of contract revenues for the period.
Three months ended June 30, 2003		4 customers, 35%, 24%, 11% and 11%, respectively
Six months ended June 30, 2003		3 customers, 35%, 16%, and 13%, respectively
Three months ended June 30, 2002		3 customers, 38%, 32% and 15%, respectively
Six months ended June 30, 2002		2 customers, 63% and 10%, respectively

5. 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. During the three and six months ended June 30, 2003, the Company made cash payments for severance benefits of approximately $85,000 and $1.0 million, respectively. As of June 30, 2003, approximately $102,000 of severance benefits were accrued and are expected to be paid to terminated employees over the next three months.

6. Contract Cancellation Obligation

Effective June 30, 2003, the Company canceled its November 2000 agreement with Lonza Biologics plc (“Lonza”) for the exclusive use of a cell culture production suite, because the Company determined that with the opening of its own manufacturing plant, it no longer needed access to the Lonza facility. Upon canceling the agreement, the Company was obligated to pay Lonza four equal installments of 4,250,000 British Pounds on October 1, 2003, February 1, 2004, May 1, 2004 and August 1, 2004, which eliminated the Company’s commitment to pay approximately $46 million in total monthly fees through August 2006. At June 30, 2003, the total value of this obligation was approximately $28.0 million United States dollars and was recorded as a component of Manufacturing start-up costs in the Company’s Statements of Operations.

7. Customer Indemnification

The Company has certain agreements with customers and collaborators that contain

indemnification provisions. In such provisions, the Company typically agrees to indemnify the customer or collaborator against certain types of third-party claims. The Company would accrue for known indemnification issues if a loss were probable and could be reasonably estimated. The Company would also accrue for estimated incurred but unidentified issues based on historical activity. There was no accrual for or expense related to indemnification issues as of June 30, 2003 and 2002 and, in each case, for the three and six months then ended.

8. Recent Accounting Pronouncements

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 after June 30, 2003. The provisions of the EITF Issue No. 00-21 do not impact the accounting treatment of the Company’s existing revenue arrangements. The Company believes that the adoption of EITF Issue No. 00-21 will not result in a material change to its existing revenue recognition policy for prospective revenue arrangements. The Company does not expect the adoption of EITF Issue No. 00-21 to have a material impact on its consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46 (the Interpretation), Consolidation of Variable Interest Entities. The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when it has controlling financial interest through ownership of a majority voting interest in the entity. The Interpretation will be implemented by Abgenix in the quarter ended September 30, 2003. The Company has performed a preliminary analysis of the Interpretation and does not believe that the adoption will result in a material impact on the results of operations or financial position. During the quarter ended September 30, 2003, the Company will complete its evaluation of the implications of the Interpretation to all variable interest entities with which it has involvement.

Item 2. 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. In this Quarterly Report on Form 10-Q, 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 the heading “Additional Factors that Might Affect Future Results”. In this Quarterly Report on Form 10-Q, references to “Abgenix,” we,” “us,” and “our” are to Abgenix, Inc. and its subsidiaries.

Overview

We are a biopharmaceutical company that is focused on the discovery, development and manufacture of antibody therapeutic products 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 Quarterly Report on Form 10-Q 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 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. We intend to build a large and diversified product portfolio by using our XenoMouse and XenoMax technologies to generate antibodies to antigen targets that we source, entering into additional joint development and commercialization agreements with pharmaceutical and biotechnology companies and, in some cases, self funding clinical activities to determine preliminary safety and efficacy and carrying out additional internal product development. We also plan to enter into additional agreements to use our XenoMax technology to assist our licensees and collaborators in isolating antibodies with desired function and characteristics. These arrangements may involve sharing of costs and profits.

As of June 30, 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 June 30, 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 antibody product candidates for the treatment of cancer, inflammation, autoimmune diseases, transplant rejection, cardiovascular disease, growth factor modulation, neurological 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:

• Antigen Target Sourcing Contracts—We have entered into several target sourcing contracts with genomics and biopharmaceutical companies that may enable us to generate a pipeline of proprietary fully human antibody product candidates. Typically, pursuant to these contracts we generate fully human antibodies to the antigen targets provided or identified by our collaborators. The contracts typically contain provisions that allow either Abgenix or our collaborator to evaluate and select particular antibodies from the pool of generated antibodies for further development and commercialization. The party selecting an antibody for further development or commercialization will generally pay to the other party license fees, milestone payments and royalty payments on any eventual product sales, in exchange for rights to develop and commercialize the product. In connection with these arrangements, we may also agree to make equity investments in collaborators for strategic reasons. For example, we have made equity investments in CuraGen Corporation and MDS Proteomics Inc. in connection with our collaborations with these parties.

• Proprietary Product Development—In each of July and August 2000, we entered into a joint development and commercialization agreement. Pursuant to one of these agreements, we are co-developing ABX-EGF, a fully human antibody we created, with Amgen and Immunex. Under the agreement, Immunex paid us an initial license fee at signing and a second license fee in May 2001. We are obligated to pay 50% of the development costs and are entitled to receive 50% of any profits from sales of collaboration products. We also share responsibility for product development. We will be responsible for completing the ongoing Phase 1 trial and any additional Phase 1 trials that are initiated, and both companies share responsibility for the execution of Phase 2 trials across a variety of indications. Amgen will have primary responsibility for Phase 3 clinical trials and will market any potential products, while we will have co-promotion rights. The other agreement is with SangStat Medical Corporation for ABX-CBL, an in-licensed mouse antibody we developed. In February 2003, we and SangStat announced that because the Phase 2/3 clinical trial for ABX-CBL did not meet its primary endpoint, further development of ABX-CBL would not continue. Currently we are concluding all activities associated with the development of ABX-CBL including the Phase 2/3 clinical trial. Under that agreement, SangStat paid us certain license fees and milestone payments, and we and SangStat have shared equally in all development costs.

• Production Services—We have entered into a contract with one customer to provide process sciences and manufacturing services related to an antibody product candidate that we developed and which the customer selected from a pool of antibodies generated pursuant to an existing antigen sourcing agreement. Under this production services contract we will deliver a variety of process development, cell banking and manufacturing services for the selected antibody product candidate. The agreement provides for the customer to pay us certain fees in advance and upon completion of work, and we will be entitled to royalties on the sale of products subject to this contract. We also have the right of first offer with regard to production services for additional antibodies developed by this customer. We intend to enter into agreements to provide process sciences and manufacturing services to other existing and new customers.

• Technology Out-Licensing—We have licensed our XenoMouse technology to third parties for the purpose of generating antibody product candidates to one or more specific antigen targets provided by the customer. In some cases in which we license XenoMouse technology, we provide our mice to the customer, which then carries out immunizations with its specific antigen targets. In other cases, we immunize the mice with the customer’s antigen targets for additional compensation. The customer generally has an option for a period of time to acquire a product license for any antibody identified using XenoMouse technology that the customer wishes to develop and commercialize. The financial terms of these agreements may include license fees, option fees and milestone payments paid to us by the customer. Based on our agreements, these payments and fees would average from approximately $7.0 million to $10.0 million per antigen target if our customer takes the antibody into development and ultimately to commercialization. Additionally, our license agreements entitle us to receive royalties on any future product sales by

the customer. We may also agree to make equity investments in some of our customers, or they may agree to make equity investments in us, in connection with these licensing arrangements. As of June 30, 2003, we had entered into one agreement in which we licensed our SLAM technology to one party on a non-exclusive basis for the purpose of generating and using antibodies other than antibodies derived from XenoMouse technology or other technology that involves the use of non-human animals, and on a co-exclusive basis for the purpose of antigen discovery. We currently do not intend to license our SLAM technology for use by any other parties. In addition, as of June 30, 2003, we had also entered into an agreement in which we exclusively licensed to one party rights under patent applications and patents held by us to develop and commercialize therapeutic antibodies to parathyroid hormone-related protein, or PTHrp.

• Technology In-Licensing—We also license technology from other parties that we use in conjunction with our proprietary technology to develop, manufacture and commercialize therapeutic antibody candidates. The other party may also agree to produce antibody therapeutic candidates for us using its own technology. For example, we have entered into license and options agreements with ImmunoGen, Inc. pursuant to which we may develop and commercialize products based upon certain proprietary immunotoxins. These agreements often also obligate us to pay license fees, milestone payments and royalty fees to the counterparty upon the occurrence of specified conditions, including upon our sale of products derived from use of the licensed technology. We may also agree to make an equity investment in the other party for strategic reasons in connection with these arrangements. For example, we purchased shares of common stock of ImmunoGen in connection with our agreement with that company.

As of June 30, 2003, two of our antibody therapeutic product candidates were in ongoing clinical trials.

• ABX-EGF—Generated using XenoMouse technology for development as a treatment for a variety of cancers, ABX-EGF is our leading fully human antibody therapeutic product candidate. 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:

• Various cancers—We initiated a Phase 1 clinical trial for ABX-EGF in cancer in July 1999, in which enrollment is ongoing.

• Renal cell cancer—We initiated a Phase 2 clinical trial evaluating the effect of ABX-EGF as monotherapy in patients with renal cell cancer in April 2001, in which enrollment is ongoing.

• Non-small cell lung cancer— Immunex initiated a Phase 2 clinical trial for ABX-EGF in non-small cell lung cancer in combination with standard chemotherapy, compared to standard chemotherapy alone, in July 2001, in which enrollment is ongoing.

• Colorectal cancer— Immunex initiated a Phase 2 clinical trial evaluating the effect of ABX-EGF as monotherapy in patients with metastatic colorectal cancer who have previously failed chemotherapy in December 2001. Enrollment in this study is complete. Immunex initiated a separate Phase 2 clinical trial evaluating the effect of ABX-EGF in combination with standard chemotherapy, as first-line treatment in patients with metastatic colorectal cancer in January 2002, in which enrollment is ongoing.

• Prostate cancer—We initiated a Phase 2 clinical trial evaluating the effect of ABX-EGF in patients with hormone resistant prostate cancer in January 2002, in which enrollment is ongoing.

• ABX-MA1—Generated using XenoMouse technology, ABX-MA1 is a fully human antibody therapeutic product candidate for the treatment of a variety of cancers. We filed an Investigational New Drug Application, or IND, in December 2001 and initiated a Phase 1 clinical trial for

ABX-MA1 in metastatic melanoma in February 2002, in which enrollment is ongoing.

We developed ABX-CBL, an in-licensed mouse antibody, for the treatment of a transplant-related disease known as graft versus host disease. In February 2003, we and our co-developer, SangStat, announced that the Phase 2/3 clinical trial for ABX-CBL did not meet its primary endpoint and that we would discontinue further development. We are concluding all activities associated with the development of ABX-CBL. Also, in May 2002, after analyzing Phase 2b clinical trial results of ABX-IL8, a fully human antibody therapeutic product candidate generated using XenoMouse technology, we decided to discontinue the clinical development of ABX-IL8 and wind down ongoing clinical trials, consistent with patient safety and follow-up.

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 our proprietary antibody therapeutic product candidates in clinical trials, there are three customer-developed antibodies generated with XenoMouse technology in clinical trials or the subject of an IND as follows:

• Pfizer—We generated a XenoMouse-derived fully human antibody therapeutic product candidate for treating cancer that Pfizer has advanced into clinical trials. In addition, Pfizer has recently filed an IND to initiate clinical testing of a second XenoMouse-derived fully human antibody therapeutic product candidate.

• Amgen—We generated a XenoMouse-derived fully human antibody therapeutic product candidate that binds to an undisclosed antigen target that Amgen has advanced into clinical trials.

Results of Operations

Three Months and Six Months Ended June 30, 2003 and 2002

Contract Revenues.

Contract revenues totaled $2.4 million and $8.5 million, respectively, in the three and six months ended June 30, 2003, compared to $2.5 million and $13.5 million, respectively, in the comparable 2002 periods. Because contract revenues depend to a large extent on the success or failure of research and development efforts undertaken by our collaborators and licensees, our period-to-period contract revenues can fluctuate significantly and are inherently difficult to predict. With our new manufacturing facility and our existing pilot plant, we now offer integrated process sciences and manufacturing services, which we refer to as production services. In future periods we expect to generate revenue from production services and for those revenues to increase over the next few years.

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

• Technology Licensing

We recognized a total of $2.3 million and $7.8 million, respectively, in the three and six months ended June 30, 2003, compared to $1.5 million and $11.0 million, respectively, in the comparable 2002 periods, from licensing our proprietary technologies. Revenues consisted primarily of the following:

• Chugai Pharmaceutical Co. Ltd.—In the three months ended March 31, 2003, we recognized $3.0 million under an agreement with Chugai in which we exclusively licensed to Chugai rights under patent applications and patents held by us to develop and commercialize anti-PTHrp therapeutic antibodies.

• Celltech R&D Ltd.—In the three months ended March 31, 2002, we recognized $8.4 million under an agreement with Celltech in which we granted a license of our SLAM technology. We received payments totaling $16.8 million in the fourth quarter of 2001 representing a research license fee and service fees for the transfer of technology, net of $0.2 million in shared closing costs. We recognized these fees over the six-month period ended March 31, 2002, during which we fulfilled our obligations to provide Celltech with the applicable protocols, technical information and training to enable Celltech to effectively utilize the SLAM technology.

• Additionally, in the three and six months ended June 30, 2003 and 2002, we recognized various fees, such as research license and service fees, product license fees, product development and research milestone payments, and option fees, under agreements related to the licensing of our XenoMouse technology. We recognized fees primarily from Pfizer, Amgen, and Abbott Laboratories in the three and six month periods ended June 30, 2003, and primarily from Pfizer and CuraGen in the three and six month periods ended June 30, 2002.

• Proprietary Product Development

We recognized approximately $64,000 and $685,000, respectively in the three and six months ended June 30, 2003, compared to $1.0 million and $2.5 million, respectively, in the comparable 2002 periods, pursuant to our joint development and commercialization agreements. In the three and six months ended June 30, 2002 and 2003, the revenues included the reimbursement of development costs from the development of ABX-CBL. In 2002, the revenue also included the reimbursement of development costs from the development of ABX-EGF.

Interest and Other Income.

Interest and other income consist primarily of interest from cash, cash equivalents and marketable securities. Interest and other income decreased to $2.8 million and $6.0 million in the three and six months ended June 30, 2003, compared to $5.1 million and $10.4 million, respectively, in the comparable 2002 periods. The decrease was due to lower interest rates and lower average cash, marketable securities and cash equivalent balances.

Research and Development Expenses.

Research and development expenses were $20.7 million and $41.9 million, respectively, in the three and six months ended June 30, 2003, compared to $38.9 million and $67.9 million, respectively, in the comparable 2002 periods. Management separates research and development expenditures into amounts related to research and amounts related to product development as follows:

• Research Costs

Research costs include costs associated with research and testing of our product candidates prior to reaching the development stage and costs associated with cell line development. Such costs include the costs of Abgenix personnel, facilities, including depreciation, and technology in-licensing. Research costs were $13.4 million and $28.9 million, respectively, in the three and six months ended June 30, 2003, as compared to $20.8 million and $35.7 million, respectively, in the comparable 2002 periods. Major components of the changes in research

costs in the three and six months ended June 30, 2003 as compared to the same periods in 2002 were as follows:

• Technology In-Licensing—In the first quarter of 2003 we made a decision to discontinue the development of therapeutic antibodies to the complement protein properdin. Accordingly, we recorded an impairment charge of $1.4 million of previously capitalized costs and $0.6 million of other related costs related to the license to develop and commercialize properdin.

• Costs of Abgenix Personnel—Costs of Abgenix personnel to support research activities decreased 27% and 26% in the three and six months ended June 30, 2003, respectively, from the comparable 2002 periods. The decrease was a result of our restructuring plan implemented in October 2002, which resulted in an approximately 15% reduction in total employees overall. Personnel costs primarily include salary, fringe benefits, recruiting and relocation costs.

• Outside Contractors – Costs for outside contractors to support research activities decreased 70% and 49% in the three and six months ended June 30, 2003, respectively, from the comparable 2002 periods. The decrease was a result of the reduction of activities performed by outside contractors related to the development of cell lines for our product candidates.

• Product Development Costs

Product development costs include costs of preclinical development and conducting clinical trials. Such costs include costs of Abgenix personnel, drug supply costs, research fees charged by outside contractors and facility expenses including depreciation. Product development costs were $7.3 million and $13.0 million, respectively, in the three and six months ended June 30, 2003 as compared to $18.1 million and $32.2 million, respectively, in the comparable 2002 periods. The decrease in the three and six months ended June 30, 2003 was primarily related to the decrease in clinical trials being conducted for ABX-IL8. Major components of the changes in product development costs in the three and six months ended June 30, 2003 as compared to the same periods in 2002 were as follows:

• Clinical Research Fees and Drug Supply Costs—Clinical research fees, including clinical investigator site fees, monitoring costs, and data management costs, and drug supply costs decreased 79% and 81%, respectively, in the three and six months ended June 30, 2003, as compared to the comparable 2002 periods. The decrease was primarily due to the decrease in clinical trials being conducted for ABX-IL8 in the first and second quarters of 2003 as compared to the same periods in 2002.

• Costs of Abgenix Personnel—Costs of Abgenix personnel to support clinical activities decreased 57% and 53%, respectively, in the three and six months ended June 30, 2003, as compared to the comparable 2002 periods. The decrease was a result of our restructuring plan implemented in October 2002, which resulted in an approximate 15% reduction in total employees overall, and the decrease in clinical trials being conducted for ABX-IL8. Personnel costs primarily include salary, fringe benefits, recruiting and relocation costs.

Manufacturing Start-Up Costs.

Manufacturing start-up costs were $41.3 million and $52.8 million, respectively, in the three and six months ended June 30, 2003. Manufacturing start-up costs include costs associated with our new antibody production facility, including quality assurance and quality control activities and the costs of outside contractors. The primary component of this expense in 2003 was a cancellation fee of

approximately $28.0 million in June 2003 for the negotiated cancellation of an agreement with an outside contractor, Lonza Biologics plc. Effective June 30, 2003, we canceled our November 2000 agreement with Lonza for the exclusive use of a cell culture production suite because we determined that with the opening of our own manufacturing facility we no longer needed access to the Lonza facility. Excluding the cancellation fee, manufacturing start-up costs primarily include facility expenses that include depreciation, outside contractor costs, and personnel costs. We began manufacturing antibody therapeutic candidates in portions of the facility in the second quarter of 2003, at which time we began to depreciate portions of the facility. We expect the facility to be under-utilized for the remainder of the year and therefore manufacturing start-up costs will continue for the remainder of 2003. These costs may decrease as a result of utilization of the facility for the manufacture of ABX-EGF and potentially other product candidates under production services agreements; however, this decrease may be offset by an increase in additional depreciation.

Amortization of Identified Intangible Assets.

Our identified intangible assets consist primarily of existing technology (including patents and certain royalty rights) that we acquired through our acquisition of Hesed Biomed Inc. in 2001, Abgenix Biopharma Inc. and IntraImmune Therapies, Inc. in 2000, and JT America’s interest in Xenotech in 1999. Amortization of intangible assets totaled $1.8 million and $3.6 million, respectively, in each of the three and six month periods ended June 30, 2003 and $1.8 million and $3.6 million for the three and six months ended June 30, 2002.

General and Administrative Expenses.

General and administrative expenses include compensation, professional services, consulting, facilities, including depreciation, and other expenses related to legal, finance and information systems. General and administrative expenses totaled $6.5 million and $13.4 million, respectively, in the three and six months ended June 30, 2003, as compared to $7.2 million and $13.9 million, respectively, in the comparable 2002 periods. The decrease in 2003 as compared to 2002 was primarily due to a decrease in consulting related to the implementation of our new information systems in 2002 and in legal costs due to the timing of activities related to securities filings, licensing, financing activities and other contractual matters partially offset by an increase in personnel related costs, facility costs and depreciation expense related to the enterprise resource planning system, which was launched at the beginning of the third quarter of 2002. We expect general and administrative costs to approximate the same levels in the third quarter of 2003 as they were in each of the first two quarters of 2003.

Impairment of Investments.

We purchased an aggregate amount of $80.0 million of common stock of CuraGen and ImmunoGen as strategic investments at various times in 1999 and 2000.

In 2002, during the first, second and fourth quarters, declines in the fair value of the CuraGen and ImmunoGen common stock were deemed to be other than temporary. Accordingly, we recorded impairment charges of $34.7 million, $30.4 million and $2.2 million, in the first, second and fourth quarters of 2002, respectively. The total impairment charge for the year ended December 31, 2002 was $67.3 million. As of June 30, 2003, these investments were recorded at fair value in long-term investments on the balance sheet, and the net unrealized holding gains 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, in 2001, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with the collaboration with that company. As of June 30, 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 in the second quarter of 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. The investment 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.

Interest Expense.

Interest expense was primarily related to interest and amortization of issuance costs on our convertible debt. For the three months ended June 30, 2003 and 2002, interest expense decreased to approximately $1.5 million from $1.9 million, respectively, as a result of an increase in capitalized interest. Interest expense increased to approximately $2.5 million from $2.4 million in the six months ended June 30, 2003 and 2002, because our convertible debt was outstanding for only a portion of the relevant period in 2002. This increase was partially offset by an increase in capitalized interest. The convertible debt was issued in March 2002, accrues interest at an annual rate of 3.5%, and is payable semi-annually. Interest expense related to the convertible debt was capitalized in the amount of $0.6 million and $1.7 million, respectively, in the three and six months ended June 30, 2003, as compared to $0.2 million and $0.3 million in the same periods in 2002. For each future quarterly period, we expect to accrue approximately $1.8 million of interest expense 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.

Foreign Income Tax Expense.

Foreign income tax expense was recorded reflecting an income tax provision on foreign contract research projects of zero and approximately $84,000, respectively, in the three and six months ended June 30, 2003.

Liquidity and Capital Resources

At June 30, 2003, we had cash, cash equivalents and marketable securities of approximately $307.4 million. 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 $15.5 million at June 30, 2003.

Cash Used in Operating Activities. Net cash used in operating activities was $62.7 million and $55.5 million in the six months ended June 30, 2003 and 2002, respectively. The major components of the change in cash used in operating activities in the six months ended June 30, 2003, compared to the same period in 2002, were primarily the following:

• A decrease of $31.1 million in research and development costs, net of depreciation and an impairment charge related to an identified intangible asset, related to the development of new products.

• An increase of $21.4 million in manufacturing costs, net of the Lonza contract cancellation obligation and depreciation, related to the start-up of our new antibody production facility.

• An increase of $5.1 million in customer payments due primarily to the timing of payments received under our contracts offset by a decrease of $5.5 million in cash from interest income due to lower interest rates and lower average cash balances.

• An increase of $17.1 million in vendor payments, which reduced accounts payable.

Cash Used in Investing Activities. Net cash used in investing activities was $112.1 and $43.3 million in the six months ended June 30, 2003 and 2002, respectively. Cash was provided by and used in investing activities as follows:

• Capital expenditures of $26.4 million and $86.4 million in the six months ended June 30, 2003 and 2002, respectively. The investments in 2003 and 2002 reflect primarily investment in construction in progress and equipment for our new manufacturing facility. The investments in 2002 also reflect investment in leasehold improvements in our new office facility and process science laboratory and investments in computer hardware and software, including the acquisition of a new enterprise resource planning system.

• Purchases, net of maturities and sales, of marketable securities of $85.7 million during the six months ended June 30, 2003 and maturities and sales, net of purchases, of marketable securities of $43.2 million during the six months ended June 30, 2002.

Cash Provided by Financing Activities. During the six months ended June 30, 2003, net cash provided by financing activities was $1.4 million, consisting of proceeds from the exercise of stock options and the issuance of stock under our employee stock purchase plan. During the six months ended June 30, 2002, net cash provided by financing activities was $195.6 million, consisting of $194.0 million net proceeds from our issuance of convertible subordinated notes, as described below, and $1.6 million proceeds from the exercise of stock options and the issuance of stock under our employee stock purchase plan.

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 while the facility was under construction. The standby letter of credit for 1.0 million Canadian dollars was terminated in January 2003. The outstanding stand-by letters of credit are secured by an investment account, in which we must maintain a balance of approximately $6.0 million.

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. We also intend to look for opportunities to acquire new technology through in-licensing, collaborations or acquisitions. Over the next six months, we estimate that we will spend approximately $10.0 million on leasehold improvements and equipment for our new manufacturing and our research and development facilities. Additionally, during the same period we expect to spend up to approximately $0.5 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, sale-lease back financing, funding by one or more collaborators, equity or equity-related financing 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 that may adversely affect our liquidity and capital resources to a significant extent. As of June 30, 2003, four of our proprietary product candidates, ABX-EGF, ABX-MA1, ABX-CBL and ABX-IL8, were 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:

• the number of patients that ultimately participate in the trial;

• the duration of patient follow-up that seems appropriate in view of the results;

• the number of clinical sites included in the trials; and

• the length of time required to enroll suitable patient subjects.

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 on our own or with our collaborators 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. 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 and other costs. 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-IL8.

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 intend to enter co-development agreements, similar to our agreements with Amgen and Immunex for ABX-EGF and to enter into additional joint development agreements earlier in the development lifecycle of product candidates than we did in our existing co-development agreements. We have begun to implement our collaboration strategy through co-development arrangements with companies such as Chugai Pharmaceutical, U3 Pharma AG and Corvas International, Inc. 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. The number, size and type of clinical trials we conduct for a particular product candidate are also affected by the policies of the FDA and European regulatory agencies regarding the availability of possible expedited approval procedures, which we may seek to utilize. These policies may change form time to time. In addition, 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:

• the retention of existing and establishment of further collaboration, licensing, manufacturing and other agreements, if any;

• the cost of establishing and operating our manufacturing facility;

• the cost of conducting commercialization activities and arrangements;

• the time and expense involved in seeking regulatory approvals;

• competing technological and market developments;

• the time and expense of filing and prosecuting patent applications and enforcing or defending against patent claims;

• our investment in, or acquisition of, other companies;

• the amount of product in-licensing in which we engage; and

• other factors not within our control.

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, $208.9 million in 2002 and $99.8 million in the six months ended June 30, 2003. As of June 30, 2003, our accumulated deficit was $468.2 million. Our losses to date have resulted principally from:

• research and development costs relating to the development of our XenoMouse and XenoMax technologies and antibody therapeutic product candidates;

• costs associated with certain agreements with Japan Tobacco, Inc. and certain 1997 settlement and cross-licensing agreements with GenPharm International, Inc.;

• in-process research and development costs and amortization of intangible assets associated with our acquisitions of Hesed Biomed, Abgenix Biopharma, IntraImmune and Japan Tobacco’s interest in Xenotech;

• general and administrative costs relating to our operations;

• impairment charges related to our strategic investments in CuraGen, ImmunoGen and MDS Proteomics; and

• manufacturing start-up costs, primarily those related to the cancellation of our agreement with Lonza for the exclusive use of a cell culture production suite.

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 and operating 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.

Net Operating Loss Carryforwards. As of December 31, 2002, we had net operating loss carryforwards for federal income tax purposes 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. 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.

• Research and product license fees are generally recognized only after both the license period has commenced and the technology has been delivered. However, if we are obligated to provide significant assistance to enable the customer to practice the license, then the revenue is recognized over the period of such obligation. Under some of our research and product license arrangements, the period of our obligation to provide significant assistance to the customer may not be contractually defined with an end date. In these circumstances, we must exercise judgment in estimating the period of time over which certain deliverables, such as customer training, will be provided to enable the customer to practice the license.

• Option fees for granting options to obtain product licenses to develop a product are recognized when the option is exercised or when the option period expires, whichever occurs first.

• Fees we receive for research services we perform are generally recognized ratably over the entire period we perform these services. However, in the case of co-development arrangements, fees we receive for research services we provide are recorded as revenue in the period they are rendered.

• Incentive milestone payments are recognized as revenue when the specified milestone is achieved. Incentive milestone payments are triggered either by the results of our research efforts or by events external to Abgenix, such as regulatory approval to market a product. Incentive milestone payments are substantially at risk at the inception of the contract, and the values assigned thereto are commensurate with the type of milestone achieved. Upon achievement of an incentive milestone event, we have no future performance obligations related to the payment.

Accounting for Equity Investments.

The Company records gains and losses on equity investments in accordance with SFAS No. 115. Gains and losses that are deemed other than temporary are charged to earnings, and any net unrealized holding gains and losses, to the extent not recognized as an impairment charge, are reported as a component of stockholders’ equity.

In 2002, during the first, second and fourth quarters, declines in the fair value of our investment in CuraGen and ImmunoGen common stock were deemed to be other than temporary, primarily because the stock of each company traded below our respective cost basis for more than six months. Accordingly,

we recorded impairment charges of $34.7 million, $30.4 million and $2.2 million, in the first, second and fourth quarters of 2002, respectively. The total impairment charge for the year ended December 31, 2002 was $67.3 million.

In addition, in 2001, 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. As of June 30, 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 second quarter of 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. This investment 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.

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. As a result, we no longer amortize goodwill but instead review goodwill for impairment on annual basis, or sooner if indications of impairment exist. Under our accounting policy, we have adopted the beginning of the fourth quarter as an annual goodwill impairment test date. Following this approach, we compare the carrying values available as of September 30 with the estimated fair value of the reporting unit to assess if there has been a potential impairment, and, if impairment is indicated, complete the measurement of impairment under the procedures established by SFAS 142. 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. We also consider whether current business and general market conditions suggest that the fair value of the reporting unit has likely declined below its carrying value.

For a brief period during the first quarter of 2003, 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 first quarter of 2003 and as of June 30, 2003, our common stock was trading at a price that represented a market capitalization higher than our book value. As of June 30, 2003, we determined that the fair value of the reporting unit was higher than its carrying value and an impairment charge was not recognized.

If we were to determine in a future period that an impairment of goodwill existed, the impairment measurement procedures could result in a charge for the impairment of goodwill. Furthermore, a change in our determination of reporting units could result in a charge for the impairment of goodwill in future periods. A change in the determination of reporting units could occur should we reorganize into reporting units such that each unit constitutes a business for which discrete financial information is available that is regularly reviewed by management to evaluate the performance of that unit. As of June 30, 2003, the carrying value of our goodwill was approximately $34.8 million.

Accounting for Clinical Trial Supplies.

The costs associated with the manufacture of our antibody therapeutic product candidates (clinical trial supplies) 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 immediately expense previously capitalized costs if the asset is not expected to have an alternative future use, such as use in a clinical trial. As of June 30, 2003, the balance of prepaid clinical trial supplies was $16.7 million and consisted of ABX-EGF. We may incur expenses related to clinical supply writedowns depending on the outcome of ongoing clinical trials.

Contractual Obligations and Commercial Commitments

As of June 30, 2003, future minimum payments for certain contractual obligations for years subsequent to December 31, 2002 were as follows:

	Total		2003		2004- 2005*		2006- 2007*		2008 and Thereafter
	(in thousands)
Contractual Obligations
Operating leases	$	148,908	$	6,401	$	26,875	$	28,765	$	86,867
Convertible debt	200,000		—		—		200,000		—
Total	$	348,908	$	6,401	$	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%. We are obligated to pay interest on March 15 and September 15 of each year, beginning on September 15, 2002. We expect to make interest payments on the notes of $7.0 million per year, for years 2003 through 2006, and $1.2 million in 2007, assuming all the notes remain outstanding until their maturity date. 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.

Other significant commercial commitments include the following:

• Purchase commitments totaling $2.3 million to contractors related to the purchase of equipment and design and construction of our new manufacturing facility;

• Effective June 30, 2003, the Company canceled its agreement with Lonza for the exclusive use of a cell culture production suite. Upon canceling the agreement, the Company is obligated to pay Lonza four equal installments of 4,250,000 British Pounds on October 1, 2003, February 1, 2004, May 1, 2004 and August 1, 2004. The total value of this obligation was approximately $28.0 million United States dollars on June 30, 2003. The cancellation arrangement eliminated the Company’s commitment to pay approximately $46 million in total monthly fees through August 2006;

• An annual maintenance fee of $50,000 for our exclusive worldwide rights to commercialize ABX-CBL. In addition, we commit at least $1.0 million annually to the development of ABX-CBL until ABX-CBL receives regulatory approval as a commercial product in any country and to pay royalties on potential product sales. If we fail to fulfill this commitment, we would lose the CBL license and not be able to continue the development of ABX-CBL. Our obligations under the CBL license agreement are subject to our discretionary right to terminate the agreement. We and our co-developer, SangStat, announced in February 2003 our decision to discontinue further development of ABX-CBL; and

• A commitment to share equally all development costs for ABX-EGF pursuant to our joint development and commercialization agreement with Amgen and Immunex. Development costs are determined by the development plan agreed upon by a joint steering committee. We share responsibility for product development with Amgen and Immunex.

Recent Accounting Pronouncements

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 after June 30, 2003. The provisions of the EITF Issue No. 00-21 do not impact the accounting treatment of our existing revenue arrangements. We believe that the adoption of EITF Issue No. 00-21 will not result in a material change to our existing revenue recognition policy for prospective revenue arrangements. We do not expect the adoption of EITF Issue No. 00-21 to have a material impact on our consolidated financial statements.

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, $208.9 million in 2002 and $99.8 million in the six months ended June 30, 2003. As of June 30, 2003, our accumulated deficit was $468.2 million. Our losses to date have resulted principally from:

• research and development costs relating to the development of our XenoMouse technology and antibody product candidates;

• costs associated with certain agreements with Japan Tobacco and certain 1997 settlement

and cross-licensing agreements with GenPharm;

• in-process research and development costs and amortization of intangible assets associated with our acquisitions of Hesed Biomed, Abgenix Biopharma, IntraImmune Therapies, and Japan Tobacco’s interest in Xenotech;

• general and administrative costs relating to our operations;

• impairment charges related to our strategic investments in CuraGen, ImmunoGen, and MDS Proteomics; and

• manufacturing start-up costs, primarily those related to the cancellation of our agreement with Lonza for the exclusive use of a cell culture production suite.

We expect to incur additional losses for the foreseeable future as a result of our research and development costs and manufacturing start-up 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, Inc. 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 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 contractual 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:

• enter into further co-development, licensing, manufacturing or other agreements;

• successfully complete preclinical development or clinical trials;

• obtain required regulatory approvals;

• successfully manufacture or market product candidates; or

• generate additional revenues or profitability.

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 and establish and operate our manufacturing facility, 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. For the six months ended June 30, 2003, we spent $41.9 million 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 that may adversely affect our liquidity and capital resources. Our future liquidity and capital requirements will depend on many factors, including:

• the scope and results of preclinical development and clinical trials;

• the retention of existing and establishment of further co-development, licensing, manufacturing and other agreements, if any;

• continued scientific progress in our research and development programs;

• the size and complexity of these programs;

• the cost of establishing manufacturing capabilities and meeting good manufacturing practice regulations;

• the cost of conducting commercialization activities and arrangements;

• the time and expense involved in seeking regulatory approvals;

• competing technological and market developments;

• the time and expense of filing and prosecuting patent applications, and enforcing and defending against patent claims;

• our investment in, or acquisition of, other companies;

• the amount of product or technology in-licensing in which we engage; and

• other factors not within our control.

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 indebtedness may harm our financial condition and results of operations.

We have a significant amount of convertible debt and debt service obligations. Our level of

indebtedness will have several important effects on our future operations, including, without limitation:

• we will have additional cash requirements to support the payment of any interest or amortization required with respect to outstanding indebtedness;

• increases in our outstanding indebtedness and leverage will increase our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure; and

• depending on the levels of our outstanding debt, our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes may be limited.

Our ability to make payment of principal and interest on our indebtedness depends upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required, among other things:

• to seek additional financing in the debt or equity markets;

• to refinance or restructure all or a portion of our indebtedness, including our convertible subordinated notes;

• to sell selected assets; or

• to reduce or delay planned capital expenditures.

Such measures might not be sufficient to enable us to service our debt. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms.

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. In 1999 and 2000, the Company purchased an aggregate amount of $80.0 million of the common stock of CuraGen and ImmunoGen as strategic investments. In 2002, during the first, second and fourth quarters, declines in the fair value of the CuraGen and ImmunoGen common stock were deemed to be other than temporary, primarily because the stock of each company traded below our respective cost basis for more than six months. Accordingly, we recorded impairment charges of $34.7 million, $30.4 million and $2.2 million, in the first, second and fourth quarters of 2002, respectively. The total impairment charge for the year ended December 31, 2002 was $67.3 million. 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. As of June 30, 2003, these investments were recorded at fair value in long-term investments on the balance sheet, and any net unrealized holding gains and losses are reported as a component of stockholders’ equity.

In addition, in 2001, 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. As of June 30, 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 second quarter of 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. The investment is record 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 in early stages 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 three 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:

• delays in product development, clinical testing or manufacturing;

• unplanned expenditures in product development, clinical testing or manufacturing;

• failure in clinical trials or failure to receive regulatory approvals;

• emergence of superior or equivalent product development technologies or products;

• inability to manufacture on our own, or through others, product candidates on a clinical or commercial scale;

• inability to market products due to third-party proprietary rights;

• election by our customers not to pursue product development;

• failure by our customers to develop products successfully; and

• failure to achieve market acceptance.

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 and variety 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:

• the number of patients that ultimately participate in the trial;

• the duration of patient follow-up that seems appropriate in view of the results;

• the number of clinical sites included in the trials; and

• the length of time required to enroll suitable patient subjects.

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.

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 various stages of clinical trials, some of which are being wound down or terminated. 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. Failures of clinical trials of any product candidate 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 may 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, to produce ABX-CBL, ABX-IL8 and ABX-EGF under good manufacturing practice regulations, for use in our clinical trials. In June 2003, we canceled our manufacturing supply agreement with Lonza, pursuant to which we had exclusive access to a cell culture production suite, because we determined that with the opening of our own manufacturing plant, we no longer needed access to the Lonza facility. 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 and we may use Lonza or another third-party manufacturer if necessary in the future.

Third-party manufacturers 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. 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 establishing 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 completed a significant stage of validation in the second quarter of 2003. We expect to complete additional significant stages of validation in each of the remaining quarters of 2003. Inspection of the facility by the State of California, a precondition for the use of the facility for the production of clinical trial supplies and commercial products, is scheduled for the third quarter of 2003. The total costs of this facility, including design fees, permits, validation, leasehold improvements and equipment, will be approximately $148.0 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. Although we are currently manufacturing an antibody product candidate in this facility in compliance with those regulations, we may not be able to maintain 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:

• production yields;

• quality control and assurance;

• availability of qualified personnel;

• on-going compliance with FDA regulations;

• production costs; and

• development of advanced manufacturing techniques and process controls.

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 collaborator or other 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 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, to a significant extent 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:

• access proprietary antigens for which we can generate fully human antibody products;

• fund our research and development activities;

• fund preclinical development, clinical trials and manufacturing;

• seek and obtain regulatory approvals; and

• successfully commercialize existing and future product candidates.

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 antibody therapeutic products. We have generated only a limited number of fully human antibody therapeutic product candidates pursuant to our collaboration agreements and only six 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 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:

• limit the number of product candidates that we will be able to develop and commercialize;

• reduce the likelihood of successful product introduction;

• significantly increase our capital requirements; and

• place additional strain on our management’s time.

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 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:

• adversely affect the successful commercialization of any drugs that we or our customers develop;

• impose costly procedures on us or our customers;

• diminish any competitive advantages that we or our customers may attain; and

• adversely affect our receipt of revenues or royalties.

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:

• delays;

• warning letters;

• fines;

• product recalls or seizures;

• injunctions;

• refusal of the FDA to review pending market approval applications or supplements to approval applications;

• total or partial suspension of production;

• civil penalties;

• withdrawals of previously approved marketing applications; and

• criminal prosecutions.

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 or may choose not 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 State of 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. 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:

• establishment and demonstration of clinical efficacy and safety;

• cost-effectiveness of our product candidates;

• their potential advantage over alternative treatment methods;

• reimbursement policies of government and third-party payors; and

• marketing and distribution support for our product candidates, including the efforts of our collaborators where they have marketing and distribution responsibilities.

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 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:

• obtain patents;

• protect trade secrets;

• operate without infringing the proprietary rights of others; and

• prevent others from infringing our proprietary rights.

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, seek to 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.

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.

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

• enforce patents that we own or license;

• protect trade secrets or know-how that we own or license; or

• determine the enforceability, scope and validity of the proprietary rights of others.

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, Inc., Medarex’s collaborator, Kirin Brewing Co. Ltd.; GenMab A/S; Cambridge Antibody Technology Group plc; Protein Design Labs, Inc.; MorphoSys AG; Xenerex Biosciences Inc., a subsidiary of Avanir Pharmaceuticals; XLT Biopharmaceuticals Ltd.; and Alexion Pharmaceuticals, Inc. Finally, we compete with companies that currently offer antibody production services, and may compete with companies that currently only manufacture their own antibodies but could offer antibody production services to third parties.

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, in collaborations with Bristol-Meyers Squib Company and Merck KgAa; 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. AstraZeneca has received approval for Iressa, a small molecule product candidate that may compete with ABX-EGF, in the United States, Japan and Australia for the treatment of advanced non-small cell lung cancer. Furthermore, we are also aware that Merck KgAa has submitted applications for the authorization to market Erbitux, ImClone’s antibody product candidate, for the treatment of metastatic colorectal cancer in the European Union and Switzerland.

Many of these companies and institutions, either alone or together with their customers or collaborators, 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 or collaborators, have significantly greater experience than we do in:

• developing products;

• undertaking preclinical testing and human clinical trials;

• obtaining FDA and other regulatory approvals of products; and

• manufacturing and marketing products.

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:

• other drug development technologies and methods of preventing or reducing the incidence of disease;

• new small molecules; or

• other classes of therapeutic agents.

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 included 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.

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 provide 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 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:

• the potential inability to identify target companies best suited to our business plan;

• the potential inability to successfully integrate acquired operations and businesses and to realize anticipated synergies, economies of scale or other expected value;

• incurrence of expenses attendant to transactions that may or may not be consummated; and

• difficulties in managing and coordinating operations at multiple venues, which, among other things, could divert our management’s attention from other important business matters.

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.

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:

• issue preferred stock without any vote or further action by the stockholders;

• eliminate the right of stockholders to act by written consent without a meeting;

• specify procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings; and

• eliminate cumulative voting in the election of directors.

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 also intend to expand our insurance coverage to include production services activities. 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.

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 June 30, 2002 and June 30, 2003, our common stock closed as high as $12.28 per share and as low as $4.58 per share. This may impact your decision to buy or sell our common stock. Factors affecting our stock price include:

• our financial results;

• fluctuations in our operating results;

• announcements of technological innovations or new commercial therapeutic products by us or our competitors;

• published reports by securities analysts;

• developments in our clinical trials and in clinical trials for potentially competitive product candidates;

• government regulation;

• changes in reimbursement policies;

• developments in patent or other proprietary rights;

• developments in our relationship with customers;

• public concern as to the safety and efficacy of our products; and

• general market conditions.

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:

• it is or holds itself out to be engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or

• it is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 percent of the value of such company’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk. We are exposed to interest rate sensitivity on our investments in debt securities and our 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 interest rates, we invest in short-term securities and our goal is to maintain an average maturity of approximately one year. In addition, as of June 30, 2003, we had $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 June 30, 2003 would result in an adverse net change in the fair value of our interest rate sensitive assets and liabilities of approximately $5.4 million. A hypothetical 1.0% per annum decrease in interest rates as of December 31, 2002 would result in an adverse net change in the fair value of our interest rate sensitive assets and liabilities of approximately $6.3 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 aggregate market value of our investments in these securities was approximately $15.5 million and $13.0 million as of June 30, 2003 and December 31, 2002, respectively. Due to decreases in the market prices of the shares of CuraGen and ImmunoGen, we recorded impairment charges of $67.3 million in 2002 related to these investments. 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 $1.6 million and $1.3 million from the fair value of those investments at June 30, 2003 and December 31, 2002, respectively. 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 strategic investment in MDS Proteomics, a privately held company. 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 write-downs of these securities. At June 30, 2003, our strategic investment in MDS Proteomics had a carrying amount of $7.9 million.

Foreign Currency Risk. A substantial majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, we do enter into transactions in other currencies, primarily the British pound. As of June 30, 2003, we had a contract cancellation obligation to Lonza of approximately $28.0 million, which is payable in British pounds. A hypothetical 10% adverse change in exchange rates as of June 30, 2003 would result in an increase in the U.S. dollar value of this obligation of approximately $2.8 million.

Item 4. 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-15(e) promulgated under the Securities Exchange Act of 1934, as of the end of the period covered by 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 quarterly report on Form 10-Q has been made known to them in a timely fashion.

Changes in Internal Controls Over Financial Reporting

There has been no change in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Not applicable.

ITEM 2. Changes in Securities and Use of Proceeds

Not applicable.

ITEM 3. Defaults upon Senior Securities

Not applicable.

ITEM 4. Submission of Matters to Vote of Security Holders

At our Annual Meeting of Stockholders, held on June 27, 2003, one matter, the election of directors, was voted upon. The following is tabulation of votes with respect to each nominee:

	Votes
Nominee	For	Withheld

R. Scott Greer	60,894,854	97,445
M. Kathleen Behrens	59,335,857	1,656,442
Raju S. Kucherlapati	59,342,722	1,649,577
Kenneth B. Lee Jr.	60,774,245	218,054
Mark B. Logan	60,775,395	216,904
Thomas G. Wiggans	59,340,563	1,651,736
Raymond M. Withy	60,892,754	99,545

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Number		Description

3.1(1)		Amended and Restated Certificate of Incorporation of Abgenix, as currently in effect.
3.2(2)		Amended and Restated Bylaws of Abgenix, as currently in effect.
10.82		Letter Agreement dated June 27, 2003, between Lonza Biologics plc and Abgenix, Inc.
10.83		Form of Change of Control Severance Agreement between Abgenix, Inc. and its officers
10.84		Amended and Restated Change of Control Severance Agreement, dated as of April 24, 2003, between Abgenix, Inc. and Raymond M. Withy, Ph.D.
31.1		Certification of Raymond M. Withy, Ph.D. Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Kurt Leutzinger Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		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.
32.2		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.

(1) Incorporated by reference to the same exhibit filed with Abgenix’s Annual Report on Form 10-K for the year ended December 31, 2002.

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

(b) Reports on Form 8-K

We filed a Form 8-K on April 23, 2003, furnishing under “Item 12. Disclosure of Results of Operations and Financial Condition” a press release we issued on that date to report our financial results for the quarter ended March 31, 2003.

We filed a Form 8-K on July 22, 2003, furnishing under “Item 12. Disclosure of Results of Operations and Financial Condition” a press release we issued on that date to report our financial results for the quarter ended June 30, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 14, 2003

	ABGENIX, INC.
	(Registrant)


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


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