-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RxMI2P0S5N0kbLOiucmDdgFqG/cdrNV3oqu1FKwsQefszg91fcl5tYV5EcoCEBVm 5+h3xyr5S0TAmqWDO0OonA== 0001047469-99-021144.txt : 19990518 0001047469-99-021144.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-021144 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABGENIX INC CENTRAL INDEX KEY: 0001052837 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 943248826 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24207 FILM NUMBER: 99627486 BUSINESS ADDRESS: STREET 1: 7601 DUMBARTON CIRCLE CITY: FREMONT STATE: CA ZIP: 94555 BUSINESS PHONE: 5106086500 MAIL ADDRESS: STREET 1: 7601 DUMBARTON CIRCLE CITY: FREMONT STATE: CA ZIP: 94555 10-Q 1 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 MARCH 31, 1999 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 APRIL 30,1999 THERE WERE 14,902,327 SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING. ============================================================================== ABGENIX, INC. FORM 10-Q INDEX
PAGE NO. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS Condensed Balance Sheets - March 31, 1999 and December 31, 1998 ..... 3 Condensed Statements of Operations - Three months ended March 31, 1999 and March 31, 1998 ................................................ 4 Condensed Statements of Cash Flows - Three months ended March 31, 1999 and March 31, 1998 ................................................ 5 Notes to Condensed Financial Statements .............................. 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .......................................... 8 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS .............................................. 25 ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS ...................... 25 ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ................................ 26 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 26 ITEM 5 - OTHER INFORMATION............................................... 26 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K................................ 26 SIGNATURES............................................................... 27
2 ABGENIX, INC. CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
March 31, December 31, 1999 1998 --------- --------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 22,977 $ 1,415 Marketable Securities 39,338 15,329 Prepaid expenses and other current assets 705 1,438 --------- --------- Total current assets 63,020 18,182 Property and equipment, net 5,304 5,435 Deposits and other assets 590 603 --------- --------- $ 68,914 $ 24,220 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,192 $ 439 Deferred revenue 425 425 Accrued product development costs 775 1,225 Other accrued liabilities 1,481 1,293 Current portion of long-term debt 1,714 1,699 --------- --------- Total current liabilities 5,587 5,081 Long-term debt 1,746 2,180 Commitments Stockholders' equity: Preferred Stock, $.0001 par value; 5,000,000 shares authorized, none outstanding Common Stock, $.0001 par value; 50,000,000 shares authorized, 14,684,953 and 11,120,293 shares issued and outstanding at March 31, 1999 and December 31, 1998, respectively, at amount paid in 105,566 55,842 Additional paid-in capital 31,759 31,588 Deferred compensation (1,046) (1,170) Accumulated deficit (74,698) (69,301) --------- --------- Total stockholders' equity 61,581 16,959 --------- --------- $ 68,914 $ 24,220 --------- --------- --------- ---------
See accompanying notes. 3 ABGENIX, INC. CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended March 31, -------------------------- 1999 1998 -------- -------- Revenues: Revenue from collaborative agreements from related parties (net of related contributions to Xenotech of $117 for the three months ended March 31, 1998) $ - $ 291 Contract revenue - 600 -------- -------- Total revenues - 891 Operating expenses: Research and development 4,567 5,366 General and administrative 1,084 918 Equity in losses from the Xenotech joint venture 8 - -------- -------- Total operating expenses 5,659 6,284 -------- -------- Operating loss (5,659) (5,393) Other income and expenses: Interest income (395) (197) Interest expense 133 149 -------- -------- Net loss $ (5,397) $ (5,345) -------- -------- -------- -------- Net loss per share $ (0.44) $ (0.67) -------- -------- -------- -------- Shares used in computing net loss per share 12,137 7,953 -------- -------- -------- --------
See accompanying notes. 4 ABGENIX, INC. CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31, ---------------------- 1999 1998 -------- -------- Operating activities: Net loss $(5,397) $(5,345) Adjustments to reconcile net loss to net cash used by operating activities: Equity in losses of Xenotech 8 115 Depreciation and amortization 408 445 Stock options issued to consultants 171 Changes for certain assets and liabilities: Prepaid expenses and other current assets 733 (236) Deposits and other assets (98) Accounts payable 753 (402) Accrued product development costs (450) Other accrued liabilities 188 137 -------- -------- Net cash used in operating activities (3,586) (5,384) -------- -------- Investing activities: Purchases of marketable securities (26,730) (3,643) Sales of marketable securities 2,721 1,978 Capital expenditures (148) (54) Contributions to Xenotech (117) -------- -------- Net cash used in investing activities (24,157) (1,836) -------- -------- Financing activities: Net proceeds from issuances of common stock 49,724 46 Net proceeds from issuances of redeemable convertible preferred stock 3,936 Principal payments on long-term debt and capital lease obligations (419) (408) -------- -------- Net cash provided in financing activities 49,305 3,574 -------- -------- Net increase (decrease) in cash and cash equivalents 21,562 (3,646) Cash and cash equivalents at the beginning of the period 1,415 4,617 -------- -------- Cash and cash equivalents at the end of the period $22,977 $ 971 -------- -------- -------- --------
See accompanying notes. 5 ABGENIX, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31,1999 1. 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. While the Company believes that the disclosures are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the audited financial statements for the year ended December 31, 1998 and accompanying notes included in the Company's Annual Report as filed on Form 10-K with the Securities and Exchange Commission on March 18, 1999. The results of operations for the quarter ended March 31, 1999 are not necessarily indicative of the results to be expected for the full year or for any other future period. 2. NET LOSS PER SHARE Net loss per share is based on the weighted average number of common stock outstanding. Potentially dilutive securities have been excluded from the computation, as their effect is antidilutive. 3. FOLLOW-ON PUBLIC OFFERING On March 4, 1999, the Company completed a follow-on public offering and issued 3,000,000 shares of its common stock to the public at a price of $15.00 per share. The Company received cash of $42.3 million, after deducting underwriting discounts and commissions and before deducting expenses payable by the Company. On April 7, 1999 the Company's underwriters exercised an option to purchase an additional 208,000 shares of common stock at a price of $15.00 per share to cover over-allotments. The Company received cash of approximately $2.9 million, net of underwriting discounts and commissions. 4. COLLABORATION AND LICENSE AGREEMENTS In January 1999, the Company entered into a research license and option agreement with AVI BioPharma ("AVI") to generate fully human antibodies to a specified antigen. This agreement allows AVI to conduct research and provides the partner with an option, for a limited time, to enter into a product license agreement at a future date. If the product license agreement is signed, it may provide the Company with additional license fees, milestone payments and royalties. In January 1999, the Company entered into a multi-antigen research license and option agreement with Genentech. Under the agreement, the Company granted Genentech a license to utilize XenoMouse technology in its antibody product research efforts and an option to obtain product licenses for up to ten antigen targets, but not more than two in any one year, over the agreement's six year term. Included in the ten are the two previously identified antigen targets under the now superceded research license and option agreement at the new option, license fee and milestone payment levels. The agreement can be renewed by Genentech for up to an additional four targets over a subsequent three year period. Genentech acquired 495,356 shares of the Company's common stock for an aggregate purchase price of $8,000,000. To renew the agreement at the end of the sixth year, Genentech must purchase an additional $2,500,000 of the Company's common stock at a 50% premium to the then current market price. 6 In March 1999, the Company entered into a research collaboration agreement with BASF Bioresearch Corporation ("BASF"). Under the agreement, BASF can utilize Abgenix's XenoMouse technology to develop fully human antibodies to an undisclosed antigen target. In return, Abgenix will receive an upfront research payment, and could receive additional fees and milestone payments plus royalties on future product sales by BASF, if any. BASF will be responsible for product development, manufacturing and marketing of any products developed through the collaboration. 5. SUBSEQUENT EVENT In April 1999 the Company entered into a research, option and license agreement with Amgen, Inc. ("Amgen"). Under the agreement, the Company will use its XenoMouse-TM- technology to generate for Amgen fully human monoclonal antibodies to an undisclosed antigen. In return, Abgenix will receive an upfront research payment and could receive additional fees and milestone payments plus royalties on future product sales by Amgen, if any. Amgen will be responsible for product development, manufacturing, and marketing of any products developed through the collaboration. 7 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 WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE STATEMENTS INCLUDE THE STATEMENTS IN PARAGRAPH TWO UNDER "OVERVIEW" REGARDING OUR COMMERCIALIZATION STRATEGY, THE STATEMENTS IN PARAGRAPH THREE UNDER "OVERVIEW" REGARDING FUTURE REVENUES FROM CURRENT AND POTENTIAL FUTURE COLLABORATIVE ARRANGEMENTS, THE STATEMENTS IN PARAGRAPH SIX UNDER "OVERVIEW" REGARDING ADVANTAGES TO GENENTECH OF EARLY IMPLEMENTATION OF XENOMOUSE TECHNOLOGY, THE STATEMENTS IN PARAGRAPH SEVEN UNDER "OVERVIEW" REGARDING THE RESULTS FROM ABX-CBL CLINICAL TRIALS, THE STATEMENTS IN PARAGRAPH FIVE UNDER "LIQUIDITY AND CAPITAL RESOURCES" REGARDING EXPANSION OF RESEARCH AND DEVELOPMENT USE OF AVAILABLE RESOURCES DURING FUTURE PERIODS, THE STATEMENTS IN PARAGRAPH SIX UNDER "LIQUIDITY AND CAPITAL RESOURCES" REGARDING THE SUFFICIENCY OF OUR AVAILABLE RESOURCES TO MEET WORKING CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS, AND THE STATEMENTS BELOW UNDER "ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS", AMONG OTHERS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ENTAIL VARIOUS RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES ARE SET FORTH HEREIN AND BELOW UNDER "ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS". OVERVIEW We are a biopharmaceutical company that develops and intends to commercialize antibody therapeutic products for the treatment of a variety of disease conditions, including transplant-related diseases, inflammatory and autoimmune disorders, and cancer. We have developed XenoMouse technology, a proprietary technology, which we believe enables quick generation of high affinity, fully human antibody product candidates to essentially any disease target appropriate for antibody therapy. We intend to use XenoMouse technology to build a large and diversified product portfolio that we plan to commercialize either through corporate collaborations or internal product development programs. We have established collaborative arrangements to use XenoMouse technology to produce fully human antibodies with ten companies covering at least 13 antigen targets. Pursuant to these collaborations, we and our partners intend to generate antibody product candidates for the treatment of cancer, inflammation, transplant rejection, cardiovascular disease and growth factor modulation. Our collaborative partners include Cell Genesys, Inc., Pfizer, Inc., Schering-Plough Research Institute, Genentech, Inc., Millennium BioTherapeutics, Inc., Research Corporation Technologies, Inc., Centocor, Inc., AVI BioPharma, Inc., BASF Bioresearch Corporation and Amgen, Inc. Among our ten collaborative partners, Pfizer, Genentech and Millennium BioTherapeutics have each entered into additional collaborations with us specifying additional antigens for XenoMouse antibody development. We expect that substantially all of our revenues for the foreseeable future will result from payments under collaborative arrangements. The terms of the collaboration arrangements vary, reflecting the value we add to the development of any particular product candidate. These collaborations typically provide our collaborative partners with access to XenoMouse technology for the purpose of generating fully human antibody product candidates to one or more specific antigen targets provided by the collaborative partner. In most cases, we provide our mice to collaborative partners who then carry out immunizations with their specific antigen target. In other cases, we may immunize the mice with the collaborative partner's antigen target for additional compensation. As an extension of this concept, we may grant multi-antigen research licenses to select collaborative partners, allowing them to incorporate XenoMouse technology into early stages of their antibody product research efforts without specifically knowing the antigens that they intend to target for XenoMouse antibody generation. These collaborative partners will need to execute product licenses for any antibody product they wish to develop and commercialize. The financial terms of our existing collaborations typically include upfront payments, potential license fees and milestone payments paid to us by the collaborative partner. Based on our collaborative agreements entered into, these payments and fees may approximate $8.0 million per antigen target assuming our collaborative partner takes the antibody product candidate to commercialization. In certain instances, the collaborative partner could make reimbursement payments to us for research that we conduct on its behalf. Additionally, if a product receives marketing 8 approval from the FDA or an equivalent foreign agency, we are entitled to receive royalties on any future product sales by the collaborative partner. Furthermore, the collaborative partner will be responsible for worldwide manufacturing, product development and marketing of any product developed through the collaboration. Our dependence on collaborative and licensing arrangements with third parties subjects us to a number of risks. Agreements with collaborative partners typically allow them significant discretion in electing whether to pursue any of the planned activities. We cannot control the amount and timing of resources our collaborative partners may devote to the product candidates. Even if we fulfill our obligations under a collaborative agreement, the collaborative partner can terminate the agreement at any time following proper written notice. If any collaborative partner were to terminate or breach its agreement with us, or otherwise fail to complete its obligations in a timely manner, our business, financial condition and results of operations may be materially adversely affected. We also have four antibody product candidates that are under development internally. Our lead product candidate, ABX-CBL, is an in-licensed mouse antibody. We recently completed a multi-center confirmatory Phase II clinical trial for ABX-CBL for the treatment of a transplant-related disease known as graft versus host disease. Our other three product candidates were generated using XenoMouse technology. We completed a Phase I clinical trial for our fully human antibody product candidate in psoriasis, ABX-IL8, and began a Phase I/II clinical trial in November 1998. In addition, we entered a Phase I clinical trial for ABX-IL8 in rheumatoid arthritis in January 1999. We are in preclinical development with two other fully human antibody product candidates: ABX-EGF for use in the treatment of cancer; and ABX-RB2 for use in the treatment of chronic immunological disorders. We expect to initiate Phase I clinical trials with ABX-EGF in mid-1999. In January 1999, we entered into a multi-antigen research license and option agreement with Genentech. Under the agreement, we granted Genentech a license to utilize XenoMouse technology in its antibody product research efforts and an option to obtain product licenses for up to ten antigen targets. Included in the ten are two previously identified antigen targets under previous collaboration arrangements with Genentech. We believe that this license will allow Genentech to integrate the use of XenoMouse technology much earlier in its research and development efforts, allowing a more complete realization of the advantages of XenoMouse technology. We plan to pursue similar multi-antigen research licenses with new or existing collaborative partners. In February 1999, we reported the preliminary results of our multi-center confirmatory Phase II clinical trial for ABX-CBL in graft versus host disease. This trial supports the safety and efficacy data seen in previously published clinical trials conducted by third parties. The trial was conducted at nine sites on 27 patients. Data from 23 of the 27 patients was evaluated for efficacy at four dosing levels. A response rate of 73% was reported among the 15 patients in the three highest dose groups. The remaining eight patients reported a 25% response at the lowest dose. We believe the treatment was safe and well tolerated except for temporary muscle pain. We will submit the complete report to the FDA and, if approved, expect to commence a pivotal Phase III clinical trial for ABX-CBL in mid-1999. In 1991, Cell Genesys and Akros Pharma, Inc., (formerly JT America, Inc.), formed Xenotech, an equally owned joint venture, to develop XenoMouse technology and to commercialize products generated from XenoMouse technology. Upon the organization of Abgenix, Cell Genesys assigned its rights in Xenotech to Abgenix. Xenotech funds its research and development activities through capital contributions from Abgenix and Akros Pharma, Inc., and Abgenix is obligated to fund 50% of all Xenotech expenses. During 1995, 1996 and 1997, Abgenix derived revenues principally from performing research for Xenotech for the continued development of XenoMouse technology. In connection with the grant of stock options since our organization on July 15, 1996, we have recorded aggregate deferred compensation of approximately $2.3 million through December 31, 1998, representing the difference between the deemed fair value of the common stock for accounting purposes and the option exercise price at the date of grant. These amounts are presented as a reduction of stockholders' equity and are amortized ratably over the vesting period of the applicable options, generally four years. These valuations resulted in charges to operations of $125,000 and $149,000 in three months ended March 31, 1999 and 1998, respectively. 9 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 AND 1998 Revenue under collaborative agreements from related parties for the three months ended March 31,1998 consisted of revenue derived principally from performing research for Xenotech. The development of XenoMouse technology was substantially completed in 1996 with modest ongoing research activities in 1997 and 1998. Therefore, we do not expect to recognize significant revenues from research performed on behalf of Xenotech in the future. Contract revenue of $600,000 in the three months ended March 31, 1998 consisted of a nonrefundable signing fee paid in connection with the execution in January 1998 of a collaboration agreement and the achievement of a milestone under an existing collaborative agreement. In the three months ended March 31, 1999, no contract revenues were recognized. Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, costs associated with preclinical testing and planned clinical trials of our product candidates and facilities expenses. Research and development expenses decreased from $5.4 million in the three months ended March 31,1998 to $4.6 million in the three months ended March 31, 1999. The decrease in research and development expenses reflects decreased expenses primarily for the manufacture of antibody products in 1998 in connection with the preparation for and the initiation of clinical trials of ABX-CBL and ABX-IL8. General and administrative expenses include compensation and other expenses related to finance and administrative personnel, professional services expenses and facilities expenses. General and administrative expenses increased slightly from $916,000 in the three months ended March 31, 1998 to $1,084,000 in the three months ended March 31, 1999. The increase in general and administrative expenses reflects additional investor relation costs due to being a publicly traded company and increased financing activity, primarily related to our follow-on public offering. Other income and expenses consist of interest income from cash, cash equivalents and short term investments and interest expense incurred in connection with equipment lease line financing and loan facilities. Interest income increased due to higher average balances of short-term investments as a result of our initial and follow-on public offerings. LIQUIDITY AND CAPITAL RESOURCES Since formation, we have financed our operations primarily through capital contributions by, and borrowings from Cell Genesys, revenue from collaborative arrangements, private placements of preferred stock, an initial public offering of common stock in 1998 and a follow-on public offering of common stock in the first quarter of 1999, and equipment leaseline financings and loan facilities. During the three months ended March 31, 1999 we received net cash of $49.7 million from financing activities, consisting principally of $42.3 million from the sale of 3,000,000 shares of common stock in a follow-on public offering in March 1999, $8.0 million from the sale of 495,356 shares of common stock to Genentech in January 1999 and issuance of common stock for the exercise of stock options, less offering costs. We have incurred operating losses in each of the last three years of operation, including net losses of approximately $7.1 million in 1996, $35.9 million in 1997 and $16.8 million in 1998 and $5.4 million in the three months ended March 31, 1999. As of March 31, 1999, we had an accumulated deficit of approximately $74.7 million. Our losses have resulted principally from costs incurred in performing research and development for our XenoMouse technology and antibody product candidates, from the non-recurring cross-license and settlement charge (described in the Company's 1998 Annual Report) and from general and administrative costs associated with our operations. See our Annual Report "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" for a description of the cross-license and settlement. We expect to incur additional operating losses until at least the year 2000 as a result of our expenditures for research and product development, including costs associated with conducting preclinical testing and clinical trials. We expect the amount of such losses will fluctuate significantly from quarter to quarter as a result of increases or decreases in our research and development efforts, the execution or termination of collaborative arrangements, or the initiation, success or failure of clinical trials. 10 The Company's net cash used in operating activities was $3.6 million and $5.4 million for the three months ended March 31, 1999 and 1998, respectively. The cash used for operations was primarily to fund research and development expenses and manufacturing costs related to the development of new products. As of March 31,1999, we had cash, cash equivalents and marketable securities of $62.3 million. We have invested the net proceeds of our initial and follow on public offering in highly liquid, interest-bearing, investment grade securities. We have an agreement with a financing company under which we have financed purchases of about $2.0 million of 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 have a construction financing line with a bank in the amount of $4.3 million that was used to finance construction of leasehold improvements at our current facility. The line matures in January 2001, bears interest at a rate of prime plus one percent (8.75% at March 31, 1999 and December 31, 1998). As of March 31, 1999, no further borrowings were available under the construction financing line. We plan to continue to expend substantial resources for the expansion of research and development, including costs associated with conducting preclinical testing and clinical trials. We may be required to expend substantial funds if unforeseen difficulties arise in the course of completing required additional development of product candidates, manufacturing of product candidates, performing preclinical testing and clinical trials of such product candidates, obtaining necessary regulatory approvals or other aspects of our business. Our future liquidity and capital requirements will depend on many factors, including: - - continued scientific progress in our research and development programs; - - size and complexity of these programs; - - scope and results of preclinical testing and clinical trials; - - time and expense involved in obtaining regulatory approvals; - - competing technological and market developments; - - establishment of further collaborative arrangements; - - maintaining current collaborations; - - time and expense of filing and prosecuting patent applications and enforcing patent claims; - - cost of establishing manufacturing capabilities, conducting commercialization activities and arrangements; - - product in-licensing; and - - other factors not within our control. We believe that our current cash balances, cash equivalents, marketable securities and the cash generated from our collaborative arrangements will be sufficient to meet our operating and capital requirements for at least the next two years. However, we may need additional financing within this timeframe. We may need to raise additional funds through public or private financing, collaborative relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms favorable to us. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Collaborative arrangements may require us to relinquish 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. As of December 31, 1998 we had federal net operating loss carryforwards of approximately $36.5 million. Our net operating loss carryforwards exclude losses incurred prior to the organization of Abgenix in July 1996. Further, the 11 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 2018, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of our computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This may result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to receive supplies from our vendors, or operate our accounting and other internal systems. Our plan to resolve the Year 2000 issue is based on a recently completed assessment of our exposure. All of our time-sensitive software is widely used and purchased from major vendors, all of whom have announced that their software is either currently Year 2000-compliant or will be made so with upgrades before the end of 1999. We have already purchased the Year 2000-compliant upgrade of our accounting system. We have determined that each of our 60 personal computers is compliant. We have determined that our telephone, voicemail and network equipment is not compliant and will be upgraded. In addition, we will be gathering information about the Year 2000 compliance status of third parties with whom we have significant relationships to determine the extent to which our operations are vulnerable to these third parties' failure to solve their own Year 2000 issue. None of our systems interface with those of third parties. Upgrading the accounting system was already planned in order to acquire the benefits of its improved features, and was not accelerated by the Year 2000 issue. We believe that the total cost of our compliance with the Year 2000 issue will be less than $50,000. We believe we have an effective program in place to resolve the Year 2000 issue in a timely manner. However, should our software vendors be unable to address the Year 2000 compliance of their products, or should our suppliers' operations be disrupted by the Year 2000 issue, then our ability to serve our collaborative partners and develop products may be materially and adversely impacted. Our contingency plans for minimizing the impact include increasing supplies of materials used in clinical trials, establishing accounts with alternative vendors, and temporarily employing manual accounting systems until alternative systems can be installed. ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS Abgenix became a public company in July 1998. Included here are risk factors as updated from the Company's Annual Report. 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 a very early stage of development. We have begun clinical trials with respect to only one fully human antibody product candidate, ABX-IL8. We cannot be certain that XenoMouse technology will generate antibodies against all the antigens to which it is exposed in an efficient and timely manner, if at all. Furthermore, XenoMouse technology may not result in any meaningful benefits to our current or potential collaborative partners or be safe and efficacious for patients. If XenoMouse technology fails to generate antibody product candidates that lead to the successful development and commercialization of products, our business, financial condition and results of operations will be materially adversely affected. 12 CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES WILL BE EXPENSIVE AND THEIR OUTCOME IS UNCERTAIN Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any products, we must demonstrate through preclinical testing and clinical trials that our product candidates are safe and effective for use in humans. We will incur substantial expense for, and devote a significant amount of time to, preclinical testing and clinical trials. Historically, the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from preclinical and clinical activities are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of product development. Only two of our product candidates, ABX-CBL and ABX-IL8, are currently in clinical trials. Patient follow-up for these clinical trials has been limited. To date, data obtained from these clinical trials has been insufficient to demonstrate safety and efficacy under applicable FDA guidelines. As a result, such data will not support an application for regulatory approval without further clinical trials. Clinical trials conducted by Abgenix or by third parties on our behalf may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for ABX-CBL, ABX-IL8 or any other potential product candidates. Regulatory authorities may not permit us to undertake any additional clinical trials for our product candidates. In addition, our other product candidates are in preclinical development, and we have not submitted investigational new drug applications nor begun clinical trials for such product candidates. Our preclinical or clinical development efforts may not be successfully completed. We may not file further investigational new drug applications. Our clinical trials may not commence as planned. Completion of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the product candidate. Our commencement and rate of completion of clinical trials may be delayed by many factors, including: - - inability to manufacture sufficient quantities of materials used for clinical trials; - - slower than expected rate of patient recruitment; - - inability to adequately follow patients after treatment; - - unforeseen safety issues; - - lack of efficacy during the clinical trials; or - - government or regulatory delays. We have limited experience in conducting and managing clinical trials. We rely on third parties, including our collaborative partners, to assist us in managing and monitoring clinical trials. Our reliance on such third parties may result in delays in completing, or failing to complete, such trials if they fail to perform under our agreements with them. Our product candidates may fail to demonstrate safety and efficacy in clinical trials. Such failure may delay development of other product candidates, and hinder our ability to conduct related preclinical testing and clinical trials. As a result of such failures, we may also be unable to obtain additional financing. Our business, financial condition and results of operations will be materially adversely affected by any delays in, or termination of, our clinical trials. 13 THE CLINICAL SUCCESS OF ABX-CBL IS UNCERTAIN We recently completed a multi-center confirmatory Phase II trial in graft versus host disease, or GVHD. As of March 31, 1999, ABX-CBL had been administered to a total of only 151 patients for GVHD and organ transplant rejection indications. ABX-CBL was administered to a total of 85 of these 151 patients by third parties prior to Abgenix obtaining an exclusive license to ABX-CBL. In our clinical trials, we administered ABX-CBL to only 66 of these patients, 27 of which were used for our preliminary Phase II report submitted to the FDA. 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. In addition, our clinical trials are being conducted with patients who have failed conventional treatments and who are in the most advanced stages of GVHD. During the course of treatment, these patients can die or suffer adverse medical effects for reasons that may not be related to ABX-CBL. Such adverse effects may affect the interpretation of clinical trial results. As an extension to the original Phase II trial protocol, we filed for and received permission from the FDA to enroll additional patients at a single dose. This protocol remains open and continues to enroll patients. Our application to the FDA for approval to advance to Phase III clinical trials will contain the original Phase II data plus all additional data then available from the extension protocol. There can be no assurance that the results of the extension protocol will be favorable or will extend the findings of the original Phase II study. In addition, the FDA may view our application as insufficient and require additional clinical trials before allowing us to commence a Phase III clinical trial. Additional clinical trials will be extensive, expensive and time-consuming. If ABX-CBL fails to receive regulatory approval, our business, financial condition and results of operations may be materially adversely affected. SUCCESSFUL DEVELOPMENT OF OUR PRODUCTS IS UNCERTAIN Our development of current and future product candidates is subject to the risks of failure inherent in the development of new pharmaceutical products and products based on new technologies. These risks include: - - delays in product development, clinical testing or manufacturing; - - unplanned expenditures in product development, clinical testing or manufacturing; - - failure in clinical trials or failure to receive regulatory approvals; - - emergence of superior or equivalent products; - - inability to manufacture product candidates on a commercial scale; - - inability to market products due to third-party proprietary rights; - - election by our collaborative partners not to pursue product development; - - failure by our collaborative partners to successfully develop products; and - - failure to achieve market acceptance. Because of these risks, our research and development efforts or those of our collaborative partners may not result in any commercially viable products. To date, none of our collaborative partners has exercised its 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 adversely affected. 14 WE ARE AN EARLY STAGE COMPANY You must evaluate us in light of the uncertainties and complexities present in an early stage biopharmaceutical company. Our product candidates are in early stages of development. We will require significant additional investment in research and development, preclinical testing and clinical trials, regulatory and sales and marketing activities to commercialize current and future product candidates. We cannot assure you that such product candidates, if successfully developed, will generate sufficient or sustainable revenues to enable us to be profitable. WE HAVE A HISTORY OF LOSSES We have incurred net losses in each of the last four years of operation, including net losses of approximately $8.3 million in 1995, $7.1 million in 1996, $35.9 million in 1997 and $16.8 million in 1998. We have also incurred net losses of approximately $5.4 million in the three months ended March 31, 1999. As of March 31, 1999, our accumulated deficit was approximately $74.7 million. Our losses have resulted principally from: - - research and development costs relating to the development of our XenoMouse technology and antibody product candidates; - - cross-license and settlement costs relating to our patent portfolio; and - - general and administrative costs relating to our operations. We expect to incur additional operating losses until at least the year 2000 as a result of increases in our research and development costs, including costs associated with conducting preclinical testing and clinical trials. We expect that the amount of operating losses will fluctuate significantly from quarter to quarter as a result of increases or decreases in our research and development efforts, the execution or termination of collaborative arrangements, or the initiation, success or failure of clinical trials. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR FUTURE PROFITABILITY IS UNCERTAIN Prior to June 1996, our business was owned by Cell Genesys and operated as a business unit. Since that time, we have funded our research and development activities primarily from contributions from Cell Genesys, private placements of preferred stock, the initial public offering of our common stock, the follow-on public offering of our common stock, revenues generated from our collaborative arrangements, equipment leaseline financings and loan facilities. We expect that substantially all of our revenues for the foreseeable future will result from payments under collaborative arrangements. To date, such payments have been in the form of upfront payments, reimbursement for research and development expenses and milestone payments, but may include license fees in the future. Payments under our existing and any future collaborative arrangements will be subject to significant fluctuation in both timing and amount. Our revenues may not be indicative of our future performance or of our ability to continue to achieve such milestones. Our revenues and results of operations for any period may also not be comparable to the revenues or results of operations for any other period. We cannot assure you that we will: - - enter into further collaborative arrangements; - - successfully complete preclinical or clinical trials; - - obtain required regulatory approvals; - - successfully develop, manufacture and market product candidates; or - - generate additional revenues or profitability. If we fail to achieve any of the above goals, our business, financial condition and results of operations will be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 15 WE WILL NEED TO FIND COLLABORATIVE PARTNERS TO DEVELOP MANY OF OUR PRODUCT CANDIDATES Our strategy for the development and commercialization of antibody therapeutic products depends, in large part, upon the formation of collaborative arrangements with several collaborative partners. Potential collaborative partners include pharmaceutical and biotechnology companies, academic institutions and other entities. We must enter into these collaborations to successfully develop and commercialize product candidates. Such collaborations are necessary in order for us to: - - access proprietary antigens for which we can generate fully human antibody products; - - fund our research and development activities; - - fund preclinical testing, clinical trials and manufacturing; - - seek and obtain regulatory approvals; and - - successfully commercialize existing and future product candidates. Only a limited number of fully human antibody product candidates have been generated pursuant to our collaborations. None of these collaborative product candidates has entered clinical testing and may not result in commercially successful products. Current or future collaborative arrangements may not be successful. If we fail to maintain our existing collaborative arrangements or to enter into additional collaborative arrangements, our business, financial condition and results of operations will be materially adversely affected. Our dependence on collaborative arrangements with third parties subjects us to a number of risks. Such collaborative arrangements may not be on terms favorable to Abgenix. Agreements with collaborative partners typically allow partners significant discretion in electing whether to pursue any of the planned activities. We cannot control the amount and timing of resources our collaborative partners may devote to the product candidates. Our partners may not perform their obligations as expected. Business combinations or significant changes in a collaborative partner's business strategy may adversely affect a partner's willingness or ability to complete its obligations under the arrangement. Even if we fulfill our obligations under a collaborative agreement, our partner can terminate the agreement at any time following proper written notice. If any collaborative partner were to terminate or breach our agreement with it, or otherwise fail to complete its obligations in a timely manner, our business, financial condition and results of operations may be materially adversely affected. If we are not able to establish further collaborative arrangements or any or all of our existing collaborative arrangements are terminated, we may be required to seek new collaborative arrangements or to undertake product development and commercialization at our own expense. Such an undertaking may: - - limit the number of product candidates that we will be able to develop and commercialize; - - reduce the likelihood of successful product introduction; - - significantly increase our capital requirements; and - - place additional strain on management's time. Existing or future collaborative partners may pursue alternative technologies, including those of our competitors. Disputes may arise with respect to the ownership of rights to any technology or products developed with any current or future collaborative partner. Lengthy negotiations with potential new collaborative partners or disagreements between Abgenix and our collaborative partners may lead to delays or termination in the research, development or commercialization of product candidates or result in time consuming and expensive litigation or arbitration. If our collaborative partners pursue alternative technologies or fail to develop or commercialize successfully any product candidate to which they have obtained rights from us, our business, financial condition and results of operations may be materially adversely affected. 16 OUR JOINT VENTURE WITH AKROS PHARMA, INC. MAY LIMIT OUR ABILITY TO DEVELOP PRODUCT CANDIDATES In 1991, Cell Genesys and Akros Pharma, Inc., (formerly JT America, Inc.), formed Xenotech, L.P., an equally-owned joint venture, to develop genetically modified strains of mice which can produce fully human monoclonal antibodies, called XenoMouse technology, and to commercialize products generated from XenoMouse technology. Upon our organization, Cell Genesys assigned its rights in Xenotech to us. We must obtain licenses from Xenotech to commercialize antibody products generated by XenoMouse technology. We have the right to license the use of XenoMouse technology from Xenotech to develop a certain number of antigen targets each year. If we have used our yearly allotment of licenses to develop antigen targets and desire to acquire a license to develop additional antigen targets, we may have to negotiate with Akros Pharma, Inc. or others to acquire such rights. Disputes with Akros Pharma, Inc., or its parent company Japan Tobacco, Inc., may result in the loss of the right to commercialize a product candidate by either party. Limits on our ability to acquire additional licenses to develop antigen targets, or disputes with Akros Pharma, Inc. or Japan Tobacco, Inc. will limit our ability to establish collaborations and fully realize the commercial potential of XenoMouse technology. WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. We are aware of several pharmaceutical and biotechnology companies that are actively engaged in research and development in areas related to antibody therapy. These companies have commenced clinical trials of antibody products or have successfully commercialized antibody products. Many of these companies are addressing the same diseases and disease indications as Abgenix or our collaborative partners. Also, we compete with companies that offer antibody generation services to companies that have antigens. These competitors have specific expertise or technology related to antibody development. These companies include GenPharm International, Inc., a wholly-owned subsidiary of Medarex, Inc., Cambridge Antibody Technology Group 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. Recently, Sangstat Medical Corp. received approval for an organ transplant rejection product that may compete with ABX-CBL, which is in clinical trials. We are also aware that several companies, including Genentech, Inc., have potential product candidates that may compete with ABX-IL8. Furthermore, we are aware that ImClone Systems, Inc., Medarex and OSI Pharmaceuticals, Inc. have potential antibody and small molecule product candidates already in clinical development that may compete with ABX-EGF, which is in preclinical development. We may also compete with Japan Tobacco in supplying XenoMouse technology or antibody product candidates to potential collaborative partners. Many of these companies and institutions, either alone or together with their collaborative partners, have substantially greater financial resources and larger research and development staffs than we do. In addition, many of these competitors, either alone or together with their collaborative partners, have significantly greater experience than we do in: - - developing products; - - undertaking preclinical testing and human clinical trials; - - obtaining FDA and other regulatory approvals of products; and - - manufacturing and marketing products. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or commercializing products before us. If we commence commercial product sales, we will be competing against companies with greater marketing and manufacturing capabilities, areas in which we have limited or no experience. 17 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 collaborative arrangements with pharmaceutical and biotechnology companies for establishing relationships with academic and research institutions, and for licenses to proprietary technology. These competitors, either alone or with their collaborative partners, may succeed in developing technologies or products that are more effective than ours. MARKET ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN Our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. We may not achieve market acceptance even if clinical trials demonstrate safety and efficacy, and the necessary regulatory and reimbursement approvals are obtained. The degree of market acceptance of any product candidates that we develop will depend on a number of factors, including: - - establishment and demonstration of clinical efficacy and safety; - - cost-effectiveness of our product candidates; - - their potential advantage over alternative treatment methods; - - reimbursement policies of government and third-party payors; and - - marketing and distribution support for our product candidates. Physicians will not recommend therapies using our products until such time as clinical data or other factors demonstrate the safety and efficacy of such procedures as compared to conventional drug and other treatments. Even if the clinical safety and efficacy of therapies using our antibody products is established, physicians may elect not to recommend the therapies for any number of other reasons, including whether the mode of administration of our antibody products is effective for certain indications. For example, antibody products are typically administered by infusion or injection, which requires substantial cost and inconvenience to patients. Our product candidates, if successfully developed, will compete with a number of drugs and therapies manufactured and marketed by major pharmaceutical and other biotechnology companies. Our products may also compete with new products currently under development by others. Physicians, patients, third-party payors and the medical community may not accept and utilize any product candidates that Abgenix or our collaborative partners develop. If our products do not achieve significant market acceptance, our business, financial condition and results of operations will be materially adversely affected. 18 OUR PATENT POSITION IS UNCERTAIN AND OUR SUCCESS DEPENDS ON OUR PROPRIETARY RIGHTS Our success depends in part on our ability to: - - obtain patents; - - protect trade secrets; - - operate without infringing upon the proprietary rights of others; and - - prevent others from infringing on our proprietary rights. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. While we have pending patent applications in the United States relating to XenoMouse technology, no patents have been issued. We try to protect our proprietary position by filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. The patent position of biopharmaceutical companies involves complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from third parties may not provide any protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. Also, patent rights may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. In addition to patents, we rely on trade secrets and proprietary know-how. We seek protection, in part, through confidentiality and proprietary information agreements. These agreements may not provide meaningful protection or adequate remedies for our technology in the event of unauthorized use or disclosure of confidential and proprietary information. The parties may breach such agreements. Furthermore, our trade secrets may otherwise become known to, or be independently developed by, our competitors. WE MAY FACE CHALLENGES FROM THIRD PARTIES REGARDING THE VALIDITY OF OUR PATENTS AND PROPRIETARY RIGHTS Research has been conducted for many years in the antibody field. This has resulted in a substantial number of issued patents and an even larger number of patent applications. Patent applications in the United States are, in most cases, maintained in secrecy until patents issue. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Our technologies may infringe the patents or violate other proprietary rights of third parties. In the event of infringement or violation, Abgenix and our collaborative partners may be prevented from pursuing product development or commercialization. Such a result will materially adversely affect our business, financial condition and results of operations. In March 1997, we entered into a cross-license and settlement agreement with GenPharm to avoid protracted litigation. Under the cross-license, we licensed on a non-exclusive basis certain patents, patent applications, third-party licenses, and inventions pertaining to the development and use of certain transgenic rodents including mice that produce fully human antibodies that are integral to our products and business. Our business, financial condition and results of operations will be materially adversely affected if any of the parties breaches the cross-license agreement. We have one issued European patent relating to XenoMouse technology that is currently undergoing opposition proceedings within the European Patent Office and the outcome of this opposition is uncertain. 19 The biotechnology and pharmaceutical industries have been characterized by extensive litigation regarding patents and other intellectual property rights. The defense and prosecution of intellectual property suits, United States Patent and Trademark Office interference proceedings and related legal and administrative proceedings in the United States and internationally involve complex legal and factual questions. As a result, such proceedings are costly and time-consuming to pursue and their outcome is uncertain. Litigation may be necessary to: - - enforce our issued and licensed patents; - - protect trade secrets or know-how that we own or license; or - - determine the enforceability, scope and validity of the proprietary rights of others. If we become involved in any litigation, interference or other administrative proceedings, we will incur substantial expense and the efforts of our technical and management personnel will be significantly diverted. An adverse determination may subject us to significant liabilities or require us to seek licenses that may not be available from third parties. We may be restricted or prevented from manufacturing and selling our products, if any, in the event of an adverse determination in a judicial or administrative proceeding or if we fail to obtain necessary licenses. Costs associated with these arrangements may be substantial and may include ongoing royalties. Furthermore, we may not be able to obtain the necessary licenses on satisfactory terms, if at all. These outcomes will materially adversely affect our business, financial condition and results of operations. WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS AND WE MAY NOT BE ABLE TO OBTAIN REGULATORY APPROVALS Our product candidates under development are subject to extensive and rigorous domestic government regulation. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. If our products are marketed abroad, they also are subject to extensive regulation by foreign governments. None of our product candidates has been approved for sale in the United States or any foreign market. The regulatory review and approval process, which includes preclinical studies and clinical trials of each product candidate, is lengthy, expensive and uncertain. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish the product candidates safety and efficacy. For example, we have not received FDA approval to commence Phase III clinical trials for ABX-CBL. The approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance, and may involve ongoing requirements for post-marketing studies. Delays in obtaining regulatory approvals may: - - adversely affect the successful commercialization of any drugs that Abgenix or our collaborative partners develop; - - impose costly procedures on Abgenix or our collaborative partners; - - diminish any competitive advantages that Abgenix or our collaborative partners may attain; and - - adversely affect our receipt of revenues or royalties. Certain material changes to an approved product such as manufacturing changes or additional labeling claims are subject to further FDA review and approval. Any required approvals, once obtained, may be withdrawn. Compliance with other regulatory requirements may not be maintained. Further, if we fail to comply with applicable FDA and other regulatory requirements at any stage during the regulatory process, Abgenix or our contract manufacturers may be subject to sanctions, including: - - delays; - - warning letters; 20 - - fines; - - product recalls or seizures; - - injunctions; - - refusal of the FDA to review pending market approval applications or supplements to approval applications; - - total or partial suspension of production; - - civil penalties; - - withdrawals of previously approved marketing applications; and - - criminal prosecutions. We expect to rely on our collaborative partners to file investigational new drug applications and generally direct the regulatory approval process for many of our products. Our collaborative partners may not be able to conduct clinical testing or obtain necessary approvals from the FDA or other regulatory authorities for any product candidates. If we fail to obtain required governmental approvals, our collaborative partners will experience delays in or be precluded from marketing products developed through our research. In addition, the commercial use of our products will be limited. Delays and limitations may materially adversely affect our business, financial condition and results of operations. Abgenix and our contract manufacturers also are required to comply with the applicable FDA current good manufacturing practice regulations. Good manufacturing practice regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA. Such facilities must be approved before we can use them in commercial manufacturing of our products. Abgenix or our contract manufacturers may not be able to comply with the applicable good manufacturing practice requirements and other FDA regulatory requirements. If Abgenix or our contract manufacturers fails to comply, our business, financial condition and results of operations will be materially adversely affected. WE RELY ON A SOLE SOURCE THIRD-PARTY MANUFACTURER AND DO NOT HAVE COMMERCIAL SCALE MANUFACTURING EXPERIENCE We lack the resources and capability to manufacture our products on a commercial scale. We currently manufacture only limited quantities of antibody products for preclinical testing. While we maintain a limited inventory of antibody products, we depend 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. There are, on a worldwide basis, a limited number of contract facilities in which our product candidates can be produced under good manufacturing practice regulations for use in pharmaceutical drugs. It can also take a substantial period of time for a contract facility to begin producing antibodies under good manufacturing practice regulations. Accordingly, we depend on our contract manufacturer to produce our product candidates under good manufacturing practice regulations which meet acceptable standards for our clinical trials. Contract manufacturers often encounter difficulties in scaling up production, including problems involving production yields, quality control and quality assurance and shortage of qualified personnel. Our contract 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 21 product candidates for clinical use on a timely basis and at commercially reasonable prices, and we fail to find a replacement manufacturer or develop our own manufacturing capabilities, our business, financial condition and results of operations will be materially adversely affected. In addition, Abgenix and our third-party manufacturer are required to register manufacturing facilities with the FDA and foreign regulatory authorities. The facilities will then be subject to inspections confirming compliance with good manufacturing practice requirements established by the FDA or corresponding foreign regulations. If Abgenix or our third-party manufacturer fails to maintain compliance with the good manufacturing practice requirements, our business, financial condition and results of operations will be materially 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 adversely affected. WE DEPEND ON KEY PERSONNEL AND MUST CONTINUE TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS We are highly dependent on the principal members of our scientific and management staff. If we lose any of these persons, our business, financial condition and results of operations may be materially adversely affected. For us to pursue product development, marketing and commercialization plans, we will need to hire additional qualified scientific personnel to perform research and development. We will also need to hire personnel with expertise in clinical testing, government regulation, manufacturing, 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. In addition, we rely on members of our Scientific and Medical Advisory Boards and other consultants to assist us in formulating our research and development strategy. All of our consultants and the members of our Scientific and Medical Advisory Boards are employed by other entities. They may have commitments to, or advisory or consulting agreements with, other entities that may limit their availability to us. If we lose the services of these personnel, the achievement of our development objectives may be impeded. Such impediments may materially adversely affect our business, financial condition and results of operations. DIRECTORS, EXECUTIVE OFFICERS, PRINCIPAL STOCKHOLDERS AND AFFILIATED ENTITIES OWN A SIGNIFICANT PERCENTAGE OF OUR CAPITAL STOCK Our directors, executive officers, principal stockholders and affiliated entities beneficially own, in the aggregate, approximately 28.7% of our outstanding common stock as of March 31, 1999. These stockholders, if acting together, will be able to significantly influence all matters requiring approval by our stockholders. Such matters include the election of directors and the approval of mergers or other business combination transactions. We may be adversely impacted by the control that such stockholders will have with respect to matters affecting us. 22 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 testing and clinical trials. We will be required to expend substantial funds in the course of completing required additional development, preclinical testing and clinical trials of and regulatory approval for product candidates. Our future liquidity and capital requirements will depend on many factors, including: - - the scope and results of preclinical testing and clinical trials; - - the retention of existing and establishment of further collaborative arrangements, if any; - - continued scientific progress in our research and development programs; - - the size and complexity of these programs; - - the time and expense involved in obtaining regulatory approvals, if any; - - competing technological and market developments; - - the time and expense of filing and prosecuting patent applications and enforcing patent claims; - - the cost of establishing manufacturing capabilities, conducting commercialization activities and arrangements and product in-licensing; and - - other factors not within our control. We believe that our current cash balances, cash equivalents, short-term investments and cash generated from our collaborative arrangements will be sufficient to meet our operating and capital requirements for at least the next two years. However, we may need additional financing within this timeframe. We may need to raise additional funds through public or private financing, collaborative arrangements or other arrangements. Additional funding may not be available to us on favorable terms, if at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Collaborative arrangements may require us to relinquish our rights to certain of our technologies, product candidates or marketing territories. If we fail to raise additional funds when needed, our business, financial condition and results of operations will be materially adversely affected. CELL GENESYS EXERCISES SIGNIFICANT INFLUENCE OVER US As of March 31,1999 Cell Genesys beneficially owns 22.9% of our outstanding capital stock. As a result, Cell Genesys will have significant influence over all matters requiring the approval of our stockholders. Such matters include the election of our Board of Directors and changes in control of Abgenix. We have entered into a governance agreement with Cell Genesys which provides that so long as Cell Genesys or a group to which it belongs owns a specific percentage of our outstanding voting stock, Cell Genesys or the group shall have the right to nominate a fixed number of directors to serve on our Board. The details of this arrangement are set forth in the table below:
NUMBER OF PERCENTAGE OWNERSHIP DIRECTORS -------------------- --------- 50% or more 4 out of 7 Less than 50% but greater than 25% 3 out of 7 Less than 25% but greater than 15% 1 out of 7
23 The governance agreement also provides that Cell Genesys and each of our officers and directors who owns voting stock shall agree to vote for the persons nominated as set forth above. We may be adversely impacted by the significant influence which Cell Genesys will have with respect to matters affecting us. WE FACE UNCERTAINTY OVER REIMBURSEMENT AND HEALTHCARE REFORM In both domestic and foreign markets, sales of our product candidates will depend in part upon the availability of reimbursement from third-party payors. Such third-party payors include government health administration authorities, managed care providers, private health insurers and other organizations. These third-party payors are increasingly challenging the price and examining the cost effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. We may need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of our products. Such studies may require us to provide a significant amount of resources. Our product candidates may not be considered cost-effective. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Domestic and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. Accordingly, legislation and regulations affecting the pricing of pharmaceuticals may change before our proposed products are approved for marketing. Adoption of such legislation could further limit reimbursement for pharmaceuticals. If the government and third-party payors fail to provide adequate coverage and reimbursement rates for our product candidates, the market acceptance of our products may be adversely affected. If our products do not receive market acceptance, our business, financial condition and results of operations will be materially adversely affected. WE FACE PRODUCT LIABILITY RISKS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE INSURANCE The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to liability claims resulting from such use or sale of our products. These claims might be made directly by consumers, healthcare providers or by pharmaceutical companies or others selling such products. We may experience financial losses in the future due to product liability claims. We have obtained limited product liability insurance coverage for our clinical trials. Our insurance coverage limits are $5.0 million per occurrence and $5.0 million in the aggregate. We intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for product candidates in development. However, insurance coverage is becoming increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our business, financial condition and results of operations may be materially adversely affected. OUR OPERATIONS INVOLVE HAZARDOUS MATERIALS Our research and manufacturing activities involve the controlled use of hazardous materials. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, we may be held liable for any resulting damages, which may exceed our financial resources and may materially adversely affect our business, financial condition and results of operations. OUR STOCK PRICE IS HIGHLY VOLATILE The market price of our common stock has been highly volatile and is likely to continue to be volatile. Factors affecting our stock price include: - - fluctuations in our operating results; - - announcements of technological innovations or new commercial therapeutic products by us or our competitors; - - published reports by securities analysts; - - progress with clinical trials; 24 - - governmental regulation; - - changes in reimbursement policies; - - developments in patent or other proprietary rights; - - developments in our relationship with collaborative partners; - - public concern as to the safety and efficacy of our products; and - - general market conditions. WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions which may discourage takeover attempts, including transactions in which stockholders might receive a premium for their shares. This may limit stockholders' ability to approve a transaction that they may think is in their best interest. Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws require that any action required or permitted to be taken by our stockholders must be taken at a properly called meeting of stockholders that may be called only by the Board of Directors, the Chairman of the Board or the President. In addition, the Board of Directors has the authority, without stockholder action, to fix the rights and preferences of and issue shares of preferred stock, which may have the effect of delaying or preventing a change in control. WE DO NOT INTEND TO PAY DIVIDENDS We intend to retain any future earnings to finance the growth and development of our business and we do not plan to pay cash dividends in the foreseeable future. WE FACE UNCERTAINTY WITH YEAR 2000 COMPLIANCE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of our computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This may result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to receive supplies from our venders, or operate our accounting and other internal systems. If our software vendors are unable to address the Year 2000 compliance of their products, or should our suppliers' operations be disrupted by the Year 2000 Issue, then our ability to serve collaborative partners and develop products may be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PART II ITEM 1 - LEGAL PROCEEDINGS Not applicable. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS USE OF PROCEEDS In July 1998, we closed an initial public offering of 2,875,000 shares of our common stock at a per share price of $8.00 pursuant to a Registration Statement on Form S-1 (Registration No. 333-49415), which was declared effective on July 2, 1998. The managing underwriters for our offering were BancAmerica Robertson Stephens (now BancBoston Robertson Stephens Inc.) and Lehman Brothers Inc. Of the $23,000,000 in gross proceeds 25 raised in connection with the offering, (i) $1,610,000 was paid to the managing underwriters in connection with underwriting discounts and (ii) approximately $1,359,000 was paid by us in connection with expenses, including legal, printing and filing fees, in connection with the offering. Of the remaining net proceeds, we have paid $3,750,000 pursuant to the cross-license and settlement with GenPharm and through the nine month period ended March 31, 1999, approximately $13.2 million of the net proceeds have been spent on research and development activities. There were no direct or indirect payments to any of our directors or officers or to any other person or entity. No material amount of the proceeds from the offering have been used for the construction of plant, building or facility or installation of machinery or equipment, or the purchases of real estate or the acquisition of other businesses. We are currently investing the remaining net proceeds from the offering for future use as additional working capital. Such remaining net proceeds have been invested in highly liquid instruments, such as commercial paper and U.S Government obligations, with an average maturity of fifteen months or less. A portion of those net proceeds may be used for the acquisition of businesses, products and technologies that are complimentary to those of Abgenix. RECENT SALES OF UNREGISTERED SECURITIES On January 27, 1999, we issued 495,356 shares of our common stock to Genentech at a per share purchase price of $16.15, or an aggregate purchase price of $8.0 million. This issuance was in connection with a collaborative arrangement we entered into with Genentech. The sale and issuance of our common stock to Genentech was deemed to be exempt from registration under the Securities Act Regulation D promulgated thereunder, as a transaction by an issuer not involving any public offering. Genentech represented its intention to acquire the common stock for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the certificates for the common stock. Genentech had adequate access, through its relationship with Abgenix, to information about Abgenix. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Not applicable. ITEM 5 - OTHER INFORMATION Not applicable. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K The Company filed a report on form 8-K on March 30, 1999 relating to the agreement between the Company and BASF Bioresearch Corporation. 26 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: May 14, 1999. 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) 27 INDEX TO EXHIBITS EXHIBITS -------- 27.1 Financial Data Schedule 28 EX-27.1 2 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED BALANCE SHEETS AND THE STATEMENTS OF OPERATIONS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 22,977 39,338 0 0 0 63,020 7,536 2,232 68,914 5,587 1,746 0 0 105,566 (43,985) 68,914 0 0 0 0 5,659 0 133 (5,397) 0 (5,397) 0 0 0 (5,397) 0.44 0.44
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