10-Q 1 a10-q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q ---------- (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 30, 2000 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 000-24207 ABGENIX, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3248826 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7601 DUMBARTON CIRCLE FREMONT, CALIFORNIA 94555 (Address of principal executive offices) TELEPHONE NUMBER (510) 608-6500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of July 31, 2000 there were 81,191,610 shares of the Registrant's Common Stock outstanding. ================================================================================ 1 ABGENIX, INC. FORM 10-Q INDEX
Page No. -------- PART I - FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets -- June 30, 2000 and December 31, 1999................................................. 3 Condensed Consolidated Statements of Operations -- Three months and six months ended June 30, 2000 and June 30, 1999.............. 4 Condensed Consolidated Statements of Cash Flows -- Six months ended June 30, 2000 and June 30, 1999............................. 5 Notes to Condensed Consolidated Financial Statements................ 6 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................... 11 ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 33 PART II - OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS............................................ 33 ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS.................... 33 ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES.............................. 34 ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 34 ITEM 5 -- OTHER INFORMATION............................................ 35 ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K............................. 35 SIGNATURES............................................................. 36
2 ABGENIX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, DECEMBER 31, 2000 1999 --------- ------------ Unaudited ASSETS Current assets: Cash and cash equivalents ............................... $ 124,546 $ 13,366 Marketable securities ................................... 430,991 43,543 Interest receivable ..................................... 5,907 1,103 Accounts receivable ..................................... 600 4,150 Prepaid expenses and other current assets ............... 8,726 4,861 --------- --------- Total current assets .......................... 570,770 67,023 Property and equipment, net .................................. 6,254 5,300 Long-term investment ......................................... 31,896 29,225 Intangible assets, net ....................................... 45,038 46,591 Deposits and other assets .................................... 708 402 --------- --------- $ 654,666 $ 148,541 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................ $ 1,821 $ 1,705 Deferred revenue ........................................ 12,539 3,767 Accrued product development costs ....................... 2,191 1,667 Accrued employee benefits ............................... 1,018 1,287 Other accrued liabilities ............................... 1,035 725 Current portion of long-term debt ....................... 541 1,759 --------- --------- Total current liabilities ..................... 19,145 10,910 Deferred rent ................................................ 207 150 Long-term debt ............................................... 33 421 Commitments Stockholders' equity: Preferred stock, $.0001 par value; 5,000,000 shares authorized, none issued and outstanding Common stock, $0.0001 par value; 100,000,000 shares authorized, 81,126,168 and 68,669,092 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively, at amount paid in ....................... 681,715 181,263 Additional paid-in capital .............................. 32,849 32,254 Deferred compensation ................................... (419) (670) Accumulated other comprehensive income .................. 16,739 14,013 Accumulated deficit ..................................... (95,603) (89,800) --------- --------- Total stockholders' equity .................... 635,281 137,060 --------- --------- $ 654,666 $ 148,541 ========= =========
See accompanying notes. 3 ABGENIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- --------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenues: Contract revenue .......................... $ 3,478 $ 1,720 $ 5,443 $ 1,720 Interest income ........................... 8,781 797 13,122 1,192 -------- -------- -------- -------- Total revenues .................... 12,259 2,517 18,565 2,912 Costs and expenses: Research and development .................. 11,912 5,312 19,126 9,878 General and administrative ................ 1,805 1,210 3,390 2,295 Amortization of intangible assets ......... 777 -- 1,553 -- Equity from the Xenotech joint venture ... -- (548) -- (540) Interest expense .......................... 185 111 300 244 -------- -------- -------- -------- Total costs and expenses .......... 14,679 6,085 24,369 11,877 -------- -------- -------- -------- Net loss ....................................... $ (2,420) $ (3,568) $ (5,804) $ (8,965) ======== ======== ======== ======== Basic and diluted net loss per share ........... $ (0.03) $ (0.06) $ (0.07) $ (0.17) ======== ======== ======== ======== Shares used in computing basic and diluted net loss per share ............................ 80,545 59,664 77,522 54,216 ======== ======== ======== ========
See accompanying notes. 4 ABGENIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ----------------------- 2000 1999 --------- --------- Operating activities: Net loss ................................................... $ (5,804) $ (8,965) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in (income) losses of Xenotech .................. -- (540) Depreciation and amortization .......................... 2,511 831 Stock-based compensation related to stock options issued to consultants ....................................... 595 390 Changes for certain assets and liabilities: Interest receivable .................................. (4,804) (682) Accounts receivable .................................. 3,550 -- Prepaid expenses and other current assets ............ (3,864) (899) Deposits and other assets ............................ (315) -- Accounts payable ..................................... 116 1,215 Deferred revenue ..................................... 8,772 -- Accrued product development costs .................... 524 886 Other accrued liabilities ............................ 41 159 Deferred rent ........................................ 57 -- --------- --------- Net cash provided by (used in) operating activities ........ 1,379 (7,605) --------- --------- Investing activities: Purchases of marketable securities ..................... (514,607) (47,780) Maturities of marketable securities .................... 127,214 5,183 Capital expenditures ................................... (1,652) (245) --------- --------- Net cash used in investing activities ...................... (389,045) (42,842) --------- --------- Financing activities: Net proceeds from issuances of common stock from the follow-on public offering in February 2000 ....... 496,657 -- Net proceeds from other issuances of common stock ...... 3,795 52,884 Payments on long-term debt ............................. (1,606) (842) --------- --------- Net cash provided by financing activities .................. 498,846 52,042 --------- --------- Net increase in cash and cash equivalents .................. 111,180 1,595 Cash and cash equivalents at the beginning of the period ... 13,366 1,415 --------- --------- Cash and cash equivalents at the end of the period ......... $ 124,546 $ 3,010 ========= =========
See accompanying notes. 5 ABGENIX, INC. CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The unaudited condensed financial statements of Abgenix, Inc. (the "Company" or "Abgenix") included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information or footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the accompanying unaudited condensed financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 1999 and accompanying notes included in the Company's Annual Report as filed on Form 10-K with the Securities and Exchange Commission on March 28, 2000. The results of operations for the quarter and six months ended June 30, 2000 are not necessarily indicative of the results to be expected for the full year or for any other future period. REVENUE RECOGNITION - In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101--Revenue Recognition in Financial Statements ("SAB 101"), which provides guidance on the accounting for revenue recognition. The Company is currently evaluating the applicability of SAB 101 to its existing agreements. Should the Company conclude that its approach is different from the approach described in SAB 101, it will change its method of accounting. As amended, SAB 101 is required to be implemented no later than the fourth fiscal quarter of 2000, for companies with fiscal years beginning between December 16, 1999 and March 15, 2000. The Company receives payments from customers for licenses, options and services. These payments are generally non-refundable but are reported as deferred revenue until they are recognizable as revenue. The Company has followed the following principles in recognizing revenue: - Research license fees: Fees to license the use of XenoMouse in research performed by the customer are generally recognized when both the inception of the license period and delivery of the technology has occurred. If Abgenix is obligated to provide significant assistance to enable the customer to practice the license, then the revenue is recognized over the period of such obligation. - Product license fees: Fees to license the production, use and sale of an antibody generated by XenoMouse are generally recognized when both the inception of the license period and delivery of the technology has occurred. If Abgenix is obligated to provide significant assistance to enable the customer to practice the license, then the revenue is recognized over the period of such obligation. - Option fees: Fees for granting options to obtain product licenses are recognized as revenue when the option is exercised or when the option period expires, whichever occurs first. - Payments for research services performed by Abgenix are recognized ratably over the period during which these services are performed. - Milestone payments are recognized as revenue when the milestone is achieved. 6 TWO-FOR-ONE STOCK SPLITS - The accompanying financial statements have been restated to reflect both a two-for-one common stock split effective on April 6, 2000 and a two-for-one common stock split effective on July 7, 2000. BASIC AND DILUTED NET LOSS PER SHARE Net loss per share is based on the weighted average number of shares of common stock outstanding. Potentially dilutive securities have been excluded from the computation, as their effect is antidilutive. 2. MARKETABLE SECURITIES The following is a summary of marketable securities at June 30, 2000 and December 31, 1999:
AS OF JUNE 30, 2000 AS OF DECEMBER 31, 1999 ------------------------------------ ------------------------------------ Amortized Unrealized Estimated Amortized Unrealized Estimated Cost Gain/(Loss) Fair Value Cost Gain/(Loss) Fair Value --------- ----------- ---------- --------- ----------- ---------- (in thousands) (in thousands) Commercial obligations ............... $ 19,650 $ (45) $ 19,605 $ 22,829 $ (73) $ 22,756 Commercial paper ..................... 515,670 (43) 515,627 15,358 10 15,368 Obligations of the U.S. government and its agencies ................... 16,000 (69) 15,931 17,822 (149) 17,673 Marketable equity securities ......... 15,000 16,896 31,896 15,000 14,225 29,225 --------- --------- --------- --------- --------- --------- Total ................................ $ 566,320 $ 16,739 $ 583,059 $ 71,009 $ 14,013 $ 85,022 ========= ========= ========= ========= ========= ========= Classified as: Cash equivalents .................. $ 120,172 $ 11,151 Marketable securities ............. 430,991 44,646 Long-term investment .............. 31,896 29,225 --------- --------- $ 583,059 $ 85,022 ========= =========
The Company's available-for-sale debt securities have the following maturities at June 30, 2000:
Due in one year or less........................ $ 559,180 Due after one year but less that five years.... 1,983 --------- $ 561,163 =========
3. COMPREHENSIVE INCOME Other comprehensive gains/(losses) consist of unrealized gains or losses on available-for-sale securities. For the quarter and six month periods ended June 30, 2000 the company recorded an unrealized loss of $7.73 million and an unrealized gain of $2.67 million, respectively, relating to its investment in CuraGen Corporation. Additionally, for the quarter and six month periods ended June 30, 2000 the company recorded unrealized losses of $50,000 and $156,000, respectively, in other available for sale investments. There were no other comprehensive gains or losses for the quarter or six months ended June 30, 1999. 4. STOCKHOLDER'S EQUITY AND FOLLOW-ON PUBLIC OFFERING All shares and per share amounts have been restated to reflect both the two-for-one common stock split effective April 6, 2000 and the two-for-one common stock split effective July 7, 2000. On February 10, 2000 the Company completed a follow-on public offering in which the Company sold 8,640,000 shares and Cell Genesys sold 3,360,000 shares of the Company's common stock to the public at a 7 price of $52.50 per share. On February 29, 2000 the Company's underwriters exercised their overallotment option to purchase 1,800,000 additional shares, of which 1,296,000 shares were sold by the Company and 504,000 shares were sold by Cell Genesys at a price of $52.50 per share. The Company received net proceeds from the offerings of approximately $496.5 million after the underwriters' discount and costs of offering. In January 2000, Cell Genesys exercised its warrants to purchase 486,668 shares of the Company's stock at an exercise price of $1.50 per share. On May 3, 2000 the Company's stockholders approved an increase to the aggregate number of shares of common stock authorized for issuance under the Company's 1996 Incentive Stock Plan by 1,200,000 shares. On May 3, 2000 the Company's stockholders approved an amendment to the Company's Certificate of Incorporation to increase the authorized number of shares of common stock from 50,000,000 to 100,000,000. 5. CUSTOMER AND LICENSE AGREEMENTS Abbott: In May 2000, the Company entered into a collaboration agreement, including an option and research license, with Abbott Laboratories to generate fully human antibodies to disease targets. Under this agreement, Abbott is required to pay the Company to perform the immunizations and certain research activities. Corixa: In March 2000, the Company entered into an agreement to discover and develop fully human antibodies against selected targets from Corixa Corporation's library of proprietary autoimmune disease, cancer and infectious disease antigens. Elan: In January 2000, the Company entered into a research license and option agreement with Elan Pharmaceuticals Inc. to generate fully human antibodies to an undisclosed antigen in the field of neurological diseases. Gliatech: In January 2000, the Company entered into a research agreement, option and license agreement with Gliatech Medical Inc. to generate fully human antibodies for use in the fields of cardiovascular and inflammatory diseases. Under this agreement, Gliatech is required to pay the Company to perform the immunizations and certain research activities. Millennium: In March 2000, the Company granted Millennium Pharmaceuticals, Inc. a license to use XenoMouse in research performed by Millennium and several licenses to make, use and sell antibodies generated with XenoMouse. Payments totaling $10 million were made in the first quarter of 2000 representing a research license fee, product license fees and service fees to establish the technology at Millennium. The Company is recognizing these fees ratably each month over the period ended December 31, 2000 during which Abgenix is obligated to assist in establishing the technology at Millennium, which will enable Millennium to practice the research license and product licenses. Accordingly, $1.0 million was recognized as revenue in the quarter ended March 31, 2000, and $3.0 million was recognized as revenue in the quarter ended June 30, 2000. At June 30, 2000, $6.0 million remained in deferred revenue. The $10 million payment was made in common stock of Millennium, which was subsequently sold in May 2000 shortly after the shares were registered. Millennium was obligated to make up the difference, if any, between the fair value of such stock upon sale and $10 million, and the Company was obligated to pay, and did pay, the excess of the fair value of such stock upon sale and $10 million. SmithKline Beecham: In May 2000, the Company entered into a collaboration agreement, including an option and research license with SmithKline Beecham Pharmaceuticals Inc. to generate fully human antibodies to an undisclosed antigen. 8 6. OTHER CONTRACTUAL OBLIGATIONS In May 2000, the Company entered into an agreement to produce commercial quantities of its fully human antibody, ABX-IL8, using Genzyme Transgenics Corporation's manufacturing system. Under the terms of the agreement, in exchange for fees and milestone payments, Genzyme Transgenics agreed to develop transgenic goats that express ABX-IL8 in their milk. In May 2000, the Company entered into an agreement with a contract manufacturer of its product candidates, to reserve manufacturing capacity by acquiring an option to negotiate a supply agreement, the terms of which are generally outlined in the option agreement. The total amount paid for this agreement was approximately $3.8 million of which $2.3 million was recorded as an expense in research and development and approximately $1.5 million was recorded as a deposit because it is creditable to the supply agreement. If a supply agreement is not entered into, all of the $3.8 million is non-refundable except under limited circumstances. 7. FACILITY LEASES AND LETTER OF CREDIT In February 2000, the Company signed an operating lease for an additional 100,100 square foot facility to be used primarily for offices. In May 2000, the Company also signed an operating lease for an additional 100,000 square foot facility to be built and used for pilot scale manufacturing. Both leases expire in the year 2015, with options to extend the lease terms. The Company issued a stand-by letter of credit for $2.0 million to the lessor for the lease term, as a condition to the lease. Future minimum payments under these non-cancelable operating leases are as follows (in thousands): 2000--$1,121; 2001--$3,986; 2002--$4,802; 2003--$4,969; 2004--$5,138; and thereafter $65,509. 8. SUBSEQUENT EVENTS Lexicon: On July 12, 2000 the Company entered into a collaborative agreement with Lexicon Genetics Inc. Under the terms of the agreement, Lexicon agreed to contribute antigen targets that derive from its proprietary portfolio of full-length human genes whose functions are defined using Lexicon's knockout mouse technology. The Company will use its XenoMouse technology to generate fully human antibodies for each of the targets selected by a joint committee. Each party will have the right to obtain exclusive commercialization rights, including sublicensing rights, for an equal number of qualifying antibodies. Each party will receive milestone payments and royalties on sales of antibody drugs from the collaboration that are commercialized by the other party. Immunex: On July 26, 2000 the Company entered into a joint development and commercialization agreement with Immunex Corporation, for ABX-EGF, a fully human antibody created by the Company and currently in a Phase I clinical trial involving several tumor types. Under the agreement, Immunex has agreed to make an initial license fee payment to the Company, and a second license fee payment upon commencement of Phase II clinical trials of ABX-EGF. Development costs will be shared equally, as would any potential profits from sales of a targeted product. Immunex and the Company will share responsibility for product development. The Company will complete the ongoing Phase I trial, while both parties would share efforts in the execution of Phase II trials across a variety of indications. Immunex would have primary responsibility for Phase III clinical trials, and would market any potential product, while the Company would retain co-promotion rights. SangStat: On August 8, 2000, the Company entered into a joint development and commercialization agreement with SangStat Medical Corporation for ABX-CBL, an antibody developed by the Company and currently in a Phase II/III clinical trial. Under the agreement, SangStat will make an initial license fee payment and 9 additional milestone payments to Abgenix. Development costs will be shared equally, as would any potential profits from sales of collaboration products. SangStat and Abgenix will share responsibility for product development, including the ongoing Phase II/III clinical trial. SangStat will market any potential products and Abgenix will be responsible for manufacturing ABX-CBL. 10 ABGENIX, INC. ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS QUARTERLY REPORT ON FORM 10-Q, THE WORDS "INTEND," "ANTICIPATE," "BELIEVE," "ESTIMATE," "PLAN" AND "EXPECT" AND SIMILAR EXPRESSIONS AS THEY RELATE TO ABGENIX ARE INCLUDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH BELOW AND UNDER "ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS" SET FORTH BELOW IN THIS QUARTERLY REPORT ON FORM 10-Q AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q. 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, cardiovascular disease, infectious diseases and cancer. We have developed XenoMouse technology, a proprietary technology, which we believe offers many advantages, including rapid generation of highly specific, fully human antibody product candidates that bind to essentially any disease target appropriate for antibody therapy. In addition, we believe our technology offers advantages in product development and flexibility in manufacturing. We intend to use XenoMouse technology to build a large and diversified product portfolio that we plan to develop and commercialize through licensing to pharmaceutical companies, joint development and commercialization licensing arrangements with pharmaceutical companies and internal product development programs. We have contractual arrangements with multiple pharmaceutical, biotechnology and genomics companies involving our XenoMouse technology. In addition, we have three proprietary antibody product candidates currently in clinical trials, one of which we recently agreed to co-develop and commercialize with Immunex. Contractual Arrangements As of August 9, 2000 we have established contractual arrangements to use our XenoMouse technology to produce fully human antibodies with twenty-three customers covering numerous antigen targets. Pursuant to these arrangements, we and our customers intend to generate antibody product candidates for the treatment of cancer, inflammation, auto immune diseases, transplant rejection, cardiovascular disease, growth factor modulation, neurological diseases and infectious disease. Our customers as of August 9, 2000 include Abbott Laboratories, Amgen, AVI BioPharma, BASF Bioresearch Corporation, Cell Genesys, Centocor/Johnson and Johnson, Chiron, Corixa, CuraGen, Elan, Genentech, Gliatech, Human Genome Sciences, Immunex, Japan Tobacco, Lexicon Genetics, Millennium, Pfizer, Research Corporation Technologies, Sangstat, Schering-Plough, SmithKline Beecham and the U.S. Army. Of these customers, six have each entered into new or expanded agreements with us specifying additional antigens for XenoMouse antibody development. Additionally, of the customers with whom we have entered technology license deals, AVI BioPharma, Japan Tobacco, Millennium, Pfizer, and Schering-Plough have entered into product licenses. The terms of the arrangements vary, but can generally be categorized as follows: - Antigen Target Sourcing Arrangements-Four of our contractual arrangements are target sourcing arrangements with genomics and biopharmaceutical companies which will enable us to generate a continuous stream of proprietary fully human antibody product candidates. Typically, these arrangements 11 provide that we make fully human antibodies to the partners' antigen targets. There are various mechanisms for each of the parties to evaluate and select antibodies from the pool of generated antibodies for further development and commercialization. The party selecting a product candidate will generally pay to the other, for rights to develop and commercialize such product, license fees, milestone payments and royalty payments on any eventual product sales. - Proprietary Product Licensing-In July and August 2000, we entered into two joint development and commercialization agreements. The first was with Immunex Corporation for ABX-EGF, a fully human antibody created by us. Under the agreement, Immunex agreed to make an initial license fee payment to us and a second license fee payment to us upon commencement of Phase II clinical trials of ABX-EGF. Development costs will be shared equally, as would any potential profits from sales of collaboration products. We both share responsibility for product development. We will complete the ongoing Phase I trial. If Phase I trials are successful, both companies will share efforts in the execution of Phase II trials across a variety of indications. Immunex will have primary responsibility for Phase III clinical trials, and will market any potential product, while we will retain co-promotion rights. The second agreement was with Sangstat Medical Corporation for ABX-CBL, an antibody developed by us. Under the agreement, SangStat agreed to make an initial license fee payment to us and additional milestone payments to us. Development costs will be shared equally, as would any potential profits from sales of collaboration products. SangStat and Abgenix will share responsibility for product development, including the ongoing Phase II/III clinical trial. SangStat will market any potential product and we will be responsible for manufacturing ABX-CBL. We intend to build our product portfolio by generating antibodies to antigen targets that we source, self-funding clinical activities to determine preliminary safety and efficacy, and entering into more development and commercialization agreements with pharmaceutical and biotechnology companies. These arrangements may or may not involve joint sharing of costs and profits. - Technology Licensing Deals-These agreements typically provide our customers 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 customer. In most cases, we provide our mice to the customers who then carry out immunizations with their specific antigen targets. In other cases, we immunize the mice with the customers' antigen targets for additional compensation. The customer generally has a period of time to acquire product licenses for any antibody product they wish to develop and commercialize, generally referred to as an option. The financial terms of these agreements may include license fees, option fees, and milestone payments paid to us by our customers. Based on our agreements, these payments and fees would average $8.0 to $10.0 million per antigen target if our customer takes the antibody product candidate into development and ultimately to commercialization. Additionally we are entitled to receive royalties on any future product sales by the customer. Proprietary Products We also have three antibody product candidates that are currently in clinical trials as follows: - ABX-IL8 - Generated using XenoMouse technology, ABX-IL8 is our fully human antibody candidate for the treatment of psoriasis. We completed Phase I and Phase I/II clinical trials and initiated Phase II clinical trials in April 2000 in which enrollment is ongoing. - ABX-EGF - Generated using XenoMouse technology, ABX-EGF is our fully human antibody candidate for the treatment of a variety of cancers. We initiated a Phase I clinical trial for ABX-EGF in cancer in 1999 in which enrollment is ongoing. In July 2000 we entered the joint development and commercialization agreement with Immunex Corporation for ABX-EGF, described above. 12 - ABX-CBL - An in-licensed mouse antibody, ABX-CBL is an antibody we developed for the treatment of a transplant-related disease known as graft versus host disease, or GVHD. We completed a multi-center Phase II clinical trial for ABX-CBL and initiated a Phase II/III clinical trial in December 1999 in which enrollment is ongoing. In August 2000 we entered into the joint development and commercialization agreement with Sangstat Medical Corporation, for ABX-CBL, described above. We will expend significant capital to conduct clinical trials for these product candidates. We believe that more extensive clinical data will enable us to enter into more favorable proprietary product licensing agreements. We expect that this will increase our operating losses until our development expenses can be covered by increased revenues from licensing of XenoMouse technology and marketing of proprietary products. If clinical trials of one or more product candidates at any stage are unsuccessful, we may abandon that product candidate which would result in the substantial loss of our investment in such candidate. Other In December 1999, we paid $47.0 million to purchase Japan Tobacco's interest in the Xenotech joint venture, and a non-recurring payment of $10.0 million to terminate rights to the current XenoMouse technology. Additionally, Japan Tobacco paid us $6.0 million to acquire a license to new technology, and $4.0 million to acquire a research license and commercialization rights under existing and future XenoMouse technology on a more limited basis than it had under our prior collaboration with Japan Tobacco. RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Contract revenue totaled $3.5 million and $5.4 million in the three and six-month periods ended June 30, 2000 compared to $1.7 million in both of the comparable 1999 periods. Revenue recognized during the 2000 three and six month periods included $1.0 million and $4.0 million, respectively, of the $10 million payment received under the agreement with Millennium Pharmaceuticals. Although the payment from Millennium is non-refundable and was received at the inception of a research license and product licenses granted to Millennium upon signing of the agreement, Abgenix is obligated up to December 31, 2000 to provide assistance to enable Millennium to practice these licenses, so the payment from Millennium is being recognized ratably over this period. Additionally, in the 2000 periods, contract revenue included fees for research funding and the performance of certain research work, and in the six-month period included fees for two product licenses. In the three and six month periods ended June 30, 1999, contract revenue consisted primarily of non-refundable signing fees, a research milestone fee and a non-refundable reimbursement fee for clinical trial costs. Interest income consists primarily of interest from cash, cash equivalents and short-term investments. Interest income totaled $8.8 million and $13.1 million in the three and six-month periods ended June 30, 2000 compared to $0.8 million and $1.2 million in the comparable 1999 periods. This is a result of our follow-on offering in February of 2000 in which we received net proceeds of approximately $496.5 million, after the costs of the offering. Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, costs associated with preclinical testing and clinical trials of our product candidates, including the costs of manufacturing the product candidates, and facilities expenses. Research and development expenses increased to $11.9 million in the three months ended June 30, 2000 from $5.3 million in the comparable period in 1999 and to $19.1 million in the six months ended June 30, 2000 from 13 $9.9 million in the comparable period in 1999. The increase reflects primarily costs associated with the following: - Increased personnel - Staffing at June 30, 2000 increased by approximately 60% from June 30, 1999. The increase is to support the increased level of product development activities, including new target validation, process sciences, manufacturing and increased clinical activities. Additionally, the increase in personnel is related to increased licensing activity. Included in the increase are salary and related fringe benefits, recruiting and relocation costs. We expect personnel costs to increase further as we continue to build our organization. - Product Supply Agreement - Included in the quarter and six month period ended June 30, 2000, is a charge of approximately $2.3 million to reserve manufacturing capacity by acquiring an option to negotiate a supply agreement with a contract manufacturer. The total amount paid for this agreement was approximately $3.8 million, of which approximately $1.5 million is creditable to the supply agreement. If a supply agreement is not executed, all of the $3.8 million is non-refundable to us, except under limited circumstances. - Research Fee-Included in the quarter and six month period ended June 30, 2000, is a fee paid to Genzyme Transgenics Corporation related to research they are performing in which they agreed to produce our antibody product candidate, ABX-IL8 using Genzyme's manufacturing system. Under this agreement, for undisclosed fees and milestone payments, Genzyme will develop transgenic goats that express ABX-IL8 in their milk. Additionally, there are several future payments required as certain milestones are met. - Clinical Costs- In the first six months of 2000, we had clinical trials in progress for three of our product candidates, ABX-CBL, ABX-IL8 and ABX-EGF, which are continuing. In 1999, during the comparable period, we had clinical trials in progress for two of our product candidates, ABX-CBL and ABX-IL8. The costs of such trials include the clinical investigator site fees, monitoring costs and data management costs. Additionally such costs include the costs of manufacturing the antibody used in clinical trials. In July and August 2000 we entered into separate agreements with Immunex and SangStat to share equally in the costs of developing and commercializing ABX-EGF and ABX-CBL, respectively. However, we expect clinical costs will increase in the future as we enter additional clinical trials for both new and existing product candidates. General and administrative expenses include compensation and other expenses related to finance and administrative personnel, professional services and facilities. General and administrative expenses increased to $1.8 million in the three months ended June 30, 2000 from $1.2 million in the comparable period in 1999 and to $3.4 million in the six months ended June 30, 2000 from $2.3 million in the comparable period in 1999. The increase reflects increased personnel costs including an accrual for incentive compensation, and additional investor relations costs. We expect personnel costs to increase further as we continue to build our organization. Amortization of intangible assets relates primarily to patents and certain royalty rights which were acquired through the acquisition of the Xenotech joint venture in December of 1999. Equity from the Xenotech joint venture in 1999 reflects our percentage ownership of the net income from the joint venture, which was prior to our acquisition of 100% of the joint venture in December 1999. Interest expense consists of interest incurred in connection with equipment lease line financing and loan facilities. Interest expense increased due to costs associated with obtaining a letter of credit. 14 LIQUIDITY AND CAPITAL RESOURCES In February 2000, we completed a follow-on public offering in which we raised net proceeds of $496.5 million by selling 9,936,000 shares of our common stock. In addition to this funding, in 2000 we received $0.73 million from Cell Genesys for the exercise of warrants and $3.2 million from the exercise of stock options and our employee stock purchase plan. At June 30, 2000, we had cash, cash equivalents and marketable securities of $555.5 million. We have invested our cash equivalents and marketable securities in highly liquid, interest bearing, investment grade and government securities in order to preserve principal. In the first six months of 1999 net cash provided by financing activities was $52.0 million, received primarily from a secondary offering and the sale of stock to Genentech. Net cash provided by operating activities was $1.4 million for the six months ended June 30, 2000 and net cash used in operating activities was $7.6 million for the six months ended June 30, 1999. In the six months ended June 30, 2000 cash was provided by interest income of $8.3 million net of interest receivable of $4.8 million, and payments from customers of $14.2 million including $8.8 million recorded as deferred revenue. Additionally, we received $3.6 million from customers, as payment on accounts receivable at December 31,1999. Cash was used for operations in both periods primarily to fund research and development expenses and manufacturing costs related to the development of new products. Additionally, cash was used in the six month period ended June 30, 2000 for a deposit related to a supply agreement. Net cash used in investing activities was $389.0 million for the six months ended June 30, 2000 and $42.8 million for the six months ended June 30, 1999. The activity in both years reflects the purchasing of investments with the funds we received from follow-on public offerings earlier in both years. In March 2000, we issued a stand by letter of credit for $2.0 million from a commercial bank as a deposit on our new leased facility. The stand-by letter of credit is secured by an investment account which must maintain a $2.0 million balance. Additionally, we have an agreement with a financing company under which we have financed purchases of about $2.0 million of our 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 had a construction financing line with a bank in the amount of $4.3 million that was used to finance construction of leasehold improvements at our current facility. The line was paid off in May 2000. The line had an interest rate of prime plus one percent (9.5 % at December 31, 1999). We plan to make significant expenditures to establish our own manufacturing facility and expand our research and development activities, including preclinical product development and clinical trials. We may be required to make substantial expenditures if unforeseen difficulties arise in the course of development of product candidates, manufacturing of product candidates, performing preclinical development 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: - scope and results of preclinical testing and clinical trials; - the retention of existing and establishment of further licensing and contractual agreements, if any; - continued scientific progress in our research and development programs; - size and complexity of these programs; 15 - cost of establishing our manufacturing capabilities, conducting commercialization activities and arrangements; - time and expense involved in obtaining regulatory approvals; - competing technological and market developments; - time and expense of filing and prosecuting patent applications and enforcing patent claims; - investment in, or acquisition of, other companies; - product in-licensing; and - other factors not within our control. We believe that our current cash balances, cash equivalents, marketable securities and the cash generated from our licensing and contractual agreements will be sufficient to meet our operating and capital requirements for at least two years. However, we may need additional financing within this timeframe. We may need to raise additional funds through public or private financing, licensing and contractual agreements or other arrangements. We cannot assure you 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. Licensing and other contractual agreements may require us to relinquish our 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. We have incurred operating losses in each of the last three years of operation, including net losses of approximately $35.9 million in 1997, $16.8 million in 1998 $20.5 million in 1999 and $5.8 million in the six months ended June 30, 2000. As of June 30, 2000, we had an accumulated deficit of approximately $95.6 million. Our losses have resulted principally from costs incurred in performing research and development for our XenoMouse technology and antibody product candidates, costs associated with certain agreements with Japan Tobacco, costs related to the non-recurring cross-license and settlement charge in 1997 and from general and administrative costs associated with our operations. We expect to incur additional operating losses for the foreseeable future as a result of our expenditures for research and product development, including preclinical testing and clinical trials, and charges related to purchases of technology or other assets. We intend to invest significantly in our products prior to entering into licensing arrangements. This may increase our need for capital and will result in losses for several years. 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 licensing arrangements, or the initiation, success or failure of clinical trials. As of December 31, 1999, we had federal net operating loss carryforwards of approximately $61.0 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 that have been expensed for financial statement accounting purposes have been capitalized and are being 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 2019, if not utilized. Utilization of the net operating losses and credits may be subject to a 16 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. ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS The following factors represent current challenges that we face which create risk and uncertainty. Failure to adequately overcome any of the following challenges, either singly or in combination, could materially adversely effect our results of operations, business, or financial position. 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 an early stage of development. We have begun clinical trials with respect to only two fully human antibody product candidates, ABX-IL8 and ABX-EGF. 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 customers 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 and adversely affected. 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. As of June 30, 2000, three of our product candidates, ABX-CBL, ABX-IL8 and ABX-EGF, were 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, this data will not support an application for regulatory approval without further clinical trials. Clinical trials conducted by us 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, ABX-EGF and or any other potential product candidates. Regulatory authorities may not permit us to undertake any additional clinical trials for our product candidates. 17 In addition, our other product candidates are in preclinical development, but we have not submitted investigational new drug applications nor begun clinical trials for these 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. 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 for use in 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 customers, to assist us in managing and monitoring clinical trials. Our reliance on these third parties may result in delays in completing, or failing to complete, these trials if they fail to perform under our agreements with them. Our product candidates may fail to demonstrate safety and efficacy in clinical trials. This failure may delay development of other product candidates, and hinder our ability to conduct related preclinical testing and clinical trials. As a result of these failures, we may also be unable to obtain additional financing. Any delays in, or termination of, our clinical trials will materially and adversely affect our business, financial condition and results of operations. THE CLINICAL SUCCESS OF ABX-CBL IS UNCERTAIN. We recently completed a multi-center Phase II trial for the treatment of graft versus host disease, or GVHD, with our mouse antibody, ABX-CBL. As of June 30, 2000, ABX-CBL had been administered to a total of only 167 patients for GVHD and organ transplant rejection indications. ABX-CBL was administered to a total of 85 of these 167 patients by third parties prior to Abgenix obtaining an exclusive license to ABX-CBL. We cannot rely on data obtained from patients studied prior to our obtaining an exclusive license to ABX-CBL to support the efficacy of ABX-CBL in an application for regulatory approval. Data from 27 patients included in the Phase II study was submitted to the FDA. As an extension to the original Phase II trial protocol, we have enrolled an additional 32 patients. In December 1999, we initiated a multicenter randomized, and controlled Phase II/III study comparing ABX-CBL to ATG(R). The study is designed to demonstrate statistically significant efficacy of a single dose level of ABX-CBL in comparison to a control group of patients receiving ATG(R). The results of the Phase II/III trial may not be favorable or may not extend the findings of the original Phase II study. The FDA may view the result of our Phase III trial as insufficient and may require additional clinical trials. There are several issues that could adversely affect the 18 clinical trial results, including the lack of a standard therapy for GVHD patients in the control group, unforeseen side effects, variability in the number and types of patients in the study, and response rates required to achieve statistical significance in the study. 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. These adverse effects may affect the interpretation of clinical trial results. There is a risk that the FDA will not accept the results of the Phase II/III study or other elements of the product license application as being sufficient for approval to market. 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 and 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 on our own, or through others, product candidates on a commercial scale; - inability to market products due to third-party proprietary rights; - election by our customers not to pursue product development; - failure by our customers to successfully develop products; and - failure to achieve market acceptance. Because of these risks, our research and development efforts or those of our customers may not result in any commercially viable products. To date, only four of our customers have exercised their right to obtain a product license. 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 and adversely affected. OUR OWN ABILITY TO MANUFACTURE IS UNCERTAIN. We are in the planning stages of establishing our own pilot scale manufacturing facility for the manufacture of products for Phase I and Phase II clinical trials, in compliance with FDA good manufacturing practices. In May 2000 we signed a long-term lease for a facility to be built for this pilot scale facility. Construction schedules for this facility may take longer than expected, and the planned and actual construction costs of building and qualifying the facility for regulatory compliance may be higher than expected. The process of manufacturing antibody products is complex. We have no experience in clinical or commercial scale 19 manufacture of ABX-CBL, ABX-IL8 and ABX-EGF, or any other antibody products. Such antibody products will also need to be manufactured in a facility and by a process which complies with FDA and other regulations. It may take a substantial period of time to begin producing antibodies in compliance with such regulations. Our manufacturing operations will be subject to ongoing, periodic unannounced inspection by the FDA and state agencies to ensure strict compliance with good manufacturing practices. If we are unable to establish and maintain a manufacturing facility within our planned time and costs parameters, the development and sales of our products and our financial performance may be adversely affected. We also may encounter problems with the following: - production yields; - quality control and assurance; - shortages of qualified personnel; - compliance with FDA regulations; - production costs; and - development of advanced manufacturing techniques and process controls. For Phase III clinical trial supplies and commercial production of our antibody products we are currently evaluating our options, which include use of third party contract manufacturers, establishing our own commercial scale manufacturing facility, or entering into a manufacturing joint venture relationship with a third party. We are aware of only a limited number of companies on a worldwide basis who operate manufacturing facilities in which our product candidates can be manufactured under good manufacturing practice regulations, a requirement for all pharmaceutical products. It would take a substantial period of time for a contract facility which has not been producing antibodies to begin producing antibodies under good manufacturing practice regulations. We cannot assure you that we will be able to contract with any of these companies on acceptable terms, if at all. In addition, we and any third-party manufacturer will be required to register manufacturing facilities with the FDA and other regulatory authorities. The facilities will then be subject to inspections confirming compliance with FDA good manufacturing practice or other regulations. If we or our third-party manufacturer fail to maintain regulatory compliance, our business, financial condition and results of operations will be materially and adversely affected. WE CURRENTLY RELY ON A SOLE SOURCE THIRD-PARTY MANUFACTURER. We currently rely, and will continue to rely for at least the next two years, on a sole source contract manufacturer to produce ABX-CBL, ABX-IL8 and ABX-EGF under good manufacturing practice regulations, for use in our clinical trials. Our contract manufacturer has a limited number of facilities in which our product candidates can be produced. Our contract manufacturer has limited experience in manufacturing ABX-CBL, ABX-IL8 and ABX-EGF in quantities sufficient for conducting clinical trials or for commercialization. We currently rely on our contract manufacturer to produce our product candidates under good manufacturing practice regulations, which meet acceptable standards for our clinical trials. 20 Contract manufacturers often encounter difficulties in scaling up production, including problems involving production yields, quality control and assurance, shortage of qualified personnel, compliance with FDA regulations, production costs, and development of advanced manufacturing techniques and process controls. Our contract manufacturer 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 manufacturer fails 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 and 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. 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, marketing and finance. Attracting and retaining qualified personnel will be critical to our success. We may not be able to attract and retain personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. If we lose any of these persons, or are unable to attract and retain qualified personnel, our business, financial condition and results of operations may be materially and adversely affected. In addition, we rely on members of our Scientific Advisory Board and other consultants to assist us in formulating our research and development strategy. All of our consultants and the members of our Scientific Advisory Board 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 advisors, the achievement of our development objectives may be impeded. Such impediments may materially and adversely affect our business, financial condition and results of operations. 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. Our product candidates, if successfully developed, may not generate sufficient or sustainable revenues to enable us to be profitable. WE HAVE A HISTORY OF LOSSES. We have incurred net losses in each of the last five years of operation, including net losses of approximately $8.3 million in 1995, $7.1 million in 1996, $35.9 million in 1997, $16.8 million in 1998, $20.5 million in 1999 and $5.8 million in the six months ended June 30, 2000. As of June 30, 2000, our accumulated deficit was $95.6 million. Our losses to date have resulted principally from: - research and development costs relating to the development of our XenoMouse technology and antibody product candidates; - costs associated with certain agreements with Japan Tobacco. 21 - costs related to a cross-license and settlement agreement relating to our intellectual property portfolio; and - general and administrative costs relating to our operations. We expect to incur additional losses for the foreseeable future as a result of increases in our research and development costs, including costs associated with conducting preclinical development and clinical trials, and charges related to purchases of technology or other assets. We intend to invest significantly in our products prior to entering into licensing agreements. This may increase our need for capital and will result in losses for several years. We expect that the amount of operating losses will fluctuate significantly from quarter to quarter as a result of increases or decreases in our research and development efforts, the execution or termination of licensing and contractual agreements, or the initiation, success or failure of clinical trials. 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: - the follow-on public offering of our common stock in February 2000 - initial contributions from Cell Genesys; - private placements of our capital stock; - the initial public offering of our common stock; - the follow-on public offering of our common stock in 1999; - revenues generated from our licensing and contractual agreements; - equipment leaseline financings; and - loan facilities. We expect that substantially all of our revenues for the foreseeable future will result from payments under licensing and contractual agreements and interest income. To date, payments under licensing and contractual agreements have been in the form of option fees, reimbursement for research and development expenses, license fees and milestone payments. Payments under our existing and any future customer agreements will be subject to significant fluctuation in both timing and amount. Our revenues may not be indicative of our future performance or of our ability to continue to achieve such milestones. Our revenues and results of operations for any period may also not be comparable to the revenues or results of operations for any other period. We may not be able to: - enter into further licensing and contractual agreements; - successfully complete preclinical development or clinical trials; - obtain required regulatory approvals; 22 - 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 and adversely affected. WE WILL NEED TO FIND THIRD PARTIES TO LICENSE AND 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 licensing agreements with third parties. Potential third parties include pharmaceutical and biotechnology companies, academic institutions and other entities. We must enter into these agreements to successfully develop and commercialize product candidates. These agreements are necessary in order for us to: - access proprietary antigens for which we can generate fully human antibody products; - fund our research and development activities; - fund preclinical development, clinical trials and manufacturing; - seek and obtain regulatory approvals; and - successfully commercialize existing and future product candidates. Only a limited number of fully human antibody product candidates have been generated pursuant to our collaboration agreements. Only ABX-IL8 and ABX-EGF have entered clinical testing. We cannot assure you that any of them will result in commercially successful products. Current or future collaboration agreements may not be successful. If we fail to maintain our existing collaboration agreements or to enter into additional agreements our business, financial condition and results of operations will be materially and adversely affected. Our dependence on licensing and contractual agreements with third parties subjects us to a number of risks. These agreements may not be on terms favorable to us. Agreements with collaborators 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 collaborators may devote to the product candidates. Our collaborators may not perform their obligations as expected. Business combinations or significant changes in a collaborator's business strategy may adversely affect a collaborator's willingness or ability to complete its obligations under the arrangement. Even if we fulfill our obligations under an agreement, our collaborators can terminate the agreement at any time following proper written notice. If any collaborators 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 and adversely affected. If we are not able to establish further collaboration agreements or any or all of our existing agreements are terminated, we may be required to seek new collaborators or to undertake product development and commercialization at our own expense. Such an undertaking may: - limit the number of product candidates that we will be able to develop and commercialize; 23 - reduce the likelihood of successful product introduction; - significantly increase our capital requirements; and - place additional strain on management's time. Existing or future collaborators 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 collaborator. Lengthy negotiations with potential new collaborators or disagreements between us and our collaborators 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 collaborators 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 and 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 customers. 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., Medarex's joint venture partner, Kirin Brewing Co., Ltd., Cambridge Antibody Technology Group plc, Protein Design Labs, Inc. and MorphoSys AG. Some of our competitors have received regulatory approval or are developing or testing product candidates that may compete directly with our product candidates. For example, SangStat Medical Corp. and Protein Design Labs market organ transplant rejection products that may compete with ABX-CBL, which is in clinical trials. In addition, MedImmune, Inc. has a potential antibody product candidate in clinical trials for graft versus host disease that may compete with ABX-CBL. We are also aware that several companies, including Genentech, Inc., have potential product candidates that may compete with ABX-IL8, which is in clinical trials. Furthermore, we are aware that ImClone Systems, Inc., Medarex, AstraZeneca and Pfizer, in collaboration with OSI Pharmaceuticals, Inc., have potential antibody and small molecule product candidates in clinical development that may compete with ABX-EGF, which is also in clinical trials. Many of these companies and institutions, either alone or together with their customers, have substantially greater financial resources and larger research and development staffs than we do. In addition, many of these competitors, either alone or together with their customers, have significantly greater experience than we do in: - developing products; - undertaking preclinical testing and human clinical trials; - obtaining FDA and other regulatory approvals of products; and - manufacturing and marketing products. 24 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 competitors may render our product candidates or technologies obsolete or noncompetitive. We face and will continue to face intense competition from other companies for agreements with pharmaceutical and biotechnology companies for establishing relationships with academic and research institutions, and for licenses to proprietary technology. These competitors, either alone or with their customers, may succeed in developing technologies or products that are more effective than ours. 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 25 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 we or our customers develop. If our products do not achieve significant market acceptance, our business, financial condition and results of operations will be materially and adversely affected. 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. We solely own two issued patents in the U.S., one granted patent in Europe, three granted patents in Japan, and have several pending patent applications in the U.S. and abroad relating to XenoMouse technology. Our wholly owned subsidiary Xenotech owns two issued U.S. patents, one Australian patent and several pending U.S. and foreign pending patent applications related to methods of treatment of bone disease in cancer patients. In addition, we have four issued U.S. patents and several pending patent applications in the U.S. and abroad that are jointly owned with Japan Tobacco relating to antibody technology or genetic manipulation. 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 adequate proprietary protection or competitive advantages against competitors with similar technologies. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. In addition to patents, we rely on trade secrets and proprietary know-how. We seek protection, in part, through confidentiality and proprietary information agreements. These agreements may not provide meaningful protection 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. Also, our trade secrets may otherwise become known to, or be independently developed by, our competitors. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. WE MAY FACE CHALLENGES FROM THIRD PARTIES REGARDING THE VALIDITY OF OUR PATENTS AND PROPRIETARY RIGHTS. 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 still-pending patent applications. Patent applications in the United States are, in most cases, maintained in secrecy until patents issue. The publication of discoveries in 26 the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Our technologies may unintentionally infringe the patents or violate other proprietary rights of third parties. In the event of such infringement or violation, we and our customers may be prevented from pursuing product development or commercialization. Such a result will materially and adversely affect our business, financial condition and results of operations. In March 1997, we entered into a cross-license and settlement agreement with GenPharm International Inc. 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 and adversely affected if any of the parties breaches the cross-license agreement. We have one granted 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. We are aware of at least two companies that each have a patent claiming the use of antibodies to the EGF receptor in combination with chemotherapy. We believe that our antibody product candidate targeting the EGF receptor, ABX-EGF, may be effective alone, and may be used without chemotherapy. We believe use of ABX-EGF alone is not covered by claims in these other companies' patents. If clinical trials demonstrate that combination therapy is preferable or necessary in the treatment of patients, we may desire to, or be required to, obtain a license under the other companies' patents in order to commercialize ABX-EGF. Any license under these other patents may not be available on commercially reasonable terms, if at all. 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 patents that we own or license; - protect trade secrets or know-how that we own or license; or - determine the enforceability, scope and validity of the proprietary rights of others. If we become involved in any litigation, interference or other administrative proceedings, we will incur substantial expense and the efforts of our technical and management personnel will be significantly diverted. An adverse determination may subject us to loss of our proprietary position or to significant liabilities, or require us to seek licenses that may not be available from third parties. 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 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 and adversely affect our business, financial condition and results of operations. 27 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. 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 we or our customer develop; - impose costly procedures on us or our customers; - diminish any competitive advantages that we or our customers may attain; and - adversely affect our receipt of revenues or royalties. Certain material changes 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, we 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 28 - criminal prosecutions. We expect to rely on our customers to file investigational new drug applications and generally direct the regulatory approval process for many of our products. Our customers may not be able to conduct clinical testing or obtain necessary approvals from the FDA or other regulatory authorities for any product candidates. If we fail to obtain required governmental approvals, our customers 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 and adversely affect our business, financial condition and results of operations. We 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. These facilities must be approved before we can use them in commercial manufacturing of our products. We or our contract manufacturers may not be able to comply with the applicable good manufacturing practice requirements and other FDA regulatory requirements. If we or our contract manufacturers fail to comply, our business, financial condition and results of operations will be materially and adversely affected. 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 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 and adversely affected. WE MAY REQUIRE ADDITIONAL FINANCING. We will continue to expend substantial resources for the expansion of research and development, including costs associated with conducting preclinical development 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 development and clinical trials; - the retention of existing and establishment of further licensing and contractual agreements, if any; - continued scientific progress in our research and development programs; 29 - the size and complexity of these programs; - the cost of establishing manufacturing capabilities and conducting commercialization activities and arrangements; - 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; - investment in, or acquisition of, other companies; - product in-licensing; and - other factors not within our control. We believe that the net proceeds from our February 2000 offering, our cash balances, cash equivalents, short-term investments and cash generated from our customer agreements will be sufficient to meet our operating and capital requirements for at least two years. However, we may need additional financing within this timeframe. We may need to raise additional funds through public or private financings, licensing and contractual agreements or other arrangements. Additional funding may not be available to us on favorable terms, if at all. Furthermore, any additional equity financing would be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Contractual 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 and adversely affected. CELL GENESYS EXERCISES INFLUENCE OVER US. As of June 30, 2000 Cell Genesys beneficially owned approximately 12.0% of our outstanding common stock. We may be adversely impacted by the influence that Cell Genesys will have with respect to matters affecting us. 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 30 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 and 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. 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 and 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 and adversely affect our business, financial condition and results of operations. OUR STOCK PRICE IS HIGHLY VOLATILE. The market price and trading volume of shares of our common stock are volatile, and we expect them to continue to be volatile for the foreseeable future. For example, during the period between June 30, 1999 and June 30, 2000, our common stock closed as high as $99.75 per share and as low as $4.72 per share. This may impact your decision to buy or sell your common stock. 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; - published reports by securities analysts; - progress with clinical trials; - government regulation; - changes in reimbursement policies; - developments in patent or other proprietary rights; 31 - developments in our relationship with customers; - public concern as to the safety and efficacy of our products; and - general market conditions. WE HAVE IMPLEMENTED A STOCKHOLDER RIGHTS PLAN AND ARE SUBJECT TO OTHER ANTI-TAKEOVER PROVISIONS. In June 1999, our board of directors adopted a stockholder rights plan, which was amended in November 1999. The stockholder rights plan provides for a dividend distribution of one preferred share purchase right on each outstanding share of our common stock. Each right entitles stockholders to buy 1/1000th of a share of our Series A participating preferred stock at an exercise price of $120.00. Each right will become exercisable following the tenth day after a person or group, other than Cell Genesys or its affiliates, successors or assigns, announces an acquisition of 15% or more of our common stock, or announces commencement of a tender offer, the consummation of which would result in ownership by the person or group of 15% or more of our common stock. In the case of Cell Genesys, or its affiliates, successors or assigns, which beneficially owned approximately 12.0% of our outstanding common stock as of June 30, 2000, each right will become exercisable following the tenth day after it announces the acquisition of more than 25% of our common stock, or announces commencement of a tender offer, the consummation of which would result in ownership by Cell Genesys, or its affiliates, successors or assigns, of more than 25% of our common stock. We will be entitled to redeem the rights at $0.01 per right at any time on or before the close of business on the tenth day following acquisition by a person or group of 15% or more, or in the case of Cell Genesys, or its affiliates, successors or assigns, more than 25%, of our common stock. The stockholder rights plan and certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire control of Abgenix. This could limit the price that certain investors might be willing to pay in the future for our shares of common stock. Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws allow us to: - issue preferred stock without any vote or further action by the stockholders; - eliminate the right of stockholders to act by written consent without a meeting; - specify procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings; and - eliminate cumulative voting in the election of directors. We are subject to certain provisions of Delaware law which could also delay or make more difficult a merger, tender offer or proxy contest involving us. In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless certain conditions are met. The stockholder rights plan, the possible issuance of preferred stock, the procedures required for director nominations and stockholder proposals and Delaware law could have the effect of delaying, deferring or preventing a change in control of us, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. The provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. 32 WE DO NOT INTEND TO PAY CASH DIVIDENDS ON OUR COMMON STOCK. We intend to retain any future earnings to finance the growth and development of our business and we do not plan to pay cash dividends on our common stock in the foreseeable future. ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The objective of our investment activities is to preserve principal, while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid and high quality debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in short term securities and maintain an average maturity on one year or less. A hypothetical 67 basis point increase in interest rates would result in an approximate $650,000 decrease (0.12%) in the fair value of our debt securities, classified as available-for-sale securities, at June 30, 2000. As part of a strategic alliance effort, we invested in common stock of CuraGen Corporation. This investment is subject to fluctuations from market value changes in stock prices. As of June 30, 2000, our investment in CuraGen was approximately $31,896,000. Assuming a 10% adverse change in the price of the CuraGen stock, the Company's investment in CuraGen would decrease in value by approximately $3,189,600, based upon the value of the stock as of June 30, 2000. PART II ITEM 1 -- LEGAL PROCEEDINGS Not applicable. ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS CHANGES IN SECURITIES On March 1, 2000, our Board of Directors declared a two-for-one common stock split to be effected in the form of a stock dividend. The record date for the stock split was March 16, 2000 and the payment date was April 6, 2000. Following this stock split, our number of outstanding common shares was slightly under 40,000,000. On May 3, 2000, our stockholders approved an amendment to our certificate of incorporation to increase our number of authorized shares from 50,000,000 to 100,000,000 shares. The amendment became effective on June 6, 2000, the date that we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware. On June 8, 2000, our Board of Directors declared another two-for-one common stock split to be effected in the form of a stock dividend. The record date for this stock split was June 19, 2000 and the payment date was July 7, 2000. Following this stock split, our number of outstanding common shares was slightly over 80,000,000. On July 6, 2000, our Board of Directors approved an amendment to our certificate of incorporation to increase our number of authorized common shares from 100,000,000 to 220,000,000, subject to approval by our 33 stockholders at a special meeting to be held on August 23, 2000. Adoption of the proposed amendment and any potential issuance of the additional common shares would not affect the rights of the holders of our currently outstanding common shares, except for effects incidental to increasing the number of shares outstanding, such as dilution of the earnings per share and the voting rights of current stockholders. If the amendment is adopted, it will become effective upon filing of a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware. The proposal is further described in our definitive proxy statement filed with the Securities and Exchange Commission on July 27, 2000. USE OF PROCEEDS Not applicable. RECENT SALES OF UNREGISTERED SECURITIES Not applicable. ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4 -- SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS At our Annual Meeting of Stockholders, held on May 3, 2000 three matters were voted upon. A description of each matter and tabulation of votes follows: 1. Election of Directors:
Votes ----------------------------- Nominee For Withheld -------------------- ------------- ------------ R. Scott Greer 56,555,172 10,214,932 M. Kathleen Behrens 49,058,448 17,711,656 Raju S. Kucherlapti 56,555,172 10,214,932 Mark B. Logan 56,553,512 10,216,592 Joseph E. Maroun 56,553,352 10,216,752 Stephen A. Sherwin 56,547,172 10,222,932
There were no abstentions or broker nonvotes. 2. To increase the aggregate number of shares of Common Stock authorized for issuance under the Company 1996 Incentive Stock Plan by 1,200,000 shares:
Votes ---------------------------------------- For Against Abstain ------------ ----------- --------- 53,413,764 13,325,972 29,288
There were 1,080 broker nonvotes. 34 3. To amend the Company's Certificate of Incorporation to increase the authorized number of shares of Common Stock from 50,000,000 to 100,000,000 shares:
Votes ---------------------------------------- For Against Abstain ------------ ----------- --------- 64,702,384 2,051,776 15,744
There were no broker nonvotes. ITEM 5 -- OTHER INFORMATION Not applicable. ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit No. Caption ----------- ------- 10.54 Lease agreement dated February 24, 2000 between Ardenwood Corporate Park Associates, a California Limited Partnership and Abgenix, Inc. 10.55 Lease agreement dated May 19, 2000 between Ardenwood Corporate Park Associates, a California Limited Partnership and Abgenix, Inc. 10.56 Amendments to stock option plans dated April 27, 2000 to eliminate the Company's ability to reprice issued and outstanding options. 27.1 Financial Data Schedule
---------- (b) Reports on Form 8-K - On January 7, 2000 a Form 8-K was filed relating to the announcement that we had acquired JT America Inc.'s interest in the Xenotech joint venture. - On January 28, 2000 a Form 8-K was filed relating to our signing several agreements with JT America Inc., including the acquisition of JT America Inc.'s interest in the Xenotech joint venture that became effective on December 31, 1999. - On January 28, 2000 a Form 8-K was filed relating to our Registration Statement on Form S-1 with the Securities and Exchange Commission, covering the underwritten public offering of our common stock. - On March 2, 2000 a Form 8-K was filed relating to the announcement that we had declared a two-for-one stock split to be effected in the form of a stock dividend. - On July 6, 2000 a Form 8-K was filed relating to the announcement that we had declared a two-for-one stock split to be effected in the form of a stock dividend. 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 14, 2000 ABGENIX, INC. (Registrant) /s/ R. Scott Greer --------------------------------------------- R. Scott Greer President and Chief Executive Officer (Principal Executive Officer) /s/ Kurt Leutzinger --------------------------------------------- Kurt Leutzinger Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 36 INDEX TO EXHIBITS
EXHIBITS -------- 10.54 Lease agreement dated February 24, 2000 between Ardenwood Corporate Park Associates, a California Limited Partnership and Abgenix, Inc. 10.55 Lease agreement dated May 19, 2000 between Ardenwood Corporate Park Associates, a California Limited Partnership and Abgenix, Inc 10.56 Amendments to stock option plans dated April 27, 2000 to eliminate the Company's ability to reprice issued and outstanding options. 27.1 Financial Data Schedule
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