UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2002

OR

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

For the transition period from         to

Commission file number 0-32405

SEATTLE GENETICS, INC.

(Exact name of registrant as specified in its charter)

Delaware	91-1874389
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
21823 30th Drive SE
Bothell, Washington 98021
(Address of principal executive offices, including zip code)
(425) 527-4000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

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 ý   No  o

As of April 30, 2002, there were 30,626,082 shares of the registrant’s Common Stock outstanding.

Seattle Genetics, Inc.

INDEX

PART I.  FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Balance Sheets
		Statements of Operations
		Statements of Cash Flows
		Notes to Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
PART II.                 OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 2.	Changes in Securities and Use of Proceeds
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

Seattle Genetics, Inc.

Balance Sheets

	March 31, 2002			December 31, 2001
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	6,349,334		$	8,293,504
Short-term investments	39,633,659			33,624,723
Interest receivable	736,935			724,953
Accounts receivable	51,576			81,603
Prepaid expenses and other current assets	874,302			477,782
Total current assets	47,645,806			43,202,565
Property and equipment, net	6,244,899			6,350,450
Restricted investments	984,016			982,002
Long-term investments	6,203,100			12,456,820
Other assets	36,406			36,406
Total assets	$	61,114,227		$	63,028,243
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	1,339,987		$	895,536
Accrued liabilities	899,940			1,012,181
Deferred revenue	141,667			141,667
Total current liabilities	2,381,594			2,049,384
Deferred rent	152,931			107,052
Deferred revenue, net of current portion	165,278			200,694
Total long-term liabilities	318,209			307,746
Stockholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued	—			—
Common stock, $0.001 par value, 100,000,000 shares authorized, 29,927,812 and 29,322,741 issued and outstanding, respectively	29,928			29,323
Additional paid-in capital	101,925,824			98,484,346
Notes receivable from stockholders	(271,533		)	(271,533		)
Deferred stock compensation	(4,179,132		)	(4,688,507		)
Accumulated other comprehensive income	356,769			572,980
Accumulated deficit	(39,447,432		)	(33,455,496		)
Total stockholders’ equity	58,414,424			60,671,113
Total liabilities and stockholders’ equity	$	61,114,227		$	63,028,243

The accompanying notes are an integral part of these financial statements.

Seattle Genetics, Inc.

Statements of Operations

(Unaudited)

	Three months ended March 31,
	2002			2001
Revenues
Collaboration and license agreements	$	219,819		$	—
Government grants	49,453			—
Total revenues	269,272			—
Operating expenses
Research and development (excludes non-cash stock-based compensation expense of $315,579 and $512,244, respectively)	4,852,896			2,855,999
General and administrative (excludes non-cash stock-based compensation expense of $563,948 and $730,127, respectively)	1,105,412			725,322
Non-cash stock-based compensation expense	879,527			1,242,371
Total operating expenses	6,837,835			4,823,692
Loss from operations	(6,568,563		)	(4,823,692		)
Investment income, net	576,627			577,761
Net loss	(5,991,936		)	(4,245,931		)
Accretion on mandatorily redeemable preferred stock	—			(3,295		)
Net loss attributable to common stockholders	$	(5,991,936	)	$	(4,249,226	)
Basic and diluted net loss per share	$	(0.20	)	$	(0.46	)
Weighted-average shares used in computing basic and diluted net loss per share	29,508,376			9,279,630

The accompanying notes are an integral part of these financial statements.

Seattle Genetics, Inc.

Statements of Cash Flows

(Unaudited)

	Three months ended March 31,
	2002			2001
Operating activities
Net loss	$	(5,991,936	)	$	(4,245,931	)
Adjustments to reconcile net loss to net cash used in operating activities
Amortization of deferred compensation	879,527			1,242,371
Depreciation and amortization	280,781			78,606
Realized loss on sale of investments	—			3,652
Amortization (accretion) on investments	195,629			(13,442		)
Deferred rent	45,880			—
Changes in operating assets and liabilities
Accounts receivable	30,027			—
Interest receivable	(11,982		)	51,721
Prepaid expenses and other current assets	(396,285		)	(307,124		)
Accounts payable	1,031,493			711,739
Accrued liabilities	(112,241		)	886,764
Deferred revenue	(35,417		)	—
Net cash used in operating activities	(4,084,524		)	(1,591,644		)
Investing activities
Purchases of investments	(6,086,019		)	(1,048,916		)
Proceeds from sale and maturities of investments	5,916,950			7,520,633
Purchases of property and equipment	(762,508		)	(127,990		)
Net cash (used in) provided by investing activities	(931,577		)	6,343,727
Financing activities
Net proceeds from issuance of common stock	3,071,931			46,979,745
Proceeds from subscription receivable	—			3,096
Net cash provided by financing activities	3,071,931			46,982,841
Net increase (decrease) in cash and cash equivalents	(1,944,170		)	51,734,924
Cash and cash equivalents, at beginning of period	8,293,504			2,618,986
Cash and cash equivalents, at end of period	$	6,349,334		$	54,353,910
Supplemental disclosure of cash flow information
Non-cash investing and financing activities
Conversion of preferred stock to common stock	$	—		$	37,559,302
Increase (decrease) in deferred stock compensation	$	370,152		$	(123,160	)

The accompanying notes are an integral part of these financial statements.

Seattle Genetics, Inc.

Notes to Financial Statements

(Unaudited)

1.  Basis of presentation

The accompanying unaudited financial statements of Seattle Genetics, Inc. (“Seattle Genetics” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period.

The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s annual report filed on Form 10-K as filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements that effect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2.  Collaboration and license agreements

In January 2002, the Company entered into an agreement with Genencor International, Inc. (Genencor) to jointly discover and develop a class of cancer therapeutics based on tumor-targeted enzymes that activate prodrugs. The companies will share preclinical and clinical development costs and have the right to jointly commercialize any resulting products within the field.  Genencor may also pay specific fees and milestone payments. Seattle Genetics may also make milestone payments to Genencor.  As part of the collaboration, Genencor paid $3 million to acquire 573,614 shares of the Company’s common stock at fair value.

Also in March 2002, the Company entered into an agreement with Celltech Group plc (Celltech) to use Seattle Genetics’ antibody-drug conjugate technology with Celltech’s monoclonal antibodies and antibody fragments directed against specific diseases, including immunological targets.  Under the terms of the multi-year agreement, Celltech has paid an upfront technology access fee and may make progress-dependent milestone payments. In addition, Celltech will pay research and reagent fees and royalties on net sales of any resulting products. Celltech will be responsible for product development, manufacturing and marketing of any products generated through the collaboration.

3.  Net loss per share

Basic net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less the weighted-average number of restricted shares of common stock issued that are subject to repurchase. The Company has excluded all outstanding options to purchase common stock and restricted shares of common stock subject to repurchase from the calculation of diluted net loss per share, as such securities are antidilutive for all periods presented.

The following table presents the calculation of basic and diluted net loss per share:

	Three months ended March 31,
	(Unaudited)
	2002			2001
Net loss attributable to common stockholders	$	(5,991,936	)	$	(4,249,226	)
Basic and diluted
Weighted-average shares used in computing basic and diluted net loss per share	29,508,376			9,279,630
Basic and diluted net loss per share	$	(0.20	)	$	(0.46	)
Antidilutive securities not included in net loss per share calculation
Options to purchase common stock	3,514,896			1,462,108
Restricted shares of common stock subject to repurchase	346,722			738,543
Total	3,861,618			2,200,651

4.  Comprehensive loss

Comprehensive loss includes certain changes in equity that are excluded from net loss.  Specifically, unrealized holding gains in available for sale investments, which were reported separately in stockholders’ equity, are included in accumulated other comprehensive loss.  Comprehensive loss and its components were as follows:

	Three months ended March 31,
	(Unaudited)
	2002			2001
Net loss	$	(5,991,936	)	$	(4,245,931	)
Unrealized (loss) gain on securities available for sale	(216,211		)	52,982
Comprehensive loss	$	(6,208,147	)	$	(4,192,949	)

5.  Investments

Investments consist of the following:

	Fair Value March 31, 2001		Fair Value December 31, 2001
	(Unaudited)
U.S. corporate obligations	$	24,383,969	$	27,923,286
Mortgage-backed securities	14,188,170		11,288,709
U.S. government and agencies	7,730,126		7,286,394
Municipal bonds	518,510		565,156
Total	$	46,820,775	$	47,063,545
Reported as:
Short-term investments	$	39,633,659	$	33,624,723
Long-term investments	6,203,100		12,456,820
Restricted investments	984,016		982,002
Total	$	46,820,775	$	47,063,545

6.  Property and equipment

Property and equipment consists of the following:

	March 31, 2002			December 31, 2001
	(Unaudited)
Leasehold improvements	$	3,750,901		$	3,731,182
Laboratory equipment	2,245,408			2,135,986
Furniture and fixtures	777,899			761,683
Computers and office equipment	643,953			618,246
	7,418,161			7,247,097
Less: accumulated depreciation and amortization	(1,173,262		)	(896,647		)
Total	$	6,244,899		$	6,350,450

7.  Subsequent events

On April 19, 2002, the Company entered into an agreement with Genentech, Inc. (Genentech) to license Seattle Genetics’ proprietary antibody-drug conjugate technology for use with Genentech’s antibodies targeted to certain diseases. Under the terms of the multi-year agreement, Genentech has agreed to pay a $2.5 million upfront fee and may pay technology access fees and research fees, as well as progress-dependent milestone payments. Genentech will also pay royalties on net sales of any resulting products. Genentech is responsible for research, product development, manufacturing and commercialization of any products resulting from the collaboration.

As part of the collaboration, Genentech purchased 697,544 shares of Seattle Genetics’ common stock in a private placement for an aggregate purchase price at fair value of approximately $3.5 million. This stock purchase increases Genentech’s total equity ownership in Seattle Genetics to 1,663,530 shares, or approximately 5.4% of Seattle Genetics’ outstanding common stock. If an additional benchmark is achieved under the collaboration agreement, Seattle Genetics has an option, at its sole discretion, to sell additional equity to Genentech at fair value.

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

Forward-Looking Statements

The following discussion of our 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 relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict, potential or continue, the negative of terms like these or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks outlined under the caption “Important Factors That May Affect Our Business, Results of Operations and Our Stock Price” set forth at the end of this Item 2 and those contained from time-to-time in our other filings with the SEC. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

We focus on the discovery and development of monoclonal antibody–based drugs to treat cancer and related diseases. We have four monoclonal antibody–based technologies: genetically engineered monoclonal antibodies; monoclonal antibody-drug conjugates (ADCs); single–chain immunotoxins; and antibody–directed enzyme prodrug therapy (ADEPT). Our technologies enable us to develop monoclonal antibodies that can kill cells on their own as well as those that require an increase in potency to destroy cancer cells. Using our expertise in cancer and monoclonal antibody technologies, we have constructed a diverse portfolio of product candidates targeted to many human tumors. Our technologies also provide us with an opportunity to partner with other companies that are developing monoclonal antibodies.

We have three monoclonal antibody–based product candidates in clinical trials, SGN-15, SGN-10 and SGN-30. SGN-15 and SGN-10 target a variety of cancers including breast, colon, prostate and lung. SGN-30 is being developed to treat patients with various hematologic malignancies. We also have four preclinical product candidates presently undergoing development for patients with solid tumors, melanoma or hematologic malignancies. These include PRO64553 (formerly SGN-14), which is being developed in an alliance with Genentech, Inc., and SGN-17/19, which is being developed in collaboration with Genencor International.  Two of our preclinical product candidates utilize our high-potency ADC technology, SGN-25 and a novel AC10-ADC. This next generation technology utilizes proprietary stable linker systems that can significantly reduce the toxic side effects caused by the systemic release of drugs associated with less stable linker technology. Our ADC technology also contains synthetic, highly-potent, cell-killing drugs including Auristatin E, which can be readily produced.

Since our inception, we have incurred substantial losses and, as of March 31, 2002, we had an accumulated deficit of $39.4 million. These losses and accumulated deficit have resulted from the significant costs incurred in the development of our monoclonal antibody–based technologies, clinical trial costs of SGN-15, SGN-10 and SGN-30, manufacturing expenses of preclinical and clinical grade materials, general and administrative costs, and non-cash stock–based compensation expenses associated with stock options granted to employees and consultants prior to our initial public offering in March 2001. We expect that our losses will increase for the foreseeable future as we continue to expand our research, development, clinical trial activities and infrastructure in support of these activities.

Results of Operations

Three months ended March 31, 2002 and 2001

Revenues.  Revenues increased to $269,000 for the three months ended March 31, 2002 from no revenues for the three months ended March 31, 2001.  Revenues for the three months ended March 31, 2002 were derived from the earned portion of technology-access fees, service and reagent fees and from a Small Business Innovative Research grant.

Research and development expenses.  Research and development expenses, excluding non-cash stock-based compensation expenses, increased 70% to $4.9 million for the three months ended March 31, 2002 from $2.9 million for the three months ended March 31, 2001. This increase was principally due to an increase in rent and occupancy costs related to our new headquarters and operations facility of approximately $806,000, an increase in contract manufacturing expenses of approximately $529,000 and an increase in personnel expenses of approximately $396,000.  The number of research and development personnel increased to 62 at March 31, 2002 from 42 at March 31, 2001.  We anticipate that research and development expenses will continue to grow in the foreseeable future as we expand our research, development, contract manufacturing and clinical trial activities.

General and administrative expenses.  General and administrative expenses, excluding non-cash stock-based compensation expenses, increased 52% to $1.1 million for the three months ended March 31, 2002 from $725,000 for the three months ended March 31, 2001.  This increase was primarily due to additional administrative personnel and other increases attributable to being a public company, including higher premiums for directors’ and officers’ insurance. The number of general and administrative personnel increased to 17 at March 31, 2002 from 11 at March 31, 2001.  We anticipate that general and administrative expenses will increase in the foreseeable future as we expand and incur the annualized costs related to our headquarters and operations facility.

Non-cash stock-based compensation expense.  Non-cash stock-based compensation expense decreased 29% to $880,000 for the three months ended March 31, 2002 from $1.2 million for the three months ended March 31, 2001.  This decrease is attributable to accelerated amortization of deferred stock-based compensation, which will decrease in later years as the options vest, and to adjustments to options subject to variable accounting. Variable accounting treatment will result in charges or credits, recorded to non-cash stock-based compensation, dependent on fluctuations in the quoted prices for the Company’s common stock.

Investment income, net.  Investment income remained fairly constant at $577,000 for the three months ended March 31, 2002 compared to $578,000 for the three months ended March 31, 2001.  Higher average balances of cash and cash equivalents, short-term and long-term investments and restricted investments at lower average interest yields for the three months ended March 31, 2002 counteracted lower average balances and higher average interest yields for the three months ended March 31, 2001, to produce equivalent amounts of investment income, net.   Average balances for the three months ended March 31, 2001 included the net proceeds from our initial public offering in March 2001.

Liquidity and Capital Resources

At March 31, 2002, cash, cash equivalents, short-term and long-term investments totaled $52.2 million and restricted investments amounted to $984,000.  We have financed our operations since inception through our initial public offering and concurrent private placement in March 2001, the private placement of equity securities prior to and subsequent to our initial public offering, revenue from license agreements, government grants and investment income, net. Our cash, cash equivalents, short-term and long-term investments and restricted investments are held in a variety of interest-bearing instruments, consisting of U.S. government and agency securities, high-grade U.S. corporate bonds, taxable municipal bonds, mortgage-backed securities, commercial paper and money market accounts.

Net cash used in operating activities for the three months ended March 31, 2002 was $4.1 million compared to $1.6 million for the three months ended March 31, 2001.  Expenditures in both periods were a result of clinical trials, contract manufacturing, preclinical research and development and general administrative expenses in support of our operations.  We expect cash used in operating activities to increase in the future as we increase our number of employees, expand our contract manufacturing initiatives and increase the patient enrollments of our clinical trials.

Net cash used in investing activities for the three months ended March 31, 2002 was $932,000 compared to $6.3 million of net cash provided by investing activities for the three months ended March 31, 2001.  Cash provided from investing activities for the three months ended March 31, 2001 includes $6.5 million from the sales of investments, net of purchases.  Purchases of property and equipment were $763,000 for the three months ended March 31, 2002 compared to $128,000 for the three months ended March 31, 2001.  We expect that our level of capital expenditures for 2002 will decrease when compared to 2001 because of the completion of a significant portion of our facility construction.

Net cash provided by financing activities was $3.1 million for the three months ended March 31, 2002 compared to $47.0 million for the three months ended March 31, 2001.  Financing activities during the three months ended March 31, 2002 consisted primarily of the receipt of $3.0 million from the private placement of common stock with Genencor International.  Financing activities during the three months ended March 31, 2001 included net proceeds of approximately $44.9 million from our initial public offering and approximately $2.0 million from our concurrent private placement.

We expect to incur substantial costs as we continue to develop and commercialize our product candidates. We anticipate that our rate of spending will accelerate as the result of the increased costs and expenses associated with clinical trials, regulatory filings, manufacturing, and research and development collaborations.

Our future expenditures and capital requirements will depend on numerous factors, including the progress of our research and development activities, the cost of filing and enforcing any patent claims and other intellectual property rights, competing technological and market developments, and our ability to establish license and collaboration agreements.

We believe that our current cash and investment balances will be sufficient to enable us to meet our anticipated expenditures and operating requirements for at least the next 12 months. We intend to seek additional funding through some or all of the following methods: corporate collaborations, licensing arrangements and public or private equity sales. However, additional financing may not be available on favorable terms or at all. If we are unable to raise additional funds should we need them, we may be required to delay, reduce or eliminate some of our development programs and some of our clinical trials, which may adversely affect our business and operations.

Subsequent Event

In April 2002, we announced that Genentech, Inc. had licensed our proprietary antibody-drug conjugate (“ADC”) technology for use with Genentech’s antibodies targeted to certain diseases. The collaboration agreement provides Genentech with broad access to our ADC technology for use with therapeutic antibodies recognizing multiple target antigens. Genentech intends to utilize this technology in its efforts to develop therapeutic antibodies linked to toxic payloads that could increase their potency.

Under the terms of the multi-year agreement, Genentech has agreed to pay a $2.5 million upfront fee and may pay technology access fees and research fees, as well as progress-dependent milestone payments.  Genentech will also pay royalties on net sales of any resulting products. Genentech is responsible for research, product development, manufacturing and commercialization of any products resulting from the collaboration.

As part of the collaboration, Genentech purchased 697,544 shares of our common stock in a private placement for an aggregate purchase price of approximately $3.5 million. This stock purchase increases Genentech’s total equity

ownership in Seattle Genetics to 1,663,530 shares, or approximately 5.4% of our outstanding common stock. If an additional benchmark is achieved under the collaboration agreement, we have an option, at our sole discretion, to sell additional equity to Genentech. The shares sold to Genentech are not registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. We have granted Genentech registration rights for such shares alongside existing registration rights holders. We intend to use the proceeds from this investment for working capital and general corporate purposes.

Important Factors That May Affect Our Business, Results of Operations and Our Stock Price

You should carefully consider the risks described below, together with all of the other information included in this quarterly report on Form 10-Q and the information incorporated by reference herein. If we do not effectively address the risks we face, our business will suffer and we may never achieve or sustain profitability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

This quarterly report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this quarterly report on Form 10-Q.

We have a history of net losses. We expect to continue to incur net losses and may not achieve or maintain profitability for some time. Our limited operating history may make it difficult to evaluate our business and an investment in our common stock.

We incorporated in July 1997 and have a limited operating history upon which an investor may evaluate our operations and future prospects. We have incurred net losses since our inception and, as of March 31, 2002, we had an accumulated deficit of approximately $39.4 million. We expect to make substantial expenditures to further develop and commercialize our product candidates and expect that our rate of spending will accelerate as the result of the increased costs and expenses associated with research, development, clinical trials, manufacturing, regulatory approvals and commercialization of our potential products. In the near term, we expect our revenues to be derived from milestone payments, technology licensing fees and sponsored research fees under existing and future collaborative arrangements.  In the longer term, our revenues may also include royalties from collaborations with current and future strategic partners and commercial product sales. However, our revenue and profit potential is unproven and our limited operating history makes our future operating results difficult to predict.

Our product candidates are at an early stage of development and, if we are not able to successfully develop and commercialize them, we may not generate sufficient revenues to continue our business operations.

All of our product candidates are in early stages of development. Significant further research and development, financial resources and personnel will be required to develop commercially viable products and obtain regulatory approvals. We expect that much of our efforts and expenditures over the next few years will be devoted to SGN-15, SGN-10, SGN-30, PRO64553 (formerly SGN-14), SGN-17/19, SGN-25 and a novel AC10-ADC. These are our only product candidates in preclinical development, clinical trials or in collaboration with others at the present time. We have no drugs that have received regulatory approval for commercial sale.

Our ability to commercialize our product candidates depends on first receiving FDA approval. The future commercial success of these product candidates will depend upon their acceptance by physicians, patients and other key decision-makers as

therapeutic and cost-effective alternatives to currently available products. If we fail to gain approval from the FDA or to produce a commercially successful product, we may not be able to earn sufficient revenues to continue as a going concern.

We will continue to need significant amounts of additional capital that may not be available to us.

From inception to March 31, 2002, we have used approximately $26.3 million of cash in operating activities and approximately $7.5 million of cash to purchase property and equipment. We expect to make additional capital outlays and to increase operating expenditures over the next several years as we hire additional employees and support our preclinical development and clinical trial activities. We believe that our existing cash and investment securities, milestone payments and research grants will be sufficient to fund our operations for at least the next 12 months. However, changes in our business may occur that would consume available capital resources sooner than we expect. If adequate funds are not available to us, we will be required to delay, reduce the scope of or eliminate one or more of our development programs. We do not know whether additional financing will be available when needed, or that, if available, we will obtain financing on terms favorable to our stockholders or us. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.

Clinical trials for our product candidates are expensive, time consuming and their outcome is uncertain.

Before we can obtain regulatory approval for the commercial sale of any product candidate that we wish to develop, we are required to complete preclinical development and extensive clinical trials in humans to demonstrate its safety and efficacy. Each of these trials requires the investment of substantial expense and time. We are currently conducting multiple clinical trials of our three most advanced product candidates, and expect to commence additional trials of these and other product candidates. There are numerous factors that could delay each of these clinical trials or prevent us from completing these trials successfully.

Success in preclinical and early clinical trials does not ensure that large-scale trials will be successful nor does it predict final results. Acceptable results in early trials may not be repeated in later trials. A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Negative or inconclusive results or adverse medical events during a clinical trial could cause it to be redone or terminated. In addition, failure to construct appropriate clinical trial protocols could result in the test or control group experiencing a disproportionate number of adverse events and could cause a clinical trial to be redone or terminated.

The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by the FDA or another regulatory authority may vary significantly based on the type, complexity and novelty of the product involved as well as other factors.  To date, we have limited clinical data and have seen evidence of gastrointestinal toxicity with SGN-15 and SGN-10. Future trials may not show sufficient safety or efficacy to obtain the requisite regulatory approval for these product candidates or any other potential product candidates. Because SGN-15, SGN-10, SGN-30, PRO64553 (formerly SGN-14), SGN-17/19, SGN-25 and a novel AC10-ADC, are our only product candidates in clinical trials or preclinical development at the present time, any delays or difficulties we encounter may impact our ability to generate revenue and cause our stock price to decline significantly.

We may choose to, or may be required to, delay, suspend, repeat or terminate our clinical trials if patient enrollment cannot be achieved on a timely basis or if the trials are not conducted in accordance with regulatory requirements, the results are negative or inconclusive or the trials are not well designed.

Clinical trials must be conducted in accordance with the FDA’s guidelines and are subject to oversight by the FDA and institutional review boards at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced under the FDA’s current Good Manufacturing Practices, and may require large numbers of test patients. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the existence of competing clinical trials and the availability of alternative or new treatments. We depend on medical institutions to conduct our clinical trials and to the extent they fail to enroll patients for our clinical trials or are delayed for a significant time in achieving full enrollment, we may be affected by increased costs, program delays or both, which may harm our business.

In addition, we or the FDA might delay or halt our clinical trials of a product candidate for various reasons, including: deficiencies in the conduct of the clinical trials; the product candidate may have unforeseen adverse side effects; the time required to determine whether the product candidate is effective may be longer than expected; fatalities arising during a clinical trial due to medical problems that may not be related to clinical trial treatments; the product candidate may not appear to be more effective than current therapies; insufficient patient enrollment in the clinical trials; the quality or stability of the product candidate may fall below acceptable standards; or we may not be able to produce sufficient quantities of the product candidate to complete the trials.

Due to these and other factors, our current product candidates or any of our other future product candidates could take a significantly longer time to gain regulatory approval than we expect or may never gain approval, which could reduce or eliminate our revenue and delay or terminate the potential commercialization of our product candidates.

We currently rely on third-party manufacturers and other third parties for production of our drug products and our dependence on these manufacturers may impair the development of our product candidates.

We do not currently have the ability to manufacture the drug products that we need to conduct our clinical trials. For two of our product candidates in clinical trials, SGN-15 and SGN-10, we presently rely on drug products that were produced and vialed by Bristol-Myers Squibb and contract manufacturers retained by Bristol-Myers Squibb.  We intend to enter into agreements with contract manufacturers to supplement our supplies of SGN-15 and SGN-10 as necessary.  We have contracted with ICOS Corporation to manufacture clinical supplies of monoclonal antibody BR96, the monoclonal antibody used in our product candidate SGN-15. For our third product candidate in clinical trials, SGN-30, we also contracted with ICOS to manufacture preclinical and clinical supplies. In addition, we rely on other third parties to perform additional steps in the manufacturing process, including vialing and storage of these product candidates.

For the foreseeable future, we will continue to rely on contract manufacturers and other third parties to produce, vial and store sufficient quantities of our product candidates for use in our clinical trials. If our contract manufacturers or other third parties fail to deliver our product candidates for clinical use on a timely basis, with sufficient quality, and at commercially reasonable prices, and we fail to find replacement manufacturers or to develop our own manufacturing capabilities, we may be unable to continue development and production of our product candidates.

Contract manufacturers have a limited number of facilities in which our product candidates can be produced. We currently rely on contract manufacturers to produce our product candidates under FDA current Good Manufacturing Practices to meet acceptable standards for our clinical trials. Such standards may change, affecting the ability of contract manufacturers to produce our product candidates on the schedule we require for our clinical trials. Contract manufacturers may not perform or may discontinue their business before the time required by us to successfully produce and market our product candidates.

In some circumstances we rely on collaborators to assist in the research and development activities necessary for the commercialization of our product candidates. If we are not able to locate suitable collaborators or if our collaborators do not perform as expected, we may not be able to commercialize our product candidates.

We have established and intend to continue to establish alliances with third party collaborators to develop and market our current and future product candidates. We may not be able to locate third party collaborators to develop and market our product candidates and we may lack the capital and resources necessary to develop all our product candidates alone. If our collaborators do not prioritize and commit substantial resources to programs associated with our product candidates, we may be unable to commercialize our product candidates, which would limit our ability to generate revenue and become profitable.

We have a license agreement with Genentech pursuant to which they are developing our lead CD40 targeted product candidate, PRO64553 (formerly SGN-14), to treat patients with hematologic malignancies or other types of cancer. Genentech is also responsible for gaining final approval through the required U.S. and international regulatory authorities to ultimately market the product. At any time, Genentech may terminate the agreement for any reason and return the rights of the CD40 program to us.

If we are unable to protect our proprietary technology, trade secrets or know-how, we may not be able to operate our business profitably. Similarly, if we fail to sustain and further build our intellectual property rights, competitors may be able to develop competing therapies.

Our success depends, in part, on our ability to maintain protection for our products and technologies under the patent laws or other intellectual property laws of the United States, France, Germany, Japan, United Kingdom and Italy, as well as other countries. We have filed several patent applications with the U.S. Patent and Trademark Office for our technologies that are currently pending. We also have exclusive rights to issued U.S. patents, and foreign counterpart patents and patent applications in the countries listed above relating to our monoclonal antibody-based technology. Our rights to these patents are derived from worldwide licenses from Bristol-Myers Squibb, Arizona State University, Proacta Therapeutics and the National Institutes of Health, among others. In addition, we have licensed or optioned rights to pending U.S. patent applications and foreign counterpart patents and patent applications to third parties. The standards which the U.S. Patent and Trademark Office uses to grant patents are not always applied predictably or uniformly and can change. Consequently, the pending patent applications may not be allowed; and if allowed, may not contain the type and extent of patent claims that will be adequate to conduct our business as planned. Additionally, any issued patents may not contain claims that will permit us to stop competitors from using similar technology. Similarly, the standards that courts use to interpret patents are not always applied predictably or uniformly and can change, particularly as new technologies develop. As a result, the protection, if any, given by our patents if we attempt to enforce them or if they are challenged in court is uncertain. In addition, we rely on certain proprietary trade secrets and know-how. We have taken measures to protect our unpatented trade secrets and know-how, including the use of confidentiality and assignment of inventions agreements with our employees, consultants and certain contractors. It is possible, however, that these persons may breach the agreements or that our competitors may independently develop or otherwise discover our trade secrets.

We may incur substantial costs and lose important rights as a result of litigation or other proceedings relating to patent and other intellectual property rights.

The defense and prosecution of intellectual property rights, U.S. Patent and Trademark Office interference proceedings and related legal and administrative proceedings in the United States and elsewhere involve complex legal and factual questions. These proceedings are costly and time-consuming. If we become involved in any litigation, interference or other administrative proceedings, we will incur substantial expense and it will divert the efforts of our technical and management personnel. An adverse determination may subject us to significant liabilities or require us to seek licenses that may not be available from third parties on commercially reasonable terms, if at all. We may be restricted or prevented from developing and commercializing our product candidates in the event of an adverse determination in a judicial or administrative proceeding, or if we fail to obtain necessary licenses.

If we lose our key personnel or are unable to attract and retain additional qualified personnel, our future growth and ability to compete would suffer.

We are highly dependent on the efforts and abilities of the principal members of our managerial and scientific staff, particularly Dr. H. Perry Fell, our Chairman and Chief Executive Officer, and Dr. Clay B. Siegall, our President and Chief Scientific Officer.  Additionally, we have several scientific personnel with significant and unique expertise in monoclonal antibodies and related technologies. The loss of the services of principal members of our managerial or scientific staff may prevent us from achieving our business objectives.

The competition for qualified personnel in the biotechnology field is intense, and we rely heavily on our ability to attract and retain qualified scientific, technical and managerial personnel. Our future success depends upon our ability to attract, retain and motivate highly skilled employees. In order to commercialize our products successfully, we will be required to expand our workforce, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business development and sales and marketing. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, as well as academic and other research institutions. To the extent we are not able to attract and retain these individuals on favorable terms, our business may be harmed.

We face intense competition and rapid technological change, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.

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. Some of these companies have commenced clinical trials of antibody products or have successfully commercialized antibody products. Many of these companies are developing products for the same disease indications as we are. Some of these competitors have received regulatory approval or are developing or testing product candidates that do or may in the future compete directly with our product candidates. For example, Genentech, Immunogen, IDEC Pharmaceuticals and Wyeth market products that may compete with ours. Other potential competitors include large, fully integrated pharmaceutical companies and more established biotechnology companies, which have significant resources and expertise in research and development, manufacturing, testing, obtaining regulatory approvals and marketing. Also, academic institutions, government agencies and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and marketing. It is possible that these competitors will succeed in developing technologies that are more effective than those being developed by us or that would render our technology obsolete or noncompetitive.

If our competitors develop superior products, manufacturing capability or marketing expertise, our business may fail.

Our business may fail because we face intense competition from major pharmaceutical companies and specialized biotechnology companies engaged in the development of other products directed at cancer. Many of our competitors have greater financial and human resources expertise and more experience in the commercialization of product candidates. Our competitors may, among other things: develop safer or more effective products; implement more effective approaches to sales and marketing; develop less costly products; obtain quicker regulatory approval; have access to more manufacturing capacity; form more advantageous strategic alliances; or establish superior proprietary positions. In addition, if we receive regulatory approvals, we may compete with well-established, FDA approved therapies that have generated substantial sales over a number of years. We anticipate that we will face increased competition in the future as new companies enter our market and scientific developments surrounding other cancer therapies continue to accelerate.

We have no experience in commercializing products on our own and to the extent we do not develop this ability or contract with a third-party to assist us, we may not be able to successfully sell our product candidates.

We do not have a sales and marketing force and may not be able to develop this capacity. If we are unable to establish sales and marketing capabilities, we will need to enter into sales and marketing agreements to market our products in the United States. For sales outside the United States, we plan to enter into third-party arrangements. In these foreign markets, if we are unable to establish successful distribution relationships with pharmaceutical companies, we may fail to realize the full sales potential of our product candidates.

Additionally, our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any approved product candidate will depend on a number of factors, including: establishment and demonstration of clinical efficacy and safety; cost-effectiveness of a product; its potential advantage over alternative treatment methods; and marketing and distribution support for the product.

Moreover, government health administrative authorities, private health insurers and other organizations are increasingly challenging both the need for and the price of new medical products and services. Consequently, uncertainty exists as to the reimbursement status of newly approved therapeutics and diagnostics. For these and other reasons, physicians, patients, third-party payors and the medical community may not accept and utilize any product candidates that we develop and even if they do, reimbursement may not be available for our products to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development.

Our stock price may be volatile and your shares may suffer a decline in value.

The market prices for securities of biotechnology companies have in the past been, and are likely to continue in the future to be, very volatile. As a result of fluctuations in the price of our common stock you may be unable to sell your shares at or above the price you paid for them. The market price of our common stock may be subject to substantial volatility in response to many risk factors listed in this section, and others beyond our control, including: announcements regarding the results of discovery efforts and preclinical and clinical activities by us or our competitors; changes in our existing corporate partnerships or licensing arrangements; establishment of new corporate partnering or licensing arrangements by us or our competitors; developments or disputes concerning our proprietary rights; issuance of new or changed analysts’ reports and recommendations regarding us or our competitors; share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; changes in government regulations; and economic or other external factors.

We face product liability risks and may not be able to obtain adequate insurance to protect us against losses.

We currently have no products that are available for commercial sale. However, the current use of any of our product candidates in clinical trials, and the sale of any approved products in the future, may expose us to liability claims. These claims might be made directly by consumers and healthcare providers or indirectly by pharmaceutical companies, our corporate collaborators 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. 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, 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 assets may not be sufficient to cover such claims and our business operations could be impaired.

Our existing stockholders have significant control of our management and affairs, which they could exercise against your best interests.

Our executive officers and directors and greater than 5% stockholders, together with entities that may be deemed affiliates of, or related to, such persons or entities, beneficially own approximately 65% of our outstanding common stock. As a result, these stockholders, acting together, may be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control, including a merger, consolidation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control, which might affect the market price of our common stock.

We may engage in future acquisitions that increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities and subject us to other risks.

We actively evaluate various strategic transactions on an ongoing basis, including in-licensing or acquiring complementary products, technologies or businesses.  Any potential acquisitions may entail numerous risks, including increased operating expenses and cash requirements, assimilation of operations and products, retention of key employees, diversion of our management’s attention and uncertainties in our ability to maintain key business relationships of the acquired entities.  In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense.  Moreover, we may not be able to locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business.

Anti-takeover provisions could make it more difficult for a third party to acquire us.

Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of Seattle Genetics without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. Further, certain provisions of our charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Seattle Genetics, which could have an adverse effect on the market price of our stock. In addition, our charter documents provide for a classified board, which may make it more difficult for a third party to gain control of our Board of Directors. Similarly, state anti-takeover laws in Washington related to corporate takeovers may prevent or delay a change of control of Seattle Genetics.

Item 3.  Quantitative and Qualitative Disclosure of Market Risk

In accordance with our policy, we do not use derivative financial instruments in our investment portfolio. We invest in high quality interest-bearing instruments, consisting of U.S. government and agency securities, high-grade U.S. corporate bonds, taxable municipal bonds, mortgage-backed securities, commercial paper and money market accounts. Such securities are subject to interest rate risk and will rise and fall in value if market interest rates change, however, we do not expect any material loss from such interest rate changes.

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 2. Changes in Securities.

(c)   Recent Sales of Unregistered Securities

In January 2002, we formed a strategic alliance with Genencor International, Inc. to jointly discover and develop a class of cancer therapeutics based on tumor-targeted enzymes that activate prodrugs. In conjunction with forming this strategic alliance, we sold Genencor 573,614 shares of our common stock for an aggregate purchase price of $3 million in a private placement.

In April 2002, we entered into an agreement with Genentech, Inc. to license our proprietary antibody-drug conjugate technology for use with Genentech’s antibodies targeted to certain diseases.   As part of the collaboration, we sold Genentech 697,544 shares of our common stock for an aggregate purchase price of approximately $3.5 million in a private placement.  This stock purchase increased Genentech’s total equity ownership in Seattle Genetics to 1,663,530 shares, or approximately 5.4% of Seattle Genetics’ outstanding common stock.

The shares of common stock sold to Genencor and Genentech were issued in reliance on the exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended (the “Securities Act”).  Genencor and Genentech made certain representations to us as to investment intent, their receipt of all information they considered necessary or appropriate in deciding whether to purchase the securities, their knowledge and experience in financial or business matters such that they were capable of evaluating the risks and merits of the investment in the securities, and their ability to bear the economic risk of the investment in the securities, that they possessed a sufficient level of financial sophistication and that they received information about Seattle Genetics. The shares issued in the transactions were subject to restrictions on transfer absent registration under the Securities Act, and no offers to sell the securities were made by any form of general solicitation or general advertisement.

(d)  Use of Proceeds from Sale of Registered Securities

Seattle Genetics completed its initial public offering of common stock pursuant to a Registration Statement on Form S-1 under the Securities Act (File No. 333-50266) that was declared effective by the SEC on March 6, 2001.  The aggregate gross proceeds of the offering were $49.0 million, which resulted in net proceeds to us of approximately $44.4 million after deducting underwriting discounts and commissions and other offering expenses of $4.6 million. As of March 31, 2002, we had used approximately $22.7 million of the offering proceeds, including $1.1 million for clinical trials, $7.0 million for contract manufacturing costs, $6.1 million for purchase of property and equipment and approximately $8.5 million for preclinical research and development activities and general corporate purposes.

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

None.

Item 6.                    Exhibits and Reports on Form 8-K.

(a)Exhibits:

Exhibit Number
3.1*	Amended and Restated Certificate of Incorporation of the Registrant
3.2*	Bylaws of the Registrant
4.1*	Form of Stock Certificate
4.2*	Amended and Restated Investors Rights Agreement dated December 22, 2000 by and among the Registrant and certain holders of the Registrant’s capital stock.
10.1†	Collaboration Agreement dated January 4, 2002 between Seattle Genetics, Inc. and Genencor International, Inc.
10.2	Common Stock Purchase Agreement dated January 4, 2002 between Seattle Genetics and Genencor International, Inc.
10.3†	Collaboration Agreement dated March 27, 2002 between Seattle Genetics, Inc. and Celltech R&D Limited.

*	Previously filed as an exhibit to Registrant’s registration statement on Form S-1, File No. 333-50266, originally filed with the Securities and Exchange Commission on November 20, 2000, as subsequently amended, and incorporated herein by reference.
†	Confidential treatment requested.

(b)           Reports on Form 8-K:

The Company did not file any reports on Form 8-K during the three months ended March 31, 2002.

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.

		Seattle Genetics, Inc.
	By:		/s/  TIM CARROLL
			Tim Carroll
			Chief Financial Officer
			(Principal Financial Officer and Authorized Officer)
Date:  May 14, 2002

INDEX TO EXHIBITS

Exhibit Number
3.1*	Amended and Restated Certificate of Incorporation of the Registrant
3.2*	Bylaws of the Registrant
4.1*	Form of Stock Certificate
4.2*	Amended and Restated Investors Rights Agreement dated December 22, 2000 by and among the Registrant and certain holders of the Registrant’s capital stock.
10.1†	Collaboration Agreement dated January 4, 2002 between Seattle Genetics, Inc. and Genencor International, Inc.
10.2	Common Stock Purchase Agreement dated January 4, 2002 between Seattle Genetics and Genencor International, Inc.
10.3†	Collaboration Agreement dated March 27, 2002 between Seattle Genetics, Inc. and Celltech R&D Limited.

*	Previously filed as an exhibit to Registrant’s registration statement on Form S-1, File No. 333-50266, originally filed with the Commission on November 20, 2000, as subsequently amended, and incorporated herein by reference.
†	Confidential treatment requested.