-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H4YVMgTZDpFIlFZC0RmmMVbpTJWzhSORvDYxtwsmjq70cLolGAMOldiEYv3qvy7X p7qTZZpVzUCWk5syNn2oUA== 0000891618-99-000099.txt : 19990118 0000891618-99-000099.hdr.sgml : 19990118 ACCESSION NUMBER: 0000891618-99-000099 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19990115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABGENIX INC CENTRAL INDEX KEY: 0001052837 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 943248826 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-70631 FILM NUMBER: 99506940 BUSINESS ADDRESS: STREET 1: 7601 DUMBARTON CIRCLE CITY: FREMONT STATE: CA ZIP: 94555 BUSINESS PHONE: 5106086500 MAIL ADDRESS: STREET 1: 7601 DUMBARTON CIRCLE CITY: FREMONT STATE: CA ZIP: 94555 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1999 REGISTRATION NO. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ABGENIX, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 2836 94-3248826 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
ABGENIX, INC. 7601 DUMBARTON CIRCLE FREMONT, CALIFORNIA 94555 (510) 608-6500 (ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) R. SCOTT GREER PRESIDENT AND CHIEF EXECUTIVE OFFICER ABGENIX, INC. 7601 DUMBARTON CIRCLE FREMONT, CALIFORNIA 94555 (510) 608-6500 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS) COPIES TO: MARIO M. ROSATI, ESQ. CHRIS F. FENNELL, ESQ. WILSON SONSINI GOODRICH & ROSATI PROFESSIONAL CORPORATION 650 PAGE MILL ROAD PALO ALTO, CA 94304 (650) 493-9300 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time as the selling stockholders may decide. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE - ---------------------------------------------------------------------------------------------------------------------- Common stock, $0.0001 par value... 1,146,300 $15.50 $17,767,650 $4,940.00 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended, based on the average of the high and low sales price as reported by Nasdaq on January 13, 1999. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JANUARY 15, 1999 LOGO 1,146,300 SHARES COMMON STOCK The selling stockholders identified in this prospectus are offering 1,146,300 shares of Abgenix, Inc.'s common stock. Abgenix's stock is traded on the Nasdaq National Market under the symbol "ABGX." The last reported sale price for the common stock on the Nasdaq National Market on January 14 was $16.00 per share. We will not receive any of the proceeds from the sale of shares by the selling stockholders and we are not offering any shares for sale under this prospectus. See "Plan of Distribution" for a description of sales of the shares by the selling stockholders. ------------------------------ INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------------ THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1999 3 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THE SELLING STOCKHOLDERS ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO "ABGENIX," "WE," "US" AND "OUR" REFER TO ABGENIX, INC. AND ITS SUBSIDIARIES. ------------------------- TABLE OF CONTENTS
PAGE ---- Summary..................................................... 3 Risk Factors................................................ 6 Special Note Regarding Forward-Looking Statements........... 20 Certain Information......................................... 21 Use of Proceeds............................................. 21 Price Range of Common Stock................................. 21 Dividend Policy............................................. 21 Capitalization.............................................. 22 Selected Financial Data..................................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 24 Business.................................................... 31 Management.................................................. 52 Certain Transactions........................................ 61 Principal and Selling Stockholders.......................... 65 Plan of Distribution........................................ 68 Description of Capital Stock................................ 69 Shares Eligible for Future Sale............................. 71 Legal Matters............................................... 72 Experts..................................................... 72 Where You Can Find Additional Information................... 72 Index to Financial Statements............................... F-1
------------------------- We own Abgenix and the Abgenix logo trademarks. We have rights to use XenoMouse, a registered trademark of Xenotech, L.P., one of our subsidiaries. This prospectus also includes trademarks owned by other companies. 2 4 SUMMARY Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire prospectus, especially "Risk Factors" and the Financial Statements and Notes, before deciding to invest in our common stock. ABGENIX We are a biopharmaceutical company that develops and intends to commercialize antibody therapeutic products for the treatment of a variety of disease conditions, including transplant-related diseases, inflammatory and autoimmune disorders, and cancer. We have developed XenoMouse technology, a proprietary technology which we believe enables quick generation of high affinity, fully human antibody product candidates to essentially any disease target appropriate for antibody therapy. We intend to use XenoMouse technology to build a large and diversified product portfolio that we plan to commercialize either through corporate collaborations or internal product development programs. OUR XENOMOUSE TECHNOLOGY COLLABORATIONS We have established collaborative arrangements to use our XenoMouse technology to produce fully human antibodies with eight companies covering at least 11 antigen targets. Pursuant to these collaborations, we intend to generate antibody product candidates for the treatment of cancer, inflammation, transplant rejection, cardiovascular disease and growth factor modulation. Our collaborative partners include Cell Genesys, Inc., Pfizer Inc., Schering-Plough Research Institute, Genentech, Inc., Millennium BioTherapeutics, Inc., Research Corporation Technologies, Centocor, Inc. and AVI BioPharma, Inc. Among our eight collaborative partners, Pfizer, Genentech and Millennium BioTherapeutics have each entered into additional collaborations with us specifying additional antigens for XenoMouse antibody development. The financial terms of our existing collaborations typically include upfront payments, potential license fees and milestone payments payable to us by the collaborative partner. OUR PROPRIETARY PRODUCTS We also have four antibody product candidates that are under development internally. Our lead product candidate, ABX-CBL, is an in-licensed mouse antibody. We are currently conducting a multi-center confirmatory Phase II clinical trial for ABX-CBL for the treatment of a transplant-related disease known as graft versus host disease. Once the final report on our Phase II clinical trial has been completed, we plan to submit the data to the FDA for approval to commence a Phase III clinical trial for ABX-CBL during 1999. Our other three product candidates were generated using XenoMouse technology. We completed a Phase I clinical trial for our fully human antibody product candidate in psoriasis, ABX-IL8, and began a Phase I/II clinical trial in November 1998. We are in preclinical development with two other fully human antibody product candidates: ABX-EGF for use in the treatment of cancer; and ABX-RB2 for use in the treatment of chronic immunological disorders. We expect to initiate Phase I clinical trials with ABX-EGF in mid-1999. 3 5 THE OFFERING Common stock to be offered by the selling stockholders... 1,146,300 shares Common stock outstanding after the offering.............. 11,120,293 shares Use of proceeds.......................................... We will not receive any proceeds from the sales of common stock by the selling stockholders. See "Use of Proceeds." Nasdaq National Market Symbol............................ ABGX
Unless otherwise stated, all information contained in this prospectus excludes: (1) 1,642,186 shares of common stock issuable upon exercise of stock options at a weighted average exercise price of $2.44 per share outstanding as of December 31, 1998; (2) 121,667 shares of common stock issuable upon exercise of warrants with an exercise price of $6.00 per share outstanding as of December 31, 1998; and (3) 25,000 shares of common stock issuable pursuant to a license agreement outstanding as of December 31, 1998. 4 6 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------------------------- ------------------------- 1993 1994 1995 1996 1997 1997 1998 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (UNAUDITED) STATEMENT OF OPERATIONS DATA(1): Total revenues(1)............. $ 6,600 $ 6,200 $ 6,200 $ 4,719 $ 1,954 $ 1,109 $ 2,008 Operating expenses: Research and development.... 4,629 7,921 11,879 9,433 11,405 8,787 11,976 General and administrative............ 1,019 1,955 2,603 2,565 3,525 1,966 2,562 Charge for cross-license and settlement amount allocated from Cell Genesys(2)................ -- -- -- -- 11,250 11,250 -- Equity in losses from the Xenotech joint venture (charge for cross-license and settlement)(2)........ -- -- -- -- 11,250 7,500 -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses............ 5,648 9,876 14,482 11,998 37,430 29,503 14,538 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operating income (loss)....... 952 (3,676) (8,282) (7,279) (35,476) (28,394) (12,530) Interest income (expense), net......................... -- -- -- 179 (404) (206) (229) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss)............. $ 952 $ (3,676) $ (8,282) $ (7,100) $ (35,880) $ (28,600) $ (12,301) =========== =========== =========== =========== =========== =========== =========== Net loss per share(3)......... $(46,710.53) $ (1,032.70) $ (2,756.11) $ (3.27) =========== =========== =========== =========== Shares used in computing net loss per share(3)........... 152 34,744 11,102 3,766,615
SEPTEMBER 30, 1998 ------------------ (UNAUDITED) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 24,573 Working capital............................................. 17,856 Total assets................................................ 30,781 Long-term debt, less current portion........................ 2,710 Accumulated deficit......................................... (64,775) Total stockholders' equity.................................. 20,984
- --------------- (1) The statement of operations includes our revenues and expenses as a business unit within Cell Genesys prior to July 15, 1996. During the years ended December 31, 1993, 1994, 1995 and 1996, our revenues were derived principally from Xenotech, L.P. for the development of XenoMouse technology, which was essentially completed in 1996. (2) In the year ended December 31, 1997, we incurred an aggregate non-recurring charge for cross-license and settlement of $22.5 million. This amount represents an allocation from Cell Genesys of $11.25 million and an entry of $11.25 million to record the equity in the losses of Xenotech L.P., our equally owned joint venture with JT America, Inc. The statement of operations for the nine-month period ended September 30, 1997 excludes the final amount of $3.75 million that we expensed in December 1997. See Note 6 of Notes to the Financial Statements. (3) Net loss per share data has not been presented prior to July 15, 1996 as there were no equity securities outstanding prior to that date. 5 7 RISK FACTORS An investment in this common stock offering is very risky. You should carefully consider the following risk factors in addition to the remainder of this prospectus before purchasing the common stock. This prospectus contains forward-looking statements that involve risks and uncertainties. Many factors, including those described below, may cause actual results to differ materially from anticipated results. OUR XENOMOUSE TECHNOLOGY MAY NOT PRODUCE SAFE, EFFICACIOUS OR COMMERCIALLY VIABLE PRODUCTS Our XenoMouse technology is a new approach to the generation of antibody therapeutic products. We have not commercialized any antibody products based on XenoMouse technology. We are not aware of any commercialized, fully human antibody therapeutic products that have been generated from any technologies similar to ours. Our antibody product candidates are still at a very early stage of development. We have begun clinical trials with respect to only one fully human antibody product candidate, ABX-IL8. We cannot be certain that XenoMouse technology will generate antibodies against all the antigens to which it is exposed in an efficient and timely manner, if at all. Furthermore, XenoMouse technology may not result in any meaningful benefits to our current or potential collaborative partners or be safe and efficacious for patients. If XenoMouse technology fails to generate antibody product candidates that lead to the successful development and commercialization of products, our business, financial condition and results of operations will be materially adversely affected. See "Business -- The Abgenix Solution -- XenoMouse Technology." CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES WILL BE EXPENSIVE AND THEIR OUTCOME IS UNCERTAIN 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 will incur substantial expense for, and 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, regulatory delays or rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of product development. Only two of our product candidates, ABX-CBL and ABX-IL8, are currently in clinical trials. Patient follow-up for these clinical trials has been limited. To date, data obtained from these clinical trials has been insufficient to demonstrate safety and efficacy under applicable FDA guidelines. As a result, such data will not support an application for regulatory approval without further clinical trials. Clinical trials conducted by Abgenix or by third parties on our behalf may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for ABX-CBL, ABX-IL8 or any other potential product candidates. Regulatory authorities may not permit us to undertake any additional clinical trials for our product candidates. In addition, our other product candidates are in preclinical development, and we have not submitted investigational new drug applications nor begun clinical trials for such product candidates. Our preclinical or clinical development efforts may not be successfully completed. We may not file further investigational new drug applications. Our clinical trials may not commence as planned. 6 8 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. Our commencement and rate of completion of clinical trials may be delayed by many factors, including: - inability to manufacture sufficient quantities of materials used for clinical trials; - slower than expected rate of patient recruitment; - inability to adequately follow patients after treatment; - unforeseen safety issues; - lack of efficacy during the clinical trials; or - government or regulatory delays. We have limited experience in conducting and managing clinical trials. We rely on third parties, including our collaborative partners, to assist us in managing and monitoring clinical trials. Our reliance on such third parties may result in delays in completing, or failing to complete, such trials if they fail to perform under our agreements with them. Our product candidates may fail to demonstrate safety and efficacy in clinical trials. Such failure may delay development of other product candidates, and hinder our ability to conduct related preclinical testing and clinical trials. As a result of such failures, we may also be unable to obtain additional financing. Our business, financial condition and results of operations will be materially adversely affected by any delays in, or termination of, our clinical trials. THE CLINICAL SUCCESS OF ABX-CBL IS UNCERTAIN We are currently conducting a multi-center confirmatory Phase II trial in graft versus host disease, or GVHD. As of December 31, 1998, ABX-CBL has been administered to a total of only 133 patients for GVHD and organ transplant rejection indications. In our clinical trials, we administered ABX-CBL to only 48 of these patients, and we cannot rely on data obtained from other patients to support the efficacy of ABX-CBL in an application for regulatory approval. In addition, our clinical trials are being conducted with patients who have failed conventional treatments and who are in the most advanced stages of GVHD. During the course of treatment, these patients can die or suffer adverse medical effects for reasons that may not be related to ABX-CBL. Such adverse effects may affect the interpretation of clinical trial results. We continue to treat patients and collect data from our Phase II clinical trials. Once the final report on our Phase II clinical trials has been completed, we plan to submit the data to the FDA for approval to commence a Phase III clinical trial. We cannot assure you that the results of our Phase II clinical trials will be favorable. The FDA may require additional clinical trials before allowing us to commence a Phase III clinical trial. If required, additional clinical trials will be extensive, expensive and time-consuming. If ABX-CBL fails to receive regulatory approval, our business, financial condition and results of operations may be materially adversely affected. SUCCESSFUL DEVELOPMENT OF OUR PRODUCTS IS UNCERTAIN Our development of current and future product candidates is subject to the risks of failure inherent in the development of new pharmaceutical products and products based on new technologies. These risks include: - 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 products; - inability to manufacture product candidates on a commercial scale; 7 9 - inability to market products due to third-party proprietary rights; - election by our collaborative partners not to pursue product development; - failure by our collaborative partners to successfully develop products; and - failure to achieve market acceptance. Because of these risks, our research and development efforts or those of our collaborative partners may not result in any commercially viable products. If a significant portion of these development efforts is not successfully completed, required regulatory approvals are not obtained, or any approved products are not commercially successful, our business, financial condition and results of operations will be materially adversely affected. See "Business -- Proprietary Product Development Programs." WE ARE AN EARLY STAGE COMPANY 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 require significant additional investment in research and development, preclinical testing and clinical trials, regulatory and sales and marketing activities to commercialize current and future product candidates. We cannot assure you that such product candidates, if successfully developed, will generate sufficient or sustainable revenues to enable us to be profitable. WE HAVE A HISTORY OF LOSSES We have incurred net losses in each of the last three years of operation, including net losses of approximately $8.3 million in 1995, $7.1 million in 1996, and $35.9 million in 1997. We also incurred net losses of approximately $12.3 million in the nine-month period ended September 30, 1998. As of September 30, 1998, our accumulated deficit was approximately $64.8 million. Our losses have resulted principally from: - research and development costs relating to the development of our XenoMouse technology and antibody product candidates; - cross-license and settlement costs relating to our patent portfolio; and - general and administrative costs relating to our operations. We expect to incur additional operating losses until at least the year 2000 as a result of increases in our research and development costs, including costs associated with conducting preclinical testing and clinical trials. 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 collaborative arrangements, or the initiation, success or failure of clinical trials. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR FUTURE PROFITABILITY IS UNCERTAIN Prior to June 1996, our business was owned by Cell Genesys and operated as a business unit. Since that time, we have funded our research and development activities primarily from contributions from Cell Genesys, private placements of preferred stock, the initial public offering of our common stock, revenues generated from our collaborative arrangements, equipment leaseline financings and loan facilities. We expect that substantially all of our revenues for the foreseeable future will result from payments under collaborative arrangements. To date, such payments have been in the form of upfront payments, reimbursement for research and development expenses and milestone payments, but may include license fees in the future. Payments under our existing and any future collaborative arrangements will be subject to significant fluctuation in both timing and amount. Our revenues may not be indicative of our future performance or of our ability to continue to achieve such milestones. Our revenues and results of 8 10 operations for any period may also not be comparable to the revenues or results of operations for any other period. We cannot assure you that we will: - enter into further collaborative arrangements; - successfully complete preclinical or clinical trials; - obtain required regulatory approvals; - successfully develop, manufacture and market product candidates; or - generate additional revenues or profitability. If we fail to achieve any of the above goals, our business, financial condition and results of operations will be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Proprietary Product Development Programs." WE WILL NEED TO FIND COLLABORATIVE PARTNERS TO DEVELOP MANY OF OUR PRODUCT CANDIDATES Our strategy for the development and commercialization of antibody therapeutic products depends, in large part, upon the formation of collaborative arrangements with several collaborative partners. Potential collaborative partners include pharmaceutical and biotechnology companies, academic institutions and other entities. We must enter into these collaborations to successfully develop and commercialize product candidates. Such collaborations 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 testing, clinical trials and manufacturing; - seek and obtain regulatory approvals; and - successfully commercialize existing and future product candidates. Only a limited number of fully human antibody product candidates have been generated pursuant to our collaborations. None of these collaborative product candidates has entered clinical testing and may not result in commercially successful products. Current or future collaborative arrangements may not be successful. If we fail to maintain our existing collaborative arrangements or to enter into additional collaborative arrangements, our business, financial condition and results of operations will be materially adversely affected. Our dependence on collaborative arrangements with third parties subjects us to a number of risks. Such collaborative arrangements may not be on terms favorable to Abgenix. Agreements with collaborative partners typically allow partners significant discretion in electing whether to pursue any of the planned activities. We cannot control the amount and timing of resources our collaborative partners may devote to the product candidates. Our partners may not perform their obligations as expected. Business combinations or significant changes in a collaborative partner's business strategy may adversely affect a partner's willingness or ability to complete its obligations under the arrangement. Even if we fulfill our obligations under a collaborative agreement, our partner can terminate the agreement at any time following proper written notice. If any collaborative partner were to terminate or breach our agreement with it, or otherwise fail to complete its obligations in a timely manner, our business, financial condition and results of operations may be materially adversely affected. If we are not able to establish further collaborative arrangements or any or all of our existing collaborative arrangements are terminated, we may be required to seek new collaborative arrangements 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; 9 11 - significantly increase our capital requirements; and - place additional strain on management's time. Existing or future collaborative partners may pursue alternative technologies, including those of our competitors. Disputes may arise with respect to the ownership of rights to any technology or products developed with any current or future collaborative partner. Lengthy negotiations with potential new collaborative partners or disagreements between Abgenix and our collaborative partners may lead to delays or termination in the research, development or commercialization of product candidates or result in time consuming and expensive litigation or arbitration. If our collaborative partners pursue alternative technologies or fail to develop or commercialize successfully any product candidate to which they have obtained rights from us, our business, financial condition and results of operations may be materially adversely affected. OUR JOINT VENTURE WITH JT AMERICA, INC. MAY LIMIT OUR ABILITY TO DEVELOP PRODUCT CANDIDATES In 1991, Cell Genesys and JT America, Inc. formed Xenotech, L.P., an equally-owned joint venture, to develop genetically modified strains of mice which can produce fully human monoclonal antibodies, called XenoMouse technology, and to commercialize products generated from XenoMouse technology. Upon our organization, Cell Genesys assigned its rights in Xenotech to us. We must obtain licenses from Xenotech to commercialize antibody products generated by XenoMouse technology. We have the right to license the use of XenoMouse technology from Xenotech to develop a certain number of antigen targets each year. If we have used our yearly allotment of licenses to develop antigen targets and desire to acquire a license to develop additional antigen targets, we may have to negotiate with JT America or others to acquire such rights. Disputes with JT America, or its parent company Japan Tobacco, Inc., may result in the loss of the right to commercialize a product candidate by either party. Limits on our ability to acquire additional licenses to develop antigen targets, or disputes with JT America or Japan Tobacco, will limit our ability to establish collaborations and fully realize the commercial potential of XenoMouse technology. See "Business -- Joint Venture With Japan Tobacco." WE WILL REQUIRE ADDITIONAL FINANCING We will continue to expend substantial resources for the expansion of research and development, including costs associated with conducting preclinical testing and clinical trials. We will be required to expend substantial funds in the course of completing required additional development, preclinical testing and clinical trials of and regulatory approval for product candidates. Our future liquidity and capital requirements will depend on many factors, including: - the scope and results of preclinical testing and clinical trials; - the retention of existing and establishment of further collaborative arrangements, if any; - continued scientific progress in our research and development programs; - the size and complexity of these programs; - the time and expense involved in obtaining regulatory approvals, if any; - competing technological and market developments; - the time and expense of filing and prosecuting patent applications and enforcing patent claims; - the cost of establishing manufacturing capabilities, conducting commercialization activities and arrangements and product in-licensing; and - other factors not within our control. We will need to raise additional funds through public or private financing, collaborative arrangements or other arrangements. Additional funding may not be available to us on favorable terms, if at all. 10 12 Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Collaborative arrangements may require us to relinquish our rights to certain of our technologies, product candidates or marketing territories. If we fail to raise additional funds when needed, our business, financial condition and results of operations will be materially adversely affected. WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE 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 products or have successfully commercialized antibody products. Many of these companies are addressing the same diseases and disease indications as Abgenix or our collaborative partners. 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. These companies include GenPharm International, Inc., a wholly-owned subsidiary of Medarex, Inc., Cambridge Antibody Technology Group, Inc., Protein Design Labs, Inc. and Morphosys, Inc. Some of our competitors have received regulatory approval or are developing or testing product candidates that may compete directly with our product candidates. Recently, Sangstat Medical Corp. received approval for an organ transplant rejection product that may compete with ABX-CBL, which is in clinical trials. We are also aware that several companies, including Genentech, Inc., have potential product candidates that may compete with ABX-IL8. Furthermore, we are aware that ImClone Systems, Inc., Medarex and OSI Pharmaceuticals, Inc. have potential antibody and small molecule product candidates already in clinical development that may compete with ABX-EGF, which is in preclinical development. We may also compete with Japan Tobacco in supplying XenoMouse technology or antibody product candidates to potential collaborative partners. Many of these companies and institutions, either alone or together with their collaborative partners, 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 collaborative partners, 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 us. 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. 11 13 Developments by competitors may render our product candidates or technologies obsolete or noncompetitive. We face and will continue to face intense competition from other companies for collaborative arrangements 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 collaborative partners, may succeed in developing technologies or products that are more effective than ours. MARKET ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN Our product candidates may not gain market acceptance among physicians, patients, healthcare 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. 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 the clinical safety and efficacy of therapies using our antibody products is established, 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. For example, antibody products 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 and utilize any product candidates that Abgenix or our collaborative partners develop. If our products do not achieve significant market acceptance, our business, financial condition and results of operations will be materially adversely affected. See "Business -- Proprietary Product Development Programs," "-- Competition," and "-- Pharmaceutical Pricing and Reimbursement." OUR PATENT POSITION IS UNCERTAIN AND OUR SUCCESS DEPENDS ON OUR PROPRIETARY RIGHTS Our success depends in part on our ability to: - obtain patents; - protect trade secrets; - operate without infringing upon the proprietary rights of others; and - prevent others from infringing on 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. While we have pending patent applications in the United States relating to XenoMouse technology, no patents have been issued. We try to protect our proprietary position by filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. The patent position of biopharmaceutical companies involves complex legal and factual questions and, therefore, enforceability cannot be predicted with 12 14 certainty. Patents, if issued, may be challenged, invalidated or circumvented. 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 proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. 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 or adequate remedies for our technology in the event of unauthorized use or disclosure of confidential and proprietary information. The parties may breach such agreements. Furthermore, our trade secrets may otherwise become known to, or be independently developed by, our competitors. See "Business -- Intellectual Property." WE MAY FACE CHALLENGES FROM THIRD PARTIES REGARDING THE VALIDITY OF OUR PATENTS AND PROPRIETARY RIGHTS Research has been conducted for many years in the antibody field. This has resulted in a substantial number of issued patents and an even larger number of patent applications. Patent applications in the United States are, in most cases, maintained in secrecy until patents issue. 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 infringe the patents or violate other proprietary rights of third parties. In the event of infringement or violation, Abgenix and our collaborative partners may be prevented from pursuing product development or commercialization. Such a result will materially adversely affect 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 will be materially adversely affected if any of the parties breaches the cross-license agreement. We have one issued European patent relating to XenoMouse technology that is currently undergoing opposition proceedings within the European Patent Office and the outcome of this opposition is uncertain. See "Business -- Intellectual Property -- Patent Cross-License and Settlement Agreement with GenPharm." The biotechnology and pharmaceutical industries have been characterized by extensive litigation regarding patents and other intellectual property rights. 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 our issued and licensed patents; - protect trade secrets or know-how that we own or license; or - determine the enforceability, scope and validity of the proprietary rights of others. If we become involved in any litigation, interference or other administrative proceedings, we will incur substantial expense and the efforts of our technical and management personnel will be significantly diverted. An adverse determination may subject us to significant liabilities or require us to seek licenses that may not be available from third parties. We may be restricted or prevented from manufacturing and 13 15 selling our products, if any, in the event of an adverse determination in a judicial or administrative proceeding or if we fail to obtain necessary licenses. 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 will materially adversely affect our business, financial condition and results of operations. WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS AND WE MAY NOT BE ABLE TO OBTAIN REGULATORY APPROVALS 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 our products are marketed abroad, they also are subject to extensive regulation by foreign governments. None of our product candidates has been approved 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 candidates safety and efficacy. For example, we have not received FDA approval to commence Phase III clinical trials for ABX-CBL. 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. Delays in obtaining regulatory approvals may: - adversely affect the successful commercialization of any drugs that Abgenix or our collaborative partners develop; - impose costly procedures on Abgenix or our collaborative partners; - diminish any competitive advantages that Abgenix or our collaborative partners may attain; and - adversely affect our receipt of revenues or royalties. Certain material changes to an approved product such as manufacturing changes or additional labeling claims are subject to further FDA review and approval. Any required approvals, once obtained, may be withdrawn. Compliance with other regulatory requirements may not be maintained. Further, if we fail to comply with applicable FDA and other regulatory requirements at any stage during the regulatory process, Abgenix or our contract 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. We expect to rely on our collaborative partners to file investigational new drug applications and generally direct the regulatory approval process for many of our products. Our collaborative partners may not be able to conduct clinical testing or obtain necessary approvals from the FDA or other regulatory 14 16 authorities for any product candidates. If we fail to obtain required governmental approvals, our collaborative partners will experience delays in or be precluded from marketing products developed through our research. In addition, the commercial use of our products will be limited. Delays and limitations may materially adversely affect our business, financial condition and results of operations. Abgenix and our contract manufacturers also are required to comply with the applicable FDA current good manufacturing practice regulations. 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. Such facilities must be approved before we can use them in commercial manufacturing of our products. Abgenix or our contract manufacturers may not be able to comply with the applicable good manufacturing practice requirements and other FDA regulatory requirements. If Abgenix or our contract manufacturers fails to comply, our business, financial condition and results of operations will be materially adversely affected. See "Business -- Government Regulation." WE RELY ON THIRD PARTY MANUFACTURERS AND DO NOT HAVE COMMERCIAL SCALE MANUFACTURING EXPERIENCE We lack the resources and capability to manufacture our products on a commercial scale. While we currently manufacture limited quantities of antibody products for preclinical testing, we depend on sole source contract manufacturers to produce ABX-CBL, ABX-IL8 and ABX-EGF under good manufacturing practice regulations for use in our clinical trials. Each contract manufacturer has a limited number of facilities in which our product candidates can be produced. Our contract manufacturers have limited experience in manufacturing ABX-CBL, ABX-IL8 and ABX-EGF in quantities sufficient for conducting clinical trials or for commercialization. There are, on a worldwide basis, a limited number of contract facilities in which our product candidates can be produced under good manufacturing practice regulations for use in pharmaceutical drugs. It can also take a substantial period of time for a contract facility to begin producing antibodies under good manufacturing practice regulations. Accordingly, we depend on our contract manufacturers to produce our product candidates under good manufacturing practice regulations which meet acceptable standards for our clinical trials. Contract manufacturers often encounter difficulties in scaling up production, including problems involving production yields, quality control and quality assurance and shortage of qualified personnel. Our contract manufacturers 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. If our contract manufacturers fail to deliver the required quantities of our product candidates for clinical use on a timely basis and at commercially reasonable prices, and we fail to find a replacement manufacturer or develop our own manufacturing capabilities, our business, financial condition and results of operations will be materially adversely affected. In addition, Abgenix and our third-party manufacturers are required to register manufacturing facilities with the FDA and foreign regulatory authorities. The facilities will then be subject to inspections confirming compliance with good manufacturing practice requirements established by the FDA or corresponding foreign regulations. If Abgenix or our third-party manufacturers fails to maintain compliance with the good manufacturing practice requirements, our business, financial condition and results of operations will be materially adversely affected. See "Business -- Manufacturing." WE DO NOT HAVE MARKETING AND SALES EXPERIENCE We do not have a marketing, sales or distribution capability. For certain products, we may establish an internal marketing and sales force. We intend to enter into arrangements with third parties to market and sell most of our products. We may not be able to enter into 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 15 17 successful. If we are unable to enter into third-party arrangements, then we must 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 experience 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. If we fail to establish successful marketing and sales capabilities or fail to enter into successful marketing arrangements with third parties, our business, financial condition and results of operations will be materially adversely affected. WE DEPEND ON KEY PERSONNEL AND MUST CONTINUE TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS We are highly dependent on the principal members of our scientific and management staff. If we lose any of these persons, our business, financial condition and results of operations may be materially adversely affected. For us to pursue product development, marketing and commercialization plans, we will need to hire additional qualified scientific personnel to perform research and development. We will also need to hire personnel with expertise in clinical testing, government regulation, manufacturing and marketing. 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. In addition, we rely on members of our Scientific and Medical Advisory Boards and other consultants to assist us in formulating our research and development strategy. All of our consultants and the members of our Scientific and Medical Advisory Boards are employed by other entities. They may have commitments to, or advisory or consulting agreements with, other entities that may limit their availability to us. If we lose the services of these personnel, the achievement of our development objectives may be impeded. Such impediments may materially adversely affect our business, financial condition and results of operations. See "Business -- Scientific and Medical Advisory Boards." CELL GENESYS EXERCISES SIGNIFICANT INFLUENCE OVER US As of December 31, 1998, Cell Genesys beneficially owns 30.2% of our outstanding capital stock. As a result, Cell Genesys will have significant influence over all matters requiring the approval of our stockholders. Such matters include the election of our Board of Directors and changes in control of Abgenix. We have entered into a governance agreement with Cell Genesys which provides that so long as Cell Genesys or a group to which it belongs owns a specific percentage of our outstanding voting stock, Cell Genesys or the group shall have the right to nominate a fixed number of directors to serve on our Board. The details of this arrangement are set forth in the table below:
PERCENTAGE OWNERSHIP NUMBER OF DIRECTORS -------------------- ------------------- 50% or more........................................ 4 out of 7 Less than 50% but greater than 25%................. 3 out of 7 Less than 25% but greater than 15%................. 1 out of 7
The governance agreement also provides that Cell Genesys and each of our officers and directors who owns voting stock shall agree to vote for the persons nominated as set forth above. We may be adversely impacted by the significant influence which Cell Genesys will have with respect to matters affecting us. See "Certain Transactions" and "Management -- Board Composition." DIRECTORS, EXECUTIVE OFFICERS, PRINCIPAL STOCKHOLDERS AND AFFILIATED ENTITIES OWN A SIGNIFICANT PERCENTAGE OF OUR CAPITAL STOCK Our directors, executive officers, principal stockholders and affiliated entities beneficially own, in the aggregate, approximately 43.7% of our outstanding common stock. These stockholders, if acting together, will be able to significantly influence all matters requiring approval by our stockholders. Such matters 16 18 include the election of directors and the approval of mergers or other business combination transactions. We may be adversely impacted by the control that such stockholders will have with respect to matters affecting us. See "Principal and Selling Stockholders." WE FACE UNCERTAINTY OVER REIMBURSEMENT AND HEALTHCARE REFORM 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 third-party payors include government health administration authorities, managed care providers, private health insurers and other organizations. These third-party payors are increasingly challenging the price and examining the cost effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. We may need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of our products. Such studies may require us to provide a significant amount of resources. Our product candidates may not be considered cost-effective. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Domestic and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. Accordingly, legislation and regulations affecting the pricing of pharmaceuticals may change before our proposed products are approved for marketing. Adoption of such legislation could further limit reimbursement for pharmaceuticals. If the government and third-party payors fail to provide adequate coverage and reimbursement rates for our product candidates, the market acceptance of our products may be adversely affected. If our products do not receive market acceptance, our business, financial condition and results of operations will be materially adversely affected. WE FACE PRODUCT LIABILITY RISKS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE INSURANCE The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to liability claims resulting from such use or sale of our products. These claims might be made directly by consumers, healthcare providers or by pharmaceutical companies or others selling such products. 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. Our insurance coverage limits are $5.0 million per occurrence and $5.0 million in the aggregate. We intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for product candidates in development. However, insurance coverage is becoming increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our business, financial condition and results of operations may be materially adversely affected. OUR OPERATIONS INVOLVE HAZARDOUS MATERIALS Our research and manufacturing activities involve the controlled use of hazardous materials. 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 adversely affect our business, financial condition and results of operations. OUR STOCK PRICE IS HIGHLY VOLATILE The market price of our common stock has been highly volatile and is likely to continue to be volatile. Factors affecting our stock price include: - fluctuations in our operating results; - announcements of technological innovations or new commercial therapeutic products by us or our competitors; 17 19 - published reports by securities analysts; - progress with clinical trials; - governmental regulation; - changes in reimbursement policies; - developments in patent or other proprietary rights; - developments in our relationship with collaborative partners; - public concern as to the safety and efficacy of our products; and - general market conditions. SUBSTANTIAL SALES OF SHARES MAY IMPACT MARKET PRICE OF OUR COMMON STOCK If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options and warrants, the market price of our common stock may fall. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. We have outstanding 11,120,293 shares of common stock, based upon shares outstanding as of December 31, 1998, and assuming no exercise of outstanding options or warrants after December 31, 1998. Of these shares, the 1,146,300 shares sold in this offering, together with the 2,875,000 shares sold in our initial public offering in July 1998 and an additional 2,771,302 shares, subject in certain instances to volume re-sale limitations under Rule 144, are freely tradable. The remaining 4,327,691 shares of common stock held by existing stockholders may not be sold publicly unless they are registered under the Securities Act of 1933, as amended, or are sold pursuant to Rule 144 or another exemption from registration. These shares will become eligible for public resale at various times over a period of less than one year following the completion of this offering, subject to volume limitations. The holders of 6,698,052 shares of common stock and 121,667 shares issuable upon the exercise of warrants will be entitled to certain demand and piggyback rights with respect to registration of such shares under the Securities Act. If such holders, exercising the demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales may have an adverse effect on the market price for our common stock. If we were to initiate a registration and include shares held by these holders pursuant to the exercise of their piggyback registration rights, such sales may have an adverse effect on our ability to raise capital. WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions which may discourage takeover attempts, including transactions in which stockholders might receive a premium for their shares. This may limit stockholders' ability to approve a transaction that they may think is in their best interest. Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws require that any action required or permitted to be taken by our stockholders must be taken at a properly called meeting of stockholders that may be called only by the Board of Directors, the Chairman of the Board or the President. In addition, the Board of Directors has the authority, without stockholder action, to fix the rights and preferences of and issue shares of preferred stock, which may have the effect of delaying or preventing a change in control. See "Description of Capital Stock -- Preferred Stock" and "-- Certain Charter and Bylaw Provisions and Delaware Law." WE DO NOT INTEND TO PAY DIVIDENDS 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 in the foreseeable future. 18 20 WE FACE UNCERTAINTY WITH YEAR 2000 COMPLIANCE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of our computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This may result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to receive supplies from our venders, or operate our accounting and other internal systems. If our software vendors are unable to address the Year 2000 compliance of their products, or should our suppliers' operations be disrupted by the Year 2000 Issue, then our ability to serve collaborative partners and develop products may be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 19 21 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this prospectus including, without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, or the Reform Act. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Such factors include, among others: - our XenoMouse technology may not produce safe, efficacious or commercially viable products; - clinical trials will be expensive and their outcome is uncertain; - the clinical success of ABX-CBL is uncertain; - successful development of our products is uncertain; - we are an early stage company; - we have a history of losses; - our future profitability is uncertain; - we will need to find collaborative partners to develop many of our product candidates; - our joint venture with JT America, Inc. may limit our ability to develop product candidates; - we will require additional financing; - we face intense competition and rapid technological change; - market acceptance of our products is uncertain; - our patent position is uncertain and our success depends on our proprietary rights; - we may face challenges from third parties regarding the validity of our patents and proprietary rights; - we are subject to extensive government regulations and we may not be able to obtain regulatory approvals; - we rely on third-party manufacturers and do not have commercial scale manufacturing experience; - we do not have marketing and sales experience; and - other factors referenced in this prospectus. Certain of these factors are discussed in more detail elsewhere in this prospectus, including, without limitation, under the captions "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Given these uncertainties, you should not place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 20 22 CERTAIN INFORMATION We were incorporated on June 24, 1996, and subsequently on July 15, 1996, were organized pursuant to a stock purchase and transfer agreement with Cell Genesys. Our business and operations were started in 1989 by Cell Genesys and prior to our organization were conducted within Cell Genesys. In 1991, Cell Genesys and JT Immunotech USA, Inc., the predecessor company to JT America and a medical subsidiary of Japan Tobacco, formed Xenotech, an equally owned joint venture, to develop genetically modified strains of mice known as XenoMouse technology which can produce fully human monoclonal antibodies and to commercialize products generated from these mice. Upon our organization, Cell Genesys assigned to us substantially all of its rights in Xenotech. USE OF PROCEEDS We will not receive any proceeds from the sales of common stock by the selling stockholders pursuant to this prospectus. PRICE RANGE OF COMMON STOCK Our common stock began trading publicly on the Nasdaq National Market on July 2, 1998 under the symbol "ABGX." The following table lists quarterly information on the price range of the common stock based on the high and low reported last sale prices for our common stock as reported on the Nasdaq National Market for the periods indicated below. These prices do not include retail markups, markdowns or commissions.
HIGH LOW ------ ------- Fiscal 1999: First Quarter (through January 14, 1999)........ $17.00 $ 15.00 Fiscal 1998: Fourth Quarter.................................. $18.00 $ 6.00 Third Quarter................................... 9.25 5.375
As of December 31, 1998, there were approximately 162 holders of record of the common stock. On January 14, 1999, the last reported sale price on the Nasdaq National Market for the common stock was $16.00. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We currently expect to retain our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our loan and security agreement prohibits the payment of dividends without the consent of the lender. 21 23 CAPITALIZATION The following table sets forth our capitalization at September 30, 1998. You should read our capitalization information set forth below in conjunction with our Financial Statements and Notes included elsewhere in this prospectus.
SEPTEMBER 30, 1998 ------------------ (IN THOUSANDS) Long-term debt, less current portion........................ $ 2,710 Stockholders' equity: Preferred stock, $0.0001 par value; 5,000,000 shares authorized, none issued and outstanding................ -- Common stock, $0.0001 par value; 50,000,000 shares authorized, 11,067,620 shares issued and outstanding, at amount paid in (1).................................. 55,506 Contributions from parent................................. 29,277 Additional paid-in capital................................ 2,296 Deferred compensation..................................... (1,320) Accumulated deficit....................................... (64,775) -------- Total stockholders' equity........................ 20,984 -------- Total capitalization.............................. $ 23,694 ========
- --------------- (1) The number of shares of common stock outstanding at September 30, 1998 excludes: (a) 1,642,086 shares of common stock issuable upon exercise of options outstanding as of September 30, 1998, with a weighted average exercise price of $2.16 per share; (b) 121,667 shares of common stock issuable upon exercise of warrants outstanding as of September 30, 1998, with an exercise price of $6.00 per share; and (c) 25,000 shares of common stock issuable pursuant to the terms of a license agreement. 22 24 SELECTED FINANCIAL DATA You should read the following selected financial data in conjunction with our Financial Statements and Notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1995, 1996 and 1997, and the balance sheet data as of December 31, 1996 and 1997 are derived from our Financial Statements that have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1993 and 1994 are derived from our Financial Statements audited by Ernst & Young LLP that are not included in this prospectus. The statement of operations data for the nine months ended September 30, 1997 and 1998, and the balance sheet data as of September 30, 1998 are derived from our unaudited financial statements which are also included elsewhere in this prospectus and which have been prepared on the same basis as the audited Financial Statements and in our opinion include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial position and results of operations for the unaudited interim periods. The statement of operations data for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the entire year.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------------------------- ------------------------- 1993 1994 1995 1996 1997 1997 1998 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA(1): Revenues: Revenue under collaborative agreements from related parties..................... $ 6,600 $ 6,200 $ 6,200 $ 4,719 $ 1,343 $ 1,109 $ 710 Contract revenue.............. -- -- -- -- 611 -- 1,298 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total revenues(1)....... 6,600 6,200 6,200 4,719 1,954 1,109 2,008 Operating expenses: Research and development...... 4,629 7,921 11,879 9,433 11,405 8,787 11,976 General and administrative.... 1,019 1,955 2,603 2,565 3,525 1,966 2,562 Charge for cross-license and settlement -- amount allocated from Cell Genesys(2).................. -- -- -- -- 11,250 11,250 -- Equity in losses from the Xenotech joint venture (charge for cross-license and settlement)(2).......... -- -- -- -- 11,250 7,500 -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses.............. 5,648 9,876 14,482 11,998 37,430 29,503 14,538 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operating income (loss)......... 952 (3,676) (8,282) (7,279) (35,476) (28,394) (12,530) Interest income (expense), net........................... -- -- -- 179 (404) (206) 229 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss)............... $ 952 $ (3,676) $ (8,282) $ (7,100) $ (35,880) $ (28,600) $ (12,301) =========== =========== =========== =========== =========== =========== =========== Net loss per share(3)........... $(46,710.53) $ (1,032.70) $ (2,576.11) $ (3.27) =========== =========== =========== =========== Shares used in computing net loss per share(3)............. 152 34,744 11,102 3,766,615
DECEMBER 31, ------------------- SEPTEMBER 30, 1996 1997 1998 -------- -------- ------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 10,172 $ 15,321 $ 24,573 Working capital............................................. 5,564 6,637 17,856 Total assets................................................ 14,357 22,084 30,781 Long-term debt, less current portion........................ 1,757 3,979 2,710 Redeemable convertible preferred stock(4)................... 10,150 31,189 -- Accumulated deficit......................................... (16,594) (52,474) (64,775) Total stockholders' equity (net capital deficiency)......... (2,316) (22,318) 20,984
- --------------- (1) Our statement of operations includes our revenues and expenses as a business unit within Cell Genesys prior to July 15, 1996. During the years ended December 31, 1993, 1994, 1995 and 1996, our revenues were derived principally from Xenotech for the development of XenoMouse technology, which was essentially completed in 1996. (2) In 1997, we incurred a non-recurring charge for cross-license and settlement of $22.5 million. This amount represents an allocation from Cell Genesys of $11.25 million and an entry of $11.25 million to record the equity in the losses of Xenotech L.P., our equally owned joint venture with JT America, Inc. The statement of operations for the nine month period ended September 30, 1997 excludes the final amount of $3.75 million that we expensed in December 1997. See Note 6 of Notes to our Financial Statements. (3) Net loss per share data has not been presented prior to July 15, 1996 as there were no equity securities outstanding prior to that date. (4) In connection with the initial public offering of our common stock in July 1998, each outstanding share of preferred stock was converted into one share of common stock. 23 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements based upon current expectations that involve risks and uncertainties. When used in this prospectus, 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 under "Risk Factors" and elsewhere in this prospectus. BASIS OF FINANCIAL STATEMENT PRESENTATION Our business and operations commenced in 1989 and were initially conducted as a business unit of Cell Genesys. On June 24, 1996, we were incorporated and subsequently on July 15, 1996 were organized pursuant to a stock purchase and transfer agreement with Cell Genesys. The agreement set forth the terms and conditions for the transfer of the antibody business unit within Cell Genesys to us. Our accompanying financial statements include our operations since July 15, 1996, and the revenues and expenses of the Abgenix business unit within Cell Genesys prior to July 15, 1996. The statements of cash flows do not reflect the carve out balances before July 15, 1996, as such information would not be meaningful. Prior to July 15, 1996, specifically identified revenues and expenses such as research and development attributable to the antibody business unit were allocated to us from Cell Genesys. General and administrative expenses were allocated based on our research and development expenses as a percentage of Cell Genesys' total research and development expenses. From July 16, 1996 to July 31, 1997, Cell Genesys performed certain general and administrative functions on our behalf. As of December 31, 1998, Cell Genesys beneficially owns 30.2% of our outstanding capital stock. OVERVIEW We are a biopharmaceutical company that develops and intends to commercialize antibody therapeutic products for the treatment of a variety of disease conditions, including transplant-related diseases, inflammatory and autoimmune disorders, and cancer. We have developed XenoMouse technology, a proprietary technology which we believe enables quick generation of high affinity, fully human antibody product candidates to essentially any disease target appropriate for antibody therapy. We intend to use XenoMouse technology to build a large and diversified product portfolio that we plan to commercialize either through corporate collaborations or internal product development programs. We have established collaborative arrangements to use XenoMouse technology to produce fully human antibodies with eight companies covering at least 11 antigen targets. Pursuant to these collaborations, we intend to generate antibody product candidates for the treatment of cancer, inflammation, transplant rejection, cardiovascular disease and growth factor modulation. Our collaborative partners include Cell Genesys, Pfizer, Schering-Plough, Genentech, Millennium BioTherapeutics, Research Corporation Technologies, Centocor and AVI BioPharma. Among our eight collaborative partners, Pfizer, Genentech and Millennium BioTherapeutics have each entered into additional collaborations with us specifying additional antigens for XenoMouse antibody development. We expect that substantially all of our revenues for the foreseeable future will result from payments under collaborative arrangements. The terms of the collaboration arrangements vary, reflecting the value we add to the development of any particular product candidate. These collaborations typically provide our collaborative partners with access to XenoMouse technology for the purpose of generating fully human antibody product candidates to one or more specific antigen targets provided by the collaborative partner. In most cases, we provide our mice to collaborative partners who then carry out immunizations with their specific antigen target. In other cases, we may immunize the mice with the collaborative partner's antigen target for additional compensation. As an extension of this concept, we may grant multi-antigen research licenses to select collaborative partners, allowing them to incorporate XenoMouse technology into early stages of their antibody product research 24 26 efforts without specifically knowing the antigens that they intend to target for XenoMouse antibody generation. These collaborative partners will need to execute product licenses for any antibody product they wish to develop and commercialize. The financial terms of our existing collaborations typically include upfront payments, potential license fees and milestone payments paid to us by the collaborative partner. Based on our collaborative agreements entered into, these payments and fees may average approximately $8.0 million per antigen target. In certain instances, the collaborative partner could make reimbursement payments to us for research that we conduct on its behalf. Additionally, if a product receives marketing approval from the FDA or an equivalent foreign agency, we are entitled to receive royalties on future product sales by the collaborative partner, if any. Furthermore, the collaborative partner will be responsible for worldwide manufacturing, product development and marketing of any product developed through the collaboration. Our dependence on collaborative and licensing arrangements with third parties subjects us to a number of risks. Agreements with collaborative partners typically allow them significant discretion in electing whether to pursue any of the planned activities. We cannot control the amount and timing of resources our collaborative partners may devote to the product candidates. Even if we fulfill our obligations under a collaborative agreement, the collaborative partner can terminate the agreement at any time following proper written notice. If any collaborative partner were to terminate or breach its agreement with us, or otherwise fail to complete its obligations in a timely manner, our business, financial condition and results of operations may be materially adversely affected. We also have four antibody product candidates that are under development internally. Our lead product candidate, ABX-CBL, is an in-licensed mouse antibody. We are currently conducting a multi-center confirmatory Phase II clinical trial for ABX-CBL for the treatment of a transplant-related disease known as graft versus host disease. Once the final report on the Phase II clinical trial has been completed, we plan to submit the data to the FDA for approval to commence a Phase III clinical trial for ABX-CBL during 1999. Our other three product candidates were generated using XenoMouse technology. We completed a Phase I clinical trial for our fully human antibody product candidate in psoriasis, ABX-IL8, and began a Phase I/II clinical trial in November 1998. We are in preclinical development with two other fully human antibody product candidates: ABX-EGF for use in the treatment of cancer; and ABX-RB2 for use in the treatment of chronic immunological disorders. We expect to initiate Phase I clinical trials with ABX-EGF in mid-1999. In 1991, Cell Genesys and JT America formed Xenotech, an equally owned joint venture, to develop XenoMouse technology and to commercialize products generated from XenoMouse technology. Upon the organization of Abgenix, Cell Genesys assigned its rights in Xenotech to Abgenix. Xenotech funds its research and development activities through capital contributions from Abgenix and JT America, and Abgenix is obligated to fund 50% of all Xenotech expenses. During 1995, 1996 and 1997, Abgenix derived revenues principally from performing research for Xenotech for the continued development of XenoMouse technology. During this three-year period, Abgenix recognized aggregate revenues from Xenotech research in the approximate amount of $12.3 million. The development of XenoMouse technology was substantially completed in 1996 with modest ongoing research activities in 1997 and 1998. Therefore, Abgenix does not expect to recognize significant revenues from research performed on behalf of Xenotech in the future. Abgenix accounts for its investment in Xenotech under the equity method of accounting. Since inception, we have funded our research and development activities primarily through: - contributions from Cell Genesys; - revenues from collaborative arrangements; - private placements of preferred stock; - our initial public offering of common stock in July 1998 resulting in net proceeds of $19.9 million; and - equipment leaseline financings and loan facilities. 25 27 We have incurred operating losses in each of the last three years of operation, including net losses of approximately $8.3 million in 1995, $7.1 million in 1996, $35.9 million in 1997. We also incurred net losses of approximately $12.3 million in the nine-month period ended September 30, 1998. As of September 30, 1998, we had an accumulated deficit of approximately $64.8 million. Our losses have resulted principally from costs incurred in performing research and development for our XenoMouse technology and antibody product candidates, from the non-recurring cross-license and settlement charge (described in the next paragraph) and from general and administrative costs associated with our operations. We expect to incur additional operating losses until at least the year 2000 as a result of our expenditures for research and product development, including costs associated with conducting preclinical testing and clinical trials. We expect the amount of such 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 collaborative arrangements, or the initiation, success or failure of clinical trials. In 1994, Cell Genesys and GenPharm and, beginning in 1996, Abgenix, became involved in litigation primarily related to intellectual property rights associated with a method for inactivating a mouse's antibody genes and technology pertaining to transgenic mice capable of producing fully human antibodies. Rather than endure the cost and business interruption of protracted litigation, in March 1997, Cell Genesys, along with Abgenix, Xenotech and Japan Tobacco, signed a comprehensive patent cross-license and settlement agreement with GenPharm that resolved all related litigation and claims between the parties. Under the cross-license and settlement agreement, Abgenix has licensed on a non-exclusive basis certain patents, patent applications, third-party licenses and inventions pertaining to the development and use of certain transgenic rodents including mice that produce fully human antibodies. We use our XenoMouse technology to generate fully human antibody products and have not licensed the use of, and do not use, any transgenic rodents developed or used by GenPharm. As initial consideration for the cross-license and settlement agreement, Cell Genesys issued a note to GenPharm due September 30, 1998 for $15.0 million payable by Cell Genesys and convertible into shares of Cell Genesys common stock. Of this note, approximately $3.8 million satisfied certain of Xenotech's obligations under the agreement. Japan Tobacco also made an initial payment. During 1997, two patent milestones were achieved by GenPharm, and Xenotech was obligated to pay $7.5 million for each milestone. Xenotech paid $7.5 million to satisfy the first milestone and has recorded a payable to GenPharm for the remaining $7.5 million. We recorded a liability of approximately $3.8 million in our balance sheet representing our equal share of the Xenotech obligation. The obligation was paid in November 1998. No additional payments will accrue under this agreement. We have recognized, as a non-recurring charge for cross-license and settlement, a total of $22.5 million. We concluded that the cost of the cross-license and settlement agreement was properly expensed under Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs" because the cross-license received by us from GenPharm is non-exclusive and has no alternative future uses for us. We also concluded that the $11.3 million was properly allocated from Cell Genesys because it related to the technology Cell Genesys contributed to Abgenix upon our organization. We do not have any future financial obligations under the cross-license and settlement agreement. In connection with the grant of stock options since our organization on July 15, 1996, we have recorded aggregate deferred compensation of approximately $2.3 million through September 30, 1998, representing the difference between the deemed fair value of the common stock for accounting purposes and the option exercise price at the date of grant. These amounts are presented as a reduction of stockholders' equity and are amortized ratably over the vesting period of the applicable options, generally four years. These valuations resulted in charges to operations of $528,000 and $448,000 in the year ended December 31, 1997, and the nine months ended September 30, 1998, respectively. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 Revenue under collaborative agreements from related parties consists of revenue derived principally from performing research for Xenotech. Revenues from the Xenotech joint venture are recognized when 26 28 earned, net of our cash contributions to Xenotech, under the terms of the related agreements. Research and development funding received in advance under these agreements is recorded as deferred revenue. Revenues from the achievement of milestone events are recognized when the milestones have been achieved. Revenues from Xenotech decreased from $1.1 million in the nine months ended September 30, 1997 to $0.7 million in the nine months ended September 30, 1998. Revenues from Xenotech decreased because Xenotech's research related to developing the genetically modified mice was essentially completed during 1996 with modest ongoing research activities in 1997 and 1998. Contract revenues of $1.3 million in the nine months ended September 30, 1998 consisted principally of non-refundable signing fees paid in connection with the execution of collaborative agreements and no future obligations exist for such agreements. These contract revenues also include fees paid for the achievement of research milestones under existing collaborative agreements. Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, costs associated with preclinical testing and planned clinical trials of our product candidates and facilities expenses. Research and development expenses increased from $8.8 million in the nine months ended September 30, 1997 to $12.0 million in the nine months ended September 30, 1998. The increase in research and development expenses reflected increased expenses primarily for the manufacture of antibody products in connection with the preparation for and the initiation of clinical trials of two of our antibody product candidates under development, ABX-CBL and ABX-IL8, in addition to the expenses of conducting these trials. We anticipate that research and development expenses will increase in future periods as it expands research and development efforts and clinical trials. General and administrative expenses include compensation and other expenses related to finance and administrative personnel, professional services expenses and facilities expenses. General and administrative expenses increased from $2.0 million in the nine months ended September 30, 1997 to $2.6 million in the nine months ended September 30, 1998. The increase in general and administrative expenses reflected the hiring of personnel to manage the administrative functions formerly performed for us by Cell Genesys and increased financing activity, primarily related to our initial public offering and status as a public company. We anticipate that general and administrative expenses will increase in the future as additional personnel are added to support our operations. The aggregate nonrecurring charge for cross-license and settlement of $18.8 million in the nine months ended September 30, 1997 relates to the initial amount of $15.0 million and one additional $3.8 million amount under the comprehensive patent cross-license and settlement agreement. We recorded the initial cross-license and settlement amount of $15.0 million in March 1997 and an additional $3.8 million in September 1997. The remaining $3.8 million of the aggregate $22.5 million non-recurring charge was recorded in December 1997. Other income and expenses consist of interest income from cash, cash equivalents and short-term investments and interest expense incurred in connection with our equipment leaseline financing and loan facilities. Interest income increased due to higher average balances of short-term investments and interest expense declined due to lower average balances of debt. YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 During 1995, 1996 and 1997, we derived revenues principally from performing research for Xenotech. Revenues from the joint venture are recognized when earned, net of our cash contributions to Xenotech, under the terms of the related agreements. Research and development funding received in advance under these agreements is recorded as deferred revenue. Revenues from the achievement of milestone events are recognized when the milestones have been achieved. Revenues from Xenotech decreased from $6.2 million in 1995 to $4.7 million in 1996 and to $1.3 million in 1997. In addition, until July 1995, we did not make capital contributions to the joint venture and, therefore, we recorded all proceeds received from Xenotech as revenue. Revenues in 1997 decreased because Xenotech's research related to developing XenoMouse technology was essentially completed in 1996. 27 29 Contract revenues of $611,000 in 1997 consisted principally of a nonrefundable signing fee paid in connection with the execution in December 1997 of a collaboration agreement. No future obligations exist for this agreement. Research and development expenses decreased from $11.9 million in 1995 to $9.4 million in 1996 and increased to $11.4 million in 1997. The decrease from 1995 to 1996 reflected a decrease of $3.8 million in research activities related to developing the genetically modified mice for Xenotech, partially offset by an increase of $1.3 million in costs associated with preclinical development and testing of our product candidates. The increase in research and development expenses from 1996 to 1997 reflected increased expenses in connection with preparation for the initiation of clinical trials of ABX-CBL and ABX-IL8. Most of the 1997 increase resulted from increased payroll and other personnel expenses, related laboratory supplies, equipment and facilities expansion. General and administrative expenses remained relatively unchanged at $2.6 million from 1995 to 1996 and increased to $3.5 million in 1997. The increase in 1997 was primarily attributable to increased personnel levels associated with the expansion of our operations, increased professional services expenses associated with negotiation of Abgenix's collaborative arrangements and increased costs associated with moving to our current facilities. The aggregate non-recurring charge for cross-license and settlement of $22.5 million in 1997 resulted from the execution of the comprehensive patent cross-license and settlement agreement with GenPharm. See "Overview" and Note 6 of Notes to Abgenix's Financial Statements. Other income and expenses consist of interest income from cash, cash equivalents and short-term investments and interest expense incurred in connection with our equipment leaseline financing and loan facilities. LIQUIDITY AND CAPITAL RESOURCES Since formation, we have financed our operations primarily through capital contributions by, and borrowings from Cell Genesys, revenue from collaborative arrangements, private placements of preferred stock, an initial public offering of common stock and equipment leaseline financings and loan facilities. Through September 30, 1998, we received net cash of $75.6 million from financing activities, consisting principally of approximately $14.3 million from contributions by Cell Genesys, $31.1 million from private placements of preferred stock, $19.9 million from our initial public offering in July 1998, $4.3 million from construction financing, $2.0 million in lease financing, and $4.0 million borrowed from Cell Genesys and converted to preferred stock. Cell Genesys is not obligated to provide any future funding to us. Our net cash used in operating activities was $2.2 million in 1996, $10.2 million in 1997 and $12.5 million from January 1, 1998 to September 30, 1998. The cash used for operations was primarily to fund research and development expenses and manufacturing costs related to the development of new products. As of September 30, 1998, we had cash, cash equivalents and short-term investments of $24.6 million. We have invested the net proceeds of our initial public offering in short-term, interest-bearing, investment grade securities. We have an agreement with a financing company under which we have financed purchases of about $2.0 million of its laboratory and office equipment. The lease term is 48 months and bears interest at rates ranging from 12.5% to 13.0%, which are based on the change in the five year U.S. Treasury rate. We also have a construction financing line with a bank in the amount of $4.3 million that was used to finance construction of leasehold improvements at our current facility. The line matures in January 2001, bears interest at a rate of prime plus one percent (9.25% at September 30, 1998). As of September 30, 1998, no further borrowings were available under the construction financing line. We believe our existing capital resources together with cash generated from collaborative arrangements will be sufficient to fund our operations at least through fiscal year 1999. We plan to continue to expend substantial resources for the expansion of research and development, including costs associated with conducting preclinical testing and clinical trials. We may be required to 28 30 expend substantial funds if unforeseen difficulties arise in the course of completing required additional development of product candidates, manufacturing of product candidates, performing preclinical testing and clinical trials of such product candidates, obtaining necessary regulatory approvals or other aspects of our business. Our future liquidity and capital requirements will depend on many factors, including: - continued scientific progress in our research and development programs; - size and complexity of these programs; - scope and results of preclinical testing and clinical trials; - time and expense involved in obtaining regulatory approvals; - competing technological and market developments; - establishment of further collaborative arrangements; - maintaining current collaborations; - time and expense of filing and prosecuting patent applications and enforcing patent claims; - cost of establishing manufacturing capabilities, conducting commercialization activities and arrangements; - product in-licensing; and - other factors not within our control. We will be required to raise additional funds through public or private financing, collaborative relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms favorable to us. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Collaborative arrangements may require us to relinquish its rights to certain of our technologies, products or marketing territories. Our failure to raise capital when needed may have a material adverse effect on our business, financial condition and results of operations. As of December 31, 1997, we had federal net operating loss carryforwards of approximately $15.4 million. Our net operating loss carryforwards exclude losses incurred prior to the organization of Abgenix in July 1996. Further, the amounts associated with the cross-license and settlement have been expensed for financial statement accounting purposes and have been capitalized and amortized over a period of approximately fifteen years for tax purposes. The net operating loss and credit carryforwards will expire in the years 2011 through 2012, 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. YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of our computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This may result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to receive supplies from our vendors, or operate our accounting and other internal systems. Our plan to resolve the Year 2000 Issue is based on a recently completed assessment of our exposure. All of our time-sensitive software is widely used and purchased from major vendors, all of whom have announced that their software is either currently Year 2000-compliant or will be made so with upgrades before the end of 1999. We have already purchased the Year 2000-compliant upgrade of our accounting system. We will be testing each of our 60 personal computers over the next three months and will replace 29 31 or repair those that are non-compliant. In addition, we will be gathering information about the Year 2000 compliance status of third parties with whom we have significant relationships to determine the extent to which our operations are vulnerable to these third parties' failure to solve their own Year 2000 issue. None of our systems interface with those of third parties. Upgrading the accounting system was already planned in order to acquire the benefits of its improved features, and was not accelerated by the Year 2000 Issue. We believe that the total cost of our compliance with the Year 2000 Issue will be less than $50,000. We believe we have an effective program in place to resolve the Year 2000 Issue in a timely manner. However, should our software vendors be unable to address the Year 2000 compliance of their products, or should our suppliers' operations be disrupted by the Year 2000 Issue, then our ability to serve our collaborative partners and develop products may be materially and adversely impacted. Our contingency plans for minimizing the impact include increasing materials used in clinical trials, establishing accounts with alternative vendors, and temporarily employing manual accounting systems until alternative systems can be installed. RECENT ACCOUNTING PRONOUNCEMENTS We have reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our results of operations or financial position. Based on the review, we believe that none of these pronouncements will have a significant effect on current or future earnings, operations or financial position. 30 32 BUSINESS The following description of our business should be read in conjunction with the information included elsewhere in this prospectus. The description contains certain forward-looking statements that involve risks and uncertainties. When used in this prospectus, the words "intend," "anticipate," believe," "estimate," "plan" and "expect" and similar expressions as they relate to us are included to identify forward-looking statements. Our actual results could differ materially from the results discussed in the forward-looking statements as a result of certain of the risk factors set forth below and elsewhere in this prospectus. OVERVIEW We are a biopharmaceutical company that develops and intends to commercialize antibody therapeutic products for the treatment of a variety of disease conditions, including transplant-related diseases, inflammatory and autoimmune disorders, and cancer. We have developed XenoMouse technology, a proprietary technology which we believe enables quick generation of high affinity, fully human antibody product candidates to essentially any disease target appropriate for antibody therapy. We intend to use XenoMouse technology to build and commercialize a large and diversified product portfolio through the establishment of corporate collaborations and internal product development programs. We have established collaborative arrangements to use our XenoMouse technology to produce fully human antibodies for eight companies covering at least 11 antigen targets. Pursuant to these collaborations, we intend to generate antibody product candidates for the treatment of cancer, inflammation, transplant rejection, cardiovascular disease and growth factor modulation. Our collaborative partners include Cell Genesys, Pfizer, Schering-Plough, Genentech, Millennium BioTherapeutics, Research Corporation Technologies, Centocor and AVI Biopharma. Among our eight collaborative partners, Pfizer, Genentech and Millenium BioTherapeutics have each entered into additional collaborations with us specifying additional antigens for XenoMouse antibody development. The financial terms of the XenoMouse technology collaborations typically include upfront payments, potential license fees and milestone payments payable to us by the collaborative partner. We also have four antibody product candidates that are under development internally. Our lead product candidate, ABX-CBL, is an in-licensed mouse antibody. We are currently conducting a multi-center confirmatory Phase II clinical trial for ABX-CBL for the treatment of a transplant-related disease known as graft versus host disease. Once the final report on our Phase II clinical trial has been completed, we plan to submit the data to the FDA for approval to commence a Phase III clinical trial for ABX-CBL during 1999. Our other three antibody product candidates were generated using XenoMouse technology. We completed a Phase I clinical trial for our fully human antibody product candidate in psoriasis, ABX-IL8, and began a Phase I/II clinical trial in November 1998. We are in preclinical development with two other fully human antibody product candidates: ABX-EGF for use in the treatment of cancer; and ABX-RB2 for use in the treatment of chronic immunological disorders. We expect to initiate Phase I clinical trials with ABX-EGF in mid-1999. BACKGROUND THE NORMAL ANTIBODY RESPONSE The human immune system protects the body against a variety of infections and other illnesses. Specialized cells, which include B cells and T cells, work in concert with the other components of the immune system to recognize, neutralize and eliminate from the body numerous foreign substances, infectious organisms and malignant cells. In particular, B cells generally produce protein molecules, known as antibodies, which are capable of recognizing substances potentially harmful to the human body. Such substances are called antigens. Upon being bound by an antibody, antigens can be neutralized and blocked from interacting with and causing damage to normal cells. In order to effectively neutralize or eliminate an antigen without harming normal cells, the immune system must be able to generate antibodies that bind tightly (i.e., with high affinity) to one specific antigen (i.e., with specificity). 31 33 All antibodies have a common core structure composed of four subunits, two identical light (L) chains and two identical heavy (H) chains, named according to their relative size. The heavy and light chains are assembled within the B cell to form an antibody molecule which consists of a constant region and a variable region. As shown in figure one, an antibody molecule may be represented schematically in the form of a "Y" structure. [FIGURE 1] The base of the "Y," together with the part of each arm immediately next to the base, is called the constant region because its structure tends to be very similar across all antibodies. In contrast, the variable regions are at the end of the two arms and are unique to each antibody with respect to their three dimensional structures and protein sequences. Because variable regions define the specific binding sites for a variety of antigens, there is a need for significant structural diversity in this portion of the antibody molecule. Such diversity is achieved in the body primarily through a unique mode of assembly involving a complex series of recombination steps for various gene segments of the variable region, including the V, D and J segments (see figure two shown below). 32 34 [FIGURE 2] The human body is repeatedly exposed to a variety of different antigens. Accordingly, the immune system must be able to generate a diverse repertoire of antibodies that are capable of recognizing these multiple antigen structures with a high degree of specificity. The immune system has evolved a two-step mechanism in order to accomplish this objective. The first step, immune surveillance, is achieved through the generation of diverse circulating B cells, each of which assembles different antibody gene segments in a semi-random fashion to produce and display on its surface a specific antibody. As a result, a large number of distinct, albeit lower affinity, antibodies are generated in the circulation so as to recognize essentially any foreign antigen that enters the body. While capable of recognizing the antigens as foreign, these lower affinity antibodies are generally incapable of effectively neutralizing them. This limitation of the immune surveillance process is generally overcome by the normal immune system in a second step called "affinity maturation." Triggered by the initial binding to a specific antigen, the small fraction of B cells that recognize this antigen is then primed by the immune system to progressively generate antibodies with higher and higher affinity through a process of repeated mutation and selection. As a result, the reactive antibodies develop increasingly higher specificity and affinity with the latter being potentially a hundred to a thousand times higher than those generated in the previous immune surveillance process. These more specific, higher affinity antibodies have a greater likelihood of effectively neutralizing or eliminating the antigen while minimizing the potential of damaging healthy cells. ANTIBODIES AS PRODUCTS Recent advances in the technologies for creating and producing antibody products coupled with a better understanding of how antibodies and the immune system function in key disease states have led to renewed interest in the commercial development of antibodies as therapeutic products. According to a recent survey by the Pharmaceutical Research and Manufacturers of America, antibodies account for over 20% of all biopharmaceutical products in clinical development. As of December 31, 1998, we are aware of eight antibody therapeutic products approved for marketing in the United States for the treatment of a wide range of medical disorders. These products are Orthoclone, ReoPro, Rituxan, Zenapax, Herceptin, Synagis, Remicaid and Simulect. These products are currently being marketed for a wide range of medical disorders such as transplant rejection, cardiovascular disease, cancer and infectious diseases. 33 35 We believe that, as products, antibodies have several potential clinical and commercial advantages over traditional therapies. These advantages include the following: - faster product development; - fewer unwanted side effects as a result of high specificity for the disease target; - greater patient compliance and higher efficacy as a result of favorable pharmacokinetics; - delivery of various payloads, including drugs, radiation and toxins, to specific disease sites; and - elicit a desired immune response. LIMITATIONS OF CURRENT APPROACHES TO DEVELOPMENT OF ANTIBODY PRODUCTS Despite the early recognition of antibodies as promising therapeutic agents, most approaches thus far to develop them as products have been met with a number of commercial and technical limitations. Initial efforts were aimed at the development of hybridoma cells, which are immortalized mouse antibody- secreting B cells. Such hybridoma cells are derived from normal mouse B cells which have been genetically manipulated so that they are capable of reproducing over an indefinite period of time. They are then cloned to produce a homogeneous population of identical cells which produce one single type of mouse antibody capable of recognizing one specific antigen ("monoclonal antibody"). While mouse monoclonal antibodies can be generated to bind to a number of antigens, they contain mouse protein sequences and tend to be recognized as foreign by the human immune system. As a result, they are quickly eliminated by the human body and have to be administered frequently. When patients are repeatedly treated with mouse antibodies, they will begin to produce antibodies that effectively neutralize the mouse antibody, a reaction referred to as a Human Anti-Mouse Antibody, or HAMA, response. In many cases, the HAMA response prevents the mouse antibodies from having the desired therapeutic effect and may cause the patient to have an allergic reaction. The potential use of mouse antibodies is thus best suited to situations where the patient's immune system is compromised or where only short-term therapy is required. In such settings, the patient is often incapable of producing antibodies that neutralize the mouse antibodies or has insufficient time to do so. Recognizing the limitations of mouse monoclonal antibodies, researchers have developed a number of approaches to make them appear more human-like to a patient's immune system. For example, improved forms of mouse antibodies, referred to as "chimeric" and "humanized" antibodies, are genetically engineered and assembled from portions of mouse and human antibody gene fragments. While such chimeric and humanized antibodies are more human-like, they still retain a varying amount of the mouse antibody protein sequence, and accordingly may continue to trigger the HAMA response. Additionally, the humanization process can be expensive and time consuming, requiring at least two months and sometimes over a year of secondary manipulation after the initial generation of the mouse antibody. Once the humanization process is complete, the remodeled antibody gene must then be expressed in a recombinant cell line appropriate for antibody manufacturing, adding additional time before the production of preclinical and clinical material can be initiated. In addition, the combination of mouse and human antibody gene fragments can result in a final antibody product which is sufficiently different in structure from the original mouse antibody leading to a decrease in specificity or a loss of affinity. 34 36 [EVOLUTION OF ANTIBODY TECHNOLOGIES GRAPHIC] HUMAN ANTIBODIES The HAMA response can potentially be avoided through the generation of antibody products with fully human protein sequences. Such fully human antibodies may increase the market acceptance and expand the use of antibody therapeutics. Several antibody technologies have been developed to produce antibodies with 100% human protein sequences (see figure three shown above). One approach to generating human antibodies, called "phage display" technology, involves the cloning of human antibody genes into bacteriophage, viruses that infect bacteria, in order to display antibody fragments on the surfaces of bacteriophage particles. This approach attempts to mimic in vitro the immune surveillance and affinity maturation processes that occur in the body. Because phage display technology cannot take advantage of the naturally occurring in vivo affinity maturation process, the antibody fragments initially isolated by this approach are typically of moderate affinity. In addition, further genetic engineering is required to convert the antibody fragments into fully assembled antibodies and significant manipulation, taking from several months to a year, may be required to increase their affinities to a level appropriate for human therapy. Before preclinical or clinical material can be produced, the gene encoding the antibody derived from phage display technology must, as with a humanized antibody, be introduced into a recombinant cell line. Two additional approaches involving the isolation of human immune cells have been developed to generate human antibodies. One such approach is the utilization of immunodeficient mice which lack both B and T cells. Human B cells and other immune tissue are transplanted into these mice which are then subsequently immunized with target antigens to stimulate the production of human antibodies. However, this process is generally limited to generating antibodies only to nonhuman antigens or antigens to which the human B cell donor had previously responded. Accordingly, this approach may not be suitable for targeting many key diseases such as cancer, and inflammatory and autoimmune disorders where antibodies to human antigens may be required for appropriate therapy. The other approach involves collecting human B cells which have been producing desired antibodies from patients exposed to a specific virus or pathogen. As with the previous approach, this process may not be suitable for targeting diseases where antibodies to human antigens are required, and therefore is generally limited to infectious disease targets which will be recognized as foreign by the human immune system. 35 37 THE ABGENIX SOLUTION -- XENOMOUSE TECHNOLOGY Our approach to generating human antibodies with fully human protein sequences is to use genetically engineered strains of mice in which mouse antibody gene expression is suppressed and functionally replaced with human antibody gene expression, while leaving intact the rest of the mouse immune system. Rather than engineering each antibody product candidate, these transgenic mice capitalize on the natural power of the mouse immune system in surveillance and affinity maturation to produce a broad repertoire of high affinity antibodies. By introducing human antibody genes into the mouse genome, transgenic mice with such traits can be bred indefinitely. Importantly, these transgenic mice are capable of generating human antibodies to human antigens because the only human products expressed in the mice (and therefore recognized as "self") are the antibodies themselves. Any other human tissue or protein is thus recognized as a foreign antigen by the mouse and an immune response will be mounted. Abnormal production of certain human proteins, such as cytokines and growth factors or their receptors have been implicated in various human diseases. Neutralization or elimination of these abnormally produced or regulated human proteins with the use of human antibodies could ameliorate or suppress the target disease. Therefore, the ability of these transgenic mice to generate human antibodies against human antigens could offer an advantage to drug developers compared with some of the other approaches described previously. A challenge with this approach, however, has been to introduce enough of the human antibody genes in appropriate configuration into the mouse genome to ensure that these mice are capable of recognizing the broad diversity of antigens relevant for human therapies. To make our transgenic mice a robust tool capable of consistently generating high affinity antibodies which can recognize a broad range of antigens, we equipped the XenoMouse with approximately 80% of the human heavy chain antibody genes and a significant amount of the human light chain genes. We believe that the complex assembly of these genes together with their semi-random pairing allows XenoMouse to recognize a diverse repertoire of antigen structures. XenoMouse technology further capitalizes on the natural in vivo affinity maturation process to generate high affinity, fully human antibodies. In addition, we have developed multiple strains of XenoMouse, each of which is capable of producing a different class of antibody to perform different therapeutic functions. We believe that our various XenoMouse strains will provide maximum flexibility for drug developers in generating antibodies of the specific type best suited for a given disease indication. XENOMOUSE TECHNOLOGY ADVANTAGES We believe that our XenoMouse technology offers the following advantages: Producing Antibodies With Fully Human Protein Sequences. Our XenoMouse technology, unlike chimeric and humanization technologies, allows the generation of antibodies with 100% human protein sequences. Antibodies created using XenoMouse technology are not expected to cause a HAMA response even when administered repeatedly to immunocompetent patients. For this reason, antibodies produced using XenoMouse technology are expected to offer a better safety profile and to be eliminated less quickly from the human body, reducing the frequency of dosing. Generating a Diverse Antibody Response to Essentially Any Disease Target Appropriate for Antibody Therapy. Because a substantial majority of human antibody genes has been introduced into XenoMouse, the technology has the potential to generate high affinity antibodies that recognize more antigen structures than other transgenic technologies. In addition, through immune surveillance, XenoMouse technology is expected to be capable of generating antibodies to almost any medically relevant antigen, human or otherwise. For a given antigen target, having multiple antibodies to choose from could be important in selecting the optimal antibody product. Generating High Affinity Antibodies Which Do Not Require Further Engineering. XenoMouse technology uses the natural in vivo affinity maturation process to generate antibody product candidates usually in two to four months. These antibody product candidates may have affinities as much as a hundred to a thousand times higher than those seen in phage display. In contrast to antibodies generated using humanization and phage display technology, XenoMouse antibodies are produced without the need 36 38 for any subsequent engineering, a process which at times has proven to be challenging and time consuming. By avoiding the need to further engineer antibodies, we reduce the risk that an antibody's structure and therefore functionality will be altered between the initial antibody selected and the final antibody placed into production. Enabling More Efficient Product Development. In contrast to humanization or phage display, which require the cloning of an antibody gene and the generation of a recombinant cell line, the B cells generated in XenoMouse can be turned directly into hybridoma cell lines for human antibody production. Therefore, a supply of monoclonal antibodies can be produced quickly to allow the timely initiation of preclinical and clinical studies. Furthermore, since XenoMouse technology can potentially produce multiple product candidates more quickly than humanization and phage display technology, preclinical testing can be conducted on several antibodies in parallel to identify the optimal product candidate which will be tested in clinical trials. Providing Flexibility in Choosing Manufacturing Processes. Once an antibody with the desired characteristics has been identified, preclinical material can be produced either directly from hybridomas or from recombinant cell lines. Humanized and phage display antibodies, having been engineered, cannot be produced in hybridomas. In addition to potential time savings, production in hybridomas avoids the need to license certain third party intellectual property rights covering the production of antibodies in recombinant cell lines. ABGENIX STRATEGY Our objective is to be a leader in the generation, development and commercialization of novel antibody-based biopharmaceutical products. Key elements of our strategy to accomplish this objective include the following: Building a Large and Diversified Product Portfolio. Utilizing our XenoMouse technology, we intend to build a large and diversified product portfolio, including a mix of out-licensed and internally developed product candidates. We are targeting serious medical conditions including: cancer, inflammation, transplant rejection, cardiovascular disease and growth factor modulation. For our internal programs, we intend to collaborate with leading academic researchers and companies involved in the identification and development of novel antigens. We believe the speed and cost advantages of our technology will enable us to make cost-effective use of available human and capital resources. We can thus pursue multiple product candidates in parallel through the preclinical and early clinical stages before entering into a corporate collaboration. As a result, we believe we can create, for Abgenix or for marketing to potential collaborative partners, a package that includes antigen rights, human antibodies, and preclinical and clinical data. Leveraging XenoMouse Technology Through Technology Collaborations. We intend to diversify our product portfolio and generate revenues by licensing XenoMouse technology to numerous pharmaceutical and biotechnology companies interested in developing antibody-based products. We expect to enter into several XenoMouse technology collaborations each year. These agreements typically allow our collaborative partner to generate fully human antibodies to one or more specific antigen targets provided by the collaborative partner. In most cases, we provide our mice to collaborative partners who then carry out immunizations with their specific antigen target. In other cases, we may immunize the mice with the collaborative partner's antigen target for additional compensation. As an extension of this concept, we may grant multi-antigen research licenses to select collaborative partners, allowing them to incorporate XenoMouse technology into early stages of their antibody product research efforts without specifically knowing the antigens that they intend to target for XenoMouse antibody generation. These collaborative partners would then need to execute worldwide product licenses for any antibody product they wished to develop and commercialize. The financial terms of our XenoMouse technology collaborations typically include upfront payments, potential license fees and milestone payments plus royalties on future product sales. We have established collaborative arrangements with eight corporate partners covering at least 11 antigen targets. To date, three 37 39 of these collaborative partners have each entered into additional collaborations specifying additional antigens for XenoMouse antibody development. Establishing Collaborations for Proprietary Product Candidates. We also intend to build our product portfolio and generate revenues by licensing proprietary product candidates. These proprietary product collaborations would involve antibodies made to antigen targets that we source. We expect to enter into at least one proprietary product collaboration each year. After generating antibody product candidates and self funding preclinical and in some cases clinical activities to determine preliminary safety and efficacy, we intend to enter into development and commercialization agreements with collaborative partners for these proprietary product candidates that we created. For some of our products, we may enter into proprietary product collaborations at the preclinical or early clinical development stage allowing the collaborative partner to complete development and to market the product. For other products, we may develop the product through clinical trials and license the product candidate to a collaborative partner for marketing. Current antibody candidates for potential proprietary product collaborations include ABX-CBL, ABX-IL8, ABX-EGF and ABX-RB2. The financial terms of these product collaborations could include license fees upon signing, milestone payments, and reimbursement for research and development activities that we perform plus royalties on future product sales, if any. Given our greater investment in creating a proprietary product candidate, we expect that an arrangement for these product candidates could afford higher payments and royalty rates than a typical XenoMouse technology collaboration. PROPRIETARY PRODUCT DEVELOPMENT PROGRAMS We are currently developing antibody therapeutics for a variety of indications. The table below sets forth the development status of our product candidates.
- ------------------------------------------------------------------------------------------------------------ PRODUCT CANDIDATE INDICATION STATUS(1) - ------------------------------------------------------------------------------------------------------------ ABX-CBL GVHD Phase II - ------------------------------------------------------------------------------------------------------------ Psoriasis Phase I/II ABX-IL8 ---------------------------------------------------------------------------- Other Inflammatory Diseases Preclinical - ------------------------------------------------------------------------------------------------------------ ABX-EGF EGF-Dependent Cancers Preclinical - ------------------------------------------------------------------------------------------------------------ Transplant Rejection Preclinical ABX-RB2 ---------------------------------------------------------------------------- Autoimmune Disease Preclinical - ------------------------------------------------------------------------------------------------------------
- --------------- (1) "Phase II" indicates efficacy testing in a limited patient population. "Phase I" indicates safety and proof of concept testing in a limited patient population and toxicology testing in animal models. "Preclinical" indicates that the product candidate selected for development has met predetermined criteria for potency, specificity, manufacturability and pharmacologic activity in animal and in vitro models. ABX-CBL The CBL antigen is selectively expressed on activated immune cells including T cells, B cells and natural killer cells. To accelerate our commercialization plans, we obtained an exclusive license to ABX-CBL in February 1997. We believe that a mouse antibody can be utilized to treat GVHD patients because their immune system is either non-functioning or severely suppressed and, therefore, no HAMA responses should be generated. We believe ABX-CBL has the ability to destroy activated immune cells without affecting the rest of the immune system. Graft Versus Host Disease. We are developing ABX-CBL to reduce unwanted immune responses that occur in GVHD. GVHD is a life-threatening complication that frequently occurs following an 38 40 allogeneic bone marrow transplant ("BMT"). BMTs are used in the treatment of patients with end stage leukemia, certain other serious cancers and immune system disorders. An allogeneic BMT procedure involves transferring marrow, the graft, from a healthy person into an immunosuppressed patient, the host. The transplant is intended to restore normal circulating immune cells to a patient whose own immune system is functionally deficient or has been damaged by the treatment of an underlying disease such as cancer and therefore does not have the ability to mount a sufficient immune response. Often a portion of the graft recognizes the host's own cells as foreign, becomes activated and attacks them, resulting in GVHD. GVHD is graded based on clinical symptoms from I, which is the mildest form, to IV, which is the most severe form. It typically involves damage to multiple organ systems, including the skin, liver and intestines. GVHD causes extreme suffering and is the primary cause of death in allogeneic bone marrow transplant patients. It is estimated that approximately 12,000 allogeneic BMTs will be performed worldwide in 1998, and this number has been growing at about 15% per year. GVHD occurs in approximately 50% of allogeneic BMTs and the treatment costs for GVHD in the United States are estimated to be about $80,000 per patient. Based on a published clinical study, it is estimated that roughly 50% of patients with GVHD fail to respond to current treatments, which consist of steroid and other drug treatments to suppress the grafted immune cells. Less than 15% of steroid-resistant GVHD sufferers survive for more than one year. We believe that a safer and more effective treatment for GVHD could result in increased use of BMTs. Clinical Status. We are currently conducting a multi-center confirmatory Phase II clinical trial for ABX-CBL for the treatment of steroid-resistant, grade II/IV GVHD. This trial is studying four escalating intravenous dose regimens. As of December 31, 1998, we have treated 48 patients, and we have collected data for 23 patients from the clinical trial sites. This data is available for efficacy analysis. We continue to treat patients and collect data from our Phase II clinical trials. Once the final report on the Phase II clinical trials has been completed, we plan to submit the data to the FDA for approval to commence a Phase III clinical trial. There can be no assurance that the results of our clinical trials will be favorable. In addition, the FDA may require additional clinical trials before allowing us to commence a Phase III clinical trial. If required, additional clinical trials will be extensive, expensive and time-consuming. In four separate clinical studies conducted prior to Abgenix obtaining an exclusive license to ABX-CBL, a total of 25 patients with GVHD were treated with the antibody. No safety concerns with ABX-CBL were identified in these studies. One such trial, which has been published, was conducted on eleven patients at St. Jude Hospital in Memphis, Tennessee. In this trial, ten patients with steroid-resistant, Grade III to IV GVHD were treated with daily doses of ABX-CBL for up to six weeks. The publication reported that five of ten patients had a complete remission of GVHD, while four of ten had at least a two-grade improvement in their GVHD score. Only one patient did not respond to the therapy. Another patient who was treated at St. Jude Hospital after publication of the study experienced a two-grade improvement in the patient's GVHD score without adverse side effects. Six additional patients with GVHD were treated at the University of Wisconsin and Cook-Ft. Worth Hospital. The reports from these sites indicated that these patients showed similar results to those described in the published trial conducted at St. Jude Hospital, with four of the six patients showing at least a two grade improvement in their GVHD score. In addition, eight other GVHD patients received treatment at Stanford University and four of the patients were noted to have some improvement in their GVHD score, despite using a dose of less than one-tenth of that employed at the other sites. Immune reaction to the mouse antibody was assessed in several patients and no HAMA response was detected clinically. Furthermore, no adverse clinical responses consistent with an antibody-induced allergic reaction were observed. In addition, a number of patients were followed after the conclusion of the study for as long as one year and no adverse ABX-CBL events were observed. There can be no assurance that the results of our ABX-CBL clinical trials will demonstrate the same levels of safety and efficacy as those shown by the clinical trials completed prior to Abgenix obtaining an exclusive license to ABX-CBL. 39 41 ABX-IL8 IL-8, an important inflammatory cytokine produced at sites of inflammation, attracts and activates white blood cells that mediate the inflammation process. A number of preclinical studies suggest that excess IL-8 may contribute to the pathology and clinical symptoms associated with certain inflammatory disorders. Clinical studies have demonstrated significantly increased levels of IL-8 in plasma or other bodily fluids of patients with certain inflammatory diseases, including psoriasis, rheumatoid arthritis, reperfusion injury and inflammatory bowel disease. Antibodies to IL-8 have been shown to block immune cell infiltration and the associated pathology in animal models of several of these diseases. Using our XenoMouse technology, we have generated ABX-IL8, a proprietary fully human monoclonal antibody, that binds to IL-8 with high affinity. We in-licensed ABX-IL8 from Xenotech in March 1996. In exchange for a license fee and royalty payments on future product sales, we received an exclusive license to ABX-IL8 within the United States, its territories and possessions, Canada and Mexico and a co-exclusive license with Japan Tobacco in the rest of the world, excluding Japan, Taiwan and South Korea. We are evaluating ABX-IL8 for possible use in the treatment of psoriasis and rheumatoid arthritis. Psoriasis. Psoriasis is a chronic disease that results in plaques, a thickening and scaling of the skin accompanied by local inflammation. The disease affects approximately four to five million patients in the United States and can be debilitating in its most severe form. Approximately 500,000 psoriasis patients suffer from a severe enough form of the disease to require systemic therapy with immune suppressants and ultraviolet phototherapy. The risk of serious adverse side effects associated with these therapies often requires the patients to alternate these various therapeutic modalities as a precautionary measure. Scientific studies have shown that IL-8 concentrations can be elevated by a factor of 150 in psoriatic plaques when compared to normal tissue. We believe that IL-8 may promote psoriasis by contributing to three distinct disease-associated processes. First, IL-8 is produced by a type of skin cell called keratinocytes, and is a potent growth factor for these skin cells. It may therefore contribute to the abnormal keratinocyte proliferation in psoriatic plaques. Second, IL-8 attracts and activates immune cells which contribute to the inflammation of the psoriatic plaque. Finally, IL-8 promotes angiogenesis which augments the blood supply necessary for growth of the psoriatic plaque. Clinical Status. We have completed a Phase I dose-escalating human clinical trial examining the safety of administering a single intravenous infusion of five different doses of ABX-IL8 to patients with moderate to severe psoriasis. There were no serious or unexpected drug-related adverse events. In late 1998, we initiated a multi-center, multi-dose, dose-escalating study in moderate to severe psoriasis patients. This study is expected to be completed in the second half of 1999 and data will be collected from 40 patients at eight sites. Rheumatoid Arthritis. Rheumatoid arthritis is a chronic disease marked by inflammation and pain in joints throughout the body. The disease affects over two million people in the United States. Elevated levels of IL-8 in the synovial fluid of rheumatoid arthritis patients have been reported to correlate with the number of infiltrating immune cells. Third-party published studies have reported that the injection of non-human antibodies to IL-8 into a rabbit model of rheumatoid arthritis blocked immune cell infiltration and synovial membrane damage. Clinical Status. Because of the similarity in the histopathology of the inflamed joint and that of the psoriatic plaque, we are planning to conduct a pilot trial with eight patients in rheumatoid arthritis. The planned commencement of this pilot trial is the first quarter of 1999. ABX-IL8 will be administered by injection to the inflamed knee joints of arthritis patients who have undergone a pre-dose biopsy and a high resolution ultrasound scan. ABX-EGF Tumor cells that overexpress epidermal growth factor receptors ("EGFr") on their surface often depend on EGFr's activation for growth. EGFr is overexpressed in a variety of cancers including lung, breast, ovarian, bladder, prostate, colorectal, kidney and head and neck. This activation is triggered by the 40 42 binding to EGFr by EGF or Transforming Growth Factor alpha ("TGFa"), both of which are expressed by the tumor or by neighboring cells. We believe that blocking the ability of EGF and TGFa to bind with EGFr may offer a treatment for certain cancers. ABX-EGF, a fully human monoclonal antibody generated using XenoMouse technology, binds to EGFr with high affinity and has been shown to inhibit tumor cell proliferation in vivo and cause eradication of EGF dependent human tumors established in mouse models. We in-licensed ABX-EGF from Xenotech in November 1997. In exchange for a license fee and royalty payments on future product sales, we received an exclusive worldwide license to ABX-EGF. We are conducting preclinical studies and assessing which tumor types to pursue as possible targets for treatment with ABX-EGF. Studies have shown that ABX-EGF can inhibit growth of EGF-dependent human tumors cells in mouse models. ABX-EGF has also demonstrated the ability to reverse cancer cell growth and cause eradication of established tumors in mice even when administered after significant tumor growth has occurred. Furthermore, in these models where tumors were eradicated, no relapse of the tumor was observed after discontinuation of the antibody treatment. Based on the results seen to date in preclinical studies, we plan to initiate clinical trials with ABX-EGF in mid-1999. ABX-RB2 In certain immunological diseases where chronic administration of a drug targeting the CBL antigen is desirable, it may be important to use a fully human antibody to avoid the risk of a HAMA response. Such diseases include organ transplant rejection, primarily kidney and corneal transplant rejection, as well as autoimmune disorders. Using our XenoMouse technology, we have generated ABX-RB2, a fully human antibody which targets the CBL antigen, and we are conducting preclinical studies on this product candidate. While no human data is available on ABX-RB2, several clinical trials have been performed using ABX-CBL prior to Abgenix obtaining an exclusive license to ABX-CBL, the first generation mouse antibody to the CBL antigen, for the treatment of kidney and corneal transplant rejection. Although there can be no assurance that the data observed with ABX-RB2 in these indications will demonstrate the same degree of efficacy as the data observed with ABX-CBL, we believe the ABX-CBL studies may assist in the design of preclinical and clinical protocols for future development of ABX-RB2. Organ Transplant Rejection. Each year there are approximately 11,000 kidney transplants in the United States. Depending upon a variety of patient risk factors, many of these procedures result in the patient's immune system rejecting the organ. Current therapy for kidney transplant rejection involves administering steroids or other immune system modulators to suppress the immune system. These therapies suffer from suboptimal efficacy profiles or dose limiting toxicities. Prior to Abgenix obtaining an exclusive license to ABX-CBL, three clinical trials had been conducted using ABX-CBL for the treatment of kidney transplant rejection. In two trials conducted at Sendai Shakai Hoken Hospital in Japan, ABX-CBL was administered intravenously daily for nine days to 41 patients whose kidney transplant rejections were resistant to steroid therapy. In the first trial, organ rejection was reversed in 17 of 19 patients. In the second trial, organ rejection was reversed in a dose-dependent fashion in 18 of the 22 patients treated. A third clinical trial was conducted at the University of California at Los Angeles. In this study, 13 of the 18 patients had cadaveric donor transplants. This more refractory population responded to nine days of ABX-CBL treatment with an overall response rate of 50%. Subset analysis indicated that of the patients treated prior to severe renal failure, as many as 75% experienced reversal of the kidney rejections. No serious treatment-related side effects were observed in any of the patients in these three trials. In addition to the use of ABX-RB2 in kidney transplant rejection, we are also exploring its potential use in corneal transplantation. In a clinical trial conducted at the University of California at San Diego prior to Abgenix obtaining an exclusive license to ABX-CBL, six patients were treated with ABX-CBL after the onset of rejection and four showed graft preservation. No serious adverse side effects related to the infusion of ABX-CBL or to an immune response were observed in any of the six patients. 41 43 Autoimmune Disease. In autoimmune disease, a subset of the patient's immune cells react abnormally to a natural component of the patient's own tissue. Because the CBL antigen is selectively expressed on activated immune cells including T cells, B cells and natural killer cells, we believe that ABX-RB2 may be effective in treating autoimmune disease. We intend to conduct preclinical studies in a series of animal models of autoimmune disease, including rheumatoid arthritis, lupus, multiple sclerosis, and diabetes. XENOMOUSE TECHNOLOGY COLLABORATIONS We have entered into multiple XenoMouse technology collaborations with pharmaceutical and biotechnology companies. To date, we have collaborative arrangements with eight companies covering at least 11 antigen targets. These collaborations typically provide our collaborative partners with access to XenoMouse technology for the purpose of generating fully human antibody product candidates to one specific antigen target provided by the collaborative partner. Some of these agreements involve multiple antigen targets. In most cases, we provide our mice to collaborative partners who carry out immunizations with their specific antigen target. In other cases, we may do the immunizations for the collaborative partner and receive additional compensation. The financial terms of our XenoMouse technology collaborations typically include upfront payments, potential license fee and milestone payments. Based upon our current collaborative agreements, these fees and payments may average approximately $8.0 million per antigen target. In certain instances, the collaborative partner could make reimbursement payments to Abgenix for research that we conduct on behalf of such partner. Additionally, if a product receives marketing approval from the FDA or an equivalent foreign agency, we are entitled to receive royalties on future product sales by the collaborative partner, if any. Generally, the collaborative partner is responsible for and bears the costs of product development, worldwide manufacturing and marketing of product candidates generated under these collaborations. Our XenoMouse technology collaborations have similar structures. Our collaborative partner first enters into a research collaboration agreement. This agreement permits our collaborative partner to conduct limited research on a specific antigen using our XenoMouse technology. Our collaborative partner may then elect to enter into a research license and option agreement. If entered into, this agreement allows our collaborative partner to conduct additional research to develop antibody product candidates to a specific antigen target. Generally, a research license and option agreement does not allow our collaborative partner to initiate clinical trials with antibody product candidates. To initiate clinical trials with antibody product candidates to a specific antigen target, our collaborative partner must exercise the option to enter into a product license agreement. If our collaborative partner exercises its product license option, it has the right to conduct all clinical trials and commercialize antibody product candidates. Our dependence on collaborative arrangements with third parties subjects us to a number of risks. Agreements with collaborative partners typically allow such partners significant discretion in electing whether to pursue any of the planned activities. We cannot control the amount and timing of resources our collaborative partners may devote to the product candidates. Even if we fulfill our obligations under a collaborative agreement, the collaborative partner can terminate the agreement at any time following proper written notice. If any collaborative partner were to terminate or breach its agreement with us, or otherwise fail to complete its obligations in a timely manner, our business, financial condition and results of operations may be materially adversely affected. 42 44 Among our eight collaborative partners, Pfizer, Genentech and Millennium have each entered into additional collaborations specifying additional antigens for XenoMouse antibody development. The following table lists our collaborations to date.
- ----------------------------------------------------------------------------------- PARTNER FIELD DATE - ----------------------------------------------------------------------------------- AVI BioPharma Cancer 1/99 - ----------------------------------------------------------------------------------- Centocor Cardiovascular 12/98 - ----------------------------------------------------------------------------------- Research Corporation Technologies Transplant Rejection 12/98 - ----------------------------------------------------------------------------------- Pfizer Cancer 10/98 Cancer 12/97 - ----------------------------------------------------------------------------------- Millennium Inflammation 9/98 Inflammation 7/98 - ----------------------------------------------------------------------------------- Genentech Growth Factor Modulation 6/98 Cardiovascular 4/98 - ----------------------------------------------------------------------------------- Schering-Plough Inflammation 1/98 - ----------------------------------------------------------------------------------- Cell Genesys Gene Therapy 11/97 - -----------------------------------------------------------------------------------
AVI BioPharma. In January 1999, we entered into a research license and option agreement with AVI to generate fully human antibodies to human chorionic gonadotropin (hCG) for the treatment of various cancers. AVI has reported that a therapeutic vaccine based on hCG has shown promise in Phase II clinical trials. AVI, of Portland, Oregon, is a publicly traded biotechnology company. Centocor. In December 1998, we entered into a research collaboration agreement with Centocor to generate fully human antibodies to an undisclosed Centocor antigen in the cardiovascular field. Centocor, of Malvern, Pennsylvania, is a leading developer and marketer of antibody-based products. Research Corporation Technologies. In December 1998, we entered into a binding memorandum of understanding for a research collaboration agreement with RCT to generate fully human antibodies to CD45rb. Resultant antibody product candidates could potentially be used in treating organ transplant rejection and autoimmune disorders. RCT, of Tucson, Arizona, is a corporation involved in technology transfer between universities and industry. Under the RCT agreement, we may receive either a percentage of sublicense income received by RCT or royalty payments on sales of products. Millennium BioTherapeutics. In July 1998, we entered into a research collaboration agreement with Millennium BioTherapeutics to generate fully human antibodies to an antigen target in the field of inflammation. In October 1998, we entered into a research, license and option agreement with Millennium BioTherapeutics covering the same antigen target. In September 1998, we entered into a second research collaboration agreement with Millennium BioTherapeutics covering a second antigen target in the field of inflammation. Millennium BioTherapeutics, of Cambridge, Massachusetts, is a leading genomics company. Genentech. In April 1998, we entered into a research license and option agreement with Genentech to produce fully human antibodies to antigen target in the fields of growth factor modulation. In June 1998, Genentech exercised its option to expand its research collaboration with us to include a second antigen target in the field of cardiovascular disease. Genentech, of South San Francisco, California, is a leading biotechnology company with extensive efforts in antibody-based products. Schering-Plough. In January 1998, we entered into a research collaboration agreement with Schering-Plough to generate fully human antibodies to an antigen target in the field of inflammation. Under this agreement, Schering-Plough is paying us to perform the immunizations and certain research activities. Schering-Plough, of Kenilworth, New Jersey, is a leading global pharmaceutical company. Pfizer. In December 1997, we entered into a research collaboration agreement with Pfizer to generate fully human antibodies to an antigen target in the cancer field. In October 1998, Pfizer exercised its option 43 45 to expand its research collaboration with us to include a second antigen target in the field of cancer. Pfizer is paying us to perform the immunizations and to undertake certain research activities. As part of this arrangement, in January 1998 Pfizer purchased 160,000 shares of our series C preferred stock for $1.3 million and received an option to collaborate with us on up to three antigen targets. These shares converted into 160,000 shares of common stock at our initial public offering. Pfizer, of Groton, Connecticut, is a leading global pharmaceutical company. Cell Genesys. In November 1997, we entered into the gene therapy rights agreement (the "GTRA") with Cell Genesys. Cell Genesys received certain rights to commercialize products based on antibodies generated with XenoMouse technology in the field of gene therapy. Cell Genesys, of Foster City, California, is a leading gene therapy company. JOINT VENTURE WITH JAPAN TOBACCO XENOTECH In June 1991, Cell Genesys entered into several agreements with JT America for the purpose of forming an equally owned limited partnership named Xenotech. In connection with the formation of Xenotech, both Cell Genesys and JT America contributed cash, and Cell Genesys contributed the exclusive right to certain of its technology for the research and development of genetically modified strains of mice that can produce fully human antibodies. Cell Genesys assigned its rights in Xenotech to Abgenix in connection with the formation of Abgenix. As part of the Xenotech relationship, Abgenix provides research and development on behalf of Xenotech in exchange for cash payments. As of December 31, 1998, Abgenix has made capital contributions to Xenotech of approximately $18.6 million and has received approximately $42.9 million in funding for research related to the development of XenoMouse technology. PRODUCT RIGHTS Under the master research, license and option agreement among Abgenix, Japan Tobacco and Xenotech (the "MRLOA"), Abgenix and Japan Tobacco have been provided with colonies of transgenic mice that have been developed for Xenotech pursuant to Abgenix's research and development efforts on behalf of Xenotech. Under the MRLOA, Abgenix and Japan Tobacco have the right to use the transgenic mice for research purposes. The right to commercialize medical products that incorporate antibodies derived through the use of the transgenic mice can be licensed from Xenotech by Abgenix and/or Japan Tobacco pursuant to a nomination process. This process gives Abgenix and Japan Tobacco the right to select a certain number of antigens per year and receive an option to the commercial rights in antibodies that bind to the selected antigens. Both Abgenix and Japan Tobacco are obligated to make royalty payments to Xenotech on revenues derived from the sale of such antibody products. All payments to Xenotech are then shared equally by Abgenix and JT America. During the nomination process, if either Abgenix or Japan Tobacco, but not both, selects an antigen, the selecting party receives an option to an exclusive worldwide license. If both Abgenix and Japan Tobacco select the same antigen at the same time, each party has an option to an exclusive license in its home territory and a co-exclusive license in the rest of the world. The MRLOA defines the home territory of Japan Tobacco as Japan, Korea and Taiwan, and the home territory of Abgenix as North America. In the former case where one party selects an antigen, the nonselecting party has the opportunity to obtain an option to an exclusive license to the selected antigen in the nonselecting party's home territory by exercising its buy-in right within the allotted time. Each party has a limited number of buy-in rights, and they cannot be exercised by the nonselecting party if the antigen selected is subject to proprietary rights of a third party and the third party is unwilling to license its rights to the antigen to the nonselecting party. We must obtain licenses from Xenotech to commercialize antibody products generated by XenoMouse technology. If we have used our yearly allotment of licenses to develop antigen targets and desire to acquire a license to develop additional antigen targets, we may have to negotiate with JT America or others to acquire such rights. Disputes with JT America or its parent company, Japan 44 46 Tobacco, may result in the loss of the right to commercialize a product candidate by either party. Limits on our ability to acquire additional licenses to develop antigen targets or disputes with JT America or Japan Tobacco will limit our ability to establish collaborations and fully realize the commercial potential of XenoMouse technology. GENE THERAPY RIGHTS AGREEMENT WITH CELL GENESYS As stated above, the GTRA provides Cell Genesys with certain rights to commercialize products based on antibodies generated with XenoMouse technology in the field of gene therapy. Under the GTRA, Cell Genesys has certain rights to direct us to make antibodies to two antigens per year. In addition, Cell Genesys has an option to enter into a license to commercialize antibodies binding to such antigens in the field of gene therapy. Cell Genesys is obligated to make certain payments to us for these rights including royalties on future product sales. The GTRA also prohibits us from granting any third-party licenses for antibody products based on antigens nominated by us for our own purposes where the primary field of use is gene therapy. In the case of third-party licenses granted by us where gene therapy is a secondary field, we are obligated to share with Cell Genesys a portion of the cash milestone payments and royalties resulting from any products in the field of gene therapy. INTELLECTUAL PROPERTY 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. While we have pending patent applications in the United States relating to XenoMouse technology, no patents have issued. We try to protect our proprietary position by filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. The patent position of biopharmaceutical companies involves complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. 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 proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. 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 or adequate remedies for our technology in the event of unauthorized use or disclosure of such information. The parties to these agreements may breach them. Furthermore, our trade secrets may otherwise become known to, or be independently developed by, our competitors. Research has been conducted for many years in the antibody field. This has resulted in a substantial number of issued patents and an even larger number of patent applications. Patent applications in the United States are, in most cases, maintained in secrecy until patents issue. 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 infringe the patents or violate other proprietary rights of third parties. In the event of infringement or violation, Abgenix and our collaborative partners may be prevented from pursuing product development or commercialization. Such a result will materially adversely affect 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. See "-- Patent Cross-License and Settlement Agreement with GenPharm." Abgenix 45 47 has one issued European patent relating to XenoMouse technology that is currently undergoing opposition proceedings within the European Patent Office and the outcome of this opposition is uncertain. The biotechnology and pharmaceutical industries have been characterized by extensive litigation regarding patents and other intellectual property rights. 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 our issued and licensed patents; - protect trade secrets or know-how that we own or license; or - determine the enforceability, scope and validity of the proprietary rights of others. If we become involved in any litigation, interference or other administrative proceedings, we will incur substantial expense and the efforts of our technical and management personnel will be significantly diverted. An adverse determination may subject us to significant liabilities or require us to seek licenses that may not be available from third parties. We may be restricted or prevented from manufacturing and selling our products, if any, in the event of an adverse determination in a judicial or administrative proceeding or if we fail to obtain necessary licenses. Costs associated with such arrangements may be substantial and may include ongoing royalties. Furthermore, we may not be able to obtain the necessary licenses on satisfactory terms, if at all. These outcomes will materially adversely affect our business, financial condition and results of operations. PATENT CROSS-LICENSE AND SETTLEMENT AGREEMENT WITH GENPHARM In 1994, Cell Genesys and GenPharm and, beginning in 1996, Abgenix became involved in litigation primarily related to intellectual property rights associated with a method for inactivating a mouse's antibody genes and technology pertaining to transgenic mice capable of producing fully human antibodies. Rather than endure the cost and business interruption of protracted litigation, in March 1997, Cell Genesys, along with Abgenix, Xenotech and Japan Tobacco, signed a comprehensive patent cross-license and settlement agreement with GenPharm that resolved all related litigation and claims between the parties. Under the cross-license and settlement agreement, Abgenix has licensed on a non-exclusive basis certain patents, patent applications, third-party licenses and inventions pertaining to the development and use of certain transgenic rodents including mice that produce fully human antibodies. We use our XenoMouse technology to generate fully human antibody products and have not licensed the use of, and do not use, any transgenic rodents developed or used by GenPharm. As initial consideration for the cross-license and settlement agreement, Cell Genesys issued a note to GenPharm due September 30, 1998 for $15.0 million payable by Cell Genesys and convertible into shares of Cell Genesys common stock. Of this note, approximately $3.8 million satisfied certain of Xenotech's obligations under the agreement. Japan Tobacco also made an initial payment. During 1997, two patent milestones were achieved by GenPharm, and Xenotech was obligated to pay $7.5 million for each milestone. Xenotech paid $7.5 million to satisfy the first milestone and has recorded a payable to GenPharm for the remaining $7.5 million. We recorded a liability of approximately $3.8 million in our balance sheet representing our equal share of the Xenotech obligation. The obligation was paid in November 1998. No additional payments will accrue under this agreement. We have recognized, as a non-recurring charge for cross-license and settlement, a total of $22.5 million. We concluded that the cost of the cross-license and settlement agreement was properly expensed under Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs" because the cross-license received by us from GenPharm is non-exclusive and has no alternative future uses for us. We also concluded that the $11.3 million was properly allocated from Cell Genesys because it related to the technology Cell Genesys contributed to Abgenix upon our organization. We do not have any future financial obligations under the cross-license and settlement agreement. 46 48 GOVERNMENT REGULATION Our product candidates under development are subject to extensive and rigorous domestic government regulation. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. If our products are marketed abroad, they also are subject to extensive regulation by foreign governments. Non-compliance with applicable requirements can result in fines, warning letters, recall or seizure of products, clinical study holds, total or partial suspension of production, refusal of the government to grant approvals, withdrawal of approval, and civil and criminal penalties. Abgenix believes its antibody products will be classified by the FDA as "biologic products" as opposed to "drug products." The steps ordinarily required before a biological product may be marketed in the United States include: (1) preclinical testing; (2) the submission to the FDA of an investigational new drug application ("IND"), which must become effective before clinical trials may commence; (3) adequate and well-controlled clinical trials to establish the safety and efficacy of the biologic; (4) the submission to the FDA of a Biologics License Application; and (5) FDA approval of the application, including approval of all product labeling. Preclinical testing includes laboratory evaluation of product chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of each product. Preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding good laboratory practices. The results of the preclinical tests together with manufacturing information and analytical data are submitted to the FDA as part of the IND and are reviewed by the FDA before the commencement of clinical trials. Unless the FDA objects to an IND, the IND will become effective 30 days following its receipt by the FDA. If we submit an IND, our submission may not result in FDA authorization to commence clinical trials. Also, the lack of an objection by the FDA does not mean it will ultimately approve an application for marketing approval. Furthermore, we may encounter problems in clinical trials that cause us or the FDA to delay, suspend or terminate our trials. Clinical trials involve the administration of the investigational product to humans under the supervision of a qualified principal investigator. Clinical trials must be conducted in accordance with Good Clinical Practices under protocols submitted to the FDA as part of the IND. In addition, each clinical trial must be approved and conducted under the auspices of an Institutional Review Board ("IRB") and with patient informed consent. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possibility of liability of the institution conducting the trial. Clinical trials are conducted in three sequential phases which may overlap. Phase I clinical trials may be performed in healthy human subjects or, depending on the disease, in patients. The goal of a Phase I clinical trial is to establish initial data about safety and tolerance of the biologic agent in humans. In Phase II clinical trials, evidence is sought about the desired therapeutic efficacy of a biologic agent in limited studies of patients with the target disease. Efforts are made to evaluate the effects of various dosages and to establish an optimal dosage level and dosage schedule. Additional safety data are also gathered from these studies. The Phase III clinical trial program consists of expanded, large-scale, multi-center studies of persons who are susceptible to or have developed the disease. The goal of these studies is to obtain definitive statistical evidence of the efficacy and safety of the proposed product and dosage regimen. Historically, the results from preclinical testing and early clinical trials have often not 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 could delay, limit or prevent regulatory approval. In addition, delays or rejections by regulatory authorities may be encountered as a result of many factors, including changes in regulatory policy during the period of product development. Only two of our product candidates, ABX-CBL and ABX-IL8, are currently in clinical trials. Patient follow-up for these clinical trials has been limited. To date, data obtained from these clinical trials has 47 49 been insufficient to demonstrate safety and efficacy under applicable FDA guidelines. As a result, such data will not support an application for regulatory approval without further clinical trials. Clinical trials conducted by Abgenix or by third parties on our behalf may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for ABX-CBL, ABX-IL8 or any other potential product candidates. Regulatory authorities may not permit us to undertake any additional clinical trials for our product candidates. Our other product candidates are still in preclinical development, and we have not submitted INDs or begun clinical trials for these product candidates. Our preclinical or clinical development efforts may not be successfully completed. Further INDs may not be filed. Clinical trials may not commence as planned. 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. Our commencement and rate of completion of clinical trials may be delayed by many factors, including: - inability to manufacture sufficient quantities of materials used for clinical trials; - slower than expected rate of patient recruitment; - inability to adequately follow patients after treatment; - unforeseen safety issues; - lack of efficacy during the clinical trials; or - government or regulatory delays. We have limited experience in conducting and managing clinical trials. We rely on third parties, including our collaborative partners, to assist us in managing and monitoring clinical trials. Our reliance on third parties may result in delays in completing, or failing to complete, clinical trials if they fail to perform under our agreements with them. Our product candidates may fail to demonstrate safety and efficacy in clinical trials. Such failure may delay development of other product candidates, and hinder our ability to conduct related preclinical testing and clinical trials. As a result of such failures, we may also be unable to obtain additional financing. Our business, financial condition and results of operations will be materially adversely affected by any delays in, or termination of, our clinical trials. Abgenix and our contract manufacturers also are required to comply with the applicable FDA current good manufacturing practice ("cGMP") regulations. cGMP 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. The facilities must be approved before they can be used in commercial manufacturing of our products. Abgenix or our contract manufacturers may not be able to comply with the applicable cGMP requirements and other FDA regulatory requirements. If Abgenix or our contract manufacturers fails to comply, our business, financial condition and results of operations will be materially adversely affected. For clinical investigation and marketing outside the United States, we may be subject to the regulatory requirements of other countries, which vary from country to country. The regulatory approval process in other countries includes requirements similar to those associated with FDA approval set forth above. COMPETITION The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. We are aware of several pharmaceutical and biotechnology companies that are actively engaged in research and development in areas related to antibody therapy. These companies have commenced clinical trials of antibody products or have successfully commercialized antibody products. Many of these companies are addressing the same diseases and disease indications as Abgenix or our 48 50 collaborative partners. 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. These companies include GenPharm, Cambridge Antibody Technology Group, Inc., Protein Design Labs, Inc. and Morphosys, Inc. Some of our competitors have received regulatory approval or are developing or testing product candidates that may compete directly with our product candidates. Recently, Sangstat Medical Corp. received approval for an organ transplant rejection product that may compete with ABX-CBL, which is in clinical trials. We are also aware that several companies, including Genentech, Inc., have potential product candidates that may compete with ABX-IL8. Furthermore, we are aware that ImClone Systems, Inc., Medarex and OSI Pharmaceuticals, Inc. have potential antibody and small molecule product candidates already in clinical development that may compete with ABX-EGF, which is in preclinical development. We may also compete with Japan Tobacco in supplying XenoMouse technology or antibody product candidates to potential collaborative partners. Many of these companies and institutions, either alone or together with their collaborative partners, 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 collaborative partners, 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 us. 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 others may render our product candidates or technologies obsolete or noncompetitive. We face and will continue to face intense competition from other companies for collaborative arrangements 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 collaborative partners, may succeed in developing technologies or products that are more effective than ours. PHARMACEUTICAL PRICING AND REIMBURSEMENT In both domestic and foreign markets, sales of our product candidates will depend in part upon the availability of reimbursement from third-party payors. Third-party payors include government health administration authorities, managed care providers, private health insurers and other organizations. These third-party payors are increasingly challenging the price and examining the cost-effectiveness of medical 49 51 products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. We may need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of our products. These studies may require us to provide a significant amount of resources. Our product candidates may not be considered cost-effective. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Domestic and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. Accordingly, legislation and regulations affecting the pricing of pharmaceuticals may change before our proposed products are approved for marketing. Adoption of such legislation could further limit reimbursement for pharmaceuticals. If the government and third-party payors fail to provide adequate coverage and reimbursement rates for our product candidates, the market acceptance of our products may be adversely affected. If our products do not receive market acceptance, our business, financial condition and results of operations will be materially adversely affected. MANUFACTURING We lack the resources and capability to manufacture our products on a commercial scale. While we currently manufacture limited quantities of antibody products for preclinical testing, we depend on sole source contract manufacturers to produce ABX-CBL, ABX-IL8 and ABX-EGF under cGMP regulations for use in our clinical trials. Each contract manufacturer has a limited number of facilities in which our product candidates can be produced. Our contract manufacturers have limited experience in manufacturing ABX-CBL, ABX-IL8 and ABX-EGF in quantities sufficient for conducting clinical trials or for commercialization. There are, on a worldwide basis, a limited number of contract facilities in which our product candidates can be produced under cGMP regulations for use in pharmaceutical drugs. It can also take a substantial period of time for a contract facility to begin producing antibodies under cGMP regulations. Accordingly, we depend on our contract manufacturers to produce our product candidates under cGMP regulations which meets acceptable standards for our clinical trials. Contract manufacturers often encounter difficulties in scaling up production, including problems involving production yields, quality control and quality assurance and shortage of qualified personnel. Our contract manufacturers 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. If our contract manufacturers fail to deliver the required quantities of our product candidates for clinical use on a timely basis and at commercially reasonable prices, and we fail to find a replacement manufacturer or develop our own manufacturing capabilities, our business, financial condition and results of operations will be materially adversely affected. In addition, Abgenix and our third-party manufacturers are required to register manufacturing facilities with the FDA and foreign regulatory authorities. The facilities will then be subject to inspections confirming compliance with good manufacturing practice requirements established by the FDA or corresponding foreign regulations. If Abgenix or our third-party manufacturers fail to maintain compliance with the good manufacturing practice requirements, our business, financial condition and results of operations will be materially adversely affected. EMPLOYEES As of December 31, 1998, we employed 61 persons, of whom 16 hold Ph.D. or M.D. degrees and 11 hold other advanced degrees. Approximately 49 employees are engaged in research and development, and 12 support administration, finance, management information systems and human resources. Our success will depend in large part upon our ability to attract and retain employees. We face competition in this regard from other companies, research and academic institutions, government entities and other organizations. We believe that we maintain good relations with our employees. 50 52 FACILITIES We are currently leasing 52,400 square feet of office and laboratory facilities in Fremont, California. During 1997, we built out approximately 46,000 square feet of laboratory and office space at the Fremont site. Abgenix believes this facility, with potential additional build-outs, will meet its space requirements for research and development and administration for the next several years. Our lease expires in the year 2007 with options to extend. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. SCIENTIFIC AND MEDICAL ADVISORY BOARDS We have established Scientific and Medical Advisory Boards to provide specific expertise in areas of research and development relevant to our business. The Scientific and Medical Advisory Boards meet periodically with our scientific and development personnel and management to discuss our present and long-term research and development activities. Scientific and Medical Advisory Board members include: Frederick Applebaum, M.D. ................... Director, Clinical Research Division, Fred Hutchinson Cancer Research Center Benedict Cosimi, M.D. ....................... Professor of Surgery, Harvard Medical School, and Chief of Transplant Unit, Massachusetts General Hospital Anthony DeFranco, M.D., Ph.D. ............... Professor, Biochemistry and Biophysics, University of California, San Francisco John Gallin, M.D. ........................... Director, Warren Grant Magnusen Clinical Center, NIH Raju S. Kucherlapati, Ph.D. ................. Professor and Chair, Molecular Genetics, Albert Einstein College of Medicine Michele Nussenswieg, M.D., Ph.D. ............ Professor, Molecular Immunology, The Rockefeller University Matthew Scharff, M.D. ....................... Professor of Medicine, Albert Einstein College of Medicine Lee Simon, M.D. ............................. Professor of Medicine, Harvard Medical School David Yocum, M.D. ........................... Professor of Medicine, University of Arizona Medical School
51 53 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth, as of December 31, 1998, certain information concerning our executive officers and directors:
NAME AGE POSITION ---- --- -------- R. Scott Greer.......................... 40 President, Chief Executive Officer and Director C. Geoffrey Davis, Ph.D. ............... 47 Vice President, Research Kurt W. Leutzinger...................... 47 Vice President, Finance and Chief Financial Officer John A. Lipani, M.D. ................... 58 Vice President, Clinical Development Raymond M. Withy, Ph.D. ................ 43 Vice President, Corporate Development Stephen A. Sherwin, M.D.(1)(2).......... 50 Chairman of the Board M. Kathleen Behrens, Ph.D.(2)........... 46 Director Raju S. Kucherlapati, Ph.D. ............ 55 Director Mark B. Logan(1)(2)..................... 60 Director Joseph E. Maroun........................ 69 Director
- --------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee R. Scott Greer has served as our President and Chief Executive Officer and as one of our directors since June 1996. He also serves as a director of Xenotech. From July 1994 to July 1996, Mr. Greer was Senior Vice President of Corporate Development at Cell Genesys. From April 1991 to July 1994, Mr. Greer was Vice President of Corporate Development and from April 1991 to September 1993 was Chief Financial Officer of Cell Genesys. From 1986 to 1991, Mr. Greer held various positions at Genetics Institute, Inc., a biotechnology company, including Director, Corporate Development. Mr. Greer received a B.A. in economics from Whitman College and an M.B.A. from Harvard University and is a certified public accountant. C. Geoffrey Davis, Ph.D., has served as our Vice President, Research since June 1996. From January 1995 to June 1996, Dr. Davis was Director of Immunology at the Xenotech Division of Cell Genesys. From November 1991 to December 1994, he served at Repligen Corporation, a biotechnology company, first as Principal Investigator and then as Director of Immunology. Dr. Davis received a B.A. from Swarthmore College and a Ph.D. in immunology from the University of California, San Francisco. Kurt W. Leutzinger has served as our Vice President, Finance and Chief Financial Officer since July 1997. From June 1987 to July 1997, Mr. Leutzinger was a Vice President of General Electric Investments and a portfolio manager of the $27 billion General Electric Pension Fund. There, he was responsible for private equity investments with a focus on medical technology. He also serves as a director of C3, Inc. Mr. Leutzinger received a B.A. in economics from Fairleigh Dickinson University and an M.B.A. in finance from New York University and is a certified public accountant. John A. Lipani, M.D., has served as our Vice President, Clinical Development since April 1997. From 1992 to April 1997, Dr. Lipani was Group Director of Inflammation and Tissue Repair at SmithKline Beecham Corporation, a pharmaceutical company. From 1989 to 1992, Dr. Lipani held clinical development positions at various biopharmaceutical companies, including Immunex Corporation, Norwich Eaton Pharmaceuticals, Inc. and Centocor, Inc. He received a B.A. from Villanova University and an M.D. from Tulane Medical School. Raymond M. Withy, Ph.D., has served as our Vice President, Corporate Development since June 1996. He also serves as a director of Xenotech. From May 1993 to June 1996, Dr. Withy served in various positions at Cell Genesys, most recently as Director of Business Development. From 1991 to May 1993, Dr. Withy was a private consultant to the biotechnology industry in areas of strategic planning, business 52 54 development and licensing. From 1984 to 1991, Dr. Withy was an Associate Director and Senior Scientist at Genzyme Corporation, a biotechnology company. Dr. Withy received a B.Sc. in chemistry and biochemistry and a Ph.D. in biochemistry, both from the University of Nottingham. Stephen A. Sherwin, M.D., has served as our Chairman of the Board since June 1996. Since March 1990, Dr. Sherwin has served as President, Chief Executive Officer and a director of Cell Genesys. Since March 1994, he has served as Chairman of the Board of Cell Genesys. From 1983 to 1990, Dr. Sherwin held various positions at Genentech, Inc., a biotechnology company, most recently as Vice President, Clinical Research. Dr. Sherwin currently serves as a Director of the California Healthcare Institute. Dr. Sherwin received a B.A. in biology from Yale University and an M.D. from Harvard Medical School. M. Kathleen Behrens, Ph.D., has served as one of our directors since December 1997. Dr. Behrens joined Robertson Stephens Investment Management Co. in 1983 and became a general partner in 1986 and a managing director in 1993. In 1988, Dr. Behrens joined the venture capital group of Robertson Stephens Investment Management Co. and has helped in the founding of three biotechnology companies: Mercator Genetics, Inc., Protein Design Laboratories, Inc. and COR Therapeutics, Inc. Dr. Behrens is currently president and a director of the National Venture Capital Association. Dr. Behrens received a Ph.D. in microbiology from the University of California, Davis, where she performed genetic research for six years. Raju S. Kucherlapati, Ph.D., has served as one of our directors since June 1996. Dr. Kucherlapati was a founder of Cell Genesys and has served as a director of Cell Genesys since 1988. Since July 1989, he has been the Saul and Lola Kramer Professor and the Chairman of the Department of Molecular Genetics at the Albert Einstein College of Medicine. Dr. Kucherlapati also serves as a director of Megabios Corp. and Millennium Pharmaceuticals, Inc. Dr. Kucherlapati received a B.S. in biology from Andhra University in India and a Ph.D. in genetics from the University of Illinois, Urbana. Mark B. Logan has served as one of our directors since August 1997. Mr. Logan has served as Chairman of the Board, President and Chief Executive Officer of VISX, Incorporated, a medical device company, since November 1994. From January 1992 to October 1994, he was Chairman of the Board and Chief Executive Officer of INSMED Pharmaceuticals, Inc., a pharmaceutical company. Previously, Mr. Logan held several senior management positions at Bausch & Lomb, Inc., a medical products company, including Senior Vice President, Healthcare and Consumer Group and also served as a member of its board of directors. Mr. Logan received a B.A. from Hiram College and a PMD from Harvard Business School. Joseph E. Maroun has served as one of our directors since July 1996 and has served as a director of Cell Genesys since June 1995. Mr. Maroun spent 30 years with Bristol-Myers Squibb, a pharmaceuticals company, serving until his retirement in 1990, at which time he was President of the International Group, Senior Vice President of the corporation, and a member of its Policy Committee. He also headed the U.S.-Japan Pharmaceutical Advisory Group. Mr. Maroun received a B.A. from the University of Witwaterrand, Johannesburg. COMMITTEES OF THE BOARD OF DIRECTORS Our Compensation Committee consists of Dr. Sherwin and Mr. Logan. The Compensation Committee makes recommendations regarding our various incentive compensation and benefit plans and determines salaries for our executive officers and incentive compensation for our employees and consultants. Our Audit Committee consists of Dr. Sherwin, Mr. Logan and Dr. Behrens. The Audit Committee makes recommendations to the Board of Directors regarding the selection of our independent auditors, reviews the results and scope of the audit and other services provided by our independent auditors and reviews and evaluates our control functions. 53 55 BOARD COMPOSITION Our Amended and Restated Bylaws provide that the number of members of our Board of Directors shall be determined by the Board of Directors. The number of directors is currently set at seven. All members of our Board of Directors hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified. There are no family relationships among any of our directors, officers or key employees. We have entered into a governance agreement with Cell Genesys which provides that so long as Cell Genesys or a group to which it belongs owns a specific percentage of our outstanding voting stock, Cell Genesys or the group shall have the right to nominate a fixed number of directors to serve on our Board. The details of this arrangement are set forth in the table below:
PERCENTAGE OWNERSHIP NUMBER OF DIRECTORS -------------------- ------------------- 50% or more........................................ 4 out of 7 Less than 50% but greater than 25%................. 3 out of 7 Less than 25% but greater than 15%................. 1 out of 7
The governance agreement also provides that Cell Genesys and each of our officers and directors who owns voting stock shall agree to vote for the persons nominated as set forth above. We may be adversely impacted by the significant influence which Cell Genesys will have with respect to matters affecting us. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of our Compensation Committee was, at any time since our formation, an officer or employee of Abgenix. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee. See "Certain Transactions" for a description of transactions between Abgenix and entities affiliated with members of our Compensation Committee. DIRECTOR COMPENSATION Our non-employee directors currently receive $5,000 per year in retainer plus $1,000 per Board meeting attended as cash compensation for their service as members of our Board of Directors, and are reimbursed for certain expenses in connection with attendance at our Board and committee meetings. We provide $500 per meeting as additional compensation for committee participation or special assignments of the Board of Directors. From time to time, certain of our directors have received grants of options to purchase shares of our common stock pursuant to the 1996 Incentive Stock Plan. On June 4, 1997, R. Scott Greer, Stephen A. Sherwin, Raju S. Kucherlapati and Joseph E. Maroun received options to purchase 67,500, 10,000, 7,500, and 7,500 shares of our common stock, respectively, at a per share exercise price of $2.50. On August 8, 1997, Mark B. Logan received an option to purchase 30,000 shares of our common stock at a per share exercise price of $4.00. On December 11, 1997, Raju S. Kucherlapati received an option to purchase 20,000 shares of our common stock at a per share exercise price of $5.00. There were no other director option grants in 1997. On February 18, 1998, R. Scott Greer, Stephen A. Sherwin, M. Kathleen Behrens, Raju S. Kucherlapati, Mark B. Logan and Joseph E. Maroun received options to purchase 40,000, 5,900, 30,000, 4,400, 3,200 and 4,400 shares of our common stock, respectively, at a per share exercise price of $6.00. On June 15, 1998, Stephen A. Sherwin received options to purchase 10,000 shares of our common stock at a per share exercise price of $10.00. Beginning with the 1999 annual meeting of stockholders, our non-employee directors are eligible to receive nondiscretionary, automatic grants of options to purchase shares of our common stock pursuant to the 1998 Director Option Plan. See "Management -- Stock Plans -- 1998 Director Option Plan" and "Certain Transactions." 54 56 EXECUTIVE COMPENSATION The following table sets forth the compensation paid by us during the years ended December 31, 1998 and 1997 to our President and Chief Executive Officer and to our four other most highly compensated executive officers, each of whose aggregate compensation during our last fiscal year exceeded $100,000 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES -------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS COMPENSATION --------------------------- ----------- --------- -------- ------------ ------------ R. Scott Greer...................... 1998 $267,120 $ -- 40,000 $ -- President and Chief Executive Officer 1997 252,000 55,200 67,500 4,112(1) C. Geoffrey Davis, Ph.D............. 1998 165,350 -- 10,000 -- Vice President, Research 1997 152,250 21,750 25,500 1,974(2) Kurt W. Leutzinger(3)............... 1998 179,830 -- 12,750 19,638(4) Vice President, Finance and Chief 1997 81,555 -- 100,000 127,059(5) Financial Officer John A. Lipani, M.D.(6)............. 1998 180,147 -- 12,750 607(7) Vice President, Clinical Development 1997 131,250 -- 100,000 64,585(8) Raymond M. Withy, Ph.D.............. 1998 165,350 -- 10,000 -- Vice President, Corporate Development.................... 1997 152,250 21,750 25,500 --
- --------------- (1) Consists of imputed interest income on a loan from Abgenix to Mr. Greer. (2) Consists of imputed interest income on a loan from Abgenix to Dr. Davis. (3) Mr. Leutzinger has been our Vice President, Finance and Chief Financial Officer since July 1997. His 1997 annualized salary was $175,000. (4) Consists of $18,734 for reimbursement of relocation expenses and $904 for imputed interest income on a loan from Abgenix to Mr. Leutzinger. (5) Consists of $126,568 for reimbursement of relocation expenses and $491 for imputed interest income on a loan from Abgenix to Mr. Leutzinger. (6) Dr. Lipani has been our Vice President, Clinical Development since April 1997. His 1997 annualized salary was $175,000. (7) Consists of imputed interest income on a loan from Abgenix to Dr. Lipani. (8) Consists of $63,232 for reimbursement of relocation expenses and $1,353 for imputed interest income on a loan from Abgenix to Dr. Lipani. 55 57 OPTION GRANTS IN LAST FISCAL YEAR The following table provides information relating to stock options awarded to each of the Named Executive Officers during the year ended December 31, 1998. All such options were awarded under our 1996 Incentive Stock Plan.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE -------------------------------------------------- VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION UNDERLYING GRANTED FOR OPTIONS TERM(4) OPTIONS IN FISCAL EXERCISE EXPIRATION --------------------- NAME GRANTED(1) 1998(2) PRICE(3) DATE 5% 10% ---- ---------- ------------- -------- ---------- --------- --------- R. Scott Greer................ 40,000 11.3% $6.00 2/17/08 $150,935 $382,498 C. Geoffrey Davis, Ph.D....... 10,000 2.8 6.00 2/17/08 37,734 95,625 Kurt W. Leutzinger............ 12,750 3.6 6.00 2/17/08 48,110 121,921 John A. Lipani, M.D........... 12,750 3.6 6.00 2/17/08 48,110 121,921 Raymond M. Withy, Ph.D........ 10,000 2.8 6.00 2/17/08 37,734 95,625
- --------------- (1) The options granted to Mr. Greer and Drs. Davis and Withy became exercisable as to 1/48th of the option shares on the date of grant and an additional 1/48th of the option shares become exercisable on the first day of each calendar month thereafter, with full vesting occurring four years after the date of grant. The options granted to Mr. Leutzinger and Dr. Lipani become exercisable as to 25% of the option shares one year from the date of grant and 1/48th of the option shares become exercisable on the first day of each calendar month thereafter, with full vesting occurring four years after the date of grant. In each case, vesting is subject to the optionee's continued relationship with Abgenix. Such options expire ten years from the date of grant, or earlier upon termination of employment. See "Stock Plans." (2) Based on an aggregate of 353,551 options granted by Abgenix in the year ended December 31, 1998 to our employees, non-employee directors of and consultants, including the Named Executive Officers. (3) Options were granted at an exercise price equal to the fair market value of our common stock, as determined by our Board of Directors on the date of grant. (4) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission. There can be no assurance provided to any executive officer or any other holder of our securities that the actual stock price appreciation over the option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of our common stock appreciates over the option term, no value will be realized from the option grants made to the executive officers. The potential realizable value is calculated by assuming that the fair value of our common stock on the date of grant of $6.00 per share appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. The potential realizable value computation is net of the applicable exercise price, but does not take into account applicable federal or state income tax consequences and other expenses of option exercises or sales of appreciated stock. 56 58 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth for each of the Named Executive Officers the number of shares of common stock acquired and the dollar value realized upon exercise of options during the year ended December 31, 1998 and the number and value of securities underlying unexercised options held at December 31, 1998:
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(2) ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ----------- ----------- ------------- ----------- ------------- R. Scott Greer............. 31,875 $207,189 63,744 179,641 $ 940,226 $2,571,888 C. Geoffrey Davis, Ph.D.... -- -- 73,009 62,491 1,109,914 908,211 Kurt W. Leutzinger......... -- -- 38,603 74,147 519,637 986,051 John A. Lipani, M.D........ -- -- 44,853 67,897 684,740 1,010,948 Raymond M. Withy, Ph.D..... 25,416 188,078 37,593 62,491 555,654 908,211
- --------------- (1) Value realized reflects the fair market value of our common stock underlying the option on the date of exercise minus the aggregate exercise price of the option. (2) Value of unexercised in-the-money options are based on a value of $16.25 per share, the closing price of our common stock on December 31, 1998. Amounts reflected are based on the value of $16.25 per share, minus the per share exercise price, multiplied by the number of shares underlying the option. STOCK PLANS 1996 Incentive Stock Plan. As of December 31, 1998, a total of 2,891,250 shares of common stock have been authorized for issuance under our 1996 Incentive Stock Plan (the "1996 Plan"). Under the 1996 Plan, as of December 31, 1998, options to purchase an aggregate of 1,642,187 shares were outstanding, 386,810 shares of common stock had been purchased pursuant to exercises of stock options and stock purchase rights and 862,253 shares were available for future grant. The 1996 Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, nonqualified stock options and stock purchase rights to our employees, consultants and nonemployee directors. Incentive stock options may be granted only to employees. The 1996 Plan is administered by the Board of Directors or a committee appointed by the Board of Directors, which determines the terms of awards granted, including the exercise price and the number of shares subject to the award and the exercisability thereof. The exercise price of incentive stock options granted under the 1996 Plan must be at least equal to the fair market value of our common stock on the date of grant. However, for any employee holding more than 10% of the voting power of all classes of our stock, the exercise price will be no less than 110% of the fair market value. The exercise price of nonqualified stock options is set by the administrator of the 1996 Plan. However, for any person holding more than 10% of the voting power of all classes of our stock, the exercise price will be no less than 110% of the fair market value. The maximum term of options granted under the 1996 Plan is ten years. An optionee whose relationship with Abgenix or any related corporation ceases for any reason, other than death or total and permanent disability, may exercise options in the three-month period following such cessation, or such other period of time as determined by the administrator, unless such options terminate or expire sooner, or for nonstatutory stock options, later, by their terms. The three-month period is extended to twelve months for terminations due to death or total and permanent disability. In the event of a merger of Abgenix with or into another corporation, any outstanding options may either by assumed or an equivalent option may be substituted by the surviving entity or, if such options are not assumed or substituted, such options shall become exercisable as to all of the shares subject to the options, including shares as to which they would not otherwise be exercisable. In the event that options become exercisable in lieu of assumption or substitution, the Board of Directors shall notify optionees that all options shall be fully exercisable for a period of 30 days, after which such options shall terminate. 57 59 None of our employees may be granted, in any fiscal year, options to purchase more than 750,000 shares, 1,500,000 shares in the case of a new employee's initial employment with Abgenix. The 1996 Plan will terminate in June 2006, unless sooner terminated by the Board of Directors. The Board of Directors may also grant stock purchase rights to employees and consultants under the 1996 Plan. Such grants are made pursuant to a restricted stock purchase agreement, and the price to be paid for the shares granted thereunder is determined by the administrator. Abgenix is generally granted a repurchase option exercisable on the voluntary or involuntary termination of the purchaser's employment with Abgenix for any reason, including death or disability. The repurchase price shall be the original purchase price paid by the purchaser. The repurchase option shall lapse at a rate determined by the administrator. Once the stock purchase right has been exercised, the purchaser shall have the rights equivalent to those of a stockholder. 1998 Employee Stock Purchase Plan. We have adopted the 1998 Employee Stock Purchase Plan, or the Purchase Plan, and have reserved a total of 250,000 shares of common stock for issuance thereunder. The Purchase Plan also provides for an annual increase, commencing in 1999, in the number of shares reserved for issuance under the Purchase Plan equal to the lesser of 250,000, 1% of our outstanding capitalization or a lesser amount determined by the Board, such that the maximum number of shares which could be reserved under the Purchase Plan over its term would be 2,500,000 shares. Under the Purchase Plan, as of December 31, 1998, 14,130 shares were issued and were outstanding, and 235,870 shares were available for future issuance. The Purchase Plan, which is intended to qualify under Section 423 of the Code, is administered by our Board of Directors or by a committee appointed by the Board of Directors. Under the Purchase Plan, Abgenix withholds a specified percentage, not to exceed 15%, of each salary payment to participating employees over certain offering periods. Any employee who is currently employed for at least 20 hours per week and for at least five consecutive months in a calendar year, either by Abgenix or by one of our majority-owned subsidiaries, is eligible to participate in the Purchase Plan. Unless the Board of Directors or the committee determines otherwise, each offering period will run for 24 months and will be divided into consecutive purchase periods of approximately six months. The first offering period and the first purchase period commenced on July 2, 1998. Thereafter, new 24-month offering periods commence every six months on each November 1 and May 1. In the event of a change in control of Abgenix, including a merger of Abgenix with or into another corporation, or the sale of all or substantially all of our assets, the offering and purchase periods then in progress will be shortened. The price of common stock purchased under the Purchase Plan is equal to 85% of the fair market value of the common stock on the first day of the applicable offering period or the last day of the applicable purchase period, whichever is lower. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with Abgenix. The maximum number of shares that a participant may purchase on the last day of any offering period is determined by dividing the payroll deductions accumulated during the purchase period by the purchase price. However, no person may purchase shares under the Purchase Plan to the extent such person would own 5% or more of the total combined value or voting power of all classes of our capital stock or of any of our subsidiaries, or to the extent that such person's rights to purchase stock under all employee stock purchase plans would exceed $25,000 for any calendar year. The Board of Directors may amend the Purchase Plan at any time. The Purchase Plan will terminate in March 2008, unless terminated earlier in accordance with the provisions of the Purchase Plan. 1998 Director Option Plan. We have adopted the 1998 Director Option Plan, or the Director Plan, and have reserved a total of 250,000 shares of common stock for issuance thereunder. Each non-employee director who becomes an Abgenix director after July 2, 1998 will be automatically granted a nonstatutory option to purchase 30,000 shares of common stock on the date on which such person first becomes a director. At each annual stockholders meeting beginning with the 1999 Annual Stockholders Meeting, each non-employee director will automatically be granted a nonstatutory option to purchase 7,500 shares of common stock, 10,000 shares for the Chairman of the Board if a non-employee director. The exercise 58 60 price of options under the Director Plan will be equal to the fair market value of the common stock on the date of grant. The maximum term of the options granted under the Director Plan is ten years. Each initial grant under the Director Plan will vest as to 25% of the shares subject to the option one year after the date of grant and at a rate of 1/48th of the shares each month thereafter. Each subsequent grant will vest as to 1/48th of the shares subject to the option one month after the date of grant and at a rate of 1/48th of the shares on the last day of each month thereafter. In the event of a merger of Abgenix with or into another corporation, all outstanding options may either be assumed or an equivalent option may be substituted by the surviving entity or, if such options are not assumed or substituted, such options shall become exercisable as to all of the shares subject to the options, including shares as to which they would not otherwise be exercisable. In the event that options become exercisable in lieu of assumption or substitution, the Board of Directors shall notify optionees that all options shall be fully exercisable for a period of 30 days, after which such options shall terminate. In the event that a non-employee director is involuntarily terminated following option assumption, the option becomes fully vested and exercisable. The Director Plan will terminate in March 2008, unless terminated earlier in accordance with the provisions of the Director Plan. 401(K) PLAN All of our employees who are located in the United States and who work a minimum of 30 hours per week are eligible to participate in our 401(k) Retirement Plan (the "401(k) Plan"). Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the lesser of 15% of their annual compensation or the statutorily prescribed annual limit allowable under Internal Revenue Service Regulations and to have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits us, but does not require us, to make additional matching contributions on behalf of all participants in the 401(k) Plan. We have not made any contributions to the 401(k) Plan. The 401(k) Plan is intended to qualify under Section 401(k) of the Code so that contributions to the 401(k) Plan by employees or by Abgenix, and the investment earnings thereon, are not taxable to employees until withdrawn from the 401(k) Plan, and that our contributions, if any, will be deductible by us when made. CHANGE IN CONTROL ARRANGEMENTS Our Board of Directors has approved a plan which provides that in the event of a change in control of Abgenix, the options of each Abgenix employee whose employment is terminated without cause within 24 months of the change in control will become exercisable in full. For this purpose, a change in control includes: (i) a person becoming the beneficial owner of 50% or more of our outstanding voting securities, (ii) certain changes in the composition of our Board of Directors occurring within a two-year period or (iii) a merger or consolidation of Abgenix in which Abgenix stockholders immediately before the transaction own immediately after the transaction less than a majority of the outstanding voting securities of the surviving entity, or its parent. LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS Our Amended and Restated Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for (1) any breach of their duty of loyalty to the corporation or its stockholders, (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) unlawful payments of dividends or unlawful stock repurchases or redemptions or (4) any transaction from which the director derived an improper personal benefit. Such limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our Amended and Restated Bylaws provide that we shall indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnification under our Amended and Restated Bylaws covers at 59 61 least negligence and gross negligence on the part of indemnified parties. Our Amended and Restated Bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the Amended and Restated Bylaws would permit indemnification. We have entered into agreements to indemnify our directors and executive officers, in addition to indemnification provided for in our Amended and Restated Bylaws. These agreements, among other things, indemnify our directors and executive officers for certain expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Abgenix arising out of such person's services as our director or executive officer, any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. 60 62 CERTAIN TRANSACTIONS OUR INCORPORATION AND ORGANIZATION Pursuant to the terms of the stock purchase and transfer agreement between Abgenix and Cell Genesys, we issued 1,691,667 shares of series A senior convertible preferred stock to Cell Genesys. In exchange for $10 million, and 2,058,333 shares of series 1 subordinated convertible preferred stock to Cell Genesys. In exchange, Cell Genesys contributed to Abgenix research, development and manufacturing technology, patents and other intellectual property specific to the antibody therapy programs to be pursued by Abgenix, including Cell Genesys' interest in Xenotech, and certain equipment, furniture and fixtures leased by Cell Genesys. We are responsible for the remaining lease obligations for such capital equipment which total approximately $30,000 per month. Cell Genesys also assigned us two notes receivable totaling $150,000. On July 15, 1996, Abgenix, in exchange for a loan in the principal amount of up to $4,000,000, issued a convertible promissory note to Cell Genesys that subsequently was converted into 666,667 shares of series A preferred stock at a conversion price of $6.00 upon the closing of the series B preferred stock financing in December 1997. Also, in connection with, and contemporaneous to, the series B preferred stock financing, the shares of series A senior convertible preferred stock, and the shares of series 1 subordinated convertible preferred stock were converted into an aggregate 3,750,000 shares of series A preferred stock. (See "Preferred Stock Financings"). Simultaneously with the execution of the stock purchase and transfer agreement, we entered into a governance agreement, tax sharing agreement, services agreement, and patent assignment agreement with Cell Genesys. In addition, we entered into an immunization services agreement, gene therapy agreement, and voting agreement with Cell Genesys. The immunization services agreement, gene therapy agreement, and voting agreement were superseded by the gene therapy rights agreement. See "Business -- Gene Therapy Rights Agreement with Cell Genesys." The governance agreement with Cell Genesys provides that so long as Cell Genesys or a group to which it belongs owns a specific percentage of our outstanding voting stock, Cell Genesys or the group shall have the right to nominate a fixed number of directors to serve on our Board. The details of this arrangement are set forth in the table below:
PERCENTAGE OWNERSHIP NUMBER OF DIRECTORS -------------------- ------------------- 50% or more........................................ 4 out of 7 Less than 50% but greater than 25%................. 3 out of 7 Less than 25% but greater than 15%................. 1 out of 7
The governance agreement also provides that Cell Genesys and each of our officers and directors who owns voting stock shall agree to vote for the persons nominated as set forth above. The tax sharing agreement provides for the allocation of federal and state tax liabilities between Abgenix and Cell Genesys. Pursuant to the terms of the agreement, we will pay to Cell Genesys the federal and state income and franchise tax liability that we would have owed if Cell Genesys had filed a separate tax return. If we realize a loss or credit that reduces the consolidated tax liability of Cell Genesys, then Cell Genesys shall pay us the amount of the reduction. The agreement shall remain in effect with respect to any taxable year for which consolidated or combined returns are filed by Cell Genesys as a common parent corporation and Abgenix is an includable party in such consolidated return. As of December 31, 1998, Cell Genesys' ownership of our outstanding capital stock was 30.2%. Therefore, a consolidated tax return will not be filed for 1998. Pursuant to the terms of the services agreement, Cell Genesys provided certain administrative services for a quarterly fee. In fiscal 1997, these fees totaled $60,000. No fees were incurred in 1998, and Cell Genesys no longer provides services under this agreement. 61 63 Pursuant to the terms of the patent assignment agreement, Cell Genesys assigned us all of its rights in and to certain patents and patent applications related to antibody development. OTHER TRANSACTIONS WITH CELL GENESYS On January 23, 1997 and March 27, 1997, we issued two warrants to purchase an aggregate of 121,667 shares of series A preferred stock (convertible into 121,667 shares of common stock) to Cell Genesys at the exercise price per share of $6.00 in return for providing guarantees for the Loan and Security Agreement with Silicon Valley Bank and the Master Lease Agreement with Transamerica Business Credit Corporation. In October 1997, Cell Genesys extended a short-term, convertible line of credit facility to Abgenix. The credit facility terminated in accordance with its terms, without Abgenix drawing upon the credit facility, upon the closing of the series B preferred stock financing in December 1997. In November 1998, Cell Genesys sold the 1,146,300 shares of common stock offered by this prospectus to the selling stockholders. Pursuant to that sale, we agreed to register the shares under the Securities Act for resale to the public. Under the registration rights agreement, we must use reasonable efforts to cause this registration statement to be declared effective by the Securities and Exchange Commission as soon as practicable and to keep this registration statement, or a replacement, continuously effective under the Securities Act until the earlier of (1) November 18, 2000 or (2) such time as the selling stockholders have sold all shares offered by this prospectus, or a replacement prospectus. BANCBOSTON ROBERTSON STEPHENS RELATIONSHIP M. Kathleen Behrens, Ph.D., one of our directors, is also a managing director of Robertson Stephens Investment Management Co. Robertson Stephens Investment Management Co. was formerly affiliated with BancBoston Robertson Stephens. BancBoston Robertson Stephens acted as one of our placement agents in the series B preferred stock financing in December 1997 and as the managing underwriter for our initial public offering in July 1998. BancBoston Robertson Stephens received approximately $759,000 in fees for services provided in the private placement. Also, persons and entities currently or formerly affiliated with Robertson Stephens Investment Management Co. and BancBoston Robertson Stephens purchased, in the aggregate, 784,616 shares of the series B preferred stock for an aggregate purchase price of approximately $5.1 million. BancBoston Robertson Stephens together with the other underwriters received approximately $1.6 million in discounts and commissions in connection with its services as the managing underwriter of our initial public offering. In connection with Cell Genesys' sale of shares of our common stock to the selling stockholders, BancBoston Robertson Stephens received approximately $475,000 in fees in connection with its services as placement agent. 62 64 PREFERRED STOCK FINANCINGS In connection with the initial public offering of our common stock in July 1998, each outstanding share of preferred stock was converted into one share of common stock. The following directors and holders of more than 5% of our outstanding stock purchased the following shares of our preferred stock prior to the consummation of our initial public offering.
PREFERRED STOCK --------------------- PREFERRED STOCKHOLDER SERIES A SERIES B --------------------- --------- -------- Cell Genesys, Inc.(1)....................................... 4,538,334 -- Robertson Stephens Investment Management Co. Entities(2).... -- 769,231 Stephen A. Sherwin, M.D.(3)................................. 4,538,334 -- M. Kathleen Behrens, Ph.D.(4)............................... -- 784,616 Raju Kucherlapati, Ph.D.(5)................................. 4,538,334 10,000 Joseph E. Maroun(6)......................................... 4,538,334 153,846
- --------------- (1) Includes 121,667 shares issuable pursuant to outstanding warrants to purchase series A preferred stock. (2) Includes 56,280 shares held by Bayview Investors, LTD, 224,145 shares held by Crossover Fund II, L.P., 67,663 shares held by Crossover Fund IIA, L.P., 334,079 shares held by Omega Ventures II, L.P., 87,064 shares held by Omega Ventures II Cayman, L.P. (collectively, the "RSIM Shares"). Each of the above entities is affiliated with Robertson Stephens Investment Management Co. (3) Includes 4,416,667 shares held by Cell Genesys and 121,667 shares issuable pursuant to outstanding warrants to purchase series A preferred stock (collectively, the "Cell Genesys Owned Shares"). Dr. Sherwin is an officer, director and beneficial stockholder of Cell Genesys. As such, he may be deemed to have voting and dispositive power over the Cell Genesys Owned Shares. However, Dr. Sherwin disclaims beneficial ownership of the Cell Genesys Owned Shares except to the extent of his pro rata pecuniary interest therein. (4) Includes the RSIM Shares. Dr. Behrens, a managing director of Robertson Stephens Investment Management Co., disclaims beneficial ownership of the RSIM Shares except to the extent of her pro rata pecuniary interest therein. (5) Includes the Cell Genesys Owned Shares. Dr. Kucherlapati is a director and beneficial stockholder of Cell Genesys. As such, he may be deemed to have voting power over the Cell Genesys Owned Shares. However, Dr. Kucherlapati disclaims beneficial ownership of the Cell Genesys Owned Shares except to the extent of his pro rata pecuniary interest therein. (6) Includes the Cell Genesys Owned Shares. Mr. Maroun is a director and beneficial stockholder of Cell Genesys. As such, he may be deemed to have voting and dispositive power over the Cell Genesys Owned Shares. However, Mr. Maroun disclaims beneficial ownership of the Cell Genesys Owned Shares except to the extent of his pro rata pecuniary interest therein. The selling stockholders and holders of preferred stock are entitled to certain registration rights with respect to the common stock issued upon conversion thereof. See "Description of Capital Stock -- Registration Rights of Certain Holders." Cell Genesys beneficially owns approximately 30.2% of our outstanding capital stock. As a result, Cell Genesys will have significant influence over all matters requiring the approval of our stockholders, including the election of our Board of Directors. See "Risk Factors -- Cell Genesys Exercises Significant Influence Over Us." Three of our directors, Stephen A. Sherwin, M.D., Raju S. Kucherlapati, Ph.D. and Joseph E. Maroun are also directors of Cell Genesys. Dr. Sherwin is also the Chairman of the Board and Chief Executive Officer of Cell Genesys. 63 65 TRANSACTIONS WITH EMPLOYEES On May 27, 1997, John A. Lipani, M.D. our Vice President, Clinical Development, and Abgenix entered into a relocation loan agreement pursuant to which we loaned $100,000 to Dr. Lipani in exchange for a promissory note secured by a deed of trust. No interest accrues on the loan until May 27, 2002. The outstanding principal balance as of December 31, 1998 was $100,000. In addition, Dr. Lipani received a $35,000 loan from Abgenix to assist with relocation expenses. The $35,000 loan, which is evidenced by a promissory note, was forgiven in April 1998 when Dr. Lipani completed 12 months of employment with Abgenix. On December 2, 1992, R. Scott Greer, our President and Chief Executive Officer, and Cell Genesys entered into a relocation loan agreement pursuant to which Cell Genesys loaned $100,000 to Mr. Greer in exchange for an interest-free promissory note secured by shares of Cell Genesys' common stock owned by Mr. Greer. In June 1996, Cell Genesys assigned its rights under the promissory note to Abgenix. Mr. Greer repaid the entire loan to Abgenix in September 1997. On April 21, 1995, C. Geoffrey Davis, Ph.D. our Vice President, Research, and Cell Genesys entered into a relocation loan agreement pursuant to which Cell Genesys loaned $30,000 to Dr. Davis in exchange for a promissory note secured by a deed of trust. No interest accrues on the loan until January 1, 2000. In June 1996, Cell Genesys assigned its rights under the promissory note to Abgenix. As of December 31, 1998, the outstanding principal balance was $30,000. On August 26, 1997, Mr. Leutzinger received a $25,000 loan from Abgenix to assist with relocation expenses. The $25,000 loan, which is evidenced by a full recourse promissory note, was forgiven in July 1998 when Mr. Leutzinger completed 12 months of employment with Abgenix. On February 27, 1998, Mr. Leutzinger and Abgenix entered into a relocation loan agreement pursuant to which Abgenix loaned $100,000 to Mr. Leutzinger in exchange for a promissory note secured by a deed of trust. No interest accrues on the loan until June 30, 2003. As of December 31, 1998, the outstanding principal balance of the promissory note was $100,000. We have entered into indemnification agreements with each of our directors and executive officers. See "Management -- Limitations of Liability and Indemnification Matters." All future transactions, including any loans from Abgenix to our officers, directors, principal stockholders or affiliates, will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested members of the Board of Directors or, if required by law, a majority of disinterested stockholders, and will be on terms no less favorable to Abgenix than could be obtained from unaffiliated third parties. 64 66 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of our common stock as of December 31, 1998, and as adjusted to reflect the sale of the common stock being offered hereby by (1) each person, or group of affiliated persons, who is known by us to own beneficially more than 5% of the common stock, (2) each of our directors, (3) each of our executive officers, (4) all of our directors and executive officers as a group and (5) the selling stockholders. Except as otherwise noted, the persons or entities in this table have sole voting and investing power with respect to all the shares of common stock owned by them.
SHARES BENEFICIALLY NUMBER SHARES BENEFICIALLY OWNED OWNED PRIOR TO OFFERING OF AFTER OFFERING ------------------------ SHARES -------------------------- NUMBER PERCENT(1) OFFERED(2) NUMBER PERCENT(1) ---------- ----------- ---------- ----------- ------------ BENEFICIAL OWNER DIRECTORS, OFFICERS AND 5% STOCKHOLDERS Cell Genesys(3)........................... 3,392,034 30.2% -- 3,392,034 30.2% 342 Lakeside Drive Foster City, CA 94404 Robertson Stephens Investment Management Co. Entities(4)......................... 907,468 8.2 -- 907,468 8.2 555 California Street, Suite 2500 San Francisco, CA 94104 Joseph E. Maroun(5)....................... 3,569,911 31.7 -- 3,569,911 31.7 Stephen A. Sherwin, M.D.(6)............... 3,464,565 30.6 -- 3,464,565 30.6 Raju S. Kucherlapati, Ph.D.(7)............ 3,432,315 30.4 -- 3,432,315 30.4 M. Kathleen Behrens, Ph.D.(8)............. 932,228 8.4 -- 932,228 8.4 R. Scott Greer(9)......................... 220,588 2.0 -- 220,588 2.0 C. Geoffrey Davis, Ph.D.(10).............. 79,395 * -- 79,395 * Raymond M. Withy, Ph.D.(11)............... 80,647 * -- 80,647 * Kurt W. Leutzinger(12).................... 45,737 * -- 45,737 * John A. Lipani, M.D.(13).................. 51,899 * -- 51,899 * Mark B. Logan(14)......................... 12,250 * -- 12,250 * All directors and executive officers as a group (10 persons)(15).................. 5,105,467 43.7 -- 5,105,467 43.7 SELLING STOCKHOLDERS Alan Mandell, Trustee of the 1982 Elizabeth Heller Mandell Trust.......... 8,000 * 8,000 -- -- Barrie Ramsay Zesiger..................... 12,000 * 12,000 -- -- City of Milford Pension & Retirement Fund.................................... 90,000 * 90,000 -- -- City of Stamford Firemen's Pension Fund... 46,000 * 46,000 -- -- Domenic J. Mizio.......................... 17,000 * 17,000 -- -- Fred & Lucy Giampino JTWROS............... 3,000 * 3,000 -- -- Harold & Grace Willens JTWROS............. 5,000 * 5,000 -- -- HBL Charitable Unitrust................... 8,000 * 8,000 -- -- Helen Hunt................................ 8,000 * 8,000 -- -- Lazar Foundation.......................... 8,000 * 8,000 -- -- Mary Ann S. Hamilton Trust for Self....... 10,000 * 10,000 -- -- Morgan Trust Co. of the Bahamas Ltd. as Trustee U/A/D 11/30/93.................. 16,000 * 16,000 -- -- Murray Capital, L.L.C..................... 8,000 * 8,000 -- -- NFIB Employee Pension Trust............... 22,000 * 22,000 -- -- Norwalk Employees' Pension Plan........... 48,000 * 48,000 -- -- Planned Parenthood of NY.................. 6,000 * 6,000 -- -- Public Employee Retirement System of Idaho................................... 181,000 1.6 181,000 -- -- Roanoke College........................... 19,000 * 19,000 -- -- State of Oregon PERS/ZCG.................. 546,300 4.9 546,300 -- -- The Ferris Hamilton Family Trust.......... 8,000 * 8,000 -- -- The Jenifer Altman Foundation............. 16,000 * 16,000 -- -- The Meehan Investment Partnership I, L.P..................................... 8,000 * 8,000 -- -- Van Loben Sels Foundation................. 19,000 * 19,000 -- -- Wells Family L.L.C........................ 24,000 * 24,000 -- -- Wolfson Investment Partners L.P........... 10,000 * 10,000 -- --
65 67 - --------------- * Represents beneficial ownership of less than one percent of the common stock. (1) Beneficial ownership is determined in accordance with the rules of Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, the stockholders named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Percentage of beneficial ownership is based on 11,120,293 shares of common stock outstanding as of December 31, 1998. (2) Assumes that the selling stockholders will sell all of their shares of common stock in this offering. (3) Consists of 3,270,367 shares and 121,667 shares issuable pursuant to warrants exercisable within 60 days of December 31, 1998 (the "CG Shares"). (4) Includes 56,280 shares held by Bayview Investors, LTD, 50,000 shares held by The Robertson Stephens Orphan Fund, L.P., 17,500 shares held by The Robertson Stephens Orphan Offshore Fund, L.P., 362,545 shares held by Crossover Fund II, L.P., 334,079 shares held by Omega Ventures II, L.P. and 87,064 shares held by Omega Ventures II Cayman, L.P. (the "Robertson Stephens Investment Management Co. Shares"). Bayview Investors, LTD, The Robertson Stephens Orphan Fund, L.P. and the Robertson Stephens Orphan Offshore Fund, L.P. are affiliated with Robertson Stephens Investment Management Co. Robertson Stephens Investment Management Co. disclaims beneficial ownership of the Robertson Stephens Investment Management Co. Shares except to the extent of its pro rata pecuniary interests therein. (5) Includes the CG Shares. Also includes 24,031 shares issuable upon exercise of options exercisable within 60 days of December 31, 1998. Mr. Maroun is a director and beneficial stockholder of Cell Genesys. As such, he may be deemed to have voting and dispositive power over the CG Shares. However, Mr. Maroun disclaims beneficial ownership of the CG Shares except to the extent of his pro rata pecuniary interest therein based upon his beneficial ownership of the capital stock of Cell Genesys. (6) Includes the CG Shares. Also includes, 72,531 shares issuable upon exercise of options exercisable within 60 days of December 31, 1998. Dr. Sherwin is an officer, director and beneficial stockholder of Cell Genesys. As such, he may be deemed to have voting and dispositive power over the CG Shares. However, Dr. Sherwin disclaims beneficial ownership of the CG Shares except to the extent of his pro rata pecuniary interest therein based upon his beneficial ownership of the capital stock of Cell Genesys. (7) Includes the CG Shares. Also includes, 30,281 shares issuable upon exercise of options exercisable within 60 days of December 31, 1998. Dr. Kucherlapati is a director and beneficial stockholder of Cell Genesys. As such, he may be deemed to have voting and dispositive power over the CG Shares. However, Dr. Kucherlapati disclaims beneficial ownership of the shares of the CG Shares except to the extent of his pro rata pecuniary interest therein based upon his beneficial ownership of the capital stock of Cell Genesys. (8) Includes the Robertson Stephens Investment Management Co. Shares. Also includes 9,375 shares issuable upon exercise of options exercisable within 60 days of December 31, 1998. Dr. Behrens, a managing director of Robertson Stephens Investment Management Co., disclaims beneficial ownership of the Robertson Stephens Investment Management Co. Shares except to the extent of her pro rata pecuniary interests therein. (9) Includes 80,819 shares issuable upon exercise of options exercisable within 60 days of December 31, 1998. 66 68 (10) Includes 79,395 shares issuable upon exercise of options exercisable within 60 days of December 31, 1998. (11) Includes 43,979 shares issuable upon exercise of options exercisable within 60 days of December 31, 1998. (12) Includes 45,649 shares issuable upon exercise of options exercisable within 60 days of December 31, 1998. (13) Includes 51,899 shares issuable upon exercise of options exercisable within 60 days of December 31, 1998. (14) Includes 12,250 shares issuable upon exercise of options exercisable within 60 days of December 31, 1998. (15) Includes 450,209 shares issuable upon exercise of options exercisable within 60 days of December 31, 1998 and 121,667 shares subject to warrants. 67 69 PLAN OF DISTRIBUTION In November 1998, Cell Genesys sold the 1,146,300 shares of common stock offered by this prospectus to the selling stockholders. Pursuant to that sale, we agreed to register the shares under the Securities Act for resale to the public. Under the registration rights agreement between Abgenix and the selling stockholders, we must use reasonable efforts to cause this registration statement to be declared effective by the Securities and Exchange Commission as soon as practicable and to keep this registration statement, or a replacement, continuously effective under the Securities Act until the earlier of (1) November 18, 2000 or (2) such time as the selling stockholders have sold all shares offered by this prospectus, or a replacement prospectus. The sale of all or a portion of the shares of common stock offered hereby by the selling stockholders may be effected from time to time at prevailing market prices at the time of such sales, at prices related to such prevailing prices, at fixed prices that may be changed or at negotiated prices. The selling stockholders may effect such transactions by selling directly to purchasers in negotiated transactions, to dealers acting as principals or through one or more brokers, or any combination of these methods of sale. In addition, shares may be transferred in connection with the settlement of call options, short sales or similar transactions that may be effected by the selling stockholders. Dealers or brokers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders. The selling stockholders and any brokers or dealers that participate in the distribution may under certain circumstances be deemed to be "underwriters" within the meaning of the Securities Act, and any commissions received by such brokers or dealers and any profits realized on the resale of shares by them may be deemed to be underwriting discounts and commissions under the Securities Act. Abgenix and the selling stockholders may agree to indemnify such brokers or dealers against certain liabilities, including liabilities under the Securities Act. To the extent required under the Securities Act or the rules of the Securities and Exchange Commission, a supplemental prospectus will be filed, disclosing (1) the name of any such brokers or dealers, (2) the number of shares involved, (3) the price at which such shares are to be sold, (4) the commissions paid or discounts or concessions allowed to such brokers or dealers, where applicable, (5) that such brokers or dealers did not conduct any investigation to verify the information set out in this prospectus, as supplemented, and (6) other facts material to the transaction. There is no assurance that any of the selling stockholders will sell any or all of the shares of common stock offered hereby. Abgenix has agreed to pay the expenses incurred in connection with the registration of the shares of common stock offered hereby. The selling stockholders will be responsible for all selling commissions, transfer taxes and related charges in connection with the offer and sale of such shares. 68 70 DESCRIPTION OF CAPITAL STOCK GENERAL Our Amended and Restated Certificate of Incorporation authorizes the issuance of up to 50,000,000 shares of common stock, $0.0001 par value per share and authorizes the issuance of 5,000,000 shares of preferred stock, $0.0001 par value per share, the rights and preferences of which may be established from time to time by our Board of Directors. As of December 31, 1998, 11,120,293 shares of common stock were issued and outstanding and held by 162 stockholders and no shares of preferred stock were issued and outstanding. COMMON STOCK Each holder of common stock is entitled to one vote for each share held on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of Abgenix, holders of common stock would be entitled to share in our assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by the rights of the holders of shares of any series of preferred stock which we may designate in the future. PREFERRED STOCK Our Board of Directors is authorized, without any further action by the stockholders, subject to any limitations prescribed by law, from time to time to issue up to an aggregate of 5,000,000 shares of preferred stock, $0.0001 par value per share, in one or more series, each of such series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by our Board of Directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. Issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. We have no present plans to issue any shares of preferred stock. WARRANTS AND OTHER OBLIGATIONS TO ISSUE CAPITAL STOCK As of December 31, 1998, we have two outstanding warrants to purchase an aggregate of 121,667 shares of common stock at an exercise price of $6.00 per share. These warrants are currently exercisable in full. One warrant will expire on January 23, 2000, and the other warrant will expire on March 27, 2000. Also, as of December 31, 1998, we are obligated to issue 25,000 shares of the common stock upon the occurrence of certain milestones pursuant to the terms of a license agreement. REGISTRATION RIGHTS OF CERTAIN HOLDERS The holders of 6,698,052 shares of common stock and 121,667 shares of common stock issuable upon exercise of outstanding warrants (the "Registrable Securities") or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of an agreement (the "Amended and Restated Stockholder Rights Agreement") between Abgenix and the holders of the Registrable Securities. The holders of at least 50% of the Registrable Securities may require, subject to certain limitations in the Amended and Restated Stockholder Rights Agreement, on two occasions, that we use our best efforts to register the Registrable Securities for public resale. If we register any of our common stock either for our own account or for the account of other security holders, other than in connection 69 71 with the registration of the shares offered hereby and certain other exceptions, the holders of Registrable Securities are entitled to include their shares of common stock in the registration. A holder's right to include shares in an underwritten registration statement is subject to the right of the underwriters to limit the number of shares included in the offering, subject to certain limitations. The holders of Registrable Securities may also require Abgenix, on no more than two occasions during any 12-month period, to register all or a portion of their Registrable Securities on Form S-3 when use of such form becomes available to Abgenix, provided, among other limitations, that the proposed aggregate selling price, net of underwriting discounts and commissions, is at least $500,000. All registration expenses will be borne by Abgenix (subject to certain limitations) and all selling expenses relating to Registrable Securities must be borne by the holders of the securities being requested. If such holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price for our common stock. If we were to initiate a registration and include Registrable Securities pursuant to the exercise of piggyback registration rights, the sale of such Registrable Securities may have an adverse effect on our ability to raise capital. The shares offered by the selling stockholders under this prospectus are entitled to certain rights with respect to the registration of these shares under the Securities Act. See "Plan of Distribution." CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW 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 Abgenix. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions allow Abgenix 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 and eliminate cumulative voting in the election of directors. These provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of Abgenix. In addition, Abgenix is subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder, unless: (1) prior to such date, the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (2) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder; the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding, for purposes of determining the number of shares outstanding, those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (3) on or subsequent to such date, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Our Amended and Restated Certificate of Incorporation eliminates the right of stockholders to call special meetings of stockholders or to act by written consent without a meeting. The Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws do not provide for cumulative voting in the election of directors. The authorization of undesignated preferred stock makes it possible for the Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of Abgenix. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of Abgenix. The amendment of any of these provisions would require approval by holders of at least 66 2/3% of the outstanding common stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is ChaseMellon Shareholder Services. 70 72 SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of common stock in the public market following this offering, including shares issued upon exercise of outstanding options and warrants, could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sale of our equity securities. Sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. We have outstanding 11,120,293 shares of common stock (based upon shares outstanding as of December 31, 1998), assuming no exercise of outstanding options or warrants after December 31, 1998. Of these shares, the 1,146,300 shares sold in this offering will be freely tradable without restriction under the Securities Act except for any shares purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. In addition, the 2,875,000 shares sold in our initial public offering in July 1998 and an additional 2,771,302 shares, subject in certain instances to volume re-sale limitations under Rule 144, are freely tradeable. The remaining 4,327,691 shares of common stock held by existing stockholders may not be sold publicly unless they are registered under the Securities Act or are sold pursuant to Rule 144 or another exemption from registration. These shares will become eligible for public resale at various times over a period of less than one year following the completion of this offering, subject to volume limitations. In connection with our initial public offering, a director and a certain stockholder who, in the aggregate, hold 71,665 of the shares of common stock outstanding immediately prior to the completion of this offering entered into lock-up agreements under which they have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, or agree to dispose of, directly or indirectly, any shares of common stock, options or warrants to acquire shares of common stock or securities exchangeable for or convertible into common stock owned by them until June 27, 1999, without the prior written consent of BancBoston Robertson Stephens. Upon expiration of the 360-day lock-up agreements, all 71,655 of these shares will become eligible for public resale, subject to volume limitations imposed by Rule 144. The holders of 6,698,052 shares of our common stock will be entitled to certain demand and piggyback rights with respect to registration of such shares under the Securities Act. If such holders exercise the demand registration rights and cause a large number of securities to be registered and sold in the public market, such sales may have an adverse effect on the market price for our common stock. If we were to initiate a registration and include shares held by such holders pursuant to the exercise of their piggyback registration rights, such sales may have an adverse effect on our ability to raise capital. Additionally, 121,667 shares issuable pursuant to warrants will also be entitled to similar registration rights. The number of shares sold in the public market could increase if such registration rights are exercised. On October 23, 1998 we filed a Registration Statement on Form S-8 registering 3,053,819 shares of common stock subject to outstanding options or reserved for future issuance under our stock plans, thus permitting the resale of such shares in the public market without restriction under the Securities Act after expiration of any vesting restrictions. As of December 31, 1998, we are obligated to issue 25,000 shares of common stock upon the occurrence of certain milestones pursuant to the terms of a license agreement. In general, under Rule 144 as currently in effect, a person or persons whose shares are aggregated, who has beneficially owned shares for at least one year, including the holding period of any prior owner except an affiliate, is entitled to sell in "broker's transactions" or to market makers, a number of shares during any three-month period that does not exceed the greater of (1) one percent of the number of shares of common stock then outstanding, approximately 111,203 shares currently, or (2) the average weekly trading volume of the common stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to certain manner of sale provisions and notice requirements and to the availability of current public information about Abgenix. Under Rule 144(k), a person who is not deemed to have been an affiliate of Abgenix at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without having to comply with the manner of sale, public 71 73 information, volume limitation or notice provisions of Rule 144. Under Rule 701 of the Securities Act, persons who purchase shares upon exercise of options granted prior to the effective date of our initial public offering are currently entitled to sell such shares in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Abgenix by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. As of December 31, 1998, a certain investment partnership and members of Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially owned an aggregate of 16,250 shares of common stock of Abgenix. EXPERTS The financial statements of Abgenix, Inc. at December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997 appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of Xenotech, L.P. at December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997 and for the period from inception (June 12, 1991) to December 31, 1997, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION Abgenix has filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby by the selling stockholders. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to Abgenix and our common stock, reference is made to the registration statement and the exhibits and schedules filed as a part thereof. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete. In each instance, reference is made to the copy of such contract or document filed as an exhibit to the registration statement, and each such statement is qualified in all respects by such reference. Copies of the registration statement, including exhibits and schedules thereto, may be inspected without charge at the Securities and Exchange Commission's principal office in Washington, D.C., or obtained at prescribed rates from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Securities and Exchange Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the site is http://www.sec.gov. Abgenix is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's following Regional Offices: Suite 1400, Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661; and 13th Floor, Seven World Trade Center, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. 72 74 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Abgenix, Inc., Financial Statements Report of Ernst & Young LLP, Independent Auditors......... F-2 Balance Sheets............................................ F-3 Statements of Operations.................................. F-4 Statement of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity (Net Capital Deficiency)............................................ F-5 Statements of Cash Flows.................................. F-6 Notes to Financial Statements............................. F-7 Xenotech, LP, Financial Statements Report of Ernst & Young LLP, Independent Auditors......... F-21 Balance Sheets............................................ F-22 Statements of Operations.................................. F-23 Statement of Partners' Capital............................ F-24 Statements of Cash Flows.................................. F-25 Notes to Financial Statements............................. F-26
F-1 75 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Abgenix, Inc. We have audited the accompanying balance sheets of Abgenix, Inc. as of December 31, 1996 and 1997, and the related statements of operations, changes in redeemable convertible preferred stock and stockholders' equity (net capital deficiency), and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Abgenix, Inc. at December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Palo Alto, California January 23, 1998 F-2 76 ABGENIX, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS
DECEMBER 31, -------------------- SEPTEMBER 30, 1996 1997 1998 -------- -------- ------------- (UNAUDITED) Current assets: Cash and cash equivalents.............................. $ 7,190 $ 4,617 $ 2,283 Short-term investments................................. 2,982 10,704 22,290 Prepaid expenses and other current assets.............. 158 550 370 -------- -------- -------- Total current assets........................... 10,330 15,871 24,943 Property and equipment, net.............................. 3,648 5,776 5,418 Deposits and other assets................................ 379 437 420 -------- -------- -------- $ 14,357 $ 22,084 $ 30,781 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Short-term payable to parent........................... $ 2,429 $ 212 $ 34 Payable to Xenotech for cross-license and settlement obligation.......................................... -- 3,750 3,750 Accounts payable....................................... -- 426 474 Deferred revenue from related party.................... 376 -- -- Accrued stock issuance costs........................... -- 1,200 -- Other accrued liabilities.............................. 1,961 2,000 1,135 Current portion of long-term debt...................... -- 1,646 1,694 -------- -------- -------- Total current liabilities...................... 4,766 9,234 7,087 Long-term note payable to parent......................... 1,757 -- -- Long-term debt........................................... -- 3,979 2,710 Commitments Redeemable convertible preferred stock, $0.0001 par value; 20,000,000 shares authorized, 3,750,000 and 7,263,209 shares issued and outstanding at December 31, 1996 and 1997, and no shares issued and outstanding at September 30, 1998; at amount paid in; aggregate redemption and liquidation value of approximately $45,003 and none at December 31, 1997 and September 30, 1998, respectively..................................... 10,150 31,189 -- Redeemable convertible preferred stock subscription receivable............................................. -- (2,737) -- Redeemable convertible preferred stock issuable.......... -- 2,737 -- Stockholders' equity (net capital deficiency): Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued and outstanding............. -- -- -- Common stock, $0.0001 par value; 50,000,000 shares authorized, 1,192, 233,542 and 11,067,620 shares issued and outstanding at December 31, 1996 and 1997 and September 30, 1998 respectively, at amount paid in.................................................. 1 351 55,506 Contributions from parent.............................. 14,277 29,277 29,277 Additional paid-in capital............................. -- 1,776 2,296 Deferred compensation.................................. -- (1,248) (1,320) Accumulated deficit.................................... (16,594) (52,474) (64,775) -------- -------- -------- Total stockholders' equity (net capital deficiency).................................. (2,316) (22,318) 20,984 -------- -------- -------- $ 14,357 $ 22,084 $ 30,781 ======== ======== ========
See accompanying notes. F-3 77 ABGENIX, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------ ------------------------ 1995 1996 1997 1997 1998 ------- ----------- ---------- ---------- ---------- (UNAUDITED) Revenues: Revenue under collaborative agreements from related parties (net of equity in losses of Xenotech of $1,702, $3,866 and $897 for the years ended December 31, 1995, 1996 and 1997, and $990 and $520 for the nine months ended September 30, 1997 and 1998, respectively)... $ 6,200 $ 4,719 $ 1,343 $ 1,109 $ 710 Contract revenue............. -- -- 611 -- 1,298 ------- ----------- ---------- ---------- ---------- Total revenues....... 6,200 4,719 1,954 1,109 2,008 Operating expenses: Research and development..... 11,879 9,433 11,405 8,787 11,976 General and administrative... 2,603 2,565 3,525 1,966 2,562 Charge for cross-license and settlement amount allocated from Cell Genesys................... -- -- 11,250 11,250 -- Equity in losses from the Xenotech joint venture (charge for cross-license and settlement)........... -- -- 11,250 7,500 -- ------- ----------- ---------- ---------- ---------- Total operating expenses........... 14,482 11,998 37,430 29,503 14,538 ------- ----------- ---------- ---------- ---------- Operating loss................. (8,282) (7,279) (35,476) (28,394) (12,530) Other income and expenses: Interest income.............. -- 203 307 274 657 Interest expense............. -- (24) (711) (480) (428) ------- ----------- ---------- ---------- ---------- Net loss....................... $(8,282) $ (7,100) $ (35,880) $ (28,600) $ (12,301) ======= =========== ========== ========== ========== Net loss per share............. $(46,710.53) $(1,032.70) $(2,576.11) $ (3.27) =========== ========== ========== ========== Shares used in computing net loss per share............... 152 34,744 11,102 3,766,615 =========== ========== ========== ==========
See accompanying notes. F-4 78 ABGENIX, INC. STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
REDEEMABLE CONVERTIBLE REDEEMABLE REDEEMABLE PREFERRED CONVERTIBLE CONVERTIBLE STOCK PREFERRED PREFERRED SUBSCRIPTION STOCK STOCK RECEIVABLE ISSUABLE ----------- ------------ ----------- Balance at December 31, 1994............... $ -- $ -- $ -- Contributions from parent................ -- -- -- Net loss................................. -- -- -- -------- ------- ------- Balance at December 31, 1995............... -- -- -- Contributions from parent................ -- -- -- Issuance of 3,750,000 shares of series A redeemable convertible preferred stock to parent for $10,000 cash and assignment of employee notes totalling $150 in July 1996...................... 10,150 -- -- Issuance of 1,192 shares of common stock upon exercise of stock options......... -- -- -- Net loss................................. -- -- -- -------- ------- ------- Balance at December 31, 1996............... 10,150 -- -- Contributions from parent................ -- -- -- Issuance of 2,846,542 shares of series B redeemable convertible preferred stock in December 1997 for cash at $6.50 per share, net of issuance costs of $1,463................................. 17,039 -- -- Conversion of note payable to parent into 666,667 shares of series A redeemable convertible preferred stock in December 1997................................... 4,000 -- -- Stock subscription to purchase 421,143 shares of series B redeemable convertible preferred stock at $6.50 per share in December 1997............. -- (2,737) 2,737 Issuance of 176,756 shares of common stock upon exercise of stock options... -- -- -- Issuance of 55,594 shares of common stock upon the exercise of stock purchase rights................................. -- -- -- Deferred compensation for stock options issued below deemed fair value......... -- -- -- Amortization of deferred compensation.... -- -- -- Net loss................................. -- -- -- -------- ------- ------- Balance at December 31, 1997............... 31,189 (2,737) 2,737 Issuance of 160,000 shares of series C redeemable convertible preferred stock at $8.00 per share (unaudited)......... 1,280 -- -- Issuance of 421,143 shares of series B redeemable convertible preferred stock at $6.50 per share, net of issuance cost of $81 (unaudited)................ 2,656 2,737 (2,737) Conversion of 7,844,352 shares of series A, series B and series C redeemable convertible preferred stock to common stock (unaudited)...................... (35,125) -- -- Issuance of 2,500,000 shares of common stock at $8.00 per share upon initial public offering (net of issuance costs of $2,863) (unaudited)................. -- -- -- Issuance of 375,000 shares of common stock at $8.00 per share upon the exercise of the over-allotment option granted to the underwriters (net of issuance costs of $210) (unaudited).... -- -- -- Issuance of 114,726 shares of common stock upon exercise of stock options (unaudited)............................ -- -- -- Deferred compensation for stock options issued below deemed fair value (unaudited)............................ -- -- -- Amortization of deferred compensation (unaudited)............................ -- -- -- Net loss (unaudited)..................... -- -- -- -------- ------- ------- Balance at September 30, 1998 (unaudited).............................. $ -- $ -- $ -- ======== ======= ======= STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) --------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' CONTRIBUTIONS ADDITIONAL EQUITY (NET COMMON FROM PAID-IN DEFERRED ACCUMULATED CAPITAL STOCK PARENT CAPITAL COMPENSATION DEFICIT DEFICIENCY) ------- ------------- ---------- ------------ ----------- ------------- Balance at December 31, 1994............... $ -- $ 1,212 $ -- $ -- $ (1,212) $ -- Contributions from parent................ -- 8,282 -- -- -- 8,282 Net loss................................. -- -- -- -- (8,282) (8,282) ------- ------- ------ ------- -------- -------- Balance at December 31, 1995............... -- 9,494 -- -- (9,494) -- Contributions from parent................ -- 4,783 -- -- -- 4,783 Issuance of 3,750,000 shares of series A redeemable convertible preferred stock to parent for $10,000 cash and assignment of employee notes totalling $150 in July 1996...................... -- -- -- -- -- -- Issuance of 1,192 shares of common stock upon exercise of stock options......... 1 -- -- -- -- 1 Net loss................................. -- -- -- -- (7,100) (7,100) ------- ------- ------ ------- -------- -------- Balance at December 31, 1996............... 1 14,277 -- -- (16,594) (2,316) Contributions from parent................ -- 15,000 -- -- -- 15,000 Issuance of 2,846,542 shares of series B redeemable convertible preferred stock in December 1997 for cash at $6.50 per share, net of issuance costs of $1,463................................. -- -- -- -- -- -- Conversion of note payable to parent into 666,667 shares of series A redeemable convertible preferred stock in December 1997................................... -- -- -- -- -- -- Stock subscription to purchase 421,143 shares of series B redeemable convertible preferred stock at $6.50 per share in December 1997............. -- -- -- -- -- -- Issuance of 176,756 shares of common stock upon exercise of stock options... 128 -- -- -- -- 128 Issuance of 55,594 shares of common stock upon the exercise of stock purchase rights................................. 222 -- -- -- -- 222 Deferred compensation for stock options issued below deemed fair value......... -- -- 1,776 (1,776) -- -- Amortization of deferred compensation.... -- -- -- 528 -- 528 Net loss................................. -- -- -- -- (35,880) (35,880) ------- ------- ------ ------- -------- -------- Balance at December 31, 1997............... 351 29,277 1,776 (1,248) (52,474) (22,318) Issuance of 160,000 shares of series C redeemable convertible preferred stock at $8.00 per share (unaudited)......... -- -- -- -- -- -- Issuance of 421,143 shares of series B redeemable convertible preferred stock at $6.50 per share, net of issuance cost of $81 (unaudited)................ -- -- -- -- -- -- Conversion of 7,844,352 shares of series A, series B and series C redeemable convertible preferred stock to common stock (unaudited)...................... 35,125 -- -- -- -- 35,125 Issuance of 2,500,000 shares of common stock at $8.00 per share upon initial public offering (net of issuance costs of $2,863) (unaudited)................. 17,137 -- -- -- -- 17,137 Issuance of 375,000 shares of common stock at $8.00 per share upon the exercise of the over-allotment option granted to the underwriters (net of issuance costs of $210) (unaudited).... 2,790 -- -- -- -- 2,790 Issuance of 114,726 shares of common stock upon exercise of stock options (unaudited)............................ 103 -- -- -- -- 103 Deferred compensation for stock options issued below deemed fair value (unaudited)............................ -- -- 520 (520) -- -- Amortization of deferred compensation (unaudited)............................ -- -- -- 448 -- 448 Net loss (unaudited)..................... -- -- -- -- (12,301) (12,301) ------- ------- ------ ------- -------- -------- Balance at September 30, 1998 (unaudited).............................. $55,506 $29,277 $2,296 $(1,320) $(64,775) $ 20,984 ======= ======= ====== ======= ======== ========
See accompanying notes. F-5 79 ABGENIX, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ------------------- 1995 1996 1997 1997 1998 ------- ------- -------- -------- -------- (UNAUDITED) OPERATING ACTIVITIES Net loss................................................ $(8,282) $(7,100) $(35,880) $(28,600) $(12,301) Adjustments to reconcile net loss to net cash used by operating activities: Equity in losses of Xenotech (including the charge for cross-license and settlement)....................... -- 3,866 12,147 4,740 520 Depreciation and amortization......................... -- 8 1,489 613 1,347 Charge for cross-license and settlement............... -- -- 11,250 11,250 -- Changes for certain assets and liabilities: Prepaid expenses and other current assets........... -- (58) (392) (814) 180 Deposits and other assets........................... -- (337) (78) (100) (100) Short-term payable to parent........................ -- 730 -- (2,429) (178) Payable to Xenotech for cross-license and settlement obligation........................................ -- -- -- 3,750 -- Accounts payable.................................... -- -- 426 796 48 Deferred revenue from related parties............... -- 376 (376) (376) -- Accrued stock issuance costs........................ -- -- 1,200 -- (1,200) Other accrued liabilities........................... -- 345 39 (677) (865) ------- ------- -------- -------- -------- Net cash used in operating activities................... (8,282) (2,170) (10,175) (11,847) (12,549) ------- ------- -------- -------- -------- INVESTING ACTIVITIES Purchases of short-term investments..................... -- (2,982) (15,505) (4,979) (26,148) Sales of short-term investments at maturity............. -- -- 7,783 7,961 14,562 Capital expenditures.................................... -- (334) (1,075) (2,613) (527) Contributions to Xenotech............................... -- (3,864) (4,647) (935) (417) ------- ------- -------- -------- -------- Net cash used in investing activities................... -- (7,180) (13,444) (566) (12,530) ------- ------- -------- -------- -------- FINANCING ACTIVITIES Net proceeds from issuances of redeemable convertible preferred stock....................................... -- 10,000 17,039 -- 3,936 Proceeds from issuance of note payable to parent........ -- 1,757 -- -- -- Proceeds from long-term debt............................ -- -- 4,300 8,495 -- Contributions from parent............................... 8,282 4,783 -- -- -- Payments under long-term debt........................... -- -- (643) (333) (1,221) Net proceeds from issuances of common stock............. -- -- 350 13 20,030 ------- ------- -------- -------- -------- Net cash provided in financing activities............... 8,282 16,540 21,046 8,175 22,745 ------- ------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents.... -- 7,190 (2,573) (4,238) (2,334) Cash and cash equivalents at the beginning of the period................................................ -- -- 7,190 7,190 4,617 ------- ------- -------- -------- -------- Cash and cash equivalents at the end of the period...... $ -- $ 7,190 $ 4,617 $ 2,952 $ 2,283 ======= ======= ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for interest.................. $ -- $ 10 $ 632 $ 480 $ 428 ======= ======= ======== ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES Allocation of charges related to the cross-license and settlement from parent and Xenotech................... $ -- $ -- $ 15,000 $ 15,000 $ -- ======= ======= ======== ======== ======== Conversion of note payable to parent.................... $ -- $ -- $ 4,000 $ -- $ -- ======= ======= ======== ======== ======== Financed property and equipment acquisitions............ $ -- $ 3,314 $ -- $ -- $ -- ======= ======= ======== ======== ======== Assignment of note receivable from Xenotech............. $ -- $ 30 $ -- $ -- $ -- ======= ======= ======== ======== ======== Assignment of note receivable from parent............... $ -- $ 150 $ -- $ -- $ -- ======= ======= ======== ======== ======== Furniture and equipment acquired under capital lease financing............................................. $ -- $ -- $ 1,968 $ 1,968 $ -- ======= ======= ======== ======== ======== Deferred compensation related to grant of certain stock options............................................... $ -- $ -- $ 1,776 $ -- $ 520 ======= ======= ======== ======== ========
See accompanying notes. F-6 80 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION Abgenix, Inc., a Delaware corporation ("Abgenix" or the "Company"), develops and intends to license and commercialize antibody therapeutic products for the prevention and treatment of a variety of disease conditions, including transplant-related diseases, inflammatory and autoimmune disorders and cancer. The Company has developed a proprietary technology which it believes enables it to quickly generate high affinity, fully human antibody product candidates to essentially any disease target appropriate for antibody therapy. The operations of Abgenix commenced in 1989 and were initially conducted as a research project within Cell Genesys, Inc., ("Cell Genesys"). On June 24, 1996, Abgenix was incorporated and subsequently on July 15, 1996 it was organized pursuant to a Stock Purchase and Transfer Agreement between the Company and Cell Genesys. The agreement sets forth the terms and conditions for the transfer of the antibody business and operations within Cell Genesys to Abgenix. The accompanying financial statements include the operations of Abgenix since July 15, 1996, and the revenues and expenses of Abgenix as a research project within Cell Genesys prior to July 15, 1996. The Company was not a separate business unit or division within Cell Genesys and, therefore, no separate accounting records existed for the Company during the period it was operated as a research project within Cell Genesys. All administrative functions were handled by Cell Genesys and the costs of operations, while part of Cell Genesys, were estimated from project cost records and were recorded as contributions. All assets and liabilities for 1994 and 1995 were combined with Cell Genesys and it was impractical and not meaningful to carve out the balance sheets for such periods. As a result, it is not possible to present a detailed statement of cash flows for the Company for the year ended December 31, 1995. Prior to July 15, 1996, specifically identified revenues and costs such as research and development were allocated to Abgenix from Cell Genesys. General and administrative expenses were allocated based on Abgenix research and development expense as a percentage of Cell Genesys' total research and development expenses. From July 16, 1996 to July 31, 1997, Cell Genesys performed certain general and administrative functions on behalf of Abgenix. The Company estimates that the general and administrative costs would have been $500,000 to $1,000,000 higher (unaudited) for each year of operation on a stand- alone basis. The Company believes the allocation methodology used was reasonable. In 1997, the Company incurred an aggregate non-recurring charge for cross-license and settlement of $22,500,000 which represents an allocation of $11,250,000 from Cell Genesys and an entry to record the equity in the losses of an equally owned joint venture with JT America, Inc., a medical subsidiary of Japan Tobacco, Inc. and the Company ("Xenotech") of $11,250,000 (see Note 6). INTERIM FINANCIAL INFORMATION The financial information at September 30, 1998 and for the nine months ended September 30, 1997 and 1998 is unaudited but includes all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Results for the nine months ended September 30, 1998 are not necessarily indicative of results for any other interim period or for the entire year. INITIAL PUBLIC OFFERING In July 1998, the Company completed an initial public offering of 2,500,000 shares of its common stock to the public, at a per share price of $8.00. On July 27, 1998 the Company's underwriters exercised F-7 81 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) an option to purchase an additional 375,000 shares of common stock at a price of $8.00 per share to cover over-allotments. The total cash received by the Company from the offering was approximately $19.9 million, net of issuance costs. Upon the closing of the initial public offering, each of the outstanding 7,844,352 shares of convertible redeemable preferred stock was automatically converted into one share of common stock. REVENUE RECOGNITION Revenues related to collaborative research agreements with corporate partners are recognized ratably over the related funding periods for each contract. For research funding, the Company is required to perform research activities as specified in each respective agreement on a best efforts basis, and the Company is reimbursed based on the fees stipulated in the respective agreements which approximates cost. Deferred revenue may result when the Company does not incur the required level of effort during a specific period in comparison to funds received under the respective contracts. Milestone payments are recognized pursuant to collaborative agreements upon the achievement of the specified milestone, where no future obligation to perform exists for that milestone. Nonrefundable signing fees, under which no future obligation to perform exists, are recognized when the cash is received. Revenues related to the Xenotech research agreement are recognized net of the Company's related contributions to Xenotech. RESEARCH AND DEVELOPMENT Research and development expenses, including direct and allocated expenses, consist of independent research and development costs and costs associated with sponsored research and development. NET LOSS PER SHARE In 1997, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share is computed using the weighted average number of common shares outstanding and excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Potentially dilutive securities have been excluded from the computation, as their effect is antidilutive. Pro forma net loss per share has been computed to give effect to the automatic conversion of redeemable convertible preferred stock into common stock at the completion of the Company's initial public offering in July 1998, using the as-if-converted method, from the original date of issuance. F-8 82 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) A reconciliation of shares used in calculation of basic and diluted and pro forma net loss per share follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ---------------------------- 1996 1997 1997 1998 ----------- ------------ ------------ ------------ Net loss........................... $(7,100,000) $(35,880,000) $(28,600,000) $(12,301,000) =========== ============ ============ ============ Basic and diluted: Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share............ 152 34,744 11,102 3,766,615 =========== ============ ============ ============ Basic and diluted net loss per share............................ $(46,710.53) $ (1,032.70) $ (2,576.11) $ (3.27) =========== ============ ============ ============ Pro forma: Shares used in computing basic and diluted net loss per share (from above).................. 34,744 11,102 3,766,615 Adjusted to reflect the effect of the assumed conversion of preferred stock from the date of issuance................... 3,858,843 3,750,000 5,280,034 ------------ ------------ ------------ Weighted-average shares used in computing pro forma net loss per share..................... 3,893,587 3,761,102 9,046,649 ============ ============ ============ Pro forma net loss per share....... $ (9.22) $ (7.60) $ (1.36) ============ ============ ============
Had the Company been in a net income position, diluted earnings per share would have included the shares used in the computation of pro forma net loss per share as well as an additional 1,168,906, 1,630,093, and 1,763,753 shares related to outstanding options and warrants not included above, determined using the treasury stock method at the estimated average fair value, for the years ended December 31, 1996 and 1997, and for the nine months ended September 30, 1998, respectively. Net loss per share has not been presented prior to the Company's organization on July 15, 1996, as there were no outstanding equity securities prior to that period. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly-liquid investments purchased with a maturity from the date of purchase of three months or less to be cash equivalents; investments with maturities in excess of three months are considered to be short-term investments. The Company's investment securities are classified as available-for-sale and carried at fair value. The Company determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. DEPRECIATION AND AMORTIZATION The Company records property and equipment at cost and provides depreciation using the straight-line method over the estimated useful lives of the assets, generally two to five years. Furniture and equipment leased under capital leases is amortized over the shorter of the useful lives or the lease term. Amortization of leased assets is included in depreciation and amortization expense and is combined with accumulated depreciation and amortization of the Company's owned assets. F-9 83 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. OTHER RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which required additional disclosures to be adopted beginning in the first quarter of 1998 and on December 31, 1998, respectively. Under SFAS 130, the Company will be required to display comprehensive income and its components as part of the Company's full set of financial statements. SFAS 131 requires that the Company report financial and descriptive information about its reportable operating segments. The Company has determined that the impact of adopting SFAS 130 and SFAS 131 on its future financial statement disclosures is not material. 2. COLLABORATION AGREEMENT WITH XENOTECH XENOTECH In 1991, Cell Genesys and JT America, Inc. formed Xenotech to develop genetically modified strains of mice, which can produce fully human monoclonal antibodies, and to commercialize products generated from these mice. Upon the creation of Abgenix, Cell Genesys' rights in the joint venture were assigned to the Company. Xenotech funds its research, which is generally conducted by Abgenix, through capital contributions from the partners. The Company paid and expensed as research and development $350,000, $172,500, $172,500 and $150,000 related to licensing the rights to this technology from Xenotech for the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, respectively. The Company is obligated to pay 50% of all Xenotech's funding requirements. The Company accounts for its investment in Xenotech under the equity method; 50% of Xenotech's net losses up to the Company's investment amount. Details are as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ----------------- 1995 1996 1997 1997 1998 ------ ------ -------- -------- ----- (IN THOUSANDS) Abgenix's share of Xenotech losses... $2,315 $3,306 $ 12,347 $ 8,315 $520 Losses associated with cross-license and settlement..................... -- -- (11,250) (7,500) -- Difference due to timing and change in deferred revenue................ (613) 560 (200) 175 -- ------ ------ -------- ------- ---- Equity in losses of Xenotech......... $1,702 $3,866 $ 897 $ 990 $520 ====== ====== ======== ======= ====
The Company recognized revenue of $6,200,000, $4,719,000, $1,343,000, $1,109,000 and $710,000 for the years ended 1995, 1996 and 1997, and for the nine months ended September 30, 1997 and 1998, respectively, net of its equity in the losses of the joint venture related to this revenue. F-10 84 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) Summary financial information for Xenotech is as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- ------------------- 1995 1996 1997 1997 1998 -------- ------- -------- -------- ------- (IN THOUSANDS) Total assets.................. $ 1,357 $ 492 $ 7,569 $ 8,032 $ 7,651 Total liabilities............. 601 59 7,556 7,563 7,589 Total revenues................ 4,747 1,912 272 72 310 Total operating expenses...... (11,926) (8,547) (24,964) (16,712) (1,350) Net loss...................... (7,129) (6,614) (24,680) (16,631) (1,040)
3. COLLABORATION AND LICENSE AGREEMENTS CBL LICENSE AGREEMENT On February 1, 1997, the Company entered into a license agreement for exclusive worldwide rights to commercialize ABX-CBL. The Company paid an initial license fee and is further obligated to pay an annual maintenance fee of $50,000, to commit at least $1,000,000 annually to the development of ABX-CBL until ABX-CBL receives regulatory approval in any country and to pay royalties on potential product sales. The Company is also obligated to issue 25,000 shares of its common stock upon the submission of a Product License Application for the first indication of the product. RESEARCH COLLABORATION AND LICENSE OPTION AGREEMENT WITH PFIZER In December 1997, Abgenix established a research collaboration with Pfizer Inc. ("Pfizer"). In connection with the execution of the agreement, Pfizer paid the Company a fee upon signing and may make additional payments to Abgenix upon completion of certain research milestones. Additionally, Pfizer has an option to expand the research collaboration. The agreement expires in December 1999. Concurrent with the execution of the research collaboration agreement, Pfizer and Abgenix entered into a license and royalty agreement that grants Pfizer the option to acquire an exclusive, worldwide license to develop, make, use and sell antibody products derived from the research collaboration. If Pfizer chooses to exercise its option to expand the research collaboration, Abgenix could receive potential license fees and milestone payments of up to approximately $8,000,000 per antigen upon the completion of certain milestones, including preclinical and clinical trials and receipt of regulatory approval. Additionally, if a product receives marketing approval from the FDA or an equivalent foreign agency, the Company is entitled to receive royalties on future product sales by Pfizer. Pfizer will be responsible for manufacturing, product development and marketing of any products developed through this collaboration. In January 1998, the Company also entered into a stock purchase agreement with Pfizer to purchase 160,000 shares of the Company's series C redeemable convertible preferred stock at $8.00 per share. The shares were automatically converted to 160,000 shares of the Company's common stock upon the completion of the Company's initial public offering in July 1998. In October 1998, Pfizer exercised its option to expand its research collaboration with the Company to include a second undisclosed antigen target in the field of cancer and has an option for a third antigen target. After the exercise of an option by Pfizer, the Company could receive potential license fees and milestone payments of up to approximately $8,000,000 per antigen upon the completion of certain milestones, including preclinical and clinical trials and receipt of regulatory approval. Additionally, if a product receives marketing approval from the FDA or an equivalent foreign agency, the Company is F-11 85 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) entitled to receive royalties on future product sales by Pfizer. Pfizer will be responsible for manufacturing, product development and marketing of any products developed through this collaboration. RESEARCH COLLABORATION WITH SCHERING-PLOUGH In January 1998, Abgenix established a research collaboration with Schering-Plough Research Institute ("Schering-Plough"). In connection with the execution of the agreement, Schering-Plough paid the Company a fee upon signing and will be obligated to make additional payments to Abgenix upon completion of the research. In addition, the agreement provides Schering-Plough with an option, for a limited time, to enter into a research, option and license agreement that provides Schering-Plough an option to obtain with an exclusive worldwide license to develop, make, use and sell antibody products derived from the research collaboration. If the option is exercised, the research, option and license agreement may provide Abgenix with up to approximately $8,000,000 in additional research fees and milestone payments upon the completion of certain milestones, including preclinical and clinical trials and receipt of regulatory approval. Additionally, if a product receives marketing approval from the FDA or an equivalent foreign agency, the Company is entitled to receive royalties on future product sales by Schering-Plough. RESEARCH LICENSE AND OPTION AGREEMENT WITH GENENTECH In April 1998, Abgenix established a research collaboration with Genentech to develop antibody products for an undisclosed antigen designated by Genentech in the field of growth factor modulation. In June 1998, the Company and Genentech expanded their collaboration to include a second undisclosed antigen in the field of cardiovascular research. Under the research license and option agreement, as amended, Abgenix will allow Genentech to use XenoMouse technology to generate fully human antibodies to the antigen targets. Genentech is obligated to make payments to Abgenix for performance of research activities. In addition, the agreement provides Genentech with options, for a limited time, to enter into product license agreements that provide Genentech with an exclusive worldwide license, with respect to the antigen in the field of growth factor modulation, and a license, with respect to the antigen in the field of cardiovascular research, to develop, make, use and sell antibody products derived from the research collaboration. If an option is exercised, a product license agreement may provide Abgenix with up to approximately $5,500,000 per antigen target in license fees and milestone payments to be made upon completion of certain milestones, including clinical trials and receipt of regulatory approvals. Additionally, if a product receives marketing approval from the FDA or an equivalent foreign agency, the Company is entitled to receive royalties on future product sales by Genentech. Genentech will be responsible for manufacturing, product development and marketing of any product developed through the collaboration. RESEARCH AGREEMENTS WITH MILLENNIUM BIOTHERAPEUTICS In July 1998 and September 1998, the Company established its first and second research collaboration with Millennium BioTherapeutics in which Millennium BioTherapeutics will make payments to the Company for performance of research activities. The July 1998 research collaboration expired in September 1998. In October 1998, the Company entered into a research license and option agreement that provides Millennium BioTherapeutics with an option to obtain a license to develop, make, use and sell antibody products derived from the July 1998 research collaboration. If the option is exercised, the research license and option agreement may provide Abgenix with up to approximately $7,500,000 in license fees and milestone payments to be made in the future upon completion of certain milestones, F-12 86 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) including completion of research, clinical trials and the receipt of regulatory approvals. Additionally, if a product receives marketing approval from the FDA or equivalent foreign agency, the Company is entitled to receive royalties on future product sales by Millennium BioTherapeutics. 4. AVAILABLE-FOR-SALE SECURITIES All of the Company's available-for-sale securities consist of commercial paper and U.S. government obligations and are classified as short-term investments. All investments mature within two years. These investments are carried at market, which approximates cost. There were no significant unrealized gains or losses related to these investments. The following is a summary of available-for-sale securities at fair value, which approximates amortized cost:
DECEMBER 31, ------------------ 1996 1997 ------- ------- (IN THOUSANDS) Commercial paper................................. $10,093 $12,038 U.S. government obligations...................... -- 2,881 ------- ------- Total.................................. $10,093 $14,919 ======= =======
Included in cash and cash equivalents at December 31, 1996 and 1997 are available-for-sale securities of $7,111,000 and $4,215,000, respectively. Included in short-term investments at December 31, 1996 and 1997 are available-for-sale securities of $2,982,000 and $10,704,000, respectively. At December 31, 1997, the average remaining maturity of the portfolio is less than 12 months. 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------- 1996 1997 ------ ------ (IN THOUSANDS) Furniture, machinery and equipment................. $ 611 $2,188 Leasehold improvements............................. 3,037 4,503 ------ ------ 3,648 6,691 Less accumulated depreciation and amortization..... -- (915) ------ ------ $3,648 $5,776 ====== ======
The Company did not record any depreciation on assets in 1996 as such assets were all purchased in the last month of the year. Property and equipment financed under capital leases was $1,968,000 at December 31, 1997. Accumulated amortization related to this equipment totaled $383,000 at December 31, 1997. 6. COMMITMENTS LONG-TERM NOTE PAYABLE TO CELL GENESYS In July 1996, the Company issued a $4,000,000 Convertible Promissory Note (the "Note") to Cell Genesys which the Company could draw against in order to pay for services provided by Cell Genesys. As of December 31, 1996, the Company had drawn $1,757,000 against the Note. Interest accrued at the rate F-13 87 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) of 6.82% per annum on the outstanding principal until July 15, 1997, whereupon the accrued interest was added to the outstanding principal of the Note. The entire principal and accrued interest amount was due on or before July 14, 2000. In December 1997, the Company had drawn $4,000,000 against the Note and Cell Genesys exercised its option to convert the Note into 666,667 shares of Series A convertible preferred stock at a conversion price of $6.00 per share. Upon the completion the Company's initial public offering, these shares were automatically converted to 666,667 shares of the Company's common stock. SHORT-TERM PAYABLE TO CELL GENESYS Until June 30, 1997, the Company reimbursed Cell Genesys for payments made to third parties on behalf of the Company. At December 31, 1997 and September 30, 1998, the Company owed $212,000 and $34,000 to Cell Genesys for this reimbursement. LOAN On January 24, 1997, the Company secured a loan with a bank in the amount of $4,300,000 in order to finance tenant improvements on its facility in Fremont, California. The loan matures in January 2001 and bears an annual interest rate of prime plus 1.0% (9.5% for the year ended December 31, 1997). The loan was guaranteed by Cell Genesys until the Company completed its initial public offering of its common stock in July 1998. The loan is secured by substantially all tangible and intangible assets of the Company. CAPITAL LEASE On March 28, 1997, the Company entered into a lease agreement with a financing company under which the Company may finance up to $3,000,000 of its laboratory and office equipment. The lease term is 48 months and was guaranteed by Cell Genesys until the Company completed an initial public offering of its common stock in July 1998. Future principal payments under the loan and minimum payments under the capital lease are as follows:
CAPITAL TOTAL LOAN LEASE PAYMENTS ------- ------- -------- (IN THOUSANDS) Year ending December 31, 1998......................................... $ 1,259 $ 594 $ 1,853 1999......................................... 1,259 594 1,853 2000......................................... 1,258 594 1,852 2001......................................... 105 432 537 ------- ------ ------- Total................................ 3,881 2,214 6,095 Less amount representing interest.............. -- (470) (470) ------- ------ ------- Present value of future payments............... 3,881 1,744 5,625 Less current portion........................... (1,259) (387) (1,646) ------- ------ ------- Noncurrent portion............................. $ 2,622 $1,357 $ 3,979 ======= ====== =======
The carrying value of the loan approximates fair value at December 31, 1997. The fair value of the loan was estimated using discounted cash flow analysis, based on the incremental borrowing rates currently available to the Company for borrowings with similar terms and maturity. F-14 88 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) FACILITY LEASE In October 1996, the Company signed an operating lease commencing February 1, 1997, for its facilities in Fremont, California. The lease expires in January 2007; however, the Company has the option to extend the term through 2016. Future minimum payments under the noncancelable operating lease at December 31, 1997 are:
(IN THOUSANDS) Year ending December 31, 1998................................................. $ 862 1999................................................. 891 2000................................................. 923 2001................................................. 955 2002................................................. 987 Thereafter............................................. 4,360 ------ Total lease payments......................... $8,978 ======
Rent expense was approximately $567,000 for the year ended December 31, 1997. CHARGE FOR CROSS-LICENSE AND SETTLEMENT On March 27, 1997, Cell Genesys announced, along with Abgenix, Xenotech and Japan Tobacco, Inc., that it had signed a comprehensive patent cross-license and settlement agreement with GenPharm that resolved all related litigation and claims between the parties. As initial consideration for the cross-license and settlement agreement, Cell Genesys issued a note to GenPharm due September 30, 1998 for $15,000,000 payable by Cell Genesys and convertible into shares of Cell Genesys common stock. Of this note, $3,750,000 satisfied certain of Xenotech's obligations under the agreement. Japan Tobacco also made an initial payment. During 1997, two patent milestones were achieved and Xenotech was obligated to pay $7,500,000 for each milestone. Xenotech paid $7,500,000 to satisfy the first milestone and has recorded a payable to GenPharm for the remaining $7,500,000. The Company recorded a liability of $3,750,000 in its balance sheet at December 31, 1997, representing its share of the Xenotech obligation, since the joint venture partners are equally obligated to fund the cash requirements of Xenotech. The Company made the payment of $3,750,000 in November 1998. No additional payments will accrue under this agreement. The Company has recognized as a non-recurring charge for cross-license and settlement, a total of $22,500,000 ($18,750,000 through September 30, 1997). The full amount of the cross-license and settlement costs has been recognized in the Company's statement of operations for the year ended December 31, 1997 because the Company has determined that the cross-license received by the Company from GenPharm is non-exclusive and has no alternative future uses for the Company. Pursuant to Staff Accounting Bulletin 55, Cell Genesys allocated its portion of the settlement obligation, $11,250,000, to Abgenix since the related technology was contributed upon formation of Abgenix. The $15,000,000 note issued by Cell Genesys was recorded as a capital contribution by Abgenix. In accordance with the joint venture agreement, Abgenix has also recorded an expense of $11,250,000 representing 50% of the Xenotech expense. F-15 89 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 7. STOCKHOLDERS' EQUITY COMMON STOCK Each holder of common stock is entitled to one vote for each share held on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of common stock would be entitled to share in the Company's assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and the shares of common stock offered by the Company in this offering, when issued and paid for, will be, fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by the rights of the holders of shares of any series of preferred stock, which the Company may designate in the future. PREFERRED STOCK The Board of Directors is authorized, without any further action by the stockholders, subject to any limitations prescribed by law, without stockholder approval, from time to time to issue up to an aggregate of 5,000,000 shares of preferred stock, $0.0001 par value per share, in one or more series, each of such series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Board of Directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. Issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of preferred stock. WARRANTS In connection with the loan guaranteed by Cell Genesys in January 1997, the Company issued a warrant to purchase 71,667 shares of common stock at an exercise price of $6.00 per share to Cell Genesys. The warrants are exercisable immediately and expire three years from issuance. In connection with the loan guaranteed by Cell Genesys in March 1997, the Company issued a second warrant to purchase 50,000 shares of common stock at an exercise price of $6.00 per share to Cell Genesys. The terms for exercise and expiration are the same as the January 1997 warrants. The fair value of the above warrants was insignificant for accounting purposes. 1996 INCENTIVE STOCK PLAN The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") requires use of option valuation models that were not developed for use in valuing F-16 90 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) employee stock options. Under APB 25, because the exercise price of the Company's employee stock option equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The 1996 Incentive Stock Plan (the "Plan") provides for the granting of options to purchase common stock to employees, outside directors and consultants of the Company. Stock purchase rights are granted only to employees or consultants. The Company grants shares of common stock for issuance under the Plan at no less than the fair value of the stock (at a price determined by the Board of Directors for nonqualified options and stock purchase rights). Options granted under the Plan generally have a term of ten years and vest over four years at the rate of 25% one year from the grant date and 1/48 monthly thereafter. Information with respect to the Plan activity is as follows:
SHARES NUMBER OF WEIGHTED AVAILABLE SHARES AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE ---------- ----------- -------------- Authorized at inception................ 1,600,000 -- -- Options granted below fair value..... (1,185,100) 1,185,100 $0.60 Options exercised.................... -- (1,192) $0.60 Options canceled..................... 15,002 (15,002) $0.60 ---------- --------- ----- Balances at December 31, 1996.......... 429,902 1,168,906 $0.60 Authorized............................. 791,250 -- -- Options granted below fair value..... (676,644) 676,644 $2.42 Options exercised.................... -- (232,350) $1.51 Options canceled..................... 104,774 (104,774) $1.11 ---------- --------- ----- Balances at December 31, 1997.......... 649,282 1,508,426 $1.24 Authorized (unaudited)................. 500,000 -- -- Options granted (unaudited).......... (294,551) 294,551 $6.46 Options exercised (unaudited)........ -- (114,726) $0.90 Options canceled (unaudited)......... 46,165 (46,165) $2.52 ---------- --------- ----- Balances at September 30, 1998......... 900,896 1,642,086 $2.16 ========== ========= =====
Exercise prices for options outstanding as of December 31, 1997 ranged from $0.60 to $5.00. The following table summarizes information about options outstanding at December 31, 1997:
OUTSTANDING OPTIONS ------------------------------------------ REMAINING NUMBER OF EXERCISE NUMBER OF CONTRACTUAL OPTIONS PRICES OPTIONS LIFE, IN YEARS EXERCISABLE -------- --------- -------------- ----------- $0.60................................... 1,089,610 8.66 257,697 $1.00................................... 3,800 9.32 -- $2.50................................... 315,416 9.45 19,921 $4.00................................... 74,800 9.64 5,817 $5.00................................... 24,800 9.95 -- --------- ------- 1,508,426 283,435 ========= =======
From inception to December 31, 1997, options to purchase a total of 1,861,744 shares of common stock were granted at prices ranging from $0.60 to $5.00 per share. Deferred compensation of $1,776,000 F-17 91 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) was recorded for these option grants based on the deemed fair value of common stock ranging from $1.20 to $6.50 per share. The Company amortized $528,000 of this balance during the year ended December 31, 1997. In the first quarter of 1998, the Company granted options to purchase 260,175 shares of common stock at $6.00 per share for which deferred compensation of approximately $520,000 was recorded based on the deemed fair value of common stock at $8.00 per share. During the second and third quarters of 1998, the Company granted an additional 34,376 options to purchase shares of common stock at prices ranging from $5.00 to $10.00 per share. No deferred compensation expense was recorded as the options were granted at the then current market price of the stock on the date of the grant. PRO FORMA INFORMATION Pro forma information regarding net loss and net loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 1996 and 1997, respectively: risk-free interest rate of 6.65% and 6.46%; no dividend yield in 1996 or 1997; volatility factor of 0.68 and 0.67; and an expected life of the option of five years in 1996 and 1997. These same assumptions were applied in the determination of the option values related to stock options granted to non-employees, which value has been recorded in the financial statements. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The weighted-average fair value of options granted during the years ended December 31, 1996 and 1997 were $0.87 and $3.00 per share. All options were granted at exercise prices below the deemed fair value of the underlying common stock. 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 years.
1996 1997 ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net loss: As reported................................. $(7,100) $(35,880) Pro forma................................... $(7,190) $(36,103) Net loss per share: As reported................................. $ (1.89) $ (9.22) Pro forma................................... $ (1.92) $ (9.27)
STOCK PLANS In March 1998, the board of directors adopted the 1998 Employee Stock Purchase Plan, the 1998 Director Option Plan and approved the amended and restated 1996 Incentive Stock Plan, subject to stockholder approval. An additional 500,000 shares of common stock have been reserved for issuance F-18 92 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) under the amended and restated 1996 Incentive Stock Plan and 250,000 shares of common stock have been reserved under both the 1998 Employee Stock Purchase Plan and the 1998 Director Option Plan. The Employee Stock Purchase Plan also provides for an annual increase, commencing in 1999, in the number of shares reserved for issuance under the Employee Stock Purchase Plan equal to the lesser of 250,000, 1% of the Company's outstanding capitalization or a lesser amount determined by the Board, such that the maximum number of shares which could be reserved under the Employee Stock Purchase Plan over its term would be 2,500,000 shares. 8. OTHER RELATED PARTY TRANSACTIONS Through July 31, 1997, pursuant to the terms of the Service Agreement with Cell Genesys, Cell Genesys provided Abgenix certain administrative services. In addition, beginning July 15, 1996, the Company leased equipment from Cell Genesys on a month-to-month basis pursuant to the Stock Purchase and Transfer Agreement. Total fees incurred under the Services Agreement and the Stock Purchase and Transfer Agreement were approximately $1,816,000, $825,000, $78,000 and $287,000 in 1996, 1997, and the nine months ended September 30, 1997 and 1998, respectively. The Company chose to draw down on its Promissory Note with Cell Genesys in order to pay for the fees incurred through December 1997. In December 1997, the entire principal amount of the Promissory Note was converted into preferred stock, which subsequently was automatically converted to common stock upon the completion the Company's initial public offering of its common stock. In addition, the Company had an agreement with Cell Genesys under which the Company provided immunization services as requested by Cell Genesys. Under this agreement, the Company recognized revenue of $100,375 and $111,000 in 1996 and 1997, respectively. On December 31, 1996, the Company purchased Xenotech's remaining laboratory equipment. The Company paid $154,360, which approximated net book value at the time of purchase. In July 1996, the Company assumed from Cell Genesys a $100,000 loan issued to a Director and officer. The loan did not bear interest and was evidenced by a promissory note secured by the common stock of Cell Genesys owned by the Director and officer. The note was repaid in September 1997. In May 1997, the Company granted a 10-year loan for $100,000 to an officer of the Company. Interest is accrued per annum at 6.6% beginning May 2002. The loan is payable in five equal installments beginning June 2003. On February 27, 1998, the Chief Financial Officer and the Company entered into a Relocation Loan Agreement pursuant to which Abgenix loaned $100,000 to the Chief Financial Officer in exchange for a promissory note secured by a deed of trust. No interest accrues on the loan until June 30, 2003. 9. INCOME TAXES As of December 31, 1997, the Company had federal net operating loss carryforwards of approximately $15,400,000. The Company also had federal research and development tax credit carryforwards of approximately $220,000 as of December 31, 1997. The Company's net operating loss carryforwards exclude losses incurred prior to the organization of Abgenix in July 1996. Further, the amounts associated with the cross-license and settlement have been expensed for financial statement accounting purposes and have been capitalized and will be amortized over a period of approximately fifteen years for tax purposes. The net operating loss and credit carryforwards will expire in the years 2011 through 2012, if not utilized. F-19 93 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 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. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows:
DECEMBER 31, ----------------- 1996 1997 ----- -------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards............... $ 700 $ 5,400 Research credit carryforwards.................. 100 400 Capitalized research and development........... 100 200 Capitalized cross-license and settlement....... -- 8,000 Other, net..................................... -- 400 ----- -------- Net deferred tax assets.......................... 900 14,400 Valuation allowance.............................. (900) (14,400) ----- -------- Total.................................. $ -- $ -- ===== ========
The net valuation allowance increased by $900,000 during the year ended December 31, 1996. Deferred tax assets relate primarily to net operating loss carryforwards and to the capitalization of the cross-license and settlement agreement. 10. SUBSEQUENT EVENTS (UNAUDITED) TECHNOLOGY AGREEMENT WITH AVI In January 1999, the Company entered into a XenoMouse technology agreement with AVI BioPharma ("AVI") to generate fully human antibodies to human chorionic gonadotropin (hCG) for the treatment of various cancers. AVI, of Portland, Oregon, is a publicly traded biotechnology company. TECHNOLOGY AGREEMENT WITH CENTOCOR In December 1998, the Company entered into a XenoMouse technology agreement with Centocor to generate fully human antibodies to an undisclosed Centocor antigen in the cardiovascular field. Centocor, of Malvern, Pennsylvania, is a developer and marketer of antibody-based products. TECHNOLOGY AGREEMENT WITH RCT In December 1998, the Company entered into a XenoMouse technology agreement with Research Corporation Technologies ("RCT") to generate fully human antibodies to CD45rb. Resultant antibody product candidates could potentially be used in treating organ transplant rejection and autoimmune disorders. RCT, of Tucson, Arizona, is a corporation involved in technology transfer between universities and industry. Under the RCT agreement, Abgenix may receive the greater of pre-set minimum license fees, milestone and royalty payments or a percentage of sublicense income received by RCT. F-20 94 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Xenotech, LP We have audited the accompanying balance sheets of Xenotech, LP (a development stage enterprise) as of December 31, 1996 and 1997, and the related statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1997 and for the period from inception (June 12, 1991) to December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Xenotech, LP (a development stage enterprise) at December 31, 1996 and 1997 and the results of its operations and its cash flows for each of the three years ended December 31, 1997 and for the period from inception (June 12, 1991) to December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Palo Alto, California January 23, 1998 F-21 95 XENOTECH, LP (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS (IN THOUSANDS) ASSETS
DECEMBER 31, -------------------- SEPTEMBER 30, 1996 1997 1998 -------- -------- ------------- (UNAUDITED) Cash..................................................... $ 292 $ 58 $ 20 Short-term investments................................... -- 3,750 3,895 Prepaid expenses and other current assets................ 200 11 3,736 Receivable from partner.................................. -- 3,750 -- -------- -------- -------- Total current assets........................... $ 492 $ 7,569 $ 7,651 ======== ======== ======== LIABILITIES AND PARTNERS' CAPITAL Accrued liabilities...................................... $ 59 $ 56 $ 89 Payable related to cross-license and settlement agreement.............................................. -- 7,500 7,500 -------- -------- -------- Total current liabilities...................... 59 7,556 7,589 Partners' capital: Paid-in capital........................................ 36,486 60,746 61,836 Deficit accumulated during the development stage....... (36,053) (60,733) (61,774) -------- -------- -------- Total partners' capital........................ 433 13 62 -------- -------- -------- Total liabilities and partners' capital........ $ 492 $ 7,569 $ 7,651 ======== ======== ========
See accompanying notes. F-22 96 XENOTECH, LP (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (IN THOUSANDS)
PERIOD FROM NINE MONTHS ENDED INCEPTION YEAR ENDED DECEMBER 31, SEPTEMBER 30, (JUNE 12, 1991) ---------------------------- ------------------ SEPTEMBER 30, 1995 1996 1997 1997 1998 1998 ------- ------- -------- -------- ------- --------------- (UNAUDITED) (UNAUDITED) Research and license revenues from partners................... $ 4,747 $ 1,912 $ 272 $ 72 $ 310 $ 10,614 Expenses: Research and development........ 11,270 8,240 2,396 1,668 1,273 48,382 General and administrative...... 656 307 98 64 78 1,717 Cross-license and settlement expense...................... -- -- 22,470 14,980 -- 22,470 ------- ------- -------- -------- ------- -------- Total expenses.......... 11,926 8,547 24,964 16,712 1,351 72,569 Interest income................... 50 21 12 9 -- 181 ------- ------- -------- -------- ------- -------- Net loss.......................... $(7,129) $(6,614) $(24,680) $(16,631) $(1,041) $(61,774) ======= ======= ======== ======== ======= ========
See accompanying notes. F-23 97 XENOTECH, LP (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF PARTNERS' CAPITAL (IN THOUSANDS)
LIMITED PARTNERS ------------------------ TOTAL GENERAL JAPAN PARTNERS' PARTNER TOBACCO INC. ABGENIX CAPITAL ------- ------------ -------- --------- Capital contributed at inception............... $ 60 $ 4,750 $ -- $ 4,810 Capital distribution of interest income........ -- -- (34) (34) Net loss....................................... (47) (4,705) 32 (4,720) ----- -------- -------- -------- Balance at December 31, 1991..................... 13 45 (2) 56 Capital contributed............................ 130 5,500 -- 5,630 Capital distribution of interest income........ -- -- (1) (1) Net loss....................................... (55) (5,481) 4 (5,532) ----- -------- -------- -------- Balance at December 31, 1992..................... 88 64 1 153 Capital contributed............................ 12 6,800 700 7,512 Net loss....................................... (75) (6,770) (607) (7,452) ----- -------- -------- -------- Balance at December 31, 1993..................... 25 94 94 213 Capital contributed............................ 40 5,000 -- 5,040 Net loss....................................... (47) (4,780) 220 (4,607) ----- -------- -------- -------- Balance at December 31, 1994..................... 18 314 314 646 Capital contributed............................ 72 4,833 2,333 7,238 Net loss....................................... (71) (4,779) (2,279) (7,129) ----- -------- -------- -------- Balance at December 31, 1995..................... 19 368 368 755 Capital contributed............................ 63 3,114 3,115 6,292 Net loss....................................... (66) (3,274) (3,274) (6,614) ----- -------- -------- -------- Balance at December 31, 1996..................... 16 208 209 433 Capital contributed............................ 230 12,015 12,015 24,260 Net loss....................................... (246) (12,217) (12,217) (24,680) ----- -------- -------- -------- Balance at December 31, 1997..................... -- 6 7 13 Capital contributed (unaudited)................ 10 540 540 1,090 Net loss (unaudited)........................... (10) (515) (516) (1,041) ----- -------- -------- -------- Balance at September 30, 1998 (unaudited)........ $ -- $ 31 $ 31 $ 62 ===== ======== ======== ========
See accompanying notes. F-24 98 XENOTECH, LP (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM NINE MONTHS ENDED INCEPTION YEAR ENDED DECEMBER 31, SEPTEMBER 30, (JUNE 12, 1991) ---------------------------- ------------------ SEPTEMBER 30, 1995 1996 1997 1997 1998 1998 ------- ------- -------- -------- ------- --------------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss.......................... $(7,129) $(6,614) $(24,680) $(16,631) $(1,041) $(61,774) Adjustments to reconcile net loss to net cash used by operating activities: Charge for cross-license and settlement................... -- -- 7,485 3,735 -- 7,485 Depreciation and amortization expense...................... 71 74 8 8 -- 326 Changes in certain assets and liabilities: Decrease (increase) in prepaid and other current assets..... (109) 108 181 112 (3,725) (3,736) Decrease (increase) in receivable from partner...... (30) 30 (3,750) (7,500) 3,750 -- Increase (decrease) in accrued liabilities.................. 292 (298) (3) 4 33 89 Decrease in deferred revenue.... (1,650) (250) -- -- -- -- Increase in payable for cross-license settlement..... -- -- 7,500 7,500 -- 7,500 ------- ------- -------- -------- ------- -------- Net cash used in operating activities...................... (8,555) (6,950) (13,259) (12,772) (983) (50,110) ------- ------- -------- -------- ------- -------- CASH USED IN INVESTING ACTIVITIES Capital expenditures.............. (62) -- -- -- -- (325) Purchases of short-term investments..................... -- -- (3,750) -- (145) (3,895) ------- ------- -------- -------- ------- -------- Net cash used by investing activities...................... (62) -- (3,750) -- (145) (4,220) ------- ------- -------- -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions............. 7,237 6,292 16,775 12,932 1,090 54,350 ------- ------- -------- -------- ------- -------- Net increase (decrease) in cash... (1,380) (658) (234) 160 (38) 20 Cash at beginning of period....... 2,330 950 292 292 58 -- ------- ------- -------- -------- ------- -------- Cash at end of period............. $ 950 $ 292 $ 58 $ 452 $ 20 $ 20 ======= ======= ======== ======== ======= ========
See accompanying notes. F-25 99 XENOTECH, LP (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 1. ORGANIZATION AND BUSINESS Xenotech, LP, a California limited partnership and a development stage enterprise (the "Partnership"), was organized on June 12, 1991 pursuant to a Limited Partnership Agreement between Xenotech, Inc. (the "General Partner"), Cell Genesys, Inc. ("Cell Genesys") and JT Immunotech USA, Inc., the predecessor company of JT America, Inc. and a medical subsidiary of Japan Tobacco, Inc. ("JT America"), (the "Limited Partners"), to develop genetically modified strains of mice which can produce fully human monoclonal antibodies, and to commercialize products generated therefrom. On July 15, 1996, Cell Genesys transferred its partnership interest to its subsidiary, Abgenix Inc. ("Abgenix"). The General Partner must make cash contributions as necessary to maintain a minimum capital balance of 1% of the total positive capital account balances for the Partnership. Since July 1995, net losses are allocated 49.5% to Abgenix, 49.5% to JT America and 1% to the General Partner. Prior to July 1995, operating expenses were allocated 99% to JT America and 1% to the General Partner until JT America had been allocated, on a cumulative basis, partnership losses and deductions in an amount equal to the sum of JT America's total research support capital contributions and 50% of JT America's initial capital contribution. Since 1992, interest income has been allocated 49.5% to Abgenix, 49.5% to JT America and 1% to the General Partner. No allocation of expenses and losses shall create a deficit in the Limited Partners' capital accounts. Such item, to the extent it would increase or create such a deficit, shall be allocated 100% to the General Partner. Cash distributions are generally to be made in accordance with the percentage interests. See related discussion in Note 3 -- Related Party Transactions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Research revenues from partners or their affiliates are recorded when earned as defined under the terms of the respective collaboration agreements. Payments received in advance under these agreements are recorded as deferred revenue until earned (see Notes 3 and 4). DEPRECIATION The Partnership depreciates equipment using the straight-line method over the estimated useful lives of the assets, generally four years. INCOME TAXES The financial statements include no provision for income taxes as Partnership income or loss is reported in the Partners' separate income tax returns. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-26 100 XENOTECH, LP (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) INTERIM FINANCIAL INFORMATION The financial information at September 30, 1998 and for the nine months ended September 30, 1997 and 1998 is unaudited but includes all adjustments, consisting only of normal recurring adjustments, which the Partnership considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Results for the nine months ended September 30, 1998 are not necessarily indicative of results for any other interim period or for the entire year. 3. RELATED PARTY TRANSACTIONS Abgenix provides contract research and development services to the Partnership to develop genetically modified strains of mice, which can produce human monoclonal antibodies pursuant to a collaboration agreement under which Abgenix receives certain minimum payments. During the years ended 1995, 1996 and 1997 and the quarters ended September 30, 1997 and 1998, the Partnership paid Abgenix $5,300,000, $1,200,000, $2,300,000, $1,634,000 and $1,230,000, respectively ($42,430,000 for the period from inception to September 30, 1998) to perform research. In January 1994, the Partnership, Abgenix and JT America executed an agreement creating the Xenotech Division within Abgenix to conduct ongoing preclinical research of human monoclonal antibodies derived from the genetically modified strains of mice. Abgenix and Japan Tobacco, Inc. ("Japan Tobacco"), the indirect parent company of JT America, are providing significant funding to the Partnership for research funding and in consideration of the Partnership granting marketing rights for specified products in certain territories to Abgenix and Japan Tobacco (see Note 4). The Partnership reimbursed Abgenix for the costs of the operation of the Xenotech Division. During 1995 and 1996, the Partnership recognized expenses of $5,500,000 and $5,500,000, respectively ($13,300,000 for the period from inception to December 31, 1997) which were paid to Abgenix for the costs of operating the Xenotech Division. Pursuant to an agreement dated June 28, 1996, the Xenotech Division was terminated as of December 31, 1996. In conjunction with this agreement, Xenotech paid Abgenix $1,200,000 to satisfy Xenotech's obligations under the Xenotech Division Research Agreement. In addition, Abgenix purchased Xenotech's capital equipment at net book value, and was assigned Xenotech's note receivable, which was reflected as a reduction of capital contributions. 4. RESEARCH REVENUES The Partnership recorded research and license revenues of $4,700,000, $1,900,000 and $272,000 for the years ended December 31, 1995, 1996 and 1997, respectively. For the nine months ended September 30, 1997 and 1998 the amounts recorded were $72,000 and $310,000, respectively. The research revenues were derived from research payments made by Japan Tobacco and Abgenix. Of research payments made by Japan Tobacco and Abgenix, $250,000 was deferred revenue at December 31, 1995. 5. CROSS-LICENSE AND SETTLEMENT AGREEMENT On March 27, 1997, Cell Genesys announced, along with Abgenix, Xenotech and Japan Tobacco, that it had signed a comprehensive patent cross-license and settlement agreement with GenPharm, International, Inc. ("GenPharm"), a subsidiary of Medarex, Inc., that resolved all related litigation and claims between the parties. As initial consideration for the cross-license and settlement agreement, Cell Genesys issued a note to GenPharm due September 30, 1998 for $15,000,000 payable by Cell Genesys and F-27 101 XENOTECH, LP (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) convertible into shares of Cell Genesys common stock. Of this note, $3,750,000 satisfied certain of Xenotech's obligations under the agreement. Japan Tobacco also made an initial payment. During 1997, two patent milestones were achieved and Xenotech was obligated to pay $7,500,000 for each milestone. Xenotech paid $7,500,000 to satisfy the first milestone and recorded a payable to GenPharm for the remaining $7,500,000, which was paid in November 1998. No additional payments will accrue under this agreement. Xenotech has recognized as a non-recurring charge for cross-license and settlement, a total of $22,500,000. F-28 102 DESCRIPTION OF GRAPHICS PAGE 32: HEADER: "ANTIBODY STRUCTURE" This illustration shows a Y-shaped antibody structure composed of two "Heavy Chains" and two "Light Chains." The heavy chains form the base and branches of the "Y," while the shorter light chains only run parallel to the arms of the "Y." A legend indicates that shaded areas represent "Constant Domain," and unshaded areas represent "Variable Domain." The top halves of the light chains are unshaded, while the remainder is shaded. The upper tips of the heavy chains are unshaded, while the remainder is shaded. PAGE 33: Four gene segments, represented by numerically labeled squares within rectangles, are labeled "DNA before recombination (heavy chain)." One arrow from a particular section of each of the four segments points toward a combined segment and demonstrates how recombination produces an antibody gene. The "Antibody gene assembled by recombination" is represented by a rectangle containing four numerically labeled squares. An arrow leads from this antibody gene to a Y-shaped antibody, labeled "Antibody heavy chain produced by gene." PAGE 35: HEADER: "EVOLUTION OF ANTIBODY TECHNOLOGIES" This diagram depicts four Y-shaped figures, extending horizontally across the page, which represent antibodies produced by four alternate methods. From left to right, the figures are labeled "Ordinary Mouse," "Chimeric," "Humanized" and "XenoMouse," with arrows connecting the labels. A legend indicates that shaded areas represent mouse protein while unshaded areas represent human protein. The left-most Y-shaped figure is entirely shaded and below is labeled "100% Mouse Protein." The next figure from the left is unshaded with a thick shaded stripe on each upper arm of the "Y" and below is labeled "34% mouse protein." The following figure from the left is unshaded with three small shaded stripes on each upper arm of the "Y" and below is labeled "10% mouse protein." The right-most figure is completely unshaded and below is labeled "Human." 103 LOGO 104 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all fees and expenses payable by Abgenix in connection with the registration of the common stock hereunder. All of the amounts shown are estimates except for the SEC registration fee.
AMOUNT TO BE PAID ----------- SEC Registration Fee........................................ $ 4,940.00 Blue Sky Qualification Fees and Expenses.................... 5,000.00 Printing and Engraving Expenses............................. 150,000.00 Legal Fees and Expenses..................................... 150,000.00 Accounting Fees and Expenses................................ 75,000.00 Transfer Agent and Registrar Fees and Expenses.............. 10,000.00 Miscellaneous Expenses...................................... 105,060.00 ----------- Total............................................. $500,000.00 ===========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law allows for the indemnification of officers, directors and any corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. Our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws provide for indemnification of our directors, officers, employees and other agents to the extent and under the circumstances permitted by the Delaware General Corporation Law. We have also entered into agreements with our directors and executive officers that require Abgenix among other things to indemnify them against certain liabilities that may arise by reason of their status or service as directors and executive officers to the fullest extent permitted by Delaware law. We have also purchased directors and officers liability insurance, which provides coverage against certain liabilities including liabilities under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) Since our incorporation (June 24, 1996), we have issued and sold the following unregistered securities: (1) On July 15, 1996, we issued 1,691,667 shares of series A senior convertible preferred stock to Cell Genesys in exchange for $10.0 million. (2) On July 15, 1996, we issued 2,058,333 shares of series 1 subordinated convertible preferred stock to Cell Genesys, and in exchange, Cell Genesys contributed research, development and manufacturing technology, as well as patents and other intellectual property specific to the antibody therapy programs to be pursued by Abgenix, including Cell Genesys' interest in its joint venture with Japan Tobacco. (3) On July 15, 1996, Abgenix, in exchange for a loan in the principal amount of up to $4,000,000, issued a convertible promissory note to Cell Genesys convertible at an exercise price per share of $6.00 into up to 666,667 shares of series A convertible preferred stock. (4) From July 15, 1996 to October 22, 1998, we granted options to purchase 2,156,295 shares of common stock to employees, directors and consultants under the 1996 Plan at exercise prices ranging from $0.60 to $10.00 per share. Of the 2,156,295 shares granted, 1,622,008 remain outstanding, II-1 105 349,023 shares of common stock have been purchased pursuant to exercises of stock options or stock purchase rights under the 1996 Plan and 185,264 shares have been canceled and returned to the 1996 Plan. (5) On January 23, 1997 and March 27, 1997, we issued two warrants to purchase an aggregate of 121,667 shares of series A senior convertible preferred stock (convertible into 121,667 shares of common stock) to Cell Genesys with a weighted average exercise price per share of $6.00. (6) On December 23, 1997, we issued 3,267,685 shares of series B preferred stock to 29 accredited or institutional purchasers at a purchase price per share of $6.50. In connection with and contemporaneous to this transaction the 1,691,667 shares of series A senior convertible preferred stock, the 2,058,333 shares of series 1 subordinated convertible preferred stock and the $4,000,000 convertible promissory note issued to Cell Genesys, described above, were all converted into an aggregate 4,416,667 shares of series A convertible preferred stock. (7) On January 12, 1998, we issued 160,000 shares of series C preferred stock to Pfizer at a per share purchase price of $8.00. This issuance was in connection with a collaborative arrangement entered into between Abgenix and Pfizer. The sales and issuances of securities in the transactions described above were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act, Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving any public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in such transactions. All recipients had adequate access, through their relationship with Abgenix, to information about Abgenix. (b) There were no underwritten offerings employed in connection with any of the transactions set forth in Item 15(a). ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 3.1(1) Amended and Restated Certificate of Incorporation of Abgenix, as currently in effect. 3.2(1) Amended and Restated Bylaws of Abgenix, as currently in effect. 4.1(1) Specimen Common Stock Certificate. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1(1) Form of Indemnification Agreement between Abgenix and each of its directors and officers. 10.2(1) 1996 Incentive Stock Plan and form of agreement thereunder. 10.3(1) 1998 Employee Stock Purchase Plan and form of agreement thereunder. 10.4(1) 1998 Director Option Plan and form of agreement thereunder. 10.5(1) Warrant dated January 23, 1997 exercisable for shares of Series A Preferred Stock. 10.6(1) Warrant dated March 27, 1997 exercisable for shares of Series A Preferred Stock. 10.7(3) Joint Venture Agreement dated June 12, 1991 between Cell Genesys and JT Immunotech USA Inc. 10.7A(6) Amendment No. 1 dated January 1, 1994 to Joint Venture Agreement. 10.7B(9) Amendment No. 2 dated June 28, 1996 to Joint Venture Agreement. 10.8(3) Collaboration Agreement dated June 12, 1991 among Cell Genesys, Xenotech, Inc. and JT Immunotech USA Inc.
II-2 106 10.8A(5) Amendment No. 1 dated June 30, 1993 to Collaboration Agreement. 10.8B(13) Amendment No. 2 dated January 1, 1994 to Collaboration Agreement. 10.8C(7) Amendment No. 3 dated July 1, 1995 to Collaboration Agreement. 10.8D(9) Amendment No. 4 dated June 28, 1996 to Collaboration Agreement. 10.8E(2) Amendment No. 5 dated November 1997 to Collaboration Agreement. 10.9(3) Limited Partnership Agreement dated June 12, 1991 among Cell Genesys, Xenotech, Inc. and JT Immunotech USA Inc. 10.9A(6) Amendment No. 2 dated January 1, 1994 to Limited Partnership Agreement. 10.9B(8) Amendment No. 3 dated July 1, 1995 to Limited Partnership Agreement. 10.9C(10) Amendment No. 4 dated June 28, 1996 to Limited Partnership Agreement. 10.10(4) Field License dated June 12, 1991 among Cell Genesys, JT Immunotech USA Inc. and Xenotech, L.P. 10.10A(10) Amendment No. 1 dated March 22, 1996 to Field License. 10.10B(10) Amendment No. 2 dated June 28, 1996 to Field License. 10.11(3) Expanded Field License dated June 12, 1991 among Cell Genesys, JT Immunotech USA Inc. and Xenotech, L.P. 10.11A(10) Amendment No. 1 dated June 28, 1996 to Expanded Field License. 10.12(2) Amended and Restated Anti-IL-8 License Agreement dated March 19, 1996 among Xenotech, L.P., Cell Genesys and Japan Tobacco Inc. 10.13(9) Master Research License and Option Agreement dated June 28, 1996 among Cell Genesys, Japan Tobacco Inc. and Xenotech, L.P. 10.13A(2) Amendment No. 1 dated November 1997 to the Master Research License and Option Agreement. 10.14(2) Stock Purchase and Transfer Agreement dated July 15, 1996 by and between Cell Genesys and Abgenix. 10.15(1) Governance Agreement dated July 15, 1996 between Cell Genesys and Abgenix. 10.15A(1) Amendment No. 1 dated October 13, 1997 to the Governance Agreement. 10.15B(1) Amendment No. 2 dated December 22, 1997 to the Governance Agreement. 10.16(1) Tax Sharing Agreement dated July 15, 1996 between Cell Genesys and Abgenix. 10.17(2) Gene Therapy Rights Agreement effective as of November 1, 1997 between Abgenix and Cell Genesys. 10.18(2) Patent Assignment Agreement dated July 15, 1996 by Cell Genesys in favor of Abgenix. 10.19(11) Lease Agreement dated July 31, 1996 between John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Arrillaga Family Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended, and Abgenix. 10.20(1) Loan and Security Agreement dated January 23, 1997 between Silicon Valley Bank and Abgenix. 10.21(1) Master Lease Agreement dated March 27, 1997 between Transamerica Business Credit Corporation and Abgenix. 10.22(2) License Agreement dated February 1, 1997 between Ronald J. Billing, Ph.D. and Abgenix. 10.23(12) Release and Settlement Agreement dated March 26, 1997 among Cell Genesys, Abgenix, Xenotech, L.P., Japan Tobacco Inc. and GenPharm International, Inc.
II-3 107 10.24(12) Cross License Agreement effective as of March 26, 1997, among Cell Genesys, Abgenix, Xenotech, L.P., Japan Tobacco Inc. and GenPharm International, Inc. 10.25(12) Interference Settlement Procedure Agreement, effective as of March 26, 1997, among Cell Genesys, Abgenix, Xenotech, L.P., Japan Tobacco Inc. and GenPharm International, Inc. 10.26(2) Agreement dated March 26, 1997 among Xenotech, L.P., Xenotech, Inc., Cell Genesys, Abgenix, Japan Tobacco Inc. and JT Immunotech USA Inc. 10.27(2) Collaborative Research Agreement dated December 22, 1997 between Pfizer, Inc. and Abgenix. +10.27A Amendment No. 1 dated May 26, 1998 to Collaborative Research Agreement between Abgenix and Pfizer, Inc. +10.27B Amendment No. 2 dated October 22, 1998 to Collaborative Research Agreement between Abgenix and Pfizer, Inc. 10.28(1) Amended and Restated Stockholder Rights Agreement dated January 12, 1998 among Abgenix and certain holders of Abgenix's capital stock. 10.29(2) Collaborative Research Agreement effective as of January 28, 1998 between Schering-Plough Research Institute and Abgenix. 10.30(1) Excerpts from the Minutes of a Meeting of the Board of Directors of Abgenix, dated October 23, 1996. 10.31(1) Excerpts from the Minutes of a Meeting of the Board of Directors of Abgenix, dated October 22, 1997. 10.32(2) Exclusive Worldwide Product License dated November 1997 between Xenotech, L.P. and Abgenix. 10.33(2) Research License and Option Agreement effective as of April 6, 1998 between Abgenix and Genentech, Inc. 10.33A(2) Amendment No. 1 effective as of June 18, 1998 to Research License and Option Agreement between Abgenix and Genentech, Inc. 10.34(14) Research Collaboration Agreement dated July 15, 1998 between Millennium BioTherapeutics, Inc. and Abgenix. +10.35 Research Collaboration Agreement dated September 29, 1998 between Millennium BioTherapeutics, Inc. and Abgenix. 10.35A Amendment No. 1 effective as of November 29, 1998 to the Research Collaboration Agreement between Millennium BioTherapeutics, Inc. and Abgenix. +10.36 Research License and Option Agreement dated October 30, 1998 between Millennium BioTherapeutics, Inc. and Abgenix. *+10.37 Research Collaboration Agreement dated December 22, 1998 between Centocor, Inc. and Abgenix. +10.38 Memorandum of Understanding between Research Corporation Technologies, Inc. and Abgenix. 10.39(15) Registration Rights Agreement dated November 18, 1998 between the selling stockholders and Abgenix. +10.40 Research License and Option Agreement dated January 4, 1999 between AVI BioPharma, Inc. and Abgenix. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Counsel (see Exhibit 5.1). 24.1 Power of Attorney (see page II-7).
II-4 108 - --------------- * To be filed by amendment. + Confidential treatment requested for portions of these exhibits. Omitted portions have been filed separately with the Commission. (1) Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form S-1 (File No. 333-49415). (2) Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form S-1 (File No. 333-49415), portions of which have been granted confidential treatment. (3) Incorporated by reference to the same exhibit filed with Cell Genesys' Registration Statement on Form S-1 (File No. 33-46452), portions of which have been granted confidential treatment. (4) Incorporated by reference to the same exhibit filed with Cell Genesys' Registration Statement on Form S-1 (File No. 33-46452). (5) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, portions of which have been granted confidential treatment. (6) Incorporated by reference to the same exhibit filed with Cell Genesys' Annual Report on Form 10-K for the year ended December 31, 1993, portions of which have been granted confidential treatment. (7) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, portions of which have been granted confidential treatment. (8) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. (9) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, portions of which have been granted confidential treatment. (10) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (11) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly report on Form 10-Q for the quarter ended September 30, 1996. (12) Incorporated by reference to the same exhibit filed with Cell Genesys' Annual Report on Form 10-K for the year ended December 31, 1996, as amended, portions of which have been granted confidential treatment. (13) Incorporated by reference to the same exhibit filed with Cell Genesys' Annual Report on Form 10-K for the year ended December 31, 1993. (14) Incorporated by reference to the same exhibit filed with Abgenix's Current Report on Form 8-K filed with the Commission on July 17, 1998, portions of which have been granted confidential treatment. (15) Incorporated by reference to the same exhibit filed with Abgenix's Current Report on Form 8-K filed with the Commission on November 24, 1998. (b) Financial Statement Schedules: All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS Insofar as indemnification by Abgenix for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Abgenix, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Abgenix of expenses incurred or paid by a director, officer or controlling person of Abgenix in the successful defense of any action, suit or proceeding) is asserted by a II-5 109 director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by Abgenix is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. We hereby undertake: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (b) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) That, for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by Abgenix pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (d) That, for purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (e) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-6 110 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Abgenix has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on the 14th day of January, 1999. ABGENIX, INC. By: /s/ R. SCOTT GREER ------------------------------------ R. Scott Greer President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints R. Scott Greer and Kurt Leutzinger, and each one of them, acting individually and without the other, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ R. SCOTT GREER President, Chief Executive January 14, 1999 - -------------------------------------------------------- Officer and Director R. Scott Greer (Principal Executive Officer) /s/ KURT W. LEUTZINGER Vice President, Finance and January 14, 1999 - -------------------------------------------------------- Chief Financial Officer Kurt W. Leutzinger (Principal Financial and Accounting Officer) Chairman of the Board January , 1999 - -------------------------------------------------------- Stephen A. Sherwin, M.D. /s/ M. KATHLEEN BEHRENS, PH.D. Director January 14, 1999 - -------------------------------------------------------- M. Kathleen Behrens, Ph.D. /s/ RAJU S. KUCHERLAPATI, PH.D. Director January 14, 1999 - -------------------------------------------------------- Raju S. Kucherlapati, Ph.D. /s/ MARK B. LOGAN Director January 14, 1999 - -------------------------------------------------------- Mark B. Logan /s/ JOSEPH E. MAROUN Director January 14, 1999 - -------------------------------------------------------- Joseph E. Maroun
II-7 111 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ----------- ----------------------- 3.1(1) Amended and Restated Certificate of Incorporation of Abgenix, as currently in effect. 3.2(1) Amended and Restated Bylaws of Abgenix, as currently in effect. 4.1(1) Specimen Common Stock Certificate. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1(1) Form of Indemnification Agreement between Abgenix and each of its directors and officers. 10.2(1) 1996 Incentive Stock Plan and form of agreement thereunder. 10.3(1) 1998 Employee Stock Purchase Plan and form of agreement thereunder. 10.4(1) 1998 Director Option Plan and form of agreement thereunder. 10.5(1) Warrant dated January 23, 1997 exercisable for shares of Series A Preferred Stock. 10.6(1) Warrant dated March 27, 1997 exercisable for shares of Series A Preferred Stock. 10.7(3) Joint Venture Agreement dated June 12, 1991 between Cell Genesys and JT Immunotech USA Inc. 10.7A(6) Amendment No. 1 dated January 1, 1994 to Joint Venture Agreement. 10.7B(9) Amendment No. 2 dated June 28, 1996 to Joint Venture Agreement. 10.8(3) Collaboration Agreement dated June 12, 1991 among Cell Genesys, Xenotech, Inc. and JT Immunotech USA Inc. 10.8A(5) Amendment No. 1 dated June 30, 1993 to Collaboration Agreement. 10.8B(13) Amendment No. 2 dated January 1, 1994 to Collaboration Agreement. 10.8C(7) Amendment No. 3 dated July 1, 1995 to Collaboration Agreement. 10.8D(9) Amendment No. 4 dated June 28, 1996 to Collaboration Agreement. 10.8E(2) Amendment No. 5 dated November 1997 to Collaboration Agreement. 10.9(3) Limited Partnership Agreement dated June 12, 1991 among Cell Genesys, Xenotech, Inc. and JT Immunotech USA Inc. 10.9A(6) Amendment No. 2 dated January 1, 1994 to Limited Partnership Agreement. 10.9B(8) Amendment No. 3 dated July 1, 1995 to Limited Partnership Agreement. 10.9C(10) Amendment No. 4 dated June 28, 1996 to Limited Partnership Agreement. 10.10(4) Field License dated June 12, 1991 among Cell Genesys, JT Immunotech USA Inc. and Xenotech, L.P. 10.10A(10) Amendment No. 1 dated March 22, 1996 to Field License. 10.10B(10) Amendment No. 2 dated June 28, 1996 to Field License. 10.11(3) Expanded Field License dated June 12, 1991 among Cell Genesys, JT Immunotech USA Inc. and Xenotech, L.P. 10.11A(10) Amendment No. 1 dated June 28, 1996 to Expanded Field License. 10.12(2) Amended and Restated Anti-IL-8 License Agreement dated March 19, 1996 among Xenotech, L.P., Cell Genesys and Japan Tobacco Inc. 10.13(9) Master Research License and Option Agreement dated June 28, 1996 among Cell Genesys, Japan Tobacco Inc. and Xenotech, L.P. 10.13A(2) Amendment No. 1 dated November 1997 to the Master Research License and Option Agreement. 10.14(2) Stock Purchase and Transfer Agreement dated July 15, 1996 by and between Cell Genesys and Abgenix.
II-8 112
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ----------- ----------------------- 10.15(1) Governance Agreement dated July 15, 1996 between Cell Genesys and Abgenix. 10.15A(1) Amendment No. 1 dated October 13, 1997 to the Governance Agreement. 10.15B(1) Amendment No. 2 dated December 22, 1997 to the Governance Agreement. 10.16(1) Tax Sharing Agreement dated July 15, 1996 between Cell Genesys and Abgenix. 10.17(2) Gene Therapy Rights Agreement effective as of November 1, 1997 between Abgenix and Cell Genesys. 10.18(2) Patent Assignment Agreement dated July 15, 1996 by Cell Genesys in favor of Abgenix. 10.19(11) Lease Agreement dated July 31, 1996 between John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Arrillaga Family Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended, and Abgenix. 10.20(1) Loan and Security Agreement dated January 23, 1997 between Silicon Valley Bank and Abgenix. 10.21(1) Master Lease Agreement dated March 27, 1997 between Transamerica Business Credit Corporation and Abgenix. 10.22(2) License Agreement dated February 1, 1997 between Ronald J. Billing, Ph.D. and Abgenix. 10.23(12) Release and Settlement Agreement dated March 26, 1997 among Cell Genesys, Abgenix, Xenotech, L.P., Japan Tobacco Inc. and GenPharm International, Inc. 10.24(12) Cross License Agreement effective as of March 26, 1997, among Cell Genesys, Abgenix, Xenotech, L.P., Japan Tobacco Inc. and GenPharm International, Inc. 10.25(12) Interference Settlement Procedure Agreement, effective as of March 26, 1997, among Cell Genesys, Abgenix, Xenotech, L.P., Japan Tobacco Inc. and GenPharm International, Inc. 10.26(2) Agreement dated March 26, 1997 among Xenotech, L.P., Xenotech, Inc., Cell Genesys, Abgenix, Japan Tobacco Inc. and JT Immunotech USA Inc. 10.27(2) Collaborative Research Agreement dated December 22, 1997 between Pfizer, Inc. and Abgenix. +10.27A Amendment No. 1 dated May 26, 1998 to Collaborative Research Agreement between Abgenix and Pfizer, Inc. +10.27B Amendment No. 2 dated October 22, 1998 to Collaborative Research Agreement between Abgenix and Pfizer, Inc. 10.28(1) Amended and Restated Stockholder Rights Agreement dated January 12, 1998 among Abgenix and certain holders of Abgenix's capital stock. 10.29(2) Collaborative Research Agreement effective as of January 28, 1998 between Schering-Plough Research Institute and Abgenix. 10.30(1) Excerpts from the Minutes of a Meeting of the Board of Directors of Abgenix, dated October 23, 1996. 10.31(1) Excerpts from the Minutes of a Meeting of the Board of Directors of Abgenix, dated October 22, 1997. 10.32(2) Exclusive Worldwide Product License dated November 1997 between Xenotech, L.P. and Abgenix. 10.33(2) Research License and Option Agreement effective as of April 6, 1998 between Abgenix and Genentech, Inc. 10.33A(2) Amendment No. 1 effective as of June 18, 1998 to Research License and Option Agreement between Abgenix and Genentech, Inc.
II-9 113
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ----------- ----------------------- 10.34(14) Research Collaboration Agreement dated July 15, 1998 between Millennium BioTherapeutics, Inc. and Abgenix. +10.35 Research Collaboration Agreement dated September 29, 1998 between Millennium BioTherapeutics, Inc. and Abgenix. 10.35A Amendment No. 1 effective as of November 29, 1998 to the Research Collaboration Agreement between Millennium BioTherapeutics, Inc. and Abgenix. +10.36 Research License and Option Agreement dated October 30, 1998 between Millennium BioTherapeutics, Inc. and Abgenix. *+10.37 Research Collaboration Agreement dated December 22, 1998 between Centocor, Inc. and Abgenix. +10.38 Memorandum of Understanding between Research Corporation Technologies, Inc. and Abgenix. 10.39(15) Registration Rights Agreement dated November 18, 1998 between the selling stockholders and Abgenix. +10.40 Research License and Option Agreement dated January 4, 1999 between AVI BioPharma, Inc. and Abgenix 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Counsel (see exhibit 5.1). 24.1 Power of Attorney (see page II-7).
- --------------- * To be filed by amendment. + Confidential treatment requested for portions of these exhibits. Omitted portions have been filed separately with the Commission. (1) Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form S-1 (File No. 333-49415). (2) Incorporated by reference to the same exhibit filed with Abgenix's Registration Statement on Form S-1 (File No. 333-49415), portions of which have been granted confidential treatment. (3) Incorporated by reference to the same exhibit filed with Cell Genesys' Registration Statement on Form S-1 (File No. 33-46452), portions of which have been granted confidential treatment. (4) Incorporated by reference to the same exhibit filed with Cell Genesys' Registration Statement on Form S-1 (File No. 33-46452). (5) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, portions of which have been granted confidential treatment. (6) Incorporated by reference to the same exhibit filed with Cell Genesys' Annual Report on Form 10-K for the year ended December 31, 1993, portions of which have been granted confidential treatment. (7) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, portions of which have been granted confidential treatment. (8) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. (9) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, portions of which have been granted confidential treatment. (10) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. II-10 114 (11) Incorporated by reference to the same exhibit filed with Cell Genesys' Quarterly report on Form 10-Q for the quarter ended September 30, 1996. (12) Incorporated by reference to the same exhibit filed with Cell Genesys' Annual Report on Form 10-K for the year ended December 31, 1996, as amended, portions of which have been granted confidential treatment. (13) Incorporated by reference to the same exhibit filed with Cell Genesys' Annual Report on Form 10-K for the year ended December 31, 1993. (14) Incorporated by reference to the same exhibit filed with Abgenix's Current Report on Form 8-K filed with the Commission on July 17, 1998, portions of which have been granted confidential treatment. (15) Incorporated by reference to the same exhibit filed with Abgenix's Current Report on Form 8-K filed with the Commission on November 24, 1998. II-11 EX-5.1 2 OPINION OF WILSON SONSINI GOODRICH & ROSATI 1 EXHIBIT 5.1 [WILSON SONSINI GOODRICH & ROSATI LETTERHEAD] JANUARY 15, 1999 Abgenix, Inc. 7601 Dumbarton Circle Fremont, CA 94555 RE: REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: We have examined the Registration Statement of Form S-1 to be filed by you with the Securities and Exchange Commission (the "Commission") on or about January 15, 1999 (as such may be further amended or supplemented, the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of 1,146,300 shares of your Common Stock, par value $0.0001 per share (the "Shares"), all of which are authorized and have been previously issued. The Shares are to be offered by the selling stockholders for sale to the public as described in the Registration Statement. As your counsel in connection with this transaction, we have examined the proceedings proposed to be taken by you in connection with the sale of the Shares. Based on the foregoing, it is our opinion that, upon conclusion of the proceedings being taken or contemplated to be taken prior to the sale of the Shares and upon completion of the proceedings taken in order to permit such transactions to be carried out in accordance with the securities laws of various states where required, the Shares, when sold in the manner described in the Registration Statement, will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement, including the prospectus constituting a part thereof, which has been approved by us, as such may be further amended or supplemented. Sincerely, WILSON SONSINI GOODRICH & ROSATI Professional Corporation /s/ WILSON SONSINI GOODRICH & ROSATI EX-10.27A 3 AMENDMENT #1 DATED 5/26/98 TO COLLABORATIVE 1 EXHIBIT 10.27A [Pfizer Letterhead] May 26, 1998 GEORGE M. MILNE, JR., PH.D. President Dr. Scott Greer President Abgenix, Inc. 7601 Dumbarton Circle Fremont, CA 94555 Dear Dr. Greer, Pursuant to our recent discussions, Pfizer and Abgenix agree to amend the Research Plan for Event C, described in Section 3.1.1 of the Collaborative Research Agreement, for the [*] Target Antigen as described below: The deliverables required in order for Abgenix to achieve a payment at the completion of Event C are deleted. The required deliverables for Event C are replaced by the following: (a) Abgenix will deliver to Pfizer [*]; (b) Abgenix will carry out [*]; (c) Abgenix will carry out [*]; (d) Abgenix will send to Pfizer [*]; (e) Abgenix will send to Pfizer [*]; (f) Abgenix will send to Pfizer [*]; (g) Abgenix will provide for Pfizer data [*]; - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2 (h) Abgenix will perform [*]; (i) Abgenix will provide [*]; Compensation for the work described above will be [*] as described in Section 3.1.1, in replacement of the same payment described in Section 3.1.1 in the Collaborative Research Agreement. In addition, in accordance with Section 3.2.3, Pfizer has requested additional work from Abgenix, not included in the Research Plan. Abgenix has agreed to accept such additional work, and to include it in the Research Plan, according to the following deliverables and payment schedule: (a) [*] (b) [*] All other terms and conditions apply and shall remain of full force and effect. If you agree with this amendment, please sign this letter and return one original to my attention. Sincerely yours, /s/ George M. Milne, Jr. George M. Milne, Jr. ABGENIX, INC. By: /s/ R. Scott Greer -------------------------- Title: CEO ------------------------ - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -2- EX-10.27B 4 AMENDMENT #2 DATED 10/22/98 TO COLLABORATIVE 1 EXHIBIT 10.27B [PFIZER LETTERHEAD] GEORGE M. MILNE, JR., PH.D. October 22, 1998 President Mr. Scott Greer President Abgenix, Inc. 7601 Dumbarton Circle Fremont, CA 94555 Dear Mr. Greer, Further to our recent discussions, Pfizer Inc ("Pfizer") and Abgenix, Inc. ("Abgenix") agree to amend the Collaborative Research Agreement of December 22, 1997 ("1997 Agreement"), to exercise Pfizer's first option to generate XenoMouseTM antibodies against a second Target Antigen, [*], pursuant to Section 9.6 of the 1997 Agreement. A Research Plan will be adopted by the parties in accordance with Section 9.6. Pfizer will fund the [*] Research Program under the terms set forth in Section 3 of the 1997 Agreement and in the Letter Amendment to the 1997 Agreement dated May 26, 1998, as appropriate, according to their terms. All other terms and conditions of the 1997 Agreement shall remain unchanged and in full force and effect. Please sign both copies of this Letter Amendment to the 1997 Agreement and return one original to [*] at the above address. Sincerely, /s/ George M. Milne, Jr. George M. Milne, Jr. Agreed: ABGENIX INC. By: /s/ R. Scott Greer ------------------------ Title: President & CEO --------------------- Date: 10/23/98 ---------------------- - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EX-10.35 5 RESEARCH COLLABORATION AGREEMENT DATED 9/29/98 1 EXHIBIT 10.35 RESEARCH COLLABORATION AGREEMENT [*] THIS RESEARCH COLLABORATION AGREEMENT dated as of September 29, 1998 (this "Agreement"), is entered into between ABGENIX, INC., a Delaware corporation ("Abgenix"), having a place of business at 7601 Dumbarton Circle, Fremont, California 94555, and MILLENNIUM BIOTHERAPEUTICS, INC., a Delaware corporation ("MBio"), having a place of business at 620 Memorial Drive, Cambridge, Massachusetts 02139, with respect to the following facts: WHEREAS, Abgenix and MBio are interested in negotiating a research license and option agreement (the "Research License and Option Agreement") regarding the generation of human monoclonal antibodies to [*] (the "Antigen") where the antibodies to the Antigen are generated through the use of certain Abgenix technology; and WHEREAS, in connection with, and during the conduct of, such negotiations, the parties desire to conduct a research program pursuant to which (a) MBio will immunize, with the Antigen, certain of Abgenix's transgenic mice which are capable of producing human antibodies when immunized with antigen (the "XenoMouse(TM) Animals") provided by Abgenix to MBio and will generate antibodies therefrom, (b) MBio will conduct certain analyses and characterizations of such antibodies, and (c) the parties will review and analyze the data and results of such research activities. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties hereby agree as follows: 1. Definitions. For purposes of this Agreement, the terms defined in this Section 1 shall have the respective meanings set forth below: "Abgenix Materials" shall mean, collectively, (a) the XenoMouse Animals and other materials specified in Exhibit A hereto, as well as any derivatives, progeny, modifications or improvements thereto developed, created, synthesized or designed therefrom, and any genetic material therefrom;and (b) any XenoMouse Animals immunized with the Antigen; provided, however, the Abgenix materials shall not include Research Materials and Inventions. "Confidential Information" shall mean, with respect to a party, all information of any kind whatsoever (including without limitation, compilations, data, formulae, models, patent disclosures, procedures, processes, projections, protocols, results of experimentation and testing, specifications, strategies and techniques), and all tangible and intangible embodiments thereof of any kind whatsoever (including without limitation, apparatus, biological or chemical materials, animals, cells, compositions, documents, drawings, machinery, patent applications, records, reports), which is owned or controlled by such party and is disclosed by such party to the receiving party and is marked, identified as or otherwise acknowledged to be confidential at the time of disclosure to the receiving party. Notwithstanding the foregoing, Confidential Information of a party shall not include information which the receiving party can establish by written documenta- - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -1- 2 tion (a) to have been publicly known prior to disclosure of such information by the disclosing party to the receiving party, (b) to have become publicly known, without fault on the part of the receiving party, subsequent to disclosure of such information by the disclosing party to the receiving party, (c) to have been received by the receiving party at any time from a source, other than the disclosing party, rightfully having possession of and the right to disclose such information free of confidentiality obligations, (d) to have been otherwise known by the receiving party free of confidentiality obligations prior to disclosure of such information by the disclosing party to the receiving party, or (e) to have been independently developed by employees or agents of the receiving party without access to or use of such information disclosed by the disclosing party to the receiving party. The parties acknowledge that the foregoing exceptions shall be narrowly construed and that the obligations imposed upon each party under Section 6 below shall be relieved solely with respect to such Confidential Information of the disclosing party which falls within the above exceptions and not with respect to related portions, other combinations, or characteristics of the Confidential Information of the disclosing party including, without limitation, advantages, operability, specific purposes, uses and the like. "Materials" shall mean, collectively, the Abgenix Materials and the Research Materials and Inventions. "Research" shall mean the interim research program described in Exhibit B hereto. "Research Materials and Inventions" shall mean [*] which results from the performance of the Research by MBio. "Xenotech" shall mean Xenotech L.P., a California limited partnership. 2. Research. a. Abgenix shall transfer to MBio the XenoMouse Animals and other materials specified in Exhibit A hereto for the sole purpose of performing the Research. MBio shall use the Abgenix Materials for the sole purpose of performing the Research, at its address listed above, under commercially and scientifically reasonable containment conditions, and not for any commercial, business or other use or purpose without the prior express written consent of Abgenix. MBio shall not transfer or provide access to the Abgenix Materials transferred to it by Abgenix hereunder to any other person or entity or to any location other than its address set forth above, - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -2- 3 without the prior express written consent of Abgenix (which consent may be conditioned inter alia upon such person or entity duly executing and delivering Abgenix's standard form of material transfer agreement therefor); provided, however, that MBio shall have the right to transfer the Research Materials and Inventions to Abgenix. MBio shall limit access to the Abgenix Materials to those of its employees working on its premises, to the extent such access is reasonably necessary in connection with its activities as expressly authorized by this Agreement. b. MBio shall conduct the Research under the direct supervision of [*], who shall be the primary contact for MBio regarding the Research. [*] 3. Further Restrictions on Use and Control over the XenoMouse Animals. Abgenix is willing to transfer the XenoMouse Animals to MBio solely on the terms and conditions contained in this Agreement. The XenoMouse Animals contain technology and intellectual property which has been licensed to Abgenix under specific terms and conditions set forth in certain licensing agreements with third parties, including without limitation Xenotech. The transfer of the XenoMouse Animals and the use of XenoMouse Animals by MBio is made expressly subject to the following terms and conditions: a. all XenoMouse Animals transferred to MBio shall be the sole property of Abgenix, and the transfer of physical possession to MBio, and/or possession or use by MBio of XenoMouse Animals shall not be, nor be construed as, a sale, lease, offer to sell or lease, or other transfer of title to or any interest in any XenoMouse Animals; b. all XenoMouse Animals shall remain in the control of MBio, and MBio shall not (and shall not attempt or purport to) transfer the XenoMouse Animals to any third party, without the prior express written consent of Abgenix (which may be conditioned inter alia upon such third party duly executing and delivering Abgenix's standard form of material transfer agreement therefor); c. MBio shall not directly or indirectly use or attempt to use the XenoMouse Animals or any derivatives, information or biological or chemical materials derived from, based upon or related thereto to reproduce, generate, create or produce, through breeding, reverse-engineering, genetic manipulation or otherwise, the XenoMouse Animals or other transgenic mice or other transgenic animals; d. the XenoMouse Animals shall be delivered to MBio solely for the purpose of immunizing the XenoMouse Animals with the Antigen as specified in Exhibit B, and MBio shall not use the XenoMouse Animals for any purpose other than immunizing the XenoMouse Animals with the Antigen and subsequent use of such immunized XenoMouse Animals as reasonably necessary solely for purposes of conducting the Research; e. MBio shall not (and shall not attempt or purport to) transfer, assign, sell, have sold, lease, offer to sell or lease, otherwise transfer title to, or otherwise distribute or license, sublicense or otherwise commercialize or exploit, any XenoMouse Animals or any interest in any XenoMouse Animals; - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -3- 4 f. MBio shall not directly or indirectly use the XenoMouse Animals to make or use antibodies to [*]; g. Other than Research Materials and Inventions as defined in Section 1 and as provided in Section 7(b) of this Agreement, Abgenix shall own all right, title and interest in and to all discoveries, inventions, materials, products, derivatives, know-how and information (whether or not patentable), together with all patent rights and other intellectual property rights therein, which are conceived, made, created or developed by MBio (and any of its agents or employees) through any use of the XenoMouse Animals which is not in accordance with the terms and conditions set forth in this Agreement; and h. Xenotech shall be a third-party beneficiary of the obligations and commitments by MBio set forth in items (a) through (f) above. 4. Reports. MBio shall keep Abgenix informed of all uses made of the Abgenix Materials provided to it. MBio shall provide Abgenix [*]. 5. Publication. Unless otherwise agreed to in writing by Abgenix or otherwise provided in Section 6 below, neither party shall have the right to disclose to third parties, or to otherwise publish, the Research Materials and Inventions, the reports described in Section 4 above (or any data or information contained therein), or the source data and information described in Section 4 above. 6. Confidentiality. a. During the term of this Agreement and for a period of five (5) years following the expiration or earlier termination hereof, each party shall maintain in confidence the Confidential Information of the other party, and shall not disclose, use or grant the use of the Confidential Information of the other party except on a need-to-know basis to such party's directors, officers and employees, and to such party's consultants working on such party's premises, to the extent such disclosure is reasonably necessary in connection with such party's activities as expressly authorized by this Agreement. To the extent that disclosure to any person is authorized by this Agreement, prior to disclosure, a party shall obtain written agreement of such person to hold in confidence and not disclose, use or grant the use of the Confidential Information of the other party except as expressly permitted under this Agreement. Each party shall notify the other party promptly upon discovery of any unauthorized use or disclosure of the other party's Confidential Information. Upon the expiration or earlier termination of this Agreement, each party shall return to the other party all tangible items regarding the Confidential Information of the other party and all copies thereof; provided, however, that each party shall have the right to retain one (1) copy for its legal files for the sole purpose of determining its obligations hereunder. b. Notwithstanding anything to the contrary in this Agreement, for purposes of this Agreement, the Abgenix Materials and all oral or written communications received by MBio regarding the Abgenix Materials are, and shall remain, Confidential Information of [*]. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -4- 5 c. Notwithstanding anything to the contrary in this Agreement, for purposes of this Agreement, the Research Materials and Inventions and all oral or written communications received by MBio regarding the Research Materials and Inventions are, and shall remain, Confidential Information of [*]. d. Neither party shall disclose any terms or conditions of this Agreement to any third party without the prior consent of the other party; provided, however, that a party may disclose the terms or conditions of this Agreement, (i) on a need-to-know basis to its affiliated companies including, but not limited to, for MBio, Millennium Pharmaceuticals, Inc., Millennium Information, Inc., Millennium Predictive Medicine, Inc., plus any future affiliated companies that own a majority of the stock of MBio or that MBio owns a majority of the stock thereof and for Abgenix, Xenotech L.P. plus any future affiliated companies that own a majority of the stock of Abgenix or that Abgenix owns a majority of the stock thereof) and to its/their legal and financial advisors to the extent such disclosure is reasonably necessary in connection with such party's activities as expressly permitted by this Agreement, (ii) to a third party in connection with (A) an equity investment in such party by a third party, (B) a merger, consolidation or similar transaction entered into by such party, or (C) the sale of all or substantially all of the assets of such party, and (iii) as may, in the reasonable opinion of such party's counsel, be required by applicable law, regulation or court order, including without limitation, a disclosure in connection with such party's filing of a registration statement or other filing with the United States Securities and Exchange Commission (in which event such party will first consult with the other party with respect to such disclosure). Notwithstanding the foregoing, prior to execution of this Agreement Abgenix and MBio shall agree upon the substance of information that can be used to describe the terms of this transaction, and each party may disclose such information, as modified by written agreement of Abgenix and MBio from time to time, without the consent of the other. e. The confidentiality obligations under this Section 6 shall not apply to the extent that a party is required to disclose Confidential Information of the other party by applicable law, regulation or order of a governmental agency or a court of competent jurisdiction; provided, however, that such party shall provide written notice thereof to the other party and sufficient opportunity to object to any such disclosure or to request confidential treatment thereof. 7. Ownership and Control of Materials. a. All right, title and interest to the Abgenix Materials and all patent rights and other intellectual property rights therein shall belong [*]. MBio shall not (and shall not attempt or purport to) transfer, assign, sell, have sold, lease, offer to sell or lease, otherwise transfer title to, or otherwise distribute or license, sublicense or otherwise commercialize or exploit, any Abgenix Materials, unless Abgenix otherwise expressly agrees in writing. Promptly upon the earlier of (i) completion of the Research or (ii) the expiration or termination of this Agreement, MBio shall destroy or return to Abgenix all remaining Abgenix Materials (as Abgenix shall direct), unless Abgenix otherwise expressly agrees in writing prior to such completion, expiration or termination. MBio shall not (and shall not attempt or purport to) file or prosecute in any country any patent application which claims or purports to claim the Abgenix Materials or any use thereof, without the prior express written consent of Abgenix. b. Unless the parties otherwise expressly agree in writing, all right, title and interest to all the Research Materials and Inventions and all patent rights and other intellectual - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -5- 6 property rights therein shall belong [*]. MBio shall use the Research Materials and Inventions, at is address listed above, for the sole purposes of performing the Research, [*]. Neither party shall transfer or provide access to the Research Materials and Inventions to any third party or to any location other than its address set forth above, without the prior express written consent of the other party. Neither party shall (and neither party shall attempt or purport to) transfer, assign, sell, have sold, lease, offer to sell or lease, otherwise transfer title to, or otherwise distribute or license, sublicense or otherwise commercialize or exploit, any Research Materials and Inventions (or any products derived thereof), unless the other party otherwise expressly agrees in writing. Promptly upon the expiration or earlier termination of the term of this Agreement, each party shall destroy all remaining Research Materials and Inventions, unless the parties otherwise expressly agree in writing prior to such expiration or termination. Neither party shall (and neither party shall attempt or purport to) file or prosecute in any country any patent application which claims or purports to claim the Research Materials and Inventions or any use thereof unless and until the parties duly execute and deliver the Research License and Option Agreement in accordance with Section 12 below, without the prior express written consent of the other party. 8. No Warranty. The Materials are being provided for research purposes only solely to facilitate the Research. THE MATERIALS ARE BEING SUPPLIED "AS IS," WITH NO WARRANTIES, EXPRESS OR IMPLIED, AND ABGENIX EXPRESSLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NONINFRINGEMENT. 9. Care in Use of the Materials. The parties acknowledge that the Materials are experimental in nature and may have unknown characteristics. Each party agrees to use prudence and reasonable care in the use, handling, storage, transportation, disposition, and containment of the Materials provided by the other party. MBio shall not administer the Materials to humans, or file or submit any regulatory application or other submission to obtain approval therefor, under any circumstances. 10. Indemnification. MBio shall indemnify and hold harmless Abgenix from and against all losses, liabilities, damages and expenses (including reasonable attorneys' fees and costs) resulting from any claims, demands, actions or other proceedings by any third party arising from (i) the material breach of any representation, warranty or covenant by MBio under this Agreement, (ii) the performance of the Research by MBio, (iii) any use, handling or storage by MBio of the Abgenix Materials, (iv) any use, handling or storage by MBio of the Research Materials and Inventions, or (v) any use by MBio of the Confidential Information of Abgenix. Abgenix shall indemnify and hold harmless MBio from and against all losses, liabilities, damages and expenses (including reasonable attorneys' fees and costs) resulting from any claims, demands, actions or other proceedings by any third party arising from any use by Abgenix of the Confidential Information of MBio. 11. Compliance with Laws. MBio shall use the Materials in compliance with all applicable laws, guidelines and regulations which are applicable to the Materials or the use thereof, including without limitation any biosafety procedures and all safety precautions accompanying the Materials. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -6- 7 12. Negotiation of Research License and Option Agreement. a. During the term of this Agreement, the parties shall negotiate in good faith, and attempt to reach mutual agreement upon and enter into, the Research License and Option Agreement. The Research License and Option Agreement, if entered into between the parties, shall include the terms set forth on Exhibit C and shall include such other terms and conditions as the parties mutually agree, including, but not limited to, provisions relating to intellectual property, confidentiality, publication, representations and warranties of each party, diligence, indemnification and reporting. During the term of this Agreement, Abgenix will not engage in negotiations with any third party, or enter into any agreements with any third party, regarding a collaboration, license or commercialization of human monoclonal antibodies, generated through the use of the XenoMouse technology, to Antigen. b. The obligations of Abgenix relating to the negotiations described above or the Research License and Option Agreement are limited to the extent that Abgenix has, and hereafter will have, the right to grant licenses and other rights to the XenoMouse Animals and related technology. However, Abgenix represents and warrants to MBio that it has no present knowledge of any reason that it does not have the right to grant licenses and other rights to the XenoMouse Animals to MBio, consistent with the terms and conditions of this Agreement and the terms contemplated under Exhibit C hereto. 13. No Conflict. Each party represents that this Agreement does not, and during the term of this Agreement will not, conflict with any other right or obligation provided under any other agreement or obligation that such party has with any third party. 14. Term of Agreement. This Agreement shall remain in effect for sixty (60) days from the date of this Agreement, or such other date as the parties mutually agree upon in writing. Upon the expiration of this Agreement, Sections 2(a) (other than the first sentence thereof), 3, 5, 6, 7 and 10 shall survive. 15. Assignment. MBio shall not assign its rights or obligations under this Agreement, in whole or in part, by operation of law or otherwise, without the prior express written consent of the Abgenix; provided, however, that MBio may, without such consent, assign this Agreement and its rights and obligations hereunder in connection with the transfer or sale of all or substantially all of its business, or in the event of its merger or consolidation or change in control or similar transaction. Any permitted assignee shall assume all obligations of its assignor under this Agreement. Any purported assignment in violation of this Section 15 shall be void. 16. Waivers and Amendments. No change, modification, extension, termination or waiver of this Agreement, or any of the provisions herein contained, shall be valid unless made in writing and signed by duly authorized representatives of the parties. 17. General. This Agreement contains the entire agreement between the parties regarding the subject matter of this Agreement and supersedes any previous understandings, representations, acknowledgements, commitments or agreements, oral or written, regarding such subject matter. This Agreement shall be governed by and construed under laws of the State of California, without regard to its conflicts of laws principles. -7- 8 IN WITNESS THEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first set forth above. ABGENIX, INC. MILLENNIUM BIOTHERAPEUTICS, INC. By: /s/ Raymond M. Withy By: /s/ John Maraganore ---------------------------- ------------------------------------ (Signature) (Signature) Raymond M. Withy, Ph.D. John Maraganore, Ph.D. Vice President, Vice President, Corporate Development General Manager -8- 9 Exhibit A Abgenix Materials [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -9- 10 Exhibit B Research Program [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -10- 11 Exhibit C Key Terms of the Research License and Option Agreement I. Option to Obtain a Product License MBio would have the right to acquire an exclusive option (the "Option") to enter into an exclusive license to develop and commercialize licensed products pursuant to a license agreement (the "Product License Agreement"), in the form of Abgenix's standard form of product license agreement. MBio would have the right to acquire the Option on or before July 31, 1999, by giving express written notice to Abgenix thereof and paying to Abgenix the [*]. II. Product License Agreement If MBio timely acquires the Option, MBio would have the right to exercise the Option on or before February 28, 2000. MBio would have the right to exercise the Option by executing the Product License Agreement and paying to Abgenix [*]. MBio would not have the right to file an IND with the FDA in the United States (or its equivalent with the governing health authority of any country) for a licensed product, or to otherwise commence human clinical trials of a licensed product, unless and until MBio has exercised such option. III. Development Milestones [*] IV. Royalties on Worldwide Net Sales SCENARIO A: [*] (i) MBIO would pay to Abgenix [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -11- 12 [*] (ii) MBIO would pay to Abgenix [*] [*] [*] In both (i) and (ii) above, [*] SCENARIO B: [*] In the event MBio [*] MBio would pay to Abgenix [*] V. [*] [*] VI. Other: Terms and Conditions The Research License and Option Agreement, if entered into between the parties, shall include the terms set forth on this Exhibit C and shall include such other terms and conditions as the parties mutually agree, including, but not limited to, provisions relating to intellectual property, confidentiality, publication, representations and warranties of each party, diligence, indemnification and reporting. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -12- EX-10.35A 6 AMENDMENT NO. 1 TO RESEARCH AGREEMENT 1 EXHIBIT 10.35A [ABGENIX LOGO] [ABGENIX LETTERHEAD] Via Facsimile Ms. Polly Ross Ribatt Manager, Corporate Development MILLENNIUM BIOTHERAPEUTICS 620 Memorial Drive Cambridge, MA 02139 Re: Amendment No. 1 to Research Collaboration Agreement Dear Polly: The purpose of this letter is to evidence the below-referenced amendments to that certain Research Collaboration Agreement ("RCA"), dated as of September 29, 1998, between Abgenix, Inc. ("ABX") and Millennium BioTherapeutics, Inc. ("MBIO"). First, ABX and MBIO agree that the effective date of this amendment is November 29, 1998. Second, ABX and MBIO agree to amend Section 14 of the RCA to read in its entirety as follows: This Agreement shall remain in effect until July 31, 1999, or such other date as the parties mutually agree upon in writing. Upon the expiration of this Agreement, Sections 2(a) (other than the first sentence thereof), 3, 5, 6, 7 and 10 shall survive. ABX and MBIO agree that all other terms of the RCA remain the same and in full force and effect. 2 To signify MBIO's agreement with the foregoing, please so indicate by having an authorized representative of MBIO sign this letter in the space provided below and returning it to Christopher A. Hare, Esq. via facsimile ((510) 608-6511). Sincerely, /s/ RAYMOND M. WITHY ------------------------------------- Raymond M. Withy, Ph.D. Vice President, Corporate Development Agreed and Acknowledged: MILLENNIUM BIOTHERAPEUTICS, INC. By: /s/ RON LINDSAY --------------------------- Its.: Ron Lindsay, VP of Pre-Clinical Development --------------------------- Date: 1/14/99 --------------------------- EX-10.36 7 RESEARCH LICENSE AND OPTION AGREEMENT 1 EXHIBIT 10.36 Execution Copy RESEARCH LICENSE AND OPTION AGREEMENT This Research License and Option Agreement (this "Agreement"), effective as of October 30, 1998 (the "Effective Date"), is made by and between Abgenix, Inc., a Delaware corporation ("ABX"), and Millennium BioTherapeutics, Inc., a Delaware corporation ("MBio"). RECITALS A. ABX has rights in certain technology regarding certain strains of XenoMouse(TM) Animals (as defined below) that are capable of producing human antibodies upon immunization with antigens; B. MBio desires to generate human antibodies to the antigen [*]; C. MBio has immunized XenoMouse Animals with [*] pursuant to that certain Research Collaboration Agreement between MBio and ABX effective as of July 15, 1998 (the "RCA"); and D. ABX is willing to grant to MBio, and MBio desires to obtain, a license to use XenoMouse Animals solely for immunization with [*] for research purposes, as described below and on the terms and conditions set forth herein; E. ABX additionally is willing to grant to MBio, and MBio desires to obtain, an option to obtain the Antigen Product License (as defined below) on the terms and conditions set forth herein. NOW THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between the parties as follows: 1. DEFINITIONS For purposes of this Agreement, the terms set forth in this Article shall have the meanings set forth below: 1.1 "Affiliate" shall mean any entity which controls, is controlled by or is under common control with ABX, MBio or a Sublicensee. An entity shall be regarded as in control of another entity if it owns or controls at least fifty percent (50%) of the shares of the subject entity entitled to vote in the election of directors (or, in the case of an entity that is not a corporation, for the election of the corresponding managing authority). - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 1 2 1.2 "Antibody" shall mean a composition comprising a whole antibody or fragment thereof, said antibody or fragment having been derived in whole or part from the XenoMouse Animals provided by ABX to MBio pursuant to the RCA or this Agreement, or having been derived from nucleotide sequences encoding, or amino acid sequences of, such an antibody or fragment. 1.3 "Antibody Cells" shall mean all cells that contain, express, or secrete (a) Antibodies or (b) Genetic Materials that encode Antibodies. 1.4 "Antigen" shall mean [*] 1.5 "Antigen Product License" shall mean a license, in the form attached hereto as Exhibit A, to be granted by ABX to MBio pursuant to Section 3.3 of this Agreement. 1.6 "Confidential Information" shall mean, with respect to a party, all information of any kind whatsoever (including without limitation, compilations, data, formulae, models, patent disclosures, procedures, processes, projections, protocols, results of experimentation and testing, specifications, strategies and techniques), and all tangible and intangible embodiments thereof of any kind whatsoever (including without limitation, apparatus, biological or chemical materials, animals, cells, compositions, documents, drawings, machinery, patent applications, records, reports), which is owned or controlled by such party and is disclosed by such party to the receiving party and is marked, identified as or otherwise acknowledged to be confidential at the time of disclosure to the receiving party. Notwithstanding the foregoing, Confidential Information of a party shall not include information which the receiving party can establish by written documentation (a) to have been publicly known prior to disclosure of such information by the disclosing party to the receiving party, (b) to have become publicly known, without fault on the part of the receiving party, subsequent to disclosure of such information by the disclosing party to the receiving party, (c) to have been received by the receiving party at any time from a source, other than the disclosing party, rightfully having possession of and the right to disclose such information free of confidentiality obligations, (d) to have been otherwise known by the receiving party free of confidentiality obligations prior to disclosure of such information by the disclosing party to the receiving party, or (e) to have been independently developed by employees or agents of the receiving party without access to or use of such information disclosed by the disclosing party to the receiving party. The parties acknowledge that the foregoing exceptions shall be narrowly construed and that the obligations imposed upon each party under Section 5 below shall be relieved solely with respect to such Confidential Information of the disclosing party which falls within the above exceptions and not with respect to related portions, other combinations, or characteristics of the Confidential Information of the disclosing party including, without limitation, advantages, operability, specific purposes, uses and the like. 1.7 "Derived" or "derived" shall mean obtained, developed, created, synthesized, designed, derived or resulting from, based upon or otherwise generated. 1.8 "Field" shall mean the use of Products for human therapeutic, preventative - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2 3 (prophylactic) and diagnostic medical purposes. 1.9 "Genetic Material" shall mean a nucleotide sequence, including DNA, RNA and complementary and reverse complementary nucleotide sequences thereto, whether coding or noncoding and whether intact or a fragment. 1.10 "GenPharm Cross License Agreement" shall mean that certain Cross License Agreement entered into by and between ABX, JTI, XT, Cell Genesys, Inc., and GenPharm International, Inc. effective as of March 26, 1997, as the same may be amended from time to time. 1.11 "IND" shall mean an Investigational New Drug application filed with FDA, or any similar filing with any foreign regulatory authority, to commence human clinical testing of any Product in any country. 1.12 "JTI" shall mean Japan Tobacco Inc., a Japanese corporation. 1.13 "Licensed Technology" shall mean ABX Patent Rights, ABX Know-How and [*]; provided, however, that Licensed Technology shall not include Excluded Technology. 1.13.1 "ABX Patent Rights" shall mean (i) the patents and patent applications listed on Exhibit B hereto and any foreign counterparts thereto; (ii) the patent applications which claim Joint Materials as defined in Section 2.1.4(B) or Joint Intellectual Property as defined in Section 4.4; (iii) all patents that have issued or in the future issue from any of the foregoing patent applications, including without limitation utility, model and design patents and certificates of invention; and (iv) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications. 1.13.2 "ABX Know-How" shall mean information discovered, developed or acquired by ABX prior to the Effective Date regarding methods and techniques of immunizing the XenoMouse Animals to the Antigen which is disclosed by ABX to MBio pursuant to this Agreement or the RCA. All ABX Know-How shall be treated as "Confidential Information" of ABX under Article 5 of this Agreement. 1.13.3 "ABX In-License" shall mean a license, sublicense or other agreement under which ABX acquired rights to the ABX Patent Rights or the ABX Know-How. 1.13.4 [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3 4 [*] 1.13.5 "Excluded Technology" shall mean any intellectual property or technology of ABX in or to (i) all antigens other than the Antigen, including without limitation: (A) compositions of such antigens or of Genetic Materials encoding such antigens; (B) uses of such antigens; (C) antibodies or other compositions that bind to such antigens, Genetic Materials encoding such antibodies or compositions, and cells that express, secrete, or contain such antibodies, Genetic Materials, or compositions; and (D) uses of such antibodies, Genetic Materials or compositions; (ii) methods to discover novel antigens; (iii) methods of using antigens other than to create antibodies; and (iv) ABX Intellectual Property as defined in Section 4.5. 1.14 "Option" shall have the meaning set forth in Section 3.1.1 below. 1.15 "Product" shall mean any product comprising (i) an Antibody which binds to the Antigen or (ii) Genetic Material encoding such an Antibody wherein, in respect of each Product, said Genetic Material does not encode multiple antibodies. 1.16 [*] shall mean the [*] below. 1.17 "Research Field" shall mean the immunization of XenoMouse Animals with the Antigen and the use of XenoMouse Animals that are so immunized and materials derived from XenoMouse Animals that are so immunized, in each case solely for the creation, identification, analysis, research, and preclinical development of Products for use in the Field. For purposes of clarification, but without limitation, the Research Field shall not include (i) the creation, breeding or development of mice or any transgenic animals, (ii) use in humans of materials derived in whole or part from the XenoMouse Animals (including without limitation Products), (iii) use of XenoMouse Animals or materials derived in whole or part from XenoMouse Animals (including without limitation Products) for screening or other research, or for any purpose other than the creation, identification, analysis, research and development of Products for use in the Field, or (iv) the transfer, sale, lease, offer for sale or lease, or other transfer of title to or an interest in XenoMouse Animals or any materials derived in whole or part from the XenoMouse Animals (including without limitation Products). 1.18 "XenoMouse" and "XenoMouse Animals" shall mean one or more transgenic mice provided by ABX to MBio for immunization with the Antigen under either this Agreement or the RCA. 1.19 "Xenotech Agreement" shall mean that certain Master Research License and Option Agreement entered into by and among XT, JTI and Cell Genesys, Inc. effective as of June 28, 1996, and subsequently assigned to ABX by Cell Genesys, Inc., as the same may be amended from time to time. 1.20 "XT" shall mean Xenotech, L.P., a California limited partnership. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 4 5 1.21 "XT-ABX Product License" shall mean a license granted from XT to ABX pursuant to the terms of the Xenotech Agreement permitting ABX to commercialize certain Products in one or more territories. 2. SUPPLY OF MICE AND MATERIALS; RESEARCH LICENSE 2.1 Supply of XenoMouse Animals. 2.1.1 XenoMouse Animals. Subject to the terms and conditions of this Agreement, including those set forth in Section 2.2 below, on or before the Effective Date, ABX has provided to MBio, solely for use in creating Antibodies to the Antigen for use in the Research Field, XenoMouse Animals pursuant to the RCA. 2.1.2 Research. Except as the parties may otherwise agree, MBio shall be responsible for conducting all research activities involved in the Research Field, including without limitation immunizations of XenoMouse Animals with the Antigen, screening of antibodies generated from such immunizations, and creation of hybridoma cells that produce antibodies to the Antigen. 2.1.3 Payments. MBio shall pay to ABX [*] on December 20, 1998. 2.1.4 Ownership of Materials and Data. A. ABX Materials. Subject to Section 2.1.4(B) below, ABX owns and shall own (i) any and all XenoMouse Animals and XenoMouse Animals immunized with the Antigen and any and all materials derived therefrom (including without limitation fragments, derivatives, progeny, modifications or improvements thereto, and derivatives thereof) [*] (the "ABX Materials"). B. Joint Materials. Notwithstanding anything to the contrary in Section 2.1.4(A), it is understood and agreed that ABX and MBio own and shall jointly own [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5 6 [*] relating to Products resulting from the parties' use of the XenoMouse Animals or Products in connection with the RCA, this Agreement or the Antigen Product License (if entered into by the parties) (the "Joint Materials"). C. MBio Materials. Subject to Sections 2.1.4(A) and 2.1.4(B), MBio owns and shall own [*] D. Determinations Regarding Materials. In the event of any good faith dispute between the parties with respect to the proper categorization of materials under Section 2.1.4(A) through (C), above, the parties shall attempt to resolve such dispute, first by thirty (30) days' amicable negotiations, then by referral of the dispute (for thirty (30) days' additional negotiation) to the chief patent lawyers (or their nominees) of each party, and then, if not resolved, to the chief executive officers of each party. If, thirty (30) days after referral to the chief executive officers, the parties continue to have a good faith dispute as to the proper categorization of the above-referenced materials, such materials shall be Joint Materials, provided that such categorization shall not cause a breach of, or a right to terminate, any ABX In-License. E. Transfer of Materials. The transfer of physical possession of any materials owned by, and the physical possession and use of such materials and/or data by, MBio of ABX, as the case may be, shall not be (nor be construed as) a sale, lease, offer to sell or lease, or other transfer of title of such materials and/or data to MBio or ABX, as the case may be. 2.2 Supply of XenoMouse Animals and Materials; Material Transfer Terms. All XenoMouse Animals, and all materials derived in whole or part from XenoMouse Animals (including without limitation Products), provided by ABX to MBio are provided solely for use in accordance with, and subject to, the following terms and conditions: (a) all XenoMouse Animals transferred to MBio shall be the sole property of ABX, and the transfer of physical possession to MBio, and/or possession or use by MBio, of XenoMouse Animals shall not be, nor be construed as, a sale, lease, offer to sell or lease, or other transfer of title to any XenoMouse Animals; (b) all XenoMouse Animals and all materials derived in whole or part from the XenoMouse Animals (including without limitation Products) shall remain in the control of MBio and shall not be transferred to MBio's Affiliates or Sublicensees or any other party (other than ABX), [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 6 7 [*] (c) MBio shall not directly or indirectly use or attempt to use the XenoMouse Animals, or any materials derived in whole or part from the XenoMouse Animals (including without limitation Products) to reproduce the XenoMouse Animals or to generate or produce by any means XenoMouse Animals or other transgenic mice or other transgenic animals; (d) The XenoMouse Animals shall be delivered to MBio solely for the purpose of immunizing the XenoMouse Animals with the Antigen, and MBio shall not use the XenoMouse Animals, or any materials derived in whole or part from the XenoMouse Animals (including without limitation Products), for any purpose other than (i) immunizing the XenoMouse Animals with the Antigen, and (ii) subsequent use of such immunized XenoMouse Animals and materials derived therefrom (including without limitation Products) as reasonably necessary for creation, manufacture, use, identification, and commercialization of Products pursuant to the Antigen Product License (if entered into by the parties); (e) MBio shall not sell, have sold, lease, offer to sell or lease, otherwise transfer title to (i) any XenoMouse Animals, (ii) cells derived in whole or part from the XenoMouse Animals (including without limitation hybridomas), or (iii) except as provided in (f) below, any other materials derived in whole or part from the XenoMouse Animals (including without limitation Products); (f) MBio shall not sell, have sold, lease, offer to sell or lease, otherwise transfer title to, or otherwise distribute, clinically develop, or commercialize any Product without obtaining the Antigen Product License from ABX with respect to such Product; (g) MBio shall not use the XenoMouse Animals to make or use antibodies to any antigen other than the Antigen (including without limitation to [*]; (h) Upon expiration or termination of this Agreement for any reason, MBio shall destroy (or return to ABX) each XenoMouse Animal and certify such destruction as directed by ABX, within ten (10) days after such expiration or termination, except as otherwise provided in the Antigen Product License (if entered into by the parties); (i) ABX shall own all right, title and interest in and to all inventions and intellectual property (whether patentable or nonpatentable) made or created by MBio (and any of its agents or employees) through any use of the XenoMouse Animals (and/or materials derived in - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 7 8 whole or part from the XenoMouse Animals) which is not in accordance with the terms and conditions set forth in this Article 2; (j) The XenoMouse Animals shall be the property of ABX, and the transfer of physical possession of any such materials to, and the physical possession of such materials by, MBio shall not be (nor be construed as) a sale, lease, offer to sell or lease, or other transfer of title of such materials to MBio; (k) No implied licenses or rights are conveyed to MBio or ABX hereunder. MBio shall only be authorized regarding the use of XenoMouse Animals and the manufacture, research use, and (if permitted under the Antigen Product License, if entered into by the parties) commercial exploitation of materials derived in whole or part from the XenoMouse Animals (including without limitation Products) solely as expressly provided hereunder or under the Antigen Product License (if entered into by the parties); (l) MBio shall only use the XenoMouse Animals and materials derived in whole or part from the XenoMouse Animals (including without limitation Products) in compliance with all applicable national, state, and local laws and regulations, including all applicable National Institutes of Health guidelines. Such materials will not be used in humans, except as otherwise expressly set forth in the Antigen Product License (if entered into by the parties). MBio acknowledges that the XenoMouse Animals, and all materials derived in whole or part from the XenoMouse Animals, are experimental in nature and may have unknown characteristics and therefore shall use prudence and reasonable care in the use, handling, storage, transportation, disposition and containment of such materials and all derivatives thereof; (m) Unless otherwise agreed by ABX in advance in writing, all XenoMouse Animals delivered to MBio shall be delivered to MBio's animal facility in Cambridge Massachusetts, [*] and such XenoMouse Animals shall not leave such facility (except for return of XenoMouse Animals to ABX or upon destruction of the XenoMouse Animals by MBio); and (n) XT shall be a third-party beneficiary of the commitments by MBio set forth in items (a) through (g) above. 2.3 Research License. (a) Subject to the terms and conditions of this Agreement, ABX hereby grants to MBio a nonexclusive license (or sublicense, as the case may be) under the Licensed Technology, with the limited right to grant sublicenses only as provided under Section 2.3(b) below, (i) to use the XenoMouse Animals provided by ABX solely for use in the Research Field, (ii) to make and use (but not to transfer, sell, lease, offer to sell or lease, or otherwise transfer title to) Antibody Cells that secrete or express Antibodies to the Antigen solely for use in the Research Field, and (iii) to make and use (but not to transfer, sell, lease, offer to sell or lease, or otherwise transfer title to) Products solely for research and development of such Products for use in the Research Field. MBio shall not use the Licensed Technology or any materials derived in whole or in part from the XenoMouse Animals (including without limitation Products) for any - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8 9 other purpose other than those uses expressly licensed under this Section 2.3 or as otherwise expressly set forth in the Antigen Product License (if entered into by the parties). The rights and (sub)license granted under this Section 2.3 shall terminate upon the earlier of (i) such time as MBio and ABX execute the Antigen Product License and (ii) November 30, 1999. (b) MBio shall have the right to [*] (c) MBio shall have the right to contract with MBio Affiliates [*] to perform certain tasks (e.g., without limitation, pathology studies) in support of MBio's activities under this Agreement; provided, however, that (i) such contract shall expressly exclude the use of the XenoMouse Animals; (ii) such contract shall permit the transfer only of Antibodies, Genetic Materials and Antibody Cells to such contractor; (iii) such contractor shall expressly agree to be bound by the terms and conditions (including without limitation the ownership, exclusivity, confidentiality and indemnification provisions) of this Agreement to the extent applicable to the contracted services; and (iv) MBio remains obligated for such contractor's performance hereunder. 2.4 Limitation. Notwithstanding any other provision of this Agreement, in no event shall MBio (i) file, or authorize any third party to file, an IND with respect to a Product or (ii) initiate, or authorize any third party to initiate, clinical trials in humans with respect to a Product or otherwise utilize or introduce in any way a Product into humans (or sell, or authorize any third party to sell, a Product), unless and until MBio has entered into the Antigen Product License for such Product in accordance with Section 3.5 below. 2.5 Exclusivity. (a) During the term of this Agreement and the term of the Antigen Product License (if entered into by the parties), MBio shall not use in clinical trials, sell or commercialize any other antibody or fragment thereof that binds to the Antigen, or enter into any agreement with any third party regarding the clinical development, sale or commercialization of such antibodies or fragments, without prior written approval of ABX. Notwithstanding the foregoing, - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9 10 MBio shall not be precluded from (i) conducting, or collaborating or contracting with a third party to conduct, early-stage or preclinical studies with respect to any other antibody or fragment thereof that binds to the Antigen, or (ii) clinically developing, selling or commercializing any antibodies or fragments thereof whose principal binding affinity is to, and mode of action is through, an antigen other than the Antigen, regardless of whether such antibodies or fragments also bind to the Antigen, or from entering into any agreement with any third party regarding the clinical development, sale or commercialization of such antibodies or fragments. (b) During the term of this Agreement and the term of the Antigen Product License (if entered into by the parties), except as provided in Section 3.2.4 below, ABX shall not (i) develop or sell any antibody or fragment thereof that binds to the Antigen, or enter into any agreement with any third party for the creation, research or development of such antibodies or fragments thereof, or (ii) option, license or otherwise transfer rights of any kind whatsoever, whether for research or commercial purposes, to any third party, which would enable such third party to develop or sell any antibody or fragment thereof that binds to the Antigen, without prior written approval of MBio. Notwithstanding the foregoing, ABX shall not be precluded from clinically developing, selling or commercializing any antibodies or fragments thereof whose principal binding affinity is to, and mode of action is through, an antigen other than the Antigen, regardless of whether such antibodies or fragments also bind to the Antigen, or from entering into any agreement with any third party regarding the clinical development, sale or commercialization of such antibodies or fragments. 2.6 Reports. MBio agrees to keep ABX reasonably informed as to its research activities hereunder. [*] 3. OPTION TO OBTAIN ANTIGEN PRODUCT LICENSE 3.1 Option. Subject to the terms and conditions set forth in this Agreement, ABX hereby grants to MBio an option (the "Option") to execute, and to have ABX execute, the Antigen Product License, which Option may be exercised by MBio pursuant to the procedures set forth in this Article 3 on or before November 30, 1999. 3.2 Exercise of Option. 3.2.1 Exercise. To exercise the Option, on or before the date set forth in Section 3.1 above, MBio shall give ABX irrevocable written notice (the "Exercise Notice") stating that MBio desires that ABX obtain the XT-ABX Product License for the Antigen and grant to MBio the Antigen Product License. MBio's exercise of the Option shall be effective upon receipt by ABX of the Exercise Notice. In the event that ABX has not received the Exercise Notice on or before the date set forth in Section 3.1 above, the Option shall immediately terminate. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 10 11 3.2.2 Obtaining the XT-ABX Product License for the Antigen. Following MBio's exercise of the Option, ABX shall exercise its option under the Xenotech Agreement and shall obtain the XT-ABX Product License for the Antigen. Upon execution of the XT-ABX Product License, MBio and ABX shall execute the Antigen Product License, and MBio shall pay to ABX the license fee set forth in Section 3.1 of the Antigen Product License. 3.2.3 Definition of Antigen. ABX shall establish as the definition of the Antigen under the Xenotech Agreement the same definition of the Antigen as is established under this Agreement (or such other definition which does not materially lessen the rights granted to MBio under this Agreement and under the Antigen Product License (if executed by the parties). 3.2.4 Use by ABX. If MBio does not exercise its Option on or before the date set forth in Section 3.1 above, or if MBIO does not promptly thereafter enter into the Antigen Product License, ABX shall be entitled, in its sole discretion, to exercise ABX's rights under the Xenotech Agreement and enter into the XT-ABX Product License related to the Antigen on its own behalf or on behalf of a third party [*], and shall not be obligated to enter into the Antigen Product License with MBio; provided, however, [*] 3.3 Execution of Antigen Product License. At such time as ABX enters into the XT-ABX Product License with respect to the Antigen as described in Section 3.2.2, MBio and ABX shall promptly execute the Antigen Product License. 3.4 [*] 3.4.1 Subject to Section 3.4.2, [*]. Subject to Section 3.4.2, [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 11 12 [*] 3.4.2 Notwithstanding Section 3.4.1, [*] 4. INTELLECTUAL PROPERTY 4.1 Existing MBio Intellectual Property. MBio owns and shall own all right, title and interest in and to inventions made, conceived, reduced to practice and otherwise developed by MBio prior to the Effective Date of the RCA and all intellectual property thereto. 4.2 Existing ABX Intellectual Property. ABX owns and shall own all right, title and interest in and to inventions made, conceived, reduced to practice and otherwise developed by ABX prior to the Effective Date of the RCA and all intellectual property thereto. 4.3 MBio Intellectual Property. Except as otherwise provided in Sections 4.4 and 4.5 below, MBio shall own all right, title and interest in and to inventions made, conceived, reduced to practice, or otherwise developed solely by MBio pursuant to the RCA, this Agreement or the Antigen Product License (if entered into by the parties) and all intellectual property thereto (the "MBio Intellectual Property"). 4.4 Joint Intellectual Property. Except as otherwise provided in Section 2.1.4 or 2.2(i) above, MBio and ABX shall jointly own all right, title and interest in and to (a) all inventions made jointly by ABX and MBio personnel under the RCA, this Agreement or the Antigen Product License (if entered into by the parties), and all intellectual property thereto, and (b) all inventions, solely or jointly made, conceived, reduced to practice, or otherwise developed by, or under the authority of, MBio and/or ABX in the course of performing research or development work under the RCA, this Agreement or the Antigen Product License (if entered into by the parties) regarding the Joint Materials and/or the Antibody Cells that contain, express, or secrete Antibodies that bind to the Antigen or Genetic Materials that encode such Antibodies, and all intellectual property thereto (all of the foregoing, collectively, the "Joint Intellectual Property"). Nothing in this Section 4.4 shall convey, or be construed to convey, title in or to the biological materials themselves embodying any such jointly-owned inventions or intellectual property to MBio or ABX, as the case may be. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 12 13 4.5 ABX Intellectual Property. Except as otherwise provided in Section 4.4 above, ABX shall own all right, title and interest in and to (a) all inventions made, conceived, reduced to practice, or otherwise developed solely by ABX pursuant to the RCA, this Agreement or the Antigen Product License (if entered into by the parties) and all intellectual property thereto, and (b) all inventions made, conceived, reduced to practice or otherwise developed jointly or solely by MBio and/or ABX using XenoMouse Animals or related to ABX Materials whether derived in whole or part from XenoMouse Animals and all intellectual property rights thereto (all of the foregoing, collectively, the "ABX Intellectual Property"). 4.6 Determinations Regarding Intellectual Property. In the event of any good faith dispute between the parties with respect to the proper categorization of intellectual property under Sections 4.1 through 4.5 above, the parties shall attempt to resolve such dispute, first by thirty (30) days' amicable negotiations, then by referral of the dispute (for thirty (30) days' additional negotiation) to the chief patent lawyers (or their nominees) of each party, and then, if not resolved, to the chief executive officers of each party. If, thirty (30) days after referral to the chief executive officers, the parties continue to have a good faith dispute as to the proper categorization of the above-referenced intellectual property, such intellectual property shall be Joint Intellectual Property, provided that such categorization shall not cause a breach of, or a right to terminate, any ABX In-License. 4.7 Assignment and Disclosure of Inventions. MBio and ABX shall cause each employee, agent, or independent contractor that conducts research pursuant to the RCA, this Agreement or the Antigen Product License (if entered into by the parties) using the XenoMouse Animals, or any materials derived in whole or part, from the XenoMouse Animals (including without limitation the Products), to promptly disclose to ABX or MBio, as the case may be, and appropriately assign any and all rights in and to, inventions made, conceived, reduced to practice, or otherwise developed by, or under the authority of, MBio or ABX hereunder. MBio and ABX agree to maintain records in sufficient detail and in good scientific manner appropriate for patent purposes and so as to properly reflect all work done and results achieved in performing its rights and obligations hereunder, and agrees to respond to reasonable requests from MBio or ABX, as the case may be, for information based upon such records. 4.8 Prosecution and Maintenance of Patents. 4.8.1 ABX. ABX shall have the sole right and responsibility (but not the obligation), at its expense, to file, prosecute and maintain all patent applications within (and to conduct any interferences, oppositions, or reexaminations on, and to request any reissues or patent term extensions of): (i) the ABX Patent Rights, other than those patent applications that claim Joint Intellectual Property; (ii) the [*]; and (iii) the ABX Intellectual Property. 4.8.2 MBio. MBio shall have the sole right and responsibility (but not the obligation), at its expense, to file, prosecute and maintain all patent applications (and to conduct any interferences, oppositions, or reexaminations thereon, and to request any reissues or patent term extensions thereof) within the MBio Intellectual Property. 4.8.3 Joint. Except as otherwise set forth in the Antigen Product License (if - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 13 14 entered into by the parties), MBio shall have the first right and responsibility (but not the obligation), at its expense, to file, prosecute and maintain all patent applications (and to conduct any interferences, oppositions, or reexaminations thereon, and to request any reissues or patent term extensions thereof) within the Joint Intellectual Property. MBio shall: (i) provide ABX with any patent application filed hereunder by MBio promptly prior to filing and receive and incorporate reasonable comments by ABX thereon; (ii) provide ABX with any patent application filed hereunder by MBio promptly after such filing; (iii) provide ABX promptly with copies of all substantive communications received from or filed in patent office(s) with respect to such filings and receive and incorporate reasonable comments by ABX thereon; (iv) notify ABX of any interference, opposition, reexamination request, nullity proceeding, appeal or other interparty action and review it with the ABX as reasonably requested; and (v) a reasonable time prior to taking or failing to take any action that would substantially affect the scope of validity of rights under such patent applications or patents thereon (including substantially narrowing or canceling any claim without reserving the right to file a continuing or divisional application, abandoning any patent or not filing or perfecting the filing of any patent application), provide ABX with notice of such proposed action so that ABX has a reasonable opportunity to review and make comments. ABX shall assist MBio upon request and at MBio's sole expense, and to the extent commercially reasonable, in preparing, filing or maintaining the patent applications and patents claiming Joint Intellectual Property. If MBio fails to undertake the filing of a patent application (or continuing or divisional application) within ninety (90) days after a written request from ABX to do so, or if MBio discontinues the prosecution or maintenance of a patent application or a patent, ABX at its expense may, in its discretion, undertake such filing, prosecution or maintenance thereof, in which case such patent application and patent thereon shall be solely owned by ABX. 4.9 Enforcement of Patents. MBio shall use good faith efforts to enforce the patent rights within the Joint Intellectual Property, and to consult with ABX both prior to and during said enforcement. ABX shall reasonably cooperate with MBio, upon request by MBio and at the sole expense of MBio, in taking any action to enforce such patent rights. All monies recovered upon the final judgment or settlement of any such action shall be used first to reimburse the costs and expenses (including reasonable attorneys' fees) of MBio and ABX, with the remainder for the account of the party or parties that undertake such actions to the extent of their financial participation therein. To the extent that damages are awarded for lost sales or lost profits from the sale of Products, such damages shall be allocated among the parties taking into account royalties that would have been payable to ABX on the sale of such Products. ABX shall use efforts consistent with prudent business judgment to enforce the patent rights within the ABX Patent Rights that are licensed to MBio hereunder, or would be licensed to MBio under the XT-ABX Product License Agreement, if entered into by the parties, and to consult with MBio both prior to and during said enforcement. MBio shall reasonably cooperate with ABX, upon request by ABX and at the sole expense of ABX, in taking any action to enforce such patent rights. ABX shall be entitled to all monies recovered upon the final judgment or settlement of any such action. 4.10 Grant-Back. It is the intent of the parties that this Agreement shall not restrict ABX's freedom to operate regarding the practice and commercialization of the Licensed Technology (including without limitation XenoMouse Animals and cells, genetic material, and antibodies generated or derived from XenoMouse Animals), except as expressly set forth herein regarding the Antigen. Accordingly, in the event that any patent owned or controlled by MBio that 14 15 directly arises from use of the XenoMouse Animals that has application other than for the manufacture, use, sale, offer for sale or import of Products, MBio hereby grants to ABX a royalty-free, perpetual, irrevocable license, with the right to grant and authorize sublicenses, under all such patents for all fields of use other than the manufacture, use, sale, offer for sale or import of Products. 4.11 Covenant Not to Sue. During the term of this Agreement and the Antigen Product License (if entered into by the parties), ABX shall not enforce against MBio or its Affiliates any issued patent which (a) is owned by ABX or its Affiliate, or is licensed to ABX or its Affiliate with the right to enforce (without an obligation to pay royalties or other amounts to any other Person), (b) covers XenoMouse Animals, and (c) would be infringed by the conduct of research and development in the Research Field, or by the manufacture, use or sale of Products in the Field, to the extent permitted under this Agreement or the Antigen Product License (if entered into by the parties). 5. CONFIDENTIALITY 5.1 Confidentiality. For purposes of this Agreement, (i) the ABX Materials and all written and oral communications related thereto are and shall remain the Confidential Information of ABX, (ii) the MBio Materials and all written and oral communications related thereto are and shall remain the Confidential Information of MBio, and (iii) the Joint Materials and all written and oral communications related thereto are and shall remain the joint Confidential Information of ABX and MBio. Except as expressly provided herein, MBio and ABX each shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose any Confidential Information of the other, whether or not furnished to it by the other party pursuant to this Agreement (including, without limitation, know-how) until the later of (i) ten (10) years from the Effective Date or (ii) five (5) years following the expiration or termination of this Agreement. 5.2 Disclosure to Third Parties. Notwithstanding Section 5.1 above, each party may disclose Confidential Information regarding the Joint Materials and Joint Intellectual Property to permitted sublicensees and contractors hereunder, provided that such sublicensee or contractor agrees in writing to be bound the confidentiality and non-use obligations of this Agreement. 5.3 Permitted Disclosure. Notwithstanding Section 5.1 above, each party may nevertheless disclose the other party's Confidential Information to the extent such disclosure is required by applicable law, regulation or court order, provided that if a party is required by law to make any such disclosure of the other party's Confidential Information, other than pursuant to a confidentiality agreement, it will give reasonable advance notice to the other party of such disclosure requirement and will use efforts consistent with prudent business judgment to secure confidential treatment of such information prior to its disclosure (whether through protective orders or confidentiality agreements or otherwise). It is understood that the expiration of MBio's obligations under Section 5.1 above shall not be deemed to limit MBio's obligations under Section 2.2 above. 5.4 Terms of Agreement. Neither party shall disclose any terms or conditions of this 15 16 Agreement to any third party without the prior consent of the other party; provided, however, that a party may disclose the terms or conditions of this Agreement, (i) on a need-to-know basis to its Affiliates including, but not limited to, for MBio, Millennium Pharmaceuticals, Inc., Millennium Information, Inc., Millennium Predictive Medicine, Inc., plus any future Affiliates that own a majority of the stock of MBio or that MBio owns a majority of the stock thereof (and any affiliated companies that own a majority of the stock of Millennium Pharmaceuticals, Inc. or that Millennium Pharmaceuticals, Inc. owns a majority of the stock thereof), and for ABX, Xenotech L.P. plus any future Affiliates that own a majority of the stock of ABX or that ABX owns a majority of the stock thereof) and to its/their legal and financial advisors to the extent such disclosure is reasonably necessary in connection with such party's activities as expressly permitted by this Agreement, (ii) to a third party in connection with (A) an equity investment in such party by a third party, (B) a merger, consolidation or similar transaction entered into by such party, or (C) the sale of all or substantially all of the assets of such party, and (iii) as may, in the reasonable opinion of such party's counsel, be required by applicable law, regulation or court order, including without limitation, a disclosure in connection with such party's filing of a registration statement or other filing with the United States Securities and Exchange Commission (in which event such party will first consult with the other party with respect to such disclosure). Notwithstanding the foregoing, prior to execution of this Agreement ABX and MBio shall agree upon the substance of information that can be used to describe the terms of this transaction, and each party may disclose such information, as modified by written agreement of ABX and MBio from time to time, without the consent of the other. 6. INDEMNIFICATION 6.1 MBio. MBio shall indemnify and hold harmless ABX, and its directors, officers, employees and agents, from and against all losses, liabilities, damages and expenses, including reasonable attorneys' fees and costs (collectively, "Liabilities"), resulting from any claims, demands, actions or other proceedings by any third party arising from (i) the material breach of any representation, warranty or covenant by MBio under this Agreement, (ii) the performance of the Research by MBio, (iii) any use, handling or storage by MBio of the ABX Materials, the Joint Materials, or Products, or (iv) any use by MBio of the Confidential Information of ABX; provided, however, that MBio shall not be obligated to indemnify or hold harmless ABX for such Liabilities to the extent that such Liabilities arise from (a) the gross negligence or willful misconduct of ABX, or (b) the misappropriation by ABX of the trade secrets or other proprietary information of a Third Party. 6.2 ABX. ABX shall indemnify and hold harmless MBio, and its directors, officers, employees and agents, from and against all Liabilities resulting from any claims, demands, actions or other proceedings by any third party arising from (i) the material breach of any representation, warranty or covenant by ABX under this Agreement, or (ii) any use by ABX of the Confidential Information of MBio; provided, however, that ABX shall not be obligated to indemnify or hold harmless MBio for such Liabilities to the extent that such Liabilities arise from (a) the gross negligence or willful misconduct of MBio, or (b) the misappropriation by MBio of the trade secrets or other proprietary information of a Third Party. 16 17 6.3 Procedure. If a party (an "Indemnitee") intends to claim indemnification under this Article 6, it shall promptly notify the indemnifying party (the "Indemnitor") in writing of any claim, demand, action or other proceeding for which the Indemnitee intends to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitor, if representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceeding. The indemnity agreement in this Article 6 shall not apply to amounts paid in settlement of any claim, demand, action or other proceeding if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld or delayed unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 6, but the omission so to deliver written notice to the Indemnitor shall not relieve it of any liability that it may have to any party claiming indemnification otherwise than under this Article 6. The party claiming indemnification under this Article 6, its employees and agents, shall reasonably cooperate with the Indemnitor and its legal representatives in the investigation of any claim, demand, action or other proceeding covered by this indemnification. 7. REPRESENTATIONS AND WARRANTIES 7.1 ABX. 7.1.1 ABX represents and warrants that: (i) it has the full right, power and authority to enter into this Agreement and to grant the rights and licenses hereunder; (ii) to the knowledge of ABX, there are no existing or threatened actions, suits or claims pending with respect to the subject matter hereof or the right of ABX to enter into and perform its obligations under this Agreement; (iii) it has taken all necessary action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; (iv) this Agreement has been duly executed and delivered on behalf of it, and constitutes a legal, valid, binding obligation, enforceable against it in accordance with the terms hereof; and (v) the execution and delivery of this Agreement and the performance of its obligations hereunder do not conflict with or violate any requirement of applicable laws or regulations and do not conflict with, or constitute a default under, any contractual obligation of it. 7.1.2 ABX further represents and warrants that: (i) on or before the Effective Date, it has provided to MBio complete copies of all applicable ABX In-Licenses (including without limitation the GenPharm Cross License Agreement) setting forth all applicable rights, limitations and restrictions described in Section 9.9 below (it being understood that the financial terms have been redacted from some or all such copies); 17 18 (ii) based upon information provided to ABX by MBio concerning MBio's intellectual property rights in the Antigen, and to the best of ABX's knowledge (without the obligation to perform due diligence), (a) ABX has the right to obtain from XT an XT-ABX Product License with respect to the Antigen that is an "Exclusive Worldwide Product License" (as defined in the Xenotech Agreement and in the form attached thereto as an exhibit); (b) the license or sublicense to be granted to ABX pursuant to such XT-ABX Product License with respect to the Antigen shall be exclusive even as to XT; and (c) JTI does not have the right under the Xenotech Agreement to obtain an "Exclusive Home Territory Product License" or a "Co-Exclusive Worldwide Product License" (as these are defined in the Xenotech Agreement and attached thereto as exhibits) with respect to the Antigen, or any other right or license under the Licensed Technology to develop, make and have made, use, sell, lease, offer to sell or lease, import, export, otherwise transfer physical possession of or otherwise transfer title to Products for use in the Field; except, in each case, with respect to the research license set forth in Article 3 of the Xenotech Agreement; (iii) ABX has nominated the Antigen under [*] the Xenotech Agreement as required under the Xenotech Agreement to obtain the right to acquire an "Exclusive World Wide Product License" under the Xenotech Agreement with respect to the Antigen; and (iv) the XT-ABX Product License to be executed by XT and ABX will be substantially identical (i.e., other than with respect to the effective date thereof and the definition of the antigen under such agreement) to the form agreement attached to this Agreement as Exhibit D (it being understood that the financial terms may be redacted from such form agreement). 7.1.3 Upon execution of the XT-ABX Product License with respect to the Antigen, ABX shall provide MBio with a copy of such fully-executed XT-ABX Product License (it being understood that the financial terms may be redacted from such copy). At any time during the term of this Agreement or the Antigen Product License (if entered into by the parties) at the request of MBio, ABX shall discuss with MBio ABX's interpretation of material terms and conditions of the applicable ABX In-Licenses, including, without limitation, the form of agreement attached to this Agreement as Exhibit D, the XT-ABX Product License, and any limitations on ABX's right to further transfer or grant licenses or sublicenses to MBio to any and all rights to technology within the scope of the ABX Patent Rights and/or ABX Know-How under any ABX In-License. 7.2 MBio. MBio represents and warrants that: (i) it has the full right, power and authority to enter into this Agreement; (ii) to the knowledge of MBio, there are no existing or threatened actions, suits or claims pending with respect to the subject matter hereof or the right of MBio to enter into and perform its obligations under this Agreement; (iii) it has taken all necessary action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; (iv) this Agreement has been duly executed and delivered on behalf of it, and constitutes a legal, valid, binding obligation, enforceable against it in accordance with the terms hereof; (v) the execution and delivery of this Agreement and the performance of its obligations hereunder do not conflict with or violate any requirement of applicable laws or regulations and do not conflict with, or constitute a default under, any contractual obligation of it; and (vi) it will not take any action, or fail to take any action, under this Agreement or the Antigen Product License, if entered into by the parties, that will cause a breach of the GenPharm Cross License Agreement, the - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 18 19 Xenotech Agreement or the XT-ABX Product License. 7.3 Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, ABX AND MBIO MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND REGARDING ABX MATERIALS, MBIO MATERIALS, JOINT MATERIALS, PRODUCTS OR LICENSED TECHNOLOGY, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, AND VALIDITY OF TECHNOLOGY OR PATENT CLAIMS, ISSUED OR PENDING. ALL XENOMOUSE ANIMALS AND MATERIALS DERIVED IN WHOLE OR PART FROM XENOMOUSE ANIMALS PROVIDED TO MBIO PURSUANT TO THIS AGREEMENT ARE PROVIDED "AS IS," AND ABX SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT WITH RESPECT TO SUCH XENOMOUSE ANIMALS AND MATERIALS DERIVED IN WHOLE OR PART FROM XENOMOUSE ANIMALS. 8. TERM; TERMINATION 8.1 Term. This Agreement shall commence on the Effective Date and, unless earlier terminated pursuant to the other provisions of this Article 8, shall continue in effect until December 31, 1999. 8.2 Termination by MBio. MBio may terminate this Agreement at any time upon ninety (90) days written notice to ABX. 8.3 Breach. In the event that a party shall have materially breached or defaulted in the performance of any of its material obligations hereunder, and such breach or default shall have continued for thirty (30) days after written notice of such breach was provided to the breaching party by the nonbreaching party, the nonbreaching party shall have the right at its option to terminate this Agreement effective at the end of such thirty-day period unless the breaching party has cured any such breach or default prior to the expiration of the thirty-day period. 8.4 Effect of Termination; Accrued Rights and Survival of Terms. Termination or expiration of this Agreement for any reason shall be without prejudice to any rights which shall have accrued to the benefit of a party prior to such termination or expiration. Without limiting the foregoing, Articles 4, 5 and 6 and Sections 2.2 and 7.3 of this Agreement shall survive any expiration or termination of this Agreement. 9. MISCELLANEOUS PROVISIONS 9.1 Governing Laws. This Agreement shall be governed by, interpreted and construed in accordance with the laws of the State of California, without regard to conflicts of law principles. 9.2 Waiver. It is agreed that no waiver by a party hereto of any breach or default of any 19 20 of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent and/or similar breach or default. 9.3 Assignments. Neither this Agreement nor any right or obligation hereunder may be assigned or delegated, in whole or part, by either party without the prior written consent of the other; provided, however, that either party may, without the written consent of the other, assign this Agreement and its rights and delegate its obligations hereunder in connection with the transfer or sale of all or substantially all of its business, or in the event of its merger, consolidation, change in control or similar transaction. Any permitted assignee shall assume all obligations of its assignor under this Agreement. Any purported assignment in violation of this Section 9.3 shall be void. Notwithstanding the foregoing, except as otherwise provided under Section 2.2(b) above, ABX shall not be obligated without its consent to send XenoMouse Animals to any party other than MBio, nor shall MBio have the right to transfer XenoMouse Animals to any other party without ABX's prior written consent. The terms and conditions of this Agreement shall be binding upon and inure to the benefit of the permitted successors and assigns of the parties. 9.4 Independent Contractors. The relationship of the parties hereto is that of independent contractors. The parties hereto are not deemed to be agents, partners or joint venturers of the others for any purpose as a result of this Agreement or the transactions contemplated thereby. 9.5 Further Actions. Each party agrees to execute, acknowledge and deliver such further instruments and to do all such other acts as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 9.6 Notices. All requests and notices required or permitted to be given to the parties hereto shall be given in writing, shall expressly reference the section(s) of this Agreement to which they pertain, and shall be delivered to the other party, effective on receipt, at the appropriate address as set forth below or to such other addresses as may be designated in writing by the parties from time to time during the term of this Agreement. Millennium BioTherapeutics, Inc.: Millennium BioTherapeutics, Inc. 620 Memorial Drive Cambridge, Massachusetts 02139 Telecopier: 617-374-7653 Attn: General Manager Abgenix, Inc.: Abgenix, Inc. 7601 Dumbarton Circle Fremont, California 94555 Attn: President with a copy to: 20 21 Pillsbury Madison & Sutro LLP 101 West Broadway, Suite 1800 San Diego, California 92101 Attn: Mark R. Wicker 9.7 Force Majeure. Nonperformance of a party (other than for the payment of money) shall be excused to the extent that performance is rendered impossible by strike, fire, earthquake, flood, governmental acts or orders or restrictions, failure of suppliers, or any other reason where failure to perform is beyond the reasonable control and not caused by the negligence, intentional conduct or misconduct of the nonperforming party. 9.8 No Consequential Damages. IN NO EVENT SHALL A PARTY HERETO BE LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR THE EXERCISE OF ITS RIGHTS HEREUNDER, INCLUDING WITHOUT LIMITATION LOST PROFITS ARISING FROM OR RELATING TO ANY BREACH OF THIS AGREEMENT, REGARDLESS OF ANY NOTICE OF SUCH DAMAGES. NOTHING IN THIS SECTION 9.8 IS INTENDED TO LIMIT OR RESTRICT THE INDEMNIFICATION RIGHTS OR OBLIGATIONS OF EITHER PARTY. 9.9 Third Party Rights. Notwithstanding anything to the contrary in this Agreement, the grant of rights by ABX under this Agreement shall be subject to and limited in all respects by the terms of the applicable ABX In-License(s) pursuant to which ABX acquired any Licensed Technology, and all rights or sublicenses granted under this Agreement shall be limited to the extent that ABX may grant such rights and sublicenses under such ABX In-Licenses. Additionally, and without limiting the foregoing, the rights granted to MBio hereunder, including without limitation any grant of "exclusive" rights, shall be subject to the rights granted to or retained by GenPharm under the GenPharm Cross License Agreement. 9.10 Complete Agreement. It is understood and agreed by the parties that this Agreement constitutes the entire agreement, both written and oral, among the parties with respect to the subject matter hereof, and that all prior agreements respecting the subject matter hereof, either written or oral, expressed or implied, shall be abrogated, canceled, and are null and void and of no effect, including, without limitation, the RCA. No amendment or change hereof or addition hereto shall be effective or binding on the parties hereto unless reduced to writing and executed by the respective duly authorized representatives of the parties. 9.11 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and together shall be deemed to be one and the same agreement. 9.12 Headings. The captions to the several Articles and Sections hereof are not a part of this Agreement, but are included merely for convenience of reference only and shall not affect its meaning or interpretation. 21 22 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized officers as of the day and year first above written, each copy of which shall for all purposes be deemed to be an original. ABGENIX, INC. MILLENNIUM BIOTHERAPEUTICS, INC. By: /s/ R. Scott Greer By: /s/ John Maraganore ------------------------------ ------------------------------------- Printed Name: R. Scott Greer Printed Name: John Maraganore -------------------- --------------------------- Title: Presdent & CEO Title: VP & General Manager --------------------------- ---------------------------------- Date: 11/6/98 Date: 11/6/98 ---------------------------- ---------------------------------- MILLENNIUM PHARMACEUTICALS, INC. hereby acknowledges and agrees to be bound by the terms and conditions of this Agreement to the extent applicable to the facilities used and services performed pursuant to Section 2.2(b) above. MILLENNIUM PHARMACEUTICALS, INC. By: /s/ Gary A. Cohn -------------------------------------- Printed Name: Gary A. Cohn ---------------------------- Title: Assoc. General Counsel Corporate and Transactions ----------------------------------- Date: 11/6/98 ------------------------------------- 22 23 EXHIBIT A FORM OF PRODUCT LICENSE AGREEMENT THIS PRODUCT LICENSE AGREEMENT (the "Agreement") effective the ____ day of ________, ____ (the "Effective Date"), is made by and between ABGENIX, INC., a Delaware corporation ("ABX"), and MILLENNIUM BIOTHERAPEUTICS, INC. a Delaware corporation ("MBio"). RECITALS MBio and ABX have entered into the Research License and Option Agreement (as defined below), pursuant to which MBio has certain rights to acquire a license under the Licensed Technology (as defined below); and MBio has exercised its rights under the Research License and Option Agreement to acquire from ABX a license or sublicense, as the case may be, under the Licensed Technology to commercialize Products (as defined below) in the Field (as defined below) on the terms and conditions herein. NOW, THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between the parties as follows: 1. DEFINITIONS. For purposes of this Agreement, the terms set forth in this Article shall have the meanings set forth below. Any capitalized term used in this Agreement, that not defined below in this Article 1, shall have the meaning as set forth in the Research License and Option Agreement. 1.1 "Affiliate" shall mean any entity which controls, is controlled by or is under common control with ABX, MBio or a Sublicensee. An entity shall be regarded as in control of another entity if it owns or controls at least fifty percent (50%) of the shares of the subject entity entitled to vote in the election of directors (or, in the case of an entity that is not a corporation, for the election of the corresponding managing authority). 1.2 "Antibody" shall mean a composition comprising a whole antibody or fragment thereof, said antibody or fragment having been derived in whole or part from the XenoMouse Animals provided by ABX to MBio pursuant to the RCA or the Research License and Option Agreement, or having been derived from nucleotide sequences encoding, or amino acid sequences of, such an antibody or fragment. 1.3 "Confidential Information" shall mean, with respect to a party, all information of any kind whatsoever (including without limitation, compilations, data, formulae, models, patent 1 24 disclosures, procedures, processes, projections, protocols, results of experimentation and testing, specifications, strategies and techniques), and all tangible and intangible embodiments thereof of any kind whatsoever (including without limitation, apparatus, biological or chemical materials, animals, cells, compositions, documents, drawings, machinery, patent applications, records, reports), which is owned or controlled by such party and is disclosed by such party to the receiving party and is marked, identified as or otherwise acknowledged to be confidential at the time of disclosure to the receiving party. Notwithstanding the foregoing, Confidential Information of a party shall not include information which the receiving party can establish by written documentation (a) to have been publicly known prior to disclosure of such information by the disclosing party to the receiving party, (b) to have become publicly known, without fault on the part of the receiving party, subsequent to disclosure of such information by the disclosing party to the receiving party, (c) to have been received by the receiving party at any time from a source, other than the disclosing party, rightfully having possession of and the right to disclose such information free of confidentiality obligations, (d) to have been otherwise known by the receiving party free of confidentiality obligations prior to disclosure of such information by the disclosing party to the receiving party, or (e) to have been independently developed by employees or agents of the receiving party without access to or use of such information disclosed by the disclosing party to the receiving party. The parties acknowledge that the foregoing exceptions shall be narrowly construed and that the obligations imposed upon each party under Section 5 below shall be relieved solely with respect to such Confidential Information of the disclosing party which falls within the above exceptions and not with respect to related portions, other combinations, or characteristics of the Confidential Information of the disclosing party including, without limitation, advantages, operability, specific purposes, uses and the like. 1.4 "Core Third Party Patents" shall mean an issued, unexpired patent that is owned or controlled by a third party (other than ABX, MBio, a Sublicensee, or an Affiliate of either MBio or its Sublicensee) and is not licensed to ABX, MBio, a Sublicensee, or Affiliates of ABX or MBio, that has not been invalidated in a final unappealed or unappealable judgment by a court of competent jurisdiction, which patent covers XenoMouse Animals and which patent would be infringed by the sale of Products but for ABX or MBio, as the case may be, obtaining a royalty-bearing license under such patent (other than pursuant to this Agreement) in order to commercialize Products in the Field under this Agreement. 1.5 "Field" shall mean the use of Products for human therapeutic, preventative (prophylactic) and diagnostic medical purposes. 1.6 "Genetic Material" shall mean a nucleotide sequence, including DNA, RNA, and complementary and reverse complementary nucleotide sequences thereto, whether coding or noncoding and whether intact or a fragment. 1.7 "GenPharm Cross License Agreement" shall mean that certain Cross License Agreement entered into by and between ABX, JTI, XT, Cell Genesys, Inc., and GenPharm International, Inc. effective as of March 26, 1997, as the same may be amended from time to time. 1.8 "IND" shall mean an Investigational New Drug application filed with FDA, or 2 25 any similar filing with any foreign regulatory authority, to commence human clinical testing of any Product in any country in the Territory. 1.9 "JTI" shall mean Japan Tobacco Inc., a Japanese corporation 1.10 "Licensed Technology" shall mean ABX Patent Rights, ABX Know-How and [*]; provided, however, that Licensed Technology shall not include Excluded Technology. 1.10.1 "ABX Patent Rights" shall mean (i) the patents and patent applications listed on Attachment A hereto and any foreign counterparts thereto; (ii) the patent applications which claim Joint Intellectual Property as defined in Section 4.4 of the Research License and Option Agreement; (iii) all patents that have issued or in the future issue from any of the foregoing patent applications, including without limitation utility, model and design patents and certificates of invention; and (iv) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications. 1.10.2 "ABX Know-How" shall mean information discovered, developed or acquired by ABX prior to the Effective Date of the Research License and Option Agreement regarding methods and techniques of immunizing the XenoMouse Animals to the Product Antigen which is disclosed by ABX to MBio pursuant to the RCA, the Research License and Option Agreement or this Agreement. All ABX Know-How shall be treated as "Confidential Information" of ABX under Article 7 of this Agreement. 1.10.3 "ABX In-License" shall mean a license, sublicense or other agreement under which ABX acquired rights to the ABX Patent Rights or the ABX Know-How. 1.10.4 [*] 1.10.5 "Excluded Technology" shall mean any intellectual property or technology of ABX in or to (i) all antigens other than the Product Antigen, including without limitation: (A) compositions of such antigens or of Genetic Materials encoding such antigens; (B) uses of such antigens; (C) antibodies or other compositions that bind to such antigens, Genetic Materials encoding such antibodies or compositions, and cells that contain, express, or secrete such antibodies, genetic materials, or compositions; and (D) uses of such antibodies, Genetic Materials, or compositions; (ii) methods to discover novel antigens; (iii) methods of using antigens other than to create antibodies; and (iv) the ABX Intellectual Property. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3 26 1.11 "Net Sales" shall mean [*] 1.11.1 "MBio Net Sales" shall mean the Net Sales of MBio and its Affiliates. 1.11.2 "Sublicensee Net Sales" shall mean the Net Sales of Sublicensees. 1.12 "Patent Claim" shall mean a claim of a pending patent application or issued and unexpired patent included within the Licensed Technology which has not been held unenforceable or invalid by a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal and which has not been admitted to be invalid or unenforceable through reissue, disclaimer or otherwise. 1.13 "Product" shall mean any product comprising (i) an Antibody that binds to the Product Antigen or (ii) Genetic Material encoding such an Antibody wherein, in respect of each Product, said Genetic Material does not encode multiple antibodies. 1.14 "Product Antigen" shall mean [*]. As used in this Agreement, [*] 1.15 "RCA" shall mean that certain Research Collaboration Agreement between MBio and ABX effective as of July 15, 1998. 1.16 "Research License and Option Agreement" shall mean that certain Research License and Option Agreement entered into by and between ABX and MBio effective as of October 30, 1998, as the same may be amended from time to time. 1.17 "Sublicensee" shall mean a third party (other than an Affiliate) that is granted a sublicense under the Licensed Technology to both make and sell Products. "Sublicensee" shall also include a third party (other than an Affiliate) that is granted the right to distribute Product, provided that such third party is responsible for marketing and promotion of Product within the applicable territory. As used herein, a "Sublicense" shall mean an agreement or arrangement pursuant to which such a sublicense or distribution right has been granted. 1.18 "Territory" shall mean all the countries of the world. 1.19 "XenoMouse" and "XenoMouse Animals" shall mean one or more transgenic - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 4 27 mice provided by ABX to MBio for immunization with the Product Antigen under the RCA or the Research License and Option Agreement. 1.20 "Xenotech Agreement" shall mean that certain Master Research License and Option Agreement entered into by JTI, XT and Cell Genesys, Inc. effective as of June 28, 1996, and subsequently assigned to ABX by Cell Genesys, Inc., as the same may be amended from time to time. 1.21 "XT" shall mean Xenotech, L.P., a California limited partnership. 1.22 "XT-ABX Product License" shall mean a license granted from XT to ABX pursuant to the terms of the Xenotech Agreement permitting ABX to commercialize certain products in one or more territories. 2. LICENSE GRANT 2.1 Grant of Rights. Subject to the terms and conditions of this Agreement, ABX hereby grants to MBio an exclusive license or sublicense, as the case may be, under the Licensed Technology, to make and have made Product anywhere in the world and to use, sell, lease, offer to sell or lease, import, export, otherwise transfer physical possession of or otherwise transfer title to Product for use in the Field in the Territory and for no other purpose. 2.2 Sublicenses. MBio may grant a Sublicense under Section 2.1 to an Affiliate or other third party; provided, however, that (i) any such Sublicense shall be subject and subordinate to the terms and conditions of this Agreement; (ii) any such Sublicensee shall agree in writing to be bound by the terms and conditions of this Agreement; (iii) MBio shall remain responsible for any such Sublicensee's performance hereunder and for all payments due to ABX hereunder with respect to Net Sales of Products by any such Sublicensee; and (iv) MBio shall provide ABX with a copy of each such sublicense agreement promptly after execution of the same (provided that the financial terms may be redacted therefrom). Notwithstanding the foregoing, MBio shall in no event have the right to Sublicense any right under this Agreement in or to a XenoMouse Animal or other transgenic animal covered by the Licensed Technology. 2.3 No Other Rights. No rights other than those expressly set forth in this Agreement are granted to MBio hereunder, and no additional rights shall be deemed granted to MBio by implication, estoppel or otherwise. Without limiting the foregoing, the rights of MBio under this Agreement are subject and subordinate in all respects to the provisions of Section 2.2 of the Research License and Option Agreement. 3. CONSIDERATION. 3.1 License Fee. Within fifteen (15) days after the Effective Date, MBio shall pay to ABX [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5 28 3.2 Milestone Payments. 3.2.1 Amounts. Within thirty (30) days following the first achievement by MBio (or any of its Affiliates or Sublicensees) of each the following milestones with respect to each Product licensed under this Agreement, on a Product-by-Product basis, MBio shall pay to ABX [*]
Milestone Payment --------- ------- A [*] B [*] C [*] D [*]
3.2.2 Terminology. As used herein, [*]. In the event milestone D above is met, and at such time either one or both of milestones A or B have not been met, the payment for all such unmet milestone payments shall then be due. 3.3 Royalties. MBio shall notify ABX of the date of commercial introduction of each Product into each country in the Territory, which shall mean, on a country-by-country basis in the Territory, the date of first commercial sale (other than for purposes of obtaining regulatory approval) of such Product by MBio, its Affiliate or any Sublicensee to an unaffiliated third party in such country (with respect to each Product in each country, hereinafter, the "Royalty Commencement Date"). 3.3.1 MBio Net Sales. In consideration of the license granted herein, MBio shall pay to ABX a royalty on MBio Net Sales as follows: - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 6 29 [*] 3.3.2 Sublicensee Net Sales. In consideration of the license granted herein, MBio shall pay to ABX a royalty on Sublicensee Net Sales equal to [*] Notwithstanding anything to the contrary in this Agreement (other than as provided in Section 3.6.3 below), the royalty amount payable to ABX under this Section 3.3.2 with respect to Sublicensee Net Sales for any Product in any country shall [*] of Sublicensee Net Sales of such Product in such country; provided, further, that if the royalty increase pursuant of Section 3.3.3 also applies, the royalty amount payable to ABX under this Section 3.3.2 with respect to Sublicensee Net Sales for such Product in such country shall [*] 3.3.3 Use of [*]. The applicable royalty rates set forth in Sections 3.3.1 and 3.3.2 above for sales of a Product in a given country shall be [*] of Net Sales of such Product if (a) there is a Patent Claim within the [*] in the country where such Products are made or sold and which would be infringed by making or selling such Product in such country, or (b) the Product utilizes or is based on, derived from, or produced using, [*] or any know-how thereof. 3.3.4 Length of Term of Royalty Obligations. MBio's obligation to pay royalties on Net Sales of each Product under this Agreement shall commence on a country-by-country basis on the Royalty Commencement Date for such Product in such country as defined in Section 3.3 above, and continue thereafter for such Product on a country-by-country basis until the later of [*] 3.3.5 Royalty Payable Only Once. The obligation to pay royalties shall be imposed only once with respect to the same unit of Product sold by MBio, its Affiliates or - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 7 30 Sublicensee; provided, however, if a unit of Product is sold by MBio or its Affiliates to a Sublicensee for resale, then the royalty shall be imposed on the resale of such unit of Product by such Sublicensee. 3.3.6 Third Party Royalty Offset. (a) In the event that MBio believes, in its reasonable and good faith belief, that in order for it to be able to manufacture and sell a Product hereunder in a commercially feasible manner it must utilize technology that is covered by a "Recombinant Expression Patent," and MBio does so utilize such technology and does enter in to a license agreement under such Recombinant Expression Patent with a non-Affiliate third party, and is obligated to pay a running royalty thereunder in accordance with the sale of such Product under such license, MBio may offset [*] of any running royalty payments made by MBio to such third party on sales of such Product in a particular county, against the royalty amounts due to ABX under this Section 3.3 on Net Sales of such Product in such county; provided, however, that the royalty amount payable to ABX under this Section 3.3 with respect to such Net Sales for such Product in such country shall not be reduced pursuant to this Section 3.3.3 to an amount below [*] of Net Sales of such Product. (b) For purposes of this Section 3.3.6, such "Recombinant Expression Patent" shall mean an issued, unexpired patent that is owned or controlled by a third party (other than ABX, a Sublicensee, or an Affiliate of either MBio or its Sublicensee) that has not been invalidated in a final unappealed or unappealable judgment by a court of competent jurisdiction, which patent covers the expression of Antibodies from recombinant cell lines in which a recombinant Antibody Cell that produces Product is generated through the cointroduction into a cell of Genetic Materials encoding heavy chain immunoglobulin genes and light chain immunoglobulin genes and which patent would be infringed by the sale of Products but for MBio's obtaining a royalty-bearing license under such patent (other than pursuant to this Agreement) in order to commercialize Products in the Field under this Agreement. 3.4 Discounting. If MBio or its Affiliate or Sublicensee sells any Product to a third party who also purchases other products or services from MBio, its Affiliate or Sublicensee, MBio agrees not to, and requires its Affiliate and Sublicensee not to, discount the sales price of the Products to a greater degree than MBio, its Affiliate or Sublicensee, respectively, generally discounts the price of its other products to such customer. 3.5 Royalties To Be Paid By ABX. It is understood that, subject to the terms and conditions of this Agreement, including without limitation MBio's payment of royalties as set forth herein, ABX will be responsible to make the royalty payments to third parties as set forth in Attachment C in respect of Net Sales of Products in accordance with this Agreement, and that MBio may not offset such payments under Section 3.3.3. 3.6 Core Third Party Patents. 3.6.1 Procedure. If either party becomes aware of any Core Third Party Patent during the term of this Agreement, or any pending patent application that would be a Core - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8 31 Third Party Patent if issued, such party shall promptly notify the other party and, except to the extent that such party is prohibited under a duty of confidentiality from disclosing such information, provide a reasonably detailed summary of its knowledge regarding such patent or patent application (including, by way of example and without limitation, the identity of the person that owns or controls such patent, the subject matter of the patent or application, and any available information about terms offered or asked with respect to licenses under such patents). ABX shall have the first right to negotiate with any third party for a license under any Core Third Party Patent; provided, however, that neither ABX nor MBio (nor its Sublicensees) shall be obligated to negotiate for, or obtain, such a license; provided, further, that if ABX elects not to negotiate for such a license it shall promptly notify MBio of such election, and MBio shall thereafter be free to negotiate such a license on its own behalf. 3.6.2 Royalty Payments. If ABX enters into a license under any Core Third Party Patent, such patent shall be sublicensed to MBio hereunder if, and only to the extent, MBio elects to take a Sublicense to such patent under the terms negotiated by ABX; provided, however, subject to Section 3.6.3 below, MBio shall pay to ABX the royalties (if any) owed by ABX under such Core Third Party Patent for the Net Sales of Products in the Territory by MBio and its Sublicensees in addition to any other royalties payable to ABX under Section 3.3. The parties hereto agree to discuss and negotiate in good faith regarding the manner in which the licensing fees, milestones, and up-front payments (if any) owed by ABX under such license may be shared between the parties hereto. 3.6.3 Royalty Offset. MBio may offset [*] of any royalty payments made by MBio pursuant to Section 3.6.2 above, either to ABX or to a third party in consideration for a license under any Core Third Party Patent on sales of a particular Product in a particular county, against the other royalty amounts due to ABX under Section 3.3 on Net Sales of such Product in such county; provided, however, that the royalty amount payable to ABX under Section 3.3 with respect to such Net Sales for such Product in such country shall not be reduced pursuant to this Section 3.6.3 to an amount below [*] of Net Sales of such Product in such country; provided, further, that if the royalty increase pursuant of Section 3.3.3 also applies, the royalty amount payable to ABX under this Section 3.3 with respect to such Net Sales for such Product in such country shall not be reduced pursuant to this Section 3.6.3 to an amount below [*] of Net Sales of such Product in such country. Any deduction hereunder, or portion thereof, that is rendered not usable pursuant to deduction limitations set forth above may be carried forward for use in a future royalty payment period, which deduction carry-forwards shall not result in royalty payments lower than the foregoing minimum royalty payments. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9 32 4. ACCOUNTING AND RECORDS. 4.1 Royalty Reports; Payments, Invoices. After the first commercial sale of Product on which royalties are required to be paid by MBio under Article 3 above, MBio agrees to make [*] written reports to ABX within [*] after the end of each [*], stating in each such report [*]. These reports may be combined with reports due under Section 5.4. Concurrently with the making of such reports, MBio shall pay to ABX all amounts payable pursuant to Article 3 above. All payments to ABX hereunder shall be made in U.S. Dollars to a bank account designated by ABX. 4.2 Records; Inspection. MBio shall keep (and cause its Affiliates and Sublicensees to keep) complete, true and accurate books of account and records for the purpose of determining the royalty amounts payable to ABX under this Agreement. Such books and records shall be kept at the principal place of business of MBio or its Affiliates or Sublicensees, as the case may be, for at least three years following the end of the calendar quarter to which they pertain. Such records of MBio or its Affiliates will be open for inspection during such three-year period by representatives of ABX (which representatives may also represent XT) for the purpose of verifying the royalty statements. MBio shall require each of its Sublicensees to maintain similar books and records and to open such records for inspection during the same three-year period by a representative of MBio reasonably satisfactory to ABX on behalf of, and as required by, ABX for the purpose of verifying the royalty statements. All such inspections may be made no more than once each calendar year at reasonable times mutually agreed by MBio and ABX. The representative of ABX will be obliged to execute a reasonable confidentiality agreement prior to commencing any such inspection. Inspections conducted under this Section 4.2 shall be at the expense of ABX, unless a variation or error producing an increase exceeding [*] of the amount stated for any period is established in the course of any such inspection, whereupon all costs relating to the audit of such period will be paid by MBio. 4.3 Payment Method. All payments due hereunder shall be made in U.S. dollars, and shall be made by bank wire transfer in immediately available funds to an account designated by ABX. 4.4 Currency Conversion. If any currency conversion shall be required in connection with the calculation of royalties hereunder, such conversion shall be made using the selling exchange rate for conversion of the foreign currency into U.S. Dollars, quoted for current transactions reported in The Wall Street Journal for the last business day of the calendar quarter to which such payment pertains. 4.5 Late Payments. Any payments due from MBio that are not paid on the date such payments are due under this Agreement shall bear interest at the lesser of (i) the prime rate as reported by the Bank of America in San Francisco, California on the date such payment is due, [*], or (ii) the maximum rate permitted by applicable law, in each case calculated on the number of days such payment is delinquent. This Section 4.5 shall in no way limit any other remedies available to any party. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 10 33 4.6 Withholding Taxes. All payments required to be made pursuant to Article 3 hereof shall be without deduction or withholding for or on account of any taxes or similar governmental charge imposed by a jurisdiction, such taxes being referred to herein as "Withholding Taxes." Withholding Taxes shall be the sole responsibility of the withholding party. The withholding party shall provide a certificate evidencing payment of any Withholding Taxes hereunder. 5. DILIGENCE. 5.1 General. [*] 5.2 Filing of IND. Without limiting Section 5.1 above, MBio, its Affiliate or Sublicensee shall file an IND with the U.S. FDA for one or more Products under this Agreement [*]; provided, however, if MBio, its Affiliate or Sublicensee has failed to file an IND with the U.S. FDA for one or more Products under this Agreement [*], such failure shall not constitute a material breach under Section 10.2 below if, and (except as provided below) for so long as, MBio, its Affiliate or Sublicensee then uses and thereafter continues to use its best efforts to file an IND with the U.S. FDA for one or more Products under this Agreement [*]; provided, further, in any event, MBio, its Affiliate or Sublicensee shall file an IND with the U.S. FDA for one or more Products under this Agreement [*] of the date of the XT-ABX Product License regarding the Product Antigen. After the filing of an IND for a Product, MBio, its Affiliate or Sublicensee shall be required to have an active IND and to be actively and diligently conducting clinical trials in pursuit of regulatory approval for the Product in the United States until such Product may be sold commercially in the United States. 5.3 Failure to Meet Due Diligence Obligation. If the diligence requirements set forth in Section 5.1 and 5.2 are not met by MBio (or its Sublicensees), ABX shall have the right to terminate this Agreement pursuant to Section 9.2 below; provided, however, with respect to a default under Section 5.1 or 5.2 above, the notice and cure period under Section 9.2 below shall be extended from thirty (30) to ninety (90) days. 5.4 Research and Development Reports. MBio agrees to keep ABX reasonably informed as to the research, development and commercialization of Products hereunder. [*] 5.5 No Conflicts. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 11 34 5.5.1 Other Products. During the term of this Agreement, MBio shall not directly or indirectly sell or commercialize for human medical use, or conduct human clinical development toward the human medical use of any product (other than the Products licensed hereunder), incorporating (i) an antibody, antibody fragment or amino acid sequence derived from an antibody, in each case which binds to the Product Antigen or (ii) Genetic Material encoding such any such composition. 5.5.2 Discounting. In the event that MBio or its Affiliates sells Product to a third party who also purchases other products or services from MBio or its Affiliate, and MBio or its Affiliates discounts the purchase price of the Product to a greater degree than MBio or its Affiliate, respectively, generally discounts the price of their other products to such customer, then in such case the Net Sales for the sale of Products to such third party shall be deemed to equal the arm's length price that third parties would generally pay for the Product alone when not purchasing any other product or service from MBio or its Affiliate. For purposes of this provision "discounting" includes establishing the list price at a lower-than-normal level. 5.6 Gene Therapy Applications. MBio's intention as of the Effective Date is to commercialize a Product hereunder for an application other than Gene Therapy before commercializing a Product hereunder for a Gene Therapy application. It is understood, however, that MBio may or may not also intend to develop and sell Products for use in Gene Therapy, and that such Gene Therapy application may ultimately be commercialized before a Product is commercialized hereunder for a non-Gene Therapy application. As used herein, "Gene Therapy" shall mean [*] 6. INTELLECTUAL PROPERTY. 6.1 Prosecution. Subject to Sections 6.2 and 6.6, ABX or its licensor, as they may agree, shall have the right to control the preparing, filing, prosecuting and maintaining of patents - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 12 35 and patent applications worldwide within the Licensed Technology and conducting any interferences, oppositions, reexaminations, or requesting reissues or patent term extensions with respect to the Licensed Technology. 6.2 Joint Intellectual Property. Notwithstanding anything to the contrary in this Article 6, MBio shall have the sole right and responsibility (but not the obligation), at its expense, to file, prosecute, maintain and enforce all patent applications (and to conduct any interferences, oppositions, or reexaminations thereon, and to request any reissues or patent term extensions thereof) that claim the Joint Intellectual Property (as defined in Section 4.4 of the Research License and Option Agreement) in accordance with the terms and conditions of Article 4 of the Research License and Option Agreement. 6.3 Enforcement. Subject to Section 6.2 and 6.6, in the event that MBio becomes aware that any Licensed Technology necessary for the practice of the license granted herein is infringed or misappropriated by a third party or is subject to a declaratory judgment action arising from such infringement in each case with respect to a composition that binds to the Product Antigen and is competitive with Products hereunder (an "Infringement") MBio shall promptly notify ABX. As between MBio, its Sublicensees and ABX, ABX shall have the exclusive right at its expense to bring an enforcement proceeding, or defend any declaratory judgment action, involving any Licensed Technology with respect to an Infringement. ABX shall keep MBio reasonably informed of the progress of such claim, suit or proceeding with respect to an Infringement involving enforcement or defense of the Licensed Technology. Any recovery received by ABX as a result of any such claim, suit or proceeding shall be used first to reimburse ABX for all expenses (including attorneys, and professional fees) incurred in connection with such claim, suit or proceeding, and the remaining amount (if any) retained by ABX, after paying amounts ABX is obligated to pay to third parties in respect of such amount pursuant to applicable ABX In-Licenses shall be divided, to the extent that the recovery expressly represents lost profits on sales of Product within the Field because of the Infringement, in equal shares between ABX and MBio. Notwithstanding the foregoing, if ABX notifies MBio that it does not desire to pursue an enforcement action, or defend a declaratory judgment action, with respect to a substantial and continuing Infringement, then to the extent such action involves a Product Composition Claim MBio may at its expense bring or defend such action in consultation with ABX; provided, however, that (i) ABX shall have the right to join such proceeding at any time at its own expense, (ii) MBio shall not admit the invalidity or unenforceability of any patent rights within the Licensed Technology without ABX's prior written consent, and (iii) if ABX does not join the action, any recovery obtained by MBio shall be used first to reimburse MBio for all expenses (including attorneys, and professional fees) incurred in connection with such claim, suit or proceeding, and the remaining amount (if any) retained by MBio after reimbursing ABX for any amounts ABX is obligated to pay to third parties in respect of such amount pursuant to applicable ABX In-Licenses shall be divided evenly between ABX and MBio. 6.4 Infringement Claims. Subject to Section 6.6, if the production, sale or use of Product pursuant to this Agreement results in any claim, suit or proceeding alleging patent infringement against MBio (or its Affiliates or Sublicensees), MBio shall promptly notify ABX thereof in writing setting forth the facts of such claim in reasonable detail. MBio shall keep 13 36 ABX reasonably informed of all material developments in connection with any such claim, suit or proceeding as it relates to the Licensed Technology. Notwithstanding the above, MBio shall not admit the invalidity of any patent within the Licensed Technology without written consent from ABX. 6.5 Patent Marking. MBio agrees to mark and have its Affiliates and all Sublicensees mark all Products sold pursuant to this Agreement in accordance with the applicable statutes or regulations in the country or countries of manufacture and sale thereof. 6.6 Limitation. Notwithstanding any other provision in this Article 6, the parties acknowledge and understand that (i) ABX shall not be obligated to prepare, file, prosecute, and maintain patents and patent applications, or to bring or pursue enforcement proceedings or defend declaratory judgment actions regarding the Licensed Technology if, and to the extent that, ABX is not entitled to do so under one or more ABX In-Licenses, and (ii) any rights conveyed under this Article 6 permitting MBio to prepare, file, prosecute and maintain certain patents and patent applications, or to bring and pursue enforcement proceedings, or defend declaratory judgment actions, regarding the Licensed Technology, shall be subject to all applicable ABX In-Licenses, and are conveyed only to the extent permitted under such agreements. 7. CONFIDENTIALITY. 7.1 Confidentiality. Except as expressly provided herein, MBio and ABX each shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose any Confidential Information of the other, whether or not furnished to it by the other party pursuant to this Agreement (including, without limitation, know-how) until the later of (i) ten (10) years from the Effective Date or (ii) five (5) years following the expiration or termination of this Agreement. 7.2 Permitted Disclosure. Notwithstanding Section 7.1 above, each party may nevertheless disclose the other party's Confidential Information to the extent such disclosure is required by applicable law, regulation or court order, provided that if a party is required by law to make any such disclosure of the other party's Confidential Information, other than pursuant to a confidentiality agreement, it will give reasonable advance notice to the other party of such disclosure requirement and will use efforts consistent with prudent business judgment to secure confidential treatment of such information prior to its disclosure (whether through protective orders or confidentiality agreements or otherwise). It is understood that the expiration of MBio's obligations under Section 7.1 above shall not be deemed to limit MBio's obligations under Section 2.2 of the Research License and Option Agreement. 7.3 Terms of Agreement. Neither party shall disclose any terms or conditions of this Agreement to any third party without the prior consent of the other party; provided, however, that a party may disclose the terms or conditions of this Agreement, (i) on a need-to-know basis to its Affiliates including, but not limited to, for MBio, Millennium Pharmaceuticals, Inc., Millennium Information, Inc., Millennium Predictive Medicine, Inc., plus any future Affiliates that own a majority of the stock of MBio or that MBio owns a majority of the stock thereof (and 14 37 any affiliated companies that own a majority of the stock of Millennium Pharmaceuticals, Inc. or that Millennium Pharmaceuticals, Inc. owns a majority of the stock thereof), and for Abgenix, Xenotech L.P. plus any future Affiliates that own a majority of the stock of Abgenix or that Abgenix owns a majority of the stock thereof) and to its/their legal and financial advisors to the extent such disclosure is reasonably necessary in connection with such party's activities as expressly permitted by this Agreement, (ii) to a third party in connection with (A) an equity investment in such party by a third party, (B) a merger, consolidation or similar transaction entered into by such party, or (C) the sale of all or substantially all of the assets of such party, and (iii) as may, in the reasonable opinion of such party's counsel, be required by applicable law, regulation or court order, including without limitation, a disclosure in connection with such party's filing of a registration statement or other filing with the United States Securities and Exchange Commission (in which event such party will first consult with the other party with respect to such disclosure). Notwithstanding the foregoing, prior to execution of this Agreement Abgenix and MBio shall agree upon the substance of information that can be used to describe the terms of this transaction, and each party may disclose such information, as modified by written agreement of Abgenix and MBio from time to time, without the consent of the other. 8. INDEMNIFICATION 8.1 MBio. MBio shall indemnify and hold harmless ABX, and its directors, officers, employees and agents, from and against all losses, liabilities, damages and expenses, including reasonable attorneys' fees and costs (collectively, "Liabilities"), resulting from any claims, demands, actions or other proceedings by any third party arising from (i) the material breach of any representation, warranty or covenant by MBio under this Agreement, (ii) the manufacture, use, sale, handling or storage by MBio, its Affiliates or Sublicensees of the Products (without regard to the foregoing entities' culpable conduct), or (iii) any use by MBio, its Affiliates or Sublicensees of the Confidential Information of ABX; provided, however, that MBio shall not be obligated to indemnify or hold harmless ABX for such Liabilities to the extent that such Liabilities arise from (a) the gross negligence or willful misconduct of ABX, or (b) the misappropriation by ABX of the trade secrets or other proprietary information of a Third Party. 8.2 ABX. ABX shall indemnify and hold harmless MBio, and its directors, officers, employees and agents, from and against all Liabilities resulting from any claims, demands, actions or other proceedings by any third party arising from (i) the material breach of any representation, warranty or covenant by ABX under this Agreement, or (ii) any use by ABX of the Confidential Information of MBio; provided, however, that ABX shall not be obligated to indemnify or hold harmless MBio for such Liabilities to the extent that such Liabilities arise from (a) the gross negligence or willful misconduct of MBio, or (b) the misappropriation by MBio of the trade secrets or other proprietary information of a Third Party. 8.3 Procedure. If a party (an "Indemnitee") intends to claim indemnification under this Article 8, it shall promptly notify the indemnifying party (the "Indemnitor") in writing of any claim, demand, action or other proceeding for which the Indemnitee intends to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, to assume the defense thereof with counsel mutually satisfactory to the 15 38 parties; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitor, if representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceeding. The indemnity agreement in this Article 8 shall not apply to amounts paid in settlement of any claim, demand, action or other proceeding if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld or delayed unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 8, but the omission so to deliver written notice to the Indemnitor shall not relieve it of any liability that it may have to any party claiming indemnification otherwise than under this Article 8. The party claiming indemnification under this Article 8, its employees and agents, shall reasonably cooperate with the Indemnitor and its legal representatives in the investigation of any claim, demand, action or other proceeding covered by this indemnification. 8.4 Insurance. MBio shall secure and maintain (a) general liability insurance at all times during the term of this Agreement, and (b) product liability insurance at all times commencing upon the initiation of any human clinical trials of Products by MBio, its Affiliate or Sublicensee, in each case with respect to the development, manufacture and sales of Products in such amount as MBio customarily maintains with respect to the development, manufacture and sale of its other products. ABX shall be named as an additional insured on any such MBio product liability insurance policies. MBio shall maintain such insurance for so long as it continues to develop, manufacture or sell any Products, and thereafter for so long as MBio customarily maintains insurance for itself covering the development, manufacture and sale of its other products. 9. REPRESENTATIONS AND WARRANTIES. 9.1 ABX. 9.1.1 ABX represents and warrants that: (i) it has the full right, power and authority to enter into this Agreement and to grant the rights and licenses hereunder; (ii) to the knowledge of ABX, there are no existing or threatened actions, suits or claims pending with respect to the subject matter hereof or the right of ABX to enter into and perform its obligations under this Agreement; (iii) it has taken all necessary action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; (iv) this Agreement has been duly executed and delivered on behalf of it, and constitutes a legal, valid, binding obligation, enforceable against it in accordance with the terms hereof; and (v) the execution and delivery of this Agreement and the performance of its obligations hereunder do not conflict with or violate any requirement of applicable laws or regulations and do not conflict with, or constitute a default under, any contractual obligation of it. 9.1.2 ABX further represents and warrants that: 16 39 (i) on or before the Effective Date, it has provided to MBio complete copies of all applicable ABX In-Licenses (including without limitation the GenPharm Cross License Agreement) setting forth all applicable rights, limitations and restrictions described in Section 10.10 below (it being understood that the financial terms have been redacted from some or all such copies); (ii) based upon information provided to ABX by MBio concerning MBio's intellectual property rights in the Antigen, and to the best of ABX's knowledge (without the obligation to perform due diligence), (a) ABX has obtained from XT an XT-ABX Product License with respect to the Antigen that is an "Exclusive Worldwide Product License" (as defined in the Xenotech Agreement and in the form attached thereto as an exhibit); (b) the license or sublicense granted to ABX pursuant to such XT-ABX Product License with respect to the Antigen shall be exclusive even as to XT; and (c) JTI does not have the right under the Xenotech Agreement to obtain an "Exclusive Home Territory Product License" or a "Co-Exclusive Worldwide Product License" (as these are defined in the Xenotech Agreement and attached thereto as exhibits) with respect to the Antigen, or any other right or license under the Licensed Technology to develop, make and have made, use, sell, lease, offer to sell or lease, import, export, otherwise transfer physical possession of or otherwise transfer title to Products for use in the Field; except, in each case, with respect to the research license set forth in Article 3 of the Xenotech Agreement; (iii) ABX has nominated the Antigen under [*] the Xenotech Agreement and taken all other actions as required under the Xenotech Agreement to obtain an "Exclusive World Wide Product License" under the Xenotech Agreement with respect to the Antigen; and (iv) the XT-ABX Product License which has been executed by XT and ABX is substantially identical (i.e., other than with respect to the effective date thereof and the definition of the antigen under such agreement) to the form agreement attached to the Research License and Option Agreement as Exhibit D (it being understood that the financial terms may be redacted from such form agreement). 9.1.3 ABX has provided MBio with a copy of such fully-executed XT-ABX Product License (it being understood that the financial terms may have been redacted from such copy). At any time during the term of this Agreement at the request of MBio, ABX shall discuss with MBio ABX's interpretation of material terms and conditions of the applicable ABX In-Licenses, including, without limitation, the XT-ABX Product License and any limitations on ABX's right to further transfer or grant licenses or sublicenses to MBio to any and all rights to technology within the scope of the ABX Patent Rights and/or ABX Know-How under any ABX In-License. 9.2 MBio. MBio represents and warrants that: (i) it has the full right, power and authority to enter into this Agreement; (ii) to the knowledge of MBio, there are no existing or threatened actions, suits or claims pending with respect to the subject matter hereof or the right of MBio to enter into and perform its obligations under this Agreement; (iii) it has taken all necessary action on its part to authorize the execution and delivery of this Agreement and the - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 17 40 performance of its obligations hereunder; (iv) this Agreement has been duly executed and delivered on behalf of it, and constitutes a legal, valid, binding obligation, enforceable against it in accordance with the terms hereof; (v) the execution and delivery of this Agreement and the performance of its obligations hereunder do not conflict with or violate any requirement of applicable laws or regulations and do not conflict with, or constitute a default under, any contractual obligation of it; and (vi) it will not take any action, or fail to take any action, under this Agreement that will cause a breach of the GenPharm Cross License Agreement, the Xenotech Agreement or the Product License. 9.3 Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATIONS OR EXTENDS ANY WARRANTIES OF ANY KIND REGARDING ABX MATERIALS, PRODUCTS OR THE LICENSED TECHNOLOGY, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, AND VALIDITY OF TECHNOLOGY OR PATENT CLAIMS, ISSUED OR PENDING. ALL XENOMOUSE ANIMALS AND MATERIALS DERIVED IN WHOLE OR PART FROM XENOMOUSE ANIMALS PROVIDED TO MBio PURSUANT TO THIS AGREEMENT ARE PROVIDED "AS IS," AND ABX SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT WITH RESPECT TO SUCH XENOMOUSE ANIMALS AND MATERIALS DERIVED IN WHOLE OR PART FROM XENOMOUSE ANIMALS. 9.4 Effect of Representations and Warranties. It is understood that if the representations and warranties under this Article 9 are not true and accurate and a party incurs liabilities, costs or other expenses as a result of such falsity, the party at fault shall indemnify, defend and hold the injured party harmless from and against any such liabilities, costs or expenses incurred, provided that the party at fault receives prompt notice of any claim against the injured party resulting from or related to such falsity and the sole right to control the defense or settlement thereof. 10. TERM AND TERMINATION. 10.1 Term. The term of this Agreement shall commence on the Effective Date and, unless earlier terminated as provided in this Article 10, shall continue in full force and effect on a Product-by-Product and country-by-country basis until the expiration of all royalty obligations pursuant to this Agreement for such Product in such country. Following the expiration, but not earlier termination, of this Agreement on a Product-by-Product and country-by-country basis, MBio shall have a fully-paid up, perpetual, non-exclusive license under the ABX Know-How solely to commercialize such Product in such country. 10.2 Termination for Breach. In the event that a party shall have materially breached or defaulted in the performance of any of its material obligations hereunder, and such breach or default shall have continued for thirty (30) days after written notice of such breach was provided to the breaching party by the nonbreaching party, the non-breaching party shall have the right at 18 41 its option to terminate this Agreement effective at the end of such thirty-day period unless the breaching party has cured any such breach or default prior to the expiration of the thirty-day period. 10.3 Termination by MBio. MBio may terminate this Agreement and the license granted herein at any time, by providing ABX ninety (90) days written notice. 10.4 Termination for Insolvency. Either party may terminate this Agreement if the other becomes the subject of a voluntary or involuntary petition in bankruptcy or any proceeding relating to insolvency, receivership, liquidation, or dissolution, and such petition or proceeding is not dismissed with prejudice within sixty (60) days after filing. 10.5 Effect of Termination. 10.5.1 Accrued Obligations. Termination of this Agreement for any reason shall not release either party hereto from any liability which at the time of such termination has already accrued to the other party or which is attributable to a period prior to such termination, nor preclude either party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued are based upon events occurring prior to such termination. 10.5.2 Stock in Hand; Sublicenses. In the event this Agreement is terminated for any reason, MBio and its Affiliates and Sublicensees shall have the right to sell or otherwise dispose (consistent with all applicable regulations and law and subject to Articles 3 and 4 of this Agreement) of the stock of any Product subject to this Agreement then on hand. Upon termination of this Agreement by ABX for any reason, any sublicense granted by MBio hereunder shall survive, provided that upon request by ABX, such Sublicensee promptly agrees in writing to be bound by the applicable terms of this Agreement. 10.5.3 Research License and Option Agreement. This Agreement is independent of, and shall not be affected by, the expiration or termination of the Research License and Option Agreement; provided that notwithstanding the foregoing, any breach by MBio of the surviving provisions of the Research License and Option Agreement shall be a breach of this Agreement. 10.5.4 Survival. Articles 3, 4, 7, 8 and 11 and Section 9.3 shall survive the expiration and any termination of this Agreement for any reason. 11. MISCELLANEOUS. 11.1 Governing Laws. This Agreement shall be governed by, interpreted and construed in accordance with the laws of the State of California, without regard to conflicts of law principles. 11.2 Waiver. It is agreed that no waiver by any party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any 19 42 subsequent and/or similar breach or default. 11.3 Assignments. Neither this Agreement nor any right or obligation hereunder may be assigned or delegated, in whole or part, by either party without the prior written consent of the other; provided, however, that either party may, without the written consent of the other, assign this Agreement and its rights and delegate its obligations hereunder (i) to any Affiliate of such party, or (ii) in connection with the transfer or sale of all or substantially all of its business, or in the event of its merger, consolidation, change in control or similar transaction. Any permitted assignee shall assume all obligations of its assignor under this Agreement. Any purported assignment in violation of this Section 11.3 shall be void. 11.4 Independent Contractors. The relationship of the parties hereto is that of independent contractors. The parties hereto are not deemed to be agents, partners or joint venturers of the others for any purpose as a result of this Agreement or the transactions contemplated thereby. 11.5 Further Actions. Each party agrees to execute, acknowledge and deliver such further instruments and to do all such other acts as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 11.6 Notices. All requests and notices required or permitted to be given to the parties hereto shall be given in writing, shall expressly reference the section(s) of this Agreement to which they pertain, and shall be delivered to the other party, effective on receipt, at the appropriate address as set forth below or to such other addresses as may be designated in writing by the parties from time to time during the term of this Agreement. Millennium Biotherapeutics, Inc.: Millennium Biotherapeutics, Inc. 620 Memorial Drive Cambridge, Massachusetts 02139 Telecopier: 617-374-7653 Attn: General Manager Abgenix, Inc.: Abgenix, Inc. 7601 Dumbarton Circle Fremont, California 94555 Attn: President with a copy to: Pillsbury Madison & Sutro LLP 101 West Broadway, Suite 1800 San Diego, California 92101 Attn: Mark R. Wicker 20 43 11.7 No Implied Licenses. Only licenses and rights granted expressly herein shall be of legal force and effect. No license or other right shall be created hereunder by implication, estoppel or otherwise. 11.8 Export Laws. Notwithstanding anything to the contrary contained herein, all obligations of ABX and MBio are subject to prior compliance with United States export regulations and such other United States laws and regulations as may be applicable, and to obtaining all necessary approvals required by the applicable agencies of the government of the United States. MBio shall be responsible for obtaining such approvals, and shall use efforts consistent with prudent business judgment to obtain such approvals. ABX agrees to cooperate reasonably with MBio and provide reasonable assistance to MBio as may be reasonably necessary to obtain any required approvals. 11.9 Third Party Rights. Notwithstanding anything to the contrary in this Agreement, the grant of rights by ABX under this Agreement shall be subject to and limited in all respects by the terms of the applicable ABX In-License(s) pursuant to which ABX acquired any Licensed Technology, and all rights or sublicenses granted under this Agreement shall be limited to the extent that ABX may grant such rights and sublicenses under such ABX In-Licenses. Additionally, and without limiting the foregoing, the rights granted to MBio hereunder, including without limitation any grant of "exclusive" rights, shall be subject to the rights granted to or retained by GenPharm under the GenPharm Cross License Agreement. 11.10 Force Majeure. Nonperformance of any party (other than for the payment of money) shall be excused to the extent that performance is rendered impossible by strike, fire, earthquake, flood, governmental acts or orders or restrictions, failure of suppliers, or any other reason where failure to perform, is beyond the reasonable control and not caused by the negligence, intentional conduct or misconduct of the nonperforming party. 11.11 Complete Agreement. It is understood and agreed between ABX and MBio that this Agreement constitutes the entire agreement, both written and oral, between the parties with respect to the subject matter hereof, and that all prior agreements respecting the subject matter hereof, either written or oral, expressed or implied, shall be abrogated, canceled, and are null and void and of no effect. No amendment or change hereof or addition hereto shall be effective or binding on either of the parties hereto unless reduced to writing and executed by the respective duly authorized representatives of ABX and MBio. 11.12 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and both together shall be deemed to be one and the same agreement. 11.13 Headings. The captions to the several Articles and Sections hereof are not a part of this Agreement, but are included merely for convenience of reference only and shall not affect its meaning or interpretation. 21 44 IN WITNESS WHEREOF, the parties have executed this Agreement, through their respective officers hereunto duly authorized, as of the day and year first above written. ABGENIX, INC. MILLENNIUM BIOTHERAPEUTICS, INC. By: ____________________________ By: _____________________________ Printed Name: __________________ Printed Name: ___________________ Title: _________________________ Title: __________________________ Date: __________________________ Date: ___________________________ 22 45 ATTACHMENT A ABX PATENT RIGHTS 23 46 ATTACHMENT B ABX EXPRESSION TECHNOLOGY 24 47 ATTACHMENT C ABX IN-LICENSES 25 48 EXHIBIT B I. PURSUANT TO THE MRLOA A. Any (i) of the patent applications listed in the following Table: [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 49 and patents issuing thereon, (ii) continuations, divisionals, reexamination certificates, reissues, or extensions thereof, and (iii) any foreign counterparts issued or issuing on any of (i) or (ii) above. B. Pursuant to the License Agreement by and between the [*] [*] C. Pursuant to the Agreement between the [*] [*] D. Pursuant to the Material Transfer and License Agreement by and between [*] [*] E. Pursuant to Agreements between [*] [*] II. PURSUANT TO THE GENPHARM CROSS LICENSE A. [*] (i) any continuations, continuations-in-part, patents of addition, divisionals, reexamination certificates, reissues or extensions, including supplemental protection certificates thereof, (ii) any patents issuing from such application or - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2 50 upon an application under (i), and (iii) foreign counterparts applied for, issued, or issuing on such application or any of (i) or (ii). B. [*] including (i) any continuations, continuations-in-part, patents of addition, divisionals, reexamination certificates, reissues or extensions, including supplemental protection certificates thereof, (ii) any patents issuing from such application or upon an application under (i), and (iii) foreign counterparts applied for, issued, or issuing on such application or any of (i) or (ii). C. Pursuant to a License Agreement dated [*] [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3 51 EXHIBIT C [*] Any (i) of the patents or patent applications listed in the following Table: [*] (ii) all patents that have issued or in the future issue from any of the foregoing patent applications, including without limitation utility, model and design patents and certificates of invention; and (iii) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications and patents issuing thereon, and (iv) any foreign counterparts issued or issuing on any of (i), (ii), or (iii) above. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 1 52 EXHIBIT D FORM OF ABX-XT PRODUCT LICENSE THIS PRODUCT LICENSE AGREEMENT (the "Agreement") effective the ____ day of ____________, _____, is made by and between XENOTECH, L.P., a California limited partnership ("XT"), and ABGENIX, INC., a Delaware corporation ("ABX") ("Licensee"). RECITALS XT desires to grant to Licensee and Licensee desires to acquire from XT an exclusive worldwide license or sublicense, as the case may be, under the Licensed Technology to commercialize Products, on the terms and conditions herein. NOW, THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between the parties as follows: 1. DEFINITIONS. For purposes of this Agreement, the terms set forth in this Article shall have the meanings set forth below. 1.1 "ABX" shall mean Abgenix, Inc. 1.2 "Affiliate" shall mean any entity which controls, is controlled by or is under common control with any one of ABX, JTI or XT. An entity shall be regarded as in control of another entity if it owns or controls at least fifty percent (50%) of the shares of the subject entity entitled to vote in the election of directors (or, in the case of an entity that is not a corporation, for the election of the corresponding managing authority); provided, however, XT shall not be an Affiliate of ABX or JTI under this Agreement and XT shall not be considered controlled by ABX or JTI for purposes of determining Affiliates of ABX or JTI. 1.3 "Antibody" shall mean a composition comprising a whole antibody or a fragment thereof, said antibody or fragment having been derived from the Licensed Technology and/or generated from the Mice or the Future Generation Mice or having been derived from nucleotide sequences encoding, or amino acid sequences of, such an antibody or fragment. 1.4 "Antibody Product" shall mean any product comprising an Antibody or Genetic Material encoding an Antibody wherein, in respect of each Antibody Product, said Genetic Material does not encode multiple Antibodies. 1.5 "Antibody-Secreting Cell" shall mean a cell that secretes an Antibody, except where such cell is part of a mammal. -1- 53 1.6 "Antigen Technology" shall mean (i) all U.S. patent applications and patents listed on Schedule 1 and patents issuing on such patent applications owned by or licensed to XT which relate to the Product Antigen, in each case to the extent XT has the right to license or sublicense the same; (ii) any continuations, divisionals, reexaminations, reissues or extensions of any of (i) above; (iii) any foreign counterparts issued or issuing on any of (i) or (ii) above; and (iv) materials as set forth in Schedule 1. 1.7 "CGI" shall mean Cell Genesys, Inc. 1.8 "Effective Date" shall mean the date this Agreement is executed by XT and Licensee. 1.9 "Future Generation Mice" shall have the meaning defined in the Master Research License and Option Agreement, as amended. 1.10 "Genetic Material" shall mean a nucleotide sequence, including DNA, RNA, and complementary and reverse complementary nucleotide sequences thereto, whether coding or noncoding and whether intact or a fragment. 1.11 "GenPharm Cross License" shall mean that certain Cross License Agreement, effective as of March 26, 1997, entered into by and among the parties, GenPharm International, Inc. ("GenPharm") and the other parties named therein, as the same may be amended from time to time. 1.12 "IND" shall mean an Investigational New Drug Exemption for a Product, as defined in the U.S. Food, Drug and Cosmetic Act and the regulations promulgated thereunder, or its non-U.S. equivalent. 1.13 "JTI" shall mean Japan Tobacco Inc. 1.14 "License Fee" shall have the meaning set forth in Article 3 hereof. 1.15 "Licensed Field" shall mean all human medical uses. 1.16 "Licensed Technology" shall mean the Antigen Technology, the XenoMouse(TM) Technology, and XT-Controlled Rights. 1.17 "Master Research License and Option Agreement" shall mean that certain Master Research License and Option Agreement entered into by CGI, JTI and XT as of June 28, 1996 (and subsequently assigned by CGI to ABX), as it may be amended. 1.18 "Mice" shall have the meaning defined in the Master Research License and Option Agreement, as amended. -2- 54 1.19 "Net Sales" shall mean [Redacted] 1.20 "Product" and "Products" shall mean one or more Antibody Products which incorporate (i) an Antibody which binds to the Product Antigen or (ii) Genetic Material encoding such an Antibody wherein said Genetic Material does not encode multiple antibodies. 1.21 "Product Antigen" shall mean ____________________. 1.22 "Sublicensee" shall mean a third party that is not an Affiliate (provided, however, that CGI may be a Sublicensee of ABX, whether or not CGI is an Affiliate of ABX) to whom Licensee has granted a sublicense under the Licensed Technology to make, use and/or sell Products to the extent of the rights of Licensee therein. "Sublicensee" shall also include a third party to whom Licensee has granted the right to distribute Products under the Licensed Technology to the extent of the rights of Licensee therein, provided that such third party is responsible for the marketing and promotion of Products within the applicable country. 1.23 "Territory" shall mean all the countries of the world. 1.24 "Transgenic Product" shall mean any product constituting (i) Mice or Future Generation Mice, (ii) Genetic Material from Mice or Future Generation Mice, or (iii) an Antibody-Secreting Cell. 1.25 "Universal Receptor Product" shall mean a substance that is developed utilizing both (i) an Antibody and (ii) Universal Receptor Technology. 1.26 "Universal Receptor Technology" shall mean technology for universal receptors [*] As used herein: (i) "universal receptor" shall mean a receptor [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -3- 55 1.27 "Valid Claim" shall mean a claim of a pending or issued, and unexpired patent included within the Licensed Technology, which has not been held unenforceable, unpatentable or invalid by a court or other governmental agency of competent jurisdiction, and which has not been admitted to be invalid or unenforceable through reissue, disclaimer or otherwise. 1.28 "XenoMouse(TM) Technology" shall mean (i) all U.S. patent applications and patents listed on Schedule 2 and patents issuing on such applications; (ii) any continuations, divisionals, reexaminations, reissues or extensions of any of (i) above; (iii) any foreign counterparts issued or issuing on any of (i) or (ii) above; and (iv) the Mice (as such term is defined in the Master Research License and Option Agreement) and other materials as set forth on Schedule 2. 1.29 "XT-Controlled Rights" shall mean all rights to patents or technology that are licensed to XT pursuant to the agreements listed on Schedule 4 or any other license or similar agreement granting XT rights to patents or technology (each such agreement an "XT In-License"), to the extent that XT has the right under the terms of the applicable XT In-License to further license or sublicense such rights during the Term of this Agreement. 1.30 "XT In-License" shall have the meaning set forth in Section 1.29, above. 2. LICENSE GRANT; USE OF MICE BY THIRD PARTIES. 2.1 Subject to the terms and conditions of this Agreement, XT hereby grants to Licensee an exclusive license or sublicense, as the case may be, under the Licensed Technology, to make and have made Products anywhere in the world and to use, sell, lease, offer to sell or lease, import, export, otherwise transfer physical possession of or otherwise transfer title to such Products in the Licensed Field in the Territory. Such license or sublicense shall be exclusive even as to XT, and shall include the exclusive right to grant and authorize sublicenses for exploitation worldwide; provided, however, that Licensee may not, under this license, grant sublicenses to any rights to the Mice except as provided in Section 2.2 of this Agreement. 2.2 In connection with the grant of a sublicense under this Agreement to a third party, and notwithstanding any provision to the contrary in the Master Research License and Option Agreement or any Material Transfer Agreement entered into between the parties under Sections 2.1, 2.2 or 2.3 of the Master Research License and Option Agreement, Licensee shall have the right to grant a sublicense to use Mice and Future Generation Mice transferred to the third party pursuant to the terms of Section 2.7 of the Master Research License and Option Agreement, and Transgenic Products other then Mice or Future Generation Mice, to research, develop, make, have made, use, import, export, sell, lease, offer to sell or lease or otherwise distribute or commercialize Products, with the proviso that the sublicense described in this Section 2.2 shall not exceed the Licensee's rights conferred in accordance with the Master Research License and Option Agreement or this Product License. -4- 56 2.3 It is understood and agreed that, as to all XT-Controlled Rights, the grant of rights under this Article 2 shall be subject in all respects to the applicable XT In-License(s) pursuant to which such XT-Controlled Rights were granted to XT. 3. LICENSE FEE. Licensee shall pay to XT within thirty days of the Effective Date a license fee of [Redacted]. 4. ROYALTIES. 4.1 Royalty Rates. In consideration for the license and rights granted herein, Licensee agrees to pay to XT royalties [Redacted]. 4.2 Royalty Offsets. In the event that (i) Licensee, its Affiliate or Sublicensee is required to pay a non-Affiliate third party amounts with respect to Products under agreements for patent rights or other technologies which Licensee, its Affiliate or Sublicensee, in its reasonable judgment, determines are necessary or desirable to license or acquire with respect to such Products (excluding any such payments made to Licensee by its Affiliates), or (ii) any reimbursement payments are due to XT pursuant to Section 5.1 below, then Licensee may deduct the aggregate of any such amounts from any royalty amount owing to XT for the sale of such Products pursuant to Section 4.1 above; provided, however, that payments from Licensee to a third party that is an Affiliate, or was an Affiliate at any time within two (2) years prior to the Effective Date, may not be offset under this Section 4.2. Notwithstanding the foregoing provisions of this Section 4.2, in no event shall the royalties due to XT pursuant to Section 4.1 above be so reduced to less than [*] of the amount that would otherwise be due to XT thereunder. [*] 4.3 Single Royalty; Non-Royalty Sales. Only one royalty shall be payable with respect to any Product, regardless of how many claims or patents within the Licensed Technology cover such Product. In addition, no royalty shall be payable under this Article 4 with respect to sales of Products among Licensee and its Affiliates and/or Sublicensees and their Affiliates or for use in research and/or development or clinical trials. 4.4 No Patent Protection. Royalties shall be payable at the rates specified in Section 4.1 or 4.2 above only with respect to sales of Products that would infringe a Valid Claim in the country in which such Products are sold. In the event that such Products are not covered by a Valid Claim in such country, XT shall be paid a royalty on such sales in accordance with this Article 4, but the royalty due XT with respect to Net Sales in such country will equal [*] of the royalty set forth in Section 4.1 or as it may be offset under Section 4.2. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -5- 57 4.5 Combination Products. In the event that a Product is sold in combination as a single product with another product or component, Net Sales from such combination sales for purposes of calculating the amounts due under this Article 4 shall be calculated by multiplying the Net Sales of that combination by the fraction A/(A + B), where A is the gross selling price of the Product sold separately and B is the gross selling price of the other product sold separately. In the event that no such separate sales are made in the same quarter by Licensee, Net Sales for royalty determination shall be as reasonably allocated by Licensee, between such Product and such other product, based upon their relative importance and proprietary protection. 4.6 Termination of Royalties. Royalties under Section 4.1, 4.2, or 4.4 will be due until the later of (i) ten years from the first commercial sale of Products in any country or (ii) on a country-by-country basis, the expiration of the last-to-expire patent within the Licensed Technology covering the Products in such country. 5. THIRD PARTY ROYALTIES. 5.1 Royalties Payable by XT. XT will be responsible for the payment of any royalties, license fees and milestone and/or other payments due to third parties under licenses or similar agreements entered into by XT necessary to allow the manufacture, use or sale of Products. Licensee shall reimburse XT for any royalties paid by XT to third parties under licenses or similar agreements covering Products necessary to allow the manufacture, use or sale or other exploitation of Products anywhere in the world. Licensee shall continue any such reimbursement payments to XT until XT's obligation to pay royalties to a third party under any license covering Products expires or terminates. XT agrees not to enter into any license or similar agreement after the Effective Date which would obligate Licensee to make any payments under this Section 5.1 without the prior written consent of Licensee. 5.2 Royalties Payable by Licensee. Xenotech shall have no responsibility under the terms of this Agreement for the payment of any royalties, license fees or milestone or other payments due to third parties under licenses or similar agreements entered into by Licensee, its Affiliates, or its Sublicensees to allow the manufacture, use or sale of Products. 6. ACCOUNTING AND RECORDS. 6.1 Royalty Reports and Payments. After the first commercial sale of Products on which royalties are required, Licensee agrees to make quarterly written reports to XT within eighty days after the end of each calendar quarter, stating in each such report the number, description, and aggregate Net Sales of Products sold during the calendar quarter upon which a royalty is payable under Article 4 above. Concurrently with the making of such reports, Licensee shall pay to XT royalties at the applicable rate specified in Section 4.1, 4.2 or 4.4 above and all royalties payable pursuant to Section 5.1 above, and any adjustment to Net Sales for a prior period in accordance with the definition of Net Sales -6- 58 in Section 1.11 hereof. All payments to XT hereunder shall be made in U.S. Dollars to a bank account designated by XT. 6.2 Early Third Party License Payments. If XT is obligated to pay royalties to a third party prior to ninety days after the end of the calendar quarter, XT shall so notify Licensee and Licensee shall provide the reports and payments set forth in Section 6.1 above not later than ten days before the date such payments are due to the third party. Up to thirty-five days before such payments are due, XT may provide Licensee with an invoice by facsimile setting forth the royalties XT must pay third parties with respect to Licensee's activities in the Territory in the preceding quarter, and Licensee shall pay such invoices within thirty days of receipt of such invoice. 6.3 Records; Inspection. Licensee shall keep (and cause its Affiliates and Sublicensees to keep) complete, true and accurate books of account and records for the purpose of determining the royalty amounts payable to XT under this Agreement. Such books and records shall be kept at the principal place of business of Licensee or its Affiliates or Sublicensees, as the case may be, for at least three years following the end of the calendar quarter to which they pertain. Such records of Licensee or its Affiliates will be open for inspection during such three-year period by a representative of XT for the purpose of verifying the royalty statements. Licensee shall require each of its Sublicensees to maintain similar books and records and to open such records for inspection during the same three-year period by a representative of Licensee reasonably satisfactory to XT on behalf of, and as required by, XT for the purpose of verifying the royalty statements. All such inspections may be made no more than once each calendar year, at reasonable times mutually agreed by XT and Licensee. The XT representative will be obliged to execute a reasonable confidentiality agreement prior to commencing any such inspection. Inspections conducted under this Section 6.3 shall be at the expense of XT, unless a variation or error producing an increase exceeding [Redacted] of the amount stated for the period covered by the inspection is established in the course of any such inspection, whereupon all costs relating thereto will be paid by Licensee. Upon the expiration of three years following the end of any fiscal year, the calculation of royalties payable with respect to such year shall be binding and conclusive, and Licensee shall be released from any liability or accountability with respect to royalties for such year. 6.4 Currency Conversion. If any currency conversion shall be required in connection with the calculation of royalties hereunder, such conversion shall be made using the selling exchange rate for conversion of the foreign currency into U.S. Dollars, quoted for current transactions reported in The Wall Street Journal for the last business day of the calendar quarter to which such payment pertains. 6.5 Late Payments. Any payments due from Licensee that are not paid on the date such payments are due under this Agreement shall bear interest to the extent permitted by applicable law at the prime rate as reported by the Bank of America in San Francisco, California on the date such payment is due, plus an additional [Redacted], calculated on the number of days such payment is delinquent. This Section 6.5 shall in no way limit any other remedies available to any party. 6.6 Withholding Taxes. -7- 59 6.6.1 Unless immediately reimbursable under Section 6.6.2 below, all payments required to be made pursuant to Articles 3, 4 and 5 hereof shall be without deduction or withholding for or on account of any taxes (other than taxes imposed on or measured by net income) or similar governmental charge imposed by a jurisdiction. Such taxes are referred to herein as "Withholding Taxes" and such Withholding Taxes shall be the sole responsibility of the withholding party. The withholding party shall provide a certificate evidencing payment of any Withholding Taxes hereunder. 6.6.2 XT agrees to elect to claim a tax credit for Withholding Taxes with respect to which it is entitled so to elect, and further agrees not to amend such election for the full carry-forward period with respect to such credit. At the time that XT realizes a reduction in U.S. tax liability by actually utilizing the Withholding Taxes as a credit against regular U.S. tax liability (determined on a "first-in-first-out" basis pro rata with other available foreign tax credits), then the amount of such reduction attributable to such credit shall immediately be reimbursed to the withholding party. For these purposes, a reduction in U.S. tax liability shall include both a direct reduction in XT's own tax liability and a reduction in the U.S. tax liability of any of its partners. 6.7 Tax Indemnity. Except as provided in Section 6.6, each party (the "Tax Indemnitor") shall indemnify and hold harmless the other party hereto (each a "Tax Indemnitee") from and against any tax or similar governmental charge assessed solely because of this Agreement with respect to and directly attributable to the income or the assets of the Tax Indemnitor. In the event that any governmental agency shall make a claim against a party hereto which could give rise to an indemnity hereunder, such potential Tax Indemnitee shall give reasonably prompt notice to the potential Tax Indemnitor of the assertion of such claim. If the transmission of such notice is unreasonably deferred and has a material, adverse affect on the ability of the potential Tax Indemnitor to challenge such claim, such potential Tax Indemnitor shall be released from liability hereunder. The Tax Indemnitor alone shall (at its own expense) control the defense or compromise of any such claim. The Tax Indemnitee shall execute any documents required to enable Tax Indemnitor to defend such claim, provide any information necessary therefor, and cooperate with Tax Indemnitor in such defense. 6.8 XT Tax Indemnity. XT shall indemnify and hold harmless Licensee and its Affiliates from and against any increase to its country of incorporation income tax liability directly attributable to a positive adjustment to the amount of gross receipts (an "Adjustment") reported or reportable by such party from the income, including the royalty income, received from Licensee on Covered Products. The amount payable hereunder shall be equal to the difference between (a) the product of (i) the amount of the Adjustment, and (ii) the highest combined marginal corporate tax rate in the country of incorporation in effect for the taxable year for which such Adjustment is made, and (b) the reduction in the party's foreign tax liability, which for purposes of this Agreement shall be equal to the product of (i) the amount of any correlative adjustment to its foreign taxable income, and (ii) the highest combined marginal foreign corporate tax rate in effect for the taxable year for which the correlative adjustment is made. No indemnification payment shall be required hereunder until comprehensive efforts to obtain a correlative adjustment to Licensee's or its Affiliates', as the case may be, taxable income in a foreign state (which may include, for example invoking competent authority -8- 60 provisions under the U.S. Japanese Income Tax Treaty (if applicable) or other applicable bilateral tax treaty) have, to the extent reasonable to do so, been exhausted. 7. RESEARCH AND DEVELOPMENT. 7.1 Funding and Conduct. Licensee shall independently furnish and be responsible for funding and conducting all of its preclinical and clinical research and development of Products, at its own expense. 7.2 Biomaterials. In the case of Previously Selected Antigens as defined in the Master Research License and Option Agreement, at the reasonable request of Licensee, XT shall make available as part of the license granted hereunder to Licensee [*]. Such hybridomas, reagents and materials, as well as the related data thus made available will be used only by Licensee and its Affiliates and Sublicensees and manufacturing subcontractors. 8. DUE DILIGENCE. 8.1 Reasonable Commercial Efforts; IND Milestone. 8.1.1 Licensee agrees to use commercially reasonable efforts consistent with prudent business judgment to commercialize Products, by the filing of an IND by Licensee, or its Affiliate or Sublicensee, in the United States or Japan within such period of time as may be agreed upon by the parties after good faith negotiations taking into account factors relating to the Product Antigen or, if no such period is agreed upon, three years from the Effective Date. 8.1.2 Notwithstanding the foregoing, Licensee shall be required actively and continuously to pursue the filing of an IND by Licensee, or its Affiliate or Sublicensee, as soon as practicable after the Effective Date using reasonable commercial efforts consistent with prudent business judgment. After filing of an IND, Licensee, or its Affiliate or Sublicensee, shall be required to have an active IND and to be actively conducting clinical trials in pursuit of regulatory approval for the Products in the United States or Japan. 8.2 Failure to Meet Due Diligence Obligation. 8.2.1 If the diligence requirements set forth in Section 8.1 are not met by Licensee (or its Affiliates or Sublicensees) in the United States or in Japan, Licensee's rights hereunder shall terminate upon written notice by XT to Licensee and subject to Sections 8.3, 8.4 and 13.3 below. 8.2.2 Notwithstanding Section 8.2.1, the license granted hereunder to Licensee shall not terminate by reason of a delay in meeting the IND milestone set forth in Section 8.1.1, to the - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -9- 61 extent that prudent business judgment, based on circumstances outside of Licensee's reasonable control, reasonably justifies such delay. 8.3 Dispute Resolution. In the event that a dispute arises whether the diligence requirements in Article 8 have been met or circumstances exist which Licensee believes justifies a failure on its part to meet such obligation, the parties will attempt to resolve any dispute by mutual agreement during a period of 30 days following Licensee's receipt of the notice under Section 8.2.1. 8.4 Arbitration. In the event that the parties are unable to resolve such dispute pursuant to Section 8.3 above, such dispute shall be settled between XT and Licensee by binding arbitration as set forth in Section 14.12. If the arbitrator determines that the party acted in good faith, but failed to meet its obligations under Section 8.1 above, the license granted to such party shall not terminate unless the nonperforming party fails to cure such non-performance within a reasonable period of time, as determined by the arbitrator. 9. PATENTS. 9.1 XenoMouse Technology. (a) XT or its licensor, as they may agree, shall have responsibility for preparing, filing, prosecuting and maintaining patents and patent applications worldwide relating to the XenoMouse Technology and conducting any interferences, oppositions, reexaminations, or requesting reissues or patent term extensions with respect to the XenoMouse Technology. XT shall keep Licensee reasonably informed as to the status of such patent matters, including without limitation, by providing Licensee the opportunity to review and comment on any substantive documents which will be filed in any patent office, and providing Licensee copies of any substantive documents received by XT from such patent offices including notice of all interferences, reexaminations, oppositions or requests for patent term extensions. Licensee shall cooperate with and assist XT in connection with such activities, at XT's request and expense. (b) In the event that Licensee becomes aware that any XenoMouse Technology necessary for the practice of the license granted herein is infringed or misappropriated by a third party or is subject to a declaratory judgment action arising from such infringement, Licensee shall promptly notify XT and XT shall thereafter promptly notify the owner of such intellectual property. XT or its licensor, as they may agree, shall have the exclusive right to enforce, or defend any declaratory judgment action, at its expense, involving any XenoMouse Technology. In such event, XT shall keep Licensee reasonably informed of the progress of any such claim, suit or proceeding. Any recovery received by XT as a result of any such claim, suit or proceeding shall be used first to reimburse XT for all expenses (including attorneys, and professional fees) incurred in connection with such claim, suit or proceeding, and the remainder divided [*] between XT and Licensee, only to the extent that such recovery is related to the Products. 9.2 Antigen Technology. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -10- 62 9.2.1 Licensee shall, at its expense, have the initial worldwide responsibility for preparing, filing, prosecuting and maintaining patent applications and conducting any interferences, oppositions, reexaminations, or requesting reissues or patent term extensions with respect to Antigen Technology, except to the extent XT may not have the right to do so. Licensee shall give XT the opportunity to review the status of all such pending patent applications and actions and shall keep XT fully informed of the progress of such applications and actions, including, without limitation, by promptly providing XT with copies of all substantive worldwide correspondence sent to and received from patent offices, and providing notice of all interferences, reexaminations, oppositions or requests for patent term extensions. In the event that Licensee declines or fails to prepare, file, prosecute or maintain such patent applications or patents or take such other actions, relating to the Products in any country, it shall promptly and in no event later than ninety days prior to any filing deadline, provide notice to XT. XT shall have the right to assume such responsibilities at its own expense, using counsel of its choice. 9.2.2 In the event that Licensee becomes aware that any Antigen Technology is infringed or misappropriated by a third party in any country of the world, or is subject to a declaratory judgment action arising from such infringement in any country, Licensee shall promptly notify XT and XT shall thereafter promptly notify the owner of such intellectual property. Licensee shall have the exclusive right to enforce, or defend any declaratory judgment action, in any country of the world, at its expense, involving any Antigen Technology. In such event, Licensee shall keep XT reasonably informed of the progress of any such claim, suit or proceeding. Any recovery by Licensee received as a result of any such claim, suit or proceeding shall be used first to reimburse Licensee for all expenses (including attorneys, and professional fees) incurred in connection with such claim, suit or proceeding, and the remainder divided [*] between Licensee and XT. 9.3 Infringement Claims. If the production, sale or use of Products pursuant to this Agreement results in any claim, suit or proceeding alleging patent infringement against Licensee (or its Affiliates or Sublicensees), Licensee shall promptly notify XT thereof in writing setting forth the facts of such claim in reasonable detail. Except where (i) the claim is determined pursuant to Article 10 of the Master Research License and Option Agreement to involve Core Technology (as defined therein) or (ii) the claim involves Additional Technology as defined in the Technology Exchange Agreement among CGI, JTI and XT dated March 22, 1996 (and subsequently assigned by CGI to ABX), as it may be amended from time to time, Licensee shall have the exclusive right to defend and control the defense of any such claim, suit or proceeding, at its own expense, using counsel of its choice. Licensee shall keep XT reasonably informed of all material developments in connection with any such claim, suit or proceeding as it relates to the Licensed Technology, Licensee shall have the right to deduct any damages and expenses (including attorneys' and professional fees) against any amounts due, or which may become due, to XT pursuant to this Agreement. Notwithstanding the above, Licensee shall not be able to settle any such claim, suit or proceeding that involves any admission of the invalidity of the Licensed Technology. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -11- 63 9.4 Patent Marking. Licensee agrees to mark and have its Affiliates and Sublicensees mark all Products sold pursuant to this Agreement in accordance with the applicable statutes or regulations in the country or countries of manufacture and sale thereof. 10. CONFIDENTIALITY. 10.1 Confidential Information. Except as expressly provided herein, the parties agree that, for the term of this Agreement and for five years thereafter, the receiving party shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose any information furnished to it by another party hereto pursuant to this Agreement except to the extent that it can be established by the receiving party by competent proof that such information: (a) was already known to the receiving party, other than under an obligation of confidentiality, at the time of disclosure; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving party in breach of this Agreement; or (d) was subsequently lawfully disclosed to the receiving party by a person other than a party or developed by the receiving party without reference to any information or materials disclosed by the disclosing party. 10.2 Permitted Disclosures. Notwithstanding Sections 10.1 above and 14.16 below, each party hereto may disclose the other party's information to the extent such disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations or otherwise submitting information to tax or other governmental authorities, making a permitted sublicense or other exercise of its rights hereunder or conducting clinical trials, provided that if a party is required to make any such disclosure of the other party's secret or confidential information, other than pursuant to a confidentiality agreement, it will give reasonable advance notice to the latter party of such disclosure requirement and, save to the extent inappropriate in the case of patent applications, will use efforts consistent with prudent business judgment to secure confidential treatment of such information prior to its disclosure (whether through protective orders or otherwise). Notwithstanding the foregoing, XT shall not disclose to third parties, clinical data or regulatory filings received from Licensee except as agreed in writing by Licensee. 11. SUBLICENSES. Pursuant to Article 2 herein, Licensee will have the right to grant and authorize sublicenses to third parties; provided, however, the Licensee shall remain responsible for any payments due XT for Net -12- 64 Sales of Products by any Sublicensee. Licensee may retain any amounts received from Sublicensees in excess of the amounts owed to XT pursuant to Articles 4 and 5. Any sublicense granted by Licensee pursuant to this Agreement shall provide that the Sublicensee will be subject to the applicable terms of this Agreement. Licensee shall provide XT with a copy of relevant portions of each sublicense agreement, as reasonably required by XT. 12. REPRESENTATIONS AND WARRANTIES. 12.1 XT. XT represents and warrants that: (i) it has the full right and authority to enter into this Agreement and grant the rights and licenses granted herein; (ii) it has not previously granted and will not grant any rights inconsistent or in conflict with the rights and licenses granted to Licensee herein; (iii) there are no existing or threatened actions, suits or claims pending against XT with respect to the Licensed Technology or the right of XT to enter into and perform its obligations under this Agreement; (iv) it has not previously granted, and will not grant during the term of this Agreement, any right, license or interest in and to the Licensed Technology, or any portion thereof, with respect to the Products, or their manufacture or use; (v) Schedule 3 hereto sets forth all royalties, license fees, milestone payments and similar payments due to third parties for which Licensee is obligated to reimburse XT under Section 5.1 above as of the Effective Date; and (vi) the Licensed Technology is all the technology owned by or licensed to XT as of the Effective Date. 12.2 Licensee. Licensee represents and warrants that: (i) it has the full right and authority to enter into this Agreement, (ii) to its knowledge, there are no existing or threatened actions, suits or claims pending with respect to the subject matter hereof or the right of Licensee to enter into and perform its obligations under this Agreement; and (iii) it has not entered and during the term of this Agreement will not enter any other agreement inconsistent or in conflict with this Agreement. -13- 65 12.3 Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, XT MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND VALIDITY OF LICENSED TECHNOLOGY CLAIMS, ISSUED OR PENDING. 12.4 Effect of Representations and Warranties. It is understood that if the representations and warranties under this Article 12 are not true and accurate and a party incurs liabilities, costs or other expenses as a result of such falsity, the party at fault shall indemnify, defend and hold the injured party harmless from and against any such liabilities, costs or expenses incurred, provided that the party at fault receives prompt notice of any claim against the injured party resulting from or related to such falsity and the sole right to control the defense or settlement thereof. 13. TERM AND TERMINATION. 13.1 Effectiveness. This Agreement shall become effective as of the Effective Date and the license rights granted by XT under Article 2 above shall be in full force and effect as of such date. 13.2 Term. Unless earlier terminated pursuant to the other provisions of this Article 13, this Agreement shall continue in full force and effect until the later of (i) the expiration of the last to expire patent within the Licensed Technology claiming Products; or (ii) the twentieth anniversary of the Effective Date. The licenses granted under Article 2 shall survive the expiration (but not an earlier termination) of this Agreement; provided that such licenses shall in such event become nonexclusive. 13.3 Termination for Breach. Either party to this Agreement may terminate this Agreement in the event the other party shall have materially breached or defaulted in the performance of any of its material obligations hereunder, and such shall have continued for sixty days after written notice thereof was provided to the breaching party by the nonbreaching party that terminates the Agreement as to such party. Any termination shall become effective at the end of such sixty day period unless the breaching party has cured any such breach or default prior to the expiration of the sixty day period. However, if the party alleged to be in breach of this Agreement disputes such breach within such sixty day period, the non-breaching party shall not have the right to terminate this Agreement unless it has been determined by an arbitration proceeding in accordance with Section 14.12 below that this Agreement was materially breached, and the breaching party fails to cure such breach within thirty days following the final decision of the arbitrators or such other time as directed by the arbitrators. -14- 66 13.4 Other Termination Rights. Licensee may terminate this Agreement and the license granted herein, in its entirety or as to any particular patent within the Licensed Technology in a particular country, at any time, by providing XT ninety-days written notice. In the event of termination as to a particular country, the subject patent in such country shall cease to be within the Licensed Technology for all purposes of this Agreement. 13.5 Effect of Termination. 13.5.1 Termination of this Agreement for any reason shall not release either party hereto from any liability which at the time of such termination has already accrued to the other party or which is attributable to a period prior to such termination. 13.5.2 In the event this Agreement is terminated for any reason, Licensee and its Affiliates and Sublicensees shall have the right to sell or otherwise dispose of the stock of any Products subject to this Agreement then on hand. Upon termination of this Agreement by XT for any reason, any sublicense granted by Licensee hereunder shall survive, provided that upon request by XT, such Sublicensee promptly agrees in writing to be bound by the applicable terms of this Agreement. 13.5.3 This Agreement, including, without limitation, any licenses or sublicenses granted pursuant to this Agreement, shall survive any dissolution, liquidation or acquisition of XT. Such licenses shall remain in full force and effect even after any distribution, following dissolution, of the intellectual property owned or licensed to XT, to any entity. Any transfer of such intellectual property prior to or following dissolution shall be subject to the licenses granted herein. 13.5.4 This Agreement, including the license granted in Article 2, is independent of, and shall not be affected by, any breach or termination of the Master Research License and Option Agreement or any other agreement between the parties or their Affiliates. In the event of the termination of the Master Research License and Option Agreement, the rights and obligations of the parties hereto under Article 12 thereof shall be deemed to be part of this Agreement. 13.5.5 Sections 6.3, 6.5, 6.6, 6.7 and 6.8 and Articles 10, 12, 13 and 14 shall survive the expiration and any termination of this Agreement for any reason. 14. MISCELLANEOUS. 14.1 Governing Laws. This Agreement shall be interpreted and construed in accordance with the laws of the State of California, without regard to conflicts of law principles. 14.2 Waiver. It is agreed that no waiver by any party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent and/or similar breach or default. -15- 67 14.3 Assignment. This Agreement and the license granted hereunder may not be assigned by Licensee to any third party without the written consent of XT, and XT may not assign this Agreement to a third party without the consent of Licensee; except any party may assign this Agreement without such consent to (a) an Affiliate (provided that such Affiliate is two-thirds or greater owned directly or indirectly) or (b) an entity that acquires substantially all of the assets of the monoclonal antibody business segment of the assigning party. The terms and conditions of this Agreement shall be binding on and inure to the benefit of the permitted successors and assigns of the parties. 14.4 Independent Contractors. The relationship of the parties hereto is that of independent contractors. The parties hereto are not deemed to be agents, partners or joint venturers of the others for any purpose as a result of this Agreement or the transactions contemplated thereby. 14.5 Compliance with Laws. In exercising their rights under this license, the parties shall fully comply with the requirements of any and all applicable laws, regulations, rules and orders of any governmental body having jurisdiction over the exercise of rights under this license. 14.6 No Implied Obligations. Except as expressly provided in Article 8 above, nothing in this Agreement shall be deemed to require Licensee to exploit the Licensed Technology nor to prevent Licensee from commercializing products similar to or competitive with any Products, in addition to or in lieu of such Products. 14.7 Notices. Any notice required or permitted to be given to the parties hereto shall be given in writing and shall be deemed to have been properly given if delivered in person or when received if mailed by first class certified mail to the other party at the appropriate address as set forth below or to such other addresses as may be designated in writing by the parties from time to time during the term of this Agreement. XT: Xenotech, L.P. 322 Lakeside Drive Foster City, California 94404 Attn: Chief Financial Officer Japan Tobacco Inc.: Japan Tobacco Inc. JT Building 2-1 Toranomon 2-chome Minato-ku, Tokyo 105 Japan Attn: Vice President Pharmaceutical Division with a copy to: JT America Inc. 1825 South Grant Street, Suite 220 -16- 68 San Mateo, CA 94402 Attn: President and to: Gilbert, Segall and Young LLP 430 Park Avenue New York, NY 10022 Attn: Neal N. Beaton, Esq. Abgenix, Inc.: Abgenix, Inc. 7601 Dumbarton Circle Fremont, California 94555 Attn: President with a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304 Attn: Kenneth A. Clark, Esq. 14.8 Export Laws. Notwithstanding anything to the contrary contained herein, all obligations of XT and Licensee are subject to prior compliance with United States [and Japanese]** export regulations and such other United States [and Japanese]** laws and regulations as may be applicable, and to obtaining all necessary approvals required by the applicable agencies of the government of the United States [and Japan].** Licensee shall use efforts consistent with prudent business judgment to obtain such approvals. XT shall cooperate with Licensee and shall provide assistance to Licensee as reasonably necessary to obtain any required approvals. 14.9 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision and the parties shall discuss in good faith appropriate revised arrangements. 14.10 Force Majeure. Nonperformance of any party (except for payment obligations) shall be excused to the extent that performance is rendered impossible by strike, fire, earthquake, flood, governmental acts or orders or restrictions, failure of suppliers, or any other reason where failure to perform, is beyond the reasonable control and not caused by the negligence, intentional conduct or misconduct of the nonperforming party. 14.11 No Consequential Damages. IN NO EVENT SHALL ANY PARTY HERETO BE LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR THE EXERCISE OF RIGHTS HEREUNDER. 14.12 Dispute Resolution; Arbitration. The parties will attempt to resolve any dispute under this Agreement by mutual agreement, and, if required, there shall be a face-to-face meeting -17- 69 between senior executives of the parties. Any dispute under this Agreement which is not settled after such meeting, shall be finally settled by binding arbitration, conducted in accordance with the Rules of Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with said rules. The arbitration proceedings and all pleadings and written evidence shall be in the English language. Any written evidence originally in a language other than English shall be submitted in English translation accompanied by the original or a true copy thereof. The costs of the arbitration, including administrative and arbitrators' fees, shall be shared equally by the parties. Each party shall bear its own costs and attorneys' and witness' fees. The prevailing party in any arbitration, as determined by the arbitration panel, shall be entitled to an award against the other party in the amount of the prevailing party's costs and reasonable attorneys, fees. The arbitration shall be held in [San Francisco, California]* [Tokyo, Japan, if initiated by XT against Licensee and in San Francisco, California, if initiated by Licensee against XT].** A disputed performance or suspended performances pending the resolution of the arbitration must be completed within thirty days following the final decision of the arbitrators. Any arbitration shall be completed within six months from the filing of notice of a request for such arbitration. 14.13 Complete Agreement. It is understood and agreed between XT and Licensee that this Agreement constitutes the entire agreement, both written and oral, between the parties with respect to the subject matter hereof, and that all prior agreements respecting the subject matter hereof, either written or oral, expressed or implied, shall be abrogated, canceled, and are null and void and of no effect. No amendment or change hereof or addition hereto shall be effective or binding on either of the parties hereto unless reduced to writing and executed by the respective duly authorized representatives of XT and Licensee. 14.14 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and both together shall be deemed to be one and the same agreement. 14.15 Headings. The captions to the several Articles and Sections hereof are not a part of this Agreement, but are included merely for convenience of reference only and shall not affect its meaning or interpretation. 14.16 Nondisclosure. Except as provided in Article 10, each of the parties hereto agrees not to disclose to any third party the terms of this Agreement without the prior written consent of each other party hereto, except to advisors, investors, licensees, sublicensees and others on a need to know basis under circumstances that reasonably ensure the confidentiality thereof, or to the extent required by law; provided, however, that the royalty rate specified in Section 4.1 of this executed Product License shall be redacted before the terms of this executed Product License are disclosed to potential licensees and sublicensees. Without limitation upon any provision of this Agreement, each of the parties hereto shall be responsible for the observance by its employees, consultants and contractors of the foregoing confidentiality obligations. 14.17 Conformity with GenPharm Cross-License. The rights and licenses granted to Licensee hereunder shall be subject to the GenPharm Cross License, and to the extent that this -18- 70 Agreement purports to grant greater rights to Licensee than is permitted under the GenPharm Cross License, such rights shall be granted only to the extent permitted under the GenPharm Cross License, and the terms of the GenPharm Cross License shall control. IN WITNESS WHEREOF, the parties have executed this Agreement, through their respective officers hereunto duly authorized, as of the day and year first above written. XENOTECH, INC. (as General LICENSEE Partner of XENOTECH, L.P.) By: ____________________________ By: _____________________________ Name: __________________________ Name: ___________________________ Title: _________________________ Title: __________________________ -19- EX-10.38 8 MEMORANDUM OF UNDERSTANDING 1 EXHIBIT 10.38 MEMORANDUM OF UNDERSTANDING BETWEEN RESEARCH CORPORATION TECHNOLOGIES AND ABGENIX, INC. Research Corporation Technologies, Inc. ("RCT") and Abgenix, Inc. ("Abgenix") desire to enter a business arrangement to commercialize antibodies binding to CD45 [*] for the treatment of transplant rejection, autoimmune disorders and other inflammatory disorders. RCT owns a patent portfolio protecting these antibodies. Collectively, the antibodies, data relating to the development work conducted by RCT or RCT contractors, know-how related to the antibodies and the patents are referred to as the "CD45 Technology." RCT has developed the CD45 Technology through pre-clinical studies and now desires to find a partner to advance the CD45 Technology to the clinic. Abgenix possesses expertise in developing human therapeutic antibodies and also owns or has rights to technologies capable of creating fully human antibodies. This human antibody technology involves proprietary genetically engineered animals (mice), know-how and a related patent portfolio collectively referred to as the "XenoMouse Technology." SECTION 1. Confidentiality and Prior Agreements. To date, RCT and Abgenix have been subject to that Confidential Disclosure Agreement between RCT and Abgenix effective June 16, 1997. RCT and Abgenix agree that inquiries and information related to this MOU will be subject to the terms of that Confidential Disclosure Agreement. [*] Any research by either RCT or Abgenix involving both XenoMice and the CD45 Technology will continue to be governed by these agreements until they are superseded by legally binding agreements based on the Commercialization terms contained in this MOU. SECTION 2. Good Faith. RCT and Abgenix agree to use the Commercialization Terms outlined in SECTION 3 below as a basis for the negotiation of binding agreements, and further agree to negotiate in good faith regarding any changes that may be made to final binding agreements. SECTION 3. Commercialization Terms. 1. RCT is continuing in its effort to advance the development of the CD45 Technology through preclinical studies. To that end, RCT intends to actively seek a third party licensee or strategic pharmaceutical development partner ("Partner") to complete clinical development and sell a pharmaceutical product based on the CD45 Technology. RCT intends to find a Partner prior to filing of an IND for a lead product; however, RCT may elect to file an IND and conduct an initial clinical trial in order to attract a Partner. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2 2. RCT will contract with Abgenix to generate fully human antibodies to CD45RB using the XenoMouse Technology ("Abgenix Contract"). The Abgenix Contract shall provide a plan of research and development (the "Research Plan") [*]. The Research Plan for the Abgenix Contract is further outlined below. RESEARCH PLAN FOR ABGENIX CONTRACT Goal: Utilizing the XenoMouse Technology, [*] a. Both Abgenix and RCT will [*] b. [*] c. [*] d. Abgenix will [*] e. Abgenix will [*] f. Abgenix will [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -2- 3 g. Abgenix will produce [*] that satisfy the criteria set forth in the Goal. As an alternative, RCT and Abgenix may elect to produce [*] should this strategy better satisfy the Goal. 3. Abgenix will grant RCT an option (the "Abgenix Option") to acquire an exclusive worldwide license (with rights to sublicense to a Partner) to the XenoMouse Technology for making, using and selling the CD45 isoform antibodies that are the subject of RCT's patent rights or know-how, and all improvement inventions, know-how and data that results from the Abgenix Contract ("Abgenix License"). The Abgenix License shall also grant RCT the right to conduct (on its own or through a sublicensee such as a Partner) human clinical studies for commercial or regulatory purposes. [*] Key financial terms of the Abgenix License are as follows: RCT shall pay Abgenix [*] of all Sublicense Revenues received by RCT from the Partner, but no less than [*] of the net sales by the Partner of products made and sold utilizing the rights granted under the Abgenix Technology. Sublicense Revenues shall include license fees, milestone payments, shares of equity, research/development reimbursement payments and royalties. Should RCT be unable to secure a partner that will itself make and sell human pharmaceutical products based on the CD45 Technology and using the XenoMouse Technology, RCT may elect to directly (or through a related entity "Newco", as described below) make and sell such human pharmaceutical products. If RCT so elects, RCT (or Newco) shall make the following payments to Abgenix: (I) [*] (II) [*] (III) [*] (IV) [*] (VI) [*]
* The payment will not be made if RCT (or Newco) should notify Abgenix that [*]. In such a case, RCT (or Newco) will forfeit rights to manufacture and sell human pharmaceutical products; however, RCT (or Newco) will continue to enjoy the rights granted under the Abgenix Option and Abgenix License to grant sublicenses to sell human pharmaceutical products under the Abgenix License to a Partner. 4. To facilitate the commercialization of the CD45 Technology and file an IND if needed, RCT may create a new entity, Newco, to develop and commercialize the CD45 Technology. RCT would give Newco worldwide exclusive rights to commercialize the CD45 Technology through - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -3- 4 a license (RCT License). Concurrently with the grant of the RCT License, RCT would assign the Abgenix Option (or Abgenix License if converted), the Abgenix Contract and related obligations from both agreements to Newco. Newco, with management assistance from RCT, [*] while developing the CD45 Technology toward and possibly into clinical trials. Should Newco [*], it may elect to directly make and sell human pharmaceutical products under the RCT License and Abgenix License as long as Newco has made all required payments to Abgenix in Section 3.3 above. 5. At any time during the development of the CD45 Technology by RCT or Newco, Abgenix is free to enter business discussions with RCT or Newco to acquire a sublicense to the CD45 Technology as the Partner. [*] SECTION 4. Binding Effect. RCT and Abgenix agree that the Abgenix Contract, the Abgenix Option, the Abgenix License and any related agreements shall include, as appropriate, the terms and conditions set forth in this MOU, and will not be changed without consent of RCT and Abgenix. RESEARCH CORPORATION TECHNOLOGIES, INC. By: /s/ Gary M. Munsinger ----------------------------------- Gary M. Munsinger, President ABGENIX, INC. By: /s/ R. Scott Greer ----------------------------------- R. Scott Greer, President and CEO - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -4- EX-10.40 9 RESEARCH LICENSE AND OPTION AGREEMENT 1 EXHIBIT 10.40 RESEARCH LICENSE AND OPTION AGREEMENT THIS RESEARCH LICENSE AND OPTION AGREEMENT (this "Agreement"), effective as of January 4, 1999 (the "Effective Date"), is made by and between ABGENIX, INC., a Delaware corporation ("ABX"), having a place of business at 7601 Dumbarton Circle, Fremont, California 94555, and AVI BIOPHARMA, INC., an Oregon corporation ("AVI"), having a place of business at One SW Columbia Street, Suite 1105, Portland, Oregon 97258, with respect to the following facts: RECITALS WHEREAS, ABX has rights in certain XenoMouse(TM) Animals (as defined below) that are capable of producing human antibodies when immunized with an antigen. WHEREAS, AVI desires to generate human antibodies to the Antigen (as defined below). WHEREAS, AVI has immunized XenoMouse Animals with the Antigen pursuant to the Research Collaboration Agreement (as defined below). WHEREAS, ABX is willing to grant to AVI, and AVI desires to obtain, a license to use XenoMouse Animals solely for immunization with the Antigen for research purposes, as described below and on the terms and conditions set forth herein. WHEREAS, ABX additionally is willing to offer to AVI the opportunity to obtain an exclusive option to enter into the AVI Product License Agreement (as defined below) on the terms and conditions set forth herein. NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants set forth below, the parties agree as follows: 1. DEFINITIONS For purposes of this Agreement, the terms set forth in this Article 1 shall have the respective meanings set forth below: 1.1 "ABX In-License" shall mean a license, sublicense or other agreement under which ABX acquired rights to the ABX Patent Rights or ABX Know-How. 1.2 "ABX Inventions" shall mean, collectively, all inventions, discoveries, data, information, methods, techniques, technology and other results, whether or not patentable (other than Materials), that are made, conceived, reduced to practice or otherwise derived from the parties' use of the ABX Materials; provided, however, that the ABX Inventions shall exclude the Research Program Inventions. 1.3 "ABX Know-How" shall mean, collectively, all inventions, discoveries, data, 2 information, methods, techniques, technology and other results, whether or not patentable but which are not generally known, regarding (a) methods and techniques of immunizing the XenoMouse Animals to the Antigen, which are disclosed by ABX to AVI pursuant to the Research Collaboration Agreement, this Agreement or the AVI Product License Agreement (if entered into by the parties), or (b) ABX Materials and ABX Inventions. All ABX Know-How shall be Confidential Information of ABX. 1.4 "ABX Materials" shall mean, collectively, (a) all XenoMouse Animals, including all XenoMouse Animals immunized with the Antigen, and all other materials specified in Exhibit A to the Research Collaboration Agreement; [*]; provided, however, that the ABX Materials shall exclude the Research Program Materials. All ABX Materials shall be Confidential Information of ABX. 1.5 "ABX Patent Rights" shall mean, collectively, (a) all patents and patent applications listed on Exhibit B and any foreign counterparts claiming priority thereof; (b) all patent applications heretofore or hereafter filed in any country which claim ABX Materials delivered to AVI or ABX Inventions; (c) all patents that have issued or in the future issue from any of the foregoing patent applications, including without limitation utility, model and design patents and certificates of invention; and (d) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications. 1.6 "Affiliate" shall mean, with respect to any person or entity, any other person or entity which controls, is controlled by or is under common control with such person or entity. A person or entity shall be regarded as in control of another entity if it owns or controls at least fifty percent (50%) of the equity securities of the subject entity entitled to vote in the election of directors (or, in the case of an entity that is not a corporation, for the election of the corresponding managing authority). 1.7 "Antibody" shall mean a composition comprising (a) a whole antibody, or any fragment thereof, derived from the XenoMouse Animals, or (b) a whole antibody, or any fragment thereof, which is derived from a whole antibody, or any fragment thereof, which itself is derived from the XenoMouse Animals (or from the nucleotide sequences that encode, or amino acid sequences of, a whole antibody, or any fragment thereof, derived from the XenoMouse Animals). 1.8 "Antibody Cells" shall mean all cells that contain, express, or secrete antibodies, genetic materials that encode antibodies. 1.9 "Antigen" shall mean (beta) human chorionic gonadotropin ((beta)HCG). 1.10 "AVI Inventions" shall mean, collectively, all inventions, discoveries, data, - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -2- 3 information, methods, techniques, technology and other results, whether or not patentable (other than Materials), solely regarding the Antigen, or the use thereof, that are made, conceived, reduced to practice or otherwise derived from the research or development work conducted pursuant to and in accordance with the Research Collaboration Agreement, this Agreement or the AVI Product License Agreement (if entered into by the parties); provided, however, that the AVI Inventions shall exclude the ABX Inventions and the Research Program Inventions. 1.11 "AVI Know-How" shall mean, collectively, all inventions, discoveries, data, information, methods, techniques, technology and other results, whether or not patentable but which are not generally known, regarding (a) the Antigen which are disclosed by AVI to ABX pursuant to the Research Collaboration Agreement, this Agreement or the AVI Product License Agreement (if entered into by the parties), and (b) AVI Materials and AVI Inventions. All AVI Know-How shall be Confidential Information of AVI. 1.12 "AVI Materials" shall mean, collectively, (a) the Antigen, and (b) all reagents, samples and other chemical or biological materials solely regarding the Antigen resulting from the parties' use of the Antigen; provided, however, that the AVI Materials shall exclude the Research Program Materials. All AVI Materials shall be Confidential Information of AVI. 1.13 "AVI Patent Rights" shall mean, collectively, (a) all patent applications heretofore or hereafter filed in any country which claim AVI Materials or AVI Inventions; (b) all patents that have issued or in the future issue from any of the foregoing patent applications, including without limitation utility, model and design patents and certificates of invention; and (c) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications. 1.14 "AVI Product License Agreement" shall mean a license agreement between ABX and AVI in the form attached hereto as Exhibit C (subject to the provisions of Section 3.2.3). 1.15 "Confidential Information" shall mean, with respect to a party, all information of any kind whatsoever (including without limitation, compilations, data, formulae, models, patent disclosures, procedures, processes, projections, protocols, results of experimentation and testing, specifications, strategies and techniques), and all tangible and intangible embodiments thereof of any kind whatsoever (including without limitation, apparatus, biological or chemical materials, animals, cells, compositions, documents, drawings, machinery, patent applications, records, reports), which is owned or controlled by such party, is disclosed by such party to the other party pursuant to the Research Collaboration Agreement or this Agreement, and (if disclosed in writing or other tangible medium) is marked or identified as confidential at the time of disclosure to the receiving party or (if otherwise disclosed) is identified as confidential at the time of disclosure to the receiving party and described as such in writing within thirty (30) days after such disclosure. Notwithstanding the foregoing, Confidential Information of a party shall not include information which the receiving party can establish by written documentation (a) to have been publicly known prior to disclosure of such information by the disclosing party to the receiving party, (b) to have become publicly known, without fault on the part of the receiving party, subsequent to disclosure of such information by the disclosing party to the receiving party, (c) to have been received by the receiving party at any time from a source, other than the disclosing party, rightfully having possession of and the right to disclose such information free of confidentiality obligations, (d) to have been otherwise known by the receiving party free of confidentiality obligations prior to -3- 4 disclosure of such information by the disclosing party to the receiving party, or (e) to have been independently developed by employees or agents of the receiving party without access to or use of such information disclosed by the disclosing party to the receiving party. The parties acknowledge that the foregoing exceptions shall be narrowly construed and that the obligations imposed upon each party under Section 5 below shall be relieved solely with respect to such Confidential Information of the disclosing party which falls within the above exceptions and not with respect to related portions, other combinations, or characteristics of the Confidential Information of the disclosing party including, without limitation, advantages, operability, specific purposes, uses and the like. 1.16 "Derived" or "derived" shall mean obtained, developed, created, synthesized, designed, derived or resulting from, based upon or otherwise generated (whether directly or indirectly, or in whole or in part). 1.17 "Excluded Technology" shall mean, collectively, (a) all patent rights, know-how or other intellectual property rights or technology of ABX in or to (i) all antigens other than the Antigen, including without limitation (A) compositions of such antigens or of Genetic Materials that encode such antigens; (B) uses of such antigens; (C) antibodies or other compositions that bind to such antigens, Genetic Materials that encode such antibodies or compositions, and Antibody Cells that express, secrete, or contain such antibodies, Genetic Materials or compositions; and (D) uses of such antibodies, Genetic Materials or compositions; (ii) methods to discover novel antigens; and (iii) methods of using antigens other than to create antibodies; (b)(i) all patent applications heretofore or hereafter filed in any country which claim ABX Materials (except for those described in clause (a) of Section 1.4 above) or ABX Inventions; (ii) all patents that have issued or in the future issue from any of the foregoing patent applications, including without limitation utility, model and design patents and certificates of invention; and (iii) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications; and (c) inventions, discoveries, data, information, methods, techniques, technology and other results, whether or not patentable but which are not generally known, regarding ABX Materials (except for those described in clause (a) of Section 1.4 above) and ABX Inventions. 1.18 "Field" shall mean the use of Products for human medical purposes. 1.19 "Genetic Material" shall mean a nucleotide sequence, including DNA, RNA and complementary and reverse complementary nucleotide sequences thereto, whether coding or noncoding and whether intact or a fragment. 1.20 "GenPharm Cross License Agreement" shall mean that certain Cross License Agreement entered into by and between ABX, JTI, XT, Cell Genesys, Inc., and GenPharm International, Inc., effective as of March 26, 1997, as the same may be amended from time to time. 1.21 "IND" shall mean an Investigational New Drug application filed with Food and Drug Administration in the United States, or any similar filing with any foreign regulatory authority, to commence human clinical testing of any Product in any country in the Territory. 1.22 "Inventions" shall mean, collectively, the ABX Inventions, the AVI Inventions and the Research Program Inventions. -4- 5 1.23 "JTI" shall mean Japan Tobacco Inc., a Japanese corporation. 1.24 "Licensed Technology" shall mean ABX's rights in the ABX Patent Rights, ABX Know-How, Research Program Patent Rights and Research Program Know-How; provided, however, that the Licensed Technology (a) is all to the extent and only to the extent that ABX has the right to grant (sub)licenses thereunder (including without limitation to the extent permitted under the applicable ABX In-Licenses); (b) is expressly subject to the ABX In-Licenses; and (c) shall exclude the Excluded Technology. 1.25 "Materials" shall mean, collectively, the ABX Materials, the AVI Materials and the Research Program Materials. 1.26 "Option" shall have the meaning set forth in Section 3.1.1 below. 1.27 "Product" shall mean any product comprising (a) an Antibody which binds to the Antigen, or (b) Genetic Material that encodes such an Antibody wherein, in respect of each Product, said Genetic Material does not encode multiple antibodies. 1.28 "Research Collaboration Agreement" shall mean the Research Collaboration Agreement effective as of October 2, 1998, between ABX and AVI. 1.29 "Research Field" shall mean the immunization of XenoMouse Animals with the Antigen and the use of XenoMouse Animals that are so immunized and materials derived from XenoMouse Animals that are so immunized, in each case solely for the creation, identification, analysis, research, characterization and preclinical development of Products for use in the Field. 1.30 "Research Program Inventions" shall mean, collectively, all inventions, discoveries, data, information, methods, techniques, technology and other results, whether or not patentable (other than Materials), regarding the Research Program Materials, or the use thereof, that are made, conceived, reduced to practice or otherwise derived from the research or development work conducted pursuant to and in accordance with the Research Collaboration Agreement, this Agreement or the AVI Product License Agreement (if entered into by the parties). 1.31 "Research Program Know-How" shall mean, collectively, all inventions, discoveries, data, information, methods, techniques, technology and other results, whether or not patentable but which are not generally known, regarding Research Program Materials and Research Program Inventions. All Research Program Know-How shall be Confidential Information of ABX. 1.32 "Research Program Materials" shall mean, collectively, [*]; in each case that are made, conceived, reduced to practice or otherwise derived from the research or development work conducted pursuant to and in accordance with the Research Collaboration Agreement, this Agreement or the AVI Product License Agreement (if entered into by the parties). All Research Program Materials shall be Confidential Information of [*]. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -5- 6 1.33 "Research Program Patent Rights" shall mean, collectively, (a) all patent applications heretofore or hereafter filed in any country which claim Research Program Materials or Research Program Inventions; (b) all patents that have issued or in the future issue from any of the foregoing patent applications, including without limitation utility, model and design patents and certificates of invention; and (c) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications. 1.34 "XenoMouse Animals" shall mean one or more sterile male transgenic mice provided by ABX to AVI for immunization with the Antigen under either the Research Collaboration Agreement or this Agreement. 1.35 "XT" shall mean Xenotech, L.P., a California limited partnership. 1.36 "XT Master Research and License Agreement" shall mean that certain Master Research License and Option Agreement entered into by and among XT, JTI and Cell Genesys, Inc. effective as of June 28, 1996, and subsequently assigned to ABX by Cell Genesys, Inc., as the same may be amended from time to time. 1.37 "XT Product License" shall mean a license granted from XT to ABX pursuant to the terms of the XT Master Research and License Agreement permitting ABX to commercialize, or to provide rights to a third party to commercialize, certain Products in one or more territories. 2. ABX MATERIALS AND RESEARCH LICENSE 2.1 Supply of ABX Materials. 2.1.1 Supply. Subject to the terms and conditions of this Agreement, including those set forth in Section 2.2 below, on or before the Effective Date, ABX shall have provided to AVI, solely for use in creating Antibodies to the Antigen for use in the Research Field, the sterilized male XenoMouse Animals and other ABX Materials described in Exhibit A to the Research Collaboration Agreement. 2.1.2 Research. Except as the parties otherwise expressly agree in writing, AVI shall be responsible for conducting all activities under this Agreement in the Research Field, including without limitation immunization of XenoMouse Animals with the Antigen, screening of Antibodies generated from such immunizations, and creation of Antibody Cells that contain, express, or secrete Antibodies to the Antigen. 2.1.3 Ownership of Materials. [*] shall solely own all right title and interest in and to the ABX Materials and Research Program Materials and all intellectual property rights therein and thereto. [*] shall solely own all right title and interest in and to the AVI Materials and all intellectual property rights therein and thereto. The transfer of physical possession of any Materials owned by, and the physical possession and use of any Materials by, AVI or ABX, as the case may be, shall not be (nor be construed as) a sale, lease, offer to sell or lease, or other transfer of title of such Materials to AVI or ABX, as the case may be. 2.1.4 Use of ABX Materials. Except as otherwise expressly provided in the AVI Product License Agreement (if entered into by the parties), all XenoMouse Animals and other ABX - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -6- 7 Materials are for use by AVI solely to perform research in the Research Field as permitted pursuant to Section 2.3(a). AVI shall limit access to the ABX Materials to those of its employees working on its premises, to the extent such access is reasonably necessary in connection with its activities as expressly authorized by this Agreement. 2.2 Material Transfer Terms. Except as otherwise expressly permitted by the license grant in Section 2.1.1 of the AVI Product License Agreement (if entered into by the parties), AVI's right to use the XenoMouse Animals and other ABX Materials are subject to the following terms and conditions: (a) All XenoMouse Animals transferred to AVI shall be the sole property of ABX, and the transfer of physical possession to AVI, and/or possession or use by AVI, of XenoMouse Animals shall not be, nor be construed as, a sale, lease, offer to sell or lease, or other transfer of title to or any interest in any XenoMouse Animals; (b) All XenoMouse Animals and all materials derived from the XenoMouse Animals (including without limitation Products) shall remain in the control of AVI, and AVI shall not (and shall not attempt or purport to) transfer the XenoMouse Animals or any materials derived from the XenoMouse Animals (including without limitation Products) to any third party (other than ABX), without the prior express written consent of ABX (which may be conditioned inter alia upon such other third party duly executing and delivering ABX's standard form of material transfer agreement therefor); (c) AVI shall not directly or indirectly use or attempt to use the XenoMouse Animals, or any information or biological or chemical materials derived from the XenoMouse Animals (including without limitation Products), to reproduce, generate, create or produce, through breeding, reverse-engineering, genetic manipulation or otherwise, the XenoMouse Animals or other transgenic mice or other transgenic animals; (d) The XenoMouse Animals shall be delivered to AVI solely for the purpose of immunizing the XenoMouse Animals with the Antigen, and AVI shall not use the XenoMouse Animals, or any materials derived from the XenoMouse Animals (including without limitation Products), for screening or any purpose other than immunizing the XenoMouse Animals with the Antigen pursuant to the Research Collaboration Agreement and conducting research in the Research Field as permitted pursuant to Section 2.4(a); (e) AVI shall not (and shall not attempt or purport to) assign, sell, have sold, lease, offer to sell or lease, distribute, license, sublicense or otherwise transfer title to or an interest in, or clinically develop, commercialize or otherwise exploit any XenoMouse Animals or any materials derived from the XenoMouse Animals (including without limitation Products); (f) AVI shall not use the XenoMouse Animals to make or use antibodies to any antigen other than the Antigen (including without limitation to [*]); (g) Upon expiration or termination of this Agreement for any reason, AVI shall destroy and certify such destruction (or return to ABX as directed by ABX) each XenoMouse Animal, all ABX Materials and all Research Program Materials within ten (10) days after such expiration or termination; - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -7- 8 (h) Upon expiration or termination of this Agreement for any reason, AVI shall not (and shall not attempt or purport to) assign, sell, have sold, lease, offer to sell or lease, distribute, license, sublicense or otherwise transfer title to or an interest in, or clinically develop, commercialize or otherwise exploit the Research Program Materials, Research Program Inventions, Research Program Patent Rights or Research Program Know-How for any purpose whatsoever, and shall not (and shall not attempt or purport to) grant to any third party any right or license to do any of the foregoing; (i) Notwithstanding anything to the contrary in this Agreement, ABX shall own all right, title and interest in and to all materials, inventions, discoveries, data, information, methods, techniques, technology and other results (whether patentable or nonpatentable), and all intellectual property rights therein and thereto, made or created by AVI (and any of its agents or employees) through any use of the XenoMouse Animals and/or materials derived from the XenoMouse Animals (including without limitation Products), which use is not in accordance with the terms and conditions set forth in this Article 2; (j) AVI shall only use the XenoMouse Animals and all materials derived from the XenoMouse Animals (including without limitation Products) in compliance with all applicable national, state, and local laws and regulations, including all applicable National Institutes of Health guidelines. AVI acknowledges that the XenoMouse Animals, and all materials derived from the XenoMouse Animals (including without limitation Products), are experimental in nature and may have unknown characteristics. AVI shall use prudence and reasonable care in the use, handling, storage, transportation, disposition and containment of the XenoMouse Animals and all materials derived from the XenoMouse Animals (including without limitation Products), and shall not use any such materials in humans; (k) Unless otherwise agreed by ABX in advance in writing, all XenoMouse Animals delivered to AVI shall be delivered to AVI's facilities located at its address set forth above, and such XenoMouse Animals shall not leave such facility (except for return of XenoMouse Animals to ABX or upon destruction of the XenoMouse Animals by AVI); and (l) XT shall be a third-party beneficiary of the commitments by AVI set forth in items (a) through (f) above. 2.3 Research License. (a) Subject to the terms and conditions of this Agreement, ABX hereby grants to AVI a nonexclusive license (or sublicense, as the case may be) under the Licensed Technology, without right to grant sublicenses, (i) to use the XenoMouse Animals provided by ABX solely for use in the Research Field, (ii) to make and use (but not to transfer, sell, lease, offer to sell or lease, or otherwise transfer title to or an interest in) Antibody Cells that contain, express, or secrete Antibodies to the Antigen solely for use in the Research Field, and (iii) to make and use (but not to transfer, sell, lease, offer to sell or lease, or otherwise transfer title to or an interest in) Products solely for research and development of such Products in the Research Field. AVI shall not use the Licensed Technology or any materials derived from the XenoMouse Animals (including without limitation Products) for any other purpose other than those uses expressly licensed under this Section 2.3(a). -8- 9 (b) The license granted under Section 2.3(a) shall terminate upon the earlier of (i) the date on which ABX duly executes and delivers the AVI Product License Agreement in accordance with the provisions of Section 3.2.3, and (ii) the date of the expiration or earlier termination of this Agreement. (c) No implied licenses or rights are conveyed to AVI hereunder. AVI shall only be authorized regarding the research use of XenoMouse Animals and the research use of materials derived from the XenoMouse Animals (including without limitation Products) solely as expressly provided in this Article 2. 2.4 Limitation. Notwithstanding any other provision of this Agreement, in no event shall AVI (a) file, or authorize any third party to file, an IND with respect to a Product or (b) initiate, or authorize any third party to initiate, clinical trials in humans with respect to a Product or otherwise utilize or introduce in any way a Product into humans (or sell, or authorize any third party to sell, a Product). 2.5 Exclusivity. During the term of this Agreement, AVI shall not develop or sell any other human, humanized or chimeric antibody or fragment thereof that binds to the Antigen, or enter into any agreement with any third party for the creation, research, characterization, development or commercialization of such antibodies or fragments thereof, without prior express written consent of ABX. 2.6 Reports. AVI shall keep (or cause to be kept) complete and accurate records of its research activities under this Agreement. AVI shall maintain (or cause to be maintained) such records in sufficient detail, and in accordance with good scientific practices. AVI shall keep ABX fully informed as to its research activities hereunder. Without limiting the foregoing, within thirty (30) days of the end of each calendar quarter, AVI shall provide to ABX a reasonably detailed written report regarding such research activities and the status thereof (including a description of all potentially patentable Research Program Inventions). 3. OPTION TO OBTAIN AVI PRODUCT LICENSE AGREEMENT 3.1 Option. Subject to the terms and conditions set forth in this Agreement, ABX hereby grants to AVI the exclusive option (the "Option"), exercisable for a period (the "Option Period") of one (1) year from the date of the Research Collaboration Agreement, to enter into the AVI Product License Agreement pursuant to the procedures set forth in this Article 3. 3.2 Exercise of Option. 3.2.1 Exercise. The Option may be exercised, at any time during the Option Period, by AVI (a) giving ABX express written notice (the "Exercise Notice") stating that AVI desires that ABX obtain the XT Product License for the Antigen and that the parties enter into the AVI Product License Agreement, and (b) paying to ABX the [*] option exercise fee (the "Exercise Fee") [*]. If ABX has not received the Exercise Notice and the Exercise Fee on or before the expiration of the Option Period, this Agreement immediately shall terminate. The Exercise Fee shall be paid in U.S. dollars, and shall be made by bank wire transfer in immediately available - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -9- 10 funds to an account designed by ABX. 3.2.2 XT Product License. Following AVI's exercise of the Option, ABX shall exercise its option under the XT Master Research and License Agreement to obtain the XT Product License for the Antigen. ABX shall notify AVI at such time as ABX has obtained the XT Product License for the Antigen. 3.2.3 AVI Product License Agreement. Within ten (10) days after AVI's receipt of notice that ABX has obtained the XT Product License for the Antigen, AVI shall duly execute and deliver the AVI Product License Agreement and shall pay to ABX the license fee set forth in Section 3.1 of the AVI Product License Agreement. Upon ABX's timely receipt of such duly executed and delivered AVI Product License Agreement and license fee, ABX shall duly execute and deliver the AVI Product License Agreement. If AVI fails to timely duly execute and deliver the AVI Product License Agreement, and to pay to ABX the license fee set forth in Section 3.1 of the AVI Product License Agreement, as set forth above, then (a) ABX shall have no further obligation to AVI regarding the AVI Product License Agreement, and (b) ABX shall be entitled, in its sole discretion, to exercise ABX's rights under the XT Master Research and License Agreement and enter into the XT Product License for the Antigen on its own behalf or on behalf of a third party without further obligation to AVI. 3.3 Definition of Antigen. ABX shall use good faith efforts to cause the definition of the Antigen under the XT Product License (as established in accordance with the XT Master Research and License Agreement) to be the same as the definition of the Antigen under this Agreement; provided, however, that the precise definition of the Antigen defining the rights licensed to ABX under the XT Product License (and the definition in the corresponding AVI Product License Agreement) shall be as established in accordance with the XT Master Research and License Agreement. 4. INVENTIONS AND INTELLECTUAL PROPERTY RIGHTS 4.1 Ownership. [*] shall solely own all right title and interest in and to the ABX Inventions and Research Program Inventions and all intellectual property rights therein and thereto. [*] shall solely own all right title and interest in and to the AVI Inventions and all intellectual property rights therein and thereto. The transfer of physical possession of any Inventions owned by, and the physical possession and use of any Inventions by, AVI or ABX, as the case may be, shall not be (nor be construed as) a sale, lease, offer to sell or lease, or other transfer of title of such Inventions to AVI or ABX, as the case may be. 4.2 Assignment and Disclosure of Inventions. AVI and ABX shall cause each employee, agent, or independent contractor that conducts research pursuant to the Research Collaboration Agreement or this Agreement promptly disclose to the other party, and appropriately assign in accordance with this Agreement any and all right, title and interest in and to any Inventions and all intellectual property rights therein and thereto. AVI and ABX shall maintain records in sufficient detail and in good scientific manner appropriate for patent purposes and so as to properly reflect all work done and results achieved in performing its rights and obligations hereunder, and agrees to respond to reasonable requests from AVI or ABX, as the case may be, for information based upon such records. - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -10- 11 4.3 Prosecution and Maintenance of Patent Rights. 4.3.1 AVI Patent Rights. AVI shall have the sole right and responsibility (but not the obligation), at its expense, to prepare, file, prosecute and maintain all patent applications and patents (and to conduct any interferences, oppositions, or reexaminations thereon, and to request any reissues or patent term extensions thereof) within the AVI Patent Rights. 4.3.2 Research Program Patent Rights. Except as otherwise set forth in the Antigen Product License (if entered into by the parties), AVI shall have the first right and responsibility (but not the obligation), at its expense, to prepare, file, prosecute and maintain all patent applications and patents (and to conduct any interferences, oppositions, or reexaminations thereon, and to request any reissues or patent term extensions thereof) within the Research Program Patent Rights. AVI shall: (i) provide ABX with a copy of any patent application proposed to be filed hereunder by AVI promptly prior to filing and receive and incorporate reasonable comments by ABX thereon; (ii) provide ABX with any patent application filed hereunder by AVI promptly after such filing; (iii) provide ABX promptly with copies of all substantive communications received from or filed in patent office(s) with respect to such filings and receive and incorporate reasonable comments by ABX thereon; (iv) notify ABX of any interference, opposition, reexamination request, nullity proceeding, appeal or other interparty action and review it with the ABX as reasonably requested; and (v) a reasonable time prior to taking or failing to take any action that would substantially affect the scope of validity of rights under such patent applications or patents (including substantially narrowing or canceling any claim without reserving the right to file a continuing or divisional application, abandoning any patent or not filing or perfecting the filing of any patent application), provide ABX with notice of such proposed action so that ABX has a reasonable opportunity to review and make comments. ABX shall assist AVI upon request and at AVI's sole expense, and to the extent commercially reasonable, in preparing, filing or maintaining the patent applications and patents claiming Research Program. If AVI fails to undertake the preparation and filing of a patent application (or continuing or divisional application) within ninety (90) days after a written request from ABX to do so, or if AVI discontinues the prosecution or maintenance of a patent application or a patent, ABX at its expense may, in its discretion, undertake such preparation, filing, prosecution or maintenance thereof, in which case such patent application and patent thereon shall be excluded from the Licensed Technology. 4.4 Enforcement of Patent Rights. 4.4.1 ABX Patent Rights. ABX shall have the sole right and responsibility (but not the obligation), at its expense, to enforce the ABX Patent Rights. 4.4.2 AVI Patent Rights. AVI shall have the sole right and responsibility (but not the obligation), at its expense, to enforce the AVI Patent Rights. 4.4.3 Research Program Patent Rights. (a) ABX shall have the sole right and responsibility (but not the obligation), at its expense, to enforce the Research Program Patent Rights. AVI shall assist ABX, upon request and at ABX's sole expense, and to the extent commercially reasonable, in enforcing the Research Program Patent Rights. -11- 12 (b) If ABX fails to abate an infringement of the Research Program Patent Rights, or to file an action to abate such infringement, within ninety (90) days after a written request from AVI to do so, or if ABX discontinues the prosecution of any such action after filing without abating such infringement, AVI at its expense may, in its discretion, undertake such action as it determines appropriate to enforce such Research Program Patent Rights against such infringer. In such case, ABX shall reasonably assist AVI, upon request and at AVI's sole expense, and to the extent commercially reasonable, in taking any action to enforce such Research Program Patent Rights against such infringer. (c) All monies recovered upon the final judgment or settlement of any such action shall be used (i) first, to reimburse the costs and expenses (including reasonable attorneys' fees and costs) of AVI and ABX, (ii) second (to the extent that damages are awarded for lost sales or lost profits from the sale of Products), to ABX taking into account the royalties that would have been payable to ABX on the sale of such Products, and (iii) the remainder to the account of the party or parties that undertake such actions to the extent of their financial participation therein. 4.5 Grant-Back. It is the intent of the parties that this Agreement shall not restrict ABX's freedom to operate regarding the practice and commercialization of the Licensed Technology (including without limitation XenoMouse Animals and cells, genetic material, and antibodies derived from XenoMouse Animals), except as expressly set forth herein regarding the Antigen. Accordingly, in the event that any patent owned or controlled by AVI that directly arises from use of the XenoMouse Animals that has application other than for the manufacture, use, sale, offer for sale or import of Products, AVI hereby grants to ABX a royalty-free, perpetual, irrevocable license in the Territory, with the right to grant and authorize sublicenses, under all such patents for all fields of use other than the manufacture, use, sale, offer for sale or import of Products. 5. CONFIDENTIALITY 5.1 Confidentiality. Except as expressly provided herein, AVI and ABX each shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose any Confidential Information of the other until the date five (5) years following the expiration or termination of this Agreement. 5.2 Permitted Disclosure. Notwithstanding Section 5.1 above, each party may nevertheless disclose the other party's Confidential Information to the extent such disclosure is required by applicable law, regulation or court order, provided that if a party is so required to make any such disclosure of the other party's Confidential Information, other than pursuant to a confidentiality agreement, it will give reasonable advance notice to the other party of such disclosure requirement and will use efforts consistent with prudent business judgment to secure confidential treatment of such information prior to its disclosure (whether through protective orders or confidentiality agreements or otherwise). The expiration of AVI's obligations under Section 5.1 above shall not limit AVI's obligations under Section 2.2 above. 5.3 Terms of Agreement. Neither party shall disclose any terms or conditions of this Agreement to any third party without the prior consent of the other party; provided, however, that a party may disclose the terms or conditions of this Agreement, (i) on a need-to-know basis to its -12- 13 legal and financial advisors to the extent such disclosure is reasonably necessary in connection with such party's activities as expressly permitted by this Agreement, (ii) to a third party in connection with (A) an equity investment in such party by a third party, (B) a merger, consolidation or similar transaction entered into by such party, or (C) the sale of all or substantially all of the assets of such party, and (iii) as may, in the reasonable opinion of such party's counsel, be required by applicable law, regulation or court order, including without limitation, a disclosure in connection with such party's filing of a registration statement or other filing with the United States Securities and Exchange Commission (in which event such party will first consult with the other party with respect to such disclosure). Notwithstanding the foregoing, prior to execution of this Agreement, ABX and AVI shall agree upon the substance of information that can be used to describe the terms of this transaction, and each party may disclose such information, as modified by written agreement of ABX and AVI from time to time, without the consent of the other. 6. INDEMNIFICATION 6.1 AVI. AVI shall indemnify and hold harmless ABX, and its directors, officers, employees and agents, from and against all losses, liabilities, damages and expenses, including reasonable attorneys' fees and costs (collectively, "Liabilities"), resulting from any claims, demands, actions or other proceedings by any third party arising from (i) the material breach of any representation, warranty or covenant by AVI under this Agreement, (ii) the use by AVI of the Licensed Technology, (iii) any use, handling or storage by AVI of Materials or Products, or (iv) any use by AVI of the Confidential Information of ABX; provided, however, that AVI shall not be obligated to indemnify or hold harmless ABX for such Liabilities to the extent that such Liabilities arise from the gross negligence or willful misconduct of ABX. 6.2 ABX. ABX shall indemnify and hold harmless AVI, and its directors, officers, employees and agents, from and against all Liabilities resulting from any claims, demands, actions or other proceedings by any third party arising from (i) the material breach of any representation, warranty or covenant by ABX under this Agreement , or (ii) any use by ABX of the Confidential Information of AVI; provided, however, that ABX shall not be obligated to indemnify or hold harmless AVI for such Liabilities to the extent that such Liabilities arise from the gross negligence or willful misconduct of AVI. 6.3 Procedure. If a party (an "Indemnitee") intends to claim indemnification under this Article 6, it shall promptly notify the indemnifying party (the "Indemnitor") in writing of any claim, demand, action or other proceeding for which the Indemnitee intends to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitor, if representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceeding. The indemnity agreement in this Article 6 shall not apply to amounts paid in settlement of any claim, demand, action or other proceeding if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld or delayed unreasonably. The failure to deliver written notice to -13- 14 the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 6, but the omission so to deliver written notice to the Indemnitor shall not relieve it of any liability that it may have to any party claiming indemnification otherwise than under this Article 6. The party claiming indemnification under this Article 6, its employees and agents, shall reasonably cooperate with the Indemnitor and its legal representatives in the investigation of any claim, demand, action or other proceeding covered by this indemnification. 7. REPRESENTATIONS AND WARRANTIES 7.1 ABX. ABX represents and warrants that: (i) it has the power and authority to enter into this Agreement; (ii) to the knowledge of ABX, there are no existing or threatened actions, suits or claims pending with respect to the subject matter hereof or the right of ABX to enter into and perform its obligations under this Agreement; (iii) it has taken all necessary action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; (iv) this Agreement has been duly executed and delivered on behalf of it, and constitutes a legal, valid, binding obligation, enforceable against it in accordance with the terms hereof; and (v) the execution and delivery of this Agreement and the performance of its obligations hereunder do not conflict with or violate any requirement of applicable laws or regulations and do not conflict with, or constitute a default under, any contractual obligation of it. 7.2 AVI. AVI represents and warrants that: (i) it has the power and authority to enter into this Agreement; (ii) to the knowledge of AVI, there are no existing or threatened actions, suits or claims pending with respect to the subject matter hereof or the right of AVI to enter into and perform its obligations under this Agreement; (iii) it has taken all necessary action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; (iv) this Agreement has been duly executed and delivered on behalf of it, and constitutes a legal, valid, binding obligation, enforceable against it in accordance with the terms hereof; (v) the execution and delivery of this Agreement and the performance of its obligations hereunder do not conflict with or violate any requirement of applicable laws or regulations and do not conflict with, or constitute a default under, any contractual obligation of it; and (vi) it will not knowingly take any action, or fail to take any action, under this Agreement that will cause a breach of the GenPharm Cross License Agreement or the XT Master Research and License Agreement. 7.3 Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, ABX MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND REGARDING THE MATERIALS, PRODUCTS OR LICENSED TECHNOLOGY, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, AND VALIDITY OF TECHNOLOGY OR PATENT CLAIMS, ISSUED OR PENDING. ALL XENOMOUSE ANIMALS AND OTHER MATERIALS PROVIDED TO AVI PURSUANT TO THE RESEARCH COLLABORATION AGREEMENT OR THIS AGREEMENT ARE PROVIDED "AS IS." 8. TERM; TERMINATION 8.1 Term. This Agreement shall commence on the Effective Date and, unless earlier terminated pursuant to Article 3 above or this Article 8, shall continue in effect until October 1, 1999. -14- 15 8.2 Termination for Breach. In the event that a party shall have materially breached or defaulted in the performance of any of its material obligations hereunder, and such breach or default shall have continued for thirty (30) days after written notice of such breach was provided to the breaching party by the nonbreaching party, the nonbreaching party shall have the right at its option to terminate this Agreement effective at the end of such thirty (30) day period. 8.3 Termination by AVI. AVI may terminate this Agreement at any time upon ninety (90) days written notice to ABX. 8.4 Effect of Termination; Accrued Rights and Survival of Terms. Termination or expiration of this Agreement for any reason shall be without prejudice to any rights which shall have accrued to the benefit of a party prior to such termination or expiration. Without limiting the foregoing, Articles 4, 5 and 6 and Sections 2.2 and 7.3 of this Agreement shall survive any expiration or termination of this Agreement. 9. MISCELLANEOUS PROVISIONS 9.1 Governing Laws. This Agreement shall be governed by, interpreted and construed in accordance with the laws of the State of California, without regard to conflicts of law principles. 9.2 Waiver. No waiver by a party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent and/or similar breach or default. 9.3 Assignment. Neither this Agreement nor any right or obligation hereunder may be assigned or delegated, in whole or part, by either party without the prior express written consent of the other; provided, however, that either party may, without the written consent of the other, assign this Agreement and its rights and delegate its obligations hereunder in connection with the transfer or sale of all or substantially all of its business, or in the event of its merger, consolidation, change in control or similar transaction. Any permitted assignee shall assume all obligations of its assignor under this Agreement. Any purported assignment in violation of this Section 9.3 shall be void. Notwithstanding the foregoing, ABX shall not be obligated without its consent to send XenoMouse Animals to any party other than AVI, nor shall AVI have the right to transfer XenoMouse Animals to any other party without ABX's prior written consent. The terms and conditions of this Agreement shall be binding upon and inure to the benefit of the permitted successors and assigns of the parties. 9.4 Independent Contractors. The relationship of the parties hereto is that of independent contractors. The parties hereto are not deemed to be agents, partners or joint venturers of the others for any purpose as a result of this Agreement or the transactions contemplated thereby. 9.5 Further Actions. Each party agrees to execute, acknowledge and deliver such further instruments and to do all such other acts as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 9.6 Notices. All requests and notices required or permitted to be given to the parties hereto shall be given in writing, shall expressly reference the section(s) of this Agreement to which they pertain, and shall be delivered to the other party, effective on receipt, at the appropriate address -15- 16 as set forth below or to such other addresses as may be designated in writing by the parties from time to time during the term of this Agreement. If to ABX: Abgenix, Inc. 7601 Dumbarton Circle Fremont, California 94555 Attn: President with a copy to: Pillsbury Madison & Sutro LLP 101 West Broadway, Suite 1800 San Diego, California 92101 Attn: Mark R. Wicker If to AVI: AVI BioPharma, Inc. One SW Columbia Street, Suite 1105 Portland, Oregon 97258 Attn: President 9.7 No Implied Licenses. Only licenses and rights granted expressly herein shall be of legal force and effect. No license or other right shall be created hereunder by implication, estoppel or otherwise. 9.8 Force Majeure. Nonperformance of a party (other than for the payment of money) shall be excused to the extent that performance is rendered impossible by strike, fire, earthquake, flood, governmental acts or orders or restrictions, failure of suppliers, or any other reason where failure to perform is beyond the reasonable control and not caused by the negligence, intentional conduct or misconduct of the nonperforming party. 9.9 No Consequential Damages. IN NO EVENT SHALL A PARTY HERETO BE LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR THE EXERCISE OF ITS RIGHTS HEREUNDER, INCLUDING WITHOUT LIMITATION LOST PROFITS ARISING FROM OR RELATING TO ANY BREACH OF THIS AGREEMENT, REGARDLESS OF ANY NOTICE OF SUCH DAMAGES. NOTHING IN THIS SECTION 9.9 IS INTENDED TO LIMIT OR RESTRICT THE INDEMNIFICATION RIGHTS OR OBLIGATIONS OF EITHER PARTY. 9.10 Third Party Rights. Notwithstanding anything to the contrary in this Agreement, the grant of rights by ABX under this Agreement shall be subject to and limited in all respects by the terms of the applicable ABX In-License(s) pursuant to which ABX acquired any Licensed Technology, and all rights or sublicenses granted under this Agreement shall be limited to the extent that ABX may grant such rights and sublicenses under such ABX In-Licenses. Additionally, and without limiting the foregoing, the rights granted to AVI hereunder, including without -16- 17 limitation any grant of "exclusive" rights, shall be subject to the rights granted to or retained by GenPharm under the GenPharm Cross License Agreement. 9.11 Complete Agreement. This Agreement constitutes the entire agreement, both written and oral, among the parties with respect to the subject matter hereof, and that all prior representations, understandings and agreements regarding the subject matter hereof, either written or oral, expressed or implied, shall be abrogated, canceled, and are null and void and of no effect, including, without limitation, the Research Collaboration Agreement (except for those provisions of the Research Collaboration Agreement that expressly survive pursuant to the terms thereof, including without limitation Sections 2(a) (other than the first sentence thereof), 3, 5, 6, 7 and 10 thereof). No amendment or change hereof or addition hereto shall be effective or binding on the parties unless reduced to writing and executed by the respective duly authorized representatives of the parties. 9.12 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and together shall be deemed to be one and the same agreement. 9.13 Headings. The captions to the several Articles and Sections hereof are not a part of this Agreement, but are included merely for convenience of reference only and shall not affect its meaning or interpretation. -17- 18 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized officers as of the day and year first above written. ABGENIX, INC. By: /s/ Raymond M. Withy ------------------------------------- (Signature) Raymond M. Withy, Ph.D. ------------------------------------- (Printed Name) Vice President, Corporate Development ------------------------------------- (Title) AVI BIOPHARMA, INC. By: /s/ Denis R. Burger ------------------------------------- (Signature) Denis R. Burger, Ph.D. ------------------------------------- (Printed Name) Chief Executive Officer ------------------------------------- (Title) -18- 19 EXHIBIT A ABX Materials and Information [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -19- 20 EXHIBIT B ABX PATENT RIGHTS I. Pursuant to the XT Master Research and License Agreement A. Any (i) of the patent applications listed in the following Table: [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -20- 21 [*] and patents issuing thereon, (ii) continuations, divisionals, reexamination certificates, reissues, or extensions thereof, and (iii) any foreign counterparts issued or issuing on any of (i) or (ii) above. B. Pursuant to the License Agreement by and between [*] C. Pursuant to the Agreement between [*] D. Pursuant to the Material Transfer and License Agreement by and between [*] E. Pursuant to Agreements between [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -21- 22 [*] II. Pursuant to the GenPharm Cross License Agreement A. [*], including (i) any continuations, continuations-in-part, patents of addition, divisionals, reexamination certificates, reissues or extensions, including supplemental protection certificates thereof, (ii) any patents issuing from such application or upon an application under (i), and (iii) foreign counterparts applied for, issued, or issuing on such application or any of (i) or (ii). B. [*], including (i) any continuations, continuations-in-part, patents of addition, divisionals, reexamination certificates, reissues or extensions, including supplemental protection certificates thereof, (ii) any patents issuing from such application or upon an application under (i), and (iii) foreign counterparts applied for, issued, or issuing on such application or any of (i) or (ii). C. Pursuant to a License Agreement [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -22- 23 EXHIBIT C PRODUCT LICENSE AGREEMENT THIS PRODUCT LICENSE AGREEMENT (this "Agreement"), effective as of _____, 1999 (the "Effective Date"), is made by and between ABGENIX, INC., a Delaware corporation ("ABX"), having a place of business at 7601 Dumbarton Circle, Fremont, California 94555, and AVI BIOPHARMA, INC., an Oregon corporation ("AVI"), having a place of business at One SW Columbia Street, Suite 1105, Portland, Oregon 97258, with respect to the following facts: RECITALS WHEREAS, AVI and ABX have entered into the Research License and Option Agreement (as defined below). WHEREAS, AVI has exercised rights under the Research License and Option Agreement to acquire from ABX a license or sublicense, as the case may be, under the Licensed Technology to commercialize Products (as defined below) in the Field (as defined below) on the terms and conditions herein. NOW, THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between the parties as follows: 1. DEFINITIONS. For purposes of this Agreement, the terms set forth in this Article shall have the meanings set forth below. Any capitalized term used, but not defined, in this Agreement shall have the respective meanings set forth in the Research License and Option Agreement. 1.1 "ABX Know-How" shall mean, collectively, all inventions, discoveries, data, information, methods, techniques, technology and other results, whether or not patentable but which are not generally known, regarding (a) methods and techniques of immunizing the XenoMouse(TM) Animals to the Antigen which are disclosed by ABX to AVI pursuant to the Research Collaboration Agreement, the Research License and Option Agreement or this Agreement, and (b) ABX Materials and ABX Inventions. All ABX Know-How shall be Confidential Information of ABX. 1.2 "ABX Patent Rights" shall mean, collectively, (a) all patents and patent applications listed on Attachment A and any foreign counterparts claiming priority thereof; (b) all patent applications heretofore or hereafter filed in any country which claim ABX Materials delivered to AVI or ABX Inventions; (c) all patents that have issued or in the future issue from any of the foregoing patent applications, including without limitation utility, model and design patents and certificates of invention; and (d) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications. 24 1.3 "Affiliate" shall mean, with respect to any person or entity, any other person or entity which controls, is controlled by or is under common control with such person or entity. A person or entity shall be regarded as in control of another entity if it owns or controls at least fifty percent (50%) of the equity securities of the subject entity entitled to vote in the election of directors (or, in the case of an entity that is not a corporation, for the election of the corresponding managing authority). 1.4 "Antibody" shall mean a composition comprising (a) a whole antibody, or any fragment thereof, derived from the XenoMouse Animals, or (b) a whole antibody, or any fragment thereof, which is derived from a whole antibody, or any fragment thereof, which itself is derived from the XenoMouse Animals (or from the nucleotide sequences that encode, or amino acid sequences of, a whole antibody, or any fragment thereof, derived from the XenoMouse Animals). 1.5 "Antigen" shall mean (beta) human chorionic gonadotropin ((beta)HCG). 1.6 "Confidential Information" shall mean, with respect to a party, all information of any kind whatsoever (including without limitation, compilations, data, formulae, models, patent disclosures, procedures, processes, projections, protocols, results of experimentation and testing, specifications, strategies and techniques), and all tangible and intangible embodiments thereof of any kind whatsoever (including without limitation, apparatus, biological or chemical materials, animals, cells, compositions, documents, drawings, machinery, patent applications, records, reports), which is owned or controlled by such party, is disclosed by such party to the other party and (if disclosed in writing or other tangible medium) is marked or identified as confidential at the time of disclosure to the receiving party or (if otherwise disclosed) is identified as confidential at the time of disclosure to the receiving party and described as such in writing within thirty (30) days after such disclosure. Notwithstanding the foregoing, Confidential Information of a party shall not include information which the receiving party can establish by written documentation (a) to have been publicly known prior to disclosure of such information by the disclosing party to the receiving party, (b) to have become publicly known, without fault on the part of the receiving party, subsequent to disclosure of such information by the disclosing party to the receiving party, (c) to have been received by the receiving party at any time from a source, other than the disclosing party, rightfully having possession of and the right to disclose such information free of confidentiality obligations, (d) to have been otherwise known by the receiving party free of confidentiality obligations prior to disclosure of such information by the disclosing party to the receiving party, or (e) to have been independently developed by employees or agents of the receiving party without access to or use of such information disclosed by the disclosing party to the receiving party. The parties acknowledge that the foregoing exceptions shall be narrowly construed and that the obligations imposed upon each party under Section 7 below shall be relieved solely with respect to such Confidential Information of the disclosing party which falls within the above exceptions and not with respect to related portions, other combinations, or characteristics of the Confidential Information of the disclosing party including, without limitation, advantages, operability, specific purposes, uses and the like. 1.7 "Derived" or "derived" shall mean obtained, developed, created, synthesized, designed, derived or resulting from, based upon or otherwise generated (whether directly or indirectly, or in whole or in part). 1.8 "Excluded Technology" shall mean, collectively, (a) all patent rights, know-how -2- 25 or other intellectual property rights or technology of ABX in or to (i) all antigens other than the Antigen, including without limitation (A) compositions of such antigens or of Genetic Materials that encode such antigens; (B) uses of such antigens; (C) antibodies or other compositions that bind to such antigens, Genetic Materials that encode such antibodies or compositions, and Antibody Cells that express, secrete, or contain such antibodies, Genetic Materials or compositions; and (D) uses of such antibodies, Genetic Materials or compositions; (ii) methods to discover novel antigens; and (iii) methods of using antigens other than to create antibodies; (b)(i) all patent applications heretofore or hereafter filed in any country which claim ABX Materials (except for those described in clause (a) of Section 1.4 of the Research License and Option Agreement) or ABX Inventions; (ii) all patents that have issued or in the future issue from any of the foregoing patent applications, including without limitation utility, model and design patents and certificates of invention; and (iii) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications; and (c) inventions, discoveries, data, information, methods, techniques, technology and other results, whether or not patentable but which are not generally known, regarding ABX Materials (except for those described in clause (a) of Section 1.4 of the Research License and Option Agreement) and ABX Inventions. 1.9 "Field" shall mean the use of Products for human medical purposes. 1.10 "Genetic Material" shall mean a nucleotide sequence, including DNA, RNA, and complementary and reverse complementary nucleotide sequences thereto, whether coding or noncoding and whether intact or a fragment. 1.11 "GenPharm Cross License Agreement" shall mean that certain Cross License Agreement entered into by and between ABX, JTI, XT, Cell Genesys, Inc., and GenPharm International, Inc. effective as of March 26, 1997, as the same may be amended from time to time. 1.12 "IND" shall mean an Investigational New Drug application filed with Food and Drug Administration in the United States, or any similar filing with any foreign regulatory authority, to commence human clinical testing of any Product in any country in the Territory. 1.13 "JTI" shall mean Japan Tobacco Inc., a Japanese corporation 1.14 "Licensed Technology" shall mean ABX's rights in the ABX Patent Rights, ABX Know-How, Research Program Patent Rights and Research Program Know-How; provided, however, that the Licensed Technology (a) is all to the extent and only to the extent that ABX has the right to grant (sub)licenses thereunder (including without limitation to the extent permitted under the applicable ABX In-Licenses); (b) is expressly subject to the ABX In-Licenses; and (c) shall exclude the Excluded Technology. 1.15 "Net Sales" shall mean [*]. Net Sales shall not include [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -3- 26 [*] In the event that a Product is sold in combination as a single product with another product or component, Net Sales from such combination sales for purposes of calculating the amount due under this Agreement shall be calculated by [*] 1.16 "Patent Claim" shall mean a claim of a pending patent application or issued and unexpired patent included within the Licensed Technology which has not been held unenforceable or invalid by a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal and which has not been admitted to be invalid or unenforceable through reissue, disclaimer or otherwise. 1.17 "Product" shall mean any product comprising (a) an Antibody which binds to the Antigen, or (b) Genetic Material that encodes such an Antibody wherein, in respect of each Product, said Genetic Material does not encode multiple antibodies. 1.18 "Research Collaboration Agreement" shall mean that certain Research Collaboration Agreement effective as of October 2, 1998, by and between ABX and AVI. 1.19 "Research License and Option Agreement" shall mean that certain Research License and Option Agreement effective as of January 4, 1999 by and between ABX and AVI. 1.20 "Research Program Know-How" shall mean, collectively, all inventions, discoveries, data, information, methods, techniques, technology and other results, whether or not patentable but which are not generally known, regarding Research Program Materials and Research Program Inventions. All Research Program Know-How shall be Confidential Information of ABX. 1.21 "Research Program Patent Rights" shall mean, collectively, (a) all patent applications heretofore or hereafter filed in any country which claim Research Program Materials or Research Program Inventions; (b) all patents that have issued or in the future issue from any of the foregoing patent applications, including without limitation utility, model and design patents and certificates of invention; and (c) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications. 1.22 "Sublicensee" shall mean a third party (other than an Affiliate) that is granted a sublicense under the Licensed Technology to both make and sell Products. "Sublicensee" shall also include a third party (other than an Affiliate) that is granted the right to distribute Product, provided that such third party is responsible for marketing and promotion of Product within the applicable territory. As used herein, a "Sublicense" shall mean an agreement or arrangement pursuant to which such a sublicense or distribution right has been granted. 1.23 "Territory" shall mean all the countries of the world. 1.24 "XenoMouse" and "XenoMouse Animals" shall mean one or more sterile male - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -4- 27 transgenic mice provided by ABX to AVI for immunization with the Antigen under the Research Collaboration Agreement or the Research License and Option Agreement. 1.25 "XT" shall mean Xenotech, L.P., a California limited partnership. 1.26 "XT Master Research and License Agreement" shall mean that certain Master Research License and Option Agreement entered into by and among JTI, XT and Cell Genesys, Inc. effective as of June 28, 1996, and subsequently assigned to ABX by Cell Genesys, Inc., as the same may be amended from time to time. 1.27 "XT Product License" shall mean a license granted from XT to ABX pursuant to the terms of the XT Master Research and License Agreement permitting ABX to commercialize, or to provide rights to a third party to commercialize, certain Products in one or more territories. 2. LICENSE GRANT 2.1 Grant of Rights. 2.1.1 Subject to the terms and conditions of this Agreement, ABX hereby grants to AVI an exclusive license or sublicense, as the case may be, under the Licensed Technology, to make and have made Product anywhere in the world and to use, sell, lease, offer to sell or lease, import, export, otherwise transfer physical possession of or otherwise transfer title to Product for use in the Field in the Territory. 2.1.2 The license granted under Section 2.1.1 above is expressly subject to the terms and conditions of Section 2.2 of the Research License and Option Agreement (other than the provisions of subsections (g), (h) and (i) thereof). 2.2 Sublicenses. AVI may grant Sublicenses under Section 2.1 above. AVI shall provide ABX with a copy of each such Sublicense promptly after executing the same; provided, however, that AVI shall have the right to redact any confidential financial terms from the copy provided to ABX. Any such Sublicense shall be subject and subordinate to the terms and conditions of this Agreement, and AVI shall remain responsible for all payments due to ABX hereunder with respect to Net Sales of Products by any such Sublicensee or its Affiliates. Notwithstanding the foregoing, AVI shall not have the right to Sublicense any right under this Agreement in or to a XenoMouse Animal or other transgenic animal covered by the Licensed Technology. 2.3 No Other Rights. No rights other than those expressly set forth in this Agreement are granted to AVI hereunder, and no additional rights shall be deemed granted to AVI by implication, estoppel or otherwise. Without limiting the foregoing, the rights of AVI under this Agreement are subject and subordinate in all respects to the provisions of Section 2.2 of the Research License and Option Agreement (other than the provisions of subsections (g), (h) and (i) thereof). 3. CONSIDERATION. 3.1 Milestone Payments. -5- 28 3.1.1 Amounts. Within thirty (30) days following the achievement by AVI (or any of its Affiliates or Sublicensees) of each the following milestones, AVI shall give written notice thereof to ABX and shall pay to ABX [*] 3.1.2 Terminology. As used herein, [*]. In the event milestone D above is met, and at such time either one or both of milestones A or B have not been met, the payment for all such unmet milestone payments shall then be due. 3.2 Royalties. 3.2.1 Royalty Commencement Date. AVI shall notify ABX of the date of commercial introduction of each Product into each country in the Territory, which shall mean, on a country-by-country basis in the Territory, the date of first commercial sale (other than for purposes of obtaining regulatory approval) of such Product by AVI, its Affiliate or any Sublicensee to an unaffiliated third party in such country (with respect to each Product in each country, hereinafter, the "Royalty Commencement Date"). 3.2.2 Royalty Rate. In consideration of the license granted herein, AVI shall pay to ABX a running royalty of [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -6- 29 [*] 3.2.3 Length of Term of Royalty Obligations. AVI's obligation to pay royalties on Net Sales of each Product under this Agreement shall commence on a country-by-country basis on the Royalty Commencement Date for such Product in such country and continue thereafter for such Product on a country-by-country basis until (a) if, as of the Royalty Commencement Date for such Product in such country, there exists a Patent Claim in the country where such Product is made, used or sold that covers (i) AVI's manufacture, use or sale of such Product or (ii) XenoMouse Animals or their use, such date as no such Patent Claim exists in the country where such Product is made, used or sold, or (b) otherwise, ten (10) years after the Royalty Commencement Date for such Product in such country. 3.3 Discounting. If AVI or its Affiliate or Sublicensee sells any Product to a third party who also purchases other products or services from AVI, its Affiliate or Sublicensee, AVI agrees not to, and requires its Affiliate and Sublicensee not to, discount the sales price of the Products to a greater degree than AVI, its Affiliate or Sublicensee, respectively, generally discounts the price of its other products to such customer. 3.4 Royalties To Be Paid By ABX. It is understood that, subject to the terms and conditions of this Agreement, including without limitation AVI's payment of royalties as set forth herein, ABX will be responsible to make the royalty payments to third parties as set forth in Attachment B hereto in respect of Net Sales of Products in accordance with this Agreement. 4. ACCOUNTING AND RECORDS. 4.1 Royalty Reports; Payments, Invoices. After the first commercial sale of Product on which royalties are required to be paid by AVI under Article 3 above, AVI agrees to make quarterly written reports to ABX within thirty (30) days after the end of each calendar quarter, stating in each such report the number, description, and aggregate Net Sales of Product sold during the calendar quarter upon which a royalty is payable under Article 3 above. These reports may be combined with reports due under Section 5.4. Concurrently with the making of such reports, AVI shall pay to ABX all amounts payable pursuant to Article 3 above. All payments to ABX hereunder shall be made in U.S. Dollars to a bank account designated by ABX. 4.2 Records; Inspection. AVI shall keep (and cause its Affiliates and Sublicensees to keep) complete, true and accurate books of account and records for the purpose of determining the royalty amounts payable to ABX under this Agreement. Such books and records shall be kept at the principal place of business of AVI or its Affiliates or Sublicensees, as the case may be, for at least three years following the end of the calendar quarter to which they pertain. Such records of AVI or its Affiliates will be open for inspection during such three-year period by representatives of ABX (which representatives may also represent XT) for the purpose of verifying the royalty statements. AVI shall require each of its Sublicensees to maintain similar books and records and to open such records for inspection during the same three-year period by a representative of AVI reasonably satisfactory to ABX on behalf of, and as required by, ABX for the purpose of verifying the royalty statements. All such inspections may be made no more than once each calendar year at reasonable times mutually agreed by AVI and ABX. The representative of ABX will be obliged to execute a reasonable confidentiality agreement prior to commencing any such inspection. Inspections conducted under this Section 4.2 shall be at the expense of ABX, unless a variation or - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -7- 30 error producing an increase [*] of the amount stated for any period is established in the course of any such inspection, whereupon all costs relating to the audit of such period will be paid by AVI. 4.3 Payment Method. All payments due hereunder shall be made in U.S. dollars, and shall be made by bank wire transfer in immediately available funds to an account designed by ABX. 4.4 Currency Conversion. If any currency conversion shall be required in connection with the calculation of royalties hereunder, such conversion shall be made using the selling exchange rate for conversion of the foreign currency into U.S. Dollars, quoted for current transactions reported in The Wall Street Journal for the last business day of the calendar quarter to which such payment pertains. 4.5 Late Payments. Any payments due from AVI that are not paid on the date such payments are due under this Agreement shall bear interest at the lesser of (i) the prime rate as reported by the Bank of America in San Francisco, California on the date such payment is due, plus an additional [*], or (ii) the maximum rate permitted by applicable law, in each case calculated on the number of days such payment is delinquent. This Section 4.5 shall in no way limit any other remedies available to any party. 4.6 Withholding Taxes. All payments required to be made pursuant to Article 3 hereof shall be without deduction or withholding for or on account of any taxes or similar governmental charge imposed by a jurisdiction, such taxes being referred to herein as "Withholding Taxes." Withholding Taxes shall be the sole responsibility of the withholding party. The withholding party shall provide a certificate evidencing payment of any Withholding Taxes hereunder. 5. DILIGENCE. 5.1 General. AVI shall use its diligent efforts to actively research, develop and obtain regulatory approvals to market in major markets throughout the world at least one Product hereunder as expeditiously as possible, and following such approval to maximize Net Sales of such Product. 5.2 Filing of IND. Without limiting Section 5.1 above, AVI or its Sublicensee shall file an IND with the U.S. FDA for one or more Products under this Agreement [*]; provided, however, prior to the expiration of such [*], if AVI requests in writing that ABX extend such time period, and provides ABX with reasonably satisfactory evidence that AVI has diligently endeavored to file such an IND within such [*], and pays to ABX the [*], then ABX shall extend such time period for an additional [*]. If AVI pays such extension fee to ABX as set forth above, AVI shall have the right to [*]. After the filing of an IND for a Product, AVI, or its Sublicensee, shall be required to have an active IND and to be actively and diligently conducting clinical trials in pursuit of regulatory approval - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -8- 31 for the Product in the United States until such Product may be sold commercially in the United States. 5.3 Failure to Meet Due Diligence Obligation. If the diligence requirements set forth in Section 5.1 and 5.2 are not met by AVI (or its Sublicensees), ABX shall have the right to terminate this Agreement pursuant to Section 9.2 below. 5.4 Research and Development Reports. AVI shall keep (or cause to be kept) complete and accurate records of its research, development and commercialization activities under this Agreement. AVI shall maintain (or cause to be maintained) such records in sufficient detail, and in accordance with good scientific practices. AVI shall keep ABX fully informed as to its research, development and commercialization activities hereunder. Without limiting the foregoing, within thirty (30) days of the end of each calendar quarter, AVI shall provide to ABX a reasonably detailed written report regarding such research, development and commercialization activities and the status thereof. 5.5 No Conflicts. 5.5.1 Other Products. During the term of this Agreement, AVI shall not directly or indirectly sell or commercialize for human medical use, or conduct research or development toward the human medical use of any product (other than the Products), comprising (a) a human, humanized, or chimeric antibody, human, humanized, or chimeric antibody fragment or amino acid sequence derived from a human, humanized or chimeric antibody, in each case which binds to the Antigen, (b) Genetic Material that encodes such any such composition, or (c) any other chemical or biological material derived by AVI from XenoMouse Animals immunized with the Antigen strictly in accordance with the terms and conditions of the Research Collaboration Agreement, the Research License and Option Agreement or this Agreement. 5.5.2 Discounting. In the event that AVI or its Affiliates sells Product to a third party who also purchases other products or services from AVI or its Affiliate, and AVI or its Affiliates discounts the purchase price of the Product to a greater degree than AVI or its Affiliate, respectively, generally discounts the price of their other products to such customer, then in such case the Net Sales for the sale of Products to such third party shall be deemed to equal the arm's length price that third parties would generally pay for the Product alone when not purchasing any other product or service from AVI or its Affiliate. For purposes of this provision "discounting" includes establishing the list price at a lower-than-normal level. 5.6 Gene Therapy Applications. AVI's intention as of the Effective Date is to commercialize a Product hereunder for an application other than Gene Therapy before commercializing a Product hereunder for a Gene Therapy application. It is understood, however, that AVI may or may not also intend to develop and sell Products for use in Gene Therapy, and that such Gene Therapy application may ultimately be commercialized before a Product is commercialized hereunder for a non-Gene Therapy application. As used herein, "Gene Therapy" shall mean [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -9- 32 [*] 6. INTELLECTUAL PROPERTY. 6.1 Licensed Technology. Subject to Sections 6.2 and 6.6, ABX or its licensor, as they may agree, shall have the right to control the preparing, filing, prosecuting and maintaining of patents and patent applications worldwide within the Licensed Technology (other than the Research Program Patent Rights) and conducting any interferences, oppositions, reexaminations, or requesting reissues or patent term extensions with respect to patents and patent applications worldwide within the Licensed Technology (other than the Research Program Patent Rights). 6.2 Research Program Patent Rights. Notwithstanding anything to the contrary in this Article 6, AVI shall have the right and responsibility (but not the obligation), at AVI's expense, to file, prosecute, maintain and enforce all patent applications and patents (and to conduct any interferences, oppositions, or reexaminations thereon, and to request any reissues or patent term extensions thereof) within the Research Program Patent Rights in accordance with and subject to the terms and conditions of Article 4 of the Research License and Option Agreement. 6.3 Enforcement. Subject to Section 6.2 and 6.6, in the event that AVI becomes aware that any Licensed Technology necessary for the practice of the license granted herein is infringed or misappropriated by a third party or is subject to a declaratory judgment action arising from such infringement in each case with respect to a composition that binds to the Antigen and is competitive with Products hereunder (an "Infringement"), AVI shall promptly notify ABX. As between AVI, its Sublicensees and ABX, ABX shall have the exclusive right at its expense to bring an enforcement proceeding, or defend any declaratory judgment action, involving any Licensed Technology with respect to an Infringement. ABX shall keep AVI reasonably informed of the progress of such claim, suit or proceeding with respect to an Infringement involving enforcement or defense of the Licensed Technology. Any recovery received by ABX as a result of any such claim, suit or proceeding shall be used first to reimburse ABX for all expenses (including attorneys, and professional fees) incurred in connection with such claim, suit or proceeding, and the remaining amount (if any) retained by ABX, after paying amounts ABX is obligated to pay to third parties in respect of such amount pursuant to applicable ABX In-Licenses shall be divided, to the extent that the recovery expressly represents lost profits on sales of Product within the Field because of the Infringement, in equal shares between ABX and AVI. Notwithstanding the foregoing, if ABX notifies AVI that it does not desire to pursue an enforcement action, or defend a declaratory judgment action, with respect to a substantial and continuing Infringement, then, to the extent such action involves a Product composition of matter claim, AVI may at its expense bring or defend - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -10- 33 such action in consultation with ABX; provided, however, that (i) ABX shall have the right to join such proceeding at any time at its own expense, (ii) AVI shall not admit the invalidity or unenforceability of any patent rights within the Licensed Technology without ABX's prior written consent, and (iii) if ABX does not join the action, any recovery obtained by AVI shall be used first to reimburse AVI for all expenses (including attorneys, and professional fees) incurred in connection with such claim, suit or proceeding, and the remaining amount (if any) retained by AVI after reimbursing ABX for any amounts ABX is obligated to pay to third parties in respect of such amount pursuant to applicable ABX In-Licenses shall be divided evenly between ABX and AVI. 6.4 Infringement Claims. Subject to Section 6.6, if the production, sale or use of Product pursuant to this Agreement results in any claim, suit or proceeding alleging patent infringement against AVI (or its Affiliates or Sublicensees), AVI shall promptly notify ABX thereof in writing setting forth the facts of such claim in reasonable detail. AVI shall keep ABX reasonably informed of all material developments in connection with any such claim, suit or proceeding as it relates to the Licensed Technology. Notwithstanding the above, AVI shall not admit the invalidity of any patent within the Licensed Technology without written consent from ABX. 6.5 Patent Marking. AVI agrees to mark and have its Affiliates and all Sublicensees mark all Products sold pursuant to this Agreement in accordance with the applicable statutes or regulations in the country or countries of manufacture and sale thereof. 6.6 Limitation. Notwithstanding any other provision in this Article 6, the parties acknowledge and understand that (i) ABX shall not be obligated to prepare, file, prosecute, and maintain patents and patent applications, or to bring or pursue enforcement proceedings or defend declaratory judgment actions regarding the Licensed Technology if, and to the extent that, ABX is not entitled to do so under one or more ABX In-Licenses, and (ii) any rights conveyed under this Article 6 permitting AVI to prepare, file, prosecute and maintain certain patents and patent applications, or to bring and pursue enforcement proceedings, or defend declaratory judgment actions, regarding the Licensed Technology, shall be subject to all applicable ABX In-Licenses, and are conveyed only to the extent permitted under such agreements. 7. CONFIDENTIALITY. 7.1 Confidentiality. Except as expressly provided herein, AVI and ABX each shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose any Confidential Information of the other until the date five (5) years following the expiration or termination of this Agreement. 7.2 Permitted Disclosure. Notwithstanding Section 7.1 above, each party may nevertheless disclose the other party's Confidential Information to the extent such disclosure is required by applicable law, regulation or court order, provided that if a party is so required to make any such disclosure of the other party's Confidential Information, other than pursuant to a confidentiality agreement, it will give reasonable advance notice to the other party of such disclosure requirement and will use efforts consistent with prudent business judgment to secure confidential treatment of such information prior to its disclosure (whether through protective orders or confidentiality agreements or otherwise). The expiration of AVI's obligations under Section 7.1 above shall not be deemed to limit AVI's obligations under Section 2.2 of the Research License and -11- 34 Option Agreement. 7.3 Terms of Agreement. Neither party shall disclose any terms or conditions of this Agreement to any third party without the prior consent of the other party; provided, however, that a party may disclose the terms or conditions of this Agreement, (i) on a need-to-know basis to its legal and financial advisors to the extent such disclosure is reasonably necessary in connection with such party's activities as expressly permitted by this Agreement, (ii) to a third party in connection with (A) an equity investment in such party by a third party, (B) a merger, consolidation or similar transaction entered into by such party, or (C) the sale of all or substantially all of the assets of such party, and (iii) as may, in the reasonable opinion of such party's counsel, be required by applicable law, regulation or court order, including without limitation, a disclosure in connection with such party's filing of a registration statement or other filing with the United States Securities and Exchange Commission (in which event such party will first consult with the other party with respect to such disclosure). Notwithstanding the foregoing, prior to execution of this Agreement, the parties shall agree upon the substance of information that can be used to describe the terms of this transaction, and each party may disclose such information, as modified by written agreement of Abgenix and AVI from time to time, without the consent of the other. Additionally, notwithstanding the foregoing, ABX shall have the right in its sole discretion to disclose (a) the identity of the Antigen upon filing of an IND for a Product, and (b) the achievement of each milestone described in Section 3.1 above, the grant of regulatory approval of each Product in each country and the market launch of each Product in each country, in each case upon the occurrence of the same. 8. INDEMNIFICATION. 8.1 AVI. AVI shall indemnify and hold harmless ABX, and its directors, officers, employees and agents, from and against all losses, liabilities, damages and expenses, including reasonable attorneys' fees and costs (collectively, "Liabilities"), resulting from any claims, demands, actions or other proceedings by any third party arising from (i) the material breach of any representation, warranty or covenant by AVI under this Agreement, (ii) the manufacture, use, sale, handling or storage by AVI, its Affiliates or Sublicensees of the Products (without regard to culpable conduct), or (iii) any use by AVI, its Affiliates or Sublicensees of the Confidential Information of ABX; provided, however, that AVI shall not be obligated to indemnify or hold harmless ABX for such Liabilities to the extent that such Liabilities arise from the gross negligence or willful misconduct of ABX. 8.2 ABX. ABX shall indemnify and hold harmless AVI, and its directors, officers, employees and agents, from and against all Liabilities resulting from any claims, demands, actions or other proceedings by any third party arising from (i) the material breach of any representation, warranty or covenant by ABX under this Agreement, or (ii) any use by ABX of the Confidential Information of AVI; provided, however, that ABX shall not be obligated to indemnify or hold harmless AVI for such Liabilities to the extent that such Liabilities arise from the gross negligence or willful misconduct of AVI. 8.3 Procedure. If a party (an "Indemnitee") intends to claim indemnification under this Article 8, it shall promptly notify the indemnifying party (the "Indemnitor") in writing of any claim, demand, action or other proceeding for which the Indemnitee intends to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the -12- 35 Indemnitor so desires, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitor, if representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceeding. The indemnity agreement in this Article 8 shall not apply to amounts paid in settlement of any claim, demand, action or other proceeding if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld or delayed unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 8, but the omission so to deliver written notice to the Indemnitor shall not relieve it of any liability that it may have to any party claiming indemnification otherwise than under this Article 8. The party claiming indemnification under this Article 8, its employees and agents, shall reasonably cooperate with the Indemnitor and its legal representatives in the investigation of any claim, demand, action or other proceeding covered by this indemnification. 8.4 Insurance. AVI shall maintain insurance, including product liability insurance, with respect to development, manufacture and sales of Products in such amount as AVI customarily maintains with respect to the development, manufacture and sale of its other products. ABX shall be named as an additional insured on any such AVI policies. AVI shall maintain such insurance for so long as it continues to develop, manufacture or sell any Products, and thereafter for so long as AVI customarily maintains insurance for itself covering the development, manufacture and sale of its other products. 9. REPRESENTATIONS AND WARRANTIES. 9.1 ABX. ABX represents and warrants that: (i) it has the power and authority to enter into this Agreement; (ii) to the knowledge of ABX, there are no existing or threatened actions, suits or claims pending with respect to the subject matter hereof or the right of ABX to enter into and perform its obligations under this Agreement; (iii) it has taken all necessary action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; (iv) this Agreement has been duly executed and delivered on behalf of it, and constitutes a legal, valid, binding obligation, enforceable against it in accordance with the terms hereof; and (v) the execution and delivery of this Agreement and the performance of its obligations hereunder do not conflict with or violate any requirement of applicable laws or regulations and do not conflict with, or constitute a default under, any contractual obligation of it. 9.2 AVI. AVI represents and warrants that: (i) it has the power and authority to enter into this Agreement; (ii) to the knowledge of AVI, there are no existing or threatened actions, suits or claims pending with respect to the subject matter hereof or the right of AVI to enter into and perform its obligations under this Agreement; (iii) it has taken all necessary action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; (iv) this Agreement has been duly executed and delivered on behalf of it, and constitutes a legal, valid, binding obligation, enforceable against it in accordance with the terms hereof; (v) the execution and delivery of this Agreement and the performance of its obligations hereunder do not conflict with or violate any requirement of applicable laws or regulations and do not conflict with, or constitute a default under, any contractual obligation of it; and (vi) it will not take any action, or -13- 36 fail to take any action, under this Agreement that will cause a breach of the GenPharm Cross License Agreement, the XT Master Research and License Agreement or the XT Product License. 9.3 Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, ABX MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND REGARDING ABX MATERIALS, PRODUCTS OR THE LICENSED TECHNOLOGY, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, AND VALIDITY OF TECHNOLOGY OR PATENT CLAIMS, ISSUED OR PENDING. ALL XENOMOUSE ANIMALS AND OTHER MATERIALS PROVIDED TO AVI PURSUANT TO THE RESEARCH COLLABORATION AGREEMENT OR THE RESEARCH LICENSE AND OPTION AGREEMENT ARE PROVIDED "AS IS." 10. TERM AND TERMINATION. 10.1 Term. The term of this Agreement shall commence on the Effective Date and, unless earlier terminated as provided in this Article 10, shall continue in full force and effect on a Product-by-Product and country-by-country basis until the expiration of all royalty obligations pursuant to this Agreement for such Product in such country. Following the expiration, but not earlier termination, of this Agreement on a Product-by-Product and country-by-country basis, AVI shall have a fully-paid up, perpetual, non-exclusive license under the ABX Know-How solely to commercialize such Product in such country. 10.2 Termination for Breach. In the event that a party shall have materially breached or defaulted in the performance of any of its material obligations hereunder, and such breach or default shall have continued for thirty (30) days after written notice of such breach was provided to the breaching party by the nonbreaching party, the nonbreaching party shall have the right at its option to terminate this Agreement effective at the end of such thirty (30) day period. 10.3 Termination by AVI. AVI may terminate this Agreement and the license granted herein at any time, by providing ABX ninety (90) days written notice. 10.4 Effect of Termination. 10.4.1 Accrued Obligations. Termination of this Agreement for any reason shall not release either party hereto from any liability which at the time of such termination has already accrued to the other party or which is attributable to a period prior to such termination, nor preclude either party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued are based upon events occurring prior to such termination. 10.4.2 Stock in Hand; Sublicenses. In the event this Agreement is terminated for any reason, AVI and its Affiliates and Sublicensees shall have the right to sell or otherwise dispose (consistent with all applicable regulations and law and subject to Articles 3 and 4 of this Agreement) of the stock of any Product subject to this Agreement then on hand. Upon termination of this Agreement by ABX for any reason, any sublicense granted by AVI hereunder shall survive, provided that upon request by ABX, such Sublicensee promptly agrees in writing to be bound by the applicable terms of this Agreement. -14- 37 10.4.3 Survival. The provisions of Articles 3, 4, 7, 8 and 11 and Section 9.3 shall survive the expiration and any termination of this Agreement for any reason. 11. MISCELLANEOUS. 11.1 Governing Laws. This Agreement shall be governed by, interpreted and construed in accordance with the laws of the State of California, without regard to conflicts of law principles. 11.2 Waiver. No waiver by any party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent and/or similar breach or default. 11.3 Assignments. Neither this Agreement nor any right or obligation hereunder may be assigned or delegated, in whole or part, by either party without the prior express written consent of the other; provided, however, that either party may, without the written consent of the other, assign this Agreement and its rights and delegate its obligations hereunder in connection with the transfer or sale of all or substantially all of its business, or in the event of its merger, consolidation, change in control or similar transaction. Any permitted assignee shall assume all obligations of its assignor under this Agreement. Any purported assignment in violation of this Section 11.3 shall be void. Notwithstanding the foregoing, ABX shall not be obligated without its consent to send XenoMouse Animals to any party other than AVI, nor shall AVI have the right to transfer XenoMouse Animals to any other party without ABX's prior written consent. The terms and conditions of this Agreement shall be binding upon and inure to the benefit of the permitted successors and assigns of the parties. 11.4 Independent Contractors. The relationship of the parties hereto is that of independent contractors. The parties hereto are not deemed to be agents, partners or joint venturers of the others for any purpose as a result of this Agreement or the transactions contemplated thereby. 11.5 Further Actions. Each party agrees to execute, acknowledge and deliver such further instruments and to do all such other acts as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 11.6 Notices. All requests and notices required or permitted to be given to the parties hereto shall be given in writing, shall expressly reference the section(s) of this Agreement to which they pertain, and shall be delivered to the other party, effective on receipt, at the appropriate address as set forth below or to such other addresses as may be designated in writing by the parties from time to time during the term of this Agreement. If to ABX: Abgenix, Inc. 7601 Dumbarton Circle Fremont, California 94555 Attn: President -15- 38 with a copy to: Pillsbury Madison & Sutro LLP 101 West Broadway, Suite 1800 San Diego, California 92101 Attn: Mark R. Wicker If to AVI: AVI BioPharma, Inc. One SW Columbia Street, Suite 1105 Portland, Oregon 97258 Attn: President 11.7 No Implied Licenses. Only licenses and rights granted expressly herein shall be of legal force and effect. No license or other right shall be created hereunder by implication, estoppel or otherwise. 11.8 Export Laws. Notwithstanding anything to the contrary contained herein, all obligations of ABX and AVI are subject to prior compliance with United States export regulations and such other United States laws and regulations as may be applicable, and to obtaining all necessary approvals required by the applicable agencies of the government of the United States. AVI shall be responsible for obtaining such approvals, and shall use efforts consistent with prudent business judgment to obtain such approvals. ABX agrees to cooperate reasonably with AVI and provide reasonable assistance to AVI as may be reasonably necessary to obtain any required approvals. 11.9 Force Majeure. Nonperformance of a party (other than for the payment of money) shall be excused to the extent that performance is rendered impossible by strike, fire, earthquake, flood, governmental acts or orders or restrictions, failure of suppliers, or any other reason where failure to perform, is beyond the reasonable control and not caused by the negligence, intentional conduct or misconduct of the nonperforming party. 11.10 No Consequential Damages. IN NO EVENT SHALL A PARTY HERETO BE LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR THE EXERCISE OF ITS RIGHTS HEREUNDER, INCLUDING WITHOUT LIMITATION LOST PROFITS ARISING FROM OR RELATING TO ANY BREACH OF THIS AGREEMENT, REGARDLESS OF ANY NOTICE OF SUCH DAMAGES. NOTHING IN THIS SECTION 11.10 IS INTENDED TO LIMIT OR RESTRICT THE INDEMNIFICATION RIGHTS OR OBLIGATIONS OF EITHER PARTY. 11.11 Third Party Rights. Notwithstanding anything to the contrary in this Agreement, the grant of rights by ABX under this Agreement shall be subject to and limited in all respects by the terms of the applicable ABX In-License(s) pursuant to which ABX acquired any Licensed Technology, and all rights or sublicenses granted under this Agreement shall be limited to the extent that ABX may grant such rights and sublicenses under such ABX In-Licenses. Additionally, and without limiting the foregoing, the rights granted to AVI hereunder, including without -16- 39 limitation any grant of "exclusive" rights, shall be subject to the rights granted to or retained by GenPharm under the GenPharm Cross License Agreement. 11.12 Complete Agreement. This Agreement constitutes the entire agreement, both written and oral, between the parties with respect to the subject matter hereof, and that all prior representations, understandings and agreements regarding the subject matter hereof, either written or oral, expressed or implied, shall be abrogated, canceled, and are null and void and of no effect, including without limitation the Research Collaboration Agreement (except for those provisions of the Research Collaboration Agreement that expressly survive pursuant to the terms thereof (including without limitation Sections 2(a) (other than the first sentence thereof), 3, 5, 6, 7, and 10 thereof) and the Research License and Option Agreement (except for those provisions of the Research License and Option Agreement that either (a) expressly survive pursuant to the terms thereof (including without limitation Sections 4, 5, 6, 2.2 and 7.3 thereof), or (b) are expressly referenced in this Agreement). No amendment or change hereof or addition hereto shall be effective or binding on either of the parties hereto unless reduced to writing and executed by the respective duly authorized representatives of ABX and AVI. 11.13 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and both together shall be deemed to be one and the same agreement. 11.14 Headings. The captions to the several Articles and Sections hereof are not a part of this Agreement, but are included merely for convenience of reference only and shall not affect its meaning or interpretation. -17- 40 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized officers as of the day and year first above written. ABGENIX, INC. By: (Signature) Raymond M. Withy, Ph.D. ------------------------------------- (Printed Name) Vice President, Corporate Development ------------------------------------- (Title) AVI BIOPHARMA, INC. By: (Signature) Denis R. Burger, Ph.D. ------------------------------------- (Printed Name) Chief Executive Officer ------------------------------------- (Title) -18- 41 ATTACHMENT A ABX PATENT RIGHTS I. Pursuant to the XT Master Research and License Agreement A. Any (i) of the patent applications listed in the following Table: [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -19- 42 [*] and patents issuing thereon, (ii) continuations, divisionals, reexamination certificates, reissues, or extensions thereof, and (iii) any foreign counterparts issued or issuing on any of (i) or (ii) above. B. Pursuant to the License Agreement by and between the [*] C. Pursuant to the Agreement between the [*] D. Pursuant to the Material Transfer and License Agreement by and between [*] E. Pursuant to Agreements between [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -20- 43 [*] II. Pursuant to the GenPharm Cross License Agreement A. [*], including (i) any continuations, continuations-in-part, patents of addition, divisionals, reexamination certificates, reissues or extensions, including supplemental protection certificates thereof, (ii) any patents issuing from such application or upon an application under (i), and (iii) foreign counterparts applied for, issued, or issuing on such application or any of (i) or (ii). B. [*], including (i) any continuations, continuations-in-part, patents of addition, divisionals, reexamination certificates, reissues or extensions, including supplemental protection certificates thereof, (ii) any patents issuing from such application or upon an application under (i), and (iii) foreign counterparts applied for, issued, or issuing on such application or any of (i) or (ii). C. Pursuant to a License Agreement [*] - ------------------ * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -21- 44 ATTACHMENT B ABX IN-LICENSES -22- EX-23.1 10 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the references to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our reports dated January 23, 1998 in the Registration Statement (Form S-1) and related Prospectus of Abgenix, Inc. for the registration of 1,146,300 shares of its common stock. Ernst & Young LLP Palo Alto, California January 14, 1999 -----END PRIVACY-ENHANCED MESSAGE-----